The Regulatory Framework Governing Financial Holding Companies in Nigeria

The Central Bank of Nigeria in 2010 for the purpose of creating a streamlined and tidy corporate structure for banking groups that also engaged in non-core banking services.

This gave rise to the Financial Holding Company (FHC) structure which will be the focus of this article by treating the following topics of:-

– The definition of Financial Holding Companies.

– The Regulatory Framework governing Financial Holding Companies in Nigeria.

– The licensing requirements for Financial Holding Companies in Nigeria.

– The permissible and non-permissible activities for Financial Holding Companies in Nigeria.

– The permissible ownership, operating and control structures of Financial Holding Companies in Nigeria.

What is a Financial Holding Company?

FHCs are defined (pursuant to the extraordinary gazette No.38 December 29 2011) as a company whose principal objects include the business of a Holding company set up for the purpose of making and managing fit its own account equity investments in 2 or more companies being its subsidiaries engaged in the provision of financial services, one of which must be a bank.

What is the Regulatory Framework governing Financial Holding Companies in Nigeria?

Financial Holding Companies are licensed, supervised and regulated by the Central Bank of Nigeria (CBN) through the Banks and Other Financial Institutions Act BOFIA and the CBN Guidelines for the Licensing and Regulation of Financial Holding Companies in Nigeria(‘The Guidelines’)

What is the operating structure of a FHC?

Financial Holding Companies are non-operating in structure, existing to carry out investments in a subsidiary company without engaging in the day to day management of same and are required to be registered with the Corporate Affairs Commission and have a board size of 7-12 directors.

Also, the Guidelines require that a FHC shall have at least 2 subsidiaries & the focus of the conglomerate shall be in the financial services sector with not more than 2 hierarchies (an intermediate company structure where a subsidiary of the FHC also has a subsidiary of its own).

Where a subsidiary is locally based, the relevant regulator shall have responsibility for its supervision. Where the subsidiary is based overseas, the relevant regulator shall seek a Memorandum of Understanding (MOU)  with the host regulator for its joint supervision.

A Financial Holding Company can also acquire a controlling interest in any permissible financial institution subject to the prior approval of the CBN along with the approval of any other relevant regulator. Where the subsidiary of a FHC outside the jurisdiction of the CBN acquires another company also outside the jurisdiction of the CBN, it(the FHC) shall notify the CBN in writing before the acquisition is completed, this notification to be accompanied by evidence of the relevant regulator’s prior approval.

Does a Financial Holding Company seeking to change to a single financial service package offering need CBN approval?

Yes, it does. A FHC seeking to revert to a mono-line commercial or merchant banking structure shall seek the prior approval of the CBN via a written request and the following:-

– a divestment plan from its subsidiaries;

– annual audited financial statements of the FHC for the immediate past 3 years under the structure it seeks to discontinue;

– any other requirement of the CBN as determined from time to time.

It should however be noted that a Financial Holding Company structure shall not be reversible for a minimum period of 3 years

Can the CBN order a FHC to carry out a divestment?

Yes it can. The CBN can direct a Financial Holding Company to divest from its Banking subsidiary where in its(the CBN’s) opinion the FHC is being run in a manner that is detrimental to the interests of its depositors and/or stakeholders of the banking subsidiary.

What are the Licensing requirements for a Financial Holding Company in Nigeria?

An application for a FHC License is basically in 2 stages :-

– The Approval-In-Principle (AIP) Stage.

– The Final License Stage.

The AIP stage.

