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Old lessons for new banking recapitalisation 17 Jul 2024

The Banking Sector Recapitalisation Programme 2024, which was launched by the Central Bank of Nigeria (CBN) on 28 March 2024, is expected to catalyse significant activity within the industry in the next 20 months. The CBN, in its circular issued on that date, announced the review of the minimum capital requirements for three categories of banks in Nigeria – commercial, merchant, and non-interest banks.

From the erstwhile N25 billion, the CBN has increased the minimum capital requirements for commercial banks by more than 100 percent in most cases. Regional commercial banks are to increase their regulatory capital to a minimum of N50 billion; national banks, N200 billion; and banks with international authorisation, N500 billion. The minimum capital requirement for merchant banks has been reviewed upward to N50 billion, regional non-interest banks are to have N10 billion or more, and national non-interest banks are to raise their capital to N20 billion at the minimum.

According to an analysis published by Nairametrics, the market capitalisation of banking stocks in the Nigerian Exchange Group (NGX) declined by 26.7% between the date of the announcement and 18 April 2024, from N8.08 trillion to N6.34 trillion. This has been attributed to the response of shareholders to the expected dilutive effect of the anticipated capital-raising activities of the banks.

Unlike the previous bank recapitalisation exercise two decades ago, banks are prohibited from meeting the new capital requirements by transferring retained earnings and other equity reserves to paid-up capital and would have to raise external capital. The circular gives a period of 24 months for the extant banks to meet the new capital requirements, the deadline being 31 March 2026. The new capital requirements are automatically applicable to all new applications for banking licenses submitted after 1 April 2024.

There seems to be a widespread acknowledgement of the need for higher minimum capital for the banks. In this regard, the CBN has faced little criticism about the appropriateness of its new stipulations. Various factors, including the risk profiles of the banks, global and domestic macroeconomic headwinds and their potential impact on banks’ balance sheets, uptrend in inflation, and stress tests of banks’ balance sheets to gauge their resilience to absorb current and future shocks, rightly advised the new capital mandates. As argued by the apex bank, the higher capital would enhance the banks’ resilience, solvency, and capacity to face “prevailing macroeconomic challenges.”

But for an exercise that would last for 24 months, the CBN seems to have hastened the banks to submit their proposals for increasing their capital to the new regulatory threshold. It provided the banks just a little over one month to submit to it their implementation plans – indicating the options for meeting the new capital requirements and various activities involved – by 30 April 2024. Except the proposals could be updated after submission, or they are very general in details, the new bank recapitalisation programme could meet its first challenge.

The last recapitalisation of the banking sector in Nigeria occurred between 2004 to 2005. Then, the CBN said banks should increase their capital base from N2 billion to N25 billion at the minimum, giving an 18-month timeline for the banks to comply. This unleashed a flurry of activities that resulted in arguable cases of regulatory oversight and negative outcomes. Not surprisingly, the programme which was also dubbed “banking industry consolidation” reduced the number of banks from 89 to 25 – a number that appeared to have been predetermined. But the number soon reduced to 23.

Perhaps the banking industry was institutionally unwieldy in 2004, which made the consolidation of the institutions through mergers and acquisitions (M&As) a welcome development. The institutional landscape is wieldier today with only 26 commercial banks, six merchant banks, and four non-interest banks. Nevertheless, apart from issuance of new common shares by way of public offer, rights issues, or private placements, the CBN has specified M&As and or upgrade/downgrade of licence category or authorisation for meeting the new capital requirements. But the M&A option has potentially negative impacts for employment and competition in the banking industry.

Business combinations are likely to result in significant disengagements from employment in the banks. Rationalisation during M&As more often than not result in job losses. While there is no quality reference data confirming the aggregate number of workers disengaged during the banking industry recapitalisation 20 years ago, available data suggests the number was high. For example, First Bank of Nigeria sacked about 1,200 workers in the immediate aftermath of the programme.

Given this antecedent, engagements with trade unions during the current exercise is likely to be more volatile, in the context of the current strong macroeconomic wind. This risk requires detailed and proactive efforts to improve labour relations in the industry. Otherwise, a sense of job insecurity and wider uncertainties may envelope the banking landscape.

The banking industry recapitalisation exercise two decades ago played a crucial role in mitigating the effect of the 2008 global financial crisis on the Nigerian banking sector. But some challenges soon surfaced in the banks post-recapitalisation, not least of which was governance lapses. Poor risk management also caused systemic distress in the industry. The two issues led to the removal and replacement of the management of eight banks by the CBN following its injection of N650 billion in liquidity bailout for the banks in the first instance. Additional bailouts raised the figure to well above N1 trillion. The CBN also had to provide a guarantee of all interbank lending transactions, foreign credit lines, and pension deposits till 2011 when it expired.

Vestiges of that systemic distress caused by poor corporate governance and risk management practices linger till today, with a few distressed banks remaining in business because of CBN’s financing support. The Asset Management Corporation of Nigeria (AMCON), a temporary resolution vehicle for distressed banks established in 2010, has not only remained in operations till date but has also expanded its interventions to distressed businesses financed by the banks, which it struggles to turnaround years after taking them over. Against the philosophy of the CBN intervention, the bailout arguably introduced moral hazards in the banking industry, whereby profits were privatised and losses were socialised.

Finally, the risk of an oligopolistic banking industry is quite strong today. The recapitalisation programme 20 years ago saw the big banks consolidating their position. Such trends in the next two years could tighten the control of the big banks in the industry.

Funmilayo Odude is Partner at Commercial and Energy Law Practice (CANDELP).