SPEECH DELIVERED BY UMARU IBRAHIM, mni, MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER,NIGERIA DEPOSIT INSURANCE CORPORATION, AT THE 2015 EXECUTIVE BREAKFAST MEETING OF THE SOCIETY FOR CORPORATE GOVERNANCE.
Protocol: Distinguished Participants, Ladies and Gentlemen.
1. It gives me great pleasure to be a Speaker at the Executive Breakfast Meeting of the Society for Corporate Governance (SCG).
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 occasionin the gathering of highly distinguished participants.
2. My remarks today will focus on Corporate Governance in Banking and its lessons learnt from experience. 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 (RBZ guideline).
3. Ladies and gentlemen, the global and Nigerian public outcry has been loud and understandable due to the several failures of sound 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 2007-2009 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.
4. 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 episodes of gross abuses by the CEOs of 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.
5. 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:) The removal of the executive management of 8 banks) The injection of N620 billion into 10 critically affected banks to ease their liquidity problems) Acquisition of Intercontinental Bank, Oceanic Bank and Fin Bank by Access Bank, Ecobank and FCMB respectively was encouraged and facilitated by the regulatory authorities) Acquisition of and injection of fresh capital into Union bank by a core investor and AMCON;) Establishment of 3 bridge banks by NDIC and 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.
6. 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 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.
7. One of the greatest 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 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.
8. 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 Vision is to become one of the leading deposit insurers in the world. The Corporation 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.
9. Ladies and gentlemen, 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 had 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 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 and personnel of the Board to ensure compliance with all government mandated codes for Boards as well as against international best practices.
10. 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.
As you are all aware, 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 culture is determined by the board of directors and the senior management that manage the firm. I would therefore offer a few remarks on Balanced Approach for Rethinking Performance Metrics for the Board.
11. The first Code of Corporate Governance for banks was issued by the CBN in 2003, revised in 2006 and 2014. SEC issued Code of Corporate Governance for Publicly Quoted Companies in 2003 and was revised in 2009. The Financial Reporting Council (FRC) Act 2011 empowers the FRC to give guidance on issues relating to corporate governance and to ensure good corporate governance practices in the public and private sectors of the Nigerian economy.
The Banker Committee, led by CBN, approved the adoption of sustainable banking principles in Nigeria by banks, discount houses and development banks in 2012. Assessment of NDIC Compliance with IADI Compliance.
12. 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.
13. 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 ability to fulfill 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 actions to resolve the bank.
14. 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:) 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. Tenure, Removal, filling vacancy in the Board, Conflict of General Reserve Fund In order to build a robust fund for insured deposit payments to compliment the Deposit Insurance Funds [DIF].
Payment of insured Deposits following inability of insured institutions to meet obligations to its depositors 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.) 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. Payment of insured deposit pending action in court- To enable the Corporation pay\\reimburse depositors without the constraint of litigation.
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. The Corporation has also requested for provision of technical assistance from the World Bank under its Financial Sector Reform Strengthening (FIRST) Initiative on Target Funding Framework for NDIC (already established for DMBs, work is on-going for PMBs & MFBs Contingency Planning & Simulation for payout. Development of Strategy for Communication during Crisis to help sustain depositor confidence in the banking system.
15. Consequently, 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. That was a clear testimony that the NDIC not only delivers on its mandate but also operates in line with international best practices due to its corporate governance structure and practices.It is worthy to note that the Corporation is also the first to win the award among African members since the awards were initiated in 2010. The 2009 Nigerian Banking Crisis.
16. 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 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.
17. Ladies and gentlemen, 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 uncovered several issues in the banking system as follows. Uneven concentration of board power. Lack of board commitment to establishing best practices. Competence: Inexperienced/unskilled members on the board.
Inadequate Succession at the helms of the banks. Poor Risk Management policies NPL. Inadequate Minority Shareholder protection. Lack of Enthusiasm & Mistrust no whistle-blowing. Ignorance and Lack of awareness of rights by shareholders. Insufficient shareholder activism institutional and individual.
18. The identified issues led to several reforms and re-regulation of banking sector, which include the following corporate governance reforms, instituting a common financial year end for all banks. establishment of a comprehensive supervisory framework to address weak consolidated financial sector oversight, full adoption of IFRS mandated by 2012 and new detailed minimum reporting requirement for banks, restricting tenure of bank CEOs and board members to a maximum of 10 years, independence and use of external auditors. release of circular on Code of Corporate Governance for banks and discount houses in Nigeria by the CBN. Recent Developments in the Nigerian Banking System.
19. After all these regulatory interventions and given an acceptable time period for banks to have addressed the Corporate Governance breaches and incorporate the new reforms, we therefore have to ask the following questions. Have Nigerian bank Board learnt any lessons?. Are they more focussed, more knowledgeable, more informed and committed as Board members? Based on the examination of 15 banks conducted by CBN/NDIC in July 2014, some of the corporate governance breaches by Nigerian banks observed included the following:.
High incidence of fraud cases by banks staff indicating weak internal controls and poor operational risk management practice. For example, a fraud of N565 million was recently perpetrated in one of our banks and was consummated within five minutes because the bank internal control was compromised.
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 16th July, 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.
Inadequate loan loss provisions\r\nd. 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.
