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Thursday, July 18, 2024

CBN Recapitalization’s Implications For Banks And The Economy

CBN recapitalization’s implications for banks and the economy

The Central Bank of Nigeria (CBN) has revised the minimum capital requirements for commercial, merchant, and non-interest banks, requiring them to increase their common equity capital within two years and downgrade their activities for lower capital requirements.

Nigerian banks are undergoing recapitalisation to enhance their risk-taking capacity, economic support, and banking system confidence. The last recapitalisation occurred in 2005, with a minimum capital requirement increase from N2.0bn to N25.0bn, reducing the number of banks from 89 to 24.
The apex bank increased the minimum capital base for commercial banks with national and regional authorization to N200 billion and N50 billion, respectively.

What ramifications result?
Banks’ increased liquidity could lower lending rates in the medium to long term, allowing them to absorb loan losses and withstand economic shocks. A larger capital base will enable banks to underwrite higher credit levels and finance larger transactions. However, the cost of capital may increase due to higher equity capital costs.

Ebo predicts a stronger financial system will support Nigeria’s economy towards a $1.0tn economy by 2030. This will attract foreign investments, increase FX liquidity, and support naira stability. Banks will also expand business activities, particularly lending, to benefit SMEs, which have received minimal support from commercial banks.

Bank mergers and acquisitions may lead to job losses and increased business for capital market players. Equity capital raises involve stakeholders like investment bankers, regulators, and solicitors, resulting in improved earnings from fees. However, premature speculation about mergers is urged, as banks have a 24-month window to recapitalize. Past recapitalization exercises have shown transformative potential for banks, but premature judgments should be avoided.

Chukwu disagreed with the Central Bank of Nigeria (CBN)’s decision to exclude retained earnings from recapitalization requirements, arguing that retained earnings could be used for dividends or shareholder reinvestment through rights issues. He suggested including retained earnings could streamline the recapitalization process. The CBN allows banks to source capital through equity injection, rights issue, subscription, mergers and acquisitions, and license authorisation.

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