New Minimum Share Capital Requirements For Nigerian Banks: Some Legal Considerations for Bank Investors and Shareholders

1. New Minimum Share Capital : Policy & Regulatory Context

The latest central banking policy decision facing commercial banks in Nigeria is a new policy mandating commercial banks to increase the regulatory share capital for carrying on the business of banking in Nigeria by up to a factor of 10[1]. Before now, the minimum share capital for National Commercial Banks in Nigeria was set at N25 Billion while that of International Commercial Banks was set at N50 Billion. With the new minimum capital requirements, the biggest Nigerian banks will now be required to have up to N500 Billion[2] of minimum share capital to continue to run as banks in Nigeria and must now comply with the new share capital requirements between April 1^st and March 31, 2026. Banks must submit a plan for raising new capital through M&As, private placements, rights issues, offers for subscription or as deemed feasible by April 30, 2024[3]. Banks may also consider a conversion, a re-categorization or a re-designation of their licenses, where this becomes strategic or where a bank is unable to raise the required minimum share capital for its license category.[4] This legal update highlights some legal considerations arising from the introduction of the new minimum share capital requirement.

• Some Legal Considerations for Bank Shareholders and Investors

1. Bail-in Powers of the CBN Governor

In 2020, Nigeria introduced the Bail-in as a new tool for resolving bank insolvency. Nigeria’s bail-in regulations empower its central bank (the “CBN”) to force a bank’s shareholders and some of its investors, to contribute to the financial costs of resolving a failing bank, by writing down the value of their investments or by converting certain types of investment into ordinary shares. The Bail-In Regulations empower the CBN to cancel, modify or convert an investment instrument where it determines that such cancellation, conversion or modification is essential to resolving a failing bank. When the CBN Governor issues a Bail-In Certificate, all claims, judgements and debt enforcement in respect of a qualifying investment instrument becomes suspended for the period specified in the Bail-In Certificate. Also, any provision in a Bail-In Certificate supersedes the provision of any written contract or law existing before the effective date of the Bail-in Certificate. Against this background, it is prudent for bank shareholders and investors to review (a) the types of qualifying investment instruments which are eligible for Bail-In and the ones that are not; (b) the scope of the pre-resolution rights of bank shareholders and bank investors; and (c) the scope of CBN’s Bail-In powers, and to consider how these statutory provisions would impact contractual allocation of risk. For instance, equity instruments are generally considered to be eligible for the application of the Bail-In tool. Within this context, investors participating in rights issue of a Nigerian bank will likely assume the risk of a total write-down of their investments by the CBN.[5]

ii. Components of the New Minimum Share Capital

Based on the new minimum share capital rules, only core Common Equity Tier 1 (CET1) qualifies as minimum share capital. The CBN has indicated that it will not recognise the proceeds of bonus issues, other reserves, and Additional Tier 1 (AT1) Capital as qualifying capital, for the purpose of the new minimum share capital rules. Against this background, it is prudent for bank shareholders and investors to review the range of instruments that qualify as CET1 as well as the type of instruments eligible for inclusion as CET1 as per extant CBN regulations on bank capital. For instance, only common shares are considered to constitute a CET1 classification and where a bank issues non-voting common shares as part of CET1, such shares must be identical to the voting common shares of the issuing bank in all respects except in relation to voting rights. Also, CET1 instruments must be the most subordinated claim in liquidation of a failing bank[6]. In its 2021 Guidelines on Regulatory Capital, the CBN defined CET1 capital to include:

• Common shares issued by the bank that meet the criteria for classification as common shares for regulatory purposes;
•  Stock surplus (share premium) resulting from the issue of instruments that meet the criteria for inclusion in CET 1 capital;
• Retained earnings (only audited components);
• Reserves attributable to Small and Medium Enterprises Equity Investment scheme s(SMEEIS) and or any other scheme as may be stipulated from time to time by the CBN;
• Statutory reserves;
• Common shares issued by consolidated subsidiaries of the bank and held by third parties (i.e. minority interest) that meet the criteria for inclusion in CET 1 capital; and
• Other reserves as may be determined by the CBN

iii. What is an International Commercial Bank?

