Last week, the Central Bank of Nigeria (CBN) instructed banks operating in the country to shore up their paid-up capital. Over the 24 months to end-March 2026, banks are requested to raise their minimum capital to anything from N500 billion (for commercial banks with international banking licences) to N10 billion (for non-interest banks with regional licences). In the alternative, banks may upgrade or downgrade their licence authorisation.
At first blush, the key questions raised by this policy initiative concern the apex bank’s banking supervision policy and the framework within which it operates. Regarding the concerns raised by the latter, take the possibility of a commercial bank downgrading to a “regional licence,” rather than beefing up its capital. What does it mean to be a “regional bank” in a digital world? How would a regional bank deal with a firm applying for a loan which, though, its business address is registered in the geopolitical zone of the bank’s operations, pledges non-movable collateral outside of the bank’s catchment area, against revenue stream from outside the geopolitical area? The same question arises on the back of the ease with which accounts may now be opened online.
Yet, by far the bigger worry is with the principle that supports the apex bank’s supervision framework. The Central Bank of Nigeria’s adoption of the full set of standards of the Basel Committee on Banking Supervision would suggest that this is a risk-based principle. At its most fundamental, risk-based supervision requires that banks maintain “sufficient capital to support their operations in accordance with regulatory requirements. Such capital provides a cushion by absorbing unexpected losses and decline in asset values that could otherwise lead to failure.” On this argument, it is clear that what the CBN describes as our “domestic money banks” are not in breach of current regulatory capital requirements. And even if they are, the CBN’s recourse would be to compel defaulting banks to either beef up their capital or reduce their risk appetite.
Is there an additional case for ramping up the capital adequacy of Nigerian banks to enable them to finance the goal of a $1 trillion economy by 2030, as set out by President Bola Ahmed Tinubu in his Policy Advisory Council report on the national economy? Stripped of its fancier arguments, this is a modern version of the contention 20 years ago when the Central Bank raised the minimum capital for banks from N2 billion to N25 billion. Then, the argument was that the top three domestic banks in the country were not as big as ABSA in South Africa. The problem, though, with this narrative is that today, ABSA is still bigger than our top three banks. This leads to a chicken-and-egg dilemma. Do heavily capitalised banks drive economic growth or does economic growth drive bank capitalisation? It would seem, however, that the last recapitalisation exercise simply inflated bubbles in the sector.
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Nonetheless, there are additional reasons why the CBN’s new capital numbers make sense. The chronic naira devaluation and the harsh domestic operating environment have continued to bloat the risk-weighted assets of Nigerian banks. If economic crises nearly always require lifelines to be offered to banking systems, then the CBN confronts the following conundrums. First, is the large body of impaired accounts with industry implications (most of the big banks are involved), which the Central Bank continues to offer forbearance on. Then, there are the exchange losses that will be occasioned by customer defaults. The sense in the markets is that banks will have to write off devaluation-related bad loans. Finally, most of the small banks have not only lost their capital but are also carrying huge capital “holes.” To take a few examples, the retained earnings of Heritage Bank, Unity Bank, Keystone Bank and Suntrust Bank are a negative ₦1.2 trillion, ₦250 billion, ₦200 billion, and ₦25 billion, respectively.
That said, there are 36 deposit money banks operating in Nigeria and the total capital requirement based on the new minimum regulatory capital threshold is ₦7.5 trillion; meanwhile the qualifying capital of these banks currently stands at ₦2.5 trillion. PREMIUM TIMES estimates the proforma capital that banks need to raise to meet the new capital requirements at around ₦5 trillion on aggregate and the banks’ estimated capital hole at around ₦4 trillion on aggregate.
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Arguably, this capital need can be reduced drastically if 10 of the 36 banks (namely: Sterling Bank, Keystone Bank, Signature Bank, Premium Trust Bank, Titan Trust Bank, Globus Bank, Optimus Bank, Unity Bank, Wema Bank, and Heritage Bank) were willing to downgrade their licence authorisation. Our back-of-the-envelope analysis under this scenario reduces the total capital requirement that the banking industry will need under the new minimum regulatory capital threshold to ₦6 trillion. And the minimum additional capital required to achieve full compliance equally falls to around ₦3.5 trillion in aggregate.
With the yield on 10-year US treasury bills at 4 per cent-plus, domestic inflation at 31 per cent-plus (both on an annual basis), and the CBN’s current effort at reining in runaway prices require it to pull the handbrakes on the economy, the timing of this move might not be as wise as it seems. PREMIUM TIMES urges caution and greater due diligence on the kind of actors asked to make large investments in naira-denominated assets at this point. Another name for the delinking of investment from the yield on such investment is “money laundering.” As such, the CBN needs to be careful of the new owners that it might enable through this exercise.
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