The Central Bank of Nigeria (CBN) has issued a directive on June 13, 2025, to all banks operating under regulatory forbearance regimes related to credit exposures and Single Obligor Limits (SOL).
The directive imposes a temporary suspension of dividend payments to shareholders, bonuses to directors and senior management, and investments in foreign subsidiaries or new offshore ventures.
This measure aims to strengthen the capital buffers and resilience of Nigerian banks, ensuring they retain internal resources to meet obligations and restore sound prudential positions.
The suspension will remain in effect until the banks fully exit forbearance and their capital adequacy and provisioning levels are independently verified as compliant with regulatory standards.
Analysis of the Directive
1. Purpose and Context:
The CBN’s action is part of its ongoing efforts to enhance the stability and resilience of the Nigerian banking sector, which has faced challenges such as high non-performing loans, currency volatility, and economic pressures.
Regulatory forbearance refers to temporary relief granted to banks, allowing them to operate despite not fully meeting capital or provisioning requirements, often to avoid immediate distress or failure.
By suspending dividend payments, bonuses, and offshore investments, the CBN is prioritizing capital retention to bolster banks’ balance sheets, ensuring they can absorb potential losses and meet future obligations.
2. Key Measures:
Suspension of Dividend Payments: Banks cannot distribute profits to shareholders, forcing them to retain earnings to strengthen their capital base.
Deferral of Bonuses: Directors and senior management will not receive bonuses, aligning their interests with the need for financial prudence.
Prohibition on Foreign Investments: Banks are barred from investing in foreign subsidiaries or new offshore ventures, reducing capital outflows and focusing resources domestically.
3. Duration:
The measures are temporary but will persist until banks exit forbearance and demonstrate compliance with capital adequacy and provisioning standards, verified independently.
4. Monitoring and Compliance:
The CBN will actively monitor compliance and engage with banks to ensure adherence to the directive and prudent capital management.
Implications for Local Shareholders in Nigeria
Local shareholders
including individual investors, institutional investors, and pension funds holding shares in affected banks, will face several implications:
1. No Dividend Income:
Shareholders will not receive dividends, which are a key source of income for many, particularly retail investors and pension funds. This could impact their financial planning, especially for those relying on dividends for regular income.
For institutional investors, such as mutual funds or pension schemes, the lack of dividends may reduce returns, potentially affecting their portfolio performance and obligations to clients.
2. Potential Share Price Impact:
The suspension of dividends may lead to a decline in the share prices of affected banks, as dividends are a significant factor in stock valuation. Investors may perceive the banks as riskier, potentially triggering sell-offs and downward pressure on stock prices.
However, if the directive successfully strengthens the banks’ financial health, it could enhance long-term shareholder value by reducing the risk of insolvency or regulatory penalties.
3. Confidence in the Banking Sector:
The directive may raise concerns among shareholders about the financial health of banks under forbearance, potentially eroding confidence in the sector. If not communicated effectively, this could lead to broader market unease.
Conversely, the CBN’s proactive stance may reassure investors that the regulator is taking steps to prevent systemic risks, potentially stabilizing the sector in the long term.
4. Economic and Market Context:
Nigeria’s economic challenges, such as inflation, currency depreciation, and external debt pressures, may exacerbate the impact of this directive on shareholders. With limited alternative investment opportunities, the suspension of dividends could push investors toward other asset classes, such as government bonds or foreign markets, if accessible.
Small and medium-scale investors, who form a significant portion of local shareholders, may face liquidity constraints, as they often rely on dividend payouts for cash flow.
5. Long-Term Benefits vs. Short-Term Pain:
While the immediate impact is negative for shareholders due to the loss of dividend income, the directive could strengthen the banking sector’s resilience. Healthier banks are less likely to face capital erosion or collapse, which would protect shareholders from more severe losses in the future.
The focus on capital retention may also position banks to better withstand economic shocks, potentially leading to more sustainable dividend policies once the suspension is lifted.
Broader Considerations
Affected Banks: The directive applies only to banks under forbearance, not the entire banking sector. Shareholders of stronger banks not under forbearance will be unaffected, potentially creating a divergence in investor sentiment between banks.
Transparency and Communication: The CBN and affected banks will need to communicate clearly with shareholders to manage expectations and prevent panic. Providing timelines or criteria for exiting forbearance could mitigate negative sentiment.
Regulatory Oversight: The CBN’s emphasis on independent verification suggests a rigorous approach to restoring compliance, which could enhance trust in the banking sector over time.
Conclusion
For local shareholders in Nigeria, the CBN’s directive means a temporary loss of dividend income, potential share price volatility, and possible short-term financial strain, particularly for retail and institutional investors reliant on dividends.
However, the measures are designed to strengthen the banking sector’s stability, which could benefit shareholders in the long term by reducing systemic risks and fostering more resilient banks.
Shareholders should monitor updates from the CBN and affected banks for clarity on the duration of the suspension and the progress of compliance efforts.
