LAGOS, Nigeria (VOICE OF NAIJA)- A recent report by Ernst and Young has sent ripples through Nigeria’s banking sector, suggesting that 17 out of 24 banks may fail to meet the capital requirements set by the Central Bank of Nigeria (CBN) if increased by 15-fold from its current N25 billion threshold.
The report delves into the potential repercussions for banks falling short of the CBN’s capital demands, exploring avenues such as mergers and acquisitions to address the looming crisis. Despite affirming the overall stability and resilience of Nigerian banks in 2023, the report underscores the urgent need for action to shore up capital reserves.
The CBN’s proposed plan to bolster bank capitalization has stirred echoes of the landmark recapitalization exercise of 2004/2005, which saw a significant consolidation in the banking sector, reducing the number of banks from 89 to 25.
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“While the CBN governor gave no indication as to the magnitude of the proposed hike in the capital base, we have assumed what the proposed increment will be based on three different scenarios underpinned on current macroeconomic conditions,” the report states.
“On the back of that, we were able to determine the number of banks (across the three license types) that may fall below the new minimum capital thresholds. In a worst-case scenario, i.e., given a capital multiplier of 15, about 17 out of 24 banks would not meet the new minimum capital.”
The rationale behind the proposed capital revaluation stems from the significant devaluation of the naira in 2023. The report highlights the contrast between the exchange rates in 2005, during the previous recapitalization exercise, and the present day, with the naira depreciating to over N1400/$ from N132.9/$. Consequently, the N25 billion capital base in 2005, equivalent to $188.2 million, has dwindled to a mere $18.4 million under current exchange rates.
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This viewpoint contrasts with the CBN Governor’s assertion that the planned recapitalization aims to bolster the banking sector’s capacity to support Nigeria’s ambitious goal of achieving a $1 trillion economy.
The backdrop to this report traces back to November 2023 when the Governor of the Central Bank of Nigeria hinted at the possibility of raising the minimum capital requirement for banks, citing the imperative of aligning with Nigeria’s economic aspirations. Despite the sector’s apparent stability, the looming capital shortfall has prompted calls for proactive measures to safeguard the integrity and resilience of Nigeria’s banking landscape.