What higher capitalisation levels mean for Nigerian and Kenyan banks

The Central Bank of Nigeria (CBN) reacted to the ‘catastrophic’ devaluation of the naira by instructing banks to submit new recapitalisation plans; the Central Bank of Kenya (CBK) has also greatly increased its minimum capital requirements, although in this case the move is designed to cover the impact of growing climate change risks. Both policy decisions could be an indication that African regulators are becoming more proactive and acting to head off what they may consider crisis levels in the industry. 

There have been two large devaluations in the naira since last June. Most recently, the official rate fell from N900 to the US dollar to above N1,500 in February, below even black market levels. This has depressed capital ratios via the inflation of foreign currency denominated risk-weighted assets. However, analysts have suggested that the new level makes the naira seem cheap, which could encourage foreign investment. 

It is possible that the Nigerian currency will eventually be allowed to float freely in a move that would bring the official and unofficial currency rates together.

Also in February, the CBN introduced limits on how much foreign currency Nigerian banks were allowed to hold because a forex shortage had resulted in a big backlog in the processing of dollar orders by the CBN. This followed President Bola Tinubu’s decision to lift some forex restrictions when he first came to power last year. The shortage may have deterred foreign investment because the backlog in processing forex deals means investors cannot instantly take money out of the country.

The new government hopes that the measures will help kickstart an economy that has experienced low levels of growth over the past decade, while the policies of successive governments have fuelled inflation and driven up interest rates. Inflation reached 29% at the end of 2023, with the CBN setting a target of reducing it to 21% by December this year. 

However, interest rates are still heading in the opposite direction, with the central bank raising its benchmark rate by 4% in February – the biggest rise for 17 years – to 22.75%, while also lifting the minimum bank cash reserve ratio from 32.5% to 45%.

In March, the CBN announced that commercial banks with international authorisation were now required to have at least N500bn ($327m) in capital, with those with only national or regional authorisation tasked with meeting lower levels (N200bn and 50bn respectively). Merchant and non-interest banks are subject to lower thresholds. The policy is designed to strengthen the financial system and support economic growth by making the country’s banks more robust in the face of future potential losses.

In dollar terms, the new levels for Nigerian banks with international authorisation are actually less onerous than they were in 2009, when the requirement amounted to $671m. Minimum capital will now only include paid-up capital and share premium, excluding retained earnings reserves as well as other forms of capital. This is in contrast with other markets, such as Ghana and Egypt, that have increased banks’ capital requirements over the past few years.

Impact of central bank interventions

The CBN has significantly changed its minimum capital requirements just twice over the past 20 years. In 2004, it lifted the minimum from N2bn to N25bn for all banks, resulting in widespread consolidation in the sector, with a fall in the number of licensed commercial banks from 89 to 25. However, this process greatly improved the reputation of Nigerian banks. 

Then in 2009, it introduced tiered licensing with separate authorisation for international, national and regional banks: the national bank minimum capital requirement level remained at N25bn, with a higher N100bn rate levied on banks operating internationally and a lower N15bn level for those with only regional authorisation. 

These thresholds have remained in place ever since but higher requirements had been expected for several years before the falling value of the naira prompted the CBN to take rapid action. 

Banks must meet the new requirements by the end of Q1 2026 but they had begun submitting their plans by June. Central bank spokesperson Hakama Sidi Ali said: “Our banks have begun submitting implementation plans for the banking sector recapitalisation programme in compliance with the CBN Circular reviewing the minimum capital requirements for commercial, merchant, and non-interest banks.” 

The proposals are now being reviewed by the CBN. Access Holdings intends to raise up to N365bn and FBN Holdings N300bn to enable them to meet the new threshold. Nigerian banks are expected to focus on raising capital through public offerings, rights issues and private placements, although some may downgrade their licence authorisations to a lower tier, or seek a merger with other banks, although a re-run of 2002-style mass consolidation seems unlikely.

Accountants KPMG said that it anticipated that the move by the CBN would “enhance the stability and capacity of the banking industry as well as attract greater investments to the sector”. It estimates a capital shortfall of N4.2tn across all licence categories, with shortfalls of 35-90% across the sector. Another global accounting firm, Deloitte noted: “The upward revision will ensure that Nigerian banks have the capacity to take on bigger risks and stay afloat amid both domestic and external shocks.”

Credit ratings agency Fitch said that none of the banks it rates currently meet the new requirements, although several would do so if they were permitted to transfer their retained earnings and other equity reserves to paid-in capital. It believes that some small and medium-sized banks may struggle to raise the necessary capital, with consolidation resulting in a more concentrated banking sector, “with higher barriers to entry, greater economies of scale and stronger long-term profitability”. 

