Adelekan: Banking Sector Recapitalisation Will Boost Economic Stability

Managing Director of Agusto & Co, Mrs. Yinka Adelekan speaks on the significance of the banking sector recapitalisation exercise for financial system stability, expansion, and macro-economic resilience. Raheem Akingbolu brings the excerpts.

The theme of this year’s Agusto & Co. Economic Roundtable suggests that Nigeria’s banking recapitalisation exercise is nearing completion. From your perspective, why is this moment significant for the Nigerian economy?

The financial intermediation role of the banking industry (the industry) makes it a catalyst for economic activities. The recapitalisation exercise has strengthened the banking industry’s capacity to extend credits by providing the necessary capital buffer. In addition, the Industry’s ability to absorb shocks from volatilities and uncertainties has increased, based on the enlarged capital base. This has enabled the banks to resolve some strained legacy assets. 

We believe the termination of the regulatory forbearance in June 2025 and the ongoing portfolio clean-up by some banks would have been difficult without the recapitalisation exercise.

Similarly, the recapitalisation exercise has strengthened the profile of Nigerian banks in the international financial scene. The recapitalisation exercise coincided with the retreat of some global banks from the African market and created opportunities for stronger pan-African financial institutions, particularly with the ongoing initiatives to connect African economies via the African Continental Free Trade Agreement (AfCTA).  

We also anticipate expansion beyond the continent as Nigerian banks leverage the ongoing change in the world economic order to expand to more global economic hubs. Thus, international expansion is featured prominently in the use of proceeds by the commercial banks with international authorisation

Agusto & Co. projects that the industry could raise close to ₦4 trillion under the current recapitalisation exercise.

Beyond the quantum of capital, what structural safeguards are necessary to ensure that stronger capital truly translates into sustainable growth?

Additional capital injected into the industry has strengthened the ability of the banks to absorb risks and support the planned expansion of the Nigerian economy. Beyond capital, strengthening corporate governance and the risk environment is necessary to support the anticipated growth.  

The 2009 banking industry crisis was accentuated by the weak risk management framework of some banks, despite the capital injection between 2003 and 2007. We anticipate a surge in the size of the banks in the near term based on the enlarged capital base. Thus, a more robust risk management framework is needed, especially addressing cyberthreats given the growing digitalisation. In addition, approximately 35% of the banks in the country commenced operations in the last five years, with limited occurrence of events that tested the resilience of their risk management framework.

What implication does a stronger banking system has for key sectors such as infrastructure, manufacturing, SMEs, and consumer markets?

The steep naira depreciation over the last three years has raised the working capital needs of manufacturing companies. The uptick in demand for goods produced in the country and the need to replace fixed assets have exacerbated the funding needs of manufacturing firms. In our view, the manufacturing industry will benefit significantly from the recapitalisation exercise.  

Over the years, exposure to the manufacturing sector has typically been the second largest exposure in the banking industry’s loan book. We expect this trend to continue after the recapitalisation exercise.

Small and medium-scale enterprises (SMEs) account for over 90 per cent of registered businesses in Nigeria and represent about 50% of the GDP, yet this segment represents less than eight per cnt of the banking industry’s loan book. 

We believe the banking industry will explore lending opportunities in the SME segment as part of the initiatives to grow the loan book and generate sufficient returns for shareholders.

Nigeria’s infrastructure stock is estimated at 30% of GDP, significantly lower than the 70 per cent recommended by the World Bank. Thus, circa $100 billion annual investment is needed to close the infrastructure gap, particularly given the 2.5% population growth rate. However, infrastructure projects are long-term in nature, while the funding of the banking industry is short-term in nature. Thus, we do not anticipate a significant exposure to infrastructure development to avoid funding mismatch.

Governance, supervision, and risk management are critical pillars. What role should regulators and boards play in ensuring recapitalisation strengthens systemic stability rather than amplifying systemic risk?

Weak risk management framework and poor governance contributed to the 2009 banking crisis despite the capital buffer emanating from the 2004 capital raising exercise. We note positively the relatively stronger risk management framework in the banking industry on the back of various regulatory directives. Inputs from the relatively more developed markets where some banks now operate have also strengthened the risk environment in the industry.  

Nonetheless, we anticipate the introduction of more complex products and transactions as the banks explore opportunities for additional profit to bolster returns to shareholders. The existing risk management framework may also not be sufficient for the expected expansion of the asset base.  

Thus, we anticipate a periodic review of the risk environment and the governance framework based on the business risks of each bank. We also expect a more proactive regulatory review to ensure the adequacy of the Industry’s risk environment.

In today’s macro-economic environment, marked by volatility and reform, how important is policy coordination between fiscal authorities, the Central Bank, and financial regulators in maximising the benefits of recapitalisation?

A stable fiscal environment and a predictable economy are necessary for businesses to thrive. Coordination between the fiscal and monetary authorities is mandatory for a suitable operating environment for businesses. Reducing the multiple and at times conflicting regulatory directives of the various tiers of governments is also important for businesses to thrive.  

Given that businesses dominate the loan book of banks, creating a favourable business environment is necessary to maximise returns and keep impaired credits low. We believe the various reforms to strengthen the private sector’s role in the economy will support businesses and optimise the benefits of the recapitalisation exercise.

From Agusto & Co.’s analytical standpoint, what early warning indicators should stakeholders monitor to assess whether this recapitalisation cycle is delivering on its promise?

The ongoing recapitalisation exercise was regulatory-driven. However, each bank has explored the available opportunities and the associated risks before establishing the proposed use of the capital raising proceeds. Some banks also provided detailed projections and other expectations from the deployment of the funds raised from the capital raising exercise. We expect the projections to act as guidance and a benchmark for assessing the success of the capital raising exercise.

Looking ahead, what broader reforms or policy priorities are necessary to ensure Nigeria fully leverages a stronger banking sector for sustainable economic growth?

The performance of any sector or industry can not be separated from the state of the economy. Thus, the stability of the Nigerian economy is one of the primary conditions for maximising the improved capital buffer of the banks. Policies that will support a market-driven exchange rate, a better operating environment, and a predictable regulatory regime will stimulate bank lending, reduce the default risk, and maximise the benefits of the recapitalisation exercise.