back to top

Avoiding CBN’s Hammer: Five Ways Nigerian Banks May Recapitalise

Share

Nigerian banks are exploring several strategies to meet the new capital requirements set by the Central Bank of Nigeria (CBN). The CBN’s recent circular mandates commercial, merchant, and non-interest banks to increase their capital base, ensuring a stable and robust financial system.

The CBN’s recapitalisation directive aims to ensure Nigerian banks are well-equipped to handle economic challenges and support national growth.

Increasing capital requirements will enhance the banks’ ability to manage risks and attract foreign investment, ultimately stabilizing the naira and boosting the economy.

While the new requirements pose challenges, they also offer opportunities for banks to restructure and strengthen their financial foundations.

Here are five primary methods banks might use to achieve this goal:

  1. Private Placements
    • Private Placements involve issuing securities to a select group of investors rather than the public. This method allows banks to raise capital by targeting specific investors who are likely to invest significant amounts. Securities offered in a private placement cannot be advertised publicly and must be approved by the Securities and Exchange Commission (SEC). This option is particularly suitable for banks looking to maintain control and ownership without public scrutiny.
  1. Rights Issues
    • Rights Issues offer existing shareholders the opportunity to buy additional shares, usually at a discounted rate, in proportion to their current holdings. This method helps banks raise capital while allowing existing shareholders to maintain their ownership percentage. If shareholders choose not to purchase the additional shares, the bank can then offer these shares to the public.
  1. Offers for Subscription
    • Offers for Subscription are similar to direct public offerings where banks issue new shares to the general public. This method involves creating a prospectus that outlines the terms of the offer and inviting the public to buy shares. This strategy can help banks raise substantial capital by attracting new investors, though it carries the risk of public offers failing to meet expectations.
  1. Mergers and Acquisitions
    • Mergers and Acquisitions (M&A) involve combining with or purchasing other banks to increase capital. By merging with another bank, institutions can pool their resources to meet the new capital requirements. Acquisitions allow a bank to take control of another bank’s assets and operations, thus enhancing its capital base. This strategy is effective for rapidly boosting capital but can be complex and require significant regulatory approval.
  1. Upgrade or Downgrade of Licence
    • License Re-categorization allows banks to change their operational scope to meet capital requirements. For instance, a bank with an international authorization might downgrade to a national or regional license, which has lower capital requirements. Conversely, a bank might upgrade its license to expand its operations if it can meet the higher capital demands. This flexibility enables banks to align their operations with their capital capacity effectively.

Different Strokes For Different Banks

Commercial Banks: For commercial banks, mergers and acquisitions are the fastest way to meet the new capital thresholds. They can also consider license re-categorization, either upgrading or downgrading their operational scope. Additionally, commercial banks can explore rights issues and private placements to raise the necessary capital.

Merchant Banks: Merchant banks might prefer private placements and rights issues to avoid diluting ownership and control. They can also look into M&A opportunities and license re-categorization. Publicly quoted merchant banks can consider offers for subscription to attract broader investment.

Non-Interest Banks: Non-interest banks can meet capital requirements through private placements, targeting high-net-worth individuals. Mergers and acquisitions are also viable, though fewer non-interest banks might limit this option. License re-categorization can help these banks adjust their capital obligations to match their capabilities.

Read more

Local News