Nigeria's banking regulator bars banks with huge NPLs from dividends payment

Nigeria's central bank has barred commercial lenders with large no-performing loans (NPL) and weak capital from paying dividends to shareholders as more listed companies released their year-end financials.

Sources said the central bank took the step to stem the rising incident of NPL and further erosion of capital base by such financial institutions.

Analysts said the regulatory bank directive could impact negatively on the performance of the stock market as many investors have taken positions ahead of the release of 2017 financial statements and accounts.

It was said that many of such investors had invested ahead of the year-end account to benefit from expected bounty dividends usually declared by banks at this period.

With the directive, many of the banks would not be able to meet their shareholders' expectation and could lead to the dumping of shares of such banks on the floor of the Nigerian stock exchange.

In the letter to the banks and discount houses, the banking sector regulator said it had observed that rather than grow their capital with retaining earnings, some banks were paying out a greater proportion of their profits, irrespective of their risk profile and the need to build resilience through adequate capital buffers.
The regulatory bank said any commercial lenders or discount houses with NPLs above 10 percent would not be allowed to declare dividends for their shareholder.

Nigeria has NPL threshold of five percent, which means any banks that exceeded the threshold is considered in danger.

As of September 2017, the banking industry’s average NPLs stood at 15.18 percent.
Total NPLs in the industry rose by 50 percent to 2.4 trillion from 1.6 trillion as at December 2016, according to data from the Nigeria Deposit Insurance Corporation (NDIC).
Also, the regulator said commercial lenders that failed to meet the regulator’s minimum Capital Adequacy Ratio, should not pay dividends to their shareholders.

“Globally, retained earnings have been identified as an important source of growing an institution’s capital. Advantages of retained earnings include being a source of long-term finance; being easier and cheaper to raise than external finance; curtailment of financial risks; and improving liquidity and profitability," the central bank said.
The central bank said it has been observed that rather than take advantage of this beneficial means of capital generation, some institutions pay out a greater proportion of their profits, irrespective of their risk profile and the need to build resilience through adequate capital buffer