At least four banks are in the market to raise funds in line with the order from the Central Bank of Nigeria (CBN) to recapitalise their operations. Their fundraising is coming at a time of significantly depressed incomes, when most people are struggling to meet their basic needs. This raises the risk that some of the banks will be forced to cut corners in a bid to raise enough money to meet the CBN threshold so that they do not lose their licences.

The four are: Fidelity Bank, Access Bank, Guaranty Trust Bank and Zenith Bank. Others are likely to join the capital raising drive before the end of the year. Some banks are offering shares mainly to existing shareholders through a rights issue. Others plan public offers.

Banks are racing to meet the central bank’s order that they raise their minimum capital to ₦500 billion (US$309 million) for international banks and ₦200 billion (US$124 million) for those with local banking licences. The expectation is that most of the top ten banks by assets, out of the 26 existing banks, will be able to do so. Other smaller banks will struggle and will therefore have to seek acquisition or merger with other smaller banks to meet the threshold.

At the end of the exercise, in March 2026, the expectation is that Nigeria may only have half the number of banks that it has now. In 2004, when a similar exercise was carried out, only about 25 of the 89 existing banks survived. Many others lost their licences or were acquired by others. However, that exercise was credited with making the country’s banks stronger and more competitive in Africa.

The downside to the earlier exercise is that the banks that emerged appeared to have been too big for the CBN to supervise adequately, or rather the central bank did not improve its capacity to supervise them. About eight of the surviving banks were found to be in distress by 2008 and had to be taken over at a significant cost to the CBN and shareholders. That led to the setting up of the Asset Management Company of Nigeria (AMCON) to take over more than ₦5,000 billion (US$3 billion) of liabilities from the distressed banks. AMCON is still struggling to recover the bad debts from that era.

The CBN has said that the current recapitalisation exercise is to enable banks to build the capital and resilience to support Nigeria’s bid to become a US$1,000 billion economy by 2030. It has shrunk from its 2014 high of about US$500 billion to the current US$300 billion. The target set by President Bola Tinubu’s administration means that they plan to triple the size of the economy in about six years, which is very ambitious considering that it is currently only averaging growth rates of 3% a year.

This, and the fact that banks are being forced to raise so much capital, makes one wonder if questions should be asked about the post-capitalisation viability of the banks. The big question is whether the economy has enough opportunities for them to deploy their new capital profitably. There is a risk that, if the economy does not achieve faster growth, the banks will be deploying their capital sub-optimally, which could lead to the kind of banking distress last witnessed in 2008.

The expectation is that the government will back its ambitions with the kind of reforms needed to grow the economy. Otherwise, most of the banks will seek opportunities outside the country. Many are already expanding across Africa and the expectation is that that this will intensify after the capital raising is completed, and especially if the domestic outlook remains dim.

The challenge with the African expansion though is that the return on capital deployed is usually low when compared to what can be achieved in a fast-growing Nigerian economy. Few African cities have the population and economic depth comparable to many of Nigeria’s cities and therefore do not have as many financing opportunities. This challenge will mean that many of the banks currently raising capital will struggle to deploy it profitably and may offer less return to shareholders post-capitalisation unless growth picks up significantly in Nigeria.

The July 2024 issue of Nigeria Focus also includes the following:

Spotlight

• Tinubu’s government suffers increasing perceptions of paralysis
• Implications

Politics & Society

• Supreme Court judgment unlikely to resolve LGA issues
• Profile: Abubakar Dantsoho–Nigerian ports’ new helmsman faces old challenges
• Samoa Agreement raises politically poisonous problems

Economy & Finance

• Banks raise new money from a challenged investor space
• Measures to curb food inflation likely to help
• Numbers

Energy Sector

• NNPCL declares a state of emergency in oil sector
• Dangote fights for crude allocation but is unlikely to get any
• Chappal Energies set to acquire Total assets

Security

• Northern governors fail to unite to tackle regional insecurity