Distinguished Participants, Ladies and Gentlemen.
- It gives me great pleasure to be a Speaker at the Executive Breakfast Meeting of the Society for Corporate Governance (SCG). I wish to thank members of this highly esteemed society under the able leadership of its President, Chief Olusegun Osunkeye, CON,OFR, for their efforts in promoting good corporate governance practices in Nigeria. The important work carried out by the society has never been so relevant and timely given the recent global financial crisis as well as Nigerian banking crisis. I would like to first congratulate SCG for organising this highly informative meeting and thank them for making me part of this very important occasion in the gathering of highly distinguished participants.
- My remarks today will focus on Corporate Governance in the Nigerian Banking system and the Objectives and role of the NDIC. Corporate Governance is the system of rules, practices and processes by which a company is directed and controlled and includes the relationships among stakeholders and the goals for which the organization is governed. Successful Corporate Governance entails operational independence, accountability, transparency of disclosure and integrity. Taken further it can be described as the processes and structures used to direct & manage the business & affairs of an institution, with the objective of ensuring its safety & soundness & enhancing shareholder value (Reserve Bank of Zambia guideline).
- Ladies and gentlemen, the public outcry has been loud and understandable due to the several failures of corporate governance practices in banks. Directors, regulators and shareholders, also policymakers and the general public need to pay more attention to corporate governance. A major lesson to draw from the global financial crisis of 2007 – 09 is that of failure of corporate governance. The 2009 CBN and NDIC special examination of all the 24 banks in Nigeria revealed that 10 banks were critically distressed as a result of many factors including weak macro-economic and prudential management, poor corporate governance practices, inadequate disclosure and transparency regime, weak regulation as well as inadequate supervision and enforcement, amongst others.
- On corporate governance, the special examination revealed that boards and executive managements in some banks were not equipped to run their institutions as their ineffectiveness manifested in the form of overbearing influence of chairman/CEO, particularly in family controlled banks; poor leadership; ineffective board committees; non-adherence to the code of corporate governance and weak ethical standards; amongst others. The unprecedented and monumental incidences of alleged gross abuses by the CEOs of some failed banks such as Oceanic and Intercontinental banks are still fresh in our memories. The enthronement of good corporate governance has, therefore, remained top in the agenda of Regulatory Authorities as well as governments seeking to use robust and stable financial systems to drive national development. The regulatory response to the observed problems will be discussed in detail later in the paper.
- The observed problems highlighted above informed the comprehensive reform embarked on by the regulatory authorities.The reform was articulated under four pillars; Enhancing quality of banks, establishing financial stability, enabling healthy financial sector evolution and ensuring the financial sector contributes to the real economy. As part of the reform, some specific actions, including the following, were taken:
a) The removal of the executive management of 8 banks;
b) The injection of N620 billion into 10 critically affected banks to ease their liquidity problems;
c) Acquisition of Intercontinental Bank, Oceanic Bank and Fin Bank by Access Bank, Ecobank and FCMB respectively was encouraged and facilitated by the regulatory authorities;
d) Acquisition and injection of fresh capital into Union bank by a core investor and AMCON;
e) Establishment of 3 bridge banks by NDIC which were subsequently acquired by AMCON. The banks are: Mainstreet Bank (which acquired assets and assumed liabilities of former Afribank), Keystone Bank (for former Bank PHB) and Enterprise Bank (for former Spring Bank).AMCON injected N679 billion into the bridge banks. The bridge banks ensured continuity of banking services of the affected banks, preserved depositors’ funds and none of the banks’ employees lost their jobs.
- It is important to consider the significance of the Bridge-Bank mechanism by the NDIC and the CBN. As at December 2011, the total Deposits of Banks in the Nigerian banking system was N11.371 trillion. N2.984 trillion and N816.29 billion were the total deposits of the 8 intervened banks and the 3 Bridge Banks, respectively. The NDIC’s risk exposure then was N567.95 billion as against DIF of N353.06 billion. A total 6,667 jobs in the affected banks were saved and all their branches and services being provided were maintained. Through the issuance of AMCON bonds, N1.7 trillion was injected into the banking system. This intervention has made it possible for banks to be lending to the private and real sector. The impact of this NDIC/CBN regulatory intervention cannot be overemphasized with respect to enhancing financial and economic stability.
