WHEN CAPITAL ISN'T CASH: A LEGAL AND FINANCIAL ANALYSIS OF BANK CAPITALISATION IN NIGERIA | Lydia Ehisuoria Ohonsi, Esq.

​I. Introduction

​The Central Bank of Nigeria ('CBN') issued a landmark directive in March 2023 mandating a comprehensive recapitalisation of Nigerian commercial banks. Pursuant to the directive, commercial banks with international authorisation are required to attain a minimum paid-up capital of ₦500 billion, national banks ₦200 billion, and regional banks ₦50 billion, with a compliance deadline of 31 March 2026. The directive triggered a wave of capital-raising activity across the banking sector, including rights issues, public offers, and merger negotiations.

​Yet, as the recapitalisation exercise unfolded, a critical legal and financial tension emerged: what, precisely, constitutes 'capital' for the purposes of regulatory compliance?. The question is not merely academic. Under both Nigerian banking law and international prudential standards, the composition of capital—not merely its quantum—determines whether an institution is genuinely well-capitalised or merely appears so. This article examines the legal framework governing bank capitalisation in Nigeria, the distinction between different categories of regulatory capital, the role of non-cash capital instruments, and the implications for the current recapitalisation exercise.

​II. The Regulatory Framework: An Overview

​Bank capitalisation in Nigeria is governed primarily by the Banks and Other Financial Institutions Act 2020 ('BOFIA 2020'), the CBN Act 2007, the CBN's Prudential Guidelines for Deposit Money Banks in Nigeria, and various circulars and directives issued from time to time. BOFIA 2020 grants the CBN extensive powers to prescribe minimum capital requirements and to take regulatory action against institutions that fail to meet them.

​Section 9 of BOFIA 2020 empowers the CBN to specify the minimum paid-up capital for banks and to vary such requirements as economic conditions dictate. Importantly, BOFIA 2020 distinguishes between 'paid-up share capital'—being cash injected directly by shareholders—and 'shareholders' funds', a broader category that includes retained earnings and share premium. This distinction has practical consequences during recapitalisation exercises, as it narrows the class of qualifying instruments.

​Nigeria has adopted the Basel III capital adequacy framework, which classifies regulatory capital into three tiers: Common Equity Tier 1 ('CET1'), Additional Tier 1 ('AT1'), and Tier 2 capital. Each tier has distinct eligibility criteria, with CET1—comprising ordinary shares and retained earnings—constituting the highest quality capital. The Basel framework expressly permits non-cash instruments such as hybrid securities and subordinated debt to constitute regulatory capital within defined limits, a flexibility that Nigerian regulators have partially incorporated.

​III. The Cash-Versus-Non-Cash Distinction in Capital

​The central controversy in the current recapitalisation exercise concerns whether non-cash contributions—such as shares issued in exchange for assets, merger consideration shares, or capitalised reserves—qualify towards the CBN's minimum capital threshold. The CBN's March 2023 circular specifies that the new minimum capital shall be measured in terms of 'paid-up capital and share premium', thereby excluding retained earnings and other components of shareholders' funds from the computation.

​This is a deliberately restrictive definition. Paid-up capital, in the strict legal sense, refers to the portion of issued share capital for which the company has received payment from shareholders. Share premium arises where shares are issued above par value. Both components are cash-denominated by nature, though Nigerian company law—specifically the Companies and Allied Matters Act 2020 ('CAMA 2020')—does not expressly require cash payment as a condition for shares being treated as 'paid-up'. Section 124 of CAMA 2020 permits shares to be allotted as fully or partly paid-up in consideration of services rendered or for consideration other than cash, a provision routinely utilised in merger transactions and asset injections.

​The tension between CAMA 2020's permissive stance and the CBN's cash-centric recapitalisation requirement has created interpretive uncertainty for banks pursuing merger-based capitalisation strategies. In the absence of explicit CBN guidance on whether merger consideration shares count towards the minimum threshold, institutions must navigate this ambiguity at their peril.

​IV. Non-Cash Capital Instruments and Their Legal Treatment

​Several categories of non-cash capital instruments are relevant to Nigerian bank capitalisation. These include:

• ​Additional Tier 1 instruments such as perpetual non-cumulative preference shares and contingent convertible bonds ('CoCos');

• ​Tier 2 instruments including subordinated term debt and cumulative preference shares;

• ​Capitalised retained earnings and general reserves.

​Additional Tier 1 instruments occupy an important position in global bank capital markets. Under the Basel III framework, AT1 instruments qualify as regulatory capital provided they are perpetual, loss-absorbing, and capable of being written down or converted to equity on the occurrence of a trigger event. Nigerian banks have historically been less active in AT1 issuances compared to their peers in South Africa and Egypt, largely due to limited domestic investor appetite for hybrid instruments and the absence of a deep corporate bond market.

​The CBN's Prudential Guidelines permit Tier 2 capital to constitute up to 100 per cent of Tier 1 capital for capital adequacy purposes, but crucially, this is distinct from the paid-up capital threshold under the recapitalisation directive. A bank may be well-capitalised for capital adequacy ratio ('CAR') purposes whilst still falling short of the CBN's minimum paid-up capital requirement—an irony that underscores the dual-track nature of Nigerian bank regulation.

