Bank mergers likely as CBN directs N500billion capital base

A Significant increase in the minimum capital requirements for all banks operating in the country was yesterday announced by the Central Bank of Nigeria (CBN).

Acting Director, Corporate Communications, Mrs. Hakama Sidi-Ali, listed requirements for the various categories of banks in a circular, reports The Nation.

The step marks a turning point in Nigeria’s banking history.

Banks are expected to play a significant role in the attainment of the $1 trillion economy projection of the Bola Ahmed Tinubu Administration.

In the circular, the minimum capital base for banks with international authorisation has been raised to N500 billion from N50 billion.

The minimum capital base of N25 billion for commercial banks with national authorisation has been raised to N200 billion (translating to an eight-fold increase).

Banks with regional authorisation have been mandated in the circular to raise their minimum capital base from N10 billion to N50 billion.

The circular pegged the minimum capital requirement for merchant banks at N50 billion.

Non-interest banks with national and regional authorisations now have minimum capital requirements of N20 billion and N10 billion respectively.

The circular states that the new requirements will come into effect on April 1, 2024, with a two-year window for compliance.

Banks are required to meet the minimum capital base by March 31, 2026.

As at December last year, the highest share capital and share premium stood at N251.81 billion.

CBN also outlined several strategies for banks to achieve the set goal.

They are at liberty to raise additional capital through private placements, rights issues, or public offers.

Consolidation through mergers and acquisitions (M&A) is another option to meet the higher capital requirements.

The banks may choose to downgrade or upgrade their licenses to comply with the new capital requirements for their desired authorisation level.

According to the apex bank, meeting the minimum capital requirement is not the sole focus.

The banks must also maintain the minimum capital adequacy ratio (CAR) mandated for their specific license authorisation.

Failure to comply with the CAR could result in mandatory capital injections to regularise the bank’s position.

The new minimum capital requirements apply not only to existing banks but also to all new applications for banking licenses submitted after April 1.

The CBN said it will continue to process pending applications where capital deposits have already been made or an Approval-in-Principle (AIP) has been granted.

However, promoters of these proposed banks “will need to bridge the gap between their deposited capital and the new requirement by March 31, 2026”.

All banks are expected to submit an implementation plan by April 30, outlining their chosen approach to meeting the new requirements and the timeline for each step. The CBN said it will monitor the institutions to ensure compliance with the new regulations within the specified timeframe.

The circular says the CBN assessed various factors in determining the appropriate level of the minimum capital requirements.

These include the risk profile of banks, global and domestic headwinds and their potential impact on banks’ balance sheets.

Also considered was the impact of inflation and stress tests on banks’ balance sheets to gauge their resilience and ability to absorb current and unexpected shocks.

To guard against illicit funds making their way into the banks, the CBN said “it has robust anti-money laundering regulations which will be strictly enforced, with the active collaboration of relevant law enforcement agencies”.

“In addition, the CBN will require all banks to ensure that appropriate and effective anti-money laundering screening/checks (Know Your Customer, Customer Due Diligence and Suspicious Transactions Monitoring, etc) are conducted.

“There will be strict enforcement of fit and proper checks for all prospective and significant shareholders as well as directors and senior management staff of banks.

“The CBN will actively monitor and supervise the recapitalisation process to ensure compliance with set guidelines.

“This will involve the conduct of on- and off-site reviews, verification of capital, periodic interventions when necessary and broader stakeholder engagements.”

Working in collaboration with the Nigeria Deposit Insurance Corporation (NDIC), the CBN said it would “ensure that depositors’ interests are protected during the programme”.

The circular adds: “The CBN will enhance its monitoring and supervisory oversight over the banks and will apply appropriate sanctions for violations of extant laws and regulations as well as ensure the protection of depositors’ interests.

“In a merger or acquisition scenario, depositors’ accounts and funds will remain secure.

“The acquiring institution will assume responsibility for all liabilities and obligations, including the protection of depositors.”

The banking sector has experienced periods of both prosperity and vulnerability.

The consolidation exercise of 2004, which raised the minimum capital requirement to N25 billion, is considered a turning point. However, with a growing economy and evolving financial landscape, concerns have grown regarding the adequacy of capital buffers held by Nigerian banks.

The CBN’s decision to raise the minimum capital requirements signals a new era for Nigerian banking.

This move aims to create a more robust and resilient banking sector, capable of supporting the nation’s projected $1 trillion economic growth and fostering financial stability.

The coming months will be crucial as banks strategise to meet the new requirements.

The success of this reform will depend on effective implementation, strategic manoeuvring by banks, and continued regulatory oversight by the CBN.