By Victor Ogiemwonyi
The Central Bank of Nigeria’s (CBN) circular of June 13, 2025, produced a mini-earthquake in Nigerian banking circles and the stock market in the following few days. The circular essentially asked banks to make full provisions for their forbearance loans and bring their single obligor limits within prudential guidelines.
Forbearance was given to banks during the COVID-19 pandemic, which allowed them to temporarily breach prudential guidelines given the tough economic conditions at the time. Many businesses were affected by the pandemic crisis, which hit the economy and many of their loans were not performing. The CBN also permitted them to exceed their single obligor limits for a period. This was over four years ago. This prudent move by the CBN is to ensure banks strengthen their capital buffers and make adequate provisions against impaired loans:Nigeria’s Addressable Market
The directive also stipulated that until they were within these recommended limits, banks were to stop dividend payments, management bonuses, and any further investments in their foreign branches. Because this was unexpected and a surprise to the banks and the market, the initial reaction was a pullback in the stock market. As the circular did not specify the banks affected by the directive, investors reacted negatively to all banking stocks, and the market immediately declined, with bank share prices falling that day.
As is usual with “smart money,” they exit the market and wait on the sidelines until more information is available. Fortunately, one of the top investment banks, Renaissance Capital, has been following up on this and has done some analysis of the impact on some of the top banks. Their analysis named banks and the likely impact of the directive. Those with a more severe impact, experienced a greater downward price adjustment the next day. Many of the banks started to issue statements to explain their positions and how they intend to meet the directive, and most promised to resume dividend payments. This was the part the investing public wanted to hear. The banks least impacted by the CBN directive were immediately rewarded, as their share prices shot up. To be fair, these banks already had premium pricing for their shares because, they not only proved their prudent decision-making, by fully providing for their impaired loans before now, but they have also consistently shown the efficiency of their operations while reporting very good profits and also paid good dividends in the current year.
A Stitch In Time
There were complaints from some quarters that the CBN’s timing of the circular was wrong because it would hamper banks’ ability to conclude their capital raising.
This position did not consider the interest of investors who would buy these shares. Investors, invest with the best information available to them. This CBN prudent push to strengthen banks’ balance sheets was the right thing to do. As the saying goes, “a stitch in time saves nine.” Taking timely action to fix a problem when it is still small, instead of waiting for it to get out of hand and require significantly more effort, will not be the right thing to do. This timely warning, from the CBN, was also alerting the market to be more diligent, in their investing in the banks, that were flagged in this circular, especially given what happened in the last major capital raising, during 2005/2006 bank consolidation, where many very weak banks raised money from the market only for those banks to fold later, with many investors losing their investments in those failed Banks.
Given that many of the big banks have already raised much of their capital to meet the new CBN requirement, the good ones will have no problem raising capital.
This CBN directive will ensure banks clean up their books and make the necessary provisions against impaired loans and reflect true profits, especially in a period we have seen many banks declare huge profits and pay big dividends. This is also the right time for the banks to do this; they are profitable and have just raised a lot of new capital. There is definitely room for adjustments and for the proper provisions to be made to ensure they establish adequate buffers for their capital. It should also be noted that provisions for impaired loans are not necessarily 100% lost. When these loans are recovered, they go straight into their profits. These provisions, are precautions against possible losses. It is therefore a prudent move that benefits everyone….banks and investors …who buy their shares. Posting “fluff” profits from loans that then go bad, does no one, any good. Strangely, our investing public expects dividend payments every year, and dividends paid reduce capital available for future business; it is therefore important that dividends should be paid from real profits.
The first report from Renaissance Capital suggested some of the banks would likely suspend dividend payments for multiple years, as the work to meet the stricter prudential standards,now imposed by the CBN, will take some time, given the significant numbers required by some of the banks. This panicked the market, and investors and traders particularly, exited their positions in banking stocks. It took time to digest the information available before investors and traders came back, realizing that banks are much stronger now, and have the ability, to make the required provisions and still be profitable.
Our banks will continue to prosper for some time to come, despite the current economic situation; they are still profitable. Imagine when the economy starts to grow properly. Even the weak ones now, will also grow, albeit at a slower rate. Their new capital raising, gives them even more money to put to work, and they are doing better with technology and the stricter prudential guidelines, the CBN is pushing now, will ensure they make quality loans, since they will not be allowed to get away with non-performing loans in their books for long. Everything for our banks points to a better future, unless for the reckless ones, or catastrophic events we cannot yet see.
The CBN intervention is timely, and a prudent move , great for our banking industry. ….There should be no cause for alarm; our banks are in a strong position, right now.
Victor Ogiemwonyi is a retired Investment Banker and writes from Ikoyi, Lagos.
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