INTRODUCTION
The Central Bank of Nigeria (CBN) being the apex bank in the country has as one of its key objectives[1] to promote a sound financial system stability. The CBN ensures the safety and soundness of the financial system in Nigeria through banking sector reforms, improved access to finance, identifying, monitoring, and assessing vulnerabilities in key nodes of the financial system, adequate institutional capacity building and implementation of good corporate governance practices.[2]
The CBN in furtherance of this objective, through a circular dated 28th March 2024, announced recapitalization of the banking sector, and prescribe an increment in the minimum capital requirements for “commercial”, “merchant”, and “non-interest banks” in Nigeria.
Recapitalization policy is not a novel concept in the Nigeria banking system, the sector has witnessed several recapitalization processes, with the last of it in 2004 when the CBN announced an upward review of the minimum capital requirements to #25 billion for commercial banks and with a deadline of 1st January 2006.
Why Recapitalization?
Recapitalization refers to the process of increasing financial strength by raising additional capital. The recapitalization of Nigerian banks arose out of the needs of the society, dynamic nature of the economy and sensitive nature of the banking industry.[3]
The Banking Sector recapitalization programme is a regulatory initiative of the Central Bank of Nigeria (CBN) that requires banks to increase their minimum paid-in common equity capital to a specified amount according to their license category and authorization within a specified period[4].
The Recapitalization policy 2024, did not come as a total shock to the Banking sector. The CBN Governor, Dr. Olayemi Cardoso had in November 2023, at the 58th Annual Bankers’ Dinner announced plans of the CBN to increase the capital base of banks.
The overall aim of the recapitalisation is to ensure that Nigerian banks have the capacity to take bigger risks and stay afloat in times of trouble, support different sectors of the economy, and improve confidence in the banking system.[5]
The CBN, by this policy aims at strengthening the financial sector and proposes to achieve the goal of a $1 trillion economy in Gross Domestic Products by 2030 of the Nigerian Federal Government.
Highlight/ Breakdown of the March 28, 2024, Recapitalization Circular
The circular was being directed to all “commercial,” “merchant,” and “non-interest banks,” and promoters of proposed banks. The circular announced-
i. Upward review of the minimum capital requirements.
ii. Options available to banks to meet the new minimum capital requirements.
iii. Time limit to comply with the new requirements.
iv. Submission of implementation plan.
v. Eligible capital for proposed banks.
The above listed shall be discussed seriatim.
i. Upward review of the minimum capital requirements.
The current minimum capital requirements for banks in Nigeria as required by the 2005 recapitalization are: International Banks – #50billion, National Banks – #25billion, and Regional Banks, #10 billion.
The CBN, in line with the Banks and other Financial Institutions Act (BOFIA) 2020[6], and as well with its objectives in the CBN Act of 2007[7], the CBN in the circular announced an upward review of the minimum capital requirements for commercial banks, merchant and non-interest banks, and promoters of proposed banks in Nigeria as follows:
| Type of Bank | Authorisation | Minimum Capital (#’ Billion) |
| Commercial | International | 500 |
| National | 200 | |
| Regional | 50 | |
| Merchant | National | 50 |
| Non-interest | National | 20 |
| Regional | 10 |
This recapitalization is coming after about 20 years when the banking sector was last recapitalized. Back then in 2005, the recapitalization had pronounced effect positively and negatively on the sector.
Of major concern to finance market and experts is the effect the recapitalization 2024 on the banking sector. Taking a clue from the 2005 recapitalization, there was a resulting effect of reduction of Nigerian banks from 89 to 24. The question how well positioned are the Nigerian banks to meet up with the new minimum requirements begs to be answered and thus is now a concern and a heated debate amongst experts.
From the records, there is no Nigerian bank at the moment that has its Total Eligible Capital that measures up to the new minimum requirements as set by the CBN and it is being watched measures that would be adopted by banks. Analyst have earlier estimated that 17 out of 24 banks might not meet the capital requirement from the CBN if it is increased 15-fold from its current #25 billion. [8]
ii. Options available to banks to meet the new minimum capital requirements
The recapitalization circular as released stipulates the options through which banks can satisfy the new minimum capital requirements. It can be through (i.) injecting fresh equity capital through private placement, right issue and/or offer for subscription. (ii) Mergers and Acquisition and/or (iii) Upgrade or downgrade of license authorization.