In capturing the scope of a license to carry on business as an International Commercial Bank, the CBN Commercial Banking Regulations[7]  provide that “a commercial bank with international banking authorisation shall be entitled to carry on its banking operations[8] within all the States of the Federation as well as to establish offshore banking operations[9] in jurisdictions of its choice”. However, in its definition section, the CBN Commercial Banking Regulations defines an “international commercial bank” as a “commercial bank which is authorised to conduct banking business on an international basis[10]”.  

Retaining both definitions in the CBN Commercial Banking Regulations is problematic because each definition suggests a different type of banking business, albeit for the same type of commercial bank. Whilst the latter suggests, carrying on banking business by way of establishing a subsidiary in a foreign country and in accordance with that country’s banking laws, a license to carry on “offshore banking operations” suggests that International Commercial Banks may provide commercial/retail banking services like account opening and deposit taking, in Nigeria, to non-resident/foreign entities.[11] This type of banking business will not typically require subsidiary operations. In practice, International Commercial Banks are generally considered to be Nigerian banks with foreign subsidiaries. However, a precise delineation of the meaning of an International Commercial Bank is now necessary.

The afore-mentioned definitions also raises other questions around (a) whether or not the definition of “International Commercial Bank” as one with at least 1 foreign subsidiary or an uncapped number of foreign subsidiaries is not an overly broad categorization, in view of the new minimum share capital requirements for International Commercial Banks; and (b) whether or not, a Regional Commercial Bank should be mandated to obtain a national commercial banking license, before it can legitimately apply for an international banking authorisation.[12]

iv. Impact of Digitization and Online Banking

Generally, the license category of a commercial bank is determined by the number of Nigerian States in which it intends to operate. For instance, regional commercial banks can only have physical structures in a minimum of 6 and a maximum of 12 contiguously linked States.[13] National banks can operate and have physical structures in all the states of the federation. With online banking, regional banks can provide banking services out of their license areas[14] and there is no CBN regulation prohibiting regional banks from providing online banking services to clients that are outside their license area. It appears reasonable that bank shareholders and investors will give due consideration to the impact of digitalisation on the provision of banking services within the context of the new minimum share capital requirements[15].

v. The Structure of Nigeria’s Banking Markets

Nigeria’s banking markets are structured differently compared to their counterparts in the EU, the United States, and the UK, encompassing at least three defining elements. Firstly, Nigeria does not practice the twin peaks regulatory model under which one strong, central regulator is charged with maintaining financial stability and the other with enforcing market conduct. In contrast, Nigeria operates with distinct regulatory bodies overseeing the commercial banking, insurance, asset management and investment banking sectors. Each regulatory entity assumes responsibility for market conduct and financial stability within its respective domain. Secondly, universal banking licenses are no longer applicable within the Nigerian banking landscape. Therefore, commercial banks cannot carry on the business of asset management, insurance or investment banking business except such businesses are ring-fenced into a legally, operationally and economically separate business unit. Thirdly, it may be useful to note that Nigerian banks are broadly categorized into Commercial Banks, Merchant Banks and Non-Interest Banks. Whilst Commercial Banks primarily provide retail banking services and accept deposits without any limits on the amounts they can accept as deposits, Merchant Banks are not allowed to grant retail loans or to engage in any form of retail banking activities. Also, Merchant Banks[16]can only accept deposits of N100,000,000 and above from individual and corporate clients. Overall, a review of the type of business each type of commercial bank is licensed to carry on as well as the limitations on such banking businesses will be prudent.

