Beyond Bigger Banks: What Nigeria Can Learn from Global Recapitalisation Reforms

Although Nigeria has concluded one of the largest banking recapitalisation exercises in its history, Central Bank of Nigeria (CBN) Governor Olayemi Cardoso says the real work has only just begun.

Speaking at the BusinessDay 14th Annual CEO Forum in Lagos on Thursday, Cardoso argued that recapitalisation was never simply about raising fresh capital. Rather, he described it as a strategic effort to build stronger and more resilient banks capable of supporting long-term economic growth.

He stressed that the CBN’s attention has now shifted from capital raising to stronger corporate governance, prudent risk management and tighter supervision, noting that a well-capitalised bank cannot be considered strong without responsible leadership and effective oversight.

Cardoso’s remarks raise a broader question that has confronted many countries after similar reforms: does bigger bank capital automatically produce a stronger economy?

Nigeria’s banks raised N4.65 trillion in fresh equity, with N3.37 trillion, or 72.55 per cent, sourced locally, while 33 of the country’s 37 banks met the new minimum capital requirements by the March 31, 2026 deadline.

The CBN expects the exercise to strengthen banks’ capacity to finance large projects and support Nigeria’s ambition of becoming a $1 trillion economy. However, recent data also show that recapitalisation alone does not eliminate risks.

The banking sector’s non-performing loan ratio rose sharply to 9.85 per cent in February from 8.03 per cent in January after the withdrawal of regulatory forbearance, well above the prudential limit of five per cent.

Even so, the sector remains resilient, with the capital adequacy ratio improving to 12.55 per cent and liquidity strengthening to 69.27 per cent, while the CBN projects credit to the private sector will rebound by 17.86 per cent in 2026 after contracting in 2025.

What Happened After Other Countries Recapitalised Their Banks?

Experiences from other countries suggest that recapitalisation can transform an economy, but only when accompanied by broader financial sector reforms.

India offers one of the strongest examples. After injecting more than ₹3 lakh crore, equivalent to about US$40 billion, into public sector banks in the early 2020s, the country witnessed a dramatic improvement in banking performance. Gross non-performing assets fell from a peak of 11.46 per cent in 2018 to just 2.31 per cent by 2025.

Credit nearly tripled from about US$1.03 trillion in 2015 to more than US$2.13 trillion in 2025, while domestic deposits doubled to about US$2.73 trillion. Public sector banks also became significantly more profitable, reducing the need for repeated government support.

The recapitalisation restored confidence, strengthened lending and positioned banks to finance investment and economic expansion.

Indonesia’s experience demonstrates that stronger banks can stimulate lending but also create new risks if supervision is weak. Following the Asian Financial Crisis, the government injected tens of billions of dollars into troubled banks through the Indonesian Bank Restructuring Agency.

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A long-term study published in the Journal of Financial Intermediation found that recapitalised banks significantly increased lending, particularly larger institutions, helping revive economic activity after the crisis.

However, the study also found that recapitalisation increased bank risk by about 40 per cent, with the effects lasting at least eight years. The findings underline the importance of combining fresh capital with strong regulation to prevent excessive risk-taking.

Malaysia followed a different path after its 1997-1998 banking crisis. Through Danaharta and Danamodal, the government removed bad loans from banks and injected fresh capital before shifting its focus to tighter regulation, mergers and organic capital growth.

Nearly three decades later, the country’s banking system remains one of the strongest in the region. According to Bank Negara Malaysia’s Financial Stability Review for the second half of 2025, banks maintained excess capital buffers of RM139.3 billion, or about US$31.5 billion.

Gross impaired loans remained exceptionally low at 1.4 per cent, business financing continued to expand, profitability improved, and Islamic banking assets grew steadily. Malaysia’s experience shows that recapitalisation can deliver lasting benefits when supported by sound regulation and disciplined risk management.

Kenya is still implementing its recapitalisation programme, but its approach also offers useful lessons. Since December 2024, banks have been raising minimum core capital in phases from KES5 billion to KES10 billion, or about US$77.7 million, by 2029.

Alongside the reforms, regulators lifted a decade-long moratorium on licensing new banks to encourage competition even as higher capital requirements drive consolidation among weaker lenders. Policymakers expect stronger banks to increase lending, lower funding costs and improve resilience while ensuring competition is preserved through new market entrants.

Taken together, these international experiences show that recapitalisation is most successful when it results in stronger lending, cleaner balance sheets, improved governance and sustained confidence in the financial system. Their experiences also demonstrate that higher capital alone does not guarantee better economic outcomes.

Will Nigeria Experience Similar Outcomes?

For Kazeem Bello, a development economist and Chief Executive Officer of Afrique Capital and Equity Funds Ltd, Nigeria’s recapitalisation will only matter if it fundamentally changes how banks finance the economy.

He explained to Pinnacle Daily that the experience of successful economies shows that strong financial systems create and deploy capital to drive industrialisation and private sector growth rather than simply increasing banks’ balance sheets.

“The depth of the financial system is what creates capital, deploys capital and makes capital available for both the public and private sectors to access and utilise for economic transformation, infrastructure development and private sector expansion,” Bello said.

He argued that countries such as the Asian Tigers and Western economies after the Second World War relied on financial systems that financed infrastructure, industries and business expansion, while Nigeria has depended excessively on government spending.

“The engine of economic growth and development is generally facilitated by the private sector, and the role of the financial system in creating the much-needed capital can never be underestimated. Unfortunately, we continue to ignore this basic principle,” he said.

Bello believes Nigeria’s recent recapitalisation has yet to produce those outcomes.

“The recapitalisation exercise did not benefit Nigeria or Nigerians and has not addressed the critical problem of the non-existence of effective capital formation mechanisms in the Nigerian financial system.”

He added: “It has not resulted in service improvement by Nigerian banks, it has not increased loanable funds to stimulate the economy, and it has not helped solve the problem of poor capital formation.”

On what should happen next, Bello argued that policymakers should focus on increasing competition rather than allowing a handful of large banks to dominate the industry.

“The last recapitalisation exercise was an opportunity to break the shackles of oligarchies in the financial industry, but we missed that by reinforcing the same system,” he said. “We have to change directions and strategies by instituting an enabling competitive financial environment to allow major foreign banks to bring capital into Nigeria.”

He maintained that a deeper and more competitive financial system would attract greater investment and improve access to financing.

“Nigeria remains one of the lowest in attracting foreign direct investment among major oil-producing countries because the depth of our financial system is extremely shallow due to poor capital creation,” Bello said.

He also argued that recapitalisation alone cannot solve Nigeria’s financing challenges.

“Our banks are unable to participate in their primary function of creating capital. That is why they are not able to finance infrastructure, industries or major businesses, and why Nigeria continues to rely heavily on foreign borrowing.”

For Bello, Nigeria’s ambition of becoming a $1 trillion economy will depend not on the amount of capital banks have raised but on whether they can create and channel that capital into productive sectors.

“Our banks do not have what it takes to create the capital needed to grow the economy. Until that changes, Nigeria will continue to struggle to finance development and achieve sustainable economic growth.”

While Nigeria’s recapitalisation has undoubtedly produced stronger banks on paper, the next test is whether those stronger balance sheets translate into cheaper credit, more investment, stronger businesses and sustainable economic growth.

As the experiences of India, Indonesia, Malaysia and Kenya suggest, capital is only one part of the equation. Effective regulation, sound corporate governance, prudent risk management and a financial system that channels credit into productive sectors will ultimately determine whether the banks’ recapitalisation delivers lasting benefits for the broader Nigerian economy.