What does CBN Recapitalization mean for banks

The Central Bank of Nigeria (CBN) is pursuing the recapitalization of banks and has issued a circular encouraging banks to increase their capital base. But what does this mean to commercial banks and how can these banks raise the funds? Let's discuss these in the article.

1. What is recapitalization 

In the aspect of banking, recapitalization is the increase in the share capital to a predetermined level set by the Central Bank. Here, the apex bank huge banks including commercial, merchant, and non-interest banks to increase the value of their share capital. Generally, it means the restructuring of an entity's capital structure to either more debt capital or of share capital.

Banks are known to control huge debts in the form of customers' deposits. These debts are usually higher than the total capital base of the entity. Therefore, to ensure that banks can survive negative waves from internal and external factors, from time to time the central bank forces banks to recapitalize. This will help protect depositors' money. We can say that the central bank of Nigeria wants commercial banks to participate in equity recapitalization. 

2. Why do CBN wants a recapitalization 

According to the secular released by the CBN on recapitalization, the purposes are:

• In pursuit of CBN responsibilities as stated in section 9 of BOFIA 2020.
• Challenges of macroeconomic conditions such as inflation and fluctuation in FOREX.
• Domestic and international headwings that are capable of impeding the growth of the financial sector.
• To boost resilience of banks.
• Help keep banks solvent.
• Ensures that banks continue to support Nigeria economic growth.

3. Requirements for 2024 to 2026 recapitalization of Banks

The image above which was extracted from the CBN circular explains how banks should recapitalize. Mega banks are expected to increase their capital base to a minimum of 500 billion Naira. While national and regional banks must increase to a minimum of 200 and 50 billion Naira respectively. 

4. How can banks successfully recapitalized

The apex bank states the three ways banks can be involved in the recapitalization process within the next two years window. A bank can choose at least one of the methods.

• Inject capital into the bank using either private placement, right issue, or offer for subscription.
• Partake in merger and acquisition. That is two or more banks combining together.
• Upgrade or downgrade the bank’s license. If the bank is a regional bank, upon recapitalization, it can choose to upgrade to a national bank and vice versa.
• What banks cannot do to recapitalize
• Banks cannot utilize their retained earnings for such recapitalization
• The minimum capital requirement is not based on shareholders' funds but on share capital and premium.
• Existing banks cannot use Additional Tier 1 capital to raise this new capital base.
• They are expected not to exceed the 2 years window to recapitalize which end in March 2026.

5. Conclusion 

CBN minimum capital recapitalization agenda can be detrimental to banks that do not meet the requirements. Thereby encouraging M&As of those entities. However, the goal is to keep a stronger economy that is resilient and stable.