CBN bans banks, others from acquiring shares in HoldCos

The Central Bank of Nigeria (CBN) has barred banks and other subsidiaries of holding companies (HoldCos) from acquiring shares in their parent companies in the country.
The apex bank disclosed this in its latest circular entitled: “Guidelines for Licensing and Regulation of Financial Holding Companies in Nigeria,” posted on the website.
Meanwhile, the subsidiaries of such holding companies were prohibited from acquiring shares of other subsidiaries of their parent holding companies.
The apex bank had amended the Universal Banking Guidelines and introduced a New Banking Model in 2010 as part of strategic initiatives to reposition the Nigerian banking system on the path of sustainable viability. The New Banking Model 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.
However, it stated that a subsidiary acting as a nominee is at liberty to invest in any financial holding company on behalf of its clients. It noted that for any holding company structure to emerge, there should be at least, two subsidiaries with the focus of the conglomerate in the financial services sector.
“The CBN may, by order, direct a financial holding company to divest from its banking subsidiary where, in the opinion of the CBN, the financial holding company is being run in a manner that is detrimental to the interest of depositors and/or other stakeholders of the banking subsidiary,” it warned.
The apex bank, however, pointed out that a HoldCo or any of its subsidiaries may, with the prior written approval of the CBN, provide shared services to the group in respect of information and communication technology; facilities (office accommodation including electricity, security and cleaning services in that accommodation) and legal services.
But it stressed that such shared services should be provided at arm’s length, explaining that transactions in respect of such services should get the consent of the board of directors of the subsidiary.
Furthermore, it explained that a HoldCo is prohibited from investment in non-financial firms, establishing, divestment and closure of subsidiaries without the prior written approval of the CBN and/or any other relevant regulatory or supervisory authority, as the case may be, interfere in the day-to-day activities of the subsidiaries; be involved in credit administration and approval process of its subsidiaries, among others.
It warned that, “any bank lending to subsidiaries within its financial holding company group would attract 100 per cent risk weight (if it is fully secured) otherwise it would be removed from the capital of the bank when computing capital adequacy ratio.
“Where the subsidiary fails to declare the expected level of dividend or redeem its obligations arising from the Service Level Agreement, the loan shall be deemed to be a reduction in the capital of the subsidiary in computing its capital adequacy ratio.
“Credit by a banking subsidiary to its holding company would be regarded as a return of capital and deducted from the capital of the bank in computing the bank’s capital adequacy ratio.”