Recapitalisation: Setting New Stage For Banking Sector

In the dynamic landscape of Nigeria’s financial sector, the recent announcement by the Central Bank of Nigeria (CBN) mandating banks to recapitalise has sparked a debate echoing through boardrooms and economic circles. This move, while hailed as a necessary step towards fortifying the financial system, also carries the weight of potential disruption, including concerns over increased risks.

Days after the CBN’s call for banks to expedite their recapitalisation efforts, the unveiling of new minimum capital requirements underscores the gravity of the situation. With commercial banks facing minimum capital thresholds of N500 billion for international authorisation, N200 billion for national authorisation, and varying amounts for regional and specialised banks, the stage is set for a transformative journey within the banking sector.

As it stands, the banks would require about N4.7 trillion to meet the recapitalisation benchmark set by the central bank. The question is ‘where will that funding come from?’ While the funding gap could be filled with N2.8 trillion from the Nigeria Exchange Limited by some of the listed banks, the balance of an estimated N1.9 trillion is expected to come in from private capital. The stock market (option 1) presents the most feasible option as few will likely go the M&A route. Access Bank has already announced it is raising N365 billion via the Rights issue.

There are concerns that the proposed increased liquidity in the banking sector could lower lending rates in the medium to long term, and weaken their ability to absorb loan losses and withstand economic shocks. There is also the fear that it could lead to a potential increase in the cost of capital due to the higher cost of equity capital relative to debt.

On the flip side, many economic experts who back the CBN on the new decision argue that 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 large ticket transactions,” an investment banker, Stephen Kanabe said.

Against the fear in some quarters that the recapitalisation exercise would force some banks to merge, causing a loss of jobs, many, including the banks have said there is no cause for alarm, stating that they are ready to meet the new requirement base. The Association of Corporate & Marketing Communication Professionals of Banks (ACAMB) in a statement last week pledged support for the CBN in its new drive to make the Nigerian banking industry more resilient, adding that the current move is long overdue.

“This support underlines ACAMB’s belief that there is always room for growth. As Nigeria seeks to aggressively unlock its innate potential to become a global emerging economy, banks must also stand ready to play their crucial roles of financial intermediation,” the association said in a statement. Nigerian banks are globally regarded as safe, resilient and thriving.

Professor of capital market at Nasarawa State University, Uche Uwaleke says the recapitalization option is the way to go. He argues that it will help strengthen the country’s financial system and a potential boost to the stock market. “In view of naira devaluation following unification of exchange rates, the new calibrated minimum capital requirements seem OK unlike the uniform capital base of N25 billion stipulated in 2005,” Professor Uwaleke stated.

Agreeing with Uwaleke, a development economist at Lotus Beta Analytics, Shadrach Israel, lauds the CBN’s initiative, citing it as a vital step towards strengthening the banking landscape. He emphasises the necessity of periodic recapitalisation to align with the evolving economic dynamics, drawing parallels with the pre-2004 era when numerous bank failures prompted a similar move. Israel underscores the dual nature of the recapitalisation exercise, acknowledging its potential to bolster the financial system while also signalling an era of mergers and acquisitions. The spectre of job losses looms large as smaller lenders may face existential challenges in meeting the new capital requirements.
However, Israel is saying “For the disadvantage side, we are already looking at a situation where many banks will not be able to survive it. From N25 billion to N500 bn; we are going to see a lot of mergers.

Any bank that must survive will have to agree to a merger.” He is among those who think that the apex bank should have considered some other amount lower than N500 billion to enable it to easily meet up with. “The current amount poses a great financial gap for the banks. I feel like the rate of increase is so high. The apex bank should have tested some amount less than N500 billion and seen how the economy reacted,” he stated.

The CBN had described the recapitalisation mandate as a regulatory imperative aimed at enhancing the resilience of Nigerian banks to weather economic storms. Reflecting on the historical precedent set by the 2005 recapitalisation, economic experts underscore its pivotal role in reducing the number of weak banks while ushering in a phase of consolidation and heightened stability.

While concerns persist regarding the potential ramifications of the recapitalisation exercise, proponents argue for its intrinsic benefits. For the central bank, by empowering banks to take larger risks and support diverse sectors of the economy, the initiative holds the promise of fostering confidence in the banking system. Moreover, amidst the backdrop of a burgeoning GDP growth rate, recalibrating the capital requirements becomes imperative to align with the evolving economic landscape.

In essence, the CBN’s call for bank recapitalisation embodies a delicate balance between fortifying the financial system and navigating the disruptions that accompany transformative change.
Uwaleke, who thinks that the two-year period allowed is sufficient to implement recapitalization, the CBN should lower the guard down for infant non-interest banks. “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.”

But On the opposing end of the spectrum, managing director/CBO at Optimus by Afrinvest, Ayodeji Ebo, said the banks must work harder to ensure that the capital raised is deployed in profitable opportunities to create value for investors.

While challenges such as job losses and industry consolidation loom on the horizon, the imperative of ensuring a resilient banking sector capable of steering Nigeria’s economic trajectory remains paramount. As stakeholders brace for the journey ahead, the recalibration of capital requirements stands as a testament to the enduring quest for stability amidst the winds of change.