- One of the serious revelations from the global and local financial crisis has been the widespread failure of risk management. In many cases risk was not managed on an enterprise basis and not aligned with corporate strategy. Boards were in a number of cases ignorant of the risks facing the company. Risk managers were often separated from management and not regarded as an essential part of implementing the company’s strategy. Reflecting the lack of adequate standards, disclosure of foreseeable risks was often poor.
The Role of NDIC in Promoting Robust Banking System through enthronement of sound Corporate Governance
- As you are all aware, the NDIC is an independent agency of the Federal Government of Nigeria, established by Decree 22 of 1988 which was repealed and replaced with the NDIC Act 16 of 2006.As a key financial safety net player, NDIC was established to be a risk minimizer with broad mandates of deposit guarantee, banking supervision, failure resolution and bank liquidation. The public policy objectives of NDIC are to protect depositors and contribute to the stability of the financial system. The NDIC’s Vision is to become one of the leading deposit insurers in the world. The Corporation’s Mission is to protect depositors and contribute to the stability of the financial system through effective supervision of insured institutions, provision of financial and technical assistance to eligible insured institutions, prompt payment of guaranteed sum and orderly resolution of failed insured institutions.
- In order to achieve its vision and be effective in the delivery of its mission, the affairs of the NDIC have continued to be guided by sound corporate governance practice since inception. The need to enthrone sound corporate governance practice in the NDIC has therefore informed the adoption of so many initiatives, chief amongst which were:
• Has adopted a Charter and Code of Corporate Governance for its Board which are hinged on sound governance structures, enhanced relations and protection of the right of stakeholders, sound risk management and internal audit, greater disclosure and business sustainability.
• NDIC Board also complies fully with the Code of Corporate Governance put together for all regulators under the auspices of the Financial services Regulation Coordinating Committee (FRSCC).
• Has also put in place a Code of Conduct for its Bank Examiners to ensure that they act in a manner that would promote the integrity, image and reputation of the NDIC.
• Has consistently complied with the provisions of relevant Acts of the Federal Government of Nigeria with regard to information disclosure of its operations to its stakeholders and the general public.
• Publishes its Annual Report and Statement of Accounts which are made available to NDIC’s shareholders, the Public Accounts Committee of the Senate& House of Representatives, the CBN and Federal Ministry of Finance as well as the banking public.
• KPMG has been continuously assessing the structure, functions, operations to ensure its effectiveness and compliance with the laws and international best practices.
- Distinguished participants, globally, there have been several efforts to improve code of corporate governance. The OECD Principles of Corporate Governance focussed on four key areas for urgent action: corporate risk management, pay and bonuses, the performance of board directors, and the need for shareholders to be more proactive in their role as owners. Effective risk management is based on a foundation of good corporate governance and rigorous internal controls. Taking calculated risks is part of any business enterprise. Ultimately, a firm’s risk is determined by its board of directors and senior management appetite.
Assessment of NDIC Compliance with IADI Core Principles for Effective Deposit Insurance Systems
- At this juncture, I will briefly like to talk about the International Association of Deposit Insurers (IADI), which was formed in May 2002, to enhance the effectiveness of deposit insurance systems by promoting guidance and international cooperation. The NDIC, together with 78 other deposit insurers from 76 jurisdictions, are members of the Association. IADI is a global standard setter similar to Basel Committee on Banking Supervision (BCBS), Financial Stability Board (FSB) and International Association of Insurance Supervisors (IAIS) to mention a few. In 2009, IADI in conjunction with the BCBS developed the Core Principles for Effective Deposit Insurance Systems, which is a catalogue of fundamental principles concerning the operation of deposit insurance organizations and their relationship with other financial safety net members. In 2010, work was completed on the “Core Principles for Effective Deposit Insurance Systems. Methodology for Compliance Assessment.” In 2011, the Core Principles were added to the list of core standards for stable financial systems by the Financial Stability Board (FSB). The methodology for compliance with the Core Principles is used by the International Monetary Fund and the World Bank in periodic financial sector stability assessments.
