In March 2024, the Central Bank of Nigeria (CBN) made a pivotal decision that shook the country’s financial sector: commercial banks must raise their capital reserves by a staggering tenfold, amounting to ₦4 trillion ($2.9 billion). While this directive wasn’t entirely unexpected, given the economic pressures and historical precedents, the enormity of the task ahead is daunting for Nigeria’s banks. The timeline is set—two years to secure the required capital—challenging the banks to find innovative and effective strategies to meet this demand.
This isn’t the first time Nigerian banks have faced such a monumental challenge. In 2004, the CBN raised the minimum capital requirement to ₦25 billion, leading to a wave of mergers and acquisitions that reshaped the industry. However, the current capital raising effort is compounded by a critical clause: the exclusion of retained earnings, including foreign exchange (FX) gains. This restriction forces banks to rely heavily on external fundraising, primarily through equity sales to retail and private investors.
Investment Bankers, Lawyers, and Accountants: The Unsung Beneficiaries
While the banks grapple with the challenge of raising capital, the situation presents a lucrative opportunity for the professional services sector—particularly investment bankers, accountants, and lawyers. According to Nigeria’s Investment and Securities Act, the Securities and Exchange Commission (SEC) caps the fees that these professionals can charge on equity raises at 2.83%. This means that the banking sector’s recapitalization could generate as much as ₦113.2 billion ($82.07 million) in fees for these professionals.
Despite the potential earnings, competition within the industry is fierce. Investment bankers often find themselves negotiating fees well below the cap, especially in significant transactions where the value of the capital raise compensates for lower percentage fees. As one investment banker noted, “There is always someone willing to take a lower fee, which drives the overall cost down, even on large transactions.”
Lawyers, who play a crucial role in ensuring compliance with legal requirements and drafting key documents, also face downward pressure on their fees. The SEC caps legal fees for rights issues at ₦10 million, but many law firms accept less due to competitive pressures. One Lagos-based lawyer involved in multiple capital raises remarked on the “awful” fees that often result from aggressive negotiation by the banks.
The Role of Auditors and Accountants
Auditors and accountants are not left out of the capital-raising process, though their earnings are capped even lower. Auditors can charge up to ₦4 million, while accountants are capped at ₦7.5 million, according to SEC regulations. Despite the capped fees, the sheer volume of transactions expected over the next two years presents a significant revenue opportunity for these professionals as well.
Regulatory and Market Implications
The SEC and the Nigerian Exchange Limited (NGX) also stand to benefit from the wave of equity raises. The SEC charges ₦500,000 for the first ₦1 billion raised and 0.15% on any additional amount. Meanwhile, the NGX could earn as much as ₦400 million from listing fees.
The bank recapitalization drive is part of a broader effort to strengthen Nigeria’s banking sector, which is crucial for the country’s economic stability and growth. The increased capital reserves are expected to enhance the resilience of banks, enabling them to support larger-scale economic activities and contribute to Nigeria’s goal of becoming a $1 trillion economy by 2030.
While the long-term benefits for Nigeria are clear, the immediate winners are the professionals who facilitate these capital raises. Investment bankers, lawyers, accountants, and other professionals are poised to reap significant rewards as they help Nigeria’s banks navigate this challenging but critical phase.