The journey of a thousand mile: Charting the course for Nigeria DMBs

By 2026, the Central Bank of Nigeria (CBN) has mandated a new recapitalisation requirement for Deposit Money Banks (DMB), marking a pivotal point in the annals of the nation’s financial trajectory. The directive is aimed at strengthening the capital base of Nigerian banks, ensuring their stability, resilience, and capacity to navigate global and domestic financial headwinds. It may be recalled that the prevailing macroeconomic headwinds of elevated prices, currency volatility, and escalated debt crises posed major risks not only to the global economic landscape but also the financial sector health of specific economies. In response to these headwinds, global systemic central banks have activated a higher-for-longer interest rate stance to steer global inflationary trends towards targeted levels.

But after teetering on the verge of global contagion following the accelerated systemization of monetary policy, the banking sector has turned around, transforming economic headwinds into opportunities. The same fate applies to Nigerian banks. This is because as of Q1 2024, the financial institutions’ activity—a sub-sector under “services economy” and the proxy for the banking sector GDP—as captured by the nation’s top statistics Czar (NBS)—has remained resilient, expanding by 18.4 percent in real terms between Q3 2023 and Q1 2024 to emerge as the fastest-growing sector amongst the seven biggest GDP sub-components. We attributed this meteoric performance to increased investment in the vertical and lateral business expansion, increased growth in earnings in digital currencies (boosted by a reduction in physical cash in circulation), and a positive spillover effect from naira devaluation (net foreign currency—FCY—asset holding). To this end, the several recapitalisation episodes the sector has witnessed were geared toward shoring up the minimum capital required to enhance their depth in competing locally and globally.

“In response to these headwinds, global systemic central banks have activated a higher-for-longer interest rate stance to steer global inflationary trends towards targeted levels.”

This involves raising the minimum capital thresholds that banks must hold to safeguard against financial risks and economic downturns. The primary rationale is to enhance the resilience and stability of Nigeria’s banking sector, especially in the face of global economic uncertainties. The Central Bank of Nigeria’s (CBN) recapitalisation mandate aims to strengthen the financial health of deposit money banks (DMBs) by increasing their capital adequacy. In this light, recapitalisation is crucial for DMBs as it enhances their ability to absorb shocks, expand operations, and support the broader macroeconomic goal of increased financial inclusivity and shared prosperity.

Understanding the CBN recapitalisation mandate

The idea that banking system reform can propel shared prosperity and inclusive economic growth has been a contentious issue in the academic world for decades. On one side of the spectrum is the argument by notable economists such as Robert King Ross Levine and Thorsten Beck (1999) that a healthy financial system is the top ingredient for “economic progress,” while proponents such as Schumpeter and others believed that entrepreneurship and innovation take precedence in the discussion of inclusivity and progress.

The latest round of recapitalisation was targeted at strengthening the financial system to take a frontal position in aiding the government’s US$1 trillion economy by 2030. Away from the government’s agenda, this became pertinent following the erosion of banks’ capital buffer post-2010 from a real and FX perspective relative to the post-2010 levels.

Using the 2023 moving average value, the minimum capital base has lost 76.1 percent and 77.1 percent of its real and FX value, respectively, within the period under consideration. To address the capital shortfall, the Central Bank of Nigeria (CBN) adjusted the new capital threshold, considering the impact of macroeconomic challenges on banks’ financial positions. Unlike previous recapitalisation exercises, the CBN now defines eligible capital as only paid-up share capital and share premium, excluding retained earnings, other reserves, and Tier-1 capital. Based on FY 2023 data, banks (excluding Heritage Bank, which is technically distressed) need to raise circa ₦5 trillion to meet the new requirements. With a 24-month deadline to March 2026, banks must either issue new capital (through public offers, rights issues, or private placements), seek structured capital injections, pursue mergers and acquisitions, or adjust their licensing categories.

In the best-case scenario, key financial metrics that will drive banking performance are those of a higher minimum capital requirement, expected to increase significantly by 2026. This move will likely improve banks’ capacity to absorb losses and support greater lending to critical sectors. The regulatory timeline leading to 2026 places pressure on banks to raise capital through equity markets, mergers, or strategic investments. Failure to meet these requirements could result in reduced competitiveness or even regulatory penalties, making timely compliance essential for banks to thrive in the evolving financial landscape.

BDI commentary: Potential banking scenarios in 2026

Shifting gears, banks are accepted as playing vital roles in addressing information asymmetry, credit intermediation facilitation, providing support to de-risk sectors & economies, incentivising entrepreneurships, and innovating financial products & services to democratise credit access as well as contributing to wealth creation. Against this backdrop, it is our staunch position at BDI that efforts to reform the financial sector landscape through financial liberalisation, restructuring, recapitalisation, enhanced regulation, or technological innovation are understood to have some positive bearing on wider economic progress.