Implications of 2024/2025 CBN Re-capitalisation Policy on Nigerian Banks

CONTRIBUTOR: OLUGBADE .A. JOHNSON

INTRODUCTION

The CBN had earlier issued a circular mandating recapitalization by commercial, merchant, and non-interest banks, and promoters of proposed banks.^[1] The circular, dated 28^th March 2024, announces an upward review of the minimum capital requirements for commercial, merchant, and non-interest banks.^[2] It also lists the available options for meeting the new minimum capital thresholds and sets the implementation timeline, as 24 months.^[3] This policy, which is the first of its kind in two decades, will have positive and negative implications for the Nigerian financial sector.

This article succinctly explores the negative and positive implications of recapitalization and the possible reasons for recapitalization.

WHAT IS RE-CAPITALISATION?

Recapitalization is a portmanteau, comprising the words, ‘re’ and ‘capitalization’. According to the Longman English Dictionary, the word ‘re’ is Latin for ‘do again’ and it is used to indicate repetition of the same event consecutively, especially in quick succession.^[4] ‘Capitalization’, on the other hand, in economic parlance, refers to the act of raising fresh income, through a variety of means like equity financing, debt financing, and (or), hybrid financing, to fund the start-up, operations, or expansion of a business venture.^[5] Put together, recapitalization refers to the repeated injection of fresh equity to further finance the operation of an existing company.^[6]

HISTORY OF RE-CAPITALISATION IN NIGERIA

The practice of recapitalization is not novel; rather, it has been implemented severally throughout history, and Nigeria is no exception.^[7] It was first implemented in Nigeria in 1952 when the colonial government increased the capital base of foreign commercial banks.^[8] It was implemented again in 1958, 1962, 1969, 1979, 1988, 1989, 1991, 1997, and 2001, respectively, with further increases in the bank’s capital base each time.^[9] In 2004, the CBN significantly increased the minimum capital requirement for banks, leading to the liquidation/merger/acquisition of 65 commercial banks^[10]. While the process was lauded as a strategic move to consolidate the Nigerian financial sector, it was criticized by others.

WHY RE-CAPITALISATION OF BANKS?

The reasons for the recapitalization of banks and other financial institutions are multifarious, and they vary, depending on the particular instance. Notwithstanding the foregoing, from a purely economic standpoint, the rationale behind the recapitalization of banks can be subsumed under the following:

1. Improve Stability or Solvency in the Banking System: The financial sector, dominated by the banking system, is the harbinger of economic growth and development in any sane country. With the proliferation of inflation, currency devaluation, and depleting foreign exchange (FOREX) reserves, the banking system is in deep turmoil.^[11] There are fears, well-founded fears, that the debt-to-equity ratio of most commercial banks is very low, signalling a looming financial crisis.^[12] Hence, recapitalization is introduced to increase the bank’s capital base, thereby stabilizing its financial position and lowering the risks of insolvency.^[13] Through recapitalization, earnings lost through inflation or currency devaluation are restored by the injection of fresh equity into the bank.

2. Support Economic Growth and Development: Recapitalization empowers banks with the financial strength to support large-scale lending and long-term investments in key sectors such as infrastructure, agriculture, manufacturing, and technology.^[14] With a stronger capital base, banks can provide bigger and longer-term loans at lower risk, fueling business expansion and job creation. This increases productivity, boosts GDP, and deepens financial inclusion. By strengthening the financial system, recapitalization creates a more stable and efficient environment for economic activity, positioning banks to serve as reliable vehicles for mobilizing and allocating capital in line with national development goals.

3. Attract Foreign Direct Investment (FDI): A well-capitalized banking sector signals financial stability, regulatory strength, and investor confidence, all of which are critical to attracting Foreign Direct Investment (FDI). International investors are more likely to engage in economies with robust, solvent, and transparent financial institutions. The CBN’s recapitalization policy is a strategic step towards building such confidence, especially as Nigeria seeks to achieve the Federal Government’s ambitious $1 trillion economy target by 2030.