- Distinguished participants, it is worthy of note that in 2011, a workshop was held in Abuja whose focus was on the extent of compliance of the NDIC with the 18 Core Principles for Effective Deposit Insurance Systems. The workshop was led by an international team of facilitators/assessors from the FDIC, the World Bank, Deposit Protection Board of Zimbabwe and Deposit Protection Fund of Board of Kenya. At the end of the exercise, the NDIC was assessed to have fully complied with 7 Core Principles (including Mitigating Moral Hazard, Compulsory Membership and Coverage), largely complied with 8 Core Principles (including Corporate Governance, Mandate and Public Policy and Objectives, PPO) and Materially Non-Compliant (MNC) with two Core Principles. PPO and Mandate were not clearly specified in the NDI Act, hence the reason for the getting Largely Non-Compliant rating. In the case of Funding, the Largely Non-Compliant score was due to the fact that the Corporation had not established a target fund ratio then, and in accordance with the Fiscal Responsibility Act, the NDIC is required to remit annually to the Treasury 80 per cent of the surplus funds after paying for the NDIC operating expenses. This limits the growth of the deposit insurance fund and constrains NDIC’s ability to fulfil its financial responsibilities. The NDIC got MNC rating under Powers because shareholders of a failed bank can file an injunction with the Federal High Court and stall NDIC’s actions to resolve the bank.
- The Corporation therefore proposed amendments aimed at addressing some challenges and issues that came to fore after the 2005 bank consolidation exercise as well as the need to fully comply with the IADI core principles of Deposit Insurers based on the 2011 assessment. Some of the proposed amendments are:
a) Public Policy Objectives -a new proposal stating clearly in the enabling law the public policy objectives of DIS in Nigeria in line with best practices and in compliance with the requirements of IADI.
b) Tenure, Removal, filling vacancy in the Board, Conflict of
c) General Reserve Fund – In order to build a robust fund for insured deposit payments to compliment the Deposit Insurance Funds [DIF].
d) Payment of insured Deposits following inability of insured institutions to meet obligations to its depositors
e) Examination and Report of Examination– The powers of the Corporation to examine banks as a risk minimiser which are contained in the Act since inception are being retained for effective supervision of the operators.
f) The Corporation as Conservator– This new proposal is to provide legal frame work for the provision in BOFIA requiring CBN to handover distress banks to the Corporation in order to protect its status as a conservator.
g) Payment of insured deposit pending action in court– To enable the Corporation pay\reimburse depositors without the constraint of litigation.
h) Dealing with parties at fault in Bank Failure – This proposal will empower the NDIC to seek legal redress against those parties at fault in bank failure.
- Notwithstanding the above short comings, the NDIC won the 2014 IADI award of ‘The Best Deposit Insurance Organization of the Year under Category 2 – Core Principles’ compliance and International collaboration.’ This is a clear testimony that the NDIC not only delivers on its mandate but also operates in line with international best practices.
The 2009 Nigerian Banking Crisis
- Distinguished participants, before the banking system consolidation of 2005, there was prevalence of weak corporate governance which manifested itself through deliberate misreporting of information to as well as non-compliance with regulatory requirements which was a major breach of the bank’s operating condition and there was general lack of adherence to professional ethics. The system had huge non-performing loans including insider related credits due to gross abuses and weak internal control. The banks did not publish their annual accounts in good time in line with regulatory requirement. Consequently, some banks were insolvent as evidenced by negative capital adequacy ratios and shareholders’ funds that had been completely eroded by operating losses.
