CBN’s Renewed Plans To Recapitalise Banks In Nigeria

Recently, the Governor of the Central Bank of Nigeria (CBN), gave an indication to once again increase the capital base of the financial institutions in the country.
The CBN Governor, Mr. Olayemi Cardoso, who disclosed this in a keynote address at the Chartered Institute of Bankers of Nigeria (CIBN) 58th Annual Bankers’ Dinner and Grand Finale of the Institute’s 60th Anniversary, held in Lagos, said, the recapitalisation was necessary to position the Nigerian banks to effectively play their intermediation role in the N1 trillion economy of the President Bola Tinubu’s administration.
The CBN’s recent directive to increase banks’ capital highlights the ongoing efforts to ensure the stability and growth of the Nigerian banking sector.
Recall, the recapitalisation of banks in Nigeria was also carried out in 2005 under the leadership of the Charles Soludo, the then Governor of the CBN.
In July 2004, Soludo announced that the minimum capital requirement for banks would be raised to N25 billion ($195 million) from the then minimum of N2 billion by the end of 2005.
The decision was aimed at increasing he banks’ capital bases and improving their financial stability.
The recapitalization process involved the consolidation of banks through mergers and acquisitions, which aimed to strengthen the banks’ financial positions and enable them to face financial challenges in the global market.
In 2011, the Asset Management Corporation of Nigeria (AMCON) was established to purchase non-performing loans (NPLs) and inject capital into illiquid or insolvent banks.
AMCON injected a total of NGN 2.3 trillion (USD 15 billion) in capital into eight different banks. Out of these eight banks, five were able to find acquirers and signed a Transaction Implementation Agreement (TIA) with their acquirers before the deadline.
The recapitalization also freed Nigerian banks from reliance on public sector funds and better equipped them to finance larger projects within key sectors such as oil, gas, and telecommunications.
Additionally, the reforms resulted in improved banks’ performance, increased lending to the private sector, and growth in the non-oil sector of the economy.
However, the recapitalization also had some adverse effects, such as the loss of business for some banks, which led to a loss of income and a decline in public confidence in the banking industry.
As of November 2023, the Central Bank of Nigeria (CBN) has directed banks to increase their capital.
This decision was made to address the capital adequacy of Nigerian banks in light of the projected $1 trillion economy in eight years.
The Presidency has expressed support for the banking sector consolidation initiative, stating that it would help the country to grow the economy.
President Bola Tinubu, in a goodwill message at the 40th anniversary of The Guardian Newspapers in Lagos, said that the bank recapitalisation was crucial to achieving a $1 trillion economy.
“Amidst the general lull in global economy, our ambition to attain a $1 trillion economy appears daunting. But we believe it is achievable, with God on our side and our collective determination. This explains why the Vice President and I have been on the road, trying to attract huge investments in various facets of our economy: agriculture, oil and gas, renewable energy and others.
“To arrive at the $1 trillion economic destination, we believe that we must address the capital adequacy of our banks that will provide the fuel for the journey,” the President stated.
Meanwhile, Cardoso while speaking at the Annual Bankers’ Dinner said, the banks would be directed to increase their capital.
“Indeed, despite the challenging global and domestic macroeconomic environment, Nigeria’s financial sector has demonstrated resilience in 2023, with key indicators of financial soundness largely meeting regulatory benchmarks.
Stress tests conducted on the banking industry also indicate its strength under mild-to-moderate scenarios of sustained economic and financial stress, although there is room for further strengthening and enhancing resilience to shocks. Therefore, there is still much work to be done in fortifying the industry for future challenges, a topic that I will delve into later in my address.
“In my recent speech at the 370th Bankers’ Committee meeting, I highlighted the economic agenda of President Bola Ahmed Tinubu’s administration. The administration, as outlined in the widely circulated Policy Advisory Council report on the national economy earlier this year, has set an ambitious goal of achieving a Gross Domestic Product (GDP) of $1 trillion over the next seven years, with clearly defined priority areas and strategies.
“Attaining this substantial target necessitates sustainable and inclusive economic growth at a significantly higher pace than current levels. The administration has already commenced this journey through fiscal reforms, including the removal of petrol subsidy and the unification of the foreign exchange market rate.
“Considering the policy imperatives and the projected economic growth, it is crucial for us to evaluate the adequacy of our banking industry to serve the envisioned larger economy. It is not just about the stability of the financial system in the present moment, as we have already established that the current assessment shows stability.
“However, we need to ask ourselves: Will Nigerian banks have sufficient capital relative to the financial system’s needs in servicing a $1.0 trillion economy in the near future? In my opinion, the answer is “No!” unless we take action. Therefore, we must make difficult decisions regarding capital adequacy. As a first step, we will be directing banks to increase their capital”, he said.

Some of the challenges associated with the recapitalization of the banks in 2005 include:
Implementation Obstacles: Many banks faced obstacles in implementing the recapitalization policy, which initially seemed difficult due to the bleak outlook of the Nigerian economy.
Corporate Governance: The recapitalization process highlighted the need for improved corporate governance within the banking sector. Despite the increase in capital adequacy, efficiencies were yet to be realized from the mergers, and corporate governance remained a concern.
Unanticipated Consequences: The recapitalization led to unanticipated consequences, including the need to address human resources and other developmental challenges that arose from the reforms.
High Incidence of Bank Failures: The high incidence of bank failures pervading the sector was a challenge that needed to be addressed to restore confidence in the banking system.
Macroeconomic and Institutional Problems: The recapitalization brought to the fore various macroeconomic and institutional problems facing the Nigerian economy, such as inappropriate macroeconomic policies, inadequate policy coordination, and high cost of doing business.