The Central Bank of Nigeria has released new guidelines on its recapitalization policy for banks in the nation, barely 48 hours after reiterating the need to boost Deposit Money Banks’ capital base for increased productivity.
The new policies were made public on Thursday in Abuja in a statement that was signed by Sidi Ali, the acting director of corporate communications.The apex bank, she said, had ordered national banks to raise their capital bases to N200 billion and commercial banks with international authorization to N500 billion.
The acting director of the CBN stated that commercial banks with national licenses need to reach a N200 billion minimum, while those with regional authorization should reach a N50 billion capital floor.In the same way, non-interest banks that hold regional and national authorizations must raise their capital to N10 billion and N20 billion, respectively.
Two days prior to the CBN’s action, the Monetary Policy Committee had made hints that it would alter the banks’ capital bases in the country.During the press conference held after the 294th MPC meeting on Tuesday, Olayemi Cardoso, the governor of the CBN, urged DMBs to move quickly to boost their capital base in order to fortify the financial system against possible threats.The committee noted during its meeting that the nation’s commercial banks ought to step up their recapitalization efforts in order to mitigate risk.
According to Cardoso, “The MPC also examined changes in the banking system and observed that it is still a safe, sound, and stable sector. Therefore, the committee requested that the bank continue its monitoring and make sure that banks were adhering to current regulatory and macro-potential guidelines.In order to fortify the system against possible threats in a world that is becoming more interconnected, the MPC also ordered the banks to expedite recapitalization efforts.But according to the most recent CBN policy directive, commercial banks that have received international authorization must now raise their capital base to N500 billion.
Banks holding regional, national, and international licenses are currently required to maintain the minimum capital bases, which are stratified based on the type of banking license.
Almost twenty years have passed since the CBN’s 2004 banking reform, which raised the capital base from N2 billion to N25 billion. This is when the current capital base increase is being proposed. Massive merger and acquisition activity characterized the 2004 banking reform, which ultimately resulted in the country’s bank count dropping from 89 to 25.
In an exclusive report published last year, it was revealed that the chief executive officers of Deposit Money Banks and other top executives had started to take steps to raise new capital through preliminary merger and acquisition talks in order to strengthen the capital base of their respective institutions.Remember that in November 2023, Cardoso announced plans for the apex bank to implement a new round of banking recapitalization for the Deposit Money Banks at the 58th Annual Bankers’ Dinner, hosted by the Chartered Institute of Bankers of Nigeria.
According to him, the policy is a component of their efforts to improve their ability to assist Nigeria in its quest to become a $1 trillion economy by 2026.
“Notwithstanding the difficult local and international economic environment, Nigeria’s financial sector has shown resilience in 2023 with key indications of financial soundness largely meeting regulatory benchmarks,” Cardoso stated during the dinner.The results of a stress test performed on the banking sector also show how resilient it is to mild to moderate levels of ongoing financial and economic strain. However, there is still opportunity to improve and strengthen shock resistance.As a result, much work needs to be done to prepare the sector for upcoming difficulties.
President Bola Ahmed Tinubu’s mandate includes an ambitious economic agenda that calls for achieving a $1 trillion GDP in the next seven years.”Sustainable and inclusive economic growth at a significantly faster rate than current levels is required to achieve this target. Assessing our banking sector’s suitability to support the envisaged broader economy is imperative. It is not just about how stable it is right now. I believe that unless we take action, Nigerian banks will not have enough capital in relation to the financial system to support a $1 trillion economy in the near future.
The central bank will order banks to raise their capital as a first test.Ernst and Young’s report from earlier in March suggested that if the Central Bank of Nigeria’s capital requirement is raised from its current N25 billion, at least 17 of the 24 Deposit Money Banks may not be able to meet it.
In spite of the fact that financial soundness indicators indicate that Nigerian banks were generally secure and resilient as of 2023, the new report, “Navigating the Horizon: Charting the Course for Banks amid Plans for Recapitalization,” noted that some banks may depend on various recapitalization options, such as mergers and acquisitions, initial public offerings, placements and/or right issues, and undistributed profit (retained earnings).
Based on this, a worst-case scenario involving 24 banks and a 15x capital multiplier will be taken into account according to the kinds of banking licenses that each bank holds. The statement said, “We have benchmarked these banks’ current capital against the current capital requirement and four recapitalization scenarios.Despite the potential disruption, the apex bank has proceeded with its bold decision.
In a letter dated April 1, 2024, and ending March 31, 2026, Mr. Haruna Mustafa, Director of the Financial Policy and Regulation Department, signed on behalf of all commercial, merchant, and non-interest banks as well as the promoters of proposed banks, emphasized that all banks had to meet the minimum capital requirement within that time frame.
The CBN asked banks to think about bringing in new equity capital through private placements, rights issues, subscription offers, mergers and acquisitions, license authorization upgrades or downgrades, and other means so that they could meet the minimum capital requirements.
The circular also revealed that paid-up capital and share premium alone will make up the minimum capital. It emphasized that the Shareholders’ Fund would not serve as the foundation for the new capital requirement.The new requirement will not be met by additional Tier 1 Capital. Banks must strictly adhere to the minimum capital adequacy ratio requirement applicable to their license authorization, even in light of the capital increase.
“According to current regulations, banks that violate the CAR requirement will have to provide additional capital in order to stabilize their position,” the statement continued.According to the CBN circular, paid-up capital will be the minimum capital requirement for proposed banks.
It further stated that all new applications for banking licenses submitted after April 1, 2024 will be subject to the new minimum capital requirement.It stated that all pending applications for banking licenses for which a capital deposit had been made or an approval-in-principle had been given would continue to be processed by the CBN.
The promoters of the proposed banks would, however, have until March 31, 2026, to make up the difference between the capital deposited with the CBN and the new capital requirement.Dr. Muda Yusuf, the CEO of the Centre for the Promotion of Private Enterprise, praised the decision to boost banks’ capital bases in a previous interview with our correspondent, pointing out that the current capital base was woefully insufficient.
“The banking industry’s minimum capital requirements need to be reviewed in light of the significant loss of value amid depreciating domestic currency,” he stated.
The 2004 banking consolidation resulted in an increase in the minimum capital requirement for banks from N2 billion to N25 billion. The amount of capital that was revised was $187 million. The same N25 billion is now only worth $32.5 million.
Additionally, as was the case with the previous recapitalization drive, Uche Uwaleke, a professor of capital markets at Nasarawa State University, urged the CBN to reward banks for raising their capital bases rather than pressuring them to do so.”We applaud the idea of bank recapitalization. Large-scale projects require capital to be financed, particularly when the government plans to achieve a $1 trillion economy in a few years.
However, I believe that the 2005 approach should be somewhat modified in the strategy. He stated that incentives rather than coercion should be the main focus.
According to the CBN, all banks must submit an implementation plan by April 30, 2024, at the latest, that clearly outlines the option(s) they have chosen to meet the new capital requirement as well as the various activities involved and their timelines.
The CBN also revealed that, within the allotted time, it would keep an eye on and guarantee adherence to the new regulations.
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