Recapitalisation: Building buffers for Nigerian banks

With the volatility in the foreign exchange market, and the knock-off effect it has had on the bank’s balance sheet, the CBN in a bid to protect the country’s financial market directed banks to recapitalise; BENJAMIN UMUTEME writes. 

In a bid to strengthen the financial system against potential risk and at the same time increase the capital base of banks operating in the country, the Central Bank of Nigeria (CBN) recently announced new guidelines on its recapitalisation policy.

Also, the apex bank stressed that for banks to guard against risk, they need to accelerate their recapitalisation efforts.

Releasing the bombshell, the apex bank in a statement signed by its Acting Director, Corporate Communications, Hakama Sidi Ali, directed commercial banks with international authorisation to increase their capital base to N500 billion and national banks to N200 billion.

According to the acting CBN director, commercial banks with national licences must meet a N200 billion threshold, while those with regional authorisation are expected to achieve a N50 billion capital floor.

Similarly, non-interest banks with national and regional authorisations will need to increase their capital to N20 billion and N10 billion, respectively.

The CBN’s move came two days after the Monetary Policy Committee hinted that it would change the capital base of the nation’s banks.

 “The MPC also enjoined the banks to expedite actions on  recapitalisation to strengthen the system against potential risks in an increasingly globalised world.”

The policy direction by the CBN is coming nearly two decades after the CBN’s 2004 banking reform, which increased the then-prevailing capital base from N2bn to N25bn.

Backing up the pronouncement, Director, Financial Policy and Regulation Department, Mr. Haruna Mustafa, in a circular he signed to all commercial, merchant, and non-interest banks and promoters of proposed banks emphasised the need for them to meet the minimum capital requirement within 24 months commencing from April 1, 2024, and terminating on March 31, 2026.

Analysts and financial experts have welcomed the new development saying it will help strengthen the country’s financial system adding that it has the potential to boost the stock market. They also opined that banks have to upgrade themselves or risk being run out of business.  

Sufficient time

In a chat with Weekend Business, Director of the Institute of Capital Market Studies at the Nasarawa State University, Keffi (NSUK), Prof. Uche Uwaleke, the 24 months’ deadline given to the banks to recapitalize was sufficient enough for any serious organization to meet.

According to Uwaleke, the new calibrated minimum capital requirement is okay unlike the uniform capital base of N25 billion in 2005.

He said, “Shareholders’ Funds comprise Paid up share capital plus reserves. If my memory serves me right, this was permitted in 2005 but now disallowed possibly from the experience of the last exercise.

“I believe the FUGAZ (FBN, UBA, GTB, Access and Zenith) banks with international authorization will have no difficulty meeting this requirement.

“The stock market (Option 1) presents the most feasible option as few will likely go the Merger and Acquisition route. Access Bank has already announced it is raising N365 billion via Rights issue. I also think the two years period allowed is sufficient to implement recapitalisation. 

“A number of Banks including FBN, Access and Fidelity had already commenced the process of recapitalisation before now, especially since the CBN governor made the announcement in November last year.

“I equally think that since the new capital base is based on the type of authorisation (International, National or Regional), the CBN may consider applying a differentiated CRR according to the category of license instead of a uniform rate (currently 45%) for commercial banks.”

He, however, noted that “in view of the young age of Non Interest Banks in Nigeria, they should be allowed a longer period, say, three years to meet the minimum capital requirements.”

Future economic environment

Financial analyst Gabriel Idakolo told Blueprint Weekend that that the amount pegged for the banks was in order.

He said, “The new recapitalisation process authorised by the CBN along license categories putting International bank capitalisation at N500 billion, National at N200 billion and Regional banks at N100 billion is adequate for the present dispensation and the envisioned future economic environment at which these banks will operate in the next five to 10 years.

“These puts international banks recapitalisation at $500 million, National at $200 million and Regional banks at N50 billion. That is $50 million looking at the size of our economy which has the highest GDP in Africa, it is very realistic.

“Considering the capitalisation of some banks in South Africa and Egypt the new capitalization threshold is very adequate.” 

Facing reality

Political economist Adefolarin Olamilekan told this reporter that the realities on ground prompted the policy pronouncement by the CBN.

“Without doubt it is a fact that the required re capitalisation funds for banks by CBN is a huge task. That would not in any way deny the reality and necessity behind the new re-capitalisation exercise, except we are not mindful of what is going on in the global financial landscape, with its volatility and vulnerabilities that financial institutions in sub-Saharan Africa are exposed to.

“In the meantime, it may be difficult in the short run for the nation’s banking sector to overcome this herculean goal from the CBN, but it is a long term goal that benefits them and the economy. 

“Conversely the development to recapitalized the banks is laudable although not free from criticism of how the players in the banking sector will overcome the burden that comes with capitalization judging by our last two outing on banking recapitalization in 2005 and 2011 that resulted in merger and acquisition of some banks in the country. 

“Having said that, it is also appropriate to state that looking at the global financial sector with the banks playing a vital and consequential role demands a prudent capitalisation of the banks, essentially in our clime with the last year financial turmoil that ravaged financial institutions in the US and parts of Europe.

“Unfortunately, our banking sector cannot be immune from such disappointment, going by the interwoven, interconnected and integrated chain value system that the global economy has leveraged into the financial space. What we are saying is that due to the integration of our bank’s participation on the global financial market they cannot escape the volatile and uncertainty that comes along financial institutions suffered imbalance and vulnerable.

“However, the recapitalisation is imperative if we want our bank to be buoyant and enjoy stability for a long term,” the economist said.

‘Dirty money’

Adefolarin, who is also a development researcher, said, “We cannot rule out the fact that many banks would definitely approach this recapitalisation exercise in a manner suitable for them to be able to meet the deadline. So, also are those replying to sharp practices and unwholesome activities. 

“Interesting, we should not be surprised if dirty funds get into some of the bank vaults. Sadly, no bank across the world is free from dirty money. What is paramount for us is that the regulators and in this case to tighten up it monitoring and evaluation, enhance it supervision and checkmate excessive of bank executive and management as this exercise of bank recapitalization take effects because the danger of dirty money is the bane to financial instability and bankruptcy, leading to financial and banking stress in the economy.

“Hence we must do everything to avoid such a scenario in the financial and banking system at this time of recapitalisation. However, l believe the regulators would definitely do the needful, and importantly this is not our first time of bank recapitalisation.”

In the same vein, Idakolo said, “The CBN had envisaged that out of desperation some banks might want to do balance sheet reorganisation to recognise funds that are not fresh funds into their system but with CBN guidelines it will be difficult for banks to mislead the CBN.”

Going forward

Financial experts have asserted that the recapitalization exercise is an opportunity by the regulator to cement Nigeria’s financial system.  

Adefolarin said, “The recapitalisation of our banking sector is a right decision by CBN, but we believe ensuring the banks compliance with the rules and regulations’ guiding the exercise is germane to our economy.

“The players in the nation’s financial sector should see this recapitalisation decision as an opportunity to build stronger and more stability to the sector. In this way, it should be an eye opener to bank management and shareholders to see the sector as the real supporter of the real sector for economic development. 

“Lastly, CBN must engage in real time media sensitisation so as to educate Nigerians on the benefits of bank recapitalisation.”