Mergers & Acquisitions looms in Nigeria’s financial institutions over central bank’s planned minimum capital increase

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Mergers & Acquisitions looms in Nigeria’s financial institutions over central bank’s planned minimum capital increase requirement, Naija247news has learned.

Nigerian banks will find it challenging to grow earnings and expand their operations this year because of a slow economic recovery and low interest rates, according to an industry body.

“It’s going to be tough in 2020 for banks,” Uche Olowu, the president of the Chartered Institute of Bankers of Nigeria, told reporters in Lagos on Thursday. Banks are changing strategies to focus on new areas in agriculture, financial technology and Nigeria’s creative industries to grow their operations, he said.

Plans by the central bank to increase minimum capital requirements for banks in 2020 may trigger mergers and acquisitions in the industry, Olowu said.

Calls for banks to go for higher capital base have been on for years and have, in many cases, succeeded. A new demand for bank recapitalisation was announced earlier in 2019 by Central Bank of Nigeria (CBN) Governor Godwin Emefiele.

He said: “In the next five years, we intend to pursue a programme of recapitalising the banking industry so as to position Nigerian banks among the top 500 in the world. Banks will, therefore, be required to maintain higher level of capital, as well as liquid assets in order to reduce the impact of an economic crisis on the financial system.”

Before that, in April precisely, a voice seeking higher capital for Nigerian banks sounded loud and clear from a distant land.

Director, IMF Monetary and Capital Markets Department, Tobias Andrian, had at the African Session of the April 2019 Spring Meetings of the World Bank, advised Nigeria to seek higher capital for its lenders through recapitalisation and also tackle rising Non-Performing Loans (NPLs) in the sector.

Andrian’s advice got a backing when Emefiele unfolded the bank’s policy direction for the next five years, with recapitalisation of banks on the top list.

Bank recapitalisation is expected to see lenders raising their capital base above the N25 billion minimum level instituted in 2004. The CBN boss also plans to lead the economy into double-digit growth, single-digit inflation, $12 billion non-oil exports by 2023 and raising financial inclusion to 95 per cent level by 2024 while retaining the managed-float exchange rate.

CBN guidelines stipulate that regional banks must have a minimum paid-up capital of N10 billion, national banks N25 billion and banks with international operations N50 billion.

Speaking further on the recapitalisation plans, Emefiele said the 2004 banking industry recapitalisation, which increased banks’ capital base from N2 billion to the current N25 billion, had weakened. He plans to pursue a programme that will make Nigerian banks rank among the top 500 in the world.

According to the CBN governor’s view, the N25 billion capital base of commercial banks has weakened substantially.

Industry leaders react
President/Chairman of Council, Chartered Institute of Bankers of Nigeria (CIBN), Uche Olowu, said the CBN has industry data and right information on why banks should recapitalise.

He said recapitalisation would provide more funds for the lenders to business, especially consumer credit, mortgage finance which are yet to be given the desired consideration by banks. He said recapitalisation would give banks the power to take advantage of opportunities in the industry, and lend more to real sector.

He said many banks have eroded their capital due to high level of NPLs and that recapitalisation would present a new lifeline for the banks.

“For me, recapitalisation of the banks is fine. I have no problem with that, rather, I see opportunities that it presents to the economy and the lenders. It will be a healthy development for the banks to recapitalise. Normally, from time to time, there is always need for recapitalisation of the banking sector. For banks with regional operations, recapitalisa-tion will enable them to raise the needed capital for more coverage,” Olowu said.

It was in faraway United States of America that the International Monetary Fund (IMF) asked Nigerian banks to recapitalise and strengthen their capital bases, if they must compete locally and globally.

Higher capital requirements

CardinalStone’s Nnebue also said raising minimum capital requirements for banks makes sense given that efforts to increase loan-to-deposit ratios “could drag some banks on the capital adequacy front.”

Emefiele told local media in June that banks’ minimum capital bases were insufficient due to the sustained slump in the value of the Nigerian naira since the last increase in capital requirements in 2005. It has fallen to 364 naira to the dollar as of Aug. 20, 2019, from 138 naira in August 2005. According to local newspaper Vanguard, new capital base requirements for national banks and those with international licences could increase to 57 billion naira and 230 billion naira, respectively.

“This is an essential step — compared with the large banks in South Africa and Morocco, for example, Nigerian banks’ capital base is smaller,” said Samira Mensah, director of EMEA financial services ratings at S&P Global Ratings.
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“Nigerian banks also operate in very risky environments, so that requires bigger capital buffers to protect lenders against economic volatility and credit losses. It’s the price of doing business in Nigeria and other high-risk economies.”

