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Nigeria: How Country Lost 75 Banks to Poor Corporate Governance

19 November 2007

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analysis

Unbelievable! Nigeria has lost 75 banks since the advent of banking in the country in 1914. Interestingly, the distress and eventual collapse of these banks was occasioned by factors relating to corporate governance. The banks did not collapse due to lack of customers or patronage but due to how they were managed and governed.

For example, a study conducted by the Nigeria Deposit Insurance Corporation (NDIC) listed the factors that caused severe distress in these banks as follows: economic depression (25%), political crisis (17.9%), bad credit policy (25%), interference of board members (32.1%).

The above indicates that issues relating to corporate governance, how the banks were managed and governed, namely bad credit policy and interference by board members, were responsible for 51.1 per cent of the severe distress of the banks.

Another study by the Corporation listed the factors that caused eventual failure or collapse of the banks as follows: bad loans and advances (19.5%), fraudulent practices (16.7%), undercapitalisation (11.8%), changes in government policy (10.8%), bad management (17.9%), inadequate supervision (16.9%), and reliance on forex (6.4%).

Again, issues relating to corporate governance namely, bad loans and advances, fraudulent practices, bad management and over reliance on forex, accounts for 60.5 per cent of the reasons for the collapse of the banks.

Furthermore, the studies reveal that one factor or corporate governance issue that is most responsible for bank failures is bad loans and advances. And, according to the NDIC, most of the bad loans were insider related loans i.e loans granted to staff, management or board members of the banks.

For example, more than 50 per cent of the bad loans in 12 liquidated banks namely FMB, Republic, UCB, Credite, Prime, Group, NMB, Royal, Alpha, Commerce ATB, and Afex, were insider loans. The case of Afex Bank was quite interesting as 95 per cent of the bad loans were insider loans.

In other words, the people appointed to run and manage the banks, ensure safety of depositors money, rather, appropriated the money to themselves in the form of loans which they never paid back.

In some cases, the Chairman or Chief Executive of the bank would use the money borrowed from the bank to build or buy a property which he would then rent to the bank at very prohibitive amount. Of course, in most cases, the loans were not secured, and where it was secured, the security was not done in a way that it can be realized.

Little wonder it came to a time that the banks couldn't pay depositors their money. Of course, the depositors did not know that board members of the bank have cornered their money and there is nothing to pay them.

Speaking at the 11th Seminar for Finance Correspondents and Business Editors organized by the Central Bank of Nigeria (CBN) in Enugu last week, Executive Director, Operations, NDIC, Professor N. Umoh, listed the various corporate governance atrocities committed by the directors of these bank as follows:

Directors did not disclose interest in loans as required by BOFIA (18)(3); Directors did not disclose interest in office or property rented/sold to the bank. BOFIA (18) (3);

Directors did not declare interest in services provided by own companies to the bank (Code of Corporate Governance, CBN); Directors took loans exceeding banks' shareholders' fund unimpaired by losses without CBN approval BOFIA (20)(I);

Unsecured Directors' loans remained non-performing, violating BOFIA 20(2)(a); Directors got interest waivers on non- performing loans without CBN approval BOFIA 20(2)(e); Directors remained on bank boards whilst their unsecured loans remained non-performing BOFIA 44 (2)(b); Directors failed to sign bank share transfer forms to transfer share ownership to the bank for debts owed banks (CBN Circular of 13/11/01); Directors received dividends, even when indebted to the bank.

Umoh further disclosed that these corporate governance infractions were more rampant in government owned and private/family owned banks. That is, banks that are largely owned by government, be it federal or state, and banks owned by an individual or with a particular family having the controlling share are more susceptible to poor corporate governance practices.

In the case of government owned banks, the banks were simply run like parastatals and most decisions are based on political considerations. In these banks, the prevailing order was political appointment of board and management, removal of appointees on TV/radio, bank credit allocation without requisite documentation, appraisal and collteralisation, credit allocation to party supporters with no intention to repay and self serving interest of directors who were not stakeholders.

In the case of private/family owned bank, the promoter or family is the majority shareholder, while the promoter or the family sponsors other shareholders. Of course, the promoter, in most case, becomes the chairman/chief executive.

In these banks, important banking decisions are taken at the family dinner/breakfast tables, while most banks credits goes to the cronies of the promoter or controlling family. Also, bank contracts and purchases are awarded (usually at prohibitive cost) to promoters companies and most employees are candidates of the promoter. This, of course, sets the stage for the promoter or controlling family to run the bank according to his fancies. The former Metropolitan Bank and Afex Bank are classical examples in the regard.

So their promoter, controlling family or directors sent most of the 75 banks, if not all of them, out of business. It would have been tolerable if that were the end of the story. But the directors of the banks, due to their corporate governance atrocities, also sent many organizations, mostly small and medium enterprises that kept money in these banks, out of business and, by extension, their employees into unemployment.

The directors of the banks also sent many individuals and families into poverty. It is pertinent to note that quite a number of these banks collapsed before the establishment of NDIC, hence, the depositors lost all their money trapped in the banks. Many of them had their live savings in the banks, their pension money, e.t.c. Only God can tell how many lives and businesses were ruined and sent to early graves by the directors of these banks.

The import of this is that, should Nigeria experience another banking distress or failure, it would, most likely, be due to issues relating to corporate governance. Again, the import is that the surest way to forestall the occurrence of banking distress and failure in the country is to ensure that those at the helm of affairs of banks adhere to sound corporate governance practices. It is for this reason that the regulatory authorities have been harping on good corporate governance in the banks in recent times to the extent of issuing a code of corporate governance for banks to follow.

But, most importantly, it is time to ban depositors and shareholders in the Nigerian banking industry to understand the need for good corporate governance and begin to take more than passive interest in the way their banks are been governed. Any bank depositor that does not want to wake up one morning and find that his/her money has been trapped due to distress in his bank, or any shareholder that does not to lose his/her investment, no matter how small, in any bank should be at the fore front of the campaign for good corporate governance in the banks.

This has become imperative given the size of the average Nigerian bank today. The shareholders fund of the average bank today is more than the shareholders fund of all the banks in the country twenty years ago. Also, the deposit base of the average bank today is, probably, bigger than that of the whole industry twenty years ago.

Hence, the failure of any of the banks today will result to great consequences, both for the industry and the economy at large. And recent examples have shown that the failure and collapse of big institutions is non-adherence to sound corporate governance practices. That is what killed Enron, the energy giant in United States, and it also killed Worldcom and a host of other large companies that collapsed recently across the globe.

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