In five years, the directors and senior management of Deposit Money Banks borrowed over N549 billion from their financial institutions.
The PUNCH research reviewed the banks’ yearly reports that were submitted to the Nigerian Exchange Limited between 2019 and 2023 indicates this.
However, in 2023, the banks’ advances and loans to certain directors, important management figures, and related party transactions sharply decreased.
These transactions decreased by 52.92 percent in a single year, from N111.31 billion in 2022 to N52.40 billion for eight financial institutions.
Access Holdings, Guaranty Trust Holding Company Plc, Zenith Bank Plc, United Bank for Africa, Fidelity Bank, Wema Bank, Stanbic IBTC Holding Plc, and the FCMB Group are among the financial firms that would be examined in the 2023 review.
This decline came alongside the Central Bank of Nigeria’s announcement of new corporate governance requirements, which became effective on August 1, 2023.
The guidelines that imposed responsibilities on the bank board and executive compliance officers are contained in a circular dated July 13, 2023, signed by Chibuzo Efobi, Director, Financial Policy and Regulation Department. The apex bank claims that this circular supersedes all previous codes, circulars, and related directives.
According to the CBN rules on related party transactions, banks must adopt a policy against insider trading and related party transactions by directors, senior executives, and staff, and publish the policy or a summary of that policy on their website. 22.2 The policy must include sufficient criteria and processes to guarantee that it is properly implemented. 22.3 In addition to the requirements outlined in Section 22.2, the bank’s internal audit function shall conduct an internal review process to examine policy compliance and effectiveness.
22.4 A director will be removed from the board of the bank and banned from serving on the boards of any other financial institution under the control of the CBN if their facility or that of their related interests remains nonperforming in any financial institution for more than a year. 22.5 Without the CBN’s prior consent, no director-related loans or interest thereon may be written off.
Fidelity Bank Plc, which saw a significant reduction in loans to related parties and companies under the control of senior management staff, led the pack, going from N92.31 billion at the end of December 2022 to N2.09 billion at the end of the previous year.
In footnotes, the bank stated that several of the related parties, including as A-Z Petroleum Limited, Dangote Group, and Genesis Group as of December 31, 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 ten banks, including Access Holdings, Guaranty Trust Holding Company Plc, Zenith Bank Plc, United Bank for Africa, Fidelity Bank, Wema Bank, Stanbic IBTC Holding Plc, FCMB Group, Unity Bank, and Sterling Bank, was N131.04 billion.
Fidelity Bank had the highest total for the year, followed by Unity Bank at N17.32 billion and UBA at N13.74 billion.
In 2021, these financial institutions’ loans to related parties increased to N139.16 billion, with Fidelity Bank and UBA leading with N97.73 billion and N15.28 billion, respectively. GTCO finished in third place with N6.859 billion.
Between 2019 and 2020, N226.6 billion was disbursed as loans. In 2019, eleven banks borrowed N29.65 billion in total from their key management personnel. The figure also includes loans to companies connected to the directors.
According to an investigation, GTCO lent N155 million to Zenith Bank (N1.76 billion), UBA borrowed N297 million from its directors, Wema Bank (N5.2 billion), Stanbic IBTC (N95 million), FCMB (N4.8 billion), Unity Bank (N7.14 billion), and Sterling Bank (N10.12 billion) to connected parties.
In 2020, the figure climbed by 564 percent, from N167.32 billion to N196.97 billion.
Checks revealed that Access Bank lent the most, totalling N174 billion to its directors and linked entities. Unity Bank followed suit with N7.55 billion. Sterling Bank placed third on the list, with N6.01 billion.
Fidelity borrowed N986.2 million from its directors, as did GTBank (N67.9 million), Zenith Bank (N1.797 billion), UBA (N206 million), Wema Bank (N2.82 billion), Stanbic IBTC (N332 million), FCMB (N3.2 billion), Unity Bank (N7.55 billion), and Sterling Bank (N6.01 billion).
In response to the trend, Ambrose Omordion, Chief Research Officer at InvestData Consulting, stated, “In my language, they say it is the yam that you know that you use to make pounded yam.” If an organisation believes that the insider or director can repay the loans made to them, there is no problem. Problems arise when they fail to pay.
“Due to economic headwinds, banks are not lending to ordinary businesses unless they are well-known. If they make loans to the public and they are unable to repay them, Non-Performing Loans will increase. It is preferable for banks if they make an offer to insiders who will pay.”
Omordion cautioned that if done in excess and without due process, it is bad.
“It is unwise to do too much. Even banks understand how to protect their customers’ money, which is the most crucial 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.”
Ayokunle Olubunmi, Head of Financial Institutions Ratings at Agusto&Co, stated that there was no association between insider loans and an increase in bank NPLs.
“Although it is not illegal to lend to someone within the company, there is a rule, and it may not be at arms’ length. However, there is no evidence that giving an insider a loan leads to a bad outcome. Some banks have fully repaid their insider loans. However, there is a possibility that they did not conduct adequate due diligence. Some banks are particularly severe on insider-related loans.
“Due to CBN corporate governance, you are required to declare the amount, collateral, and account performance. This is why you will see it in bank accounts so that analysts and investors can see it, and if it is non-performing, it will be a red light.”
Segun Aremu, a financial analyst and Chief Responsibility Officer of Peculiar Innovative Consulting, decried the prevalence of the behaviour in the Nigerian banking sector, stating, “Insider loans are common in our Nigerian banking system. This has been going for a long time. These insider loans demonstrate a lack of company control, discouraging investors.
“This situation also exposes banks to significant NPLs and low profit margins. Meanwhile, banks should improve their financial intermediation function by providing loans to those in need, such as manufacturers and employers, in order to fuel the economy,” he said.
The minority investor community generally agreed that provided the loans were performing and disclosed, there were no reasons for concern.
Eric Akinduro, Chairman of the Ibadan Zone Shareholders Association, told The PUNCH, “The point is that if it is performing, we are fine with it. As long as it performs and there is disclosure, there is no difficulty; nevertheless, when these components are missing, we have problems.
“A loan that is not performing will result in a greater rate of non-performing loans. Finally, it is about more than simply the shareholders. When a loan does not operate properly, it is detrimental to the firm. Shareholders are concerned. Non-performing loans can have a negative impact on the firm.
Bisi Bakare, the National Coordinator of the Pragmatic Shareholders Association of Nigeria, stated, “If they are receiving loans and the loans are performing, there will be no increase in Non-Performing Loans.”
She, however, urged regulators to guarantee that insider loans are not written off.