Fears of enormous job losses are plaguing Nigeria’s banking sector as banks struggle to fulfill the Central Bank of Nigeria’s recently imposed minimum capital standards.
These worries were voiced by Olusoji Oluwole, National President of the Association of Senior Staff of Banks, Insurance and Financial Institutions, in a Monday interview with Channels Television.
He said that the Association had already notified the Ministry of Labor and the CBN about how the recapitalization process would affect the sector’s workforce.
“We have a clear understanding of the prior experiences with these recapitalization programs, the most recent of which occurred in 2005. We were aware that certain banks would need to survive on their own, while others would need to do so through acquisitions or mergers.
Because of that experience, we have taken proactive measures by alerting the Ministry of Labor and the Central Bank of Nigeria about the program’s potential effects on our members’ employment.
“Job losses are inevitable when incidents like this occur. We anticipate that the banks will act fairly and make sure that our members are fairly compensated and well-protected,” he stated.
Last Thursday, the CBN increased the minimum capital requirements by 100 to 900 percent for merchant banks, national spread regional, commercial banks with international authorization, national non-interest banks, and regional non-interest banks.
The significance of the 2024 Recapitalization exercise
The CBN suggested using the action to attain President Bola Ahmed Tinubu’s government’s $1 trillion economy.
The bank added that as a result of the exercise, healthier banks would emerge, able to underwrite higher amounts of credit and loans.
The event occurred over 19 years after the top bank’s previous recapitalization process, which took place in 2005 while Prof. Charles Soludo was the governor of the CBN and Olusegun Obasanjo was the former president.
According to sources, around 5,000 staff members of affected banks such as Oceanic bank, Fin Bank, Spring Bank, Union Bank, Intercontinental Bank, Stanbic IBTC, and others lost their jobs.
That’s why the country’s banking industry was taken aback when the 2024 recapitalization plan was revealed.
The possibilities that banks offer
Beginning on April 1, 2024, the CBN granted all banks a 24-month window to begin implementing the new capital benchmark.
Nigerian banks have been forced to inject new equity capital within the allotted time frame through buyouts and mergers (M&A), rights issues, offer subscriptions, and upgrades or downgrades of license authorization choices.
Banks are responsible for investigating both options for avoiding extinction.
Clause of controversy
Contrary to the recapitalization process in 2005, CBN stipulated that the minimum capital requirements for 2024 would only include paid-up capital and share premiums, excluding contributions from shareholders.
The absence of the Shareholders’ Fund has caused controversy among the industry participants.
Cowry Assets Management Limited CEO Johnson Chukwu criticized the decision to exclude retained earnings in his statement in response to the development and suggested that the CBN match the new capital requirements with the needs of the business to ensure a smooth transition.
Will Nigerian Banks Make It Through Capitalization in 2024?
Guaranty Trust Bank, Zenith Bank, United Bank of Africa, Access Bank, First Bank of Nigeria, EcoBank, Stanbic IBTC, First City Monument Bank, Fidelity, Sterling, and other top 10 Tier 1 and 2 banks will have raised more than N3.3 trillion minimum capital base in 24 months as a result of the development.
Global financial services firm Ernst and Young had earlier estimated that roughly 17 banks would make it through recapitalization.
It stated, “Given a capital multiplier of 15, the worst-case scenario would be that approximately 17 out of 24 banks would not meet the new minimum capital.”
Reactions of Financial Experts
Renowned economist Prof. Segun Ajibola, a former chairman and president of the Council of Chartered Institute of Bankers, on Monday that many banks—particularly those that operate and are owned like families—may not be able to meet the existing requirements.
According to the economist, if properly executed, a successful banking recapitalization program might boost the Nigerian economy.
He claims that through the process, new and current local and foreign investors will support Nigeria’s domestic economy in order to achieve the capital needs. He did, however, add that the nation must be aware of the potential for foreign interests to acquire ownership of Nigerian institutions.
Given the current value of the Naira and, consequently, the scale of the bank’s financial position when seen globally, the recapitalization of Nigerian banks by their owners is undoubtedly an effort that has been long anticipated. Even inside the domestic sector, the banks’ ability to handle big ticket trades has been limited by the current value.
Many banks, particularly those with ownership and operations reminiscent of families, would not be able to meet the present requirements. Both consensual and involuntary mergers and acquisitions are possible.
“All that can be hoped for is that the circumstances of 2005—in which banks established “unholy alliances” and odd bedfellows—those with opposing cultures, attitudes, and governance practices—were compelled to work together in order to protect their shareholders from complete loss, etc. Certain banks might want to downgrade as a means of pollution and dilution of their shareholders.
