Tag: cbn

INVESTORS and shareholders’ group are spoiling for war over what they described as the unpalatable effects of some policies against their business interests, especially the cash reserve ratio by the Central Bank of Nigeria (CBN), The Nation can authoritatively report.

It would be recalled that the CBN the Monetary Policy Committee MPC had, at its 98th meeting in Abuja in November last, devalued the naira from N155 to N168 against the dollar, increased Monetary Policy Rate from 12 to 13 per cent, and also increased the private sector Cash Reserve Ratio from 15 to 20 per cent, among other policy decisions.

Speaking on behalf of the Independent Shareholders Association of Nigeria (ISAN), in Lagos, its National Coordinator, Sir Sunny Nwosu condemned in strong terms the biting effect of the policy. Raising a poser, Nwosu asked: “Why do you want to punish investors? Unfortunately, most of the issues that have been discussed at the Annual General Meeting those who are representing the CBN do not discuss and therefore the governor will not be able to feel the pulse of the investors.

“It is very important that whoever is representing the CBN must report exactly what happens at the AGM. And let me place it record here that henceforth any AGM we attend, we are not going to be violent, and we are going to be very civil protest. Anywhere they mention CBN we will give them thumbs down.”

Added to that, Nwosu said is the introduction of a policy by the Financial Reporting Council of Nigeria. “FRC came up with a gazette that for every financial inclusion by banks or companies will attract N5billion. I spoke with the Minister of Trade and Investment, I said, you say you’re looking for investment in one hand and driving away investors in the other hand. We must speak out.”

“The latest one is the corporate governance framework. I have never seen a place where exposure document stays about one month. However, we cannot continue to fold our hands. All companies, banks, everybody must contribute to the exposure document. We have about 7-8 corporate governance rules in this country today. Everybody shareholder must be enlightened to make a contribution to every regulations fashioned out by the regulators. That is the way to go,” he stressed.

Echoing similar sentiments, the President, Association for the Advancement of Rights of Nigerian Shareholders, Dr. Farouk Umar observed that the CRR policy was counterproductive. As far as he is concerned, the CBN is just warehousing money with complete disregard for the progressive and development of the economy. “First Bank for instance has over N570billion with the CBN, which is not earning any interest. We must make sure that we don’t give our monies to bank and somebody is taking the profit. Regarding the CRR, 75 per cent is quite huge. We were told by the CBN that they took that decision because politicians were borrowing the money but elections are over. Why are they still keeping our money? They should give us our money back. I don’t even believe the CBN understand this whole concept of organic growth. How do you define public sector fund? First Bank, for example, was making over N40 billion on COT alone that is no more. We should collectively write a memo to the National Assembly to protest this. This has to stop.”

To Brigadier Emmanuel Ikwue (rtd), Chairman, Coordinating Committee of the Zonal Shareholders’ Association, a proactive action is required to whip the CBN to order.  “Most investors are groaning in pains. CBN policies have been stifling investors and shareholders. This does not bode well for the economy. We may have to stage a protest match from Lagos to Daura, in Katsina to make our grievances known to the President-elect before we die in poverty,” he lamented.

Mr. Boniface Okezie, National Chairman Progressive Shareholders Association of Nigeria (PSAN) and President of Nigerian Shareholders Solidarity Association ((NISSA) Chief Timothy Adesanya are also on the same page with other shareholders’ group.

According to the duo, there is an urgent need to get things right in the interest of the economy.

But the CBN said the policy decisions were meant to save the economy from a precarious situation of a sliding naira and excess banking sector liquidity.

Justifying the need for the introduction of the policy at the time, the Deputy Governor, Corporate Services, Mr. Bayo Adelabu, told members of the House of Representatives Committee on Banking and Currency that: “The decision of the MPC was the best we could do under the circumstance the economy is presently. We noticed that a lot of things contributed to the pressure on the naira. Firstly is the declining revenue from oil.

“Our source of revenue in this country is just oil and when oil price declined by about 25 per cent in the last one month, we expected that there would be pressure on the foreign reserves. We believe that the pressure on the naira, apart from the declining oil prices, is also as a result of the liquidity in the banking industry whereby a lot of frivolous demands are being made by customers.”

“The only thing to do to stop bank from granting loans to these customers is to mop up more of the monies available to the banks. That was why we increased the CRR on private sector deposits. We believe it will reduce the pressure on the foreign reserves.”