- Banking supervision in Nigeria is the joint responsibility of the CBN and NDIC and is carried out through on-site examination and off-site surveillance between the two institutions. Nigerian economy witnessed a meltdown in its stock market that collapsed by 70% in 2008–2009, many Nigerian banks sustained huge losses, due to their exposure to the capital market and downstream oil and gas sector. As a result, a special joint committee of CBN and NDIC was constituted that conducted a special examination of all the 24 universal banks in Nigeria in 2009. The special audit of the 24 banks revealed several issues in the banking system as follows:
a. Uneven concentration of board power
b. Lack of board commitment to establishing best practices
c. Competence: Inexperienced/unskilled members on the board
d. Inadequate Succession at the helms of the banks
e. Poor Risk Management policies – NPL’s
f. Inadequate Minority Shareholder protection
g. Lack of Enthusiasm & Mistrust – no ‘whistle-blowing’
h. Ignorance and Lack of awareness of rights by shareholders
i. Insufficient shareholder activism – institutional and individual
- The identified issues led to several reforms and re-regulation of banking sector, which include the following corporate governance reforms:
a. instituting a common financial year end for all banks;
b. establishment of a comprehensive supervisory framework to address weak consolidated financial sector oversight;
c. full adoption of IFRS mandated by 2012 and new detailed minimum reporting requirement for banks.
d. restricting tenure of bank CEOs and board members to a maximum of 10 years
e. independence and use of external auditors
f. release of circular on Code of Corporate Governance for banks and discount houses in Nigeria by the CBN.
g. Adoption of differential premium assessment by NDIC.
Recent Developments in the Nigerian Banking System
- There are clear indications that the Nigerian banking system is much stronger than it was before the reforms as shown by the following performance indicators:
Although the Capital Adequacy Ratio (CAR) of the Deposit Money Banks(DMBs) declined by 1.26percentage points from 17.18% in 2013 to 15.92% in 2014, it exceeded the minimum capital adequacy threshold of 10%. As at December, 31 2014, three (3) out of twenty four (24) banks failed to meet the minimum prudential CAR of 10% compared to one (1) bank in 2013.
The Asset Quality of the banking industry significantly improved during the period under review. Table 11.2 shows the quality of assets of the industry as at 31st December, 2014 relative to December 2013. The position of asset quality for the period is further illustrated in Charts 12A and 12B.
– The banking industry total loans and advances stood at ₦12.63 trillion in 2014, showing an increase of 25.73% over ₦10.04 trillion granted in 2013.
– The industry’s volume of non-performing loans increased by 10.26% from ₦321.66 billion in 2013 to ₦354.84 billion in 2014
– The banking industry non-performing loans to total loans ratio improved from 3.20% in 2013 to 2.81% in 2014 and was within the regulatory threshold of 5%.
– The observed improved asset quality could be explained by the improved process of loan underwriting as well as the continued purchase of non-performing loans (NPLs) by AMCON.
Earnings and Profitability
The unaudited profit-before-tax (PBT) of the banking industry stood at ₦601.02 billion, representing an increase of 11.31% over ₦539.97 billion reported in 2013.
The banking industry liquidity risk was moderate during the period under review. The industry average liquidity ratio rose from 50.63% in 2013 to 53.65% in 2014 showing an increase of 3.02% over 2013 level. Individually, all the DMBs in the industry had liquidity ratios in excess of the minimum prudential requirement of 30%, as at 31st December 2014, indicating that all DMBs were sufficiently liquid.
Level of Soundness of DMBs
The banking industry performance and level of soundness in 2014 indicated that twenty three (23) DMBs were rated sound and satisfactory, only one DMB was rated marginal during the period under review. Overall the banking industry was safe and sound in 2014.
