Directors and key management personnel of Deposit Money Banks borrowed about N549billion from their financial institutions in five years.
This is according to analysis of the banks’ annual reports filed with the Nigerian Stock Exchange Limited between 2019 and 2023.
However, the banks’ loans and advances to some directors and key management personnel as well as related party transactions dropped significantly in 2023. These transactions dropped to N52.40bn for eight financial institutions, when compared to N111.31bn in 2022, indicating a 52.92 percent decline in one year.
This decline came amid the release of new corporate governance guidelines by the Central Bank of Nigeria (CBN), which went into effect August 1, 2023.
In the circular dated July 13, 2023, and signed by Director, Financial Policy and Regulation Department, Chibuzo Efobi, the guidelines, which imposed responsibilities on the Bank’s Board and the executive compliance officers, supercedes other previous codes, circulars and related directives.
The CBN guidelines on related party transactions said, “Banks shall establish a policy concerning insider trading and related party transactions by directors, senior executives, and employees, as well as publish the policy, or a summary of that policy on their website. The policy shall contain appropriate standards and procedures to ensure it is effectively implemented. In addition to the requirements, there shall be an internal review mechanism carried out by the internal audit function of the bank, to assess the compliance and effectiveness of the policy.
“Any Director whose facility, or that of his/her related interests, remains non-performing in any financial institution for more than one year shall cease to be on the Board of the bank, and shall be blacklisted from sitting on the Board of such bank and that of any other financial institution under the purview of the CBN. No director-related loans and/or interest thereon shall be written-off without the CBN’s prior approval”.
Leading the pack in terms of major decline in loans to related parties and entities controlled by key management personnel was Fidelity Bank Plc, which went from N92.31bn at the end of December 2022 to N2.09bn at the end of last year.
In footnotes, the bank however said that some of the related parties like A-Z Petroleum Limited, ?angote Group and Genesis Group, as of 31 December 2022, had “exited the related party relationship post-2022 financial year in line with CBN requirement”.
In 2022, the total value of insider loans for 10 banks including Access Holdings, Guaranty Trust Holding Company Plc (GTCO), Zenith Bank Plc, United Bank for Africa, Fidelity Bank, Wema Bank, Stanbic IBTC Holding Plc, FCMB Group, Unity Bank Plc and Sterling Bank amounted to N131.04bn. Fidelity Bank led the highest for the year, followed by Unity Bank Plc, at N17.32bn and UBA, at N13.74bn.
In 2021, the loans to related parties of these financial institutions rose to N139.16bn, with Fidelity Bank and UBA leading at N97.73bn and N15.28bn, respectively. GTCO trailed in third position, with N6.859bn.
Between 2019 and 2020, a total of N226.6bn was disbursed as loans. In 2019, eleven banks borrowed its key management personnel a total sum of N29.65bn. The figure also includes loans to companies related to the directors.
An analysis showed that GTCO lent N155m, Zenith Bank (N1.76bn), UBA borrowed its directors N297m, Wema Bank (N5.2bn), Stanbic IBTC (N95m), FCMB (N4.8bn), Unity Bank(N7.14bn), Sterling Bank (N10.12bn) to related parties. In 2020, the figure increased by 564 percent or N167.32bn to N196.97bn.
Checks showed that Access Bank lent the highest with a total of N174bn to its directors and companies related to them. This was followed by Unity Bank with N7.55bn. Third on the list was Sterling Bank with N6.01bn. Other banks, including Fidelity, borrowed its directors N986.2m, GTBank (N67.9m), Zenith Bank (N1.797bn), UBA (N206m), Wema Bank (N2.82bn), Stanbic IBTC (N332m), FCMB (N3.2bn), Unity Bank (N7.55bn), Sterling Bank (N6.01bn).
Commenting on the trend, the Chief Research Officer at InvestData Consulting, Ambrose Omordion said: “If an organisation feels that the insider or director can pay the loans given to them, then there is no issue. It is when they do not pay that is where there would be issues.
“Like what is happening now in the economy; banks are not giving loans to ordinary companies unless those with big names, because of economic headwinds. If they give loans to the public and they are unable to repay, Non-performing loans (NPLs) will rise. If the banks offer to insiders that would pay, it is better for them”.
Adding a word of caution, Omordion said, that when done in excess and without due process, then it is bad. “It is when it is done in excess that it is wrong. Even banks know how to safeguard depositors’ money, which is the most important thing. Now, that it (insider loans) is reducing, that’s a good thing for the industry and it is a good thing for regulators too”, he stated.
The Head, Financial Institutions Ratings – Agusto&Co, Ayokunle Olubunmi, pointed out that there was no correlation between insider loans and an increase in banks’ NPLs. He said, “Although it is not a crime to give a loan to someone within the organisation, there is a rule and it may not be at what we call arms length. Having said that, there is no correlation that when you give an insider a loan, it goes bad. There are some banks with insider loans which have been fully paid. However, the risk is there that they may not have done full diligence. Some banks are more stringent when it comes to insider-related loans.
“Majorly because of the CBN corporate governance, you must disclose the amount, the collateral, and the account’s performance. This is why you will see it in the accounts of banks, so that any analysts, investor will see it and if it is non-performing, then it is a red flag”.
A financial analyst and Chief Responsibility Officer, Peculiar Innovative Consulting, Segun Aremu, also lamented the prevalence of the trend in the Nigerian banking sector saying, “Insider loans are prevalent in our Nigerian banking system. It has been happening for a long time. These insider loans display a lack of corporate governance which discourages investors”.
From the minority investor community, the overall stance was that if the loans were performing and disclosed, then there were no causes for concern.
