Higher capital
The Central Bank of Nigeria has unveiled new minimum capital requirements for banks, pegging the minimum capital base for commercial banks…
The Central Bank of Nigeria has unveiled new minimum capital requirements for banks, pegging the minimum capital base for commercial banks with international authorisation at ₦500 billion, national banks to ₦200 billion and those with regional authorisation at ₦50 billion. Merchant banks’ new capital base would be ₦50 billion, while the requirement for non-interest banks with national and regional authorisations are ₦20 billion and ₦10 billion, respectively. All banks must meet the minimum capital requirement, which shall comprise paid-up capital and share premium only, between 1 April 2024 and 31 March 2026, and are to submit implementation plans no later than 30 April 2024.
A new wave of banking recapitalisation has been on the cards for some time; this move should, therefore, not surprise keen industry watchers. However, this policy could have been implemented better. The capital base should have been gradually adjusted until it reaches the target point. Increasing the capital base of banks across the country is a good and necessary policy. The last recapitalisation exercise was carried out in 2008: 16 years ago. Since then, the exchange rate and many factors within the business environment have changed. Having a solid capital base helps banks withstand economic shocks and allows them to finance significant deals. Given the wave of divestments in the oil sector, this is necessary at the moment. Moves by domestic oil companies to take over these assets would require substantial financing. Over the years, Nigerian banks have been unable to play in the major leagues in other countries because they simply do not have the capital to support overseas operations. A positive is the two-year timeline the CBN has given the banks to meet this deadline. That is enough time for banks to explore the various options available to them to recapitalise. Crucially, the constraints of not including shareholders’ funds may be aimed at driving the banks to tap into foreign investors to raise some of the funds, bringing in the much-needed foreign exchange to the market. We expect that at the end of the recapitalisation, the number of banks in the industry will have shrunk by half. Undoubtedly, this will likely lead to mergers and rights issues, so investors should prepare to make strategic moves. In 2023, the Naira experienced a significant depreciation of 103%, causing the dollar value of Nigerian companies to decrease by the same amount, with all other factors remaining constant. With that in mind, the CBN decreed in September 2023 that “banks shall not utilise such FX revaluation gains to pay dividends or meet operating expenses.” This new directive to recapitalise will ensure that Nigerian banks regain the value lost due to the Naira devaluation and position them for future growth and expansion to other markets. Positively, banks are likely to attract foreign capital, which will aid in USD liquidity in the market.