The promoters of a FHC structure should first through their lawyer send an application addressed to the Governor of the Central Bank of Nigeria and accompany this application with:-

– a non-refundable application fee of 2 Million Naira payable to the CBN via bank draft or electronic transfer;

– evidence of meeting the prescribed minimum paid-up capital of more than the minimum paid-up capital of all its subsidiaries combined;

– a detailed Business plan/Feasibility report (consult your lawyer on what a business plan must contain under the CBN Guidelines);

– a written and duly signed undertaking by the promoters of the FHC that the company will be adequately capitalized for the volume and character of its business at all times and that it shall always submit itself to the supervisory authority of the CBN as an Other Financial Institution (OFI);

– for foreign regulated institutional investors, the CBN shall require a “no objection” letter from the regulatory body of the home country;

– a shareholder’s agreement;

– a statement of intent to invest in the financial holding company;

– a technical services agreement in the financial holding company;

– a draft copy of the company’s MEMART (Memorandum &Articles of Association);

– where the FHC’s promoter/investor is a registered company, the CBN shall require :-

a). Certificate of Incorporation.

b). A Board Resolution supporting the company’s decision to invest in the equity shares of the proposed Financial Holding Company.

c). Names and addresses (business and residential) of the company’s owners & directors as well as their related company’s if any.

d). Audited Financial statements & a Tax Clearance Certificate of the company for the past 3 years.

e). Certified True Copies (CTCs) of the its Statutory forms for returns on share allotments and the particulars of directors of the company.

Upon the satisfaction of the CBN after vetting the above requirements, an Approval-In-Principle will be granted.

The Final License Stage

The promoters of a FHC shall within the period of not more than 6 months after the AIP grant, submit through their lawyer an application to the Central Bank of Nigeria for the grant of a final license along with the following:-

– A non-refundable license fee of 10 Million Naira payable to the CBN via bank draft or electronic transfer.

– Evidence of payment of capital contributions by each shareholder.

– Certified True Copies (CTCs) of the FHC’s Certificate of Incorporation and MEMART (Memorandum & Articles of Association).

– Certified True Copies of its CAC Statutory forms for the allotment of shares and the particulars of its directors.

– Evidence of location of the FHC’s Head Office location ( rented or owned) for the takeoff of business.

– A schedule of changes in the board, management and significant shareholding of the FHC since the grant of the AIP.

– Evidence of ability to meet technical requirements and modern infrastructural facilities such as offices, computers, telecommunications, etc. to perform Financial Holding Company operations and meet the Regulatory requirements of the CBN & other Regulatory agencies

– Copies of letters of offer & acceptance of employment in respect of the FHC’s top management team.

– Organizational structure, showing functional units, responsibilities, reporting relationships (?) and grades of heads of departments/units.

– Board & Staff training programmes.

What are the permissible and non-permissible activities allowed for Financial Holding Companies under the CBN Guidelines?

Permissible Activities

– The holding of equities in its subsidiaries.

– The provision of broad policy decisions in the following areas:-

1. Human Resource policy
2. Risk Management policy
3. Internal Control policy
4. Compliance policy
5. Any other service we may be approved by the Central Bank of Nigeria from time to time

– With the prior written approval of the CBN, provision of shared services to its subsidiaries in respect of :-

1. Information and Communication Technology (ICT)

2. Facilities

3. Legal services

4. Any other service as may be approved by the Central Bank of Nigeria from time to time

Shared services shall be provided on an arm’s-length basis and transactions in respect of such services shall require the consent of the board of directors of the subsidiary.

Non-Permissible Activities

– Investment in Non-Financial firms.

– The establishment, divestment & closure of subsidiaries without the prior written approval of the CBN and/or any other relevant Regulatory or supervisory authority as the case may be.

– Deriving or receiving income from sources other than as listed below:-

1. Dividend income from subsidiaries/associates.

2. Income from shared services where applicable.

3. Interest earned from idle funds invested in government securities or placement with banks/discount houses.

4. Profit on divestments from subsidiaries.

5. Any other source as may be approved by the CBN.

Conclusion :- The Financial Holding Company structure has proved very effective in creating a streamlined supervisory framework over the activities of Banking groups in Nigeria. Further guidance on the licensing and operational compliance requirements of FHC’s will require consulting your lawyer.