The Central Bank of Nigeria (CBN) has published an exposure draft of its revised guidelines for the licensing and regulation of Financial Holding Companies (FHCs) in the country.
The current original guidelines were issued in August 2014 as Nigerian banking groups were transiting from universal banking toward holding-company structures.
The apex bank stated that over the past years of the implementation of the old guidelines thereby creating gaps in terms of uneven compliance, overhead inflation, and unintended governance practices, thereby necessitating the need for revision of the old guidelines to close the operational gaps.
One of the structural changes in the draft guidelines is that where foreign subsidiaries sit within the group under the old guidelines and Nigerian banks within the group could directly hold equity in offshore subsidiaries, the draft guidelines provide that it is now the HoldCo itself (or an intermediate HoldCo) that must hold foreign subsidiaries directly.
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Similarly, the draft regulatory framework provides for a maximum of two hierarchies which the CBN must approve, namely a parent HoldCo and one intermediate HoldCo for offshore holdings.
This implies that HoldCos in the country with strong Pan-African operational networks will need to review whether their offshore ownership chains comply with this proposed guidelines, and Nigerian bank subsidiary currently holding foreign banking licences in its own name may need to restructure by transferring those holdings up to the parent or intermediate HoldCo.
The draft guidelines also requires that a HoldCo must maintain minimum regulatory capital that exceeds the combined minimum regulatory capital of all its subsidiaries by at least 20% and that only paid-in capital counts — that is, paid-up share capital plus share premium as retained earnings, revaluation reserves, and other components of equity do not qualify.
On shared services under the draft regulatory guidelines, HoldCos that had been providing a range of centralised services to their subsidiaries, such as human resources, risk management, compliance, internal audit, legal, IT, and facilities were also given some ceilings to reduce duplication and costs.
Based on the provisions, the only services a HoldCo can provide to its subsidiaries with the approval of the apex bank are facilities (office accommodation, electricity, security, cleaning), legal services, and ICT services. Risk management, compliance, internal audit, and company secretariat are not part of the approved list.
In addition, every shared services arrangement must be conducted separately and approved by the boards of both the HoldCo and the subsidiary, and subjected to a value-for-money audit every two years.
This is even as the draft guidelines also tightened corporate governance for the HoldCos as a director of a HoldCo can only sit on the board of *one* subsidiary within the group — not multiple. The collective representation of HoldCo directors on any subsidiary board cannot exceed 20% of that board’s total membership.
This implies that no Holdco staff can serve as a non-executive director at the FHC or any of its subsidiaries and cross-attendance of board or management meetings between the HoldCo and its subsidiaries is prohibited.
The draft regulatory framework introduces punitive capital measures for loans f from subsidiaries to the HoldCo, clarifying any loan a banking subsidiary makes to its parent HoldCo as a return of capital and must be fully deducted from the bank’s capital when computing its Capital Adequacy Ratio (CAR).
It also provides that loans to other affiliates within a HoldCo will attract a 100% risk weight if secured, and a full capital deduction if unsecured just as HoldCo is also prohibited from borrowing on the back of subsidiary guarantees, except where the loan is secured by dividend income or service level agreement payments.
Also, the draft framework sets out a two-stage licensing process, namely the application fee for Approval-in-Principle which is put at N20 million and non-refundable, and the final licence fee of N100 million, payable via RTGS to a CBN-designated account.
For non-bank investors setting up a new HoldCo, 100% of the combined minimum regulatory capital of all proposed subsidiaries, plus a 20% mark-up, must be deposited with the CBN before the licence will be considered and granted if all regulatory requirements are met by the promoters.
