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What The Central Bank Of Nigeria's Directive To Banks On Increasing Capital Bases Means For Businesses - FORBES
BY Steve Ogidan
During one of his first engagements with the press after his appointment, the governor of the Central Bank of Nigeria (CBN), Olayemi Cardoso, stated matter-of-factly that banks would have to increase their capital bases.
It was a short and simple statement, of which nothing else was heard until the Financial Policy and Regulation Department of the CBN issued a circular addressed to all commercial, merchant and non-interest banks notifying them of a policy change requiring an increase in the minimum capital base of all licensed banks (international, national and regional) operating in Nigeria. The required minimum capital bases range from 10 billion naira to 500 billion naira. Many banks will be affected by the circular—and the greater business community is likely to feel the impact of this policy in the coming years as well.
The CBN went further to categorically define qualifying items on the assets side of the balance sheet. Specifically, the circular stated that shareholders' funds would not count toward the determination of the minimum capital base for qualifying purposes.
This became a major point of discussion as some observers (and banks) felt it was unfair to exclude shareholders' funds. However, the prevailing argument is that:
1. Retained earnings are considered relatively volatile compared to equity and may not reflect stable value post-recapitalization.
2. One of the reasons why they are considered volatile has to do with the components of retained earnings. They comprise accumulated profits over time, which may ultimately be affected by the asset quality generating the profits.
3. Since the risk assets profile of banks varies due to operational areas and focus areas, it stands to reason that the use of retained earnings would not result in a standardized and comparable measure that gives transparency of quality. Using just the equity and share premium as required by the CBN results in greater transparency as to the components of the new capital bases.
4. Finally, the Basel III standards require only core capital components, as for the same reasons presented in point three above, banks from different countries can be comparable in terms of capital base.
The Spinoff
This policy could increase the size of the national economy and create spinoffs in terms of:
• Capitalization of the Nigerian Stock Exchange.
• Additional capital for lending.
• More robust financial system.
• Greater confidence in the country by foreign investors.
The CBN has given banks until March 2026 to achieve the minimum capital requirements. In my view, that’s more than enough time for the banks to act. No doubt, we will see some mergers (if not acquisitions) and some new investors, especially as the CBN is encouraging new Tier II capital.
What This Means For Businesses
The unsaid part of all this is the effect this rebasing would have on not just the smaller microfinance banks, but on the non-bank financial system, made up of pension funds, stockbrokers, insurance companies, etc. These players ought to start working toward strengthening themselves for the much larger quantum playing field of the near future.
In the coming year, enterprises may have to cope with the rising cost of funds. The good news is that direct foreign investors will likely see the Nigerian market as a veritable one to invest in. More flow could come from outside the country.
Enterprises will also need to build capacity. In my recent book, I advised that capacity enhancement will determine the future of enterprises. I think anyone can predict the future of an enterprise by looking at investment in capacity building today.
I think the best is surely yet to come as we shall see more changes in the coming months.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
