RECAPITALIZATION OPTIONS AVAILABLE TO BANKS TO MEET THE CBN NEW MINIMUM SHARE CAPITAL POLICY
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RECAPITALIZATION OPTIONS AVAILABLE TO BANKS TO MEET THE CBN NEW MINIMUM SHARE CAPITAL POLICY
ABSTRACT
The evolution and expansion of the banking business is a result of the ever-increasing necessity to move monies from one area of surplus to another (financial intermediation) and to keep funds and valuables safe.
Banks must be constructed on a stable financial foundation that can survive the test of time in order to effectively perform these obligations.
As a result, it stands to reason that the continual recapitalization effort in financial institutions is a sine qua non for sound banking practises. Recapitalization is the process of reengineering a bank by increasing its financial resources in order to correct past deficiencies and reinforce it for future challenges.
This project work centred on the various options available to banks to improve their paid up capital to the required amount of N25 billion.
In conducting this research, the researcher did not shy away from the fact that bank recapitalization policies should be unveiled to the extent required to make progress in identifying the options, which is primarily where the searchlight is.
PROPOSAL OF RECAPITALIZATION OPTIONS AVAILABLE TO BANKS IN ORDER TO COMPLY WITH THE CBN NEW MINIMUM SHARE CAPITAL POLICY
The evolution and expansion of the banking business is a result of the ever-increasing necessity to move monies from one area of surplus to another (financial intermediation) and to keep funds and valuables safe.
Banks must be constructed on a stable financial foundation that can survive the test of time in order to effectively perform these obligations.
As a result, it stands to reason that the continual recapitalization effort in financial institutions is a sine qua non for sound banking practises. Recapitalization is the process of reengineering a bank by increasing its financial resources in order to correct past deficiencies and reinforce it for future challenges.
This project work centred on the various options available to banks to improve their paid up capital to the required amount of N25 billion.
In conducting this research, the researcher did not shy away from the fact that bank recapitalization policies should be revealed to the extent required to make progress in identifying the options, which is primarily where the searchlight beam most.
Furthermore, the choices identified by the researcher in this paper include:
1 The capitalization of the reserve
2 The revised method for issuing new issues
3 Mergers and acquisitions among banks
4 Correct issues, and so on. This was primarily from conference papers, seminar papers, opinion authors, and so on.
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Some authorities classify banks as state banks, private banks, or public banks. Other divides banks into four categories: commercial banks, development banks, community banks, and people’s banks.
The Nigerian Agricultural and Rural Development Bank (NARDB) has amalgamated the people’s banks of Nigeria, the Nigerian agricultural and co-operative banks, and various family economic advancement programmes (FEAP).
Federal mortgage banks and other principal mortgage bankers are not considered banks. They are known as savings and loans. To sanitise the business, the supervision of main mortgage bankers was recently moved to the CBN from the Federal Mortgage Bank of Nigeria.
Insurance businesses, unit trusts, discount houses, bureau de change, and other non-banking institutions are also examples. These institutions function in the financial industry as well, but they are not banks. However, the CBN controls or has a strong influence over these institutions. Their needed minimum paid up capital has been increased in all of them.
The National Insurance Commission (NAICON) now controls the insurance industry, which requires a minimum paid up capital of N2 billion for a single class of insurance business (Life Assurance Business or General Insurance Business) and N300 million for insurers who also conduct special risk insurance business.
These reinsurance companies must have a minimum paid-up capital of N200 million. When universal banking really takes off, conventional banks may seriously infringe on the traditional insurance market.
The CBN has direct authority over the unit trust, discount houses, and bureau de change. The minimum paid-up capital for bureau de change has also been raised from N2.5 million to N1 billion, with May 2004 being the deadline for full compliance.
The issue here is that the BOFIA did not explicitly define a bank. As a result, all that is done here is to carve out the classes of firms whose accounts are being analysed under the label “account of banks,” and the simplest method to do so is to list those organisations that are regarded banks and those that are not considered banks.
As a result, the requirement for banking is to give valuable services to individuals making various types of business decisions in order to improve the decision maker’s financial resources.
Thus, in order to excel in their domains of operations, all organisations require one or more types of services from banking institutions.
As a result, banking institutions must be financially robust and designed to provide these critical services efficiently. As a result, the ability of banks to finance the activities of other organisations cannot be separated from the financial strength of the banks providing such services.
In other words, banks should be adequately capitalised in order to meet the financial needs of their consumers when carrying out their tasks.
Inadequate capital structure of banks impedes their ability to deliver essential services. Given this issue, the best alternative is to encourage the banking industry to recapitalize from N50m for commercial banks and N40m for merchant banks to a uniform for both banks. Despite this, the Central Bank of Nigeria raised the minimum paid-up capital requirement for new banks to N2 billion in May 2004,
while maintaining the minimum for existing banks. Experts, however, believe that given the value of the naira, these minimum paid up capital levels remain too low when compared to other countries, and that further increases are required in light of the emerging new world order.
