CBN raises corporate governance bar to boost market confidence

During his May 29 inaugural speech, President Bola Tinubu gave a clear indication of the economic direction his administration would go. It was not surprising when the Central Bank of Nigeria (CBN) quickly adjusted to the new direction.

Swiftly, the apex bank floated the foreign exchange rate at the Import and Export (I&E) window, which has attracted commendation from experts, both local and international. There were also mixed reactions from the market but what was not in doubt is the stability the step has engendered in the foreign exchange market with the old manipulative tendencies now seen as the old order.

With the smartly-orchestrated acquisition of shares in banks assuming a worrying trend, the CBN seems to be rediscovering its proactive role as far as engendering corporate governance in the banking sector is concerned.

As always stressed by the Financial Reporting Council of Nigeria (FRCN) through its code of conduct campaign, there is a need to ensure sustained stability in the financial sector.

It maintained that its Code of Corporate Governance is a set of guidelines and principles that aim to promote transparency, accountability and good governance practices in Nigerian financial institutions. The code was introduced to enhance investor confidence, protect the interests of stakeholders, and ensure that companies in the financial sector operate responsibly and ethically.

Key provisions of the code emphasise the importance of an effective board of directors that can provide strategic leadership, set clear objectives, and monitor the performance of management.

It also encourages the appointment of independent directors to ensure unbiased decision-making and bring fresh perspectives to the board. The code promotes the fair treatment of shareholders and stakeholders, encouraging companies to adopt policies to safeguard their rights and interests.

It equally emphasises the need for financial institutions to have robust risk management frameworks, internal control systems, and effective reporting mechanisms to identify threats.

Previously, FRCN was perceived as a solo promoter of the creed. But last week, the CBN, Nigeria’s banking regulator, took the campaign a step further by issuing a set of guidelines that would enforce corporate governance and promote transparency in the management of the banks and strengthen the oversight framework.

The CBN is implementing a range of policies and regulations to safeguard the interests of depositors, promote financial stability, and maintain the integrity of the banking sector. It sets prudential standards for banks, including capital adequacy requirements, liquidity standards, and risk management guidelines.

The directive aligns with the banking supervision framework, on-site examinations, off-site surveillance and continuous monitoring of banks’ financial condition as well as compliance with regulations. Often, the CBN conducts regular inspections of banks to assess their risk profile, internal controls, governance practices, and compliance with anti-money laundering and counter-terrorism financing measures.

Hence, its circular to all commercial, merchant, non-interest and payment service banks and other financial holding companies concerning corporate governance guidelines is described as timely.

According to the new directive, any investor looking to acquire up to five per cent of any bank in Nigeria must obtain prior approval and no objection from the CBN. Through this instrument, the CBN is now able to effectively ensure the rules and processes leading to takeovers of banks are strictly adhered to unlike what was obtained previously.

As highlighted in section 20.2 of the Corporate Governance Guidelines for Commercial, Merchant, Non-interest, and Payment Service Banks in Nigeria, bank takeover would, henceforth, be less chaotic and distortive.

Classified under the protection of shareholder’s rights provisions, the new regulations attempt to also address recent events in the capital market affecting some commercial banks.

The circular clarified further: “CBN’s prior approval and no objection shall be sought and obtained before any acquisition of shares of a bank (including through the capital market), that would result in equity holding of five per cent and above, by any investor.”

The regulation also stated that no one can own a controlling stake in more than one bank, except if there was prior approval of the apex bank.

“Except where prior approval of the CBN is granted, no individual, group of individuals, their proxies or corporate entities shall own controlling interest in more than one bank.”

The new regulation also states that where the central bank has an objection to any of the acquisitions, the notice of the objection must be communicated to the bank.

It added: “Where the CBN has an objection on any acquisition as stated in Section 20.2 (b), a notice of the objection shall be communicated to the bank, and the bank shall notify such investor(s) within 48 hours.”

The protection of shareholders’ rights regulation also extends to government ownership of banks, which it states should not exceed more than 10 per cent (direct and indirect) for a maximum of five years.

“Government’s direct and indirect equity holding in a bank shall not be more than 10 per cent, which shall be divested to private investors within a maximum period of five years from the date of investment,” the circular said.

The Central Bank has also given the government two years from the effective date of the guidelines to comply with the provision, saying for existing investments above five years, the bank shall within two years from the effective date of the guidelines, comply with the provision.

Not just the banks, the CBN also touched on financial holding companies (FHC) and, indeed, activities around mergers and acquisitions. The directive makes it clear that no director or shareholder could change control of a bank without the prior approval of the bank.

It also states that the apex bank will not allow the transfer of five per cent and above of a bank to any shareholder without its prior approval. According to the document, no FHC or any of its directors, shareholders or agents shall enter into an agreement, which results in a change of control of the holding.

It added: “A change in the control of the FHC, the transfer of shareholding of five per cent and above in the FHC and/or an increase in shareholding to five per cent or more in the FHC. Provided that CBN’s prior approval and No Objection shall be sought and obtained, before any acquisition of shares of an FHC by an investor (including through the capital market), that would result in equity holding of five per cent and above.

“The sale, disposal or transfer of the whole or any part of the business of the FHC, the acquisition or merger of the FHC, the reconstruction of the FHC or the employment of a management agent, management by or transfer of its business to any such agent.”

Among others, the code, which shall be reviewed every three years, mandates a director to report to the board for consideration “any circumstance that may impair the external auditor’s independence and objectivity; any violation of the guidelines, extant laws and regulations, any disregard for accounting and auditing standards or financial reporting requirements; the impairment of the independence of the Board or any of its committees; suspected cases of insider trading, fraud, illegal activities and unreported related party transactions as well as any other unethical behaviour.”

Already, analysts have described the move as a significant departure from the past and a major move toward restoring confidence in the investment market. Previously, the naira floating was hailed promoting a more efficient allocation of resources in the economy. When a currency is allowed to float freely, its value is determined by market forces such as supply and demand.

This means that the exchange rate adjusts to reflect the true market value of the currency. Former president of the World Bank, David Malpass, recently, commended Bola Tinubu’s administration for unifying the exchange rate.

Commenting on a Financial Times report via his official Twitter handle, he said the policies were important steps towards the reduction of corruption in the country.

“Glad to see President Tinubu taking concrete steps to scrap Nigeria’s harmful government subsidies and multiple exchange rates,” Malpass tweeted.

“These are important steps toward currency stability, lower inflation, and reduced corruption in Africa’s most populous country.” A month after the liberalisation, naira has seen over 60 per cent depreciation at the official market. But the black market still trades around N800 to a dollar with the market arbitrage now less than the recommended five per cent. Last year, the premium on the black market went up to about 100 per cent, which experts said was the major cause of round trip transactions and other official manipulations of the market.