Twenty years after the last recapitalisation, the Central Bank of Nigeira has issued a new capital base for banks in the country raising the minimum capital in an effort to ensure that the banking industry has an adequate capital buffer to support a $1 trillion Gross Domestic Product (GDP) envisioned by 2026 and promote financial stability.
According to the new requirement, commercial banks with international licenses are required to have a capital base of N500 billion while their national and regional counterparts are required to have capital base of N200 billion and N50 billion respectively.
Similarly, the capital base of national non-interest banks were raised to N20 billion while that of regional non-interest was raised to N10 billion. Merchant banks capital base was also raised to N50 billion.
The CBN also changed the composition of the regulatory capital for the banks. Hitherto, the shareholders’ funds was used as the regulatory capital and with the minimum threshold set by the apex bank.
In the new requirement, only the paid-up capital, comprising only the share capital and share premium, is allowed as regulatory capital under the new dispensation.
Specifically, other components of the shareholders’ funds (including retained earnings) and additional tier 1 instruments will be excluded in the computation of the regulatory capital.
Share capital refers to the total amount of capital raised by a company through the issuance of shares. These shares represent ownership stakes in the company and entitle shareholders to a portion of its profits. Share capital is a key indicator of a company’s financial health and growth potential, as it reflects the amount of capital contributed by investors.
It plays a vital role in determining a company’s ability to fund its operations, expand its business, and attract investors.
Share premium refers to the excess amount received by a company from investors over the face value of its shares. Share premium is recorded on the company’s balance sheet as part of shareholders’ equity and can be used for various purposes, such as expanding operations, repaying debts, or distributing dividends.
The CBN circular dated March 28, 2024 signed by the Financial Policy and Regulation, Hasan Mustafa, announcing the new minimum capital also noted that new banks are expected to meet the new requirement as part of the conditions to be met before a banking licence is issued.
However, existing banks and those with approval-in-principle (AIP), to commence banking operations, are given 24 months to shore up their paid-up capital which will become effective on April 1, 2026.
Banks with paid-up capital below the proposed minimum are required to submit the plan to shore up the shortfall to the apex bank not later than 30 April 2024. They are allowed to inject new capital through private placements, right issue and/or offer for subscription, mergers and acquisitions, upgrade or downgrade of license authorisation.
Many analysts believe that the recapitalisation of the banking industry had become expedient following the depreciation in the value of the naira. As at the last regulation-induced recapitalisation exercise in the banking industry in 2004, all banks had a homogenous banking license (universal banking license of 25 billion which at that time was equivalent to $190.8 million when considering the exchange rate of N131 to the dollar at that time as the minimum capital.
With the new directive, using the official exchange rate on the date of the announcement of N1,303 to the dollar, the national commercial banks are expected to have $153.5 million equivalent as the paid up capital.
While the $383.7 million equivalent that the international banks are expected to maintain as paid-up capital is almost twice the minimum capital in 2004, it is expected given that they are significantly exposed to cross-border risk.
