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In response to corporate governance issues observed in several financial institutions in Nigeria, including smaller banks, the Central Bank of Nigeria (CBN) has implemented stricter regulations to enhance banking oversight.
The CBN’s decision to enforce the code of corporate governance, released by the Financial Reporting Council (FRC) in 2019, was triggered by ongoing concerns stemming from a significant share acquisition by Oba Otudeko, the chairman of Honeywell Group.
Two years ago, Otudeko was removed from the board of FBN Holdings Plc due to substantial insider loans offered at below market rates, a common practice among Nigerian deposit money banks.
Otudeko subsequently increased his shareholding to 14.8% in FBN Holdings Plc, reclaiming his position as chairman in what some analysts referred to as a hostile takeover. Such insider loans, often priced significantly below commercial rates, have led to write-offs without proper recourse.
In a recent circular addressed to commercial banks, merchant banks, non-interest banks, payment service banks (PSBs), and financial holdings companies, the CBN announced changes to the corporate governance code. These changes aim to address pressing issues related to related party transactions and insider loans, particularly within the PSBs.
According to the new guideline, no individual, group, proxy, or corporate entity can hold a controlling interest in more than one bank without prior approval from the CBN. Furthermore, any acquisition of shares in a bank resulting in an equity holding of 5% or more requires prior approval and no objection from the CBN.
The circular also stipulates that government equity holding in a bank should not exceed 10% and should be divested to private investors within five years from the date of investment. Existing investments held for over five years should comply within two years from the effective date of the guidelines.
Regarding related party transactions, the circular states that directors whose facilities, or those of their related interests, remain nonperforming in any financial institution for more than one year will cease to be on the board of the bank. Additionally, no director-related loans or interest can be written off without the prior approval of the CBN.
Analysts anticipate that these new regulations will promote sound internal relationships, address issues of insider loans and trading, and improve shareholding structures within banks, thereby enhancing the overall stability of the banking sector.
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