On the 28th of March, 2024, the Federal Government of Nigeria, through its primary financial regulator, the Central Bank of Nigeria (CBN), announced an increase in the capital base of various categories of banks in Nigeria. This restructuring as stated by the CBN governor, Mr. Olayemi Cardoso, was put in place with a view to strengthen the financial system of Deposit Money Banks (DMB’S).
In Nigeria, banks are classified according to their operational functions, geographical coverage as well as the types of licenses they possess. The Central Bank of Nigeria, being the primary regulatory authority overseeing banking operations nationwide, is by virtue of Section 3(1) of the Banks and Other Financial Institutions Acts (BOFIA) 2020 vested with the authority to issue banking licenses.
The underlisted are the broad categories of Banks in Nigeria.
1. Commercial Banks
2. Non-interest Banks
3. Merchant Banks
4. Microfinance Banks
5. Mortgage Banks
In view of the Circular issued by the Central Bank of Nigeria, greater emphasis will be placed on the first three categories of banks.
1. Commercial Banks: Commercial banks are financial entities that address individuals’ needs by accepting deposits, managing savings accounts, providing financial and credit facilities, providing foreign exchange services, extending personal or business loans, as well as other banking activities that may be permitted by the Central Bank of Nigeria from time to time. They play a crucial role in ensuring the smooth operation of Nigeria’s economic and financial system.
Additionally, Commercial Banks are primarily distinguished by the type of banking license they hold. These licenses further segment Commercial Banks into different spectrum.
a. International License: An international license permits commercial banks to conduct banking activities across all states in Nigeria, along with maintaining offshore banking operations, subject to regulation and compliance with the laws of the host country,
b. National License: A national license allows a commercial Bank to carry out banking operations in all states in Nigeria only.
c. Regional License: A commercial bank holding regional banking authorization is authorized to conduct banking operations within a range of six (6) to twelve (12) states of the Federation, situated within a maximum of two (2) geographical zones of the Federation, as well as within the Federal Capital Territory.
2. Merchant Banks: These are financial institutions that provide loans and capital for businesses. Merchant banks operate in a distinctive manner, setting them apart from other financial institutions. Their main role is to furnish capital to companies, whether in the form of equity, debt, or a combination thereof. Typically, these banks engage closely with companies, actively participating in their operations, and assisting them in raising funds through methods such as initial public offerings (IPOs), private placements or other alternative means. In addition, merchant banks offer financial advisory services on matters such as restructuring, mergers, acquisitions, and various other strategic initiatives.
3. Non-Interest Banks: These are Financial institutions that provide an ethical alternative to the conventional banking system, The core principle of non-interest banking and finance revolves around risk-sharing. Unlike conventional banking, where banks serve as lenders and borrowers bear the risk, non-interest banks operate as partners with their clients. Both the bank and the client mutually share the profits or losses of an investment, fostering responsible lending and borrowing practices. This banking model is rooted in Islamic principles that regard interest as unjust and exploitative.
As per the Circular issued by the CBN, the persistent economic challenges facing the Nigerian economy have necessitated the requirement for various categories of banks in Nigeria to increase their capital base as follows.
Types of Banks Authorisation Minimum Capital Base (₦ Billion)
1.Commercial
a) International —– ₦500 Billion
b)National —–₦ 200Billion
c)Region —– ₦ 50Billion
2. Merchant
a)National —–₦ 50Billion
3.Non-Interest
a)National —– ₦20 Billion
b)Regional—– ₦10 Billion
According to the Circular issued by the Central Bank of Nigeria, all banks are required to take note of the following provisions:
1. For Existing Banks
a. The Minimum Capital specified above shall comprise of paid-up capital and share premium only, for the avoidance of doubt, the new capital shall not be based on shareholders funds.
b. Additional Tier 1 Capital shall not be eligible for the purpose of meeting this new requirement.
c. All banks are required to meet the minimum capital requirement within a period of 24 months commencing from April 1, 2024, and terminating on March 31, 2026.
d. Notwithstanding the Capital increase, banks are to ensure strict compliance with the minimum Capital Adequacy ratio (CAR) requirement applicable to their license authorization.
e. In line with the extant regulations, banks that breach the CAR requirement shall be required to inject fresh capital to regularize their position.
