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#1 » by AYDOT (β528) » February 26th, 2018, 6:44 am

THE directive from the Central Bank of Nigeria (CBN) stopping the payment of dividends to shareholders by Deposit Money Banks (DMBs) and Discount Houses (DHs) with huge bad loans and low capital bases is a welcome approach to the strengthening and protection of the financial services sector.

Concerns have been mounting over the declining assets and solvency of some banks and discount houses in recent years, and the CBN has a responsibility to address them. According to the directive dated January 31, 2018, and signed by the Director, Banking Supervision Department, Mr. Ahmad Abdullahi, the apex bank said it had observed that rather than grow their capital by retaining earnings, some banks pay out a greater proportion of their profits, irrespective of their risk profile and the need to build resilience through adequate capital buffers.
To avoid this risk, the regulator said banks and discount houses with Non-Performing Loans (NPLs) above 10 percent must, henceforth, stop paying dividends to their shareholders. While noting that “globally, retained earnings have been identified as an important source of growing an institution’s capital,” the CBN reminded the banks and discount houses of the advantages of retaining their earnings. These include the fact that the retained earnings will be a source of long-term finance that would be cheaper and easier to raise than external finance. They will also help with the curtailment of financial risks and improve liquidity as well as profitability. The banking regulator further said that rather than take advantage of this beneficial means of capital generation, some of the financial institutions follow the narrow, short-term path that is fraught with risk by ingratiating shareholders via dividend payments.
In addition, the directive said “the DMBs and DHs that meet the minimum capital adequacy ratio but have a CRR (Cash Reserve Ratio) of ‘Above Average’ or an NPL ratio of more than five percent but less than 10 percent, shall have dividend payment ratio of not more than 30 percent.” This CBN intervention is a helpful initiative that should steer our banking and other financial institutions away from the stormy waters many of them are sailing into.
It is instructive that the minimum NPL threshold for banks is five percent. This means that lenders’ bad loans should not exceed five percent of their loan books. But, as the CBN’s Financial System Stability (FSS) report showed in February, 2017, some of the banks far exceeded this threshold. While this may not necessarily call for panic, it clearly indicates that all hands should be on deck to strengthen the fundamentals of the banks in the critical areas of assets and capital planning, adequacy and generation.
Undoubtedly, it is every shareholder’s joy to get good dividends at the end of every financial year. Coming a few days to the release of the 2017 financial year annual reports by commercial banks and discount houses, the CBN directive seems a killjoy. However, the stability and solvency of our financial institutions are fundamental and should be protected by all necessary means.
Currently, the declining assets and bad loans of the banking industry are becoming worrisome. For instance, figures from the Nigeria Deposit Insurance Corporation (NDIC) show that as at September 2017, the banking sector’s NPLs stood at a disturbing 15.18 percent. They had shot up from N1.6 trillion in December 2016 to N2.4trn in September 2017.
Shareholders will certainly not like what the CBN has done. The move, however, is also for their protection as it is in their best interest to keep the institutions stable and profitable on the long run. The directive mirrors the state of affairs in the concerned institutions. The FSS report already referred to measures the soundness of the banks using indicators such as assets quality, capital and income adequacy and the ratio of NPLs.
In almost all these key indices, many Nigerian banks have not performed well. Discount houses are, perhaps, worse. Over the years, the banks’ NPLs have been increasing steadily. For example, in 2016, bad loans amounted to N2.08trn. In the 2015 NDIC Annual Report, banks’ NPLs increased to N648.8bn, from N354.34bn in 2014, an increase of 82.8 percent. There is no doubt that bad loans are dangerous to the health of financial institutions.
The banks and discount houses must, therefore, strive to check their NPLs and keep their capital bases at the required levels so that they can pay dividends to their shareholders. The shareholders should not be the victims of the institutions’ failure to meet the criteria set out by the CBN to pay dividends.
All in all, the decision of the CBN should not be seen as harsh on shareholders. Rather, it is one of the measures rolled out by the regulator to put the financial institutions in good stead and keep them focused on their core mandates. The current economic environment in which commercial banks and discount houses are operating makes it expedient to continuously keep them in check through reasonable regulatory measures.

Written by Aydot

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#2 » by eMade (f) Premium (β29481) » February 26th, 2018, 6:46 am

Its true some banks owe heavily. Its a welcome development
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