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CBN to Holding Companies: Maintain controlling interest in subsidiaries or lose license

By on April 21, 2014

Any financial Holding Company (HoldCo) that loses controlling interests in its banking subsidiaries will have its license cancelled by the Central Bank of Nigeria (CBN).

This is one of the highlights of new restrictions imposed on HoldCos in the financial sector in order to protect depositors’ funds in the banking industry.

In an Exposure Draft on Guidelines for Licensing and Regulation of Financial Holding companies in Nigeria, CBN also banned HoldCos from participating in the loan administration or approval process of their banking subsidiaries.

Following the banking crisis occasioned by poor corporate governance and abuse of depositors’ funds for funding investment activities of their subsidiaries, CBN cancelled the universal banking model and replaced it with holding company model. The purpose was to make banks operate on stand-alone basis such that depositors’ funds will be used solely for banking activities as stipulated by regulatory requirements.

Consequently, banks were given till 2012 to either divest from their non bank subsidiaries or evolve into a holding company in order to maintain their ownership.

They were also to return their universal banking license for new license. Out of the 24 banks, five banks  namely First City Monument Bank (FCMB) Plc, First Bank of Nigeria (FBN) Plc, Stanbic IBTC Bank Plc, United Bank for Africa (UBA) Plc and Union Bank of Nigeria (UBN) Plc adopted the HoldCo structure, while Access Bank Plc, Diamond Bank Plc, Fidelity Bank Plc, Guaranty Trust Bank (GTBank) Plc, Skye Bank Plc, Zenith Bank and Wema Bank chose to divest from non-banking subsidiaries.

The guidelines issued by the CBN last week defined a financial holding company as a “a company whose principal object includes the business of a holding company set up for the purpose of making and managing (for its own account) equity investment in two or more companies, being its subsidiaries, engaged in the provision of financial services, one of which must be a bank.”

It stated that, “For any financial holding company structure to emerge there shall be at least, two subsidiaries and the focus of the conglomerate shall be in the financial services sector.”

The apex bank however insists that the HoldCo must always have controlling interest   in these subsidiaries otherwise its license would be cancelled.

The guidelines stated, “Where a financial holding company loses its Controlling Interest in the only banking subsidiary in the group, for a period that exceeds six consecutive months, the financial holding company shall cease to be a financial holding company and will be required to return its licence to the Central Bank of Nigeria for cancellation.

“Where a financial holding company that has only two subsidiaries loses its Controlling Interest in either of the subsidiaries, for a period that exceeds six consecutive months, the financial holding company shall cease to be a financial holding company and will be required to return its licence to the Central Bank of Nigeria for cancellation.

For the purpose of these Guidelines, ‘control’ is gauged by the holding of more than 50 per cent of the voting shares of the subsidiary.”

The guidelines also banned HoldCos from direct and indirect involvement in the day to day running of their subsidiaries. It stated: “No financial holding company shall: Arrogate to itself any of the powers or functions of the Board of Directors, or internal management responsibilities and obligations of any of its subsidiaries or associates of any such subsidiary; Interfere in the day-to-day activities of the subsidiaries;  Be involved in credit administration and approval process of its subsidiaries;  Require its subsidiaries (including any organ, servant, employee, staff, manager, officer or director thereof) to take directives or act on the instructions of the financial holding company in its decision making process, or in relation to the conduct of its business in any way whatsoever.

Have any of its officers or employees, while in the employment of the financial holding company, work for any subsidiary, except employees engaged in shared services arrangements; vi.

Engage the services of any employee of any of its subsidiaries; Enter into any technical or management service contract with any of its subsidiaries except as stipulated in Section 5.2 of this Guidelines;   Purchase/dispose assets from/to its subsidiaries without the prior written approval of the CBN and any other relevant regulator.”

The guidelines also restrict financial dealings between HoldCos and their subsidiaries.

It stated, “No financial holding company shall: Engage in any transaction or maintain any business relationship with any of its subsidiaries, except such transaction is conducted at arms- length;  Borrow from the Nigerian banking system for the purpose of capitalizing itself or any of its subsidiaries;  Obtain a loan based on the guarantee of its banking subsidiary/associate, except where the loan is secured by dividend income or Service Level Agreements by the financial holding company for services to its banking subsidiaries.

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; 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.”

 

 

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