Following the release of the 2024 Guidelines for Bureau De Change (BDC) Operations, the Central Bank of Nigeria has introduced higher capital thresholds, revised licensing tiers, and a compliance deadline of June 3, 2025.
In this article, Simisola Eyisanmi and Bankole Oke explore the recapitalisation strategies available to BDCs, from equity and debt financing to mergers and retained earnings, within the context of Nigeria's evolving capital market.
Introduction
Throughout 2024, the Central Bank of Nigeria (CBN) implemented significant reforms in the Nigerian foreign exchange market by introducing several regulatory guidelines aimed at restructuring the operations of market participants. As part of these strategic reforms, the CBN sought to reposition the Bureau De Change (BDC) sub-sector to fulfill its envisioned role in the foreign exchange market.
On May 22, 2024, the CBN issued a circular titled "Circular to All Bureau De Change Operators and Stakeholders in the Financial Services Industry" (FPRD/DIR/PUB/CIR/002/010) (the "Circular"), which introduced the Regulatory and Supervisory Guidelines for Bureau De Change Operations in Nigeria 2024 (the "Guidelines"). These Guidelines govern the operations of all existing BDC operators and promoters of proposed BDCs in Nigeria, effectively replacing the Revised Operational Guidelines for Bureaux De Change, 2015 (the "2015 Guidelines").
In our previous publication titled "Highlights of the New Regulatory and Supervisory Guidelines for Bureaux De Change Operations in Nigeria", we examined the key provisions of the Guidelines. Among other changes, the Guidelines introduces new licensing requirements, categorizes BDCs into distinct tiers, and revises the minimum capital requirements for BDCs. Under the Guidelines, BDCs are required to meet the minimum capital requirements corresponding to their license category. Consequently, BDCs must take necessary steps to comply with these requirements by exploring recapitalization options within the stipulated timeline outlined in the Guidelines or as determined by the CBN.
This article provides a brief overview of the new licensing categories and their corresponding capital requirements under the Guidelines. Additionally, it discusses the recapitalization options available to BDCs to meet the minimum capital requirements for their desired license category.
Licensing Requirements and Categories of BDCs
The Guidelines stipulate that no person shall engage in the business of BDC in Nigeria without prior authorization from the CBN, as prescribed under the Guidelines1. This means that any individual or entity intending to operate a BDC in Nigeria must apply to the CBN for authorization under the applicable BDC licensing category outlined in the Guidelines. The CBN has introduced two categories of BDC licenses: Tier 1 BDC license and Tier 2 BDC license (collectively referred to as the "Tiers").
The Tier 1 BDC license authorizes the licensee to operate in any state of the Federation, including the Federal Capital Territory (FCT). Additionally, Tier 1 licensees may establish branches and appoint franchisees in any state or the FCT, subject to prior written approval from the CBN. This license effectively permits nationwide operations without restrictions to a specific state.2
On the other hand, the Tier 2 BDC license is more limited in scope. It allows the licensee to operate in only one state or the FCT. Furthermore, Tier 2 licensees may establish up to five branches within their state of operation, also subject to the CBN's written approval. This category is designed for smaller-scale operations compared to the nationwide reach of Tier 1 licensees.3
Minimum Capital Requirements
Under the 2015 Guidelines, the minimum capital requirement for obtaining a BDC license was set at N35,000,000 (Thirty-Five Million Naira).4 However, this requirement has since been revised. The Guidelines stipulate a minimum capital of N2,000,000,000 (Two Billion Naira) for a Tier 1 BDC license and N500,000,000 (Five Hundred Million Naira) for a Tier 2 BDC license.5
As a result, in addition to the existing N35,000,000 (Thirty-Five Million Naira) share capital that all existing BDCs have currently prior to the Guidelines, new applicants and holders of a Tier 1 and Tier 2 BDC license must now have a minimum share capital of N2,000,000,000 (Two Billion Naira) and N500,000,000 (Five Hundred Million Naira) respectively. Under the Guidelines, all capital deposits required for a BDC license, as well as any subsequent capital injections, are subject to verification by the CBN.6
Timeline for Compliance
While all BDCs were required to comply with the new minimum capital requirements by 3rd December 2024 under the Guidelines, the CBN has since extended the recapitalization deadline to 3rd June 2025. Thus, BDCs must now meet the recapitalization requirements by this new date.7
It is important to note that this deadline applies only to existing BDCs. However, any new BDC license applicants will be required to meet the minimum capital requirement before receiving a license under any Tier.
Viable Options for the Current Recapitalization of BDCs in the Nigerian Capital Markets
The capital market plays a crucial role in the recapitalization process, as it offers BDCs access to various financing options, including equity and debt financing. BDCs can raise funds from investors by issuing additional shares either by public offering, rights issue or private placement.
However, recapitalization through the capital markets—whether private or public—helps BDCs meet regulatory capital requirements, improve capital adequacy ratios, enhance credit capacity, and strengthen financial stability. This process also contributes to restoring investor confidence and improving risk management.
However, the available recapitalization options in the capital markets vary, each with its distinct implications. The viable options for BDCs include:
a. Capital Infusion through Equity Financing
Capital infusion via equity financing involves raising capital for a BDC by issuing new shares, either through a public offering, private placement, or rights issue.
