Introduction

One of the most important considerations for growth in any economy is the maintenance of a stable financial system. Banks are typically the most prominent component of any financial structure and prioritising the maintenance of a stable and reliable banking system is of utmost importance. For various reasons, particularly because they deal with customer funds and tend to be highly leveraged, banks have traditionally been considered more vulnerable to instability than other industries. Banks hold the financial assets of individuals and companies in other industries, accordingly, their instability could have far-reaching effects on other sectors outside the financial services system and the general economy. Banks have typically been subject to stringent regulatory provisions, including capital adequacy requirements, compulsory deposit insurance, and reserve requirements, to maintain stability in the system. This key goal of maintaining stability in the banking system is consistent with the goals of competition law to promote effectiveness and protect customers, for in practice, one cannot have a stable system without prioritizing the effectiveness and efficiency of such a system. Thus, in more recent times, banking regulation has moved from a strictly structural regime to a market-oriented regime, thus giving rise to an increasing application of the principles of competition law in the banking sector.

Policy Interventions

In order to maintain a sound banking system, regulators in the banking system often adopt various policies, regulatory interventions and corrective actions. Interventional measures are not a new phenomenon in the banking industry; central banks worldwide have introduced regulatory actions to foster stability and prevent a collapse of the banking system. Earlier this year, the Central Bank of Nigeria (“CBN”) announced the commencement of a recapitalization exercise, requiring banks to increase their minimum paid-in ordinary share capital to enhance the stability of the country’s financial system. Many other financial systems worldwide have also undergone a recapitalization exercise in their respective banking industries to promote stability. For example, in mid-2012, the Spanish government, faced with a worsening recession and a contracting economy, entered a Memorandum of Understanding with the European Authorities for the recapitalization and restructuring of weak banks in the country, among other measures aimed at mitigating the country’s banking crisis.¹ This Memorandum of Understanding helped provide the needed capital required to strengthen Spain’s financial industry. Ghana has also undergone three recapitalization programmes in 2007, 2012, and 2017 respectively. According to the Bank of Ghana, these recovery initiatives were designed to make banks more stable in order to support the Ghanaian economy.²

Nigeria has also adopted a number of recovery initiatives aimed at mitigating risk and enhancing stability in the financial system. In 2010, the Asset Management Corporation of Nigeria (AMCON) was established to address the issue of non-performing loans in the banking industry. AMCON has since its establishment injected capital and also acquired bad loans in various Nigerian banks such as Intercontinental Bank, Union Bank, Equatorial Trust Bank, Oceanic Bank, amongst other banks. More recently, the CBN revoked the banking licence of Heritage Bank and appointed the Nigerian Deposit Insurance Commission (NDIC) as liquidator of the bank. The CBN’s statement cited the bank’s breach of Section 12(1) of the Bank and Other Financial Institutions Act (“BOFIA”), 2020 and noted that the action was necessitated by the bank’s inability to improve its financial performance and the threat such a situation constitutes to financial stability. These interventions have had varying degrees of success: in Nigeria, AMCON’s capital injections were successful in protecting depositors’ funds and ensuring the continuation of business operations in distressed banks, whilst the situation the Spanish bailout was trying to prevent was exacerbated by the length of the recession the country faced at the time. The Ghanaian initiative had its detractors and proponents, but it is possible that its benefits may be seen in the future.

The Recapitalization Process

The process of recapitalization typically involves the injection of various forms of capital into the country’s banking system. This process is usually undertaken to improve the stability of a company’s (banks in this case) capital structure. Recapitalization can be achieved by using different processes which are generally recognized as capital raising methods. A recapitalization may take different forms, and it is important to understand that the very purpose of a recapitalization process is for an entity to make changes to its capital structure in order to enhance the efficiency of its operations. Thus, a company seeking to recapitalize may raise additional capital by issuing fresh equity.

In Nigeria, the CBN Circular on the Review of Minimum Capital Requirements for Commercial, Merchant, and Non-Interest Banks in Nigeria (the “Circular”) outlines three options that banks may consider in meeting the new capital requirements under the country’s recapitalization program. These options are:

a) Injecting Fresh Equity through private placements, rights issue and/or offer for subscription;

b) Mergers & Acquisitions; and

c) Upgrade or downgrade of license authorization.

The Circular requires commercial banks with an international license to have a minimum capital of N500,000,000,000 (five hundred billion Naira), while banks with a national license need to have a minimum capital of N200,000,000,000 (two hundred billion Naira). It is worth stating that the earlier recapitalization exercise carried out by the CBN in 2004 reduced the number of commercial banks in Nigeria from 85 to 29 and subsequently produced a wave of mergers and acquisitions in Nigeria’s banking industry.

This projected rise in mergers and acquisitions in the banking industry certainly raises some competition law concerns. The CBN’s Circular identifies mergers & acquisitions as a viable option for banks to meet the new capital requirements; undoubtedly smaller banks that are unable to raise the required capital will resort to business combinations and mergers to comply with the Circular. This is a competition law enthusiasts’ playground because pitting banks against each other to create a stronger banking sector will result in ‘efficiency rivalries’. This rivalry is also a key concern in regulating mergers and acquisitions to ensure that all participants have equal opportunities whilst preventing monopolization of the market.

