The recent prudential/statutory requirements rolled out by the Central Bank of Nigeria (CBN), to Nigerian banks with offshore operations and others intending to do so, is a timely necessity that can help protect and strengthen the financial base of the banks at home. The requirements can also act as safety nets for the subsidiary banks in times of financial turbulence.
The CBN, in a circular to that effect tagged, “Banks Offshore Expansion,” signed by its Director, Banking operations, Mr. Ignatius Imala, listed some conditions that Nigerian – owned banks with offshore operations must meet.
These include a sound financial balance sheet and free funds or excess liquidity that can meet emergency situations. Such banks, CBN’s circular added, should have operated profitably for at least two consecutive years, and this performance must be reflected in the banks’ audited accounts before such branches could be opened.
In addition, the new guidelines mandate such banks with cross border expansion to submit a detailed “Enterprise Risk Management” framework of the proposed subsidiary. It said the framework should, among other things, state the possible impact of the offshore operation on the parent bank in Nigeria and how the offshore operations would be monitored. The banks are further required to submit to the apex bank, their strategic expansion plans, covering at least five years, stating the phase(s) and time of implementation.
We welcome these new guidelines by CBN. They are in the best interest of Nigerian banks and investors. These measures may have become even more expedient because of the current fad by Nigerian banks to open offshore branches.
Perhaps in this rat-race for offshore operations, the parent banks, wittingly or unwittingly, ignore to maintain at home, a sound financial base, capable of absorbing the uncertainties and volatility of the international financial markets. We agree with the CBN that the aggressive offshore expansion by some Nigerian banks involves additional risks that require strategic planning. Therefore, safety and soundness of the financial institutions, both at home and offshore, are imperative. This, in our view, is also in line with current realities in the banking sector.
Although there is need for banks to angle for financial cash flows that come with offshore branching, that should not be at the risk of other imperatives such as sound liquidity and asset base at home. Shareholders’ confidence is secured when these indices are factored into such expansion drives.
What the apex bank has done is to remind the banks of the need for these requirements in order to minimise their risks consequent upon such operations. This is also in line with the Banking and other Financial Institutions Act (BOFIA) which stipulates that no subsidiary of any bank (whether foreign or local) would be allowed to open another subsidiary without the express permission of the CBN. Arguably, some banks are reported to have ignored this essential requirement. Also, the BOFIA requires that the parent bank’s aggregate investment in any offshore operation should not be more than 25 per cent of paid up capital and statutory reserves.
We urge the banks to comply fully with these requirements. The CBN should periodically monitor how these banks do this. While offshore operations can net in huge foreign funds for the banks and enhance their corporate image, the need to tighten the noose on such operations is necessary. It requires constant surveillance by the regulatory authorities.
