Introduction
The long-anticipated regulatory change occurred on March 28, 2024. While the new minimum capital requirements for Nigerian banks were expected, the exclusion of a significant portion of a bank’s shareholders’ funds was surprising. On that day, the Central Bank of Nigeria (CBN) issued a circular titled “Review of Minimum Capital Requirements for Commercial, Merchant, and Non-interest Banks in Nigeria,” mandating all banks and promoters of proposed banks to increase their minimum capital base. The CBN’s goal is to fortify banks against external and domestic shocks, enhance financial system stability, and ensure that banks have a robust capital base to absorb unexpected losses and contribute to Nigeria’s economic growth. The review aims to create stronger, healthier, and more resilient banks to support the country’s ambition of achieving a US$1 trillion economy by 2030.
Legal Basis
The CBN’s action is rooted in section 9 of the Banks and Other Financial Institutions Act 2020, which empowers it to set minimum paid-up share capital requirements for all licensed Nigerian banks. Compliance is mandatory within the prescribed timeline, and failure to meet these requirements could result in license revocation.
New Minimum Capital Requirements
Prior to the announcement, the minimum capital requirements for banks ranged from NGN5 billion to NGN50 billion, depending on the type of license held.
Timeline for Compliance
Banks must comply with the new requirements within two years, from April 1, 2024, to March 31, 2026. Each bank must submit an implementation plan to the CBN, detailing the chosen options and activities involved in meeting the capital requirements. Promoters of new banks must meet the requirements by March 31, 2026, and the new capital requirements will apply to all new banking license applications submitted from April 1, 2024.
Composition of the New Capital Requirements
The new capital requirements include only share capital and share premium, excluding retained earnings and other reserve components of shareholders’ funds. Additional Tier-1 capital (AT-1 Capital) and capital from bonus share issuance are also excluded. Proposed banks must base their capital on paid-up capital, while retained earnings, AT-1 Capital, and other reserves will still be recognized in the computation of a bank’s capital adequacy ratio (CAR).
Options for Existing Banks
To meet the new minimum capital requirements, banks have several options:
1. Rights Issue: Banks or their holding companies (Holdco) can raise additional capital by offering shares to existing shareholders on a pro-rata basis, thus preventing dilution risk and involving regulatory approvals from the CBN, Corporate Affairs Commission (CAC), and possibly the Securities and Exchange Commission (SEC), Central Securities Clearing System (CSCS), and The Nigeria Exchange Limited (NGX).
2. Public Offer (Offer for Subscription): PLC banks or Holdcos can issue new shares through a public offer, diversifying their investor base and attracting international investors. This requires approvals from the CBN, SEC, CAC, NGX, and CSCS.
3. Private Placement (PP): Both LTD and PLC banks or Holdcos can issue new shares to selected investors via private placement, helping raise capital and attracting international investors. Regulatory processes involve the CBN and CAC, and potentially the SEC, CSCS, and NGX for PLCs.
4. Initial Public Offer (IPO): LTD banks or Holdcos could convert to PLCs, issue new shares to the public, and list on the NGX, raising additional capital and diversifying their investor base. This involves approvals from the CBN, SEC, CAC, NGX, and CSCS.
5. Merger: Banks can merge with others to consolidate assets, liabilities, and operations, enhancing competitive positions and streamlining costs. Regulatory approvals involve the CBN, CAC, Federal High Court (FHC), Federal Inland Revenue Service (FIRS), and potentially the SEC, NGX, and CSCS.
6. Acquisition: Banks can acquire others and subsequently merge, consolidating assets and enhancing competitiveness. This requires approvals from the CBN, CAC, and potentially the SEC, CSCS, and NGX, and the FHC and FIRS for the merger.
7. Capitalisation of Dividends: Banks can declare dividends and allow shareholders to use these to pay for new shares, raising capital while complying with CBN regulations. This involves approvals from the CBN and CAC, and potentially the SEC, CSCS, and NGX for PLCs.
8. Convertible Debt Instruments: Banks or Holdcos can issue convertible debt instruments, which will convert to equity before the capitalisation deadline, raising needed capital. This involves approvals from the CBN and CAC, and potentially the SEC, CSCS, and NGX for PLCs.
Compliance with CAR by Banks
Despite the capital increase, banks must continue to comply with the minimum CAR applicable to their license. Banks with lower CAR should consider issuing instruments like AT-1 Capital and subordinated debt to meet CAR requirements.
– Hybrid Capital Instruments: Combining debt and equity features, these instruments must meet CBN conditions and may involve approvals from the CBN, SEC, and CAC.
– Subordinated Debt Instruments: Used as Tier 2 Capital, these instruments must meet specific CBN conditions and may be raised through Eurobonds or compliant loans, requiring approvals from the CBN and SEC.
Conclusion
These strategies can help banks and Holdcos strengthen their financial positions, meet new capital requirements, and comply with CAR amidst economic challenges. Proactive measures and navigating legal and regulatory landscapes are essential for banks to capitalize on opportunities and meet the CBN’s timeline. Whether these changes will benefit the Nigerian banking sector and its stakeholders remains to be seen. For further clarification on these issues, our team is available to assist.
For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Inner Konsult Ltd at www.innerkonsult.com at Lagos, Ogun state Nigeria offices, or www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.
