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Mortgage firms, banks panic over new capital base

Posted by By Chinedu Uwaegbulam (Lagos) and Mathias Okwe (Abuja) on 2004/07/19 | Views: 729 |

Mortgage firms, banks panic over new capital base

STILL locked in a battle for survival, Nigeria's mortgage firms may have been thrown into a maddening gyre by the recent increase in theirs and banks' minimum capital base, investigations have revealed.

*25 banks unhealthy, says CBN

STILL locked in a battle for survival, Nigeria's mortgage firms may have been thrown into a maddening gyre by the recent increase in theirs and banks' minimum capital base, investigations have revealed.

While the N25 billion minimumn base for banks policy has continued to attract different reactions from the nation's industrial and banking sectors, the CBN has insisted on the infallibility of its decision, adding that 25 banks are already unhealthy.

The anxiety in the mortgage sector is triggered by the inability of most of the Primary Mortgage Institutions (PMIs) to meet up with the N100 million minimum capital base placed on the industry and difficulty in raising deposits and exploring options in the new guidelines for their operations.

To date, only 45 of the mortgage firms in operation have met the minimum capital base requirement announced by Central Bank of Nigeria (CBN) in 2001. Besides, many of them have not been accredited for the National Housing Fund (NHF) by Federal Mortgage Bank of Nigeria (FMBN).

Industry watchers believe that if CBN were to put a ceiling for the sector, it would be between N500 million to N1billion while some others argue that it would be less, considering their focus on the housing industry.

In fact, opinions were divided on the attendant benefits of such increase on the sector. Many argue that it would engender confidence among depositors and create a healthy operational environment for real estate investments. Others say it will deepen the crises in the industry and wipe out its recent gains.

However, some also hold the view that many of the commercial banks that could not meet the new capital base may be forced to retrace their steps as commercial banks and acquire mortgage firms that are unable to meet such new requirements.

About 292 Primary Mortgage Institutions (PMIs) were licensed between 1990 and 1998. In July 1997, the licenses of 97 of them were revoked by the Federal Mortgage Bank of Nigeria (FMBN), which later handed over to the CBN in 1998 a total of 195 PMIs. The initial minimum share capital for PMI's was N5 million; a figure later raised first to N20 million and later to N100million.

CBN records shows that by June 2003, only 59 of the PMIs with N32.44 billion in cash and balances, loans and advances worth N12.28 billion and total assets of N55.20 billion, rendered periodic statutory returns. Total liability stood at N36.45 billion during the period and shareholders' funds amounted to N7.64 billion.

CBN has in many of its forum with Mortgage Banking Association of Nigeria (MBAN), dropped the hint of possible increase in the minimum capital base. Only last month, the CBN Deputy Governor, Mr. Tunde Lemo, urged them at the Committee of Mortgage Institutions of Nigeria (COMIN) meeting to embrace mergers and acquisitions as a strategy to avoid vanishing with the obvious threats in the nation's economy. He said this was a meaningful way to stay alive and make their services continually beneficial to the citizenry.

Lemo added that mortgage sector operators should create such understanding among themselves by which they could readily join hands to stay afloat in adverse situations. Other strategies to stay afloat, he noted, included the maintenance of constant liquidity in operations and enhancing the capital base for PMIs as a means of increasing their credibility.

But the CBN governor, Prof. Charles Soludo, has said that the new minimum capital base is in the best interest of the country. He told the Enugu State Governor, Dr. Chimaroke Nnamani, during a courtesy call at the weekend, that the policy is to save the banking sector from further distress.

The apex bank's chief revealed that 25 of the nation's 89 banks are currently unhealthy, adding that the policy is to save the economy from collapse.

He said: "Of the 89 banks in the system, 64 can be adjudged to be healthy, while 14 others totter between good health and not too healthy, while the remaining 11 (can be) classified as not doing well."

Soludo argued that Nigeria does not have banks in the true sense, describing some of the financial institutions as "mainly rent seekers which thrive on government deposits which they use to buy treasury bills and foreign exchange." He further accused them of engaging in trading and mercantile businesses to declare huge profits every year without adding value to the economy.

The CBN governor added that the new arrangement would assist the system to mobilise the N400 billion outside the banking sector for productive investments and create jobs as well as reduce poverty.

The CBN directive has continued to attract diverse opinions. A member of the House Committee on Banking and Currency, Ralph Okeke at the weekend lauded the increase. He was convinced of the merit in the decision after a session with the CBN governor.

Okeke said that the committee believed that the reforms being introduced by the CBN boss would not only sanitise the banking industry but also save the masses the agony of losing their deposits to distress in the banking sector.

According to the legislator, even the critics of the policy are aware that the CBN governor is doing the right thing.

"What he is doing is to save the masses. He wants the banks to get serious. Those shouting against the policy know that the CBN governor is correct. You cannot compare the pain of temporary job loss to the loss of deposits as it happened during the days of bank distress."

Okeke continued: "The essence is to get the banks to be serious and to show them that banking is not marketing second hand items. He (Soludo) knows what he is doing and we have assured him of our support, but the problem is that people have not had opportunity to see the content of the reform package. He has shown us and the committee is convinced."

The legislator, who is the chairman of the sub committees on states and local governments as well as the power generation, further said that the fear of job loss as a result of the new capital base in banks would be addressed through mergers that would likely produce more branches of the institutions.

Also, the chairman of Nestle Nigeria Plc, Chief Olusegun Osunkeye, believes the N25 billion new capital base for banks will make Nigeria become a big player in the global economy.

Describing the new capital base "as a good policy, Osunkeye said: "If we want to be big players in the global economy, and banks have a significant role to play, the bigger the capital base we can muster, the better we can play the big role in the banking sector worldwide."

Speaking with The Guardian at the weekend at Obaretin, near Benin, where he attended the yearly general meeting of Presco Plc, of which he is a director, Ogunkeye said banking was an international business in which Nigerian banks should be involved.

If we are going to source for loans and other credits for the development of Nigeria, the size of the loan or credit facilities you will be given by the lender will depend also on the capital you have in your balance sheet. Therefore, I think the new CBN policy is in the right direction."

He allayed fears of those who believe that the CBN directive was unhealthy for the banking sector, saying that he expects a dialogue between the CBN and the banks on the way forward.

On those who might be retrenched as a result, Osunkeye canvassed merger between banks, stressing that bank workers with special employees would be needed in other areas of the economy, especially in the fast-growing Information Technology Sector.

He said the 18-month period within which the banks must meet target was not too short, explaining that the N25 billion target was not meant to raise the paid-up capital of each bank but rather the shareholders' fund from public rights issue.

While urging total support for the policy, Osunkeye commended the interest of the Senate in the matter and urged Nigerians to do same.

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