Ayodele Akinwunmi, head of research at FSDH Merchant Bank in Lagos, said the planned capital increase was motivated by a desire to ensure that credit flows through the economy more easily. GDP will expand about 2% this year, S&P Global Ratings forecasts.

Higher capital bases could cause banks’ return on equity to decline, at least initially, he said. But this will improve as the new capital is deployed to generate additional income.

Capital markets

Midtier Nigerian banks with an international license that might undershoot the potential new capital requirements could switch to a national one should they struggle to increase their capital.

“The banks will have that flexibility,” said Mensah. He said capital markets currently have not been especially conducive to holding rights issues, but that this could change following February’s presidential election and central bank moves to end a foreign exchange shortage.

“Nigeria’s top-tier banks have a fairly stable and diversified shareholding structure so they should be able to increase their capital base if need be.”

The previous capital base increase in 2005 spurred widespread consolidation and the closure of around a dozen insolvent banks, with the number of banks eventually falling to 25 from 89 as additional reforms in 2010 hastened sector consolidation. Further consolidation is ongoing, with Access Bank PLC recently taking over peer Diamond Bank PLC to create Africa’s largest bank by customers.

In October 2019, Nigeria’s central bank increased its target for lending by commercial banks for the second time in three months, to help boost growth. Banks that miss the target will face higher cash-reserve requirements.

The bank, in a circular dated Sept. 30, ordered lenders to increase their minimum loan-to-deposit ratio to 65% from 60%, which it set in July. It said those who fall short of the new target by December would have to maintain higher cash reserves.

The new lending target takes effect immediately and will be reviewed quarterly, the central bank said.

Economic growth in Nigeria slowed to an annual rate of 1.94% in the three months to the end of June, the second quarter in a row of declines, as the country struggles to shake off the effects of a recession it escaped two years ago.

The bank has been trying to boost credit to businesses and consumers after that recession, but lending has yet to pick up. With growth slow, banks prefer to park cash in risk-free government securities rather than lend to companies and consumers.

The central bank said loans grew by 5.3% to 16.40 trillion as at the end of September, the deadline it earlier set for lenders to boost their minimum loan-to-deposit ratios to 60%.

margin pressure

The latest measure is designed to sustain the momentum, the central bank said, as it steps up efforts aimed at getting banks to play a bigger role in helping revive the economy. In October

New rule for new minimum capital requirements for microfinance banks in Nigeria

The Central Bank of Nigeria has rolled out new regulations for microfinance banks (MFBs) in the country.

Through a Tier-based system, the monetary regulator also adjusted the time frame given to the different categories of microfinance banks operating in Nigeria to recapitalise.

The review was followed up to the circular released last year on the ‘Review of minimum capital requirements for microfinance banks in Nigeria.’

The review categorised microfinance banks into the unit, state and national operators.
The capital requirements for the units are as follows:

1. Unit microfinance banks

Previous requirement: N20 million

Tier 2 unit microfinance banks – operating only in the rural, unbanked or underbanked areas.

Revised capital: N35 million – Threshold by April 2020
Minimum Capital: N50 million – Threshold by April 2021

Tier 1 unit microfinance banks – operating in the urban and high-density banked areas of the society.

Revised Capital: N100 million – Threshold: April 2020
Minimum capital: N200 million – Threshold: April 2021

2. State microfinance banks

Previous requirement: N100 million
Capital requirement: N500 million by April 2020
Capital requirement: N1 billion by April 2021

3. National microfinance banks

Previous requirement: N2 billion
Capital requirement: N3.5 billion by April 2020
Capital requirement: N5 billion by April 2021

Last year, Kevin Amugo, CBN’s Director, Financial Policy and Regulation Department announced the increment in the minimum capital base of National MFBs to N5 billion from N2 million. State’s microfinance capital requirement increased to N1 billion from N100 million and Unit MFBs from N20 million to N200 million.

The CBN explained that the revision became inevitable as the sector had been contending with challenges such as inadequate capital base, weak corporate governance, ineffective risk management practices, among others.

It further stated that the new model for unit microfinance banks will ensure continued operations of microfinance banks in the rural, unbanked and underbanked areas of the economy.

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Godwin Okafor is a Financial Journalist, Internet Social Entrepreneur and Founder of Naija247news Media Limited. He has over 16 years experience in financial journalism. His experience cuts across traditional and digital media. He started his journalism career at Business Day, Nigeria and founded Naija247news Media in 2010. Godwin holds a Bachelors degree in Industrial Relations and Personnel Management from the Lagos State University, Ojo, Lagos. He is an alumni of Lagos Business School and a Fellow of the University of Pennsylvania (Wharton Seminar for Business Journalists). Over the years, he has won a number of journalism awards. Godwin is the chairman of Emmerich Resources Limited, the publisher of Naija247news.

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