The Banking Sector Regulation Programme is a regulatory initiative of the Central Bank of Nigeria (CBN) that requires banks operating in Nigeria, to increase their minimum paid-in common equity capital to a specified amount according to their license category and authorization within a specified timeframe. Further to this Programme, on March 28, 2024, the CBN issued a Circular to all Commercial, Merchant and Non-Interest Banks; and Promoters of Proposed Banks mandating these entities to review their Minimum Capital Requirements in Nigeria. According to the CBN, this review became necessary due to the prevailing macroeconomic challenges, stemming from both external and domestic factors that have continued to affect the Nigerian economy at a broad level and by increasing the minimum capital requirements, the CBN aims to ensure banks have a robust capital base to absorb unexpected losses and capacity to continue to contribute to the growth and development of the Nigerian Economy.

Objective

The objective of the Programme is to engender the emergence of stronger, healthier and more resilient banks to support the achievement of Nigeria's $1 trillion economy plan by the year 2030. According to the CBN, bigger banks with larger capital bases and capacity can underwrite larger levels of credit which is critical to lubricate and catalyze the growth of the economy.

Scope of Application of the Circular

The circular applies to all Commercial, Merchant, and Non-interest Banks; and Promoters of Proposed Banks

Minimum Capital requirements

  1. Commercial Banks: By the Circular, all Commercial Banks in Nigeria with international banking authorization are required to have a minimum share capital of 500 billion naira. Similarly, Banks with national authorization are mandated to have at least a share capital of 200 billion naira, while those with Regional authorization are required to have a minimum of 50 billion as their Share capital.
  2. Merchant Banks: The CBN Circular applies to only Merchant Banks with regional authorization licenses and requires them to issue a minimum of 50 billion naira as their share capital.
  3. Non-interest banks (NIBs): NIBs with national and regional authorizations require 20 billion naira and 10 billion naira share capital respectively to remain operational in the country.

NB: For existing Banks, the minimum capital requirement shall comprise of Paid up capital and Share premium only and should not be based on shareholders' funds. While for Proposed Banks, the minimum capital requirement shall be paid-up capital. Also bonus issues, other reserves and Additional Tier 1 (AT1) capital1 shall not be allowed or recognized for the purpose of meeting the new minimum capital requirements.

How Banks are expected to meet the requirements

The CBN recommended the following options for existing Banks seeking to meet the Minimum Capital Requirements;

  1. The issuance of new common shares by way of the public offer, rights issues, or private placements
  2. Mergers and Acquisitions (M&As)
  3. To upgrade or downgrade their respective license category or authorization

Protective mechanisms put in place to ensure the protection of Depositors' interest in the Bank

The protective mechanism put in place to secure the interest of depositors during this process is twofold:

  1. Enhanced Monitoring and Supervisory Oversight: The Central Bank of Nigeria (CBN), in collaboration with the Nigeria Deposit Insurance Corporation (NDIC), will intensify its monitoring and supervisory oversight over banks participating in the Program. This means that the regulatory authorities will closely monitor the activities of the banks to ensure compliance with regulations and detect any potential risks to depositors' interests.
  2. Assurance of liability Assumption in Mergers or Acquisitions: In the event of a merger or acquisition involving banks participating in the Program, depositors' accounts and funds will remain secure. The acquiring institution will bear responsibility for all liabilities and obligations, including the protection of depositors. This means that depositors' funds will continue to be safeguarded, and they will not experience any adverse impact on their accounts due to the merger or acquisition.

Compliance Timeframe

The CBN set a 24-month timeframe (from April 1, 2024 and terminating on March 31, 2026) for Banks to comply with the new Capitalization requirements. In the light of this, the CBN mandates all banks affected by the Circular to submit to the Director, Banking Supervision Department of the Central Bank of Nigeria, not later than April 30, 2024, an implementation plan indicating any of the preferred options for the recapitalization exercise.

Conclusion

This new recapitalization requirement will have a considerable impact on the banking industry. Beyond the injection of fresh capital, this regulation is likely to trigger substantial corporate restructuring within the financial industry. Many banks may find themselves unable to meet the increased capital thresholds, compelling them to seek mergers or accede to acquisitions with larger institutions. Finally, the CBN's decision to raise minimum capital requirements for Nigerian banks would ensure a safe and stable banking system while supporting the nation's economic growth.

Footnote

1. This is a form of regulatory capital that banks and financial institutions are required to hold to comply with regulatory requirements.

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