Nigerian central bank directive on new banking structure stirs tension in banks

Sanusi Lamido Sanusi Governor Central Bank of Nigeria

A Central Bank of Nigeria (CBN) regulation directing banks to submit compliant plans to transit from the universal banking space to the new system which specifies that they become commercial banks, merchant banks or specialised within 90 days, is causing jitters in the industry.

The regulation, dated October 4, 2010 and released to banks on November 1, 2010, but effective from November 15th, 2010 compels banks currently operating under a universal banking license to submit for approval, a compliant plan approved by their shareholders at a duly convened general meeting in the space of 90 days.

But a number of bankers, most of whom prefer anonymity, said the 90-day deadline is putting banks under undue pressure. They explained that statutorily, banks are required to give a 14-day notice for board meetings and 28-day notice for Extraordinary General Meetings (EGM) of shareholders, making it difficult for them to comply.

Victor Ndukauba, a financial analyst with Afrinvest West Africa, shared the banks’ concern that the 90-day window is insufficient, adding that their reaction to the regulation is understandable, considering the gravity and likely implications of such a key strategic decision on the continued existence of the banks.

Equally disturbing is the back-dating of the regulation, which one of the analysts described as strange, since it leaves banks with only about 60 days instead of 90 to comply with the submission of compliance plans.

The new regulation stated that the CBN, in reviewing the compliance plan submitted by each bank, will consider the fairness of the proposal to all stakeholders, particularly depositors and shareholders. Where the compliance is found to be satisfactory, the apex bank will grant the bank an approval – in principle; in which case, such a bank will begin the restructuring of its operations in conformity with the regulation.

Another analyst observed that although the regulatory guidelines clearly spelt out minimum notice periods required for setting up board meetings, annual general meetings/extraordinary general meetings (AGM/EGMs), the back-dating leaves banks with less than 18 days within which to decide on what direction to take.

According to Babatunde Ojo, head, Analyst Desk, ARM Investment Limited, the real pressure is how soon they can convene the board meeting and EGM to ratify whatever decisions they eventually make. His take is that in reality, only very few people, most likely the board and some other key stakeholders, will make the decision, while the ‘ayes’ will always have their way at the EGM.

The circular stated further that in the event that the CBN considers a compliance plan submitted by a bank unsatisfactory, it will issue the applicant bank a deficiency letter, stating the inadequacies identified in its plan. Such a bank will be expected to submit a revised compliance plan addressing the identified inadequacies in a deficiency letter not later than 120 days from October 4, 2010.

Under the new regulation, where a bank refuses or fails to submit the compliance plan within 90 days from October 4, the CBN will be entitled to vary the conditions of the license to make it conform with the new regulation.

The CBN, in its current law, orders banks that maintain related enterprises other than what is permitted under the new banking structure to take steps to divest their interest completely before April 3, 2012. The provision is that after April 2012, any bank that fails to deliver its existing universal banking license to the CBN will cease to carry on banking business in the country.

But carpeting that stance, Ndukauba noted that such decisions should have been made after extensive consultations with all relevant stakeholders, as a wrong move could prove fatal.

However, speaking on how banks can cope, Ojo, who declared that the banks will have no choice but to come out and let the stakeholders know their intentions said: “For those looking to divest from various subsidiaries, they would be talking to potential buyers, conducting due diligence and valuation of their businesses. They may also be strategising on how to restructure their balance sheet in a way that impending divestment will not devalue the balance sheet unnecessarily,” predicting that most of the banks will re-invest monies from divestment in their core business.”

As tough as the directive appears, Ndukauba is optimistic that the banks can still get around it, adding that banks that want to form a holding company may start looking for those who will sit on the board of the holding company, and may also start drafting the modes of operations.

But in the estimation of other analysts, the market will react accordingly as soon as these pronouncements are made, to factor in the anticipated impact of the divestment in the valuation of the banks.

Boldly assenting to this submission is another financial expert who volunteered that “if a bank whose subsidiaries contribute a significant proportion to its bottom line numbers decides to sell off such subsidiaries, the market will automatically discount that from the valuation of the bank.”

Cited as “Regulation of the Scope of Banking Activities and Ancillary Matters”, the CBN document said the compliant plan will contain the type of banking license to operate detailed proposal on how the bank intends to comply with the provision of the regulation, including business justification for the proposed approach. Credits: Business Day Nigeria

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