- Notwithstanding the above, the examination of 15 banks conducted by CBN/NDIC in July 2014 revealed the following:
a. High incidence of fraud cases by banks staff indicating weak internal controls and poor operational risk management practice. The DMBs reported 10,612 fraud cases in 2014 compared with 3,756 cases reported in 2013, representing an increase of 182.77%. In the same vein, the amount involved increased by ₦3.81 billion or 17.5% from ₦21.80 billion in 2013 to ₦25.61 billion in 2014. Also the expected/actual loss increased from ₦5.76 billion in 2013 to ₦6.19 billion in 2014. The increase of 7.57% in expected/actual loss in fraud and forgeries was mainly due to the astronomical increase in the incidence of web-based (online banking)/ATM and fraudulent transfer/withdrawal of deposit frauds;
b. Breach of insider-related facilities as a percentage of their respective paid -up capital contrary to the provision CBN circular Ref no. BSD/09/2004 dated 16thJuly, 2004. The circular restricted the amount directors or significant shareholders can borrow to 10% of paid up capital. However, we had a bank whose insider-credit was more than 700% of its paid-up capital;
c. Inadequate loan loss provisions;
d. Operation of ambiguous organizational reporting structure which goes against the principle of unity of command and which has the potential of undermining and diluting the authority of the MD/CEO as well as the executive management;
e. Some boards did not actively exercise their oversight responsibilities over their banks;
f. Some banks did not have capital plans to support their strategic plan;
g. Breach of Non Executive Directors’ remuneration by some banks contrary to Section 5.3.9 of the Code of Corporate Governance;
h. Lack of succession plans by some banks;
i. Build-up of Non-Performing Loans (NPLs) as the NPLs increased from N286.09 billion in 2012 to N354.84 in 2014 and further to N546.02 billion in March 2015;
j. Loan concentration in some sectors, such as power sector, state governments, oil & gas; and
k. Failure of some banks to implement the recommendations of Bank Examination Reports.
These worrisome developments informed the efforts of the NDIC to seek for the repeal and the re-enactment of its Act to have powers to deal with persons who contribute to bank failures and powers to sanction erring bank directors for non-implementation of recommendations of Bank Examination Reports.
- There is the need to remind ourselves of fundamental responsibilities of directors which need to be examined so as to enhance corporate governance especially in our banks. These include:
a. determining the company’s strategic objectives and policies;
b. monitoring progress towards achieving the objectives and policies thereby enhancing stakeholders’/shareholders’ value and avoiding conflict of interest;
c. appointing senior management;
d. Promoting the success of the company;
e. Paying attention to health and safety of the employees of the company;
f. accounting for the company’s activities to relevant stakeholders; and
g. ensuring loyalty to the company.
- The Banks and Other Financial Institution Act 1991 which is the principal law governing operations of banks in Nigeria provides that a manager or officer who is guilty of extending facility contrary to the banks regulations should on conviction be liable to a fine of N100, 000 or to imprisonment for a term of 3 years and forfeiture of any benefit to the Federal Government. Furthermore, the Act provides that any director found guilty of failing to declare his interest as required under the Act shall on conviction be liable to fine of N100, 000 or 3 years imprisonment.
Unfortunately the Companies and Allied Matter Act did not provide any penal sanction for directors who unjustly enrich themselves at the expense of their company but merely provides that they should indemnify the company for loss or damage occasioned thereby. Furthermore where a director accepts a bribe, a gift, or commission either in cash or kind from any person or a share in the profit of that person in respect of any transaction involving his company in order to introduce his company to deal with such a person, such person commits an offence and the actual gift should be recovered and then the person may be sued if the company sustains any damages.
However under the NDIC Act a director, officer or any staff of an insured institution who fails to take all reasonable care to secure compliance with the provision of the Act; or fails to take all reasonable care to secure the authenticity of any statement submitted under the Act, is liable on conviction to imprisonment for a term not exceeding two years or a fine not more than N200, 000 or both such fine and imprisonment. It also provides that any insured institution that reimburses or pays for a staff, officer or director directly a fine imposed under the Act is liable on conviction to a fine of not more than N5,000,000 and also forfeit the amount repaid or reimbursed to the staff.
The Failed Banks Act provides that a director, manager, officer or employee of a bank who knowingly, negligently or wilfully grants, approves or is connected to the grant or approval of a credit facility to a person without collateral is liable on conviction to 5 years imprisonment without an option of fine or for 3 years imprisonment without option of fine for receiving or participating in sharing personal gratification after the procurement of the loan.
