Nigerian banking industry is currently faced with the pressure of raising capital to meet the Central Bank of Nigeria’s capitalization requirements, as the current capital gap hits N4 trillion.
The Central Bank of Nigeria, in March 2024 announced new minimum capital requirements for banks, pegging the minimum capital base for commercial banks with international authorisation at N500 billion.
However, the Afrinvest ‘2024 Nigerian Banking Sector Report’ has shown that currently, international banks, which include: Access, First Bank, FCMB, GT Co., First Bank, Fidelity, Zenith, and UBA, have together a capital of about N1.3 trillion and would require at least N2.2 trillion to reach the new capitalization requirements.
For the National licenced banks which include: Ecobank, StanbicIBTC, Citibank, Keystone Bank, Standard Chartered, Sterling, Union Bank, Unity Bank, Polaris, Wema Optimus, and Premium trust bank, their gap according to the report is N1.6 trillion in additional capital to get them to N2.2 trillion.
The regional bank group, which includes: the report showed a N545 billion capital gap, N200 billion for merchant banks and N14 billion for non-interest banks.
Presenting the report in Abuja on Wednesday, Ike Chioke, the chief executive, of Afrinvest Group said that the gap underscores the challenge of the anaemic growth that the economy of Nigeria has suffered over the last two decades, from 2004 to 2024.
He said that the industry may soon witness mergers and acquisitions, as well as downgrade or upgrade of bank licences.
Speaking further, Chioke stressed that all other sectors economy must be made to grow alongside the banking sector, if the nation must achieve its $ 1 trillion economy target.
“When you want to think about growing the Nigerian economy to $1 trillion, it’s not just the banks that will need to grow. Every other aspect of the economy needs to grow alongside it.
“So the retail earnings that banks have had for many years will not be counted. So you need to raise capital and put it in as paid-off share capital. That’s a very tall order. But that also brings in all sorts of advantages and strengthens the balance sheet, strengthens their credit rating, and makes them stronger to go.
“But there’s also the concern that if you think of where the banking sector is and the current size of loans they have created, and suddenly within a space of one and a half years, they double up. That means that all their return numbers will go down, return on equity will go down, and return on assets will go down. They can’t easily go on and start increasing the risk assets they’re giving by lending more money to customers. If there are no safeguards, otherwise they’ll end up losing that money. So there are issues to think about.
“But at the same time, when they’re raising money, there are all sorts of other challenges in terms of even the current cash reserve ratios, liquidity ratios are quite high. At the same time, you have a government that’s running its budget on a deficit. That means they’re printing more money to put cash into the system.
“And that same cash, you’re trying to quarantine at the central bank. So there are a lot of mixed signals. In the same economy where many of us feel challenged by the cost of living crisis, I would say that yes, in this room we are among the privileged, but all of us are feeling the pinch of inflation, the pinch of exchange rate devaluation, and yet it’s the same little income that we have that we need to put aside and invest it back in stocks, so there are lots of complicated issues that we need to deal with,” he said.
In his remarks, Olayemi Cardoso, the governor of the CBN noted that the banking sector recapitalization exercise requires all commercial, merchants, and non-interest banks operating in the country to increase their paid-in capital to levels considered suitable for their license categories and authorizations to be achieved in 12-24 months.
Cardoso, who was represented by John Simeon Onoja, explained that one of the reasons that informed the decision to increase the share capital was knowing that a lot of the banks would need this liquidity to be able to lend more to relevant sectors.
He explained that to meet the requirements, a lot of the banks have begun the issuance of ordinary shares, public offers, right issues, private placements, mergers and acquisitions, adding that those who are not able to meet the current capital category they are in, are allowed to downgrade.
“Meaning, a national bank can downgrade to a regional bank, and yet be especially serving the Nigerian people. Now, why do we come out with this? some of the reasons are for macroeconomic development. We’ve just come out of the COVID pandemic, and a lot of businesses went under, and so it’s macroeconomic development across the globe. We also look at the outcome of the stress test.
“This is to remind us that the Central Bank of Nigeria normally carries what we call a stress test, and it is just to check how the financial institutions will react to shocks at different levels in the economy. And we do that, and we give the results. From the results of management, decisions are taken to ensure that in the event that there are various shock levels in the economy, whether the financial institutions will be able to survive,” he said.
The CBN governor also noted that the exercise has led to an increase in foreign direct investments, which he said was evident in the increased foreign exchange earnings for the country. He added that efforts were ongoing to enforce proper purchasing criteria for new shareholders, to ensure illicit funds are not allowed into the system.
He also said that the exercise has presented an opportunity for the smaller investors to own partial shares in the financial institutions, which we know have always been doing very well. “The equity market is already being boosted and this activity is going to increase so much tendencies and further activities in the capital market.
“A lot of people have been asking. This guideline came out a few months ago. Already, at least four banks are currently raising funds through the capital market. We all know them, some of us have bought into them already. We are currently working with the banks, reviewing their capital plans, and other activities relating to the capital range.
“We are also conscious of the fact that the capital that is going to be imported into the country, especially from foreign direct investors, and we are assuring them, they are working on the policy for that, that in the place that they are not able to be taken up, they will not suffer any form of devaluation loss and they will be able to go back home with their currency and the value as we deploy them into the country.
“Over the past years, between 2010 and 2015, records have shown that investments in bank shares yielded an average of 17% per annum. So the recapitalization exercise of the Nigerian banking sector is a pivotal strategy aimed at further strengthening the resilience of the Nigerian banks and promoting sound financial systems in Nigeria. Importantly, it will support the government’s goal to achieve a GDP of $1 trillion by 2030,” he said.
Also speaking, Taiwo Oyedele, chairman of the presidential committee on fiscal policy and tax reforms noted that there was a need to ensure that all sectors of the economy work adequately, stating that available data shows that the government has focused its efforts around revenue generation in the wrong places, mostly at the bottom of the ladder
He said that the committee, in working to reconfigure the tax system so that the burden of the tax falls in the right places, not on the low end of the ladder, including very small businesses, have identified that revenue can be generated from government assets.
“Today, they are spread all over the place. They are not well managed, and some of them, people are taking advantage of that to enrich themselves and get spend on the country. There’s also the one around government-owned enterprises.
“For you to get a $1 trillion economy, you need the capital market to work, the banking sector is trying to recapitalize, and they also need a capital market themselves. And the capital market needs the economy to work consistently.
“So while we are addressing all the issues around corruption, wasteful spending, inefficiency, we also have to recognize that it’s a fundamental issue that we need to get the economy to work so that revenue can go up,” he said.
