By Arize Nwobu
THE new policy directive by the Central Bank of Nigeria, CBN, on dividend payment by banks is a proactive measure to strengthen and protect the banking industry, consumers and financial system, to ensure a more efficient economy. The policy is in tandem with the Consumer Protection Framework for Banks and Other Financial Institutions regulated by CBN which was released in November 2016 in furtherance of the apex bank’s mandate to promote a stable financial system for a stable macro economy.
The bank is the most important financial intermediary in developing economies where it provides the lion’s share of financial services to lubricate the wheel of the economy through efficient allocation of funds from savers to borrowers. In Nigeria, banks dominate the Nigerian financial system. In advanced economies, project funding is largely through the mechanism of the capital market.
CBN’s new policy on dividend payment relates to the residual dividend policy, whereby company earnings are distributed to shareholders after all of a company obligations have been met and the management has allocated funds for reinvestment into business. According to experts, the residual dividend is ‘’based on the theory that a firm’s optimal distribution policy is a function of the firm’s capital structure, the investment opportunities that the firm has, and the availability and cost of external capital. The firm makes distribution on the residual earnings.’’ It is believed that the residual dividend policy makes the most sense in terms of business operations.
In a letter dated January 31, 2018, CBN, among other highlights, stated that ‘’no bank shall pay dividend on shares until all its preliminary expenses, organisational expenses, share selling commission, brokerage, amount of losses incurred and other capitalised expenses not represented by tangible assets have been completely written off and adequate provisions have been made to the satisfaction of the bank for actual and contingency losses on the risk assets, liabilities, off balance sheet and such unearned income as are deductible there from.’’
The new policy is targeted at banks with high Non-Performing Loans, NPLs, and low Capital Adequacy Ratio, CAR. It aims at facilitating sufficient and adequate capital build up for banks in line with their risk appetite. CBN set limits for risk profile of banks, and try to maintain a balance between risk and rewards for banks which could be driven to perilous limits by the competition.
Retained earnings is a primary source for banks to raise capital, and the rule is, as risk increases, the dividend payout as a percentage of earnings should decrease. But CBN had noted that despite its October 2014 circular, ‘’some institutions pay out a greater proportion of their profits, irrespective of their risk profile and the need to build up resilience through adequate capital buffers.’’ CBN places financial system stability on the front burner, and has been even more agile in that regard after the 2008 global financial crisis. As the Governor, Godwin Emefiele noted: ‘’In that regard, we hope to anchor on two main pillars: managing factors that create liquidity shock and zero tolerance on practices that undermine the health of financial institutions.’’
Non-performing loan is one of the major causes of financial system instability. It poses a major threat to the health of financial institutions as it disrupts bank earnings and reduces available capital and ability to make profit, thereby leading to low capital base which hampers subsequent lending, whereas lending is one of the main functions of Deposit Money Banks.
NPL is defined as ‘’the sum of borrowed money upon which the debtor has not made payments for at least 90 days.” A non-performing loan is either in default or close to being in default, and it has been noted that once a loan is non-performing, the odds that it will be repaid in full are considered to be substantially lower. Such loans may be recovered if they are backed by specific assets, otherwise the lender resorts to other permissible and workable mechanism of recovery.
Contributory factors to NPLs include credit culture of the people, changes in the market/economy, real estate changes, improper assessment by banks, collusive complacency of credit officers and so on. Some analysts have noted that many Nigerian banks will not be able to pay dividends in 2018, based on their capital reserves as well as the proportion of the NPLs. In a press report, a South African research and investment firm, The SBG Securities (Pty), projected that only nine out of the existing 22 banks would be able to pay dividends in 2018.
The latest CBN Financial System Stability Report revealed that ‘’commercial banks in the country experienced deterioration in assets quality at end-December 2016.’’ The deterioration was attributed to the rising inflationary trend, negative GDP growth, and the depreciation of the naira. The report further noted that the banking industry’s non-performing loans ratio rose from N1.678 bn in June to N2.08 trn in 2016, and the ratios of non-performing loans to gross loans increased from 11.7 per cent in June to 14 per cent in December 2016. Furthermore, the report noted that ‘’the ratio of regulatory capital to risk weighted assets decreased by 0.8 per cent
In Greece, NPLs have been noted as the biggest challenge facing the banking sector, and it is top priority for the European Central Bank which has nudged Greek banks to work harder to reduce their high stock of NPLs. According to the Chair of the Supervisory Board of the European Central Bank, Daniele Nouy: ‘’Greek banks must do more and do it faster.’’ Like CBN, Greece also passed new laws to facilitate the ‘work out’ of NPLs, but Nouy noted that ‘’passing laws is just the first step; they also need to be implemented and applied.’’
To ensure strict compliance to the new policy, CBN mandated that ‘’banks shall submit their Board approved dividend payout policy to the Bank before payout of dividend shall be permitted.’’ And to curb non-performing loans, the apex bank stipulated that bank directors who are culprits should either quit or be sacked.
In past years before the promulgation of the Bank and Other Financial Institutions Decree, BOFID, in 1991, many bank directors were notorious for contributing to a greater percentage of non-performing loans which contributed to the collapse of the banking industry in that era. In some instances, such directors had multiple non-performing loans accounts respectively, which was unethical and grossly immoral.