The medium of meeting the new minimum capital requirements is streamlined to those three options only and this raises serious concerns. It is evident that CBN places restriction on other sources as the circular further states that the minimum capital shall comprise Paid-up capital and share premium only it forbids harnessing of shareholders’ fund in meeting the new minimum capital requirements, also Additional Tier 1 Capital shall not be eligible for meeting the new minimum capital requirements. It is expected that bank maintain compliance with the minimum Capital Adequacy Ratio (CAR) requirement applicable to their license authorization.
Meanwhile, it is noted that the CBN is silent on retained earnings[9], it is estimated that if retained earnings are to be used in attaining the new requirements about seven (7) banks in Nigeria would conveniently transit to the new minimum capital requirements. It may be argued that the silence as regards retained earnings is an indication or a blank cheque for banks to either use it or not, on the other hand it may be an indication that the CBN seeks bank to increase their capital through fresh equity rather than relying on shareholders and funds and accounting records, thereby increasing, and strengthening their viability and resilience economically.
iii. Time limit to comply with the new requirements
Banks have a period of 24months to comply with the new minimum capital requirements. The timeline is between 1stApril 2024 and March 31st, 2026. The 24 months window is for transiting and to battle against extinction. Banks are to strategically analyze their capital and wisely map out plans or options they will be adopting in meeting up the new minimum capital requirements.
It is safe to say that the 24months is a timeline wide enough for banks to gradually comply, it is commendable that banks are given a period of 2 years, this would forestall disruption and instability in the sector and allow for a gradual and smooth transitioning.
iv. Submission of implementation plan
The CBN requires banks to submit to it their implementation plan and strategy in response to the recapitalization circular. The implementation plan is to show which of the available options the bank has chosen in reaction to the 2024 recapitalization policy. The deadline for the submission of the implementation plan is set for 31st April 2024.
The requirements for an implementation plan within a month of the recapitalization directives is a pointer that the CBN is dedicated and owing up to objectives it is saddled with in the CBN Act of 2007. There are indications that some banks are already in Mergers and Acquisition talks. In the following weeks to come, it will be clear to the financial markets the line of action that commercial, merchant, and non-interest banks, in Nigeria will be adopting in the recapitalization process.
v. Eligible capital for proposed banks
The recapitalization circular made provision not only for existing banks but also for proposed banks. The circular applies to fresh and pending applications. The minimum capital requirements option for proposed Bank is paid up capital[10] only.
The CBN strict adherence of paid-up capital as the only acceptable mode to meet up with the new minimum capital requirements as it applies to proposed banks is justifiable paid-up capital represents the company’s current status and how dependent the company is on the shares and how easily the company can pay off its debts[11] as well, it shows financial stability.
Implications of the recapitalization policy 2024
Inflation has weakened money’s value over time, making recapitalization imperative and inevitable. The essence is to ensure the safety of depositors’ funds, strengthen the financial system’s stability, deepen the banking system’s resilience, and reposition the bank to support growth.[12]
Recapitalization of the banks will reposition the commercial banks to finance large-scale infrastructure projects in the country. It is estimated that recapitalization of these banks will bring in N3.3 trillion into the system.
The recapitalization process will attract foreign investors into the banking industry through Foreign Direct Investments, therefore helping the country to drive part of the much-needed long-term foreign currency investment into this important and attractive sector to stabilise the value of the naira[13].
The apex bank foresees that some bank might struggle to meet up with the new minimum capital requirements, it allows for Mergers and Acquisition[14] as one of the available options banks may opt for.
In Mergers, two or more companies combine to form a new company, this implies the combination, joining or fusion or two or more formerly independent into one organization or company with common ownership and management[15]. Acquisition on the other hand, one company buys another company. [16]
Mergers and Acquisitions significantly dominated the 2005 recapitalization, The merger and acquisition associated with the 2005 recapitalization were more or less a forced or compelled one, though it significantly improved the performance and efficiency of the participant banks.
Analysis of the financial standing and of banks in Nigeria reveals a few of Nigerian banks might be considering Mergers and Acquisition, especially smaller banks, but this might be circumvented if the CBN would allow banks to use their retained earnings.
