Investment banking and research firm Chapel Hill Denham has raised concerns over the structure of Nigeria’s banking regulation, warning that the framework is creating an uneven competitive environment for local lenders and forcing them to over-capitalise operations across Africa.
The firm made the observation in its report titled “The Nigerian Banking Paradox: High Returns, Deep Discounts,” which examined how Nigeria’s supervisory banking model affects the competitiveness and valuation of domestic financial institutions.
According to the report, Nigeria operates a consolidated supervision model that differs from the “segregation model” commonly used in several African countries. Under Nigeria’s system, all international banking operations are consolidated under the Nigerian parent bank, placing the entire banking group under the oversight of the Central Bank of Nigeria.
Chapel Hill Denham explained that the structure gives the apex bank complete visibility into banking exposures and allows it to avoid regulatory loopholes often associated with fragmented supervision.
“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 investment firm argued that the system imposes significant costs on Nigerian banks. These include higher capital requirements, strict cash reserve obligations, and extensive compliance reporting.
The report noted that the framework has created what it described as an “unlevel domestic playing field” between Nigerian banks and foreign-owned lenders operating in the country.
According to Chapel Hill Denham, international banks such as Standard Chartered Nigeria, Citibank Nigeria, and Stanbic IBTC Holdings can operate local subsidiaries with a minimum capital requirement of N200 billion, the same threshold applied to domestically-focused institutions.
In contrast, Nigerian banks seeking international licences are required to maintain a minimum capital base of N500 billion.
The report said the N300 billion capital gap gives foreign banks greater flexibility to channel funds into profitable Nigerian business segments, while Nigerian lenders are compelled to maintain significantly larger capital buffers to support regional expansion plans.
Chapel Hill Denham further stated that Nigerian banks tend to over-capitalise their subsidiaries across Africa relative to local market requirements in those countries.
Despite the added regulatory burden, the report acknowledged that Nigerian banks benefit from being perceived as highly capitalised institutions, which strengthens their credibility and helps them secure regulatory approvals in other African markets.
Last month, the CBN confirmed that 33 banks successfully met the revised minimum capital requirements introduced under its recapitalisation programme.
Under the revised framework:
International banks are required to maintain a minimum capital base of N500 billion.
National banks must hold at least N200 billion.
Regional banks are required to maintain N50 billion.
Non-interest banks must maintain N20 billion for national licences and N10 billion for regional licences.
The apex bank disclosed that the banking industry raised N4.65 trillion during the 24-month recapitalisation exercise. It also stated that capital adequacy ratios across the sector now exceed Basel regulatory benchmarks.
According to the CBN, about 72.55 percent of the funds raised came from domestic investors, reflecting rising local investor confidence in the banking sector.
The report also highlighted structural limitations linked to Nigeria’s Financial Holding Company framework and the Companies and Allied Matters Act.
Chapel Hill Denham noted that current regulations only permit two layers of corporate hierarchy, unlike the more flexible multi-layered structures used in Europe and Asia.
Another major concern identified in the report is the 10 percent rule under BOFIA Section 19(8)(c), which caps aggregate equity investments in foreign subsidiaries at 10 percent of shareholders’ funds unimpaired by losses.
“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 investment firm warned that as foreign subsidiaries continue to grow, Nigerian banks may be forced to either raise additional capital locally or reduce ownership stakes in overseas operations.
Chapel Hill Denham argued that Nigeria’s banking framework prevents foreign operations from being structurally separated from the Nigerian parent bank, increasing the capital burden on local lenders compared to competitors in countries such as South Africa, Kenya, and Morocco.
The report also criticised the CBN’s Cash Reserve Ratio policy, warning that the sector could be losing trillions of naira annually due to the current framework.
According to Chapel Hill Denham, the effective 50 percent Cash Reserve Ratio sterilises half of customer deposits without interest payments, limiting profitability, capital efficiency, and investor valuation despite Nigerian banks posting some of the strongest returns on equity across Africa.
The firm added that macroeconomic uncertainty and regulatory constraints continue to weigh heavily on Nigerian bank valuations compared to peers in other African markets.
