Hindsight Insights: Reviewing CBN’s recapitalisation journey

In a bold move to bolster the Nigerian banking sector, the Central Bank of Nigeria (CBN) unveiled a significant recapitalization program. This initiative, announced on March 28, 2024, mandates Nigerian banks to raise their minimum capital base to designated levels depending on their licence and authorisation type. This policy shift signifies a pivotal moment for the country’s financial landscape, prioritising the safety, soundness, and overall stability of the banking system.

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Table 1: New Minimum Capital Requirement

Source: Adapted from CBN’s Financial Policy and Regulation Department, 2024
To achieve the Federal Government of Nigeria’s ambitious goal of a US$1 trillion economy by 2030, it is imperative to foster the growth of stronger, more resilient, and healthier banks. A robust capital base is vital for banks to provide substantial credit, fueling economic expansion. The recent adjustment in capital requirements, affecting commercial, merchant, and non-interest institutions, as well as proposed banks, has significantly increased the threshold from the previous ₦25 billion to a range between ₦50 billion and ₦500 billion. This adjustment comes with a compliance timeline spanning 24 months, from April 1, 2024, to March 31, 2026.

The Nigerian banking sector has a rich history marked by various transformations and challenges, each offering valuable lessons. From the previous recapitalisation in 2005 to the global financial crisis of 2008 and the subsequent recessions in 2016 and 2020, the industry’s resilience has been repeatedly tested. Moreover, history underscores the interdependence of the financial sector and the ramifications of regulatory measures. Thus, the recent capitalisation exercise should not be viewed in isolation but rather as a catalyst for broader systemic changes capable of reshaping the competitive landscape, fostering market consolidation, and driving innovation.

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2005 Recapitalisation exercise in retrospect

According to the former CBN Governor, Prof. Charles C. Soludo, the nation’s financial system encountered numerous challenges before 2005, such as a low capital base, high non-performing loans, activity concentration in a few banks, and a deficient corporate governance framework. The total credit relative to the GDP was only 20 percent, a figure even lower than that of many developing nations. The CBN estimated that up to N400 billion (approximately 4 percent of the GDP) remained outside the formal banking system, primarily kept under mattresses, indicating a lack of trust in the banking sector.

Structurally, the banking sector was highly concentrated, with the ten biggest banks holding 71 percent of the total assets and 86 percent of saving deposits. Of these, the biggest, First Bank Plc, had Tier 1 capital of just N24 billion (US$240 million), about 1/25th the size of South Africa’s biggest bank and compared to about US$526 of the smallest bank in Malaysia. Additionally, many other banks had less than $10 million in capital, with a sizable number of them engaging in suspect and outright illegal activities.

So, the CBN, seeking to address the issues of strengthening the banking system and ensuring the safety of depositor’s funds, announced on July 6, 2004 the increase of the new minimum capital base from ₦2 billion to ₦25 billion (equivalent to $250 million at an exchange rate of $1=N100) for the 89 Deposit Money Banks (DMBs) with an 18-month timeframe ending on December 31, 2005.

The expectations were that banks would meet the new paid-up capital either by consolidation (mergers, outright acquisitions, or takeovers) or injection of fresh equity capital through the capital market (private placement, right issues, or public offers). Doing so will align the Nigerian banking sector with global standards, particularly the Basel Accord.

Meeting the deadline:

Many doubted the feasibility of the 18-month deadline set by Soludo in July 2004 for banks to bolster their holdings. This scepticism stemmed partly from concerns about potential extensions due to the pressure it might induce, especially if bank closures lead to job losses.

 “To achieve the Federal Government of Nigeria’s ambitious goal of a US$1 trillion economy by 2030, it is imperative to foster the growth of stronger, more resilient, and healthier banks. A robust capital base is vital for banks to provide substantial credit, fueling economic expansion.”

Soludo’s initiative led to a significant reduction in the number of banks, with 75 out of 89 merging to form 25 consolidated banks. These new entities accounted for 93.5 percent of the banking system’s deposit liabilities. Through compliance, they raised over ₦400 billion from the capital market, including notable transactions like Zenith Bank’s N20.3 billion IPO and foreign direct investments totaling US$ 652 million and £162,000. The banking sector’s share of the Nigeria Stock Exchange nearly doubled from 24 percent to almost 50 percent. Remarkably, this consolidation occurred without the need for government bailouts.

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Furthermore, the substantial capital mobilisation resulted in increased liquidity, leading to a significant drop in interest rates and a remarkable 40 percent surge in private-sector lending. Recapitalization liberated Nigerian banks from their dependence on public sector funds, empowering them to finance major transactions in critical sectors like oil, gas, and telecommunications. The expansion of bank branches from 2,900 in 2005 to nearly 5,500 by mid-2008 was also notable. During this period, domestic money banks (DMBs) gained access to more credit lines from foreign banks, contributing to improved bank performance. Additionally, the non-oil sector experienced rapid growth, expanding by 8.5 percent in 2005, outpacing the overall economy’s growth rate of 7.4 percent.

During the 2005 exercise, scale posed a significant challenge for many Nigerian banks. The largest bank in Africa at the time, Standard Bank of South Africa, had total assets of approximately US$45 billion (equivalent to ₦5.8 trillion), surpassing the combined total assets of the 25 Nigerian banks, which were just over ₦5 trillion. Although consolidation partly addressed this issue, it resulted in the reported loss of over 5,000 jobs in affected banks such as Oceanic Bank, Spring Bank, Union Bank, Intercontinental Bank, Stanbic IBTC, and others. Consequently, the announcement in 2024 sent shockwaves throughout the country’s banking sector.

What is different this time?

The banking ecosystem has since evolved, offering banks greater flexibility in determining their operational scope. The regulatory authority suggests that banks can meet requirements through actions such as injecting fresh equity, engaging in mergers and acquisitions, or adjusting their licence authorisation. Banks have the autonomy to explore these options to avoid collapse.

In contrast to the 2005 initiative, there has been controversy surrounding a clause that specifies only paid-up capital and share premium as part of the minimum capital requirement, omitting shareholders’ funds and retained earnings. This clause has stirred debate among industry participants. Is it conceivable that the top ten Tier 1 and Tier 2 banks, including GT Bank, Zenith, UBA, Access, FBN, EcoBank, Stanbic IBTC, FCMB, Fidelity, Sterling, and others, will need to raise nearly $4 trillion in the next 24 months?

Table 2: CBN’s New Minimum against the Old Capital Base

Computed By BusinessDay Intelligence
As we navigate the new recapitalisation policy, it is essential to heed the lessons and harness the opportunities presented by history. Strengthening capital buffers, overhauling the risk management frameworks, and fostering a culture of transparency and accountability are very crucial to realising the goal.

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Furthermore, stakeholders must also be vigilant about the pitfalls of complacency and short-termism. While the road ahead may be fraught with challenges, it also holds promises for banks willing to adapt, innovate, and collaborate.

Contact: Chief Research Officer, Nike Alao: 08034856676

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