The Applicability of the FCCPA to Bank Mergers

In Nigeria, The Federal Competition and Consumer Protection Act (“FCCPA”) is the foremost law for mergers and acquisitions. Along with subsidiary regulations such as the Notice of Threshold for Merger Notification 2019, the Merger Review Regulations, and the Guidelines on Simplified Process for Foreign-to-Foreign Mergers with Nigerian Component 2019, they outline the process and approval requirements for mergers in Nigeria.

Section 1 of the Notice of Threshold for Merger Notification dictates that the Federal Competition and Consumer Protection Commission (“FCCPC”) should be notified before embarking on the merger if, in the financial year preceding the merger, the combined annual turnover of the acquiring undertaking and the target undertaking equals N1,000,000,000 (one billion Naira) or the annual turnover of the target undertaking equals or exceeds N500,000,000 (five hundred million Naira). A cursory look at the year-end reports of banks in Nigeria shows that a significant number of banks reported profits before tax in figures ranging between ten billion to hundreds of billions of Naira. It follows that their turnovers would exceed the set threshold and any proposed merger will likely trigger the FCCPC’s threshold for notification.

In addition to the notification requirements and obtaining the FCCPC’s approvals, the merger process is also subject to sector-specific approvals from the relevant regulators. Some examples of these regulators include the Nigerian Communications Commission, the National Insurance Commission, the Nigerian Electricity Regulatory Commission and so on. For banks, the provisions of BOFIA are quite instructive in the merger process. BOFIA states that the FCCPA’s provisions on mergers in sections 92(1) (2) (3), 94 and 98 respectively should apply to a merger, acquisition, or business combination which involves a bank or other financial institution. Section 65 (3) of BOFIA further provides that all references to the FCCPC in the aforementioned sections shall be deemed and construed as a reference to the CBN.

This stipulation has been widely construed to mean that the FCCPC no longer has regulatory oversight of mergers and acquisitions taking place in the Nigerian banking system. However, we do not believe this to be the case. The FCCPC remains the foremost authority on the regulation of competition in Nigeria, section 104 of the FCCPA states that “notwithstanding the provisions of any other law but subject to the provisions of the constitution of the Federal Republic of Nigeria, in all matters relating to competition and consumer protection, the provisions of this Act shall override the provisions of any other law.”

It is clear that there seems to be a dissonance between the provisions of section 65 of BOFIA and section 104 of the FCCPA. While one could argue that the provision of BOFIA’s section 65 limits the powers of the FCCPC in relation to mergers in the banking sector, it is doubtful that a strong case can be made for the total inapplicability of the FCCPA by the enactment of an Act by another regulatory authority. Although the CBN is the key regulator of the activities of banks and other financial institutions, the apex bank’s oversight cannot extend to outrightly restricting the competition authority from overseeing competition-related matters even if they involve banks and financial institutions.

The Importance of Competition Law in Bank Mergers

While the enforcement of competition law has historically not been applied to banking because of sector-specific exceptions, banking regulations have started to shift from structural regulations to more market-oriented regulations, thus, competition and anti-trust provisions are starting to become more relevant in the improvement of the financial services system. The CBN in its Circular stated that the recapitalization program was necessary to further strengthen Nigerian banks against external and domestic shocks as well as enhance the stability of the financial system, and all these goals are aligned with the purpose of competition law.

When banks merge, the resulting entity typically has a more robust capital base, thus allowing it to strengthen its lending capacity. The newly formed entity will usually be a bigger institution with a larger capital base and more market power. This could lead to domination and foster a negative effect on the competitiveness of the market. Additionally, consolidation of banks results in fewer banks, and the existence of a handful of large banks could encourage collusive behavior. It is therefore important that such merger transactions are examined through the lens of competition law to maintain efficiency and stability in the banking system. It is necessary to consider whether a proposed merger or acquisition could have anti-competitive effects such as promoting the unilateral exercise of market power or collusion. It must also be mentioned that this position is in line with the practice in several jurisdictions. For example, the regulation of French bank mergers falls squarely under the general antitrust provisions. The Irish Competition Act also empowers the Irish Competition Authority to regulate all mergers, including bank mergers, and similarly, in Canada, bank mergers and interbank agreements fall within the scope of the general competition law.

The CBN’s recapitalization program is a positive step in improving the capital base of Nigerian banks and ultimately bettering financial services in the country. Banks play an indispensable role in the Nigerian economy, and it is important to prioritize the development of an efficient and effective financial system. A key point to note is that the financial system cannot be operationally effective without the imposition of regulatory controls. While it is certain that the Central Bank has a duty to oversee and control bank mergers, mergers and acquisitions must also be scrutinized for their potential effects on the market, and it is crucial that the various authorities with oversight over competition (specifically and generally) supervise and regulate them on competition grounds.

1. Patrizia Baudino, Mariano Herrera and Fernando Restoy, “The 2008–14 Banking Crisis in Spain”, FSI Crisis Management Series No 4, (July 2023)
2. Obuobi, B., Nketiah, E. , Awuah, F. and Amadi, A. “Recapitalization of Banks: Analysis of the Ghana Banking Industry”, Open Journal of Business and Management (2020)