Investment banking and research firm Chapel Hill Denham has said the Central Bank of Nigeria’s (CBN) banking structure is creating an uneven competitive environment for local lenders while forcing them to over-capitalise operations across Africa.
The firm made the observation in a report titled “The Nigerian Banking Paradox: High Returns, Deep Discounts,” which examined the impact of Nigeria’s banking supervision framework on the competitiveness of local banks.
According to the report, Nigeria’s model differs from the “segregation model” adopted in many African countries, where domestic and foreign banking operations are ring-fenced and supervised separately.
What the report is saying
Chapel Hill Denham explained that under Nigeria’s framework, all international banking operations are consolidated into the Nigerian parent entity, giving the CBN oversight across the entire banking group.
- “All international operations are consolidated into the Nigerian bank, giving the CBN full group-wide oversight responsibility, complete visibility of all exposures, and the ability to avoid the regulatory gaps that fragmented supervision can create,” the report stated.
However, the report noted that the structure comes at a cost, as Nigerian banks are required to maintain higher capital buffers, conservative cash reserve requirements, and extensive reporting obligations.
According to the firm, one major consequence is the creation of an “unlevel domestic playing field.”
- “International banks operating in Nigeria, Standard Chartered Nigeria, Citibank Nigeria, Stanbic IBTC, can establish local subsidiaries with N200 billion in capital, the threshold that applies to domestically-focused institutions. Nigerian banks seeking international operations must hold N500 billion to qualify for an international banking licence,” the report noted.
The report said the N300 billion capital gap gives foreign banks greater flexibility to deploy capital into profitable Nigerian business lines.
Nigerian banks, however, are forced to maintain larger capital bases to fund regional expansion ambitions.
Chapel Hill Denham added that Nigerian banks also over-capitalise subsidiaries across Africa relative to local market requirements.
The report noted that despite the added burden, Nigerian banks benefit from a strong reputation as highly capitalised institutions, helping them secure regulatory approvals and expand market share across African markets.
Get up to speed
Last month, the CBN confirmed that 33 banks successfully met the revised minimum capital requirements under its recapitalisation programme.
Under the framework:
- International banks are required to maintain a minimum capital base of N500 billion.
- National banks must meet a N200 billion threshold.
- Regional banks are expected to maintain N50 billion in capital.
- For non-interest banks, the thresholds were pegged at N20 billion for national licences and N10 billion for regional licences.
The apex bank disclosed that the banking sector raised N4.65 trillion during the 24-month recapitalisation exercise, with capital adequacy ratios now above Basel benchmarks.
The CBN also noted that 72.55% of the funds raised came from domestic investors, reflecting growing local investor confidence in the banking industry.
More insights
The report further highlighted structural constraints linked to Nigeria’s Financial Holding Company framework and the Companies and Allied Matters Act.
According to Chapel Hill Denham, CBN regulations permit only two corporate hierarchies, unlike the multi-layered structures seen in Europe and Asia.
The report also identified the 10% rule under BOFIA Section 19(8)(c) as a major limitation for Nigerian banks expanding across Africa.
- “In practice, this 10% cap now binds most tightly on cross-border banking subsidiaries, not just on non-bank ventures such as fintechs or insurance,” the report stated.
The regulation caps aggregate equity investments in foreign subsidiaries at 10% of shareholders’ funds unimpaired by losses.
As foreign subsidiaries grow, Nigerian banks must either raise additional capital locally or reduce ownership stakes abroad.
Chapel Hill Denham noted that Nigeria’s banking framework prevents foreign operations from being structurally isolated from the Nigerian parent bank.
The report argued that these restrictions increase the capital burden on Nigerian banks compared to peers in countries such as South Africa, Kenya, and Morocco.
What you should know
Chapel Hill Denham also warned that Nigeria’s banking sector could be losing trillions of naira annually due to the CBN’s high Cash Reserve Ratio (CRR) policy.
The firm said that despite Nigerian banks posting some of the strongest returns on equity in Africa, their valuations remain deeply discounted compared to peers in South Africa and Morocco because of macroeconomic concerns and regulatory constraints.
According to the report, the CBN’s 50% CRR policy effectively sterilises half of customer deposits without interest payments, significantly limiting profitability and capital efficiency within the banking sector.
