Central Bank of Nigeria (CBN) Intensifies Oversight on Banking Sector Recapitalization

The Central Bank of Nigeria (CBN), in collaboration with law enforcement agencies, has announced plans to closely monitor the recapitalization efforts within the Nigerian banking sector to prevent the infusion of illicit funds.

A circular, signed by Mr. Haruna Mustafa, the Director of the Financial Policy and Regulation Department at the CBN, has been issued to commercial, merchant, and non-interest banks. This circular provides details on the new minimum capital requirements for banks and the guidelines they must adhere to.

Mandatory Anti-Money Laundering Measures

The CBN intends to rigorously enforce its robust anti-money laundering regulations. In partnership with relevant law enforcement agencies, the aim is to ensure that the funds raised during the recapitalization process are free from any illegal activities.

Banks are mandated to conduct thorough anti-money laundering checks, including Know Your Customer (KYC), Customer Due Diligence, and monitoring of suspicious transactions. The circular stated:

“The CBN has robust anti-money laundering regulations which will be strictly enforced, with the active collaboration of relevant law enforcement agencies. “In addition, the CBN will require all banks to ensure that appropriate and effective anti-money laundering screening/checks (Know Your Customer, Customer Due Diligence and Suspicious Transactions Monitoring, etc) are conducted.”

The circular also emphasizes the vetting process for new investors and significant shareholders. It highlights the importance of ensuring that only individuals and entities meeting the 'Fit and Proper' criteria are allowed to invest significantly in or own shares in banks. This requires strict enforcement of background checks on all prospective significant shareholders, directors, and senior management staff to maintain the sector’s leadership and ownership integrity.

“The CBN will actively monitor and supervise the recapitalization process to ensure compliance with set guidelines. “This will involve the conduct of on- and off-site reviews, verification of capital, periodic interventions when necessary and broader stakeholder engagements.”

Capital Augmentation Options

The CBN has identified several options available to banks for capital augmentation. These include:

Issuance of new common shares through public offers, rights issues, or private placements.
Mergers and Acquisitions (M&As).
Adjusting their license categories to comply with the new requirements.

“Banks may meet the new requirement through the following options: a. Issuance of new common shares (by way of public offer, rights issues, or private placements); b. Mergers and Acquisitions (M&As); or c. upgrade/downgrade of their respective license category or authorization. “The CBN will issue guidelines to prescribe the definition, options, and approaches to meeting the new minimum capital requirement.”

The CBN clarified that only the paid-up capital and share premium will be considered for the new capital levels, explicitly excluding Additional Tier 1 (AT1) Capital.

New Minimum Capital Requirements

The CBN has set new minimum capital requirements for different categories of banks as follows:

Commercial banks with international authorization: N500 billion.
National authorization-holding banks: N200 billion.
Regional banks: N50 billion.
Merchant banks: N50 billion.
Non-interest banks operating nationally: N20 billion.
Non-interest banks operating regionally: N10 billion.

In November 2023, CBN Governor, Yemi Cardoso, announced plans for a new round of banking recapitalization for Deposit Money Banks (DMBs). This initiative means that DMBs will be required to raise additional capital to meet the demands of Nigeria’s economy.

A recent report by Ernst and Young suggests that 17 out of 24 banks may not meet the new capital requirement set by the CBN if it is increased 15-fold from its current N25 billion. This could result in a series of Mergers and Acquisitions (M&A), similar to what was witnessed during the last recapitalization exercise in 2004/2005, which reduced the number of banks from 89 to 25.

An analysis by Nairametrics indicates that 11 banks may need to raise a total sum of N2.61 trillion to meet the CBN’s target by March 31, 2026.

Some bankers have criticized the CBN’s decision to exclude retained earnings from the share capital calculation in its recent recapitalization guidelines.