A report by global financial services company, Ernst and Young, states that if the Central Bank of Nigeria's capital requirement is increased from its current N25bn, up to 17 out of the existing 24 Deposit Money Banks in Nigeria may not be able to comply.
If the apex bank were to raise the capital base of commercial banks in the country by 15-fold from the current N25bn, the new report titled “Navigating the Horizon: Charting the Course for Banks amid Plans for Recapitalisation” suggests that only seven banks could survive.
In several instances, the CBN Governor, Olayemi Cardoso, has stated that the apex bank would explore the possibility of raising the minimum capital base of banks in the country to bolster their capacity in supporting Nigeria's ambition to become a $1tn economy by 2026.
Based on the type of banking license, the current capital base is stratified – banks with regional, national, and international licenses are expected to maintain a minimum capital base of N10bn, N25bn, and N50bn, respectively.
The proposed increase in the capital base is occurring almost two decades after the CBN's 2004 banking reform, which saw the then prevailing capital base increase from N2bn to N25bn.
The reduction in the number of banks in the country from 89 to 25 was the ultimate result of the massive mergers and acquisition activities during the 2004 banking reform.
Last year, chief executive officers and other top executives of Deposit Money Banks were reported to have started taking steps to raise fresh capital for strengthening their institutions' capital base through initial merger and acquisition discussions.
Despite financial soundness indicators showing that Nigerian banks were largely safe and resilient as of 2023, Ernst and Young mentioned in the report that some banks may rely on different recapitalization options, including mergers and acquisitions, initial public offerings, placements, right issues, and retained earnings.
Based on the report, the CBN's recent initiative to increase the capital base of banks is projected to result in a series of mergers and acquisitions, reminiscent of the activity seen during the 2004/2005 recapitalization exercise.
The report also mentioned that the plan to recapitalize banks was based on the recent devaluation of the naira in 2023, stating that the exchange rate was N132.9/$ during the last exercise in 2005, but now the naira exchanges for over N1400/$.
