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Why Nigeria’s national DFIs must be recapitalised 07 Feb 2025

The Central Bank of Nigeria (CBN) has identified the imperative of the recapitalisation of the commercial banks again, to enhance their capital adequacy and resilience under the prevailing macroeconomic challenges, and to enable them to adequately support the aspiration of growing the Nigerian economy to $1 trillion by 2030. The regulatory capital requirement of the commercial banks was set at N25 billion in 2004, equivalent to $189 million at that time. But based on the prevailing exchange rate of about N1,660/$1, the capital value has crashed to just $15 million. To address this inadequate capitalisation, the CBN has raised the capital base of commercial banks to as much as N500 billion, approximately $300 million. But what about the national Development Finance Institutions (DFIs)?

Many Nigerian national DFIs have retained the capital bases set in the statutes that established them decades ago. For instance, the capital base of Nigerian Export-Import Bank (NEXIM) is N50 billion, or approximately $30 million, set since 1991. Although the capital base of Bank of Industry (BOI) has increased over time to N500 billion, this level of capitalisation is still quite small given the breadth of the mandate of the bank to drive the growth of the nation’s approximately 40 million small and medium enterprises (SMEs). The Federal Mortgage Bank of Nigeria has capital reserves of N5 billion to address a deficit of 28 million housing units in the country.

Without mincing words, the recapitalisation of the commercial banks will not sufficiently meet the requirement for bank capital in driving the growth of the Nigerian economy. First, the banks are set up with the commercial orientation of profit maximisation. To achieve this goal, they avoid risks that may impair their capital and profitability, such risks that are preponderant in the SMEs landscape. With the inadequate financing to address the needs of the SMEs, Nigerian commercial banks see very few bankable projects in the real sector to lend to. Therefore, more of their lending supports trading, especially the importation of consumer goods, instead of activities that will help to promote value addition and industrialisation of the economy.

The importance of the DFIs is reflected in their general mandate of de-risking nascent industries and SMEs with financing and advisory services. It is when substantial progress is made in this regard that we can begin to see a shift in the economy, with the successful interventions creating a bigger pipeline of businesses that can attract commercial lending, jobs, and technological knowhow, while also fostering significant increase in foreign exchange revenue – especially through NEXIM, which is statutorily a trade policy bank.

Nevertheless, the argument for increased capitalisation of the national DFIs, which also include Bank of Agriculture, Infrastructure Bank, Development Bank of Nigeria, and National Economic Re-construction Fund, is not without difficulty. Many critics would point to their very limited impact and low level of professionalism. Others, surprisingly including people in the circle of policymaking, say the national DFIs are not paying enough dividends to the government despite its capital commitment and intervention funds.

These arguments are largely factually accurate. But their context must be addressed. The lack of sufficient impact is due to inadequate capitalisation. And like many public institutions in Nigeria, the DFIs have continued to suffer institutional disorientation from the government that set them up. Quite often, the management of the institutions are filled with professional misfits. Their Boards are worse. And powerful government officials have hijacked the hiring of staff in these specialised institutions, often leading to the preponderance of misqualified staff and overstaffing. This creates a negative incentive for unscrupulous borrowers who view loans provided by the DFIs as their own share of the “national cake” and engage in various tactics to scandalise the banks’ executives.

But as for payment of dividends, the policymakers should know that DFIs are specially mandated to deliver development impact and not profit and dividend. If they are equipped to deliver on their statutory mandates, it would be far more beneficial to the government, in terms of its credibility and in fostering the nation’s economic resilience and growth, than the payment of dividends. Seemingly without this understanding, the government has been providing capital to some international DFIs who pay it token dividends while using the capital to grow and develop foreign economies. So doing, Nigeria continues to languish in anaemic economic growth and underdevelopment. This thinking needs to change.

It is high time the federal government recapitalised the DFIs. It should also overlay their mandates with strong key performance indicators. For this to be effective, the institutions should be professionalised with the appointment of competent managements to run them and equally competent Boards to provide them oversight functions. A sprinkling of professional leaders is surely currently present in the institutions, but a full complement of competent executive leadership is needed to run them successfully.

China’s DFIs have played a big role in the country’s astonishing economic growth of the last six decades, driven by strong domestic manufacturing and export. Indeed, the country makes a strategic statement of its competitive and growth intent with the size of its mega DFIs. For instance, in 2023, the total assets of China Development Bank, valued at $2.6 trillion, was more than eight times larger than that of the Asian Development Bank.

But for Nigeria that aspires to maintain economic leadership in Africa, the authorised capital of BOI, Nigeria’s oldest and largest DFI, is less than 10% that of African Development Bank. NEXIM’s authorised capital is less than 1% that of African Export-Import Bank. This lays bare the scale of the challenge that the recapitalisation of the Nigerian DFIs must aspire to meet over the medium- to long-term.

Jide Akintunde is Managing Editor, Financial Nigeria publications, and Director, Nigeria Development and Finance Forum.