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Bank executives secured N549bn in insider loans over five years For eight financial institutions, these transactions decreased to N52.40bn compared to N111.31bn in 2022, which is a 52.92 percent drop within a single year. |
Over a period of five years, directors and key management personnel at Deposit Money Banks have taken out approximately N549bn in loans from their own institutions.
The PUNCH's analysis of the banks' annual reports submitted to the Nigerian Exchange Limited from 2019 to 2023 supports this data.
Nonetheless, there was a significant reduction in 2023 in the loans and advances made to certain directors and key management personnel, as well as in related party transactions.
For eight financial institutions, these transactions decreased to N52.40bn compared to N111.31bn in 2022, which is a 52.92 percent drop within a single year.
The financial institutions included in the 2023 analysis are Access Holdings, Guaranty Trust Holding Company Plc, Zenith