The banking sector is in the midst of a significant transformation driven by the Central Bank of Nigeria's (CBN) announced recapitalization policy. This policy, unveiled in March, mandates a substantial increase in the minimum capital base for all banks operating within the country. The new requirements aim to strengthen the financial system, enhance risk absorption capacity, and position banks to play a more significant role in propelling Nigeria towards its $1 trillion GDP target by 2030.
The policy has ignited a race amongst banks to meet the new capital requirements by the deadline of March 31, 2026. This translates to a two-year window for banks to raise billions of naira, with some institutions facing the daunting task of increasing their capital base by tenfold.
One of the primary challenges facing Nigerian banks in this recapitalization race is raising sufficient capital to meet the CBN's requirements. This is particularly challenging for smaller banks and those with weaker financial performance. The banks' ability to attract investment largely depends on their financial health, growth prospects, and corporate governance practices.
According to CBN, Banks may opt for the Issuance of new common shares (by way of public offer, rights issues, or private placements); Mergers and Acquisitions (M&As); or upgrade/downgrade of their respective license category or authorization to meet recapitalization targets, but these processes can be complex and fraught with regulatory hurdles. Additionally, the integration of corporate cultures, systems, and personnel presents significant challenges. Moreover, rapid recapitalization efforts may lead to a focus on short-term gains rather than long-term stability, potentially compromising corporate governance principles.
Corporate governance plays a critical role in ensuring that banks maintain their integrity, comply with regulations, and protect stakeholders' interests. As banks pursue recapitalization, they mustn't compromise on governance standards in their haste to raise capital or attract investors.
A robust corporate governance framework ensures transparency, accountability, and sound decision-making. This, in turn, helps to build investor confidence and maintain market stability. Nigerian banks must ensure that their governance practices align with both regulatory requirements and international best practices, even as they navigate the complexities of recapitalization.
Finding the equilibrium between efficient capital-raising and strong corporate governance is crucial as banks go through the complex demands of regulatory compliance. A hasty approach to meeting capitalization requirements can jeopardize governance standards, risking the stability of the entire financial sector. At the same time, excessive caution in governance can slow the process, leaving banks vulnerable to regulatory penalties. The key lies in fostering transparent, accountable practices while strategically pursuing capital growth. This balance not only satisfies regulatory expectations but also secures investor confidence and promotes long-term resilience in the banking sector
Banks must exhibit a high level of transparency in their capital-raising strategies. Transparent about their capital raising plans, clearly outlining the rationale behind their chosen approach and potential implications for shareholders and other stakeholders.
They must ensure their boards have the necessary skills and independence to provide effective oversight during recapitalization efforts. The board must be vigilant to ensure that any capital-raising activity adheres to sound corporate governance principles. This includes conducting thorough due diligence on potential investors and ensuring fair and transparent terms for all stakeholders. This will help to prevent conflicts of interest and ensure that decisions are made in the best interests of stakeholders.
They must also engage stakeholders and foster open communication. Engaging with stakeholders, including shareholders, employees, and customers, is essential for maintaining trust and ensuring that recapitalization efforts are aligned with their interests. Open communication helps to manage expectations and build confidence in the bank's future.
More so, they must focus on long-term value creation. While meeting the recapitalization targets is critical, banks must not lose sight of their long-term goals. This involves developing strategies that support sustainable growth, rather than pursuing quick fixes that could undermine corporate governance. Capital raised should be strategically invested in areas that will drive long-term growth and profitability for the institution.
The key role of regulators is also important during this process. The CBN has the leading role in ensuring a successful and responsible recapitalization process by giving clear guidelines and monitoring its implementation. CBN's enforcement of these guidelines is crucial to maintaining regulatory credibility and consistency across the banking sector. By ensuring that all banks are held to the same standards, the CBN can create a level playing field and reduce the risk of regulatory arbitrage.
The CBN's recapitalization policy presents a significant opportunity for the Nigerian banking sector to strengthen its financial position and contribute to the nation's economic growth ambitions. However, banks must navigate this process cautiously, prioritizing strong corporate governance practices alongside capital-raising efforts. By striking the right balance, they can emerge from this recapitalization process more resilient, responsible, and well-positioned to play a leading role in the country's economic future.
Research & Advocacy Department,
Chartered Institute of Directors (CIoD), Nigeria
28, Cameron Road, Ikoyi, Lagos.