By Modupe Gbadeyanka
A proposal to prevent directors of banks operating in Nigeria to have access to loans from lenders they are directly linked with has been forwarded to the Central Bank of Nigeria (CBN) by the Nigeria Deposit Insurance Corporation (NDIC).
Business Day reports that this recommendation has been largely welcomed by stakeholders in the financial sector in the country.
According to the NDIC, such directors should not sit on the boards of any financial institution if their loans become classified as non-performing.
An Associate Professor and Head of Banking and Finance department at the Nasarawa State University, told Business Day in an emailed response that, “It is indeed a welcome development. A lot of studies on bank failures have shown that loans to bank Directors played a significant role.
“So, the measure will not only check insider related dealings (including sharp forex practices by Bank Directors), it will also go a long way in reducing the high prevalence of non-performing loans (well above the regulatory threshold of 5 percent) in the banking industry.”
Managing Director of Afrinvest Securities Limited, Mr Ayodeji Ebo, also in an emailed response, noted that bank directors should not be totally barred from taking loans from their banks but a review of the credit policy on related party loans.
He said the CBN needs to come up with more stringent rules around the maximum loan limit directors can access, maximum tenor as well as minimum interest rate allowable.
The amount of loan should be capped as a proportion of their remuneration. The policy should also include related companies of the directors.
Also, loan documentation should be more stringent (like higher coverage ratio) to reduce the delinquency level.
“This will reduce loan losses, hence bolster the bottom lines of the banks”, Mr Ebo noted.
This infraction by bank directors has resulted in rising Non-Performing Loans (NPL) put at a record high of N1.85 trillion, about 10 percent above 5 percent industry regulatory threshold.
Managing Director/CEO of NDIC, Mr Umaru Ibrahim, had expressed displeasure over the rising trend in the level of banks’ non-performing loans (NPLs) in these financial institutions.
According to the agency, the 25 Deposit Money Banks (DMBs) had total loans portfolio of N18.53 trillion as at December 2016.
In microfinance banks, (MFBs), insiders/ directors consumed N68.25 billion or 35 percent loans while NPL remained as high as N87.75 billion or 45 percent. The NPLs indicated a classic case of over-lending, accumulated interests charges and poor corporate governance.
Similarly, the existing 42 primary mortgage banks (PMBs) had total deposits liabilities of N69 billion but with total loans portfolio of N94 billion, which indicated another case of over-lending, accumulated interests, poor corporate governance and high ratio of NPLs which stood at N51.7 billion or 55 percent out of which N42.3 billion or 45 percent were Insider related/Directors loans.
The resultant effects of these negative trends would be poor earnings and erosion of shareholders fund, Ibrahim, had said in his 2017 budget defence before House Committee on Insurance and Actuarial Matters.
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