We have the answer: “What we have simply done is to nudge the banks to inject fresh capital and this is without prejudice to what the component of shareholder’s funds could be. And like we have stated in our circular, shareholders’ funds would continue to be recognized in the computation determination of banks capital adequacy ratio which is an important metric in our assessment of the soundness of banks” – Haruna B. Mustafa, the Director of the Financial Policy & Regulatory Department at the Central Bank of Nigeria (CBN).

Haruna B. Mustafa, the Director of the Financial Policy & Regulatory Department at the Central Bank of Nigeria (CBN), has provided insights into the exclusion of retained earnings of banks in the proposed capitalization process, amidst objections raised by some bankers.

The decision announced just two weeks ago, has stirred a robust debate within the banking sector.

Mustafa, speaking in the latest edition of the CBN podcast published on the bank’s website on Monday, clarified that the apex bank’s rationale behind excluding retained earnings is to encourage deposit money banks nationwide to infuse fresh funds into their capital base.

That is it – “fresh capital”. I will only add that every business in Nigeria needs that for the same reason banks need more capital even though you may not be as strategic as a bank to the economy.

On 15 April, Tekedia Capital will do just that for 8 companies. You are invited to join us here 

Central Bank of Nigeria Explains Exclusion of Retained Earnings from Capitalization Process

Haruna B. Mustafa, the Director of the Financial Policy & Regulatory Department at the Central Bank of Nigeria (CBN), has provided insights into the exclusion of retained earnings of banks in the proposed capitalization process, amidst objections raised by some bankers.

The decision announced just two weeks ago, has stirred a robust debate within the banking sector.

Mustafa, speaking in the latest edition of the CBN podcast published on the bank’s website on Monday, clarified that the apex bank’s rationale behind excluding retained earnings is to encourage deposit money banks nationwide to infuse fresh funds into their capital base.

Mustafa explained, “What we have simply done is to nudge the banks to inject fresh capital and this is without prejudice to what the component of shareholder’s funds could be. And like we have stated in our circular, shareholders’ funds would continue to be recognized in the computation determination of banks capital adequacy ratio which is an important metric in our assessment of the soundness of banks.”

Moreover, Mustafa noted that the recapitalization program aims to bolster the capacity of banks to undertake larger projects for the growth and development of the country.

Referencing the success of the bank’s recapitalization exercise in 2004, Mustafa highlighted its pivotal role in shielding banks across Nigeria from the fallout of the global financial crisis of 2008. He emphasized that the ongoing recapitalization efforts are geared towards fortifying Nigerian banks against unforeseen global financial threats.

Last month, the CBN announced a revision in the capital requirements of various tiers of banks across the country – marking the first such adjustment since the 2004/2005 recapitalization exercise. The apex bank raised the capital requirement for Tier-1 banks to N500 billion, while national banks’ capital expectation was set at N200 billion.

However, the CBN specified that the new capital would consist of paid-up capital and share premium, excluding shareholders’ funds – a policy that has sparked considerable debate.

Many bankers have voiced their concerns, arguing that the Central Bank’s decision to exclude retained earnings from share capital calculations is flawed and contradicts conventional and legal treatments of a company’s capital structure.

They contend that this approach overlooks the actual value represented by these earnings, which conflicts with conventional and legal treatments of a company’s capital structure.

Furthermore, some bankers argue that while the Central Bank prefers banks to retain most of their earnings to bolster their capital base, it should not simultaneously prevent them from counting these undistributed earnings as part of their capital.

The central bank acknowledged that the policy is part of its efforts to boost Nigeria’s economic growth in line with President Bola Tinubu’s $1 trillion economy plan. The federal government had late last year, admitted that the banks’ recapitalization policy is geared toward attracting foreign direct investments.

“In the economy facing all of us, our ambition to attain the $1tn appears daunting, but we believe it is achievable with God on our side and our collective determination. This explains why the Vice President and I have been on the road trying to attract huge investments into various phases of our economy: agriculture, oil and gas and others,” Special Adviser on Information and Strategy, Bayo Onanuga, said.

“To arrive at the $1 trillion economy, we must address the capital adequacy of our banks that will prepare the fuel for this journey.”

Allen Onyema, the Chief Executive Officer of Air Peace, has raised concerns over what he perceives as unfair competition tactics employed by foreign airlines on the Nigeria-UK route.

Speaking exclusively on the Channels TV evening program, Politics Today, Onyema revealed that the significant reduction in international airfares by foreign carriers operating on the route is a deliberate attempt to prematurely remove Air Peace from the market.

The CEO pointed out that before Air Peace entered into the Nigeria-UK route, foreign airlines were charging exorbitant prices, citing business class tickets costing as much as N17 million and economy class reaching N5 million. However, shortly after Air Peace began operating on the Lagos-London route, foreign airlines drastically reduced their fares, despite no significant change in the exchange rate between the dollar and the Naira.

Onyema expressed his frustration, stating, “The foreign airlines were taking between N15-N17 million for business class, N6 million for premium economy, and N5 million for economy. Then Air Peace came on, charging N4.5 million for business class, and economy class starting from N1.2 million. Now Air Peace did this, everybody has came crashing their prices from N18 million to N5 million. Dollar did not change.”

He further elaborated that foreign airlines are conspiring to cut their fares to levels below their break-even point, with the aim of pushing Air Peace out of the Nigeria-UK route. Onyema warned that if these tactics succeed, Nigerians would face considerably higher fares than the current rates.

Air Peace launched its Lagos-London route on March 30 to provide quality travel experiences and make international trips more affordable for Nigerians.

Since commencing its UK service, Air Peace has offered competitive rates, with economy class fares starting at N1.2 million, significantly lower than the N3-5 million usually charged by foreign carriers. Business class tickets are priced at around N4.5 million, well below the N15-N18 million rates of foreign airlines.

Onyema also disclosed that since the airline began its direct flights from Lagos to London a few weeks ago, Gatwick Airport has allegedly frustrated its operations, aiming to impede its activities in the UK. He cited challenges with ground handling and space allocation at Gatwick Airport as proof of these retaliatory actions.

On the inaugural flight out of London, Onyema claimed that Gatwick Airport management moved Air Peace to a different checking area and assigned a malfunctioning baggage carousel, leading to delays and inconvenience for passengers.

Additionally, the CEO revealed that the boarding gate in the reassigned terminal collapsed on the day of Air Peace’s flight, further compounding the airline’s challenges at the London airport.

Onyema acknowledged the support received from the Federal Government, particularly from the Minister of Aviation and Aerospace Development, Festus Keyamo, in launching Air Peace’s Lagos-London route successfully. However, he called on the government to intervene against foreign airlines that are slashing fares below their break-even points, aiming to force Air Peace out prematurely.

He suggested that the government could assist Air Peace by reducing its operational charges, thereby providing the airline with a better opportunity to compete against foreign carriers backed by their governments.