Some boards did not participate actively in exercising oversight over the running of their banks. Some banks did not have capital plans to support their strategic intents. Breach of Non Executive Directors remuneration by some banks contrary to Section 5.3.9 of the Code of Corporate Governance. Lack of succession plans by some bank. Build up of NPLs. Loan concentration in some sectors, eg power sector, state governments, oil & gas.
20. In addition to the above regulatory initiatives, other professional bodies like FITC have been making several efforts at enhancing Corporate Governance. For instance, a 2014 Training for Directors of Banks and Other Financial Institutions had the following as some of the recommendations for improving regulation from the Communique released after the Training. To reduce the risk of failure, regulations should always domesticate and contextualise policies, which are duplicated from other advanced jurisdictions, as most of such policies tend to fail, largely because the right foundation is not laid.
The directors observed that regulation and compliance have become very burdensome and costly. They called the CBN to reduce the cost of regulation, and factor in the cost of compliance in doing business. Regulators should lead by their own example and provide moral authority. They should also pay more attention on internal staff capacity development for enhanced competency and effective examination of banks.
Regulators should promote and encourage internal regulation based on a balance between financial and non-financial metrics; and. There should be more robust collaboration amongst law enforcement agencies, regulatory authorities and the judiciary. Enhancement of Directors Responsibilities.
21. Distinguished participants, there is the need to enforce directors responsibilities as a way of enhancing corporate governance practices in our banks. These responsibilities include: determining the company strategic objectives and policies. monitoring progress towards achieving the objectives and policies thereby enhancing stakeholders/shareholders value and avoiding conflict of interest. appointing senior management.
Promoting the success of the company. Paying attention to health and safety of the employees of the company. accounting for the company activities to relevant parties, e.g. Shareholders, the roles of directors and directors duties and compliance relate generally to corporate governance issues and a breach of same is tantamount to a liability and failure of their oversight responsibilities over the company.
22. Ladies and gentlemen, BOFIA, CAMA and the NDIC Act have already stated liabilities of directors and imposed penalties for parties at fault. According to these Acts, directors are now liable for insider abuse, conflict of interest, rendition of false returns, etc. It is my belief that the Regulatory/Supervisory Authorities should impose further appropriate liabilities on erring Directors as being practiced in other jurisdictions.
In particular, Liabilities of a director will crystallize if he/she contravenes the code of corporate governance guiding the operations of the industry in which he/she belongs. In recent developments, the UK 2006 revised company Law indicates that liability as a director is forever even to his/her estate. If this is the case in Nigeria, and I guess it is, directors should, amongst others, have the right to keep the Board minutes of meetings. Obtain insurance to protect him/herself against reckless behaviour of other directors. Should understand the companies articles of association.
23. It is worthy of note that there is a growing recognition of the pressure on directors, both in terms of workload and also in terms of their legal responsibilities. A typical example was the move by the UK regulatory authorities to enhance the supervision and management of banks with emphasis on the personal responsibilities.
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 sensitive, knowledgeable, ethical and deeply aware of the enormity of their responsibilities to their companies and also to the society.
24. Distinguished participants, in BusinessDay of February 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, edge funds and even the Bank of England itself.
25. The corporate governance aspect of risk management remains a challenge in a number of banks as witnessed some banks in Nigeria and in the widespread failure of risk management in global banks. Our examiners try to focus on the following issues. Boards should understand risk management and should.
Understand that it is not enough to keep risk register. be aware that not all risks are quantifiable. Be capable of identifying the key risks to their business. Understand where the cash is and how it is expended. Appreciate the impact of bad debts/NPLs. Appreciate the financial impact of risks, that is the potential loss.
26. Ladies and gentlemen, monitoring corporate performance is a vital function of every board. Establishing meaningful metrics for example on compensation may be one of the most difficult tasks directors face. 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.
27. The value-based metrics which should attract the attention of the Board include the following. Effective risk management. Gender equality and family friendliness. How gender and family friendly are our bank policies, including working hours and creating a conducive environment for nursing mothers?.
How do we deal with the issue of outrageous deposit mobilisation targets for especially female employees?. How do we deal with the gender composition on the Board of banks, Corporate social responsibility/Sustainable Banking. To what extent are Boards involved in ensuring compliance with Sustainable Banking principles?.
To what extent do Boards pay attention to their banks CSR as a mitigant against reputational risk. Ethics/core values Strategy. Staff Compensation /development. How do the Board ensure the recruitment and retention of ethical staff?.
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 know 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/addition as they drive the financial metrics and not the other way round.
28. In conclusion, the causes of the financial crisis are complex and multidimensional. However, most reports places 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 and being ethical in our conduct as well as a value system that promotes trust.
As Forbes, in October 1917 says, If business cannot be conducted under the existing economic order cleanly, honorably, ethically and humanely, then it ought to be swept away and something different established in its stead.
29. The NDIC shall continue to maintain appropriate relationship with other safety-net participants as well as other stakeholders in a manner that further the effective discharge of its statutory mandate.
30. We honour the past, we live in the present, but now must engage the future. If we do not engage the future, but simply acquiesce we become the victims of someone else agenda. The future is not a place where we are going, but a place we are creating, R Neville.
31. I THANK YOU