By Babajide Komolafe
The   Central Bank of Nigeria, CBN, made a major and unprecedented policy summersault when it released a new prudential guidelines less than two months after the previous one was released.

Sanusi

The new guidelines, released July 9th and effective from July 1st,  was in every ramification a watered down version of the one released in May, lacking most of the restrictions and regulations which would have curtailed the excesses and malpractices that have bedeviled the industry for long.

Top on the list are:  disclosure of executive compensation and bonuses; the limit on credit to directors  and significant shareholders; and the general provisioning of one per cent for all loans.  As a result the July guidelines are less voluminous, containing 66 pages as against 76 pages of the May guidelines. Conspicuously missing from the July guidelines and reflecting the backpedalling of the apex bank were some 38 subsections contained in the May guidelines.  And perhaps to ensure this omissions escape the prying eyes of the stakeholders, the new guidelines were quietly issued via a short worded circular signed by the  Director of Banking Supervision  CBN, Mr. Samuel Oni.

The circular titled new prudential guidelines for deposit money banks stated, “We forward herewith, the final copy of the approved prudential guidelines for deposit money banks in Nigeria. The document which details new prudential guidelines and loan loss provisioning requirements takes effect from July, 2010.  Banks are required to be guided by the guidelines. Please note that this document supercedes the one earlier issued dated May 5, 2010.”
The CBN is not reputed for giving in to banks on policy issues, no, not so easily and quickly as to withdraw a major policy document. But that is what happened in the case of the new prudential guidelines. All the subsections omitted from the new document indicated the CBN bowed to pressures from the banks, especially the majority shareholders, majority of whom are politicians and retired senior military personnel, and who the omitted restrictions would have severely affected.

It would be recalled that Financial Vanguard had exclusively reported that while some banks had written to the CBN to protest their opposition to some sections of the May guidelines some chief executives actually met privately with the CBN to register their reservations. The banks it was gathered had complained that some sections of the guidelines were impracticable and in response the apex bank agreed to withdraw the document for review.

Even the banks would have been surprised at the extent to which the document was reviewed and the number of sections omitted from the new one.

The following are most contentious sections of the May prudential guidelines deleted  by the apex bank in the July guidelines.

Section 3.5 Limit on exposures to directors and significant shareholders: (a) A significant shareholding is defined as a holding of at least 5% (individually or in aggregate) of bank’s equity. (b) A director or a significant shareholder should not borrow more than 1% of a bank’s share capital except with the prior approval of the CBN.

(c) The maximum credit to all insiders should not exceed 10% of share capital. (d) For the purpose of 3.5(b) and 3.5(c), the share capital shall be made up of paid up share capital and share premium.
(e) Insiders include directors, significant shareholders and employees. The term “director” includes director’s wife, husband, father, mother, brother, sister, son, daughter and their spouses.
(f) The provisions of this section supersede the provisions of circular BSD/9/2004 on large exposure and connected lending.

Section  4.3 Disclosure of Executive Directors’ compensations, bonuses, profit sharing arrangements and share options: (a) All compensations and bonuses paid or payable to executive directors of all banks including profit sharing arrangements and share options should be fully disclosed in the annual audited financial statements; (b) All banks are also required to disclose any profit sharing arrangements and share options with the bases for their computations in their audited financial statements.

If there are no such arrangements, a statement declaration should be made in the financial statements in this respect;(c) All compensation including bonuses, profit sharing and share options should be disclosed as a separate component of operating expenses. (d) Practices whereby executive compensations including bonuses and profit sharing arrangements and share options are charged to inappropriate accounts are prohibited. (e) The disclosure requirements in 4.3(a) to 4.3(d) also relate to staff bonuses,
profit sharing arrangements and share options.

15.4 General Provision : Banks should make general loan loss provisions of at least 2% of loan portfolio not specifically provided for, in addition to specific provisions, to provide against the unidentified losses which are known to exist in any portfolio using a systematic method which should be consistently followed from period to period.

3.14 Payment of dividend: (a) No bank shall pay dividend on its shares until: (i) all its preliminary expenses, organizational expenses, shares selling commission, brokerage, amount of losses incurred and
other capitalized expenses not represented by tangible assets have been completely written off;

(ii) adequate provisions have been made to the satisfaction of the CBN for actual and contingent losses on risk assets, liabilities, off balance sheet commitments and such unearned incomes as are deliverable there from; (iii) it has complied with all capital ratio requirement as specified by the CBN.

Others include section 3.3- Limit on portfolio concentration; section -Section 3.7 Limit on contingent liabilities;   section 3.12- Linkage between financial indicators of the borrower and total exposure from financial institutions;  section  3.15- Limit of Investment in fixed assets section  8.3- Personal Guarantees ( by owners of SMEs); and section 8.4- Leverage ratio for SME. In addition to these the apex bank deleted the all the sections on Regulations for Auto Financing,   Regulations for Credit    Cards and Regulations for Housing Finance.

While the circular announcing the new prudential. Guidelines was silent on the rationale for the policy reversal, stakeholders especially minority shareholders and bank depositors , definitely deserve an explanation from the apex bank to assure them the security of the funds and investments  is not been sacrificed to please special interest groups  in the  banking industry.