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At the 58th Annual Bankers’ dinner and grand finale of the 60th anniversary of the Chartered Institute of Bankers’ of Nigeria(CIBN), the governor of the Central Bank of Nigeria (CBN), Dr. Olayemi Cardoso, disclosed that the banking sector would witness another wave of recapitalisation. Although the apex bank has not released the guidelines for the new capital base and how much will be set as the minimum capital requirement, there are strong indications that the plan will be rolled out in the first quarter (Q1) 2024.
Recapitalisation is the process of infusing more funds into the banks to enable them meet the mandatory capital adequacy set by the apex bank. It is also meant to stabilise the structure of the banks and secure shareholders’ funds. In 2004, the CBN ordered banks to increase their capital base from N2 billion to N25 billion with effect from December 31, 2005. The plan to increase the banks’ capital base to N25 billion led to the reduction in the number of banks from 89 to 24.
According to the CBN governor, the fresh recapitalization is to enable the banks be in a position to handle the nation’s envisaged $1 trillion economy. According to him, in view of the policy imperatives and projected economic growth, it has become crucial to “evaluate the adequacy of the banking industry to serve the envisioned larger economy.” Apart from the stability of the financial system, the consolidation will enable the banks to have sufficient liquidity to withstand any domestic and global economic shocks. The major banks in Nigeria with foreign subsidiaries presently control N9.6 trillion capital base in the industry, while five mega banks have capital above N1 trillion each. This is against the background that some national, regional and merchant banks have not grown their capital base over the years as their counterparts with foreign subsidiaries have grown theirs. In the last couple of months, some banks had made moves to raise funds privately to increase their capital base.
And since the CBN announced the fresh recapitalisation initiative, many CEOs of the banks have commenced talks on preliminary mergers and acquisitions. The race by banks to beef up their capital base has begun in earnest. For example, in March this year second-tier bank, Wema, informed its shareholders of plans to issue bonds worth N25 billion. In April, Access Bank secured $300 million from its parent company, Access Holdings. Similarly, FCMB recently announced plans to borrow N20.68 billion. First Bank, Jaiz Bank, and Fidelity Bank have also sought shareholders’ approval to trade billions of shares for capital through public offerings and right issues to bolster their capital base.
According to a recent CBN financial data, banks borrowing from the apex bank in 2020 rose to N21.87 trillion. This represents 260 per cent increase when compared to the N5.744 trillion recorded in 2022. In September 2021 alone, banks’ borrowing from the CBN rose to N2 trillion or 12 per cent. The borrowings came via CBN’s two major short-term lending windows. These are the Standing Lending Facility (SLF) and Repurchase Lending. In view of the multiple challenges facing the banks and the need to address them, the fresh recapitalisation is in order.
But a CBN Financial System Stability (FSS) report in 2016 raised concerns about the declining assets of most Nigerian banks, as total assets and liabilities of deposit money banks reportedly declined to N32.1 trillion from N32.29 trillion in January 2016. The loss in value amounted to N172.2 billion. FSS measures the solvency of banks through indicators such as bank’s assets quality, capital and income adequacy, and the ratio of Non-performing loans, among other macroeconomic indicators.
Some years back, we advised the CBN to review the banks’ capital requirements and protect depositors’ funds and infuse public confidence in the sector. That is what the CBN intends to do now. The value of the N25 billion recapitalisation now stands at just N32.5 million. That is grossly inadequate to withstand any external shock or exposures. While we welcome the plan to increase the banks’ capital base, especially in the light of rising inflation and depreciation of our currency against major foreign currencies, the proposed consolidation should be done with great caution. Politics should not be allowed to influence the outcome. Anything that may send wrong signals to the investors must be avoided. The plan must be seamless and transparent.
There is need to learn from the mistakes of the previous one. The present plan must be remarkably different from the one of 2005, in both approach and execution. Where mergers and acquisitions are inevitable, they should be done in line with global standards. The banks should strengthen their asset portfolios and streamline their loan processes. Beyond the recapitalisation of the banks and the ambitious $1 trillion economy, government should address the rising of cost of living.
