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Bank Recapitalization in Nigeria Could Make Capital Inefficient Through Exclusion of Retained Earnings

Bank Recapitalization in Nigeria Could Make Capital Inefficient Through Exclusion of Retained Earnings

You are a bank in Nigeria.

You made a PROFIT of N20 million. And you have no plans to pay dividends to your shareholders, making that whole money available.

Your regulator wants you to have a paid up capital of N15 million.

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But wait, the regulator cannot allow you to use that N20 million to cover for that N15m. It wants you to go to the capital market to raise that money. You have 24 months to do that to keep your license.

Good People, what is happening here? Does the Central Bank of Nigeria prefer for these banks to distribute the N20m to shareholders, and then the next day go for rights issue, etc, diluting existing shareholders for the N15 million? (Rights issue will increase the number of outstanding shares even though the valuation has remained the same, thereby diluting current shareholders.)

Can someone tell me why banks must follow this path? Unless there is a law which says banks’ profits* cannot be paid out as dividends throughout the recapitalization period, I think this requirement of not using profit to become whole will make capital inefficient for the banks.

I agree, this is a village boy, but I want someone to educate me why the retained earnings cannot be used for this playbook.

*in banking jargon, you will see retained earnings


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