Bank Recapitalization :Nigerian Financial System

There are many offers from Commercial banks for members of the public to buy their shares recently. This is as a result of the new minimum capital requirement for financial institutions mandated by the Central Bank of Nigeria. The increase of capital base for financial institutions is envisaged to enhance the stability of the Nigerian financial system and strengthen it against foreign and domestic economic risks.

Recapitalization is the process of stabilizing a company’s capital structure by changing the debt-equity balance. Ideally, this would mean reducing the amount of debt and increasing equity. Bank recapitalization is the process by which banks raise their long term capital to the minimum level required by the regulatory authorities, of which the industry apex is the Central Bank of Nigeria (CBN). When this is done by issuing new shares as we can see many banks in Nigeria currently doing, it is called an Equity Recapitalization.

The ways by which financial institutions can meet the new capital requirement are:

FRESH EQUITY: Banks can inject fresh equity or capital through private placement, rights issue and or public offer for subscription. This option is being exercised by various banks already. For instance, Fidelity Bank and Access Bank are raising additional capital to meet the new minimum requirements by way of rights issue and public offer for subscription.
MERGER AND ACQUISITION: A merger happens when existing entities combine their assets and operations to become one new company. An example of this is the proposed merger of Unity and Providus banks which was authorized by CBN on the 6th of August.

DOWNGRADE/ UPGRADE OF LICENSE AUTHORIZATION: Financial institutions operate in tiers and can only offer services approved within the tier they are licensed for. Banks may be upgraded or downgraded according to their capital base under the new minimum capital requirement.

The application of any of these measures may have significant legal implications on the banks as well as shareholders. Some of these implications are:
Regulatory Compliance: in the employment of any of these measures, the banks must ensure to comply with laws guiding the process for any of the options they choose to exercise. In issuing new shares, the Securities and Exchange Commission has guidelines which must be obeyed. Also, the approval of CBN is required for the merger of banks to proceed. There are many more rules and guidelines which must not be disregarded in the recapitalization process.
Shareholder Rights: the value of shares held by shareholders may be diluted in the process of recapitalization. Also, the ownership structure of the bank may change as new shares are acquired.
Creditors’ Rights and Interests: The effect of recapitalization on creditors is multifaceted. On one hand, it can mean an increase in assets and stability for the banks and consequentially, increased creditworthiness. Alternatively, recapitalization may disrupt the debt structure of the bank, change the priority of claims or even dilute the value of the existing creditors’ claims. Thus, creditors may have the right to be informed of the means of recapitalization and its potential effects on their respective claims. In some cases, creditors may need to consent to the recapitalization plan.
What does this mean for you?

The purpose of the recapitalization exercise is to strengthen the banking sector, maintain economic stability and even serve as a solid foundation for rapid economic growth. As a business owner or individual in Nigeria, the recapitalization of banks can benefit you in the following ways:

Job Security: Stronger and bigger banks will retain their staff and likely employ more staff to keep up with their growth. Presently, the banking sector employs thousands and recapitalization can help to secure those jobs.
Access to Credit: Recapitalized banks have greater capacity to lend more to entrepreneurs. This means that individuals and small to medium sized businesses can access loans for personal and business use and large scale producers or manufacturers will have access to even bigger credit facilities than they currently do.

Improved Services: Banks will be better equipped to protect depositors’ funds as recapitali8zation reduces the risk of bank failure. They can also offer better services such as international banking services and investment in relevant technology.
The stability and efficiency of the financial services industry and the consequent confidence it will inspire in the general populace is crucial for encouraging domestic investments and attracting foreign investment. This will be the bedrock for the achievement of the $1 trillion GDP target set by the Federal Government.