Nigeria: CBN Guide To "Marriages" And Acquisitions.

Last Updated: 4 January 2005
Article by John Ukpaka, Oghogho Akpata and Yetunde Olasope

Insight into the effects of the CBN recapitlization directive and guidelines.

To Be Or Not To Be…

On the 6th of July 2004, the players in the banking sector received a rude shock from the Central Bank of Nigeria (CBN). The CBN issued a directive mandating all banks in Nigeria to "consolidate" or find other alternatives to raise their capital base to N25 billion, or face liquidation and exit from the banking industry.

To help strengthen the players in the banking sector in a manner that will ensure longevity, higher returns to shareholders over time, greater impact on the Nigerian economy and globalization of the banking sector, the CBN introduced the "Central Bank of Nigeria Guidelines and Incentives on Consolidation in the Nigerian Banking Industry".

These guidelines represent the superlative provisions, regulating the consolidation drive by banks, be it mergers or acquisitions.


In an apparent move to encourage banks to merge, the CBN has been organizing different rendezvous for bank chiefs to meet and map out strategies to adopt in merging. The CBN has also been encouraging banks in their merger bid to align with banks sharing common commercial principles and having the same objectives.

Rules Of Engagement.

In other to foreclose the possibility of informal business combinations, the CBN has also specified the rules of consolidation between merging parties. The guidelines expressly prohibit "mere group arrangements" or any other form of loose arrangements between parties.

Thus, combinations like asset acquisitions, marketing synergy (sharing distribution chains, sales and warehousing facilities), operating synergy (sharing facilities and personnel), investment synergy (joint use of plants, equipments etc), and other forms of synergies will not receive the blessings of the CBN. The only legal modes of consolidation allowed are mergers and outright acquisition/takeovers.

Wedding Gifts

The CBN intends to provide the following incentives for banks that consolidate and/or are able to achieve the set minimum capital base within the stipulated period:

  • Authorization to deal in foreign exchange
  • Permission to take public sector deposits and recommendation to the fiscal authorities for the collection of public sector revenue.
  • Prospects of managing part of Nigeria’s external reserves, (subject to prevailing guidelines).
  • Tax incentives in the areas of capital allowances, company income tax, stamp duties, among others, the details of which will be released after the on-going consultation with the fiscal authorities.
  • Reduction in transaction costs, the details of which will be released after the on-going consultations with the Securities and Exchange Commission, Nigerian Stock Exchange, Corporate Affairs Commission and all other parties involved in the scheme.
  • Negotiation of the possible write-down of the CBN’s exposure to the distressed banks that would be acquired as a way of improving their balance sheets as well as the treatment of the distressed banks’ bad assets.

He Who Finds A Wife…

Some of the main attractions for mergers and acquisitions are as follows;

  • The ISA provides for the exemption of Capital gains Tax in the computation of the tax liabilities of the companies merging. What this means is that a Company "A" wishing to acquire a Company "B" with poor liquidity base, ailing deposit ratio and low investor returns but with a solid asset base, could extensively reduce its acquisition costs and at the same time expand its asset base. The valuation of the assets of Company "B" balanced against its liabilities could ultimately make for a cheaper option for Company "A" in meeting its expansion demands. *(This is however subject to obtaining the requisite approvals from the Joint Tax Board).
  • Another alluring benefit of mergers and acquisitions is the option of using the losses incurred by the acquiree company prior to its acquisition as tax credit by the company acquiring it in computing its future tax exposures. Again using the Company "A" and Company "B" scenario above, a Company "A" incurring about N100 Million Naira in taxes could acquire a Company "B" which has been making losses consistently and is on the verge of liquidation. The arrears of losses could be discounted against the emerging company’s tax liabilities. *(This is also subject to obtaining the requisite approvals from the Joint Tax Board).

  • The CBN directive has also, albeit unwittingly, presented commercial banks with the opportunity to penetrate regions and market where they previously had little or no presence through the acquisition of community banks. This option is even rosier when considered in addition to the two points above mentioned, i.e. non payment of capital gains tax and use of losses incurred by the community bank as future tax credits of the acquiring bank.

Pre Nuptials

Another major provision of the guidelines is the issue of valuations.

Ordinarily, valuation is the process taken to ascertain the worth of the company being acquired viz a viz its balance sheet, capital and asset base. The guidelines make provisions for the valuations and revaluation of the entities of the merging companies by independent accountants and by due diligence efforts of the parties.

The provisions of the guidelines only enjoin the parties to a merger to conduct due diligence on each other and to adopt good corporate governance. That notwithstanding, the possibility of merging entities, and the acquiree company in particular manipulating the true value of their company are still present. Balance sheets of the company presented might not present a true value of the company’s liquid worth, might not fully disclose the company’s liabilities and might not reveal encumbrances on the assets of the companies.

Parties thus must strive to protect themselves by appropriate contractual provisions, especially at the pre merger stages of negotiations.

The stage is thus set in the Nigerian banking industry for the era of mergers and acquisitions, forced marriages or not!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances

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