CBN Issues New Directive on Capital Retention for Banks Under Regulatory Forbearance

Regulatory forbearance refers to a temporary relaxation of regulatory requirements, typically extended to banks experiencing capital shortfalls, allowing them to continue operations under close supervisory oversight. It is a policy tool employed by central banks that permits banks to maintain operations despite falling below the required capital thresholds.

To strengthen capital buffers, promote prudent internal capital retention, and support long-term balance sheet resilience during this transitional period, the CBN has introduced the following temporary restrictions for banks currently benefiting from credit or SOL forbearance:

1. Suspension of the payment of dividends to shareholders.
2. Bonuses payable to Directors and Senior Management Staff are to be deferred.
3. Refrain from making investments in foreign subsidiaries or undertaking new offshore ventures.

These measures will remain in place until the regulatory forbearance is fully exited and the banks’ capital adequacy and provisioning levels are independently confirmed to be fully compliant with prevailing standards.

Impact on Banks

a) The restriction on dividend payments may trigger a negative reaction in the capital markets, potentially leading to a sell-off in the shares of affected banks.
b) Banks under forbearance may face difficulties in attracting new equity investors during this recapitalisation programme, as the inability to return capital to investors potentially reduces investment appeal.
c) Lastly, affected banks may need to restructure or accelerate the recovery of their non-performing loans to ensure compliance with the prudential thresholds and exit the forbearance regime.

Should you have any questions regarding this article series, please do not hesitate to contact Oludare Senbore or Funmilayo Otsemobor.