A white paper authored by Chapel Hill Denham, one of Nigeria’s largest and most influential independent investment banking and asset management firms, may have been the precursor for the Financial Holding Company regulation that has shaken the banking sector to the core.
The Central Bank released an exposure draft last week that outlined sweeping new regulations that guide how financial holding companies operate in the country.
The proposed rules limit the powers of Holding Companies over the direct operations of their subsidiaries while also requiring that they maintain a capital buffer of at least 20% above the combined share capital of their subsidiaries.
However, the most contentious aspect of the proposed regulation is the requirement that Nigerian banks with foreign subsidiaries relinquish their parent company status to a new holding entity that is directly owned by the Financial HoldCo.
This proposal is central to a White Paper published by Chapel Hill Denham with the title The Nigerian Banking Paradox: High Returns, Deep Discounts.
What they are saying
One of the notable structural changes in the draft is where foreign subsidiaries sit within the group. Under the previous framework, Nigerian banks within the group could directly hold equity in offshore subsidiaries.
The new draft changes this, proposing that it is now the Holdco itself (or an intermediate Holdco) that must hold foreign subsidiaries directly.
A maximum of two hierarchies is permitted —a parent Holdco and one intermediate Holdco for offshore holdings. Beyond that requires exceptional CBN approval.
In the white paper, Chapel Hill opined that the Nigerian regulatory environment for Holdco structures “creates unique structural constraints” compared to international norms. According to the investment bank, Financial Holding Companies permit only a shallow three-tier hierarchy which involves; The Holdco and then the subsidiaries and then the subsidiaries owing their own subsidiaries.
The report claims it prevents “the complex multi-layered structures” common in European and Asian banking groups.
Nigerian banks that are owned by Holdcos also own banking subsidiaries outside the country. A case in point is Access Holdco, whose banking subsidiary, Access Bank, owns several other banks across Africa.
Chapel Hill opines that this structure plays at a disadvantage to Nigerian banks calling for an introduction to a segregation model where domestic banking operations are “ring-fenced” from international activities, international operations are held under separate legal entities, and the home central bank explicitly avoids becoming the lender of last resort for foreign operations.
This appears to be similar to what Nigeria’s central bank is calling for in its latest draft exposure. According to Chapel Hill, this limits its exposure to risks in jurisdictions beyond its supervisory control.
- “Unlike regulatory frameworks in South Africa, Kenya, or Morocco, Nigerian rules require full consolidation of all international banking subsidiaries into the Nigerian‑licensed bank, with the HoldCo sitting above but not insulating the domestic bank from cross‑border risks.
- The Nigerian bank cannot be ring‑fenced or structurally isolated from its foreign operations; capital adequacy and key prudential limits are assessed on a consolidated basis that imports regional expansion back into the domestic regulatory perimeter.” Chapel Hill
Why Chapel Hill is calling for ring-fencing of banks
Chapel Hill argues that Nigeria’s banking structure is unusually restrictive compared to other African markets because foreign subsidiaries are effectively consolidated into the Nigerian bank rather than being separated under distinct holding structures. According to the firm, this means Nigerian banks are unable to isolate domestic operations from risks arising in foreign jurisdictions.
The white paper notes that most African regulators prefer a segregation model.
- “Domestic banking operations are ring-fenced from international activities, international operations are held under separate legal entities, and the home central bank explicitly avoids becoming the lender of last resort for foreign operations.”
Chapel Hill believes Nigeria’s current structure forces banks pursuing regional expansion to maintain larger capital buffers and comply with stricter prudential requirements than many of their competitors.
The investment bank also argues that the model creates an uneven competitive landscape.
- “International banks operating in Nigeria… can establish local subsidiaries with ₦200 billion in capital… Nigerian banks seeking international operations must hold ₦500 billion to qualify for an international banking licence.”
According to the report, the result is that Nigerian banks effectively export Nigeria’s conservative capital standards across Africa, often holding more capital than local regulations require in countries where they operate.
While this may strengthen confidence in Nigerian banking groups, Chapel Hill suggests it could also depress returns and contribute to the valuation discounts at which many Nigerian banking stocks trade.
What you should know
While the proposal has attracted criticism, some bankers who spoke to Nairametrics on condition of anonymity said parts of the draft are necessary and long overdue. However, most pointed to the new capital requirements for HoldCos as the most contentious provision.
Under the draft, a HoldCo’s minimum paid-in capital must equal the combined minimum capital of its regulated subsidiaries plus an additional 20% buffer.
Bankers argue that while the requirement may strengthen group stability, it could also force HoldCos to hold excess capital that generates little return, placing further pressure on return on equity at a time investors are already demanding higher capital efficiency.
Another area of concern is the proposed restructuring of foreign subsidiaries. While the model aligns Nigeria with international practice and recommendations made by Chapel Hill Denham, bankers warn that separating offshore subsidiaries from Nigerian banking entities could be costly, operationally complex and carry implementation risks.
The proposal has also raised questions about the future of international banking licences. Market analyst and co-host of Drinks n Mics, Akindele Akintola, argues that if foreign subsidiaries are moved away from the Nigerian bank and placed directly under the HoldCo, the rationale for maintaining a ₦500 billion international banking licence at the bank level becomes less obvious.
- “The international licence exists because the bank owns international operations. Once those subsidiaries move to the HoldCo, should the bank still be required to maintain international-bank capital levels?” he asked in a recent YouTube analysis.
The draft is also creating debate around ownership thresholds. While BOFIA generally recognizes control at above 50%, the new guidelines require HoldCos to maintain at least 51% ownership in subsidiaries. Critics say the difference may appear small but could create regulatory complications for groups whose ownership structures fall between the two thresholds.
For now, stakeholders have until July 9 to submit comments before the CBN decides whether the proposals become binding regulations.
