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Implications of CBN five-year monetary policy

CBN unveils five-year policy thrust aimed at supporting Nigeria’s macro-economic growth and development.

Implications: Banks’ capital buffers to be strengthened by proposed recapitalisation, but risk ROAE dilution

Yesterday, the CBN governor unveiled his policy thrust for the next five years. Although the policy document outlines a number of objectives, the most important ones include

  1. a) the aim to achieve double-digit GDP growth in the next five years,
  2. b) bringing down inflation to single-digits
  3. c) improving the payment systems infrastructure and driving financial inclusion to 95% by 2024,
  4. d) maintaining the existing exchange-rate policy regime of a managed float and
  5. e) recapitalisation of the banking industry.

We believe that the proposed recapitalisation of Nigerian banks could have far reaching implications for the banks and the entire financial sector. No specific numeric target was disclosed by the governor. However, broadly speaking, it is a double-edged sword. While on the one hand, enhanced capital buffers will translate to improved stability of the financial sector, adding capital by extension will likely result in a reduction in banks’ ROAEs post-recapitalisation. It is impossible to provide extensive commentary on the ROAE reduction risk given the absence of a numeric recapitalisation target.

However, assuming the banks are required to increase their capital base by c.N50bn i.e. an absolute increase, and credit extension remains within our forecast trajectory, we expect to see an average ROAE reduction of c.100bps. A relative increase is more likely, keeping with the Basel Accord trends. All things being equal, Nigerian banks should be able to take on transactions of larger sizes. We also expect the drive for financial inclusion by the CBN and the imminent kick-off of payment service banks (PSB) to result in pressure for the banks on the e-payment front due to increased competition from Telco-backed PSBs. We should add that the financial inclusion target appears aggressive.

While the CBN’s objective of achieving double-digit growth is laudable, a potential downside risk to this is a slump in oil prices, particularly against the backdrop of limited diversification of government revenues. We also see the nation’s weak infrastructure base as a possible limitation. In addition, we believe that greater discipline is needed on the fiscal side to achieve this objective.

Given the success recorded by the CBN on exchange rate stability since the introduction of NAFEX in April 2017, it is no surprise that the Bank has chosen to maintain its current “managed float” regime. We do not expect unification of rates or a move to a free float any time soon.


Dele Fashomi
Dele Fashomi, seasoned journalist and communication teacher, is a holder of Master of Arts degree in Communication and Language Arts from the University of Ibadan in 1992/93. Earlier, he had bagged a Bachelor degree from the same university in 1984, after which he proceeded to the Nigerian Institute of Journalism, Lagos, in 1990, for a postgraduate diploma in Journalism. He had done many courses in communication, including the EU-BBC Editing Course in 2002. Mr. Fashomi combines effectively the practice, research and teaching of communication. And to date, he has published two academic works in communication: Issues in Communication Technology and Policy (2010) and Economic and Social Issues in Advertising and PR (2013). He had his first break in the Nigerian media in Concord Newspapers in 1990 and today, he has over two and half decades experience earned in several newspapers. He has been part of many start-ups, such as The Republic (1987), The Comet (1999), The Anchor 2001 - 2002; Sun Newspapers (2003); Westerner newsmagazine (2005 - 2010) as Editor; National Life (2011) as Sunday Editor, and Newswatch Newspapers (2012- 2016) as Daily Editor. Dele Fashomi is now the Publisher/Editor-in-Chief of newspaper online, which he started in July 2015. He is also into biography writing, with many books in his trail, some of which he wrote alone and one he co- authored with his mentor, Mr Dare Babarinsa, entitled:  Olabiyi Durojaiye - DARE TO BE DiFFERENT. He also guided and collaborated with Pa Olatunji Odusanya in writing his autobiography - AGAINST ALL ODDS. There are many other books in the works under his pen.