Nigerian regulators know something we don’t. Should you be worried?

The Central Bank of Nigeria’s recent exposure draft proposing tighter restrictions on Financial Holding Companies has triggered predictable anxiety across the banking industry.

Some of the proposed provisions, particularly those limiting expansion and imposing stricter capital requirements, have been described as far-reaching and perhaps even excessive. That reaction is understandable. Yet the proposal raises a more interesting question than whether bankers like it or not.

What exactly are Nigerian regulators worried about?

The question is worth asking because this is hardly an isolated intervention. Over the past three years, regulators across the financial sector have displayed an unusual appetite for higher capital requirements, tighter supervision, faster settlements, stricter governance standards, and greater limitations on risk-taking. Viewed individually, each measure can be explained away, but viewed collectively, they begin to look like regulators are seeing something the rest of us are not.

Consider the banking recapitalisation programme. When the CBN announced that retained earnings would not count towards the new minimum capital requirements, many bankers complained that the approach departed from global practice. The criticism appeared reasonable at the time. After all, retained earnings are ordinarily regarded as a legitimate component of shareholder funds. Then reality arrived.

Within two years, Nigerian banks had collectively written off more than N2 trillion in bad loans from retained earnings. In hindsight, the CBN’s position appears less eccentric than it first seemed. It is possible the regulator had concerns about the quality of those earnings and their ability to absorb future shocks. If so, what looked like regulatory stubbornness may have been regulatory foresight.

Now comes the Financial Holding Company proposal. Again, the industry is asking whether the regulator has gone too far. Yet perhaps the more relevant question is what risks the regulator believes are building within increasingly complex banking groups. Are regulators concerned about contagion between banking and non-banking subsidiaries? Are they worried that group structures are becoming too complicated to supervise effectively? Or do they fear that aggressive expansion is masking weaknesses elsewhere in the system?

The CBN is not alone in this slew of regulatory onslaughts. Earlier this year, the Securities and Exchange Commission increased minimum capital requirements for capital market operators. The decision attracted considerable backlash from operators who viewed the requirements as onerous and potentially disruptive. Around the same period, the SEC accelerated the transition to a T+1 settlement regime. Some fund managers and custodians complained about operational challenges and implementation costs.

Again, the question remains, why the urgency? A regulator comfortable with the resilience of market infrastructure rarely pushes for faster settlement. A regulator convinced that all intermediaries are adequately capitalised does not usually demand more capital. Such interventions suggest concern about operational risk, counterparty risk, liquidity risk, or perhaps all three.

The same pattern can be observed in the pension industry. PENCOM recently increased minimum capital requirements for Pension Fund Administrators. Predictably, some operators complained about the burden. Yet pensions represent long-term savings belonging to millions of Nigerians. If regulators believe future economic volatility may increase operational or investment risks, stronger balance sheets become less of a luxury and more of a necessity.

Even outside the financial sector, a similar regulatory instinct is emerging. The Nigerian Insurance Industry has been under persistent pressure to strengthen capitalisation and improve governance standards. The Financial Reporting Council has become more assertive on corporate governance and financial reporting. Anti-money laundering requirements have become stricter across multiple sectors. Digital lenders are facing tighter scrutiny from regulators concerned about consumer protection and data privacy. Crypto-related activities continue to attract cautious oversight despite growing public interest.

Individually, these measures address different issues, and collectively, they point towards a common concern. Perhaps regulators are worried about systemic fragility. Nigeria has spent the last several years navigating a volatile mix of currency devaluation, elevated inflation, rising interest rates, fiscal pressures, and weakening consumer purchasing power. Under such conditions, asset quality can deteriorate quickly. Business models that appear robust during periods of growth can become surprisingly vulnerable. Earnings that look impressive on paper can disappear under stress.

Regulators have access to information that the public does not. They see loan books, liquidity positions, stress tests, settlement failures, concentration risks, governance breaches, and supervisory reports. While investors see annual reports, regulators see what lies behind them. That does not automatically mean regulators are always right. Regulators can overreach. They can impose costs that outweigh benefits. They can occasionally solve yesterday’s problem while creating tomorrow’s. Healthy scepticism remains necessary.

However, it is also possible that many of the interventions attracting criticism today are attempts to address vulnerabilities before they become crises. Regulators rarely tighten rules because they are relaxed about prevailing conditions. More often, they tighten because something is keeping them awake at night.

The real question, therefore, may not be whether Nigerian regulators are becoming more aggressive. The real question is what they are seeing that justifies such aggression. If the last few years have taught us anything, it is that some of those fears may only become visible to the rest of us long after the regulations have already arrived.