The need to enhance the capital base of Deposit Money Banks for better efficiency has been reiterated, leading to the Central Bank of Nigeria announcing revised guidelines on its bank recapitalization policy in the country just 48 hours later.
A statement signed by the Acting Director of Corporate Communications, Sidi Ali, in Abuja on Thursday disclosed the new guidelines.
Commercial banks with international authorization have been directed by the apex bank to increase their capital base to N500bn, while national banks must meet N200bn.
Additionally, commercial banks with national licenses must reach a N200bn threshold, and those with regional authorization are required to achieve a N50bn capital floor.
Non-interest banks with national and regional authorizations also need to boost their capital to N20bn and N10bn, respectively.
The CBN’s action followed hints from the Monetary Policy Committee about changing the capital base of the nation’s banks.
During a press briefing after the 294th MPC meeting on Tuesday, CBN Governor Olayemi Cardoso urged DMBs to expedite increasing their capital base to fortify the financial system against potential risks.
The committee observed that to mitigate risks, commercial banks should accelerate their recapitalization endeavors.
Cardoso stated, “The MPC reviewed banking system developments, affirming its safety, soundness, and stability. It urged the banking sector to maintain surveillance, ensure regulatory compliance, and expedite recapitalization efforts for system strength against potential risks in a more globalized landscape.”
The latest CBN policy mandates commercial banks with international authorization to raise their capital base to N500bn.
Capital base requirements are currently stratified based on the banking license type, with banks holding regional, national, and international licenses expected to adhere to specific minimum capital bases.
Proposed capital base increments come nearly twenty years after the CBN’s 2004 banking reform, which elevated the prevailing capital base from N2bn to N25bn.
During the 58th Annual Bankers’ Dinner in November 2023, Cardoso announced the apex bank’s plan to conduct a new round of banking recapitalization for Deposit Money Banks.
He mentioned that this initiative aimed to enhance the capacity and support Nigeria’s goal of becoming a $1tn economy by 2026.
Cardoso emphasized, “Despite economic challenges, Nigeria’s financial sector showed resilience in 2023, meeting regulatory standards for financial soundness. However, there’s a need to strengthen further and enhance resilience to shocks.
“Given President Bola Ahmed Tinubu’s economic agenda targeting a $1tn GDP in the next seven years, sustaining inclusive and rapid economic growth is paramount. Assessing our banking industry’s adequacy to serve a larger economy requires proactive steps, starting with capital increase directives from the central bank.”
A March report by Ernst and Young indicated that at least 17 out of 24 existing Deposit Money Banks might struggle to meet the CBN’s proposed capital requirement exceeding the current N25bn.
Despite potential disruptions, the CBN proceeded with its assertive action.
In a circular to all commercial, merchant, and non-interest banks, the Director of Financial Policy and Regulation Department, Mr. Haruna Mustafa, emphasized the imperative for banks to meet the new minimum capital requirement within 24 months from April 1, 2024, to March 31, 2026.
Banks are encouraged to explore avenues like private placements, rights issues, mergers and acquisitions, license updates, and more, to meet the increased capital prerequisites.
The circular clarifies that the minimum capital should comprise paid-up capital and share premium, excluding Additional Tier 1 Capital from meeting the new requirement. Crucially, banks are urged to maintain strict compliance despite the capital hike.
The requirement for adequacy ratio must be adhered to according to the terms of their licensing agreement. Banks found in breach of the CAR requirement will need to infuse additional capital to rectify their situation. Minimum capital requirements for prospective banks are clearly outlined in the CBN circular – a stipulation that will apply to all fresh requests for banking licenses post-April 1, 2024. The CBN will continue processing existing license applications where some capital deposit has been made or an Approval-in-Principle has been issued. Promoters of such proposed banks are expected to bridge the gap between the capital previously deposited and the new requirement by March 31, 2026.
Dr. Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise, expressed support for the capital base increment in banks, highlighting the significant inadequacy of the current capital base. Uche Uwaleke, a Capital Markets Professor at Nasarawa State University, recommended that the CBN adopt an incentivizing, rather than coercive, approach towards banks to enhance their capital base, emphasizing the importance of capital in funding substantial projects.
Furthermore, the CBN mandates all banks to furnish an implementation plan detailing how they intend to meet the new capital requirement by April 30, 2024. The CBN reassured that strict monitoring and enforcement will be carried out to ensure compliance with the new regulations within the set timeframe.