- The Central Bank of Nigeria has decided to increase the minimum capital requirement for lenders to bolster the country’s economy.
- Nigerian banks now face weaker capital ratios and higher impaired loans.
- The last time Nigeria recapitalised its banking sector dates back to 2004.
Minimum capital requirement for lenders
Following the surge in inflation levels, a deteriorating economy, and the plummeting of the Naira, the CBN has decided to increase the minimum capital requirement for lenders to bolster the country’s economy.
Under the new regulations, the Central Bank of Nigeria has raised the capital threshold for international banks to $359 million (500 billion Naira), a tenfold increase from the previous requirement of 50 billion Naira.
Similarly, banks with operations solely within the country will now need 200 billion Naira in capital, up from 25 billion Naira previously.
The central bank said the requirement will enhance banks’ resilience, solvency, and capacity to continue supporting the economy’s growth, giving lenders 24 months from April 1 to meet the new rules.
The monetary reforms implemented last year are projected to have pushed the Central Bank of Nigeria to take these steps.
Effects of Fiscal and Monetary Reforms in Nigeria on the banking system
In the spirit of liberating the Naira, Nigerian banks now face weaker capital ratios and higher impaired loans.
The official exchange rate depreciated sharply in June 2023 following the Central Bank of Nigeria’s decision to allow the Naira to trade at a market-determined rate as part of the economic reforms under President Tinubu’s administration.
The depreciation inflated banks’ foreign-currency-denominated risk-weighted assets (RWAs), putting pressure on capital ratios. Additionally, inflated foreign currency-denominated loans increased the prudential provisions banks must hold against them.
The impact is mitigated by banks’ generally small FC-denominated RWAs and net long foreign currency positions, which deliver foreign exchange revaluation gains.
The naira devaluation and fuel subsidy removal led to higher near-term inflation and tighter monetary policy, putting pressure on borrowers’ debt-servicing capacity and causing lousy debt to rise quicker than previously envisioned.
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Will the new rules help Revolutionise the banking system
The last time Nigeria recapitalised its banking sector dates back to 2004. The exercise led to several mergers and acquisitions, resulting in the number of commercial lenders dropping to 25 from 89.
The central bank governor then, Prof. Charles Chukwuma Soludo, ordered banks to recapitalise from 2 billion Naira to 25 billion Naira.
The mergers and acquisitions helped stabilise Nigeria’s banking system, leaving only banks that could sustain global shocks and the economy.
Nigerian banks will undergo another recapitalisation in preparation for President Bola Tinubu’s projected economic growth of $1 trillion.
The move will increase commercial banks’ lending capacity and enable them to inject more capital into critical sectors and foster entrepreneurship nationwide.
The recapitalisation of the banking sector could also reposition Nigerian banks as the backbone of the country’s economy, driving investments and catalysing the economic expansion of the largest economy in Africa.
The CBN believes Nigerian banks must be fortified to withstand potential shocks, contribute to economic growth, and prepare them for the envisioned larger economy.
However, with banks’ capital base increased to 500 billion Naira, banking and finance experts believe the development may lead to a situation where Nigeria would have fewer but stronger commercial banks.
Effect and growth prospects for the Nigerian banking sector and the economy
According to the expectation of market analysts, despite the unstable policies, the current growth index showed that the sector is sustaining its growth trajectory following positive sentiment from investors.
The banking industry will continue to thrive in the interest rate hike environment, proposed recapitalisation, and the gain from the floating of the Naira.
Additionally, Strong financial performance throughout the year, fueled by rising interest rates and innovative non-interest income strategies, is expected.
It is believed that the confluence of promising factors positions the Nigerian banking sector as a significant driver of capital gains and share appreciation in 2024.
However, cautious optimism and effective management of potential challenges will be key to unlocking the full potential of this exciting sector.
