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CBN’s new false solutions for the banks 07 Jul 2025

Last month, the Central Bank of Nigeria (CBN) issued a circular placing a temporary suspension on the payment of dividends and bonuses by banks and on their further investment in their foreign subsidiaries. According to the CBN, these restrictions were informed by the need to strengthen the capital buffers of the banks, enhance the resilience of their balance sheets, and promote prudent internal capital retention in them. A recent study by the apex bank had revealed that some of the banks were in breach of regulatory forbearance limits on credit exposures and Single Obligor Limits. 

Such a directive would immediately spook investors. Therefore, the banking index of the Nigerian Exchange Group fell by 4.17 percent between 13 June (when the CBN issued the circular) and 17 June when it issued a follow-up circular “affirming” the strength of the banking sector. The banking index subsequently rose to its peak point on 23 June, year to date, indicating investors stood reassured about the banks.

But despite the return of bank equities to a bull market, concerns remain about the initial CBN circular, which should not be glossed over. First, equity investors look not only towards capital appreciation but also dividend payments in investing. If the suspension on dividend payments is drawn out – given its current indefinite nature – it may return bank shares to a bear market, reinforcing the sense of a crisis. 

Second, the suspension on payment of bonuses to bank directors and senior management could make the positions less attractive to experienced and skilled professionals. Banks require high-level skills and senior-level experience, not least in risk management, which is especially important in managing credit risk. This, again, portends making a bad situation worse. 

Third, the restriction on investment in the foreign subsidiaries may translate to lost opportunity for the affected banks. In this scenario, banks from other jurisdictions will fill the investment gap and reap the prospective reward, a development that can disadvantage Nigerian banks over the longer term. Some of the banks had spent the better part of the last two decades building their foreign subsidiaries, which had started to make significant contributions to their profitability. The growing geopolitical shifts and transition in the global economy are creating investment opportunities across markets and economies, including in Africa, which Nigerian banks should not miss.

And fourth, the CBN restriction on capital flow can affect the reputation of the Nigerian policymakers and the perception of the economy. Banks are proxies for the health of their domestic economies. By constraining investment flow from Nigeria, foreign investors may also be worried about bringing new investment into Nigeria on concern about the health of the economy. This will harm the policy aims of the CBN on attracting foreign investments to bolster its reserves and support the stability of the exchange rate. 

Beyond these concerns is whether the CBN is applying broad punitive measures against bank directors and senior management, instead of specifically identifying infractions and punishing those responsible for them. Only a fraction of bank directors and senior management have direct responsibility for credit appraisal, granting, and recovery. Those who are not involved in the process should not be unfairly punished. Indeed, placing a blanket punishment would suggest the regulator is struggling with identifying and punishing specific, powerful offenders, worsening the crisis of impunity in a country that is grappling with upholding the rule of law.

But by far the biggest concern is that the CBN is shifting responsibility for an outcome that is linked to its failure to stimulate economic growth – and even more specifically attributable to the failure of its monetary policy. The Nigerian economy has been stuck in the rut of suboptimal growth for years, including the last two years when growth has averaged 3.15 percent. Going by the IMF projections, based on the existing reality, Nigeria’s GDP growth rates will remain below 4 percent throughout this decade. This is well below the target of 6 percent, which the President Bola Ahmed Tinubu administration had targeted, indicating the failure of fiscal policy and the inability of monetary policy to make up for the slack.

Banks do well when their domestic economy is going fast. Conversely, they struggle when growth is sluggish as has been the case with the Nigerian economy since 2015. The adverse economic conditions would impair the loan book of the banks as borrowers struggle to repay their loans because their businesses or personal finance are adversely affected by the economic doldrums. The banks’ tolerant forbearance on credits that have missed repayment timelines, instead of classification as nonperforming loans, may be anticipatory that the problem would be temporary. But the failure to reflate the economy under the current administration would likely remain drawn out.

Also, the economic underperformance – with inflation remaining stubbornly high – and CBN’s other policy imperatives have constrained it to keep interest rates high. But the high Monetary Policy Rate, which was retained at 27.5 percent in May, has seen bank lending rate at above 30 percent. Such high interest rates in a slow-growth environment are a recipe for credit defaults. 

After allowing bank customers to be burdened with high and multifarious charges, the CBN has now shifted attention to denying investors dividend payments and bank directors and senior management bonuses. But this policy trajectory will not change the continuing impact of poor economic growth and high interest rate on the performance of the banks.

Jide Akintunde, Managing Editor, Financial Nigeria publications, is the Director of Nigeria Development and Finance Forum.