Some finance and economic experts have said there are ominous signs that the latest directive by the Central Bank of Nigeria (CBN) requiring major banks to recapitalize with N500 billion and Smaller Banks N50 billion will force smaller lenders into mergers and acquisitions.

The CBN has embarked on a comprehensive financial reform aimed at bolstering the stability and resilience of the nation’s banking sector.

This reform, unveiled on Thursday, March 28, 2024, by the CBN’s Acting Director of Corporate Communications, Mrs. Hakama Sidi Ali, introduces substantial increases in the minimum capital requirements for different categories of banks, tailored to the scope of their operations.

Already, Access Holdings Plc has unveiled plans to establish a capital raising programme of up to $1.5 billion.

The programme aims to raise $1.5 billion through a share sale or bond offering. The company also plans to ask existing shareholders to raise N365 billion through a rights issue.

For instance, checks reveal that in line with the stipulation of the CBN, Access Corporation, the parent company of Access Bank has paid-up capital and share premium of N251.811 billion according to its 2023 full-year result released last week, hence a shortfall of N248.189 billion.

FBN Holdings, the parent company of FirstBank has paid-up capital and share premium of N251.3 billion, hence a shortfall of N248.66 billion, according to its Q3’23 results

The paid-up capital and share premium of GTHoldco, the parent company of GTBank stands at N138.186 billion as of Q3’23, hence a shortfall of N361.814 billion

UBA has paid-up capital and share premium of N115.815 billion, hence a shortfall of N384.185 billion according to its Q3’23

Zenith Bank has a paid-up capital and share premium of N270.745 billion, hence a shortfall of N229.255 billion.

A new report from Ernst and Young earlier this month revealed that 17 out of 24 banks could potentially fall short of meeting the capital requirement set by the central bank if it is increased by 15-fold from its current N25 billion.

According to the report, many banks may need to consider mergers and acquisitions (M&A) to shore up their capital base, a strategy reminiscent of the consolidation witnessed during the last recapitalization exercise in 2004/2005, which saw the number of banks reduced from 89 to 25.

Some experts said this is not coming as a surprise given the level of depreciation of the naira against other currencies since the last re-capitalization.

Group Chief Economist & Managing Director of Research and International Cooperation at the African Export-Import Bank (Afreximbank), Dr. Yemi Kale said it didn’t come as a surprise because it’s something that needed to be done.

According to him, financial stability is extremely important and ensuring that the banks are well capitalized to minimize the risk of default is very important.

“Now with the exchange rate that has depreciated by over 20 percent or 100 percent, it means that many of those risk ratios that are held in the banking sector have been debilitated. “So they have to look at the ability to increase their capital to ensure that based on the international guidelines, the financial sector is stable and secure,” he stated.

Also, given the direction of government to double the size of the economy, Kale said that cannot be done with the current capital base in the banking sector. Many major projects cannot be done without a combination of 8 to 10 banks. This suggests the banks are not capitalized enough to handle such.

“I also like the aspect of the segmentation, breaking them into different levels of banking so that you don’t have this ‘one size fits all systems’ that I never believed was appropriate. So I think again, I think it is a great decision by the Central Bank,” the Economists stated in a TV interview monitored in Lagos.

Similarly, the Lead Faculty at Tekedia Institute, Professor Ndubuisi Ekekwe, said it is important to note that the new capitalrequirement will be solely of paid-up capital and share premium, stressing that Shareholders’ Fund will not be considered in meeting this requirement.

The implementation timeline for these revised minimum capital requirements is stringent, with all banks mandated to comply within 24 months, commencing from April 1, 2024, and culminating on March 31, 2026.

To facilitate the implementation of the capital requirements, the CBN has outlined various avenues for banks to raise fresh equity capital, including private placements, rights issues, offers for subscriptions, and strategic mergers and acquisitions.

“Notably, the CBN has emphasized that the minimum capital will exclusively comprise paid-up capital and share premium, with Shareholders’ Funds excluded from the calculation, ensuring a focus on tangible financial reorganization.

“Moreover, strict adherence to the minimum Capital Adequacy Ratio (CAR) requirement applicable to banks’ license authorization is paramount, with banks falling short required to inject fresh capital to rectify their standing,” Ekekwe stated.

The recent circular from the Central Bank of Nigeria (CBN) outlined the minimum capital requirement for newer banks. It specified that the paid-up capital would serve as the minimum capital requirement for proposed banks. This requirement would apply to all new applications for banking licenses submitted after April 1, 2024.

In response to these regulatory changes, Nigerian banks are diligently evaluating their capital positions and formulating comprehensive implementation plans to meet the new requirements within the stipulated time frame the don said.

“While members of the FUGAZ – mainly Zenith Bank, First Bank of Nigeria Holdings (FBNH), Access Bank, United Bank for Africa (UBA), and Guaranty Trust Bank (GTB), may find it easy to raise the required capital, others – including all tier 2 and tier 3 may not,” he added.

Other analysts said satirically that some small banks may have to hawk their shares ‘in Mile 12 traffic’ to raise capital, no cap. I know that some big banks won’t be too stressed about this but those who want to maintain their international banking license have work to do.

By restricting this increase to share capital and share premium only, banks will have to look beyond Nigeria to get the capital needed.

But the CBN has also requested that the banks share their plans to meet the capital requirement by April 30 2024 -one month from now. Stakeholders assured that depositors’ funds are safe. There is no need to panic. “We will likely see smaller banks merging to become big ones, big banks taking up small banks. When these mergers and acquisitions happen, there is no need to panic. Your funds are safe. Don’t get it twisted – Banks are important but the banking sector is not the only sector that powers the economy. Having banks with a strong capital base is great and I support it 100percent.But banking reforms alone will not solve all of Nigeria’s economic crisis.

“The recap exercise expects that if banks have more capital, they will give out loans to businesses. And if they give out more loans, businesses will have more funds to thrive, translating to economic growth.

“However, we must ask the hard questions: Will banks be willing to give more loans when the macro factors are unfavourable? If businesses have access to funding, will they thrive in this environment? The monetary side is making reforms but the fiscal side needs to be fixed too. Investors need to be comfortable in the Nigerian business space if the economy will see growth.

“Education, power, agriculture, security, and how the country spends need reforming too. So if we see deliberate and concrete efforts to improve these areas, then there is no limit to the upside of this bank recap exercise. But the bank recap in isolation isn’t an economic magic wand. (Nigerian Tribune)

Update news