A public offering is a method that allows individuals and organizations to invest in the shares of a public company, thereby becoming part owners. This recapitalization option is available to BDCs that are already public entities or private companies looking to go public.
However, private BDCs that are not yet public cannot utilize this option, as the Companies and Allied Matters Act 2020 (CAMA) prohibits private companies from issuing shares to the public.8
A rights issue allows existing shareholders of a company to purchase additional shares at a discounted price, giving them priority. Under the CAMA, a private company is required to offer its newly issued shares first to existing shareholders, in proportion to their current shareholdings.9 However, this is not compulsory for public companies, as they have the option to issue shares directly to the public as well as to existing shareholders. In contrast, private BDCs must first offer their shares to existing shareholders before issuing them to other investors.
Private placement is a method of raising capital where securities are sold directly to a select group of investors, rather than through a public offering. This group typically includes institutional investors, accredited investors, or a limited number of wealthy individuals. For private BDCs, they can raise capital by issuing shares to private or institutional investors, which is a common method of funding without going public.
However, if a public company seeks to raise capital through private placement, it must first obtain approval from the Securities and Exchange Commission (SEC). This approval is contingent on meeting certain conditions, such as:
- The company must demonstrate an urgent need for new funds or expertise, proving that private placement is the only viable option.
- Securities can only be offered to a maximum of 50 subscribers.
- The aggregate number of shares to be offered through private placement by a public quoted company shall be 30% of its existing issued and paid-up capital prior to the offer.
- The offer shall be for a period as proposed by the issuer and approved by the Commission but not exceeding ten (10) working days.10
In a bid to achieve the recapitalization quota, a BDC can employ a combination of options, such as a rights issue and a public offering, depending on its financial strategy and board decisions. Utilizing both methods can provide the institution with a flexible approach to meet its capital needs, optimize its market presence, and attract a diverse group of investors.
b. Capital Infusion via Debt Financing
Under the Guidelines, there is no explicit restriction against BDCs using debt financing for recapitalization; however, the Guidelines do not specifically permit it either. This means that BDCs would need to comply with all relevant regulations regarding debt financing if they choose this option to meet their capital requirements. The Guidelines stipulate that BDCs must limit their total borrowing to 50 percent of shareholders' funds unimpaired by losses.11 In other words, BDCs cannot borrow more than this specified threshold, and any variation from this limit would constitute a breach of the Guidelines.
The debt financing option thus, depends on the operator's creditworthiness and extant CBN's regulations. BDCs may also issue bonds or commercial paper in the capital market to raise funds, a strategy more suitable for larger BDC operators with a strong financial track record. Another option is convertible debt, a hybrid approach where the debt can be converted into equity at a later date, offering flexibility for both the operator and investors.
c. Mergers and Acquisitions
Recapitalization can also involve mergers and acquisitions. A merger combines two or more companies into a single new entity, integrating their workforce, operations, and assets. Mergers typically aim to increase market share, reduce competition, or expand into new markets. An acquisition occurs when a financially stable institution purchases the shares and assets of another entity in need of capital to enhance its operations. BDC operators can merge with or acquire other BDCs to consolidate resources and increase their capital base. This strategy can also help them achieve economies of scale whilst complying with regulatory requirements.
To pursue this option, any BDC wishing to enter into a merger and/or acquisition transaction must apply to the CBN for approval.12
d. Retained Earnings
Another recapitalization option available to BDC operators is reinvesting their profits back into the business to strengthen their capital base. This is a cost-effective way to recapitalize without diluting ownership or incurring debts. The CBN, under the Guidelines, stipulates that BDCs should not pay dividends to their shareholders until they have met the required minimum capital for their license category.13
Conclusion
The CBN's Guidelines have significantly reshaped the BDC sector, introducing new licensing categories and higher capital requirements. Existing BDC operators must now choose between Tier 1 and Tier 2 licenses and ensure compliance with the revised minimum capital requirement within the extended period - 3rd June 2025. To meet these requirements, BDCs have several recapitalization options, including equity financing, debt financing, mergers and acquisitions, and reinvestment of retained earnings. Each option has its implications, and operators must carefully align their strategies with regulatory guidelines and financial goals. Successful recapitalization will not only ensure compliance but also strengthen the financial stability and operational capacity of BDCs, enabling them to play a more effective role in Nigeria's foreign exchange market.
Footnotes
1. Paragraph 1.4 of the Guidelines
2. Paragraph 2.1 of the Guidelines
3. Paragraph 2.2 of the Guidelines
4. Paragraph 4.0 of the 2015 Guidelines
5. Paragraph 7.0 of the Guidelines
6. Ibid
7. Hope Moses-Ashike, Business Day, "CBN to extend BDCs recapitalisation deadline to June 2025 on low compliance" Available at: CBN to extend BDCs recapitalisation deadline to June 2025 on low compliance - Businessday NG
8. Section 22(5) of CAMA 2020
9. Section 142 (1) CAMA as amended by the Business Facilitation Act 2023
10. Rule 340 of The Securities and Exchange Commission Rules and Regulations, 2013 as amended
11. Paragraph 15(b) of the Guidelines
12. Paragraph 20 of the Guidelines
13. Paragraph 15(d)(ii) of the Guidelines
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
