Banks and corporate governance

That the Central Bank of Nigeria (CBN) has in the last decade risen up to its responsibility of maintaining a stringent regulatory regime for the banking sector is certainly not in doubt. Commendable as its efforts have been, the CBN should not rest on its oars. It is likely that banks and bank directors that were dislodged from their comfort-zones of making cheap profits through arbitrage or round-tripping will seek to derail the benefits of the banking reforms.

 This is why we commend the CBN for the recent alert on banks’ non-declaration of loans up to 1 million naira and above given to staff and directors. CBN has observed that some banks still give loans to management staff, directors, major shareholders and their relations and companies which eventually become non-performing. The CBN is disturbed that this trend is threatening to erode achievements recorded so far.

 To underscore the magnitude and weight of the observations, CBN has, through its director of supervision, Martins Tokunbo directed that going forward all credit facilities to board members and staff above N1 million be disclosed in the credit risk management system (CRMS). The apex bank is to sanction any bank that refuses to comply. The CRMS is a central data base which mandates all banks to render their returns in the spirit of the new prudential guidelines.

 According to a circular from the apex bank, “the CRMS, which is a central database for credit information on borrowers, established by the CBN Act No.24 of 1991 [Sections 28 and 52] as amended made it mandatory for all banks to render returns to the CRMS in respect of all credit facilities of N1 million and above. Thus, the credit facilities availed to board members and staffs of banks are not exempted. Banks are therefore required to report all credit facilities (principal plus interest) of N1million and above availed to their board members and staff in the CRMS as well as regularly update the records on these credit facilities on a monthly basis.”

 Last January in an IMF report “Nigeria: Financial Sector Stability Report” it was noted that “Bank supervision has improved markedly since the financial crisis, through better onsite and offsite practices and higher standards of corporate governance.” However, among other things, “non-transparent ownership structures and deficiencies in reporting in the financial sector still need to be fully addressed.”

 The failure to report credit given to board members and staff has been attributed to knowledge gap and lack of enough manpower at the apex bank, a deficit which some operators are wrongly exploiting to their benefit. Financial sector analysts believe that the CBN must urgently go beyond alerts or circulars and begin to sanction the identified culprits to serve as a deterrent.

 In a proper corporate governance framework, directors of companies, as fiduciaries, are required to check the likely excesses of the management of the banks. But it is regrettable that rather than perform the expected umpire role, directors now collude with the management or even instigate the latter to perpetuate these practices which makes the protection of other stakeholders’ interest difficult or impossible.

 We support any effort that is being made by the CBN towards upholding the tenets of corporate governance in the banking sector. We particularly commend the plan for a review of conduct guidelines that will provide clarity on all aspects of corporate governance practices in banks and discount houses.

We believe strongly that banks should be made to abide strictly with relevant corporate governance provisions stipulated by the apex bank, to avoid unruly and unethical practices that are capable of rocking the foundations of the industry, and consequently erode public confidence in the country’s banking system.

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