​Capitalised retained earnings present a different analytical challenge. Under CAMA 2020, a company may capitalise its reserves by issuing bonus shares to existing shareholders. Such shares are treated as fully paid-up under company law. However, the CBN's recapitalisation framework, by focusing on 'fresh capital', has been interpreted by market participants as excluding bonus issues and retained earnings from the qualifying capital base. The CBN has not, as of the time of writing, issued a definitive ruling on this question, leaving banks and their counsel to form their own interpretive positions.

​V. Rights Issues, Public Offers, and the Quality of Capital

​The majority of Nigerian banks have pursued recapitalisation through rights issues and public offers. A rights issue offers existing shareholders the right to subscribe for additional shares pro rata to their existing holdings, while a public offer targets the general investing public. Both mechanisms generate fresh cash capital and are unambiguously qualifying instruments under the CBN's recapitalisation framework.

​However, the quality and durability of capital raised through public offers is contingent on investor confidence and secondary market liquidity. Where shares are acquired by retail investors using margin loans or leveraged facilities, the resulting capital may be structurally fragile: a decline in share price may trigger margin calls, leading to forced disposals that erode the bank's capital base. This phenomenon, observed in several recapitalisation exercises globally, raises the question of whether 'paid-in' capital is invariably equivalent to 'high-quality' capital.

​The Securities and Exchange Commission ('SEC'), in its oversight of public offers under the Investments and Securities Act 2007 ('ISA 2007'), exercises jurisdiction over the process of capital-raising, including prospectus requirements and allotment procedures. The concurrent jurisdiction of both the CBN and the SEC over bank capitalisation activities has occasionally generated regulatory friction, particularly regarding the timeline for deployment of offer proceeds and the mechanics of share allotment.

​VI. Mergers and Acquisitions as a Capitalisation Strategy

​Several Nigerian banks have indicated their intention to pursue merger and acquisition strategies to meet the recapitalisation threshold. A merger creates a combined entity whose aggregate capital exceeds the individual thresholds of each constituent bank. The merged entity's paid-up capital is typically a composite of the capital of the merging banks, adjusted for merger consideration.

​The legal framework for bank mergers in Nigeria is found in BOFIA 2020 and CAMA 2020, as well as the CBN's Guidelines on the Regulation of Mergers, Acquisitions, Takeovers and Other Forms of Business Combinations for Banks and Other Financial Institutions in Nigeria. The CBN's prior approval is required for any merger or acquisition involving a bank, and the CBN retains discretion to impose conditions on approval.

​A critical legal question in merger-based capitalisation is whether the capital of an acquired bank, or the goodwill generated by a merger, may be counted towards the minimum threshold. The CBN's recapitalisation circular is silent on this point, creating scope for regulatory dispute. In analogous jurisdictions, regulators have generally taken the position that only tangible common equity—not goodwill or intangibles arising from consolidation—should count towards core capital.

​VII. Implications for Financial Stability and Systemic Risk

​The quality of capital in the banking sector has direct implications for financial stability. History demonstrates that undercapitalised banks, or banks capitalised with low-quality instruments, are more vulnerable to stress events. The 2008 global financial crisis revealed that many institutions which appeared adequately capitalised under pre-Basel III rules held insufficient loss-absorbing capital. The Nigerian banking crisis of 2008–2009, which necessitated the bailout of several major banks by the Asset Management Corporation of Nigeria ('AMCON'), similarly exposed the fragility of a system in which capital adequacy ratios masked underlying asset quality problems.

​From a systemic risk perspective, the current recapitalisation exercise is therefore not merely a quantitative exercise. The CBN's insistence on paid-up capital rather than the broader shareholders' funds base reflects a policy preference for hard, tangible capital that cannot be eroded by asset write-downs or loan loss provisioning. This approach aligns with the Basel III philosophy of prioritising CET1 capital and limiting the recognition of hybrid and deferred-tax instruments.

​However, critics have argued that the CBN's approach is insufficiently nuanced. By focusing exclusively on paid-up capital, the directive may inadvertently encourage capital structures that are heavy with ordinary equity—reducing flexibility for banks to manage their cost of capital—while ignoring the systemic benefits of deeper hybrid capital markets.

​VIII. Conclusion

​The recapitalisation exercise currently underway in Nigeria illuminates a fundamental tension in bank regulation: the difference between capital as a legal concept and capital as a financial safeguard. When capital is raised not in cash but through asset injections, merger consideration, bonus shares, or hybrid instruments, its legal validity and its prudential quality may diverge significantly.

​Nigerian banking law, as currently framed, provides only partial guidance on this question. The CBN's recapitalisation circular's focus on paid-up capital and share premium narrows the permissible capital base but leaves unresolved critical questions about merger-generated capital, non-cash consideration, and the treatment of reserves. CAMA 2020's permissive approach to non-cash consideration for shares creates a potential dissonance with prudential expectations.

​As the March 2026 deadline approaches, it is essential that the CBN issue supplementary guidance clarifying the composition of qualifying capital, the treatment of merger transactions, and the role of non-cash instruments. In the absence of such clarity, banks and their shareholders face significant legal uncertainty, and the broader objective of a robust, well-capitalised banking sector may be compromised by regulatory ambiguity rather than financial incapacity.

​Capital, in its deepest regulatory sense, is not merely a number on a balance sheet. It is a legal construct, a financial buffer, and a statement of institutional resilience. When capital isn't cash, the law must be precise about what it is—and what it is not. 

April 2025.