This strategy should not be interpreted as a form of capital punishment for banks, but rather as a means of encouraging viable banking operations in Nigeria. Adekunle (Adekunle, 1999).
Globally, with the minimum share capital policy, Nigerian banks compete in the globalisation process required of a modern banking system, which will encourage them to actively engage in international banking business such as international capital market participation, correspondence banking, financing, and so on.
1.2 STATEMENT OF THE PROBLEM
In general, whether one examines it as a depositor, creditor, investor, finance analyst, or regulatory body, the new minimum share capital is required. A depositor who is primarily concerned with deposit security would accept the policy as an adequate capital base measure to give deposit security insurance.
A creditor attempting to assess the bank’s ability to pay debts as they become due must accept the policy as proof of the bank’s financial strength to meet the obligation. Investors who are interested in the earning capability of the banks can be certain that the bank has sufficient funds to invest.
However, the minimum share capital and the numerous methods for compliance have some flaws that have prevented several banks from fulfilling the deadline.
When banks opt to raise capital by issuing new securities in the market, they must comply with the onerous listing requirements of the stock exchange market, the first tier security market that benefits any substantial participant in the banking business.
Another issue arises when eligible banks enter the capital market, only to find their shares under-subscribed, possibly as a result of the domestic economy’s downturn. Another important driver of low subscription could be poor bank performance in the past.
There is also the issue that banks have following recapitalization, which is that they are unable to utilise the funds in priority areas such as the acquisition of contemporary information technology,
the construction of a sound asset base, and so on. Where banks fail to employ the fund properly, the policy tends to penalise the banks by primarily causing acute fund mismatch, liquidity, and, eventually, distress.
Mergers and acquisitions provide another issue when two or more parties are bankrupt or poorly capitalised. When two well-capitalized banks merge,
the new bank’s share capital may not be sufficient to meet the new needed capital, and the process of obtaining extra funds may appear laborious and endless, thus the proverb “one good head is better than two bad heads.”
Also, the group’s earnings may fall short of expectations, and the market value of the shares may fall short of expectations, posing problems for new banks.
1.3 PURPOSE/OBJECTIVE OF THE STUDY
1 To investigate the banks’ minimum share capital policies and the methods available for achieving the requirement.
2 Examining the historical development of the policy by identifying the uniqueness of the various compliance tactics and changes that occur in the balance sheet after applying such strategies.
3 To make recommendations on what banks should do with the new share capital in order to promote healthier banking practises in Nigeria.
1.4 RESEARCH QUESTIONS
1 Is the new minimum share capital capable of resolving the growing distress syndrome in financial institutions?
2 Do the recapitalization plans allow banks to adequately comply with the policy?
1.5 RESEARCH HYPOTHESIS
If and only if:
Ho: the increased minimum share capital is insufficient to address the growing distress syndrome in banking organisations.
H1: Because distress is typical in banking, the new minimum share capital is capable of resolving the growing distress syndrome in financial institutions.
Ho: recapitalization plans cannot adequately enable banks to comply with policy.
H1: The recapitalization strategies can enable banks to effectively comply with the policy because each of these solutions has problems inherent in their use.
1.6 THE SIGNIFICANCE OF THE STUDY
This research would be useful to banks in carrying out operations to raise the required amount for minimum share capital to all members of the Nigerian banking industry.
This research will serve as a guide in their performance for economic development and enhancement of their profitability profile in the banking business, and they must be appropriately capitalised in order to give services to clients of varied degrees.
Again, it will aid the CBN banking system in resolving short-term difficulties and locating their causes within the system, as well as preventing a lack of cooperation among banks.
Furthermore, this research will make an important contribution to research on improving bank services in Nigerian commercial banks for the CBN’s overall benefit in reaching their new minimum share capital of banks. Relationship between correspondent banks (Elumelu 1999).
1.7 DEFINITION OF THE TERM
a) Reserve: This is a portion of the bank’s profit that is not appropriated but is held on the balance sheet as a cushion and financing operation.
b) Balance sheet: a description of an economic unit’s financial situation over time that shows its assets, liabilities, and ownership (Okeiyi 1996).
c) Common equity: this is the remaining ownership of all assets and liabilities after all creditors’ claims have been addressed.
d) Globalisation: this is the process of being aware and responsive to banking challenges all over the world.
e) Recapitalization: this is the enhancement and restructuring of an organization’s financial resources in order to increase the size of long-term funds available to the company. Ekundayo (1998):54
f) The capital market: this is a method of raising long-term funds from people, corporations, and institutional investors.
g) Private placement (PP): this is the allocation of shares to private individuals in order for them to become part owners. It is widespread in private businesses.
h) Public issues: this is a means of floating the company’s shares on the capital market through public subscription.
i) Requirement: This refers to the conditions that are required in banks.
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