The Central Bank of Nigeria (CBN) recently rolled out some guideline for new recapitalisation of commercial banks. According to the guidelines, commercial banks with international authorisation will have a new capital base of N500billion, and N200 billion for national commercial banks; national merchant banks, N50 billion; national non-interest banks, N20billion; and regional non-interest banks, N10billion. The new capital base of N500billion is for the big banks or Tier 1 banks.
While some of the big banks will likely meet the requirements, others may go for mergers and acquisition. The implication is that while 26 banks will raise about N3.97trillion to be able to meet the new threshold, the tier 1 banks have to raise a total amount of N2.569trillion. The capitalization will last for 24 months, beginning from April 1, 2024, and ending on March 31, 2026.
The CBN says that only the share capital and premium capital of the shareholders’ fund portion of the balance sheet of the banks will be recognised. This means that the retained earnings of the banks will not be part of funds to be used for the new capitalisation. Retained earnings are accumulated profits over time. Many analysts have urged the CBN not to omit retained earnings from the share capital calculation as part of the new capital base in line with global practice because they are distributable earnings.
Nevertheless, the commercial banks must fashion out strategies to meet the new capital base. Injecting fresh equity capital to meet the minimum requirement will involve private placements, rights issues and/or offers for subscription, mergers and acquisition, and/or upgrade or downgrade of license authorisation. Despite the capital increase announced by some of the big banks in recent weeks, the CBN insisted that the banks must ensure strict compliance with the minimum Capital Adequacy Ratio (CAR). This is the ratio of a bank’s capital to its risk weighted assets and current liabilities. CAR will prevent banks from being insolvent.
For new banks seeking CBN licences, the apex bank said their minimum capital requirement shall be paid-up capital submitted after April 1, 2024. The apex bank directed all banks to submit an implementation plan that will clearly indicate their chosen option(s) for meeting the new capital with their timelines not later than April 30, 2024, adding that it will monitor and ensure compliance with the new requirements within the specified timeline. The plan for banks to raise new capital is long overdue. The last of such exercise was in 2004/2005 banking consolidation when the CBN under the leadership of Prof. Charles Chukwuma Soludo raised the minimum capital of commercial banks from N2billion to N25billion. The current plan may have been further necessitated by the continued devaluation of the naira as well as the $1trillion economy envisaged by President Bola Tinubu.
We believe that the new capitalization will make the banks more resilient to enhance the growth of the economy. Besides, the new recapitalisation will mitigate the impact of external and domestic shocks against the present backdrop of volatility of exchange rate and rising inflation. The two-year period is enough for the seamless completion of the exercise.
No doubt, the impressive returns of some banks may have boosted the confidence of both the domestic and foreign investors in the sector. President Tinubu had in October 2023 set a target of growing the economy from $500 billion to $1trillion by 2026, and increasing it to $3trillion by the end of 2030. When completed, it will boost Nigeria’s capital market and strengthen the financial system. With the new capital base, the CBN may consider applying a differentiated Cash Reserve Ratio according to the category of license instead of the present uniform rate of 45 per cent for commercial banks.
Beyond the benefits of the capitalisation, the apex bank should address the concerns of experts about the programme. One of them is the issue of retained earnings. CBN has stoutly defended its decision to bar banks from recognising retained earnings as part of their share capital in the new guidelines. It said its decision was informed by the fact that the approach fails to acknowledge the actual value of what the earnings represent. It has also argued some retained earnings may be tied to risky assets or speculative ventures.
There is merit in the CBN argument because some commercial banks had over the years incurred huge losses from the oil and power sector, of which the CBN had reportedly given them forbearance. In that case, the CBN could take the option of refinancing or rescheduling the loan or modifying the terms and conditions, including interest rate and maturity.
While retained earnings can be volatile due to uncertain business cycles and other unforeseen factors, nonetheless, there is need for the apex bank to further clarify the issue of retained earnings because of its distributable nature since it is part of global practice in banking. This argument is further reinforced by the fact that commercial banks can declare dividends from those earnings, pay shareholders, and bring them back into the system.
All the same, let the capitalization be seamless and transparent. Besides, the CBN must be diligent in supervising the banks and ensure that banking rules are strictly complied with.