Nigerian banks are rushing to secure new sources of capital following an order from the country’s central bank to bolster their balance sheets in order to safeguard themselves against the deteriorating economic conditions in the country.
The Central Bank of Nigeria, which oversees the country’s 25 commercial banks, has set a deadline of March 2026 for them to meet the new capital requirements. Banks with international operations are required to have a minimum of N500bn ($314mn) in capital, while those with operations within the country must have N200bn, and smaller regional operators must have N50bn.
The central bank stated that larger banks with a higher capital base are better equipped to provide more credit, which is essential for driving economic growth. This move aims to promote stability in the banking industry amid Nigeria’s struggling economy.
Due to market-friendly reforms and two devaluations of the naira since June last year, the currency has lost nearly 70% of its value, and inflation has surged above 30%, reaching levels not seen since 1996. Nigeria, once Africa’s largest economy, has slipped to fourth place this year due to the volatile currency and declining productivity. A Deloitte report revealed that the total capital base of Nigerian banks had decreased to $1.8bn from $5bn in 2022. In comparison, South Africa’s Standard Bank, the continent’s largest lender, has a tier one capital of $11.9bn.
Nigerian banks are encouraged to meet the new requirements through rights issues, mergers and acquisitions, or downgrading their licenses, as they are not allowed to use retained capital, debt, or other assets already on their balance sheets. The total industry shortfall is estimated at N4.8tn, and no bank currently meets the new capital requirements.
Industry experts anticipate that some mid-tier banks may struggle with the new rules and may opt for mergers or license downgrades. Investment research analyst Oyinkansola Aregbesola believes that at least three mergers among the smallest banks are likely, while financial services analyst Ngozi Odum expects some mergers but sees them as a last resort.
There has been positive investor sentiment towards share offers, with subscriptions from various investors due to the strong fundamentals of these banks. Most of the investment is expected to come from international investors, according to senior financial services analyst Bolatito Bickersteth.
Central bank governor Olayemi Cardoso highlighted the higher capital requirements at the industry’s annual dinner, emphasizing the need for banks to have the financial capacity to support Nigeria’s $1tn economy goal by 2030. Banks were given a deadline to submit their recapitalization plans to the central bank, which has now passed, with the plans currently under review.
The changes in capital requirements are seen as an effort to increase competition in an industry dominated by larger banks. The central bank aims to encourage smaller banks to consolidate and compete with the major players in the industry.
The last time banks were required to boost their balance sheets was 20 years ago, with a scheme to increase capital base to N25bn ($195mn at the time). The recapitalization process led to the consolidation of 89 commercial banks into 25, most of which are now listed on the Nigerian Stock Exchange.
Experts believe that the recapitalization will result in a stronger and more resilient financial system that can withstand economic shocks. The strengthened financial system is expected to benefit from the lessons learned from the 2004-2006 recapitalization process.
In conclusion, the recapitalization of Nigerian banks is a necessary step to ensure the stability and growth of the banking industry in the face of challenging economic conditions. By meeting the new capital requirements, banks can position themselves to support Nigeria’s economic development goals and withstand future economic shocks.