CBN Goes Tough As More Banks Rush For Holding Companies

With more banks applying to operate a holding company structure in the country, the Central Bank of Nigeria (CBN) is coming up with a regulation that will make it difficult for banks and other financial institutions to easily convert to a holding structure, LEADERSHIP learnt.

LEADERSHIP’s findings revealed that more banks had approached the apex bank to operate a holding structure, by following in the footsteps of about eight commercial banks that are either fully operating a holding structure or finalising their holding company structure.

Banks already operating a holding structure include United Bank for Africa (UBA), Access Bank, Guaranty Trust Bank (GTB), First City Monument Bank (FCMB), First Bank and Stanbic IBTC Bank, while Zenith Bank has gotten approval-in-principle to operate a holding structure even as Sterling Bank had equally secured shareholders’ nod for a holding structure.

A credible source in the banking sector disclosed that more banks had approached the apex bank for a Holdco structure, a development CBN is not comfortable with.

This, the source disclosed, may have necessitated the circular issued by the banking industry regulatory body aimed at providing clarity on the requirements of change of the various licence types for banks and Other Financial Institutions (OFIs).

This circular, which was signed by the director of CBN’s financial policy and regulation department, Chibuzo Efobi, was an exposure draft of the guidelines for change of operating licence for banks and other financial institutions (OFIs).

The CBN said the draft guidelines are aimed at providing clarity on the requirements of change of the various licence types for banks and OFIs.

Due to increasing requests from financial institutions to either upgrade or convert to other licence regimes, CBN stressed that this draft guidelines aim to provide clarity to eligible financial institutions on regulatory requirements.

To this end, the apex bank prohibited any eligible bank or OFI applying for conversion or re-categorisation from expanding or reducing its current banking network, pending when the application is determined.

Such financial institutions, CBN added, must not roll out new products and services, carry out any new strategic banking activity, take any business decision after the conversion process had commenced except in line with the bank’s conversion strategy submitted to the CBN, even as they are also not allowed to engage in any banking activity specific to the proposed new licence.

On the eligibility criteria for change of operating licence, the apex bank said the financial institution must be under the supervisory purview of the CBN; has no adverse supervisory report to its application, and satisfies any other condition which it may stipulate from time to time.

However, for conversion, the CBN said, the institution must have been in operation for at least five years.

All banks or OFIs are permitted to change their licence type but the CBN reserves the right to decline a request, it noted, adding that the licensing process would be in two phases – approval-in-principle and final approval.

An interested institution, according to the apex bank, is required to pay a non-refundable application fee as stipulated in the relevant guidelines of the new licence type, a detailed business plan, and information on new investors, among others.

“This exposure draft guidelines can be accessed on our website www.cbn.gov.ng and comments/input should be addressed to the director, Financial Policy and Regulation Department with soft copies to [email protected] within three weeks from the date of this circular,” CBN said.

The apex bank had in 2010 repealed the Universal Banking Guidelines and introduced a new banking model which permits banks/banking groups to retain non-core banking businesses by evolving into a non-operating Holding Company (HoldCo) structure.

Under this model, a non-operating HoldCo is expected to hold equity investment in banks and non-core banking businesses in a subsidiary arrangement. This arrangement seeks to ring-fence depositors’ funds from risks inherent in non-core banking businesses.

According to CBN, “A financial holding company shall be a source of financial strength to the subsidiaries. In serving as a source of financial strength to its subsidiaries, a financial holding company shall maintain financial flexibility and capital- raising capabilities for supporting its subsidiaries. It shall also stand ready to use available resources to augment capital funds of its subsidiaries in periods of financial stress or adversity. ”

The new banking model gives strength to banks to embark on holding company structure, of which about seven banks have, so far, committed to.