Nigeria: CBN Focuses on Bank Recapitalization for Economic Resilience

Despite facing economic challenges that led Nigeria into recession in 2020 and drove inflation rates up to 31.7% by February this year, Nigerian banks have demonstrated improved financial performance and strength, with key indicators comfortably meeting regulatory standards.

For instance, the banking industry’s Capital Adequacy Ratio, a crucial measure of financial health, stood at 13.7% as of January this year, well above the regulatory minimum of 10%. Similarly, the Non-Performing Loans ratio stood at 4.81% in January, below the regulatory threshold of 5%, and the Liquidity ratio stood at 40.14%, surpassing the regulatory minimum of 30%.

Moreover, banks have actively supported economic activities through increased lending, evidenced by a 94% growth in Credit to the Private Sector over one year, reaching N80.86 trillion in February 2024 from N41.75 trillion in February 2023.

However, to achieve the goal of a $1 trillion economy, a key objective of the current administration, banks need to further increase their support for the economy. Nigeria’s Credit to Private Sector as a percentage of GDP lags behind global averages, standing at 14.1% in 2022 compared to the 90.7% average for BRICS countries.

To address this gap and enhance their resilience to future economic challenges, the Central Bank of Nigeria (CBN) announced new minimum capital requirements for banks. The move aims to ensure that banks raise and maintain adequate capital to support economic growth.

Under the new requirements, commercial banks with international authorization are required to have a minimum capital base of N500 billion, a 900% increase from the previous N50 billion. Similarly, commercial banks must maintain a minimum capital base of N200 billion, up 700% from N25 billion.

The CBN has given banks a 24-month window, from April 1, 2024, to March 31, 2026, to meet these new capital requirements. Banks can raise fresh capital through private placements, rights issues, mergers and acquisitions, or license upgrades/downgrades.

This upward review of minimum capital requirements has garnered support from investment analysts and real sector experts, who view it as long overdue. They emphasize the importance of preserving depositor funds, strengthening financial stability, and positioning banks to support economic growth effectively.

The recapitalization exercise is expected to attract additional domestic and foreign investment, strengthen credit creation in the real sector, and lead to the emergence of stronger and more resilient banking entities. Overall, it is seen as a positive step towards building a robust banking sector that can compete both regionally and globally, ultimately contributing to Nigeria’s economic development.