Less than 48 hours after reiterating the necessity to bolster the capital base of Deposit Money Banks for heightened productivity, the Central Bank of Nigeria has unveiled fresh directives on its recapitalization policy for the nation’s banks.
The latest guidelines were unveiled in a statement issued by the Acting Director of Corporate Communications, Sidi Ali, in Abuja on Thursday.
Ali highlighted that the apex bank has mandated commercial banks with international authorization to raise their capital base to N500 billion, while national banks are required to reach N200 billion.
For banks holding national licenses, they must meet a threshold of N200 billion, whereas those with regional authorization are expected to attain a capital floor of N50 billion.
Similarly, non-interest banks with national and regional authorizations are required to increase their capital to N20 billion and N10 billion, respectively.
The move by the CBN follows closely after the Monetary Policy Committee’s indication of potential changes to the nation’s banks’ capital base.
During the press briefing after the 294th MPC meeting on Tuesday, CBN Governor Olayemi Cardoso urged Deposit Money Banks (DMBs) to expedite actions to fortify their capital base, thereby fortifying the financial system against possible risks.
Cardoso emphasized, “The MPC also reviewed the banking system’s developments and observed that the industry remains secure, stable, and sound. The committee, therefore, called on the bank to maintain its vigilance and ensure banks’ compliance with existing regulatory and macro-prudential guidelines.”
“The MPC also urged the banks to hasten actions on recapitalization to bolster the system against potential risks in an increasingly globalized world,” Cardoso added.
However, the latest policy directive from the CBN specifies that commercial banks with international authorization must now raise their capital base to N500 billion.
The current capital base is categorized based on the type of banking license – banks with regional, national, and international licenses are presently expected to maintain the minimum capital bases.
This proposed increase in the capital base comes almost two decades after the CBN’s 2004 banking reform, which raised the then-prevailing capital base from N2 billion to N25 billion.
In an exclusive report last year, The PUNCH indicated that chief executive officers and other top executives of Deposit Money Banks had commenced efforts to raise fresh capital through preliminary merger and acquisition talks to reinforce their institutions’ capital base.
Recall that in November 2023, Cardoso, at the 58th Annual Bankers’ Dinner organized by the Chartered Institute of Bankers of Nigeria, disclosed the apex bank’s plans for a new round of banking recapitalization for the Deposit Money Banks.
At the dinner, Cardoso highlighted, “Despite the challenging global and local economic environment, Nigeria’s financial sector has shown resilience in 2023 with key indicators of financial soundness largely meeting regulatory benchmarks.”
“Stress tests conducted on the banking industry also indicate its strength under mild to moderate scenarios of sustained economic and financial stress. However, there is room for further strengthening and enhancing resilience to shocks,” he added.
Cardoso continued, “Attaining this target necessitates sustainable and inclusive economic growth at a significantly higher pace than current levels. It is crucial to evaluate the adequacy of our banking industry to serve the envisioned larger economy. As a first test, the central bank will direct banks to increase their capital.”
Earlier in March, a report by Ernst and Young revealed that at least 17 out of the existing 24 Deposit Money Banks might be unable to meet the Central Bank of Nigeria’s capital requirement if increased from the current N25 billion.
The report noted that some banks might depend on various recapitalization options, including mergers and acquisitions, initial public offerings, placements and/or right issues, and retained earnings, despite financial soundness indicators showing that Nigerian banks were largely safe and resilient as of 2023.
In spite of the potential disruption, the apex bank has moved forward with its bold action.
A circular signed by the Director of the Financial Policy and Regulation Department, Mr. Haruna Mustafa, to all commercial, merchant, and non-interest banks, as well as promoters of proposed banks, emphasized that all banks were required to meet the minimum capital requirement within 24 months, starting from April 1, 2024, to March 31, 2026.
To aid banks in meeting the minimum capital requirements, the CBN encouraged them to consider injecting fresh equity capital through private placements, rights issues and/or offers for subscription, Mergers and Acquisitions, and/or upgrade or downgrade of license authorization.
The circular also clarified that the minimum capital shall consist of paid-up capital and share premium only, excluding Additional Tier 1 Capital. The new capital requirement shall not be based on the Shareholders’ Fund.
“Additional Tier 1 Capital shall not be eligible for meeting the new requirement. Notwithstanding the capital increase, banks are to ensure strict compliance with the minimum capital adequacy ratio requirement applicable to their license authorization,” the circular added.
The CBN circular further stated that the minimum capital requirement for proposed banks shall be paid-up capital, noting that the new minimum capital requirement shall apply to all new applications for banking licenses submitted after April 1, 2024.
It also mentioned that the CBN would continue processing all pending applications for banking licenses for which a capital deposit had been made and/or an Approval-in-Principle had been granted.
However, it stated that the promoters of such proposed banks would need to bridge the difference between the capital deposited with the CBN and the new capital requirement by no later than March 31, 2026.
In a previous interview with our correspondent, the Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Dr. Muda Yusuf, welcomed the move to increase banks’ capital base, noting that the current capital base was grossly inadequate.
He remarked, “The minimum capital requirements of the banking industry need to be reviewed in light of the considerable loss of value amid a depreciating domestic currency.”
“During the banking consolidation of 2004, the minimum capital requirement for banks was raised from N2 billion to N25 billion. Today, the same N25 billion is the equivalent of just $32.5 million,” Yusuf added.
Uche Uwaleke, a Professor of Capital Markets at Nasarawa State University, urged the CBN not to coerce banks into increasing their capital base, as was the case during the last recapitalization drive; rather, they should be incentivized.
“The idea of recapitalization of banks is a welcome one. Capital is needed to finance big-ticket projects, especially when the government targets a $1 trillion economy in a few years,” he said.
“But I think the strategy should be somewhat different from the approach adopted in 2005. It should be more about incentives than coercion,” Uwaleke added.
Meanwhile, the CBN stated that all banks are required to submit an implementation plan (clearly indicating the chosen option(s) for meeting the new capital requirement and various activities involved with their timelines) no later than April 30, 2024.
The CBN also revealed that it would monitor and ensure compliance with the new requirements within the specified timeline.
