Babajide Komolafe
10 November 2008
The Nigeria Deposit Insurance Corporation 2007 annual report has shown that some banks were yet to imbibe the tenets of the Code of Corporate Governance issued by the CBN in 2006, Babajide Komolafe writes
Following the wave of corporate failures around the world as typified by the fall of Enron, Worldcom and others, the awareness of the corporate world was awakened to the importance of corporate governance. This awakening led to various national and international efforts to enhance corporate governance practices and prevent further corporate failures.
In Nigeria and especially in the banking industry, in addition to the failure of Enron and others, poor corporate governance was identified as one of the major factors responsible for all the distress experienced in the industry and the concomitant lose of about 75 banks. Effort to address this, led to ways of inculcating good corporate governance in the financial sector. The efforts which started with the establishment of a sub-committee of the Bankers Committee on Corporate Governance evolved over time to the issuance of a Code of Corporate Governance for Banks by the Central Bank of Nigeria in 2006.
Corporate governance refers to the processes and structures by which the business and the affairs of the institution are directed. It is about taking decisions that boost the credibility and viability of an institution and hence prolong its existence as a going concern. Hence, when poor corporate governance persist in an organization over a prolong period of time, the failure of such organisation is inevitable. Consequently, the code issued by the CBN in addition to promoting best practices in cooperate governance in banks, it is to ensure the continual existence of the banks and by extension the safety of depositors money.
However, The Nigeria Deposit Insurance Corporation 2007 annual report reveals that a significant number of Nigerian banks are yet to appreciate the importance of corporate governance, and hence rather than embracing good corporate governance practices as indicated in the code they are embracing poor corporate governance. That is the board and management of this banks is running their banks in a way that undermines their continual existence and the safety of depositors' money.
The report which, according to the corporation is based on ten routine examinations, one special examination and 20 special investigations arising from petitions and complaints from the banking public and other stakeholders conducted during the year, reveal that the examined banks exhibited various weaknesses in corporate governance.
"Some of them were yet to imbibe the tenets of the Code of Corporate Governance issued by the CBN in 2006. Non-performing insider-related debts remained a cause for concern. Board oversight was weak in some of the banks. In some instances, the boards had assigned the responsibility of vetting big-ticket transactions to their respective credit committees that were often dominated by the executive directors. Yet, such boards had failed to institute effective feed-back mechanisms to keep them abreast of the status of their respective bank's credit portfolios.
Some of the governance weaknesses observed in the course of routine examinations of banks during the year included the following; Failure to institute appropriate framework for risk management; Non compliance with the requirement to institute contingency plan for liquidity support at the time of crisis; Failure to develop or test business continuity and disaster recovery plans; Investing in subsidiaries without CBN approval; Failure to appoint independent directors; Resort to use of bank's funds to purchase managers' cheques and crediting same to debtors' accounts as evidence of repayment of non performing loans in order to evade provisioning; Granting of share purchase loans to various individuals to purchase the respective bank's shares and using such shares as collateral; Willful violation of banking laws, rules and regulations; insiders' dealings and abuses; and Weak oversight of management by the respective banks' boards.
One of the more critical governance issues observed in the banks had to do with non reliability of financial statements generated by the banks. Loans were deliberately misclassified as other assets while long term loans were packaged as Commercial Papers in violation of the circular on the Treatment of Bankers Acceptances and Commercial Papers-It was worrisome that some of the -External Auditors of banks did not take exception to such undesirable practices."
These of course are frightening disclosures about the way some of the banks in the country are being run and managed. Of course no depositor would patronise any bank he or she is aware is being managed as described above. This is because in the long run and if the trend continues, such bank will collapse and depositors would lose their money.
What more, perhaps as a result of or in addition to these, the report also revealed the persistence and prevalence of sharp and unethical practices by banks on an increasing and frightening dimensions.
The corporation stated, " As in the previous years, the routine examinations and investigations revealed violation of banking laws, rules and regulations of which the following were most common:
Non-implementation of recommendations contained in previous bank examination reports; Failure to provide the minimum information prescribed for credit printout; Acquisition of landed properties without the approval of CBN; Rendition of inaccurate and misleading financial statements to the regulatory authorities; Granting credit facilities in excess of specified single obligor limits; Prevalence of large volume of non-performing insider-related credit facilities; and Investments in subsidiaries without CBN approval.
Continuing, the corporation stated, "Apart from the violations of banking laws, rules and regulations, there were instances of willful violations of Foreign Exchange rules and regulations. Some of the banks examined also violated the Money Laundering (Prohibition) Act, 2004 especially the rules pertaining to "Know Your Customers" (KYC), staff awareness and training. The greatest challenge faced by banks, post consolidation, arose from high capitalization and the attendant pressure to generate acceptable returns to shareholders. Consequently, banks had become more enterprising and daring in their quest for profits.
This manifested in the array of products being offered to the banking public; and establishment of subsidiaries to compete in areas hitherto neglected or dominated by a few players. Accordingly, many banks had recorded strong showing in Insurance, Capital Market Operations, Trusteeships, Company Registrars, Assets Management, et cetera. However, it was observed that some banks had turned their various subsidiaries into vehicles for circumventing regulatory requirements.
For instance, some banks engaged in financing highly risky business activities including speculative trading in stocks and shares through their respective subsidiaries. The risky nature of the transactions conducted via these subsidiaries could pose significant challenges to the health and continued survival of the parent bank. The emerging trend underscored the need for consolidated supervision of banks.
Furthermore, the report puts a question mark on the integrity of the CBN and the transparency of the consolidation exercise when it reveal that contrary to the general belief not all the 25 banks that scaled the N25 billion capital base hurdle actually had shareholders funds of N25 billion.
According to the report, the shareholders' funds of one other banks as at December 31st 2008 was N20.35 billion. Meanwhile in 2006 the same banks was reported to have shareholders' fund of N26.3 billion. Although the corporation stated that the 2006 figure was unadjusted shareholders' funds, what it silently revealed is that the 2006 figure was the product of financial engineering by the management of the banks to meet the consolidation deadline. This means that the banking public is yet to hear the complete story of the banking consolidation exercise.
Furthermore, one of the reasons for the consolidation exercise was the oligopolistic nature of the banking industry i.e. a situation whereby out of the then 89 banks ten controlled more than 50 per of the market share. The NDIC report however reveal that this situation not only persist, it has aggravated.
It stated, " The assets of the top ten banks stood at N9.362 trillion representing 71.96 per cent of the total assets of the industry as at end of December 2007. This development was an indication that the oligopolistic nature of the banking industry in Nigeria still continued three years into the consolidation programme".
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