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The Central Bank of Nigeria (CBN) is currently steering a recapitalization initiative that is set to reshape the landscape of the banking sector. This strategy not only strengthens the financial stability of banks but also carries significant implications for both the equity capital market and the Nigeria Deposit Insurance Corporation (NDIC).
With the recapitalization effort, the banking sector is expected to bolster its capital base significantly. This increase in capital is intended to enhance the banks’ capacity to support productive economic activities, potentially accelerating economic growth. However, there is a concern that the capital market may face challenges absorbing the surge in equity stocks, resulting from Initial Public Offers (IPOs) and Rights Issues by banks seeking to meet the new capital thresholds.
The timeline set for banks to augment their minimum capital spans from April 1, 2024, to March 31, 2025. In navigating these requirements, banks might pursue mergers and acquisitions, opt for license downgrades, or seek to upgrade their operational licenses. The CBN, in a circular dated March 28, 2024, also mandated that all new banking license applicants, including those with preliminary approvals, must comply with these elevated capital requirements.
The revised capital norms specify that banks intending to operate both nationally and internationally must hold a minimum capital of ₦500 billion. National banks require ₦200 billion, regional banks ₦50 billion, and merchant banks are also set at a ₦50 billion minimum. Non-interest banks operating on a national and regional scale must maintain capital of ₦20 billion and ₦10 billion, respectively.
The CBN believes that these revised capital requirements are crucial for banks to robustly support Nigeria’s economic ascent to a USD $1 trillion economy, while also cushioning against macroeconomic challenges and external or domestic shocks.
Echoing a similar sentiment, the Bank of Canada highlights on its website that higher capital requirements mitigate the severity of financial downturns by increasing the resilience of banks, thereby enabling them to continue extending credit through economic recoveries.
This brings to light the critical role of the Nigeria Deposit Insurance Corporation (NDIC) as banks strive to meet these new capital standards. Established under the NDIC Act, the agency is tasked with administering the Deposit Insurance Scheme (DIS) to protect depositors and ensure the stability of the banking system. This scheme not only safeguards depositor funds but also bolsters public confidence and promotes system stability.
According to the NDIC, their role extends beyond deposit protection to encompass supervision of banks, which supports monetary stability, enhances the payment system, and fosters competition and innovation within the sector. Such supervision aims to minimize the risk of bank failures.
However, in the event of a bank failure, after ensuring that depositors are fully reimbursed, any remaining assets are distributed among creditors and shareholders, thus providing an additional layer of protection to bank shareholders.
Internationally, similar deposit insurance schemes operate under various names, such as the Financial Services Compensation Scheme (FSCS) in the UK, the Federal Deposit Insurance Corporation (FDIC) in the US, and the Corporation for Deposit Insurance (CODI) in South Africa, each playing a pivotal role in their respective banking systems.
The ongoing bank recapitalization orchestrated by the CBN, supported by the NDIC and influenced by equity market dynamics, underscores a complex yet vital effort towards achieving a more robust financial sector in Nigeria.
Salisu Na’inna Dambatta pens from Dambatta, providing insights into the intersections of financial policy and economic stability.
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