Banks and other subsidiaries of holding companies (HoldCos) in the country have been prohibited from acquiring shares in their parent companies.
Also, subsidiaries of such holding companies were barred from acquiring shares of other subsidiaries of their parent holding companies.
The Central Bank of Nigeria (CBN) made these clarifications in a latest circular titled: “Guidelines for Licensing and Regulation of Financial Holding Companies in Nigeria,” obtained at the weekend.
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. The CBN had repealed the universal banking guidelines and introduced a new banking model in 2010 as part of strategic initiatives to reposition the banking system.
The new banking model permits banks and banking groups to either divest non-core banking businesses or to retain same by evolving into a non-operating holding company structure.
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This subsidiary arrangement seeks to ring-fence depositors’ funds from risks inherent in non-core banking businesses.
The 27-page document also noted that for any holding company structure to emerge, there shall be at least, two subsidiaries with the focus of the conglomerate in the financial services sector.
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“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.
But it 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 also warned that no HoldCo should “engage in any transaction or maintain any business relationship with any of its subsidiaries, except such transaction is conducted at arm’s length.… borrow from the Nigerian banking system for the purpose of capitalising itself or any of its subsidiaries.”
It also noted that 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 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. The release added that “director or an insider-related party shall not borrow more than 10 per cent of the holding company’s paid up capital from the subsidiaries within the group, except with the prior approval of the CBN.”