Introduction
The Central Bank of Nigeria ("CBN") on March 28, 2024, published a circular reviewing the minimum capital requirements for Commercial, Merchant, and Non-interest Banks in Nigeria. This upward review according to the CBN, aims to ensure that financial institutions maintain the capacity to support the growth of the Nigerian economy, given current economic challenges. This newsletter highlights the revised capital requirements and consequential legal considerations.
Commercial Banks
Previously, International Operators were required to hold a minimum capital of N50 Billion. This minimum capital has now been increased significantly to N500 Billion. Similarly, National Operators are now required to have a minimum of N200 Billion, while Regional Operators have increased from N10 Billion to N50 Billion..
Merchant Banks
The minimum capital requirement for Merchant Banks has also increased from N15 Billion to N50 Billion, reflecting a substantial elevation in the financial threshold for these institutions.
Non-Interest Banks
For Non-Interest Banks, both National and Regional entities are affected. The minimum capital requirement for National Non-Interest Banks has been doubled from N10 Billion to N20 Billion, while Regional Non-Interest Banks now need to maintain a minimum capital of N10 Billion, up from N5 Billion.
Options Available to the Affected Financial Institution
The circular suggests options which the affected Banks may explore in order for them to meet the new capital requirements. The Banks may explore one or a combination of these options:
1. Mergers or Acquisitions: Banks have the option to consolidate their operations through mergers or acquisitions, thereby combining resources to meet the increased capital requirements.
Adopting this model requires a number of legal considerations including (i) tax, (ii) contractual obligations, (iii) employee rights and (iv) shareholder approval. In addition, the provisions of the primary regulations which must be complied with are identified below:
a. The Federal Competition and Consumer Protection Commission("FCCPC") Act, with the FCCPC as the authority in charge of enforcing its provisions. The Act makes provision for anti competition, regulation of mergers and acquisitions, regulatory approval and general oversight in transactions involving mergers and acquisitions.
b. The Companies and Allied Matters Act ("CAMA") regulated by the Corporate Affairs Commission. CAMA provides for share acquisitions, preemptive rights, and regulatory approvals which must be sought in the successful completion of mergers.
c. The Securities and Exchange Commission ("SEC") Rules which are within the purview of the SEC also provide for disclosure requirements, shareholder approvals, regulatory consent, amongst others.
2. Downgrading of License: Banks that do not wish to merge or be acquired may opt to downgrade their license to align with their financial capacity.
3. Capital Injection: Banks may also choose to
where possible, inject capital through (a) private placements which
involves offering a select pool of investors with the opportunity
to take up shares in the Bank, (b) a rights issue which involves
issuing new shares and providing existing shareholders with the
rights to acquire those new shares, or (c) in the case of a Bank
which is a
public company, an offer for subscription, inviting investors to
subscribe to new shares in the Bank.
Compliance Period and Submission Requirements
The CBN has set the compliance period between April 1, 2024, and March 31, 2026, thereby giving the Banks a 24-month timeline to fully comply with the capital increase. All Banks are however mandated to submit a comprehensive plan outlining their strategy for achieving compliance to the Director of the Banking and Supervision Department by April 30, 2024.
In the case of existing financial institutions, the minimum capital requirement shall comprise both their paid-up capital and share premium only. Bonus shares shall not be considered for the purpose of recapitalization. While in the case of new applications submitted after April 1, 2024, the minimum required capital shall be fully paid up.
Conclusion
The revised capital requirements introduced by the CBN mark a
significant shift in the regulatory landscape for Banks operating
in the country. With higher thresholds for minimum capital, Banks
are compelled to reassess their business strategies and explore
various avenues to meet the new requirements. Ultimately, by
imposing higher capital requirements, these measures are expected
to
strengthen the banking sector and safeguard financial stability in
Nigeria.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.