Nigerian bank mergers loom after regulator’s rule change

Nigerian banks have mostly remained stable in the last decade, even as the economy struggled through two recessions, a pandemic and a sharply devalued currency. While tensions in parts of West Africa following military coups have been an added concern for African banks with foreign operations, exposure to geopolitical risks has been limited in most cases, according to ratings firm Fitch.

Nigeria was the only major African economy where banks had a positive return on equity between 2016 and 2022, according to McKinsey. But Yemi Cardoso, a former Citigroup banker who became CBN governor last year, is moving the sector’s attention from merely focusing on stability to more active participation in the economy. He first informed banks of a prospective recapitalisation last November at an industry dinner.

Cardoso argues that Nigerian banks need more money if President Bola Tinubu is to achieve his ambition of a trillion-dollar economy — it’s currently under $400 billion. “Bigger banks with larger capital bases and capacity can underwrite larger levels of credit which is critical to lubricate and catalyze the growth of the economy,” the bank said. Credit ratings agency Moody’s scored the recapitalisation plan as “a credit positive.”

This review could mark the start of a new era for Nigeria’s banking sector, coinciding with the increased role of technology and the internet in expanding access to financial services across the country.

Nigeria’s last capital review was in 2004, when it increased the minimum requirement from 2 to 25 billion naira ($188 million at the time). It led to thousands of job losses triggered by a wave of mergers and acquisitions that shrank the number of banks from 89 to 25. But the reform proved to be a net positive for economic stability, coming shortly after the end of nearly two decades of military dictatorships and in the midst of debt relief renegotiations with the Paris Club of lenders.

Nigeria’s problem today is less about structural distress in banks and more about lethargy driven by macroeconomic headwinds. Faced with a weak naira, banks have held back on commercial lending, preferring to invest in safe fixed income securities or trade in foreign currencies, analysts say.

Despite increasing its loans to the private sector every year since 2014, Nigerian banks largely avoid lending to small and medium businesses which constitute the majority of the economy. That has left a $32.2 billion financing gap in Nigeria’s small business sector, the International Finance Corporation has warned.

Nigerian banks have long trailed counterparts in Egypt and South Africa on rankings of African banks. Raising the capital base could be a step in closing that competition gap, ratings firm S&P Global said.

Two criticisms of the new policy are that heavily capitalized banks may not necessarily drive economic growth, and banks may fail to increase lending to small businesses if macro conditions continue to weaken the local currency. Premium Times, a national daily in Nigeria, argued that the capital reform in 2004 only served to “inflate bubbles” in the banking sector, without helping Nigerian banks to catch up with South Africa’s leading banks.