The question is how adequate are these sanctions? Shouldn’t we seek for more stringent sanctions in order to deal with irresponsible and greedy behaviours which we may again witness?
- It is worthy of note that there is a growing pressure on directors, both in terms of workload and also in terms of their legal responsibilities. A typical example was the recent move by the UK regulatory authorities to enhance the supervision and management of banks with emphasis on the personal responsibilities of directors. This is with a view to ensuring that the problems which led to the banking failure in the UK and other parts of the world are greatly minimized. In this regard, both the UK Companies Acts of 2006 and the recent tough new banking rules are compelling some bank directors to think twice about their suitability and competence to remain in their positions. According to Financial Times newspaper of 8th October, 2014, “City disquiet at tough new rules sparks HSBC board departures”, bank directors are looking at their position and saying “Am I up for this?”. The central message is that reckless directors may go to jail and this led to the resignation of some members of the HSBC Board.” This phenomenon is obviously not confined to the UK but is a global trend which serves as a wake-up call for directors to be more responsive, knowledgeable, ethical and deeply aware of the enormity of their responsibilities to their companies and also to the society.
23 Distinguished participants, it is in the same vein that according to the BusinessDay of June 12, 2015, Mark Carney, Bank of England Governor had these to say about liabilities of bank directors and tough new financial sanctions. He announced an end to “age of irresponsibility” and ethical drift with the introduction of tougher criminal sanctions for market abuse by directors in response to a string of scandals that have cost big banks (including Barclays, HSBC and Royal Bank of Scotland) billions of pounds in fines for misconduct. Carney told bank executives that “Unethical behaviour went unchecked, proliferated and eventually became the norm”. Mr Carney stated that maximum criminal penalties for market abuse will be extended from seven to ten years in prison, in line with other fraud offences. The new rules for senior bankers will also cover asset managers, hedge funds and even the Bank of England itself.
- Ladies and gentlemen, in addition to these challenges, there is a paradigm shift in measuring Board performance not only in terms of financial performance but also value-based metrics. While financial metrics of board performance for banks (capital adequacy, asset quality, liquidity, growth, profitability and efficiency, among others) remain relevant, the value-based metrics have become more imperative.
25 Some of the ingredients of value-based metrics which the Board should be conversant with include the following:
i. How gender and family friendly are our banking policies, including working hours and creating a conducive environment for nursing mothers?
ii. How do we deal with the issue of outrageous deposit mobilisation targets for especially female employees?
iii. How do we deal with the gender composition on the Board of banks?
iv. To what extent are Boards involved in ensuring compliance with Sustainable Banking principles?
v. To what extent do Boards pay attention to their banks’ CSR as a mitigant against reputational risk?
vi. How do the Board ensure the recruitment and retention of ethical staff?
vii. How much attention is being paid by the Board on driving consumer protection initiatives, especially to the poor segment of the society, so as to mitigate reputational risks and encourage financial inclusion?
With regard to Staff Compensation/development, we need to ask whether the Board ensured the fairness and adequacy of staff compensation and capacity building? It is important to indicate at this juncture that Boards should pay adequate attention to the metrics from the perspective of value creation as they are the drivers of the financial metrics and not the other way round.
- In conclusion, the causes of the financial crisis are complex and multidimensional. However, most reports place a good deal of blame on the Boards of directors for failing to properly supervise risk management and incentive systems. The Board of Directors and Senior Management have a critical role to play in charting a path for a robust, safe and stable banking system. The fact remains that good governance flows from probity, honesty, ethical conduct and trust. As Forbes, in October 1917 says, “If business cannot be conducted under the existing economic order cleanly, honourably, ethically and humanely, then it ought to be swept away and something different established in its stead.
- The NDIC will continue to contribute to the promotion of sound corporate governance in our banking system in line with its mandate of deposit guarantee, supervision and distress resolution so as to ensure the safety and soundness of the system.
- I thank you for your attention.