Introduction
For the first time since 2005, the Central Bank of Nigeria (CBN) has raised the minimum capital requirements for banks.
The CBN wants commercial banks with international operations to have a capital requirement of N500 billion, N200 billion for national authorisation and N50 billion for banks with regional authorisation and merchant banks.
Non-interest banks with national and regional authorizations must meet capital requirements of N20 billion and N10 billion, respectively.
Similar to the recapitalisation process in 2005, this move is expected to significantly impact the industry in the form of acquisitions and mergers or even the outright closure of banks.
As a business owner, you might be curious about how this initiative will affect you. Let’s look at three ways this exercise can benefit your business.
1. To protect you and your customers
The main aim of ensuring adequate capital requirement in the banking sector is to maintain a certain level of capital with the CBN as a protective measure against unexpected bank failures.
In Nigeria’s history of bank failures, depositors have suffered the most, a situation Nigeria’s apex bank is trying to prevent again to protect you and your customers.
As a business owner, maintaining deposit accounts with commercial banks is often an operational necessity while your customers rely on banks to hold their funds.
This capital requirement is a cushion in the bank sector to prevent scenarios where banks fail, leaving depositors—that is you and your customers—unable to access their funds.
This recapitalisation ensures that the burden of risk is shifted from you and your customers to the shareholders of the banks.
In banking terms, you and your customers hold the highest seniority, meaning you have priority in getting your funds in the event of a bank failure before other creditors.
2. To protect the economy your business depends on
Through this recapitalisation effort, the CBN is taking detailed measures to ensure the accountability of banks on multiple fronts.
One aspect involves holding adequate cash reserves from banks to guarantee that depositors are settled in the event of bank failures.
Another critical measure is preventing banks from experiencing negative shareholder funds.
It is not uncommon for companies to have negative shareholder funds, as seen recently with Nestle Nigeria that reported a loss exceeding N100 billion resulting in a depletion of their shareholders’ fund.
In the banking sector however, a negative shareholders fund means a lot of trouble. Allowing banks to reach negative shareholder funds would cause financial distress, potentially leading to disruption of the economy and high inflation rates.
It wouldn’t matter if it affects just one bank because problems within one bank can trigger widespread panic which can be a risk on the economy.
As a Nigerian business, your success depends on the economy and the CBN’s objective is to protect both interests.
Moreover, the ongoing recapitalisation effort will contribute significantly to boosting the economy.
A substantial capital reserve benefits banks in several ways. It builds trust from international partners which translates into better lines of credit, thereby creating fresh opportunities for Nigeria on the global economic front.
Nigeria’s hopes of becoming a top-tier economy hangs on a strong banking sector to support and sustain that aspired growth.
3. More accessible loans for you
The CBN aims to strengthen its banks ability to support a top-tier economy by ensuring that they are financially viable to provide loans to businesses.
Access to loans as a business owner can be a game-changer for you. However, banks with low cash reserves lack the capacity to offer loans due to asset constraints and risk management regulations.
To raise funds for recapitalisation, banks often turn to foreign investors and seek loans in foreign currencies.
After securing those loans, banks have to redeploy them into loans, as they yield the best returns.
Forcing banks to have more capital reserves will push them towards seeking foreign investments which will empower them to support Nigerian businesses like yours.
With Nigeria’s challenges in raising capital due to high national debt, the government has not been able to meet loan demands and this has slowed down the economy.
The CBN wants banks to help and is now encouraging them to bring in more capital to facilitate easier access to loans for businesses like yours.
