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Banks with huge bad loans and dividend’s payment



The Central Bank of Nigeria (CBN) was reported the other day to have barred banks with huge bad loans from paying dividends. According to the report, the CBN stated that it had observed that some banks, not minding their worsening risk profile as a result of their huge non-performing loans, pay out a greater proportion of their profits as dividends rather than boost their capital base by ploughing back more of the profits. The apex bank found such a situation a threat to capital adequacy and growth of the institutions. Therefore, the purpose of its letter of January 31, 2018 titled “Internal Capital Generation and Dividend Payout Ratio” to deposit money banks (DMBs) and discount houses (DHs) is to facilitate sufficient and adequate capital build-up for the institutions in tandem with their risk appetite.

There is the need to appreciate that what the apex regulator did is to specify regulatory dividend payment policies/conditionalities for deposit money banks (DMBs) and discount houses (DHs), as follows: one, “Any DMB or DH that does not meet the minimum capital adequacy ratio shall not be allowed to pay dividend”; two, “DMBs and DHs that have a Composite Risk Rating (CRR) of “High” or a Non-Performing Loan (NPL) ratio of above 10% shall not be allowed to pay dividend”; three, “DMBs and DHs that meet the minimum capital adequacy ratio but have a CRR of “Above Average” or an NPL ratio of more than 5% but less than 10% shall have dividend payout ratio of not more than 30%”; four, “DMBs and DHs that have capital adequacy ratio of at least 3% above the minimum requirement, CRR of “Low” and NPL ratio of more than 5% but less than 10%, shall have dividend payout ratio of not more than 75% of profit after tax”; five, “There shall be no regulatory restriction on dividend payout for DMBs and DHs that meet the minimum capital adequacy ratio, have CRR of “Low” or “moderate” and an NPL ratio of not more than 5%. However, it is expected that the Board of such institutions will recommend payouts based on effective risk assessment and economic realities”; six, “No DMB or DH shall be allowed to pay dividend out of reserves”; and seven, “Banks shall submit their Board approved dividend payout policy to the CBN before the payment of dividend shall be permitted”. The policies which became effective January 31, 2018 were issued under the signature of Ahmad Abdullahi, Director, Banking Supervision Department of CBN.

It is instructive to note that this is not the first time CBN is specifying policies to guide DMBs and DHs on dividend payout. Its circular of October 8, 2014 was on the subject. The latest one of January 31, 2018 merely incorporated some additions and amendments based on prevailing realities in the operating environment.

In providing the regulatory policy, CBN seeks compliance, by DMBs and DHs, with Section 16 (1) of Banks and Other Financial Institutions Act (BOFIA), 2004, as amended (and the Prudential Guidelines for DMBs) which states that “Every Bank shall maintain a reserve fund and shall, out of its net profits for each year (after due provision for taxation) and before any dividend is declared, where the amount of the reserve fund is-: a) less than the paid-up share capital, transfer to the reserve fund a sum equal to but not less than thirty per cent of net profits; or b) equal to or in excess of the paid-up share capital, transfer to the reserve fund a sum equal to but not less than fifteen per cent of the net profit; Provided that no transfer under this subsection shall be made until all identifiable losses have been made good”.

It is from section 16(3) of BOFIA that CBN derives its power to vary the proportion of net profits banks can make to the reserve fund each year. That section provides that: “Notwithstanding paragraphs (a) and (b) of subsection (1) of this section, the Bank may, from time to time specify a different proportion of the net profits of each year, being either lesser or greater than the proportion specified in paragraphs (a) and (b) to be transferred to the reserve fund of each bank for the purpose of ensuring that the amount of reserve fund of such bank is sufficient for the purpose of its business and adequate in relation to its liabilities”.
Ultimately, CBN is pursuing compliance with section 17(1) of BOFIA which stipulates that “No bank shall pay dividend on its shares until-: (a) all its preliminary expenses, organisational expenses, shares selling commission, brokerage, amount of losses incurred and other capitalised expenses not represented by tangible assets have been completely written off; (b) adequate provisions have been made to the satisfaction of the Bank for actual and contingent losses on the risk assets, liabilities, off balance sheet commitments and such unearned incomes as are derivable therefrom; (c) it has complied with any capital ratio requirement as specified by the Bank pursuant to section 13(1) of this Act”.

As it were, it is no longer news that the situation of non-performing credits in banks is getting worse every passing year. The annual growth rate has become worrisome. Non-performing loans end up eroding profits and share capitals of banks. Overtime, an affected bank risks non-compliance with CBN’s regulatory capital adequacy ratio which, at present is from 10%, depending on the category of bank.

That CBN has taken proactive steps to review and update its earlier circular is a welcome and commendable development that will help in no small measure to save the banking industry and indeed, the economy from a foreseeable crisis.

If the CBN’s dividend payout policies are complied with, they will encourage aggressive debt recovery by banks, reduction in the quantum of non-performing credits and growth in banks’ capital funds. They are likely to cause: a thorough review of banks’ credit administration and management policies and practices; minimization of credit risks, improvement in the safety of the banks and protection of depositors’ funds. They may also prevent a return to the sad bad-loan-in-banks era that brought about the creation of the Asset Management Corporation of Nigeria (AMCON) as an undertaker for banks’ bad loans. Consequently, it is advised that the target institutions should comply with regulatory provisions on payment of dividends and retention of profits for capital adequacy, sufficiency and growth so that their safety, soundness, growth and sustainability will not be jeopardized. The bigger challenge, of course, rests with CBN that should monitor, supervise and ensure zero tolerance for non-compliance.

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