vi. Development Finance Banks & Specialized Financial Institutions

There are a number of other specialized financial institutions which may be of interest to local and foreign investors and business promoters. For instance, investors can invest in or establish a type of specialized financial institution referred to as a Development Finance Bank. A Development Finance Bank is a great vehicle for promoters who care about sustainable development goals and are keen about intermediating the flows of capital from the global impact investing market into Nigeria. As of 2022, the global impact investing market was valued at $1.164 trillion.[17] Other than commercial banks and development finance banks, investors can also invest in or promote other specialized financial institutions, like credit guarantee companies, credit bureaus/consumer credit companies, primary mortgage banks, payment service banks, payment service providers, finance companies and mobile money operators.  

vii. Representative Offices of Foreign Banks

Foreign banks can also establish Representative Offices in Nigeria as an alternative to or an intermediate step towards promoting a local banking subsidiary. It is useful to note that Representative Offices are not unincorporated branch offices and are required to register in Nigeria, as a limited liability company before applying for license to operate a Representative Offices. Whilst a representative office cannot accept deposits locally, a representative office may market the financial products and services of its foreign parent, pursue syndicated foreign currency loan transactions, facilitate export transactions to its home country and also conduct market research.

viii. Bilateral Investment Treaties

Bilateral investment treaties (the “BITs”) are international agreements establishing terms and conditions for private investment by nationals of companies of another country. BITs generally contain contractual provisions with guarantees against direct or indirect expropriation, investment promotion, investment dispute settlement and fair treatment clauses. BITs are a great starting point for strategic investors looking to deploy capital within Nigeria’s banking sector. Nigeria is a signatory to up to 29 BITs with only about 15 active BITs. [18]

Final Comments

(a) Nigeria reportedly requires between $100 billion and $150 billion annually over the next 30 years to close its infrastructure deficit.[19] It is hoped that the new share capital requirement will stimulate project and infrastructure financing and encourage more local promoters to transition to entrepreneurship.

(b) Economic policies may yield limited results without a robust law enforcement framework. To illustrate, prices are likely to remain high where consumer protection laws against price gouging are not enforced[1]. Against this background, there is likely a necessity for the Nigerian Government to intensify the enforcement of consumer protection laws across board.

[1] Given the current economic conditions, it would be prudent for State Governments to enact and enforce detailed price gouging laws to enable the success of economic policies

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[1] See FAQs on Banking Sector Capitalization Programme 2024 & 2024 Circular on the Review of Minimum Capital Requirements for Commercial, Merchant and Non-Interest Banks.

[2]

[3]Banks are required to maintain the current Capital Adequacy Ratios

[4] It is useful to note that undercapitalization is a valid ground for revoking a banking license.

[5] The theory here us that an application of Bail-In tool will eliminate the implicit bail-out assurance historically extended to banks and motivate bank shareholders and investors to enhance monitoring efforts, thus reducing moral hazard.

[6] Additionally, the principal amount of such investment instruments must be perpetual and never repaid outside of liquidation

[7] See the CBN Scope, Conditions & Minimum Standards for Commercial Banks Regulations No. 01, 2010

[8] Emphasis ours

[9] Emphasis ours

[10] Emphasis ours

[11] An offshore bank is ordinarily defined as one that is situated outside of the country where the depositors reside.

[12] The definition of “International Commercial Banks” suggests that only National Commercial Banks are qualified to apply for a license to operate as an International Commercial Bank

[13] These 6/12 states of operation must lie within, not more than 2 of the geopolitical zones in Nigeria

[14] Physical presence is strategic for banking government accounts, a key customer for banks, customer service and acceptance of deposits.

[15] https://www.theguardian.com/business/2024/jan/25/lloyds-cut-jobs-branches-online-banking

[16] Merchant Banks are allowed to carry on business of asset management but cannot carry on insurance business

[17] https://thegiin.org/research/publication/impact-investing-market-size-2022/

[18] These are, United Kingdom, France, Netherlands, Republic of Korea, Switzerland, Romania, South Africa, Italy, Spain, Finland, Germany, China, Serbia, Sweden and Taiwan

[19] https://punchng.com/nigerias-infrastructure-deficit-needs-attention/#google_vignette