KEY IMPLICATIONS OF THE CBN RE-CAPITALISATION POLICY

POSITIVE IMPLICATIONS

1. It will create a stronger financial system, as banks with higher capital buffers will be better positioned to absorb economic shocks, reducing systemic risk.

2. It will increase investor confidence, as a well-capitalized banking system builds domestic and international investors’ trust in Nigeria’s financial system.

3. It stimulates economic growth, as bigger banks can fund large-scale infrastructure, industrial, and SME projects, which are key to achieving the $1 trillion economy goal.

NEGATIVE IMPLICATIONS

1. It creates a risk of liquidation, merger, or acquisition for smaller banks that may not meet the new capital thresholds, reducing banking diversity and competition.

2. It may lead to job losses in the banking sector, exacerbating an already thorny issue.

3. It may result in the tightening of short-term credit, as banks might reduce lending to conserve cash, which affects both businesses and consumers.

4. It will lead to higher entry barriers in the banking sector as new entrants may find it difficult to meet the high capital base, thereby stifling innovation and financial inclusion.

RECOMMENDATIONS

To ensure the successful implementation of the 2024/2025 CBN recapitalization policy, a phased framework with interim milestones should be introduced to monitor banks’ progress. The CBN must incentivize local investors and support financial inclusion by aiding smaller banks. Banks should pursue mergers, tap capital markets, and strengthen governance to attract foreign investment. The government must uphold neutrality in bank licensing while harmonizing fiscal and monetary policies to ease capital mobilization. Meanwhile, the public and investors should stay informed, seize viable investment opportunities, and approach smaller banks with caution, relying on CBN guidance to avoid risk exposure during this transitional period.

CONCLUSION

The 2024/2025 CBN recapitalization policy is a bold step toward strengthening Nigeria’s financial system. Though it carries both risks and opportunities, it holds the potential to accelerate the nation’s path to a $1 trillion economy. With strategic collaboration and foresight, stakeholders can transform this policy into a catalyst for confidence, competitiveness, and sustainable growth.

REFERENCE

1. Central Bank of Nigeria, ‘Review of Minimum Capital Requirements for Commercial, Merchant, and Non-interest Banks in Nigeria’ (28 March 2024). https://www.cbn.gov.ng/Out/2024/CCD/Recapitalization_MARCH_2024.pdf accessed 18 April 2025. ↑
2. Ibid. ↑
3. Ibid. ↑
4. Procter P, Longman Dictionary of Contemporary English (5th edn, Longman 1978). ↑
5. Poems, ‘Capitalisation’ https://www.poems.com.sg/glossary/strategy/capitalisation/# accessed 18 April 2025. ↑
6. Will Kenton, ‘Recapitalisation: Meaning, Purposes, and Types’ Investopedia (4 October 2020). http://investopedia.com/terms/r/recapitalization.asp accessed 18 April 2025. ↑
7. S.O. Ashamu and S.T. Durowoju, ‘Bank Recapitalisation in Nigeria: Profit Performance Analysis’ (2009) 6(3) Journal of Management and Enterprise Development, 40–44. ↑
8. Ibid. ↑
9. Ibid, 40; Abiola Adegbaju and Felicia Olokoyo, ‘Recapitalisation and Bank’s Performance: A Case Study of Nigerian Banks’ (2008) 6(1) African Economic and Business Review, 1–17. ↑
10. ibid ↑
11. Damilare Adegoke, ‘Recapitalisation of Commercial Banks in Nigeria: A Move in the Right Direction?’ Akinlawon & Ajomo (29 March 2024). https://akinlawonajomo.org/recapitalization-of-commercial-banks-in-nigeria-a-move-in-the-right-direction/ accessed 18 April 2025. ↑
12. Ibid. ↑
13. Ibid. ↑
14. Sami Tunji, ‘Recapitalisation: CBN Cautions Banks against Illicit Funds’ Punch (15 April 2025). https://punchng.com/recapitalisation-cbn-cautions-banks-against-illicit-funds/ accessed 18 April 2025. ↑