On 28 March 2024, the Central Bank of Nigeria (CBN) in line with Section 9 of the Banking and Other Financial Institutions Act (BOFIA) of 2020 released a circular on the review of minimum capital requirements for commercial, merchant, and non-interest banks in Nigeria. Based on the circular released, the minimum capital requirements for commercial banks with international, national and regional licenses are ₦500billion, ₦200billion and ₦50billion respectively. The capital requirement for merchant banks was scaled up to ₦50 billion while the capital base for non-interest banks was increased to ₦20billion (national banking license) and ₦10billion (regional banking license).
Objective of the 2024 Banking Recapitalisation Programme
According to the CBN, determining the new minimum capital requirements involved assessing various factors which included the risk profile of banks, global and domestic headwinds, their potential impact on banks' balance sheets, the effect of inflation on banks' lending activities, stress test of banks' balance sheet to gauge their resilience to absorb current and unexpected shocks.
Consequently, the CBN has disclosed that the broad objective of the current recapitalisation programme is "to engender the emergence of stronger, healthier, and more resilient banks to support the achievement of a US$1 trillion economy by the year 2030."
Implementation of the Recapitalisation Programme
There are various options that banks may consider to meet the minimum capital requirements set by the CBN. These include: (1) additional equity capital injection either through private placement, rights issue and/or offer for subscription; (2) Merger and Acquisition (M&A); and finally, the banks may decide to upgrade or downgrade their license authorisation to meet the capital requirements.
Each of these options are discussed below:
- Private placement: Private placement involves selling new shares or securities to a select group of private investors rather than the public market.
There are several benefits and limitations of private placement, including but not limited to: Benefits:
Speed and confidentiality: Private placement involves faster capital raise with less regulatory disclosure.
Investor quality: It attracts investors who provide more than just capital, but technical expertise and/or networking opportunities.
Limitations:
Limited capital pool: Private placement may not raise as much capital as public offerings due to the smaller pool of investors available.
Dilution: The risk of dilution of current shareholders equity holdings exists if not properly managed.
- Offer for subscription: Offer for subscription allows banks to publicly offer new shares to members of the public. This approach allows raising for larger amounts of capital and increasing public ownership.
Benefits:
Larger access to capital: Offer for subscription provides opportunity for banks to raise capital from the general public as it provides access to a larger pool of investors.
Large pool of investors: Selling shares to members of the public has the potential to increase the bank's visibility and investor base.
Limitations:
Market risks: The success of offer for subscription is subject to market conditions and investor interest and appetite.
Regulatory hurdles: Offer for subscription involves complex regulatory compliance and disclosures.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
