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A recent report from Ernst and Young suggests that if the Central Bank of Nigeria (CBN) increases the capital requirement for banks from the current N25 billion, only seven out of the existing 24 Deposit Money Banks might meet the criteria.
Titled “Navigating the Horizon: Charting the Course for Banks amid Plans for Recapitalisation,” the report underscores the potential challenges facing banks in complying with heightened capital standards proposed by the apex bank.
The CBN Governor, Olayemi Cardoso, has repeatedly emphasized the need to bolster banks’ capacity to support Nigeria’s economic aspirations, aiming to elevate the nation to a $1 trillion economy by 2026.
Currently, banks with regional, national, and international licenses are mandated to maintain minimum capital bases of N10 billion, N25 billion, and N50 billion, respectively. However, the proposed increase in capital requirements, nearly two decades after the 2004 banking reform, poses significant hurdles for many banks.
The banking landscape witnessed extensive mergers and acquisitions during the 2004 reform, which saw the number of banks slashed from 89 to 25, indicating a precedent for such structural adjustments.
Ernst and Young’s analysis suggests that banks may explore various avenues to meet new capital thresholds, including mergers, acquisitions, initial public offerings (IPOs), placements, rights issues, and retained earnings. Despite the robustness exhibited by Nigerian banks in 2023, financial soundness indicators underscore the necessity for proactive measures.
The report forecasts a resurgence in mergers and acquisitions reminiscent of the 2004/2005 recapitalization exercise, albeit not as widespread, given the sector’s relatively solid footing and recent M&A activities.
Commenting on the potential magnitude of the proposed capital hike, the report outlines scenarios based on current macroeconomic conditions, projecting that approximately 17 out of 24 banks could fall short of new minimum capital thresholds under a worst-case scenario.
The rationale behind the recapitalization drive lies in the devaluation of the naira, which has drastically eroded the currency’s value since 2005. Today’s exchange rate, exceeding N1400/$, starkly contrasts with the N132.9/$ in 2005, necessitating a recalibration of capital adequacy metrics.
In response to these developments, stakeholders like Dr. Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise, advocate for a reassessment of minimum capital requirements, emphasizing the imperative of aligning regulatory standards with prevailing economic realities.
Professor Uche Uwaleke of Nasarawa State University echoes these sentiments, advocating for incentivizing banks rather than coercive measures, to facilitate capital augmentation in line with national economic objectives.
As banks navigate the impending recapitalization landscape, a strategic blend of regulatory foresight and industry resilience will be crucial in fortifying Nigeria’s financial ecosystem for sustained growth and stability.
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