Editorial: Recapitalising The Banks

Highlights

• The response to the strengthening of banks’ capital base must be measured; it is not yet Uhuru.
• The priority should be the mobilisation of patient, long-term capital to support sustainable development.
• New technology must be central to advancing financial inclusion and bringing the underbanked into the formal financial system.
• Nigeria has an overabundance of small businesses; finance should be directed towards scaling them up as a foundation for a competitive, increasingly export-oriented economy.

With most banks holding national licenses now meeting the new capital requirements, there is a mix of relief, expectation and, in some quarters, something close to delusion. If history is any guide, the proper response at the end of this exercise should be one of cautious, measured optimism.

A similar mood followed the 2005 banking reforms under Charles Soludo. That optimism, in retrospect, proved misplaced. The wider economy did not experience the transformation many had anticipated. Today, Nigeria still contends with deep structural weaknesses — widespread poverty, persistent inflationary pressure alongside slow growth, and a rising tide of youth unemployment with clear implications for social stability. The promise of reform has not translated into broad-based prosperity.

This should not be surprising. There is a structural weakness at the heart of the system. Nigeria’s banking framework remains largely anchored to the Anglo-Saxon model, which is inherently short-term in orientation. It prioritises liquidity and quick returns over long-term investment in production. Even in its home base, successive British governments since 1945 have struggled with the limitations of this model, particularly in driving competitiveness and export growth.

It is for this reason that attention has often turned to alternatives. The German “Länder” banking system is built on patient capital and enduring relationships between banks and industry. It has been central to Germany’s economic resilience since the aftermath of World War II. There is an irony here: elements of long-term financial intermediation observed in parts of Nigeria, especially in Ijesaland, were studied and adapted in Europe, reportedly drawing the interest of Otto von Bismarck.

The implication is straightforward. Sustainable development cannot rest on short-term capital. Nigeria must place greater emphasis on development finance built on patience and scale. A useful reference point is Brazilian Development Bank (BNDES), established in 1952 and consistently strengthened over time. It has provided long-tenor financing, in some cases spanning decades, and remains central to Brazil’s industrial growth.

There is also a case for reviving cooperative finance. The reforms of 2005 strengthened the commercial banking sector but weakened community-based financial institutions. Yet, these institutions once played a vital role in supporting agriculture and small-scale enterprise, particularly in the 1950s and 1960s. Their decline has left a gap that commercial banks have not filled.

Countries such as the Netherlands offer a useful example. Cooperative and agricultural banks there continue to underpin productivity, helping a relatively small country become one of the world’s leading food exporters. The lesson is not to copy wholesale, but to adapt what works.

There is, in addition, the question of how the newly strengthened banks deploy their enlarged capital base. If it is channelled largely into government securities and short-term trading, the broader economy will see little benefit. The real test will be whether credit flows to manufacturing, agriculture and small businesses on terms that allow them to grow and compete.

Regulation must also play its part. Capital adequacy, on its own, is not a guarantee of economic impact. The authorities must ensure that lending practices align with national development priorities, without undermining prudential standards. It is a delicate balance, but one that cannot be avoided.

Nigeria cannot afford another cycle of inflated expectations followed by disappointment. Recapitalisation is only a step. The real work lies in building a financial system that supports long-term investment, job creation and sustained economic growth.