2. For Proposed Banks
a. The new minimum capital requirement shall be paid-up capital.
b. The new minimum capital requirement shall be applicable to all new applications for banking licenses submitted after April 1, 2024.
c. The CBN shall continue to process all pending applications for banking license which capital deposit had been made and/or Approval-in-Principle (AIP) had been granted. However, the promoters of such proposed banks shall make up the difference between the Capital deposited with the CBN and the new capital requirement not later than March 31st, 2026.
What does this policy mean for Banks in Nigeria and Nigerians by Extension?
To appreciate the advantage or otherwise of this newly released Circular, it is pertinent to understand the concept of recapitalization as it relates to the banking sector. Recapitalization of banks refers to the corporate restructuring of a bank through various modes, one of which is the increase in the capital base of a corporate entity, in this case banks in Nigeria.
The history of recapitalization of banks in Nigeria is not new to the finance sector, as far back as the late 50s, banks in Nigeria have gone through a series of increases in capital base. This is in line with Section 9 of the Banks and Other Financial Institution Act (BOFIA) 2020, which gives the CBN the power to determine the minimum capital requirement of banks in Nigeria.
The earliest in time was the recapitalization of banks in 2004 when the capital base of banks under the administration of former President Olusegun Obasanjo was increased from 2 billion naira to 25 billion naira.
Some of the reasons for recapitalization of banks includes but are not limited to.
1. Creating a Strong Banking Financial System: The president of the Federal Republic of Nigeria- President Bola Ahmed Tinubu, as part of the agenda for his administration is set to make Nigeria a $1 trillion dollar economy by 2030. Thus, the financial sector has a great role to play in making this agenda a reality. This, amongst many other reasons, spurred the recapitalization policy to ensure that banks in Nigeria have the Capital Adequacy Ratio needed to service a $1 trillion dollar economy (Capital Adequacy Ratio refers to the combined capital strength of a corporate entity).
2. Bridging the gap between debt-to-equity ratio of banks: Debt to equity ratio is the ratio of indebtedness of a corporate entity vis-a-vis its common stock. Over the years, banks with a low capital base often raise funds through the issuance of debentures and other lending instruments. Oftentimes these debts tend to outweigh the equity of corporate entities, leading to bankruptcy and distress. Thus, to ensure that the liability of banks do not outweigh their assets, there is a need for an increase in the capital base to allow banks float their securities in the open market to meet up with this new demand.
3. To encourage foreign portfolio investment and infrastructural developments (FPI)): Foreign Portfolio Investment is a cross-border investment into a corporation by a person or persons outside the shores of the corporate entity. This is done by purchasing the equities of the corporate entity. With respect to recapitalization, it helps to attract foreign investment into the country, by allowing banks offer their shares on the open market in different ways ranging from an Initial Public Offering (IPO), Private Placement, Rights Issue, etc.
This in turn helps the government to generate revenue by way of taxation. This revenue generated can be used for infrastructural developments to enhance the quality of life in Nigeria.
This new policy portends that banks in Nigeria, and by extension Nigerians, will likely experience changes in the banking sector. Specifically, Deposit Money Banks may need to raise their capital bases to comply with the requirement outlined in the Circular. This will impact various aspects of banking operations and services offered to customers, potentially influencing lending practices, interest rates and overall banking stability in Nigeria.
While all the reasons for recapitalization stated above are a step in the right direction, a negative impact of this policy is that we may see an increase in the unemployment rate in the banking industry. To meet up with this new capital base, smaller banks in a bid to stay in business may likely explore the options of a merger or an acquisition, which may result in the downsizing of employees to cut costs, shooting up the unemployment rate in Nigeria. Thus, the Federal government should put adequate solutions in place to mitigate the negative downside to this policy.
In conclusion, we remain optimistic that this new policy will foster profitable growth in Nigeria and enhance its global economic significance.
Written by
Damilare Adegoke
Associate
Akinlawon & Ajomo