The Central Bank of Nigeria (CBN) has adopted policies to protect depositors’ funds in banks with Holding Company (HoldCo) structure. Some banks have embraced the arrangement which comes with challenges, such as, reduction of transaction costs, writes COLLINS NWEZE.

The banking sector has since the 2009 reforms been under-going restructuring. This inludes the overhaul of their risk management structures; 10-year tenure for Chief Executive Officers and repeal of universal banking practice which led to some adopting the Holding Company (HoldCo) structure.

A HoldCo is a corporation formed for the purpose of holding a controlling interest in several companies. It enables a corporation to diversify its investments, manage other firms and contribute to the growth of companies in different sectors.

CBN took this step to ensure that banks do not abuse lending privileges presented by the structure. Its action followed the setting aside of universal banking in 2010, thereby giving banks the option to either divest all their non-banking subsidiaries and become pure commercial banks or form a HoldCo.

The order is in compliance with the CBN’s Regulation on the Scope of Banking Activities & Ancillary Matters, No. 3, 2010. It requires the separation of commercial banking business from other financial services businesses.

CBN Director, Banking Supervision, Tokunbo Martins, said restrictions have been placed on banks’ lending to their HoldCos to protect shareholders’ funds from insider abuse.

She said any bank that violates the rule will have the loaned funds deducted from its shareholders’ funds as return capital.

Although the Bank and Other Financial Institutions Act (BOFIA) mandated the banks to adopt the structure, there is also need to monitor their operations to forestall abuse.

 

HoldCos

First Bank of Nigeria, Stanbic IBTC Bank, United Bank for Africa and First City Monument Bank have adopted the HoldCo structure.

Managing Director, First Bank of Nigeria Limited, Bisi Onasanya, said the new structure will present a better deal for its shareholders, especially as they got equal proportion of their shares in the FBN Holdings. He said the bank has off-loaded First Registrars and some other subsidiaries, while all the existing subsidiaries, including First Bank, have become a subsidiary of the First Bank of Nigeria Holdings (FBNH).

Chief Executive Officer, Stanbic IBTC Holdings, Sola David-Borha, said the initiative would consolidate the strengths and expertise of different business unit and enhance the group’s ability to drive future growth.

“The HoldCo would guarantee significant benefits to shareholders, employees and customers. Under the new structure, Stanbic IBTC will be averaging the global network of Standard Bank Group, Africa’s biggest banking group in terms of assets and earnings, to which Stanbic IBTC belongs,” she said.

David-Borha also said the HoldCo structure is consistent with the group-wide approach of the Standard Bank Group, which would allow the various subsidiaries to call on the group-wide expertise of the parent model.

She noted that the HoldCo structure will ensure that commercial banks’ retail depositors are not exposed to the risks associated with the non-banking activities of the remainder of the group, and that all customers of Stanbic IBTC and its subsidiaries will continue to enjoy the services currently provided through the other subsidiaries by keeping all existing lines of business. She said “the employee base would not be affected adversely.”

Managing Director, United Bank for Africa, Phillips Oduoza, said given the bank’s exponential growth and investments across Africa, it is beginning to derive significant values from these investments hence the decision to have a HoldCo. That decision, he said, will keep its entire bank and non-bank subsidiaries within the group.

Chairman FCMB, Jonathan Long, said the decision to form a holding company was in line with CBN’s directive to banks to separate the non-banking subsidiaries from commercial bank, stating that the bank decided to re-organise via scheme of arrangement, the non banking businesses within a holding company arrangement that would deliver and unlock value to the shareholders.

He explained that the new arrangement will see the migration of shareholders of FCMB to become shareholders of the Holdco, via a share for share exchange; sale of other disposable subsidiaries and transfer of permissible non-banking subsidiaries and investments from the bank to the Holdco.

 

Lending by HoldCos

Martins said should the HoldCos breach single obligor limits without the prior approval of the CBN, such loans will be regarded as impairment to capital, or deducted from the lender’s capital base.

For purposes of credit transactions, the rule covers banks’ related parties, listed as financial holding company (FHC), and other subsidiaries within the group within the HoldCo structure.

Also, credit transactions by the bank within the group would be treated as FHC lending to a bank within its group. The bank should treat the loan as a liability but credit by a bank to its FHC would be regarded as a return of capital and deducted from the capital of the lender in computing its capital adequacy.

