Banks’ Recapitalisation as Panacea for Economic Sustainability

In this piece, James Emejo writes on the current move by the apex bank to recapitalise the banking industry to enhance its contribution to the economy

If anything, the Central Bank of Nigeria (CBN)’s resolve to significantly boost the capital base of the banking sector didn’t catch the banks napping as this had already been foretold.
Recapitalisation refers to the process of strengthening a bank’s capital base – the difference between its assets and liabilities and essentially represents the bank’s net worth or equity. This is often achieved by raising new equity, retaining earnings instead of paying them out as dividends, or converting debt to equity, among other methods.

Mandating commercial banks to recapitalise is a measure to ensure that the banking sector is resilient, capable of supporting economic activities, and prepared to withstand financial shocks, thereby safeguarding the overall health and stability of the financial system.
In an era where Nigerian financial institutions appeared to have failed in their responsibility to play an effective role in funding key sectors of the economy, the proposed consolidation becomes inevitable.

Last November, while speaking at the Chartered Institute of Bankers of Nigeria (CIBN) 58th Annual Bankers’ Dinner and Grand Finale of the Institute’s 60th Anniversary, held in Lagos, CBN Governor, Mr. Olayemi Cardoso, signaled the intention of the apex bank to have the banks recapitalised to effectively play their intermediation role in the envisaged $1 trillion-economy which President Bola Tinubu’s administration hopes to realise.
The administration’s Policy Advisory Council report on the national economy had set an ambitious goal of achieving a Gross Domestic Product (GDP) of $1 trillion over the next seven years, with clearly defined priority areas and strategies.

Cardoso explained that attaining the substantial target required sustainable and inclusive economic growth at a significantly higher pace than current levels, pointing out that the current administration had commenced the journey through fiscal reforms, including the removal of petrol subsidy and the unification of the foreign exchange market rate.
He said given the policy imperatives and the projected economic growth; it was crucial for the apex bank to evaluate the adequacy of the banking industry to serve the envisioned larger economy.
He said it was not just about the stability of the financial system in the present moment, as current assessment had further demonstrated the resilience and stability of the sector.

Cardoso said:“However, we need to ask ourselves: Will Nigerian banks have sufficient capital relative to the financial system’s needs in servicing a $1.0 trillion economy in the near future? In my opinion, the answer is “No!” unless we take action. Therefore, we must make difficult decisions regarding capital adequacy. As a first step, we will be directing banks to increase their capital.”
Also, The Monetary Policy Committee (MPC) of the CBN at its last meeting in March 2024, further reviewed developments in the banking system and concluded that the industry remained safe, sound, and stable, and further urged the central bank to sustain its surveillance and ensure compliance of banks with existing regulatory and macroprudential guidelines.
The committee specifically encouraged the apex bank to expedite action on the recapitalisation of banks to strengthen the system against potential risks in an increasingly globalised world.

Recapitalisation order
Therefore, matching words with actions, the CBN on March 28, 2024, announced new minimum capital requirements of N500 billion and N200 billion for commercial banks with international and national authorisation respectively.
The apex bank further unveiled a new capital base of N50 billion for banks with regional licenses. The fresh capital hurdles were disclosed in a circular addressed to commercial, merchant, and non-interest banks and promoters of proposed banks, which was signed by the CBN Director, Financial Policy and Regulation Department, Mr. Haruna Mustafa.
The central bank also pegged the new minimum capital for merchant banks at N50 billion, while non-interest banks with national and regional authorisations are mandated to raise their capital thresholds to N20 billion and N10 billion, respectively and gave the banks up till March 31, 2026 to fully comply with the new capital requirements.

The CBN urged the banks to consider injecting fresh equity capital through private placements, rights issues and/or offers for subscription; mergers and acquisitions (M&As); and/or upgrade or downgrade of license authorisation to enable them to meet the new capital requirements.
Furthermore, the circular disclosed that the minimum capital shall comprise paid-up capital and share premium only, adding that the new capital base shall not be based on the shareholders’ fund, adding that additional Tier 1 (AT1) capital shall not be eligible for meeting the new capital threshold.
Notably, the proposed recapitalisation drive comes 20 years after a similar exercise in 2004 when the central bank raised banks’ capital base to N25 billion under the former CBN Governor, Prof. Chukwuma Soludo.

