CBN triggers new round of banking consolidation with N500bn capital base

Onome Amuge

A new round of banking industry consolidation in Nigeria that will see serious boardroom talks in the next two years has been triggered by the Central Bank of Nigeria (CBN) whose Easter 2024 gift to banks was the raising of their minimum capital requirement  to N500 billion for those of them with international authorisation.

The CBN decision to raise the minimum capital base of banks to N500 billion for commercial banks with international authorisation is expected to trigger a wave of mergers and acquisitions in the sector as banks strive to stay in business.

The stakes are indeed high for the country’s financial institutions. In order to meet the new N500 billion minimum capital base for banks with international authorisation, 26 banks will need to raise a total of N3.972 trillion within the next 24 months. The momentous  task, according to the CBN, is part of a broader effort to strengthen the Nigerian banking sector and ensure that banks have the capacity to meet the needs of the country’s growing economy. Specifically, it is intended to support the goal of achieving a $1 trillion economy as set by the Bola Tinubu administration.

The CBN in a circular updated on its website recently, titled REVIEW OF MINIMUM CAPITAL REQUIREMENTS FOR COMMERCIAL, MERCHANT, AND NON-INTEREST BANKS IN NIGERIA, and signed by Haruna Mustafa, the apex bank’s director of financial policy and regulation department, stated that the current macroeconomic challenges and external and domestic shocks have made it imperative for banks to increase and maintain adequate capital levels, to ensure resilience and solvency. The CBN further explained that strong and resilient banks are crucial for promoting financial stability and supporting economic growth in Nigeria.

The CBN cited its responsibility to promote a safe, sound, and stable banking system, as laid out in Section 9 of the Banks and Other Financial Institutions Act (BOFIA) 2020, as the basis for the upward review of the minimum capital requirements for commercial, merchant, and non-interest banks in Nigeria.

The CBN circular raised the minimum capital requirement for banks with international authorisation from N50 billion to N500 billion, an increase of 900 percent. The minimum capital requirement for commercial banks with national authorisation has been raised from N25 billion to N200 billion, an increase of 800 percent. Banks with regional authorisation are now required to have a minimum capital of N50 billion, an increase of 400 percent over the previous requirement of N10 billion.

Meanwhile, the new minimum capital for non-interest banks with national authorisation was raised to N20 billion, while the minimum capital for non-interest banks with regional authorisation was raised to N10 billion.

To facilitate compliance with the new minimum capital requirements, the CBN provided a number of options for banks. These include:

1.Injecting fresh equity capital through private placements, rights issue and/or offer for subscription.

2. Mergers and acquisitions (M&As).

3.Upgrade or downgrade of licence authorisation.

The CBN  stated that all banks are required to meet the minimum capital requirement within a period of 24 months, commencing from April 1,2024 and terminating on March 31,2026.

The circular further clarified that the minimum capital requirement must consist of both paid-up capital and share premium, and that the calculation of minimum capital would not take into account shareholders’ funds. 

“Additional Tier 1 Capital shall not be eligible for meeting the new requirement. Notwithstanding the capital increase, banks are to ensure strict compliance with the minimum capital adequacy ratio requirement applicable to their licence authorisation.

“In line with extant regulations, banks that breach the CAR requirement shall be required to inject fresh capital to regularise their position,” it stated.

The CBN clarified that for all new applications for banking licences, the minimum capital requirement will be paid-up capital only. This requirement will apply to all applications received after April 1, 2024, which is the effective date of the circular.

The CBN noted that the new minimum capital requirement would not affect pending applications for banking licences for which a capital deposit had been made or an Approval-in-Principle had been granted. However, it specified that the promoters of such proposed banks must make up the difference between the deposited capital and the new capital requirement by March 31, 2026.

In order to ensure that all banks comply with the new minimum capital requirement, the CBN requires that banks submit an implementation plan by April 30, 2024. The plan, it stated, must outline the option(s) chosen for meeting the new capital requirement and various activities involved with their timelines.

Uche Olowu, a former president of the Chartered Institute of Bankers of Nigeria (CIBN),  expressed support for the CBN’s new capital requirements, stating that it is a timely intervention to address the effects of currency devaluation on bank capital. Olowu anticipates a high compliance rate among banks within the 24-month window, noting that some banks may opt for mergers or regional focus to navigate the changing landscape.

“Within this window, we should expect [that] at least 75 percent of the banks would meet the target while the others may merge,” he said.

Diekola Onaolapo, chief executive officer of Eczellon Capital also shared a similar sentiment, highlighting the importance of protecting banks against currency devaluation, pointing out that this is a key consideration in setting the new capital base. He also predicted that banks would make strategic shifts in their operations, including mergers, acquisitions, and regional expansion, to meet the new standards within the allotted time frame.

Onaolapo expects that the country’s largest banks will be able to meet the new capital requirements with relative ease, while other banks may consider mergers and acquisitions as a means of compliance. He also suggested that some smaller banks may opt to focus on regional markets rather than attempting to compete on a national or international scale.