Everything You Need to Know About Bank Capitalization in Nigeria.

Research is like soup.  I first heard of this analogy as an undergraduate from a friend in the department of sociology, it sounded funny but after we both laughed out loud. He carefully explained how the complexity and creativity involved in making vegetable soup is like the process of conducting research.

This article is basically an explainer of the new bank capitalization policy of the Yemi Cardoso led Central Bank of Nigeria.

What is Bank Capitalization?

Bank capitalization refers to the financial resources that banks in the country are required to hold to ensure their solvency and stability. It represents the amount of money that a bank has available to cover potential losses and liabilities. In Nigeria the Central Bank of Nigeria (CBN) through various regulations and guidelines in line with current economic realities and future forecast set capitalization requirements for banks in a bid to ensure the stability and soundness of the banking sector, safeguard depositors fund and maintain public confidence in the banking sector.

Over the years, the CBN typically sets minimum capital requirements based on factors such as the size, risk profile, and complexity of the bank's operations. Banks in Nigeria are required to maintain a certain level of capital adequacy ratio (CAR), which is a measure of a bank's capital relative to its risk-weighted assets. A higher CAR indicates a stronger capital position and greater resilience to financial stress.

In 2005, the Central Bank of Nigeria (CBN) under the leadership of Professor Charles Soludo took a bold step despite resistance from some stakeholders in the banking industry to introduce major reforms aimed at strengthening the banking sector in Nigeria. Soludo raised the minimum capital requirements for banks in Nigeria from 2 billion Naira to 25 billion Naira in line with international best practice and the recapitalization exercise enhanced the financial strengthen and competitiveness of Nigerian banks.

Between 2009 to 2014, as a direct response to the global financial crisis of 2008, CBN Governor Lamido Sanusi also took proactive steps to regulate and strengthen the banking Industry in Nigeria. Sanusi introduced risk-based supervision, which involved assessing banks' capital adequacy relative to their risk profile. He was also very strict with enforcing compliance to regulatory requirements and many banks faced sanctions including fines.

Cardoso’s Bold Reform

The Central Bank of Nigeria (CBN) plays a crucial role in managing macroeconomics in Nigeria through its monetary policy tools and regulatory functions. As a key player in actualizing President Bola Ahmed Tinubu’s renewed hope agenda the current CBN Governor Olayemi Cardoso and is team has deemed it fit to take the bull by the horn by exercising their regulatory and supervisory power with a view to ensure the stability, soundness and integrity of banks and other financial institutions in Nigeria.

The historic March 28, 2024, circular to all commercial, merchant, and non-interest banks; and promoters of proposed bank introduced an upward review of the minimum capital requirements as follows:

Commercial banks- (International commercial banks are to have N500 billion capital base, National commercial banks are to have N200 billion capital base, regional commercial banks are to have N50 billion minimum capital base)

Merchant banks- are to have N50 billion minimum capital base.

Non-Interest banks - with national authorization are to have N20 billion minimum capital while non-interest banks with regional authorization are to have N10 billion minimum capital base.

On a final note, I find it intriguing that the Cardoso led CBN set the minimum capital requirement based on factors like size, risk profile and complexity of bank operation and this is crucial for ensuring financial stability and soundness of the banking sector in Nigeria.

Please feel free to share your thoughts or questions about the recent changes in bank capitalization in Nigeria and how they may impact the banking sector and the broader economy – Your insights are valuable.  Cheers!

 Juba Adeola