What does CBN recapitalisation mean for Nigerian banks?

He said the move is in line with President Bola Tinubu’s $1 trillion economy target.

As Nigeria seeks to achieve this target, the CBN believes Nigerian banks have to be fortified to withstand potential shocks, contribute to the country’s economic growth and at the same time prepare them for the envisioned larger economy.

Four months after the announcement, the CBN on Thursday, March 28, 2024, raised the minimum capital requirement for Deposit Money Banks (DMBs) with national licences from ₦25 billion to ₦500 billion for banks with international authorisation, while the capital base for commercial banks with national authorisation is pegged at ₦200bn.

This is coming 18 years after the apex bank recapitalised Nigerian banks from ₦2 billion to ₦25 billion under the leadership of former CBN Governor, Prof. Charles Chukwuma Soludo.

Before we dive into further details, let's explain what bank recapitalisation means in layman’s terms.

Imagine you have a piggy bank where you keep your money. The money in the piggy bank is like the capital of a bank and that is what the bank gives out to other people and businesses as loans.

Now, imagine the piggy bank gets shaky or broken and some of the money gets lost, it’ll need some sort of support to stay strong and safe.

For a real bank, this loss of money could come in the form of bad loans. A bank incurs bad loans when the money it lends to people and businesses cannot be recovered.

This situation could make banks unable to function or support a country’s economy because people and businesses who need loans to create jobs or expand their businesses won’t be able to do so.

So, to prevent this from happening, the government or investors can give more money to the banks to strengthen them.

The money given to the banks is called recapitalisation. It’s like filling up your piggy bank with more money.

What does this mean for Nigerian banks?

While announcing the recapitalisation plan, Cardoso said Nigerian banks would be directed to increase their capital base to equip them with “sufficient capital relative to the financial system’s needs in servicing a $1.0 trillion economy in the near future.”

With this, individual financial institutions in Nigeria will become more resilient and fortified against economic volatility and unforeseen challenges.

The move will also increase the lending capacity of commercial banks and consequently enable them to inject more capital into key sectors and foster entrepreneurship across the country.

The recapitalisation of the banking sector could also reposition Nigerian banks as the backbone of the country’s economy, driving investments and catalysing the economic expansion of the largest economy in Africa.

Frankly, Nigeria can achieve incredible economic growth if its banking sector is well-recapitalised, but the question many are asking is, how many of the 24 commercial banks in the country can survive this recapitalisation plan?

Economists believe tier-1 banks like Zenith Bank, Access Bank, Guaranty Trust Company, the United Bank of Africa, and First Bank of Nigeria will be able to weather the storms because they are well-capitalised.

For tier-2 financial institutions like Sterling Bank, Wema Banks, FCMB, Unity Bank, Union Bank and Stanbic IBTC, the future is not certain. Some of them will have to take a leaf from the 2005 bank recapitalisation to remain in business.

What happened when banks were recapitalised in 2005?

In July 2004, the CBN, led by Professor Charles Soludo, announced the recapitalisation of the banking sector with effect from December 31, 2005.

Charles Soludo is the current Governor of Anambra State. (PremiumTimes) Pulse Nigeria

The initiative, which increased banks' minimum capital base to ₦25bn propelled a remarkable reduction in the number of commercial banks in the country from 89 to 25.

While some of the weak banks merged to remain in business, others were completely acquired by stronger ones.

However, with banks' capital base increased to ₦500bn, banking and finance experts believe the development may lead to a situation where Nigeria would have fewer but stronger commercial banks.

This article was originally published in November 2023.