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Requires dilution of strong ownership structure
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Possibly to drive innovation
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Lenders to comb the ‘streets’ in search of investors
BEN EGUZOZIE
Financial experts, economists and development analysts are continuing to weigh in on the ‘way-to-go’ and ‘success rate’ of how banks in Nigeria would come through on the recapitalisation announced by the Central Bank of Nigeria (CBN). The announcement by the apex bank which categorises the nation’s lenders into three levels — international, national and regional — prescribed a new set of capital thresholds for the banks. It requires international banks to maintain minimum share capital of N500 billion, while national and regional banks would keep N200 billion, and N50 billion, respectively.
According to these experts and analysts, the recapitalisation policy was long expected as the previous capital base of domestic lenders can barely drive the kind of economic growth expected of Africa’s biggest economy.
“Comparing the operational size of Nigerian banks with that of say banks in South Africa and Egypt, a lot is desired,” George Iwuagwu, a seasoned wealth manager and economist, told Business A.M. in Port Harcourt, Nigeria’s oil hub.
The new recapitalisation requirement for the ‘Big Five’ lenders: FUGAZ (First Bank, UBA, GTB, Access and Zenith Bank) is N2.5 trillion, about $1.7 billion.
“A summation of capital bases of all domestic lenders both commercial, merchant and non-interest banks will mean a huge boost enough to power the kind of aggregated economic growth we hope to see,” Iwuagwu narrated further.
In particular, the CBN excluded using shareholders funding and retained earnings as sources of the expected recapitalisation funding. Rather, the banks are expected to ‘hit the streets’ in search of financial investors in order to generate fresh liquidity to meet the new requirements.
Some financial experts who spoke to Business A.M. adduce that the new capital threshold would help to reduce excess liquidity in circulation in Nigeria put at over N95 trillion to date. This will thereby bring all monies into the banking system, within the control of the apex bank.
Gregory Kronsten, a London based independent consultant on Africa finance and economics told Business a.m. that the recapitalisation move by the CBN was a very ambitious one in the current backdrop and when Nigeria is not favoured by foreign portfolio investors (FPIs).
“The rationale for the increase is sound but scale of the rise for the minimum? And the deadline of April 30 is cheeky. Previous governor used to boss the banks around; this one?”
Wilson Erumebor, an economist and researcher at the University of Oxford, weighed in on the debate by saying that he has seen arguments made that banks want retained earnings to be included and that if it happens many banks would have no need to raise additional capital.
“I think the CBN is insisting on new capital and this, in my view, is the whole essence of the recapitalisation exercise. That’s one aspect I think stakeholder engagement is needed,” Erumebor told Business a.m. from his base in Oxford, United Kingdom
Cash outside banks blowing up?
There is a major snag here: much of Nigeria’s cash in circulation is outside the banking system. Additionally, many adult Nigerians are still unbanked. According to EFInA, financial inclusion rose to 64 percent by December last year. This translates to about 140.8 million people (given Nigeria’s population at 220 million), leaving about 79.2 million Nigerians still operating outside the banking system.
The International Monetary Fund (IMF) in late 2022 in its report (Nigeria: 2022 Article IV Consultation) projected that currency outside the banking system in Nigeria would hit N4.26 trillion in 2023. This would be up from N2.94 trillion in 2021 to N3.54 trillion in 2022, N5.1 trillion in 2024, N6.08 trillion in 2025 and N7.66 trillion by 2027.
The IMF also maintained there would be an increase in the volume of currency outside banks despite CBN’s aggressive effort to bring in more cash into the banking system and out of the hands of the public.
However, data from Money and Credit Statistics of the CBN indicated different figures from the IMF data. According to the CBN data, the amount of currency outside banks crashed to N788.92 billion in January 2023. The data said, there was a decrease of 69.26 percent between December 2022 when it was N2.57 trillion and January 2023.
Effect on banking ownership
In particular, Iwuagwu informed that the recapitalisation move will require the banks to dilute strong ownership structure; and if possible drive innovation.
How will the banks achieve this?
The CBN clarified that a bank’s shareholders’ funds (total equity capital including retained earnings) and additional Tier 1 capital (AT1) cannot be used to meet the new minimum requirement.
This means that the CBN is prioritising direct capital injections into Nigerian banks rather than relying on accounting entries to satisfy recapitalisation requirements.
“Of the options available, there will likely be M&As (mergers and acquisitions). The move will force banks to raise additional capital through other means beside shareholders’ funds, retained earnings. The coming months up to two years will be interesting. If done correctly without perceived hidden motives by the apex bank, this just will be worth it,” the wealth manager explained.
According to available information, Access Bank Plc, by far Nigeria’s biggest lender, which has vast international operations, needs to raise N500 billion within the next two years. Currently, the bank has N251.81 billion in share capital premium, leaving N248.19 billion to be raised to meet the new CBN regulations.
