The Central Bank of Nigeria (CBN), has issued new guidelines to all banks including Deposit Money Banks (DMBs) and Discount Houses (DHs), on internal capital generation and dividend pay-out ratio.
Under the new guidelines, banks are now required to ensure that their composite risk rating (CRR), minimum capital adequacy ratio (CAR) and non-performing loan (NPL) ratio are within the prescribed thresholds set out by CBN before dividend can be paid out to shareholders.
The new guidelines, issued via a circular (the Circular) referenced BSD/DIR/GEN/LAB/11/002 and dated 31 January 2018, becomes effective immediately.
Dividend pay-out Criteria as highlighted in the Circular are:
No dividend pay-out; Banks with “High” CRRNPL ratio of above 10% restricted to pay-out ratio of 30%, Meet the minimum CAR “Above average” CRRNPL ratio greater than 5% but less than 10% restricted to 75% of profit after tax, Banks with CAR of at least 3% above the minimum requirement CRR of “Low” NPL ratio greater than 5% but less than 10%.
No restriction-Meet the minimum CARCRR of “Low” or “Moderate” NPL ratio of not more than 5%.
The Board of such institutions are urged to recommend pay-outs based on effective risk assessment and economic realities.
No DMB or DH shall be allowed to pay dividend out of reserves.
Banks shall submit their Board approved dividend pay-out policy to the CBN before payment of dividend shall be permitted.
The Circular is an attempt by CBN to address the worrying trend of financial institutions paying out a significant proportion of their profits as dividend, irrespective of their risk profile and without regard to the need to build resilience through adequate capital buffers. It is also expected to engender a culture where banks use retained earnings as an important source of growing their capital.
