‘CBN’s bank recapitalisation, FX reforms to strengthen economy’

The financial services sector is expected to play a pivotal role in Nigeria’s journey towards achieving a $1 trillion economy by 2030, an ambitious target set by the Federal Government.

To realise this goal, the Central Bank of Nigeria (CBN), led by Olayemi Cardoso, has introduced key policy measures, including bank recapitalisation, foreign exchange (FX) reforms, inflation control, and enhanced regulatory oversight. Stakeholders describe the goal as ambitious and audacious, yet achievable.

“I don’t see the recapitalisation being a problem, especially with the options available to the banks. The advantage of the current CBN recapitalisation exercise is that banks have multiple options, and there appears to be sufficient time for various players in the sector to determine the best course of action,” said Muda Yusuf, Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE).

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He said, “Any bank should be able to navigate the process without disrupting its operations or endangering depositors’ funds. However, it is crucial for banks to act early and avoid last-minute rushes to meet the CBN deadline. Delays could create panic and send the wrong signals to the economy and depositors. With the available options, banks should have no trouble meeting the requirements.”

Nearly two years ago, Cardoso directed banks to prepare for a new round of recapitalisation to ensure they had enough capital to serve the projected $1 trillion Gross Domestic Product (GDP). Initially met with scepticism, the directive stress the need for stronger capital adequacy.

Cardoso said “Will Nigerian banks have sufficient capital relative to the financial system’s needs in servicing a $1.0 trillion economy in the near future? In my opinion, the answer is ‘No!’ unless we take action. Therefore, we must make difficult decisions regarding capital adequacy. As a first step, we will be directing banks to increase their capital.”

He further explained that the administration’s goal, as outlined in the widely circulated Policy Advisory Council report on the national economy, required sustainable and inclusive economic growth at a significantly higher rate than current levels.

“The government has already embarked on this journey through fiscal reforms, including the removal of petrol subsidies and the unification of the foreign exchange market rate,” he added.

Many banks have already recapitalised, while others are exploring mergers and acquisitions to strengthen their capital base. The CBN governor reiterated that, in line with efforts to deepen financial inclusion and support economic growth, the apex bank introduced new minimum capital requirements for banks.

“This strategic move ensures that banks are well-capitalised, enabling them to take on greater risks, particularly in underserved markets. With stronger capital bases, banks can provide more loans and financial products to Micro, Small and Medium Enterprises (MSMEs), rural communities, and other vulnerable segments that previously struggled to access formal financial services,” he said.

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Bank Recapitalisation Timelines

On March 28, 2023, the CBN unveiled a two-year bank recapitalisation exercise, which commenced on April 1, 2024, and is expected to conclude on March 31, 2026.

The recapitalisation plan mandates minimum capital of N500 billion, N200 billion, and N50 billion for commercial banks with international, national, and regional licences, respectively. Cardoso noted that the policy not only enhances financial stability but also serves as a catalyst for inclusive growth.

“By enabling banks to extend more credit to MSMEs, we enhance job creation and productivity. Furthermore, with increased capital, banks can invest in technology and innovation, which are crucial for advancing digital financial services such as mobile money and agent banking. These technologies break down geographic and economic barriers, bringing financial services to even the most remote areas,” he stated.

A tripartite capital verification committee, including the CBN, the Securities and Exchange Commission (SEC), and the Nigeria Deposit Insurance Corporation (NDIC), is responsible for finalising the recapitalisation process. Capital verification is a major requirement before approving allotment proposals and releasing funds to banks for onward completion of the offer process and capital base enhancement.

Experts estimate that banks could raise about N5 trillion within the two-year recapitalisation period. With one year left before the deadline, banks have intensified consultations regarding potential business combinations.

Analysts observe a rise in merger and acquisition discussions as banks consider alternatives to direct capital raising. In 2024, the CBN approved the first merger between Providus Bank and Unity Bank. Access Holdings Plc, Ecobank Nigeria, and Jaiz Bank Plc have also met the new capital requirements.

According to the Afrinvest banking sector report, the CBN’s March 2024 capital requirement guidelines were designed to strengthen the financial system and support the government’s target of a $1 trillion economy by 2032. The recapitalisation initiative was prompted by the significant erosion of banks’ capital buffers in real and FX terms since 2010.

Views from Stakeholders

Adedotun Sulaiman, group chairman, Parthian Capital Limited highlighted the essential role of investments in economic development, stating: “Capital is the oxygen of the economy. Without it, we can’t go far.”

Speaking at the launch of the company’s two investment funds in Lagos, he said: “We have a huge capital deficit in Nigeria. To build infrastructure and support economic growth, we need significant capital. Our products aim to mobilise savings from individuals and corporations to fund roads, schools, healthcare, and other vital sectors.”

Sulaiman said: “The $1 trillion economy target is ambitious but possible. It requires hard work and resources. As a country, we must rise to the occasion.”

Analysts stress that achieving the government’s $1 trillion economy target will necessitate corporate governance reforms within the public sector. They urge Nigeria to adopt good governance practices to align with international standards and implement legal frameworks to support transformation.

More FX Inflows via Remittances

Remittances via International Money Transfer Operators (IMTOs) surged 79.4 percent to $4.18 billion in the first three quarters of 2024, demonstrating the positive impact of FX reforms. Additionally, the CBN lifted restrictions on 41 items previously barred from accessing FX at the official market to boost trade and investment.

These reforms highlight the CBN’s commitment to fostering an enabling environment for inclusive economic development. However, achieving macroeconomic stability requires sustained vigilance and proactive monetary policy.

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“As we shift from unorthodox to orthodox monetary policy, the CBN remains committed to restoring confidence, strengthening policy credibility, and focusing on its core mandate of price stability,” Cardoso reaffirmed.

To combat inflation, the CBN raised the Monetary Policy Rate by 875 basis points to 27.5 percent in 2024, an essential measure to contain inflation and restore economic stability. Analysts believe these measures have strengthened the forex market, fostered long-term stability, and laid the groundwork for sustainable economic growth.

Banking Sector Remains Sound and Resilient

Cardoso noted that key indicators reflect a resilient banking system. “The non-performing loan ratio remains within the prudential benchmark of five percent, showcasing strong credit risk management. The liquidity ratio exceeds the 30 percent regulatory floor, ensuring banks maintain adequate cash flow,” he said.

Efforts to bolster banks’ capital buffers were announced in 2023 with a two-year implementation window. “Many banks have already raised the required capital through rights issues and public offerings well ahead of the 2026 deadline. The banking sector is positioned to support Nigeria’s economic recovery,” he said.

The CBN also aims to strengthen Primary Mortgage Banks (PMBs) and Microfinance Banks (MFBs) to expand credit access and boost economic growth. Through these measures, the apex bank is laying the foundation for Nigeria’s journey towards a $1 trillion economy.