ASSESSING THE RECENT CBN BANKING SECTOR RECAPITALIZATION EFFORT IN NIGERIA

Introduction

The Federal Government of Nigeria (FGN) in March 2024 announced the plan to increase the minimum capital requirement for financial institutions in Nigeria. This is a move which has been met with mixed reactions from various stakeholders with numerous concerns about the potential impact of such recapitalization agenda. This short article attempts to give an insight into the objective of the recapitalisation initiative while highlighting the major challenges on the way to implementation.

Recapitalization

In its circular dated 28 March 2024, the Central Bank of Nigeria announced a review of the minimum capital requirements for commercial, merchant and non-interest banks in Nigeria. According to a recent report by KPMG Nigeria, data suggests that there exists a significant capital shortfall of N4.2 trillion across all banking license categories in Nigeria.

Having reviewed the CBN circular (linked here), I shall briefly discuss the key elements based on the following sub-themes:

a)?????? Evaluation of the recapitalisation objectives

b)????? Potential challenges of the recapitalisation and possible steps to minimise the impact.

Evaluation of the recapitalisation objective

The recapitalization move, as noted by CBN, is aimed at engendering?the emergence of stronger, healthier and more resilient banks to support the achievement of a US$1 trillion economy by the year 2030. In my view, this is a valid objective which would require a recapitalisation as part of the pre-requisites for it to come to reality.

Recapitalisation would give the banks the robust capital base necessary to organically support the economy and execute huge deals. Likewise, for the Banks to be able to better support the economic activities, they need to be resilient and stable while holding sufficient capital that can absorb losses. Thus, an increased capital buffer would help ensure that the banks remain resilient against crisis and other risks that could impact their going concern. The continuous depreciation of the Naira has further necessitated the need for a recapitalization. Between 2005 and 2024, the Naira has depreciated by over 300%; a development which has eroded the value of the Bank’s capital base.

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Potential Challenges of the Recapitalization Programme

The CBN has stipulated the following as the options available to banks in meeting up with this minimum capital requirement.

a) Issuance of new common shares (by way of public offer, rights issues, or private placements);

b) Mergers and Acquisitions (M&As); or

c) upgrade/downgrade of their respective license category or authorization.

Although, new share issuance and mergers require intense planning, negotiation and strategy, these two options seem to be the most economically feasible options available as I do not see banks adopting option (c) as an implementation strategy.

The effect of merger and acquisition would require severe internal restructuring for banks and is likely to lead to loss of job. It would be recalled that the last recapitalization exercise (in 2005) resulted in the reduction of commercial banks from 89 to 26 (as at May 2024). Lastly, those charged with governance would need to ensure that this process is effectively managed to minimize the potential adverse? impact on the most vulnerable stakeholders. Banks would need to ensure that employees receive the right communication and support and those impacted should at the minimum be given a reasonable time to search for a new job.

Conclusion

While it is relatively easy to predict the impact and challenges of the current re-capitalization move, it may be rather too early to determine the challenges and short-term pain that may come with it. In spite of such potential challenges, we expect that with proper planning in place, the process would go smoothly without causing undue disruption and interruption to the banking landscape.

Disclaimer: The opinions expressed within this article are solely those of the author. The opinion is only for informational purpose and it's not intended to constitute a financial advice to anyone.