The Central Bank of Nigeria (CBN), on March 28, announced the upward review of the minimum capital requirement for banks in the country. CHIMA NWOKOJI, in this report, takes a look at how the exercise will reshape the Nigerian banking landscape.

Players in the Nigerian banking sector recently woke up to the news that the capital base of banks with international authorisation had been increased to N500 billion while that of national banks was increased to N200 billion.

The Central Bank of Nigeria (CBN) noted that commercial banks with regional authorisation are expected to achieve a N50 billion capital base. In contrast, merchant banks are expected to shore up their capital to N50 billion as the minimum capital requirement.

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The apex bank directed non-interest banks with national and regional authorisations to boost their capital to N20 billion and N10 billion, respectively.

With this development, analysts have quickly predicted a sector consolidation that will usher in a new era of mergers and acquisitions.

The CBN noted that all banks are required to meet the minimum capital requirement within 24 months, commencing from April 1 and terminating on March 31, 2026.

Experts say this is in line with the Basel committee’s capital requirements. Basel III builds on the previous accords – Basel I and II – and is part of a continuous process to enhance regulation in the banking industry. The accord aims to prevent banks from hurting the economy by taking more risks than they can handle

The Basel Committee on Banking Supervision is a panel convened by the Bank for International Settlements (BIS) in Basel, Switzerland, which aims to ensure regulators globally apply similar minimum capital standards so that banks can survive loan losses during tough times.

Indeed, bank consolidation plays a central part in macroeconomics, notably influencing factors such as money supply, interest rates and inflation. In essence, consolidation alters the structure of the banking sector, affecting bank lending behaviour, market competition and monetary policy transmission mechanisms.

When banks merge or are acquired, the newly consolidated entity often holds greater resources, enabling it to lend more. This increased lending capacity eventually results in a higher money supply. In simple economics, money supply is the total amount of money in circulation in an economy at a particular point in time. It includes cash, coins and balances held in checking and savings accounts.

Most analysts foresee potential headwinds that can materialise in form of the dilution of returns for shareholders, the risk of lenders inadvertently generating bad risk assets or engaging in high-risk behaviours to deploy additional liquidity and the possibility of high industry concentration following consolidations, leading to oligopolistic influence.

However, other industry watchers believe the recapitalisation exercise is a win-win for the sector and the economy in general.

In a recent report, Agusto & Co, a global credit rating and research firm, highlighted the fact that the recapitalisation of banks is the way to make Nigerian banks more robust. The report described it as a needed drive capable of revolutionising the banking sector and making the government’s goal of attaining a $1 trillion economy by 2026 feasible.

Analysts at the credit rating firm stated that the directive will see the size of the banking industry increase significantly with the sector attracting more investments required to boost their capital base.

The major focus of the recapitalisation terms is to ensure that Nigerian banks have the capacity to take bigger risks and stay afloat in times of trouble, support different sectors of the economy and improve confidence in the banking system.

Agusto & Co said, “We anticipate a revolution in the banking industry which could exceed those witnessed during the 2004 exercise. New shareholders and institutional investors are expected to take advantage of the available opportunities.

“Given the low valuation of Nigeria banks (in USD terms), the relatively good performance of the banks and the appetite for banking licences as reflected in the number of applications pending with the CBN, we believe the industry should be able to attract the needed investments to shore up the capital base.”

The Lagos-based firm noted that with the review of the minimum capital base, mergers and acquisitions of banks that cannot meet the requirement is likely.

“We also anticipate some mergers and acquisitions similar to 2004 when the regulation-induced recapitalisation exercise reduced the number of banks to 25 from 89,” analysts at Agusto & Co said.

By jacking up the capital requirements for banks, the apex bank is on the mend to provide adequate capital buffers to support the $1 trillion Gross Domestic Product (GDP) envisioned by the Bola Tinubu administration by 2026.

According to the report, attaining the trillion dollar economy through the recapitalisation exercise will address the declining consumer purchasing power, strengthen government institutions, de-risk some sectors of the economy and reduce bureaucratic bottlenecks

“The recapitalisation exercise is necessary to provide the funding needed to drive the $1 trillion economy the current administration is trying to achieve.

“Based on the experience of the last regulatory-induced recapitalisation exercise, we believe new sectors will be created while some existing industries will be expanded as the banks seek to generate returns for the enlarged capital base,” it added.

According to Ayodeji Ebo, Managing Director/CBO, Optimus by Afrinvest, a larger capital base will enable banks to underwrite bigger levels of credit in the economy and ultimately generate higher income. The new single obligor limit based on the new capital will enable banks to finance larger ticket transactions. It will lead to a potential increase in the cost of capital due to the higher cost of equity capital relative to debt.

“The banks must work harder to ensure that the capital raised is deployed in profitable opportunities to create value for investors,” Ebo said.

The areas the recapitalisation exercise will touch on include economy of scale: The tier-1 banks control over 70 percent of total assets and revenue in the sector. This implies that scale has a major role to play in this space. The recapitalisation will reposition the banks to be more efficient, resulting in increased capacity.

Looking at the implication for the economy, Ebo said a stronger financial system will provide great support for the Nigerian economy as it works towards evolving into a $1 trillion economy in 2030.

Attract foreign investments: Given the estimated required additional capital for banks (N3.3 trillion), the banks will have to attract foreign portfolio and direct investors to invest in the capital raise. This will increase foreign exchange liquidity in the economy and ultimately support Naira stability.

Increase in business activities: To deliver value to shareholders, the banks will need to expand their business activities, especially lending in the medium to long term. “We hope this will impact the SMEs space, which has enjoyed minimal support from the commercial banks.”

