In January 2024, the Central Bank of West African States (BCEAO) declared it would be doubling the minimum paid-up capital for West Africa Economic and Monetary Union (WAEMU) banks to 20bn CFA francs (about US$32m). Similar moves have since been announced by the central banks in Nigeria and Kenya, while Uganda has just completed a recapitalisation programme (see panel).
Although there is general consensus that banking sector recapitalisation is essential, there are pitfalls. Raising additional capital can be challenging, especially for smaller banks or those already under financial stress. They may struggle to attract investors, resulting in forced mergers, acquisitions or even closures, limiting competition and consumer choice. Nigeria’s recapitalisation of 2005, for example, shrank the number of banks in the country from 89 to 24.
And while recapitalisation strengthens banks in the long term, it can shrink credit availability in the short term as banks become more conservative in their lending practices to meet the new capital requirements, potentially slowing economic growth. Compliance with new capital standards can also be a particularly costly overhead for smaller banks.
A strong and stable banking sector directly influences economic growth and investment
Capital crank-up
In March, the Central Bank of Nigeria raised the minimum capital requirements for all banks operating in the country, with the top-tier banks needing 500bn naira (about US$330m) by February 2026, rather than the current 50bn. In April, the Central Bank of Kenya announced it would be raising banks’ minimum capital from 1bn Kenyan shillings to 10bn (about US$78m). In 2022, Bank of Uganda gave banks until the end of June 2024 to bump up capital to 150bn Ugandan shillings (about US$40m).
Crucial cog
However, the potential pitfalls are outweighed by the potential benefits. The banking sector is a crucial cog in the wheel of any nation’s economy. Its stability and strength directly influence economic growth, investment and overall financial health. Expanding banks’ capital base ensures they have sufficient financial resources to absorb losses and continue to lend. It enhances the resilience of the sector, improves credit growth, fosters financial stability and supports economic growth.
Regulatory reform, economic shock or the need to align with international standards such as the Basel III framework are often triggers for recapitalisation to shore up the sector. For Nigeria, recapitalisation has been made absolutely necessary by record inflation and significant currency depreciation following the introduction of economic reforms.
Like Nigeria in the west, Kenya and Uganda in the east have suffered major macroeconomic shocks in recent times with mounting inflation and plummeting currencies triggering their banking recapitalisations. For the WAEMU region, recapitalisation has been a response to weak bank assets and high levels of non-performing loans since the Covid-19 pandemic.
Equipped for expansion
Layered on these macroeconomic factors is the desire to keep banks competitive. As Africa’s economies expand, banks need sufficient capital to pursue opportunities and take full advantage of the continent’s growth story. South African and Nigerian banks are spreading across sub-Saharan Africa, making the most of the rich pickings that come from investing on the continent. It is to their advantage that the huge foreign global banks are yet to move in on Africa, and African banks must seize the opportunity to gain as much ground as they can before that happens. This growth nudge may be why the bigger banks have not complained overmuch about the jacked-up minimum capital requirements.
For Africa as a whole, strong national banking systems can underpin growth in intra-African trade, investment and economic integration, aligning with the goals of the African Continental Free Trade Area (AfCFTA). By enhancing the resilience and competitiveness of their banks, African countries can position themselves as attractive investment destinations, contributing to economic development.
Banks should be encouraged to continue to lend during recapitalisations
The challenges and pitfalls certainly cannot be overlooked. Care must be taken to balance the need for stronger banks with the potential economic and social impacts of recapitalisation. Banks should be encouraged by the regulators to continue to lend during recapitalisation exercises. The Central Bank of Nigeria, for example, requires banks to maintain their loan-to-deposit and capital adequacy ratios during the current recapitalisation.
Stronger banks are a must-have for Africa. Banking recapitalisation is a critical step in strengthening them and ensuring their stability. What should not be forgotten is that by providing access to credit for businesses and households, a well-capitalised sector can help reduce poverty and improve living standards across the continent.
