Tech Safari Takes: Nigeria's central bank delivers a shocker

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A week ago, Nigeria’s central bank shocked everyone.

It announced that the minimum capital requirement for banks would go up by 20x.

This means banks need to hold up to ₦500 billion ($378m) with the Central Bank of Nigeria (CBN) to keep their bank status.

This has put the whole banking industry into disarray.

Let’s dive into what it means.

The Story

Nigerian banks now need heaps more capital to maintain their bank status.

For some banks, the new requirement would be a massive ₦500 billion ($378m), up from the ₦25 billion (US$19m) currently required.

But there are many tiers of banks in Nigeria, and the new rules affects them differently:

• International banks would need to put up ₦500 billion in capital

• National banks need ₦200 billion ($151m)

• Regional banks must cough up ₦50 billion ($37.8m)

But wait… it gets worse.

Banks can’t cash out their shares - they can only raise new capital from investors or merge with another bank.

And they have two years to come up with the cash.

So, banks need to find fresh capital, and the clock is ticking. ⏱

The Hunger Games of Nigerian banking just kicked off.

But why is the government doing this?

Who’s going to win - and who’s going to lose?

The Context

This is not the first time that Nigeria’s banks have gone through the Hunger Games.

In 2004, the central bank increased the capital requirement from ₦2 billion ($1.8m) to ₦25 billion ($20m).

This was done to prevent bank runs and blowups that were common in Nigeria at the time.

After the last Hunger Games, the number of banks in Nigeria went from 89 to 23.

Out of the ashes of this phase came the biggest names in Nigerian banking today — like Access Bank and UBA.

But this isn’t 2004 anymore.

Banks aren’t packing up, and Nigerians are definitely enjoying much better financial services than they used to.

So, what’s this about?

Two words — the economy.

Over the past decade, the Nigerian economy has been driven to the brink.

After two recessions, dwindling oil exports, and a devalued currency, the country needs a breath of life — and fast.

That breath of life is investment - a lot of it.

So, the country needs cash and plans to use banks to make that happen.

And if Nigerian banks pull off what the government wants, about ₦3.9 trillion ($4bn) in new capital will enter the economy.

Access to credit is expected to increase and the economy might finally catch a break.

But for commercial banks to 20x their capital base, almost all of them will fall short.

They’re now faced with three options:

• Raise capital.

• Merge with other banks.

• Downgrade their license.

For example, Access Holdings just went out to raise ₦365 billion ($1.5b) in equity from investors.

That’s a move that screams, “Okay, we need money!”

And looking at the last time this happened, many banks won't make it out alive.

The Tech Safari Take

So, who are the winners?

Right now, we think it’s Nigeria’s fintechs.

The big fintech players in Nigeria, like Kuda, Moniepoint, Opay, Carbon and Fairmoney have acquired microfinance bank licenses.

While a commercial bank license costs ₦25 billion, a microfinance bank license may cost anywhere from ₦100m ($80k) to ₦5 billion ($4.2m).

And microfinance banks aren’t affected by the new capital requirements… yet.

The new regulation is solely focused on commercial and merchant banks, so microfinance banks are safe for now.

And while the country’s biggest banks scramble for fresh capital, fintechs can focus on growth.

This is the fintechs’ to mess up.

But even then, they may also have a target on their backs.

Segun Adeyemi, CEO of Anchor, believes there may be something cooking for fintechs too.

The banks are the focus now simply because they are at the top of the pecking order.

But there’s more coming for other fintechs. Payment service providers and other banks will get it too.

If this happens, all fintechs would have to weather a similar storm and try to survive their own version of The Hunger Games.

One thing is certain — the next two years will either make or break the Nigerian financial services industry.

Who do you think will make it out alive?

Hit reply and let us know.

Here’s what we’re reading this week

💡 A few years ago, Wiza Jalakasi wrote this banger article about mobile money that was way ahead of its time. Read it.

🤯 This startup might be Africa’s first EV manufacturer. A good read here.

⌛ Gmail turned 20 this week, but did you know that it started as an April Fool’s prank? Find out more.

Tweet of the week

RIP to the good old days. 🕯️

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