Meanwhile, aside Mergers and Acquisition, one of the options allowed by the recapitalization circular, is the option of upgrade or downgrade of license authorization. It is incumbent that banks strategically analyze and weigh the balances. While a downgrade of license authorization may be the best option for some banks to remain a going concern and avoid extinction. It is to be noted that the option to upgrade is always available after recapitalization processes.
Conclusion
To improve the resilience of Nigerian banks against both local and global shocks and promote the stability of the financial system, the recapitalization policy is imperative. The CBN intends to boost banks’ capacity to cushion unforeseen losses and facilitate their contribution to Nigeria’s economic growth by raising the minimum capital requirement.
The economy’s growth largely depends on the ability of larger banks with significant capital and capacity to underwrite higher levels of credit, which is crucial for facilitating and accelerating economic growth.
FOOTNOTES:
[1] Sec. 2 CBN Act 2007.
[2] Chizoba E. Didigu, Nsikak J. Joshua, Joel I. Okon, Annette O. Eze, Jurbe Y. Gopar, Charles N. Oraemesi, Blessing-Oxford U. Udofia, Daniel N. Yisa, Jude C. Ejinkonye, and Victoria E. Ette, Monetary Policy and Banking Sector Stability in Nigeria, available online at https://www.cbn.gov.ng/Out/2022/STD/Monetary%20Policy%20and%20Banking%20Sector%20Stability%20in%20Nigeria_1_26, accessed 5th April, 2024.
[3] EYENUBO. A. SAMUEL, Bank Recapitalization and Economic Prosperity: A Case of Nigeria Banking Industry available online at, https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&doi=fad60d27251122a5d30e5ac54c3e5ef3bd5fe505, accessed 5th April, 2024.
[4] CBN recapitalization policy circular, FAQ.
[5] Hope Moses Ashike, What CBN recapitalisation means for banks, economy, available online at, https://businessday.ng/news/article/what-cbn-recapitalisation-means-for-banks-economy/ accessed 5th April 2024.
[6] Sec. 9 (1), (2) Banks and other Financial Institution Act, 2020.
[7] Sec. 2 of the CBN Act.
[8] Aghogho Udi, Bank Recapitalisation: 17 out of 24 banks might not meet CBN capital requirements available online at, https://nairametrics.com/2024/03/15/bank-recapitalisation-17-out-of-24-banks-might-not-meet-cbn-capital-requirements-report/ , accessed 5thApril 2024.
[9] Retained Earnings is the amount of profit a company has left over after paying all its direct costs, indirect costs, income taxes, and its dividend to shareholders.
[10] Paid-up capital is the amount of money a company has received from shareholders in exchange for shares of stock. Paid-up capital is created when a company sells its shares on the primary market directly to investors, usually through an initial public offering (IPO).
[11]Adithyan, paid up capital, available online at https://cleartax.in/glossary/paid-up-capital/ accessed April 7th 2024.
[12] CPPE’s Outlook on the Recapitalization of Nigerian Banks, available online at, https://proshare.co/articles/cppes-outlook-on-the-recapitalization-of-nigerian-banks?menu=Economy&classification=Read&category=Monetary%20Policy accessed 6th April 2024.
[13] Eniola Olatunji and Olamide Ologunagbe, From M&As to capital raise: What to expect from banks’ recapitalisation, available online at, https://businessday.ng/news/article/from-mas-to-capital-raise-what-to-expect-from-banks-recapitalisation/, accessed 7th April 2024.
[14]Worthy to note that the CBN is statutorily empowered to regulates bank mergers pursuant to its powers under the Banks and Other Financial Institutions Act 2020 (“BOFIA”) and the Central Bank of Nigeria Act 2007. The FCCPA does not regulate Mergers of financial institutions licensed by CBN. See further Section 65 of the BOFIA, see also, Sec. 65(4) of the FCCPA that grants power to CBN to prescribe additional rules and procedures for mergers, acquisitions or any business combination involving banks and other financial institutions licensed by the CBN.
[15] Harlem Solicitors| Insights into the operation of Mergers and Acquisitions in Nigeria, available online at https://www.harlemsolicitors.com/2022/04/09/insights-into-the-operation-of-mergers-and-acquisitions-in-nigeria/ accessed 6th April 2024.
[16] Ibid.
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