“Whether the domestic economy can provide the necessary funds to meet the needed capital requirements is still up for debate.
But if that occurs, the inflow of foreign capital by current and potential investors into the Nigerian economy will be a positive development.
In order to create a secure and predictable investment environment, among other things, the government must guarantee prospective investors of stable and consistent exchange control and investment regulations.
Under the Basel Accord, Tier I to Tier III designations for capital are being used. As previously stated, it is envisaged that the domestic economy will benefit from the support of both new and current domestic and foreign investors in order to meet the capital requirements.
“Once more, one is aware of the extent to which foreign interests may acquire ownership of Nigerian banks.
An effective recapitalization of banks could be advantageous to the Nigerian economy. Through adequate and timely support of economic operations, it can aid in revitalizing the growth of many economic sectors.
Indeed, it probably has the effect of discouraging investment in other economically viable sectors. Certain employment losses may result from it. However, if done well, the advantages outweigh these drawbacks, he said
The underlying problem, according to Dr. Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise, or CPPE, is that Nigeria’s skyrocketing inflation has gradually eroded the value of money, making recapitalization both necessary and inevitable.
But in order to reduce shocks and disruptions to the banking system and the economy, he suggested that the exercise be carried out.
Yusuf went on to say that due of the recapitalization policy, the top bank should warn all parties involved in the banking sector about predatory and other anti-competitive practices.
Approximately eighteen years ago, in 2005, the minimum capital requirement underwent its most significant revision. At the time, Prof. Charles Soludo was the governor of the CBN, and President Olusegun Obasanjo presided.
However, inflation has severely reduced the minimum capital requirement’s value since then. In 2005, for example, the official currency rate was roughly N130 to the US dollar.
This implied that, for example, N25 billion for a national bank was equal to $192 million. Today, the equivalent in naira is almost N250 billion. The cost of the international banking license would be almost $384 million, or roughly N500 billion.
When inflation is taken into account, the capitalization need has not really grown.
The underlying problem is that inflation has gradually reduced the purchasing power of money, necessitating and ensuring recapitalization.
The main goals are to safeguard depositors’ money, bolster the stability of the financial system, increase the resilience of the banking system, and realign the bank to support growth.
The Central Bank of Nigeria has confirmed through reports that the soundness indicators of Nigerian banks are satisfactory. As of January, the industry’s capital adequacy ratio was 13.7%, which is higher above the prudential cutoff point of 10%.
“The proportion of non-performing loans to total loan assets was 4.81 percent, which is higher than the prudential criterion of 5 percent and also indicates improvement. The prudential minimum of 30% is not met by the liquidity ratio of 40.14, indicating a similarly sound situation.
In summary, Nigerian banks are deemed to be generally sound based on financial soundness indicators.
“That being said, given the current macroeconomic headwinds, it does not lessen the necessity for regulatory authorities to ensure that this soundness and stability are maintained and enhanced.
He said, “Maybe this is what influenced the CBN’s current policy to review the capital base.”
In a similar vein, Mr. Idakolo Gbolade, CEO of SD & D Capital Management, stated that Nigeria will be able to continue playing a leading position in Africa thanks to the recapitalization process.
He spoke in favor of the growth of our economy “the recapitalization of banks in categories is long overdue.”
“The timeline is also rather suitable. A few foreign banks have anticipated this procedure and have begun setting up funds sufficiently in advance. If banks are unable to fulfill the increased capital requirements, they can choose to merge or acquire other banks.
“Nigeria has the greatest GDP in Africa, and the banks need to be well capitalized if we are to continue operating a trillion-dollar economy and hold that position.
“A trillion-dollar economy needs to be able to start and carry out multimillion-dollar deals domestically without the need for foreign involvement in critical economic sectors including mining, oil and gas production, steel production, major building projects, and public-private partnerships with the government.
“This is only possible if our banks are well capitalized and capable of handling the situation. Given that their banks are not among the best capitalized in Africa, Nigerian banks should also be proud of their position in the continent.
Consequently, our banks will be suitably positioned for the emergency economy in Nigeria, Africa, and beyond thanks to our new recapitalization program.
“Since shareholders’ funds are not a statutory capital base, the CBN wants to differentiate new funds from existing funds that may be subject to regulatory violations. This is demonstrated by the exclusion of shareholders’ funds as additional Tier 1 capital,” he said.