Sanction-backed corporate governance code for Banks and Discount Houses in Nigeria

 

With effect from October 1, 2014, a new regime of corporate governance is expected to be in operation in the Nigerian banking industry. By a circular  dated May 16, 2014, the Central Bank of Nigeria (CBN) forwarded the new code of corporate governance and guidelines for whistle blowing in the banking industry to the target institutions. The new code is a slight amendment from the previous code of corporate governance issued in 2006 but the most critical content of the new code is the section relating to sanctions for non-compliance with the code. We will review the key amendments made by the new code. No doubt corporate governance in Nigeria is witnessing a shift from principles based to rules based model as this code for instance makes compliance mandatory for all those within the target industry.

The Nigerian banking industry has witnessed series of restructuring in the last decade which has resulted in a significant reduction in the number of banks from 89 in 2004 to 21 in 2014. The various reform programs of the CBN revealed that poor corporate governance contributed in no small measure to the Nigerian banking crisis which plagued the country within the period hence the identified need to establish and strengthen good corporate governance practices. After the conclusion of the consolidation programme in 2005, a code of corporate governance for banks was issued in 2006. However, further reforms in the banking sector from 2009 revealed that there had been a deficit in corporate governance compliance with high-profile scandals involving abuse of corporate power by bank executives. In some cases, the corporate scandals resulted in criminal prosecutions and the removal of some top bank executives by the regulatory authority.

Notably, the new code has reduced the minimum amount of shares that could be owned by a single individual in a bank from 10% to 5%. The code provides that equity holding of 5% and above shall be subject to CBN’s prior approval and where such shares are acquired through the capital market, the bank is required to apply for a no-objection letter from the CBN immediately after such acquisition. It is believed that the effect of this is to dilute ownership such that no individual has so many shares as would give them excessive influence in the business of any banking institution. This is an important provision because with the sensitive nature of banks and their pivotal role in any nation’s economy, it is imperative to reduce the risk of unhealthy influence from personalised interests.

The new code also prohibits occupation of Board positions by more than two members of the same extended family where the bank is a member of a holding company. Thus where the bank is a member of a holding company such as First Bank Holdco Nigeria, more than two members of the same extended family would be prohibited from Board positions on the bank board as well as the Holding company board. In the past, there have been cases of overbearing influence by board members especially in family controlled banks. The code further prohibits the practice of simultaneous directorships by the same director on boards of both banking institutions and a holding company within a group.

Another fundamental change the new code will bring is the provision of maximum period of ten year tenure for bank Chief Executive Officers (CEOs) which tenure may be broken into periods not exceeding five years at a time. It is believed that this provision is geared towards ensuring increased level of independence and transparency on the boards of banking institutions. This provision was actually initiated by the CBN in 2010 in order to prevent sit-tight syndrome by bank CEOs and the attendant abuse that this could breed. The CBN directive on this can be found here cbn-tenure_guideline19012010

Under the new code, target institutions are expected to make extensive disclosures beyond the statutory disclosure requirements in the Banks and Other Financial Institutions Act, 2004 (BOFIA), Companies & Allied Matters Act, 2004 (CAMA) and other applicable laws. Areas of disclosures to be made by banks include details of directors relating to performance and remuneration; risk assets, risk management, regulatory sanctions and penalties, frauds and forgeries, capital structure and adequacy. The new code provides a whistle blowing guideline for all banks and discount houses and makes compliance mandatory as well.

The most striking feature of the new code is the fact that the code would be mandatory for all banks and discount houses. This is a radical departure from the principles based approach to rules based model of corporate governance. Every target institution is expected to make quarterly returns to the CBN on the status of compliance with the corporate governance code. Failure to comply with the code would attract sanctions in accordance with S. 60 of the BOFIA or as may be specified in any applicable legislation or regulation. Section 60 of the BOFIA provides a range of penalties for defaulting banks or other financial institutions from fine of N2m to suspension of licence. The penalties are applicable for infractions of any rules, regulations, guidelines or administrative directives issued by the CBN under the Act.

It is worthy of note that corporate governance in Nigeria  is moving from the realm of applicability to public companies alone. Private companies, depending on the industry are now compelled to comply as against the previous regime that left them with an option to adapt corporate governance codes. For instance, the Securities & Exchange Commission (SEC) Code of Corporate Governance 2011 is applicable to public companies and companies looking to raise funds from the capital market. But the trend with corporate governance codes for banks has been that they are usually applicable to public and private banks and it is the same with the new code.

Out of the 21 banks in Nigeria, three banks Citibank Nigeria Limited, Heritage Banking Company Ltd and Standard Chartered Bank are privately owned banks. Three other banks – Keystone Bank (formerly known as Platinum Habib Bank Plc), Mainstreet Bank (formerly known as Afribank Plc) & Enterprise Bank (formerly known as Spring Bank Plc) were taken over by Asset Management Corporation of Nigeria (AMCON) in 2010 to forestall distress and collapse of these institutions. AMCON plans to sell these three institutions to worthy investors after they must have been stabilized.

While improved corporate governance practices alone would not be sufficient to ensure stability in the financial system, it plays a vital role which cannot be overlooked. The Nigerian banking industry is expected to witness improved corporate governance practice when the new code takes effect and this should translate to better financial institutions.

The proposed code of corporate governance for Banks and discount Houses can be viewed here Code of Corporate Governance for Banks and Discount Houses in Nigeria

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