CBN Limits Dividend Payment by Banks

By Modupe Gbadeyanka

Rules regarding the payment of dividend to shareholders by banks and discount houses in the country have been tightened by the Central Bank of Nigeria (CBN).

The apex bank, in a circular titled ‘BSD/DIR/GEN/LAB/11/002’ and dated January 31, 2018, explained that the move was to ensure that the lenders use retained earnings as an important source of growing their capital.

The circular, signed by the CBN Director in charge of Banking Supervision Department, Mr Ahmad Abdullahi, expressed worry that some institutions pay out a greater proportion of their profits, irrespective of their risk profile and the need to build resilience through adequate capital buffers.

”In view of the dynamism, rapid changes and emerging risks on the horizon, there is a need to proactively address these risks,” Mr Abdullahi said.

Rolling out its new rules on dividend payment by banks, the CBN said henceforth, “Any Deposit Money Bank (DMB) or Discount House (DH) that does not meet the minimum capital adequacy ratio shall not be allowed to pay dividend.

“DMBs and DHs that have a Composite Risk Rating (CRR) of “High” or a Non-Performing Loan (NPL) ratio of above 10% shall not be allowed to pay dividend.

“DMBs and DHs that meet the minimum capital adequacy ratio but have a CRR of ‘Above Average’ or an NPL ratio of more than 5% but less than 10% shall have dividend payout ratio of not more than 30%.

“DMBs and DHs that have capital adequacy ratios of at least 3% above the minimum requirement, CRR of “Low” and NPL ratio of more than 5% but less than 10%, shall have dividend pay-out ratio of not more than 75% of profit after tax.

“There shall be no regulatory restriction on dividend pay-out for DMBs and DHs that meet the minimum capital adequacy ratio, have a CRR of ‘low’ or ‘moderate’ and an NPL ratio of not more than 5%. However, it is expected that the Board of such institutions will recommend payouts based on effective risk assessment and economic realities.

“No DMB or DH shall be allowed to pay dividend out of reserves.

“Banks shall submit their Board approved dividend payout policy to the CBN before the payment of dividend shall be permitted.”

The central bank, which said the rules take immediate effect, emphasised further that, “All ratios shall be based on financial year averages.”