When the Central Bank of Nigeria (CBN), early this year, ordered bank directors with non-performing insider-related loans to step down immediately, it was not obvious to many what augury the measure saved the banking sector. This is due to the fact that no bank distress or failure can effectively happen without the collusion or indiscretion of such board members — executive and/or non-executive.
The CBN said: “Directors with non-performing insider-related facilities are required to step down immediately from the board, while the bank should commence immediate remediation of the loans through the recovery of the collaterals, including the shareholdings of the affected directors.” Insider loans refer to loans granted by a bank to its own directors, executives, employees, major shareholders, or related parties.
In the circular that conveyed the directive to the banks, the CBN said the order was aimed at strengthening corporate governance and improving risk management in the banking sector. It said: “Banks are required to regularize within 180 days all insider-related facilities above limits prescribed in Section (5) of Banks and Other Financial Institutions Act (BOFIA) 2020, which were approved by the CBN without timelines.”
Generally, in banking, commercial loans are considered non-performing if the debtor has made zero payments of interest or principal within 90 days, or is 90 days past due. Once a loan is non-performing, the odds the debtor will repay it in full are substantially lower.
In Nigeria, over the years, banks have been carrying varying levels of non-performing loans (NPLs) owing to a number of factors, including poor corporate governance practices such as insider lending, and lack of transparency. The Nigerian economy has been experiencing downturns (booms and bursts), including recessions that usually hampered the ability of businesses to repay loans — leading to accumulation of high NPLs.
There has also been the challenge of banks’ failure to conduct thorough credit risk assessments, leading to lending to un-creditworthy borrowers, resulting in mounting NPLs. In many cases, borrowers fail to provide sufficient collateral to secure loans, making it difficult for banks to recover debts. Also, until recently, the absence of a functional credit bureau in Nigeria made it difficult for banks to access the credit history to assess the creditworthiness of borrowers.
While Nigerian banks are confronted with all these in varying degrees, the insider abuses epitomized by poor discharge of fiduciary responsibility by bank directors have become the most potent in driving NPLs growth. Fiduciary duty of bank directors demand that they act with utmost good faith, loyalty, and integrity in the best interest of the bank. They (directors) owe the fiduciary duty to the bank, its shareholders, and the depositors.
The Companies and Allied Matters Act (CAMA) 2020, the BOFIA 2020, and the Central Bank of Nigeria (CBN) Code of Corporate Governance for Banks and Discount Houses provide the legal framework for bank directors’ fiduciary responsibilities in Nigeria. This framework requires directors and managers of banks to be accountable for their actions and decisions, and must ensure that the bank’s business is conducted in a responsible and prudent manner.
Section 17 of BOFIA 2020 specifically provides that bank directors and managers must avoid any situation that may give rise to conflict of interest or duty. It also mandates that directors and managers must disclose any direct or indirect interest in any transaction or business of the bank.
Unfortunately, many of these provisions are usually breached bare-faced by many directors with the collusion or connivance of all or some members of the executive management. The Nigerian banking system, until recently, has been such that bank directors are usually owners (majority shareholders) who choose and pick who serves on the executive management.
When picked or promoted to the executive management suite (as executive directors), such persons usually end up doing the bidding of the (owner/external) directors, including giving blanket approval to all manner of poorly assessed credit requests from them. Hardly do you have majority shareholders/directors who do not have their ‘proxies’ or ‘fronts’ flooding their banks with loan requests.
Most of these loan requests come from the ‘proxies’ for businesses either solely owned by the bank majority shareholder-director or companies in which he has substantial interest/ownership. However, the introduction of the Bank Verification Number (BVN) as well as the National Identification Number (NIN) that have helped in ‘removing the veil’ on corporate entities has been checkmating the use of ‘proxies’ and ‘surrogates.’
Against this backdrop, the recent order of the CBN for bank directors who are also ‘insider-dealer’ owners of non-performing loans to step down, has come in the nick of time. Apparently, from its vintage position as a regulator, the apex bank has been able to spot the present and potential danger the activities of these ‘insider abuser’ directors pose to the individual banks and the entire industry.
Without a doubt, lack of diligence in pursuit of fiduciary responsibilities, especially recklessness in credit approvals and poor risk management have led to the collapse/failure of not a few banks. Thus, when the CBN revoked the license of one of the banks in June last year, it said this was “due to the bank’s persistent failure to improve its financial performance, which posed threat to the stability of the financial system.”
The CBN really needs to clean the Augean stable, to provide a level playing field for all banks, now that the recapitalisation race is ongoing. No bank directors or executive management should be given the undue advantage to ‘incestuously’ use ‘insider loan’ in the quest to strengthen their banks’ capital.
The apex bank must have discovered a lot of ‘filth’ and ‘games’ while processing the results of the public and rights issues (and even private placements) already concluded by some banks. Now that the race to recapitalise is halfway done (deadline being March 2026), the CBN’s recent initiatives regarding debtor-directors are most politic and timely.
Historically, given the desperation and manipulative tendencies of some bank directors during consolidation or recapitalisation exercises, the CBN’s recent move is a masterstroke. The penchant of some directors to deftly or deviously hold large/majority shares in their banks egg them on to all manner of insider-abuses, including loan defaults and credit allocations to their ‘acolytes’ and ‘fronts.’
By ‘weeding out’ debtor-directors and curbing other insider abuses at this point in time, the CBN is unwittingly amassing public trust and confidence in the banks — critical ingredients for them to thrive. It is usually irksome to the public to know that some insiders abuse their privileges by easily obtaining huge loans from (their) banks, and have them go ‘bad.’
Removal of directors having non-performing insider-related loans clearly signposts the shape and form of banks and banking, post-recapitalisation (from March 2026). It foretells the sanity, integrity and transparency that is likely to hallmark banking going forward. Great outlook indeed!
