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CBN and banks’ offshore
branches
By Sun News Publishing
Monday, December 29, 2008
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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.
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