capital ratio

Every Nigerian who has ever run a small business knows the feeling of keeping some money aside, untouched, just in case a customer fails to pay or a supplier suddenly raises prices. You do not spend everything you have. You keep a buffer. Banks are asked to do the exact same thing, except a regulator checks that they actually do it.

A bank collects deposits from millions of people and lends most of that money out as loans, mortgages, and overdrafts. If too many borrowers stop repaying at once, the bank could lose more than it can absorb, and depositors could be the ones left exposed. Capital ratio is the measure that tells everyone, including the Central Bank of Nigeria, how much of the bank's own money, not customer deposits, stands ready to soak up losses before anyone else feels the pain.

It is worked out by dividing a bank's capital by its risk weighted assets, mostly its loans, adjusted for how risky each one is. A mortgage to a salaried worker with steady income counts as less risky than an unsecured loan to a business with patchy cash flow, so it carries less weight in the sum.

In Nigeria, banks must hold a minimum capital ratio set by the CBN, and the exact figure has shifted over the years as the regulator tightens rules after shocks like the 2009 banking crisis. In the United Kingdom, the Prudential Regulation Authority enforces similar rules under international standards called Basel III, which most serious banking systems around the world have adopted in some form.

For someone sending money home from London to family in Lagos, this number rarely crosses their mind, yet it calmly decides whether the bank receiving that transfer is sturdy enough to be trusted with it. A strong capital ratio is one of the reasons a bank still stands ten years after everyone forgot to ask if it would.