A new report from Ernst and Young has highlighted foreign exchange devaluation, fintech competition, among other challenges that will constrain and cause about 17 out of 24 banks to fall short in meeting the planned capital requirement to be set by the Central Bank of Nigeria (CBN) if it is increased by 15-fold from its current N25 billion.
The report delved into the potential consequences of this shortfall, offering insights into various options available to banks that might find themselves outside the capital requirements mandated by the CBN.
It suggests that such banks may need to consider mergers and acquisitions (M&A) to shore up their capital base, a strategy reminiscent of the consolidation witnessed during the last recapitalisation exercise in 2004/2005, which saw the number of banks reduced from 89 to 25.
“While the CBN governor gave no indication as to the magnitude of the proposed hike in the capital base, we have assumed what the proposed increment will be, based on three different scenarios underpinned by current macroeconomic conditions.
“On the back of that, we were able to determine the number of banks (across the three license types) that may fall below the new minimum capital thresholds. In a worst-case scenario, given a capital multiplier of 15, about 17 out of 24 banks would not meet the new minimum capital,” the report stated.
It underscores the urgent need for Nigerian banks to reassess their capital positions and formulate strategic plans to meet the requirements of the proposed capital revaluation by the CBN.
One of the key factors driving the need for this proposed capital revaluation is the recent devaluation of the naira in 2023. The report noted that while the exchange rate stood at N132.9/$ during the last exercise in 2005, the Naira now exchanges for over N1400/$.
Additionally, it noted that the N25 billion capital base in 2005 amounted to $188.2 million, which has significantly dwindled to a mere $18.4 million using the recent exchange rate.
This analysis presents a stark contrast to the stance of the CBN governor, Olayemi Cardoso, who previously indicated that the planned recapitalisation aims to support Nigeria’s target of achieving a $1 trillion economy.
In November 2023, Cardoso hinted at the possibility of raising the minimum capital requirement for banks, citing the need for banks to have adequate capital to support an economy striving for a Gross Domestic Product (GDP) of $1 trillion, as targeted by the Federal Government.
Since the banks’ recapitalization exercise of 2005, bank liquidation in Nigeria has significantly diminished, with no incident of depositors losing money to a failed bank. However, the financial sector has significantly changed since then with the emerging fintech market which has spurred non-traditional financial institutions to record-breaking market capitalisation, underscoring the need for the banks to recapitalise.
Also, the volatility of the Nigerian forex market has exposed the weaknesses of the banks, highlighting the vulnerability of their financial strength when measured in dollars. Given the current situation, experts say many banks will merge if the CBN makes its recapitalisation move. Therefore, stakeholders are urged to collaborate closely with regulators and explore innovative strategies to ensure the continued resilience and stability of the banking sector.
Reacting to the report, the lead faculty at Tekedia Institute, Professor Ndubuisi Ekekwe, said the CBN must watch carefully before bringing another vector into the Nigerian economy.
According to him, Nigerians do not want a further reduction in competition, saying that while banks like Zenith Bank can meet any new minimum paid-up share capital for a national commercial banking license at 15x on the old N25 billion, some others may not.
He said when a certain tier 1 bank had rains last year and possibly hit more than N1 trillion on PBT, even as another bank was recording losses and is expected to record losses in some quarters this year, stressing that it was all about the choices made.
Ekekwe said, “Simply, Nigerian banking is emerging into two classes: big or dying. I think those guys in CBN are smart enough to avoid anything that would engineer more chaos in the system. We ask them to pause any recapitalisation exercise until we can stabilise the economy.”
READ ALSO: Senator Joel-Onowakpo calls for calm, condemns killing of soldiers in Delta
and then