The Central Bank of Nigeria (CBN) has announced a new plan to recapitalize the banking sector in order to support the country’s economic growth and development. The CBN governor, Yemi Cardoso, said that the recapitalization exercise would enable the banks to provide more credit to the productive sectors of the economy and help achieve the target of $1 trillion gross domestic product (GDP) by 2025.
According to Cardoso, the current capital base of the banks, which was set at N25 billion in 2004, is no longer adequate to meet the challenges and opportunities of the 21st century. He said that the CBN would soon release a new circular that would specify the minimum capital requirements for each category of banks, taking into account their size, scope and risk profile.
Capital adequacy is the measure of the financial strength and resilience of a bank or a financial institution. It reflects the ability of the institution to absorb losses and meet its obligations to depositors and creditors. Capital adequacy is also important for maintaining public confidence and promoting financial stability.
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CBN current capital base in Nigeria
The CBN has issued various guidelines on the minimum capital requirements and buffers for different categories of banks and financial institutions in Nigeria. These guidelines are based on the Basel III standards, which are the global best practices for banking supervision and regulation.
The Basel III standards aim to improve the quality and quantity of regulatory capital, enhance risk coverage, introduce leverage ratio, liquidity standards and capital buffers. The CBN has adopted these standards with some modifications to suit the Nigerian context.
The CBN has also revised its guidelines on regulatory capital from time to time, in response to changing economic conditions and emerging risks. The latest revision was in September 2021, when the CBN issued the Guidelines on Regulatory Capital for Deposit Money Banks (DMBs).
According to these guidelines, the minimum capital requirements and buffers for DMBs are as follows:
Common Equity Tier 1 (CET1) ratio: 4.5%.
Tier 1 capital ratio: 6%.
Total capital ratio: 10%.
Capital conservation buffer: 2.5%.
Countercyclical buffer: 0 – 2.5%.
Higher loss absorbency for Domestic Systemically Important Banks (D-SIBs): 1 – 3.5%.
The CET1 ratio is the ratio of a bank’s core equity capital to its risk-weighted assets. Core equity capital includes common shares, retained earnings and other reserves. Risk-weighted assets are the total assets of a bank adjusted for their riskiness according to predefined weights.
The Tier 1 capital ratio is the ratio of a bank’s Tier 1 capital to its risk-weighted assets. Tier 1 capital includes CET1 and additional Tier 1 capital. Additional Tier 1 capital includes instruments that are perpetual, non-cumulative, subordinated and have loss absorption features.
The total capital ratio is the ratio of a bank’s total regulatory capital to its risk-weighted assets. Total regulatory capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital includes instruments that are subordinated, have a minimum maturity of five years and have loss absorption features.
The capital conservation buffer is an additional buffer above the minimum capital requirements that banks are required to maintain during normal times. The buffer is designed to ensure that banks have enough capital to absorb losses during periods of stress without breaching the minimum requirements.
The countercyclical buffer is an additional buffer that varies according to the credit cycle. The buffer is designed to mitigate the procyclicality of the banking system, by requiring banks to build up capital during periods of excessive credit growth and release it during periods of credit contraction.
The higher loss absorbency for D-SIBs is an additional buffer that applies to banks that are identified as systemically important for the domestic economy. The buffer is designed to reduce the probability and impact of failure of these banks, by requiring them to hold more capital than other banks.
The CBN has also set different minimum capital requirements for other categories of financial institutions in Nigeria, such as microfinance banks (MFBs), primary mortgage banks (PMBs), non-interest banks (NIBs) and development finance institutions (DFIs).
According to a report by Pulse Nigeria, the minimum capital requirements for MFBs are as follows:
Unit MFBs: N200 million by April 2020 and N250 million by April 2021.
State MFBs: N1 billion by April 2020 and N1.5 billion by April 2021.
National MFBs: N3.5 billion by April 2020 and N5 billion by April 2021.
According to a report by Naija News, the CBN has proposed a new minimum capital requirement of N100 billion for commercial banks with international license, while retaining the existing requirements of N15 billion for regional license and N25 billion for national license.
The CBN monitors and enforces compliance with these minimum capital requirements and buffers through periodic prudential returns, on-site examinations and off-site surveillance. The CBN also imposes sanctions on non-compliant institutions, such as restrictions on dividend payments, lending activities and expansion plans.
The CBN’s guidelines on regulatory capital are aimed at enhancing the soundness and stability of the Nigerian banking system, as well as aligning it with the global best practices. The CBN expects banks and financial institutions to comply with these guidelines and maintain adequate capital at all times.
The CBN governor also said that the recapitalization exercise would be done in a gradual and phased manner, giving the banks enough time to comply with the new standards. He assured the public that the CBN would continue to monitor the financial soundness and stability of the banks and intervene when necessary to protect depositors’ funds and ensure financial system stability.
The recapitalization plan is part of the CBN’s five-year policy thrust, which aims to foster a more inclusive and sustainable economic growth, enhance financial inclusion and access to credit, improve payment system efficiency and security, and strengthen the regulatory and supervisory framework for the banking sector.