Licences revoked in crackdown

On 3 June, the CBN revoked the licence of unlisted Heritage Bank, which had authorisation to operate nationally, for breaching its rules, although it denied that the licences of several other lenders were on the verge of meeting the same fate. It had already intervened in the bank’s operations, requiring a number of supervisory steps designed to improve the bank’s performance. 

“Regrettably, the bank has continued to suffer and has no reasonable prospects of recovery, thereby making the revocation of the licence the next necessary step…The board and management of the bank have not been able to improve the bank’s financial performance, a situation which constitutes a threat to financial stability”, the regulator said in a statement.

The CBN said that the Nigeria Deposit Insurance Corporation (NDIC) has been appointed as Heritage’s liquidator. The bank was closed down by the CBN in 2006 because of its failure to meet the new capital requirements but the closure was successfully challenged in court and it resumed operations, initially as a regional bank, in 2013.

In early March, CBN officials also intervened in the forex sector, withdrawing the licences of 4,173 foreign currency exchanges for failing to comply with its regulations, pay renewal fees and provide transaction returns on time. Some were also found to be failing to comply with anti-money laundering and terrorism finance regulations. It has also lifted the minimum capital level for exchange bureaus to N2bn ($1.3m) and banned on-street forex dealing. As well as improving confidence in the industry, the move is designed to address the dollar shortage.

The crackdown followed a forensic audit of $7bn of overdue forex transactions by Deloitte that uncovered irregularities affecting $2.4bn worth of transactions, including missing documentation and the transfer of unauthorised forex payments. CBN Governor Olayemi Cardoso said that the central bank would not honour these non-compliant transactions, although it was working hard to process the remainder. 

The new limit on bank forex holdings introduced by the CBN in February was set at 20% of shareholder funds for short positions and a zero limit for long positions, while requiring banks to immediately liquidate excess holdings to boost dollar liquidity. They are also encouraged to have foreign exchange contingency funding arrangements with other organisations. “Our focus has been to start looking very aggressively at the supply side of the chain,” said Cardoso.

Kenya: CBK identifies new risks

Some consolidation is also possible in the Kenyan banking sector after the Central Bank of Kenya (CBK) announced in June that it would raise commercial bank capital requirements to account for growing risks from climate change and also in the IT sector. The move appears to have been prompted by the rising rate of non-performing loans, which reached 15.5% of all loans in February. 

Kenyan banks were previously required to have minimum capital of a relatively modest KSh1bn ($7.8m), far below even the lowest rate in Nigeria. That level was set in 2012 but has now been increased to KSh10bn. A previous attempt to raise the minimum capital threshold, at that time to KSh5bn, was rejected by the Kenyan parliament in 2015.

“The CBK will engage the market for an appropriate timetable to achieve this goal. This is intended to strengthen the resilience and increase the bank’s capacity to finance large-scale projects while creating a sufficient capital buffer,” the Cabinet Secretary Njuguna Ndung’u commented. 

The Kenyan banking ecosystem has grown strongly over the past decade, with new players entering the country and Kenyan banks expanding into other markets across Eastern Africa. There are now 38 licensed banks in the country. As in Nigeria, some sources have suggested that small and medium-sized banks could struggle to meet the requirement.

CBK Governor Kamau Thugge said: “The capital requirements for banks need to be increased. We have seen increased risks, whether from climate change or cyber- security. So we need very strong banks. We need strong banks that can not only operate in Kenya, but also operate in the region.” Banks are currently required to maintain 10.5% core capital to total risk-weighted assets, and 14.5% total capital to risk-weighted assets.

In November 2022, the Bank of Uganda announced a jump in minimum capital requirements for Tier 1 banks from USh25bn to USh150bn ($40.4m) by the end of the first half of 2024. The country’s 25 commercial banks were largely able to comply, although three smaller banks opted to downgrade to become Tier 2 financial institutions: Nigeria’s GTBank, Kenya’s ABC Capital Bank and Opportunity Bank. 

It will be interesting to see whether the recent moves by the central banks of Nigeria and Kenya trigger similar rises in other markets. A potential rise has been under discussion in Tanzania, which last reviewed its core capital requirements in 2013. Moreover, Nigeria’s threshold of $327m for banks with international authorisation is higher than in the continent’s two other biggest banking markets, South Africa and Egypt, which have minimum levels of $90m and $104.7m respectively.