The new dividends payout policy announced last week by the Central Bank of Nigeria (CBN) would, on the face of it, seem targeted at shareholders of banks, who fail to meet some set conditions.
According to the apex financial institution, banks, by the new policy, are restricted from paying a dividend if they have high Non-performing Loans (NPLs) and low Capital Adequacy Ratio (CAR). In restricting dividend payment by this category of banks, the interpretation of this policy is that the role of management in building such positions is being ignored.
But while this may not exactly interpret the action of the CBN, recent history suggests that, apart from depositors’ funds, which it works assiduously to protect, shareholders are often the last on regulators plate of consideration.
The policy itself has been broken down by certain analysts to mean that no bank shall pay dividend on its shares until all its preliminary expenses, organisational expenses, share selling commission, brokerage, amount of losses incurred and other capitalized expenses not represented by tangible assets have been completely written off; and that adequate provisions have been made to the satisfaction of the bank for actual and contingency losses on the risk assets, liabilities, off-balance sheet commitments and such unearned incomes as are derivable therefrom.
We acknowledge that the CBN wants to create a healthy financial system where management adheres to the strictly to the apex bank’s conditions put in place for this to happen.
We do know, however, from recent history, that sometimes, greed does overshadow this superior expectation. We think that it is very clear that there are at least three key actors that should matter, apart from the economy, in the life of a banking institution. These would be depositors, shareholders and the board and management of the bank. Shareholders are in it for the dividend, depositors are interested in the safekeeping of their money, while the board and management are meant to responsibly manage and direct the affairs of the bank to guarantee their incomes and returns on shareholders’ investments.
The last financial crisis in Nigeria, which many prefer to see as having a peculiar Nigerian ring to it, provides ample evidence to support the claim that shareholders do not register highly with the CBN in its consideration of how to resolve what it perceives as a system challenge.
Before the last crisis came to a head, foreign risk management analysts had for long warmed, starting from January of 2009 (even before then), about the country’s banks and their toxic assets. These toxic assets were built up by management and boards respectively, who gave out loans without adequate security, with the approvals of boards that sometimes looked the other way as top leaders at major banks extended loans to friends and non-existent companies without ever expecting to see the loans paid back.
We acknowledge the effort made by the apex bank at the time to deal with the problem, once it blew open. It has to be admitted though that while some boards and management paid a heavy price for their misdemeanour, it was the ordinary shareholders that suffered the most, losing all of their investments in the aftermath of the crisis.
There are suggestions that this new policy is meant to put bank management and boards on their toes with regards to the level of NPLs that they carry on their balance sheets. We welcome this interpretation. But we want to be quick to add that the decision that dividend should not be paid puts the burden squarely on the back of shareholders.
While we see in this the possibility of raising a more active shareholder voice going forward, we think that the Central Bank should make more demands on bank boards and management to be responsible for their actions that lead to high level NPL portfolios. Perhaps, it is time to begin individual sanctions the sometimes insider related NPLs that end up being toxic. The other point we wish to make is that bank shareholders should wake up and be alive to their responsibility to themselves and their bank, as shareholders.
This is the time for them to be more engaged in a non-disruptive way, with the management and boards of their banks.
They need to probe more, asking the right questions of their boards, to get to know what is happening in the management of their banks. For, in truth, the Central Bank may have just put some power back in their hands, and is tacitly challenging them to be more involved in what is going on in their banks.