9 September 2010

Nigeria: Banks' Minimum Capital Base Now N10 Billion

Lagos — With as low as N10 billion, you can now get a banking licence - but you will only be able to operate at a regional level. The Central Bank of Nigeria (CBN) yesterday released new guidelines for commercial banks, classifying them into three: Regional, National and International.

Regional banks must have a minimum paid-up capital of N10 billion, while national must have N25 billion and international N50 billion. Since December 2005 when the banking sector consolidation exercise spearheaded by immediate past CBN Governor Prof. Chukwuma Soludo became effective, all commercial banks in Nigeria had a uniform capital of N25 billion.

Already, the apex bank has directed all the existing universal banks to prepare and submit their plans on ensuring compliance with the requirements of the new banking regime not later than 90 days from October 4, 2010.

Given the fact that most of the banks in the country with the exception the eight rescued banks already have over N25 billion in paid-up capital, there is no likelihood that any of the existing banks would operate as a regional bank. Even the potential buyers (both local and international) of the rescued banks - majority of which, are currently being recapitalised, would elect to operate as an international bank given the amount of capital they have at their disposal.

This new banking regime titled "CBN Scope, Conditions & Minimum Standards for Commercial Banks Regulations No. 01, 2010," becomes effective from October 4, 2010.

Specifically, the guidelines, which was signed by the CBN Governor Sanusi Lamido Sanusi, and dated September 7, 2010, stipulates among others, the conditions under which a commercial banking licence may be issued; activities that are permitted and prohibited as well as places where regional, national or international banks can operate.

According to the guidelines, a commercial bank with regional banking authorisation shall be entitled to carry on its banking operations within a minimum of six and a maximum of 12 contagious States of the Federation, lying within not more than two geo-political zones of the Federation including Abuja.

A bank with national banking authorisation shall be entitled to carry on its banking operations within every state of the Federation.

But a bank with international banking authorisation shall be entitled to carry on its banking operations within all states of the Federation as well as establish and maintain offshore banking operations in jurisdictions of its choice, subject to the approval of the CBN and compliance with regulatory requirements of host country.

While explaining that the guidelines were to provide "clarity to the market on the terms on which commercial banking business may be conducted," the banking watchdog said: "In exercise of its powers under section 57(1) Banking and Other Financial Institutions Act Cap. B3 Laws of the Federation of Nigeria 2004, and other enabling powers in that regard, the Governor of the CBN hereby issues the following guidelines with respect to the granting of licences, authorizations and scope of operations for commercial banks."

It listed the business activities that commercial banks would be excluded from to include: insurance underwriting; loss adjusting services, re-insurance services; asset management services; issuing house and capital marketing services; investment in equity or hybrid-equity investments, save and except for the investments permissible under the BOFIA. Also prohibited are proprietary trading, save as permitted by these regulations; provision of financial advisory other than in accordance with provisions in section 3(h); and any other business activities that may be restricted by the CBN from time to time.

The apex bank, however, said that a commercial bank's licence shall confer the operator of the licence, the authority to take deposits and maintain current and saving accounts from natural and legal persons; provide retail banking services, including mortgage products; provide finance and credit facilities; deal in foreign exchange; act as a settlement bank; provide treasury management services as well as custodial services.

Others include provision of financial advisory services incidental to commercial banking, which do not require regulatory filings to the Securities and Exchange Commission (SEC); investment in non-convertible debts instruments and subject to CBN approval enter into derivative transactions; undertake fixed income trading; provide non-interest banking services subject to CBN approval; and "such activities as may be prescribed in writing by the CBN from time to time".

Meanwhile, the CBN in another circular referenced BSD/DIR/GEN/UBM/03/025 titled: "Circular on the Review of the Universal Banking Model" has warned banks that the overall responsibility for ensuring that banking entities comply with stipulated guidelines lie with their board and management.

The circular, which was signed by the CBN Director of Banking Supervision, Samuel Oni, stressed that the monetary authority reserves the right to stipulate additional requirements covering the organisation of banking groups, prior to granting any approval or authorisation.

The banking watchdog however, said that special banks/institutions such as the Primary Mortgage Instit-utions, Microfinance Banks, Non-Interest Banks, Devel-opment Banks and Discount Houses shall continue to perform their specialised roles within the framework of existing guidelines.

Sanusi has often criticised universal banking, which he said had put shareholders' funds of banks at risk and are not making banks concentrate on their areas of core competence. Sanusi, who spoke with THISDAY Board of Editors in an interview a few months ago in Abuja, had said universal banking licence issued to banks in December 22, 2000 was illegal.

He explained why all the 24 banks in the country needed to be categorised, stressing that universal banking was illegal because it was not included in the BOFIA. "If you read BOFIA, it says you can extend banking operations but excluded Insurance and Stock-broking from the type of business, which banks can veer into," he said. Noting that there was a bill for bank's categorisation that never sailed through, Sanusi explained that what CBN was doing now was "to correct the wrong", - just like in other jurisdictions like United States of America, which has also separated banking from propriety trading.

Universal banking in banking parlance, means banks becoming one-stop shops, offering a range of financial services - insurance, mortgage, stock broking, merchant banking, commercial banking and bureau de change - under one group. It was introduced by the former CBN Governor Joseph Sanusi. Justifying the need to phase out universal banking, he said the amount of capital a bank has must be tied to the level of risks it takes.

"It is not only capital differentiation we are talking about. If you are a global bank you must operate international best practices and prepare your accounts in line with the International Financial Reporting Standard," he had explained.

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