Presidential approval
No doubt, the current recapitalisation drive, which had already witnessed positive traction by some banks, has the express approval of President Bola Tinubu, who recognised the role of the industry in realising his administration’s huge financing needs to build infrastructure.
In his remarks at the recent 29th Nigerian Economic Summit (NES#29), with the theme: “Pathways to Sustainable Economic Transformation and Inclusion”, the president emphasised that the prospects for a $1 trillion – Nigerian economy by 2026 was feasible, including a $3 trillion – economy within a decade.
He promised to work closely with the private sector, particularly the banking sector to finance the $3 trillion National Infrastructure Stock in 10 years rather than the anticipated 300 years.

According to the president, building megacities in every geopolitical zone of the size and scale of Lagos must not take the country another six decades.
Tinubu said:”We can do it in one decade. A fully networked and connected Nigeria by rail, gas, fibre optics and road network can be constructed in less than 20 years. Establishing thriving industrial zones in every part of Nigeria is possible before 2030.
“We can do it with double-digit, inclusive, sustainable and competitive growth.”This is our agenda, and I would like to charge you, the captains of industry here present, to commit and redouble your commitment to our vision of a renewed and more prosperous Nigeria, a better Nigeria for all.
“For us to successfully deliver our promise to Nigerians, we recognise that it is imperative that we foster a highly collaborative relationship with the private sector. We must work together.”

Imperatives for improved capital buffers
Essentially, central banks may require commercial banks to recapitalise to ensure the stability and health of the financial system.
The move is also determined to enhance banks’ financial stability, improve risk management, maintain confidence of the financial system, as well as enhance compliance with regulatory requirements.
In addition, banks’ recapitalisation is intended to boost their capacity to support economic growth and address asset quality issues as well as enhance their competitive position.

How popular is the recapitalisation drive?
The popularity of the proposed capital beef-up by the banks is already measured in the manner the stakeholders have welcomed the announcement by the central bank.
Almost everyone agrees that the recapitalisation of the financial institutions was long-overdue especially given the long-term financing needs of the country.
Already, there are indications that banks including Fidelity Bank, First Bank of Nigeria (FBN), United Bank for Africa (UBA) Guaranty Trust Bank (GTB), Access Bank and Zenith Bank have long commenced the process of beefing up their capital bases. So far, there have not been major dissenting voices to the recapitalisation programme.

Analysts’ perspectives
Reacting to the drive to boost banks’ capital thresholds, analysts who spoke to THISDAY  applauded the apex bank’s policy resolve particularly considering recent devaluations of the Naira amid other headwinds.
Wealth Management and Business Development Consultant, Mr. Ibrahim Shelleng, described the move as a step in the right direction.
He said: “I believe it is the right move by the CBN. I have always been of the opinion that despite the size of the Nigerian economy, our banks do not have the capacity to really drive the economy to exponential growth.

“This is despite the fact that they are some of the most profitable institutions on the continent and have consistently made profits during numerous economic downturns in Nigeria. However, as of December 2022 figures, no Nigerian bank features in the top 10 largest banks in Africa based on Tier 1 Capital.
“The Naira devaluation will likely see Nigerian banks drop even further in 2023 numbers. The implications of this are that there are certain transaction ticket sizes that are beyond the capacity of Nigerian banks to fund even with syndication.”
Shelleng said: “This is why there has been an over reliance on DFI funding such as the African Development Bank, Afreximbank, IFC among others, for infrastructural and other developmental projects.
“The Nigerian economy is vastly untapped, and without strong, well capitalised financial institutions, it will be tough to grow the economy beyond its current limitations.”

Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu, said the exercise was over-due.
He said: “Our country is overdue for a capital raise for banks. The reason is that the depreciation of the Naira eroded the value of the capital base of Nigeria banks.
“The asset size of the Standard Bank Group of South Africa at $170 billion is more than the total asset size of all Nigerian Deposit Money banks at $140 billion. Again, no Nigerian bank is ranked between first to 10 in size of both assets and capital base in Africa.
“The foregoing answers the question of whether the new capital regime of banks is justified. It will enable Nigerian banks to expand their capacity and business frontiers to grow our economy.”

On his part, President, Association of Capital Market Academics of Nigeria, Prof. Uche Uwaleke, welcomed the recapitalisation drive, saying  it would help strengthen the country’s financial system and potentially boost the stock market.
He said: “In view of naira devaluation following unification of exchange rates, the newly calibrated minimum capital requirements seem okay unlike the uniform capital base of N25 billion stipulated in 2005.

He, however, urged the apex bank to allow the inclusion of retained earnings on the condition that they are not impaired by losses. This, he said, will make it easier for the banks to comply with the new capital requirement.
He said it was also important that the federal government provided the banks with some sort of tax incentives to aid compliance as well as to ensure that the costs of recapitalisation are not transferred to bank customers.

Uwaleke said: “The Shareholders’ Funds comprise paid up share capital plus reserves. If my memory serves me right, this was permitted in 2005 but now disallowed possibly from the experience of the last exercise.
“Nevertheless, in order to make it easier for the banks to comply, the CBN should allow the inclusion of retained earnings on the condition that they are not impaired by losses.

“I believe the FUGAZ (FBN, UBA, GTB, Access and Zenith) banks with international authorisation will have no difficulty meeting this requirement.
“The stock market (Option 1) presents the most feasible option as few will likely go the M&A route. I also think the two years period allowed is sufficient to implement recapitalisation.
“A number of banks including FBN, Access and Fidelity had already commenced the process of recapitalisation before now, especially since the CBN governor made the announcement in November last year.
“In view of the young age of Non-Interest Banks in Nigeria, they should be allowed a longer period, say, three years to meet the minimum capital requirements. I also think the CBN should extend the 30 days period it gave banks to come up with an implementation plan given that it would take some time to obtain the consent of shareholders.”

He said: “It’s also important that the CBN provides some incentives to banks to facilitate the recapitalisation exercise as was done in 2005. This can take the form of tax incentives and ensuring that the overall cost of recapitalisation is low by seeking the cooperation of relevant regulatory authorities such as the Federal Inland Revenue Service, the Securities and Exchange Commission, the Nigerian Exchange as well as the Federal Competition and Consumer protection Commission given that banks have the option of raising funds via the capital market or through mergers and acquisitions.”
Also speaking to THISDAY, Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, said the exercise will help to expand the economy.

According to him, “The recapitalisation of banks in categories is long overdue and advocated for the expansion of our economy. The Tier 1 banks operating internationally have already envisaged this process and have started making provisions early enough.
“Nigeria has the highest GDP in Africa and for us to maintain that position and also operate a trillion-dollar economy then the banks must be adequately capitalised.
“A trillion-dollar economy must have local capacity to initiate and execute million dollar transactions locally without foreign intervention in key areas of development like oil and gas, steel production, mining, mega construction projects and Public Private Partnerships with the government.”
Gbolade said: “This can only materialise if we have adequately capitalised banks that can rise to the occasion.  Nigerian banks also need to take their pride of place in Africa as regards capitalisation because presently Nigerian banks are not among the most capitalized in Africa. Therefore, this new recapitalisation policy will adequately position our banks for the emerging economy that will adequately equip them to take on large ticket transactions in Nigeria and African continent.

“The exclusion of retained earnings or shareholders’ funds as additional tier 1 capital shows the CBN wants to distinguish fresh funds from existing funds which could be subject to regulatory infractions because shareholders’ funds are not a statutory capital base.
“CBN also wants to trace the legitimacy of funds for the recapitalisation process by banks. The time frame is adequate for most of the international and national bank categories to adequately recapitalise.
“They can explore various options to raise transparent and legitimate funds from the Nigeria stock exchange, private placements or through mergers and acquisitions.
“I am of the strong opinion that recapitalisation will strengthen and enlarge our economy because of the critical roles our banks play in oiling the economy.”