However, bank lending to subsidiaries within its group especially where the credit is fully secured, would be assigned a risk weight of 100 per cent, otherwise it would be deducted from the capital when computing capital adequacy.

The CBN said review of risk weights assigned to some identified exposures is without prejudice to the risk management control functions put in place by banks to mitigate credit concentration risks. It is also in line with its risk-based supervisory agenda.

Martins said the recent crisis in the Nigerian banking industry highlighted several weaknesses in the system, key of which was the excessive concentration of credit in the asset portfolios of banks.

“Past experience revealed concentrations across products, business lines, and legal entities. The management of concentrations, or pools of exposures, whose collective performance may potentially affect a bank negatively, needs to be properly managed through the establishment of sound risk management processes,” she said.

 

Hurdles

The HoldCo structure adopted by some banks faces adverse tax implications, especially, excess dividend tax, tax experts have warned. Taiwo Oyedele, a chartered accountant said based on the Nigerian tax law, where the dividend paid by a company is higher than its taxable profit, the excess dividend will be subjected to 30 per cent tax.

He explained that should a HoldCo receive dividend from its bank subsidiary, and then redistributes the dividend, such dividend will be subjected to 30 per cent excess dividend tax, not withstanding that the subsidiary that earned the profit had paid 30 per cent income tax.

Also, withholding tax at 10 per cent is always deducted before distributing the profit to the HoldCo. He said banks had previously faced similar challenges under the universal banking model on their exempt income.

“Where tax exempt income has been excluded from the determination of taxable profit but forms part of the distributable profit available for dividend, this will result in the dividend paid being higher than the taxable profit,” he said.

Oyedele said the problem will become more pronounced under the HoldCo structure since there will be at least one company between the bank and the shareholders.

Analysts insist that banks that have adopted the HoldCo structure will have to contend with burden of double taxation.

The believe that the subsidiaries of banks that adopted the structure have to pay taxes as well as the quoted company. Aside challenge of taxation the structure is in the interest of all stakeholders. For him, the HoldCo structure will increase earnings for investors and is also in line with CBN’s enhanced emphasis on transparency and accountability.

But the management of FBN Holdings Plc said the tax challenge has been handled.

CEO of FBN Holdings, Bello Maccido, said the HoldCos at inception faced a major concern over possible interpretation of existing tax statutes that would lead to the double taxation of dividends. There was also a concern about the magnitude of transaction costs that would be incurred by the banks in responding to the change in regulations.

“It was therefore necessary for HoldCos to seek mitigation of some of these costs through waivers and concessions from the regulatory authorities. It was very clear that without government’s intervention, the companies would have faced possible challenges in this regard,” he said.

Maccido said the Coordinating Minister for the Economy, Dr. Ngozi Okonjo-Iweala in concert with the Federal Inland Revenue Service (FIRS) team was instrumental to ensuring that tax issues were heard and resolved in good time.

He noted that the Securities & Exchange Commission (SEC), Nigerian Stock Exchange (NSE) and Central Securities Clearing System (CSCS) were equally very receptive to discussions on ‘reduction of transaction costs’ for bank HoldCos.

However, Chukwuemeka Eze, a tax expert said taxing dividend from HoldCos amounts to overkill. He said it is only when the dividend is reinvested or transmitted into further ventures that it should be taxed. “The dividend can only be taxed if it is reinvested at a second venture, otherwise, it amounts to double taxation. The position of the law is that it is only when the money is reinvested, that it should be subjected to further taxation,” he said.

 

Shareholders’ views

Coordinator, Progressive Shareholders Association of Nigeria (PSAN), Boniface Okezie, said the HoldCo structure remains a good arrangement. He said the shareholders have no choice because they cannot go against the will of the CBN, but can only watch to see how the structure pays off.

“I don’t have any problem with the structure once there is food on my table. We have embraced the structure provided our dividends are paid and corporate governance is adhered to,” he said.

National coordinator of Nigerian Shareholders Solidarity Association (NSSA) Sir Sunny Nwosu said the structure will protect shareholders’ value and lead to increased capital market valuations.  Also, Farouk Umar, President, Association for the Advancement of the Rights of Nigerian Shareholders (AARN) said the restructuring will result in greater value and provide each entity with easier access to long term capital to finance growth.