Banks Under Regulatory Forbearance Face CBN Restrictions: What You Need to Know

The Central Bank of Nigeria (CBN) has released a directive mandating banks operating under regulatory forbearance to cease dividend payments, postpone bonuses for executives, and stop investments in foreign subsidiaries or offshore ventures. This suspension will remain effective until the CBN independently assesses the capital adequacy of the banks. The CBN states that this action aims to ensure that banks retain internal resources to fulfill current and future obligations while facilitating the orderly restoration of sound prudential positions.

This directive pertains to banks that have received regulatory forbearance, which permits them to function with certain relaxations on prudential requirements. The CBN has been closely monitoring these banks and has now opted to tighten its oversight of their operations. The suspension of dividend payments, executive bonuses, and foreign investments is anticipated to assist banks in conserving capital and concentrating on enhancing their financial stability.

Implications for the Banking Sector

The CBN’s action is expected to have considerable implications for the banking sector, especially in the context of foreign exchange volatility, inflation, and exposure to high-risk sectors. Banks will need to emphasize capital preservation and prudent risk management to ensure their long-term viability. The International Monetary Fund (IMF) had previously urged the CBN to retract the regulatory forbearance granted to Deposit Money Banks during the COVID-19 pandemic.

Reports indicate that the CBN’s directive is part of a wider initiative to fortify the banking sector and avert excessive risk-taking. In April 2022, the CBN extended interest rate forbearance on loans for an additional year, and in September 2023, it prohibited banks from utilizing gains from foreign exchange revaluation for dividends or other capital expenditures. The latest directive broadens these restrictions, not only limiting how profits can be utilized but also specifying who may receive them and where they can be invested.

Industry Responses and Future outlooks

The directive issued by the CBN has been positively received by numerous industry participants, who regard it as an essential measure to uphold the stability of the banking sector. Nevertheless, certain banks may encounter difficulties in executing the directive, especially those with considerable foreign investments or obligations related to dividend payments. As reported by Bloomberg, the CBN’s action is anticipated to influence the profitability of banks and their capacity to attract investors. However, the primary focus of the regulator is to ensure that banks sustain sufficient capital buffers to withstand potential shocks and bolster the overall stability of the financial system.

In a statement, the CBN remarked, “This supervisory measure is designed to guarantee that internal resources are preserved to fulfill current and future obligations and to facilitate the orderly restoration of sound prudential positions.” The regulator is expected to persist in closely monitoring the banking sector and to take additional measures as required to uphold financial stability. The CBN’s directive aims to strengthen the banking sector by promoting prudent risk management and capital preservation, ultimately ensuring the stability of the financial system.