As at end-June 2004, there were 89 deposit money banks operating in the country, comprising institutions of various sizes and degrees of soundness. Structurally, the sector was highly concentrated as the 10 largest banks account for about 50 percent of the industry’s total assets/liabilities. Most banks in Nigeria have a capitalisation of less than $10 million.

Even the largest bank in Nigeria had a capital base of about $240 million compared to $526 million for the smallest bank in Malaysia.

Stakeholders believe that Nigerians have a duty to be proactive and to strategically position Nigerian banks to be active players and not spectators in the emerging world.

The inability of the Nigerian banking system to voluntarily embark on consolidation in line with the global trend has necessitated the need to consider the adoption of appropriate legal and supervisory frameworks as well as a comprehensive incentive package to facilitate mergers and acquisition in the industry as a crisis resolution option and to promote the soundness, stability and enhanced efficiency of the system.

Professor Charles Soludo, the then governor of the CBN, at the special meeting of the Bankers’ Committee in Abuja, on July 6, 2004, said, “All over the world and given the internationalisation of finance, size has become an important ingredient for success in the globalising world.

“In the world of finance, no country can afford to operate in isolation. The last few years have witnessed the creation of the world’s banking group through mergers and acquisitions. The trend has been influenced by factors such as prospects of cost-savings due to economies of scale as well as more efficient allocation of resources, enhanced efficiency in resource allocation and risk reduction arising from improved management.”

Mergers and acquisitions, especially in the banking industry, is now a global phenomenon. In the United States of America, there had been over 7,000 cases of bank mergers since 1980, while the same trend occurred in the United Kingdom and other European countries. Specifically, in the period between 1997 and 1998, 203 bank mergers and acquisitions took place in the Euro area. Cross-country mergers are also taking hold.

In 1998, a merger in France resulted in a new bank with a capital base of $688 billion, while the merger of two banks in Germany in the same year created the second largest bank in Germany with a capital base of $541 billion. In many emerging markets, including Argentina, Brazil and Korea, consolidation has also become prominent, as banks strive to become more competitive and resilient to shocks as well as reposition their operations to cope with the challenges of the increasingly globalised banking systems. In Korea, for example, the system was left with only eight commercial banks with about 4,500 branches after consolidation.

According to Soludo, “As I stand before you today, I can visualise the Nigerian and world economy in the year 2025 and 2050. What I see is a world economy with no more than 10-20 mega-banks all over the world. I see national and cross-national mergers and acquisitions taking place in massive scales. It will not be a world for marginal or fringe players. Countries that fail to proactively position themselves today will wake up then to continue to complain of marginalisation.

“I can see Asia consolidating. I see consolidation in Europe, America and South America. Consolidation is taking place in South Africa such that one bank in South Africa, Amalgamated Banks of South Africa (ABSA), has asset base larger than all of Nigerian commercial banks put together. Malaysia has recently gone through its first round of consolidation whereby about 80 banks shrunk to about 12 within one year.

“In Malaysia, banks were required to raise their capital base from about $70 million to $526 million in one year. In Singapore (with about three million people), banks have now consolidated to about six and further moving down to three, with the second largest bank having a capital base of about $67 billion.”

According to Soludo, no bank in Nigeria was in the top 1,000 banks in the world and if you needed to make an investment of $500 million, you had to go through the then 39 banks.

Also, he noted, if you wanted to borrow abroad, there was no bank in Nigeria to guarantee that.

However, Soludo said when he started the consolidation“in the 28th month, we finished. We had 25 healthy banks, scrapped 14 and cleared up the system.

“Three years after, 14 Nigerian banks made it to the top 1,000 banks in the world and two of them made the top 300 banks in the world.

“That was when Nigerian banks began to have the muscle to be able to compete for big businesses.”

According to Soludo, before the banking consolidation, mega-businesses, including airline, were impossible in Nigeria.

“The rich and mighty in Nigeria would not have been where they are today without banking consolidation. All of a sudden, businesses that could not borrow a few 100 million are now signing a $100 billion downstream investment.

According to Ike Chioke-led Afrinvest (West) Africa Limited, “From our initial assessment, positives from the recapitalisation drive include strengthening the capacity of lenders to support credit creation in the real sector, the potential influx of capital into the domestic economy through offshore capital-raising endeavours and the likelihood of the emergence of stronger and more resilient banking entities post-recapitalisation.

Muda Yusuf, Chief Executive Officer (CEO) of the Centre for the Promotion of Private Enterprise (CPPE), said the purpose of adequate capitalisation is to ensure the efficiency and stability of the financial system.

He said, “The real issue is that inflation had weakened the value of money overtime, which makes recapitalisation imperative and inevitable. The essence of recapitalisation is to ensure the safety of depositors’ funds, strengthen the stability of the financial system, deepen resilience of the banking system and reposition the bank to support growth”

Yusuf also said the last major review of minimum capital requirements was done in 2005 under former President Olusegun Obasanjo, with Charles Soludo as CBN governor. But since then, the value of the minimum capital has been significantly eroded by inflation.

“For instance, the official exchange rate in 2005 was about N130 to the dollar. This meant that the N25 billion for a national bank, for instance, was equivalent to $192 million,” he said.

“Based on the financial soundness metrics, Nigeria banks are adjudged to be generally healthy. However, this does not diminish the need for regulatory authority to ensure that this soundness and stability is preserved and improved upon, especially because of the recent macroeconomic headwinds.

“This, perhaps, is what informed the current policy of the CBN to review the capital base.”

Yusuf said it is important to sustain the confidence of the public about the soundness and stability of the Nigerian banking system because of the perception and vulnerable risks of smaller banks.

He implored the CBN to ensure minimum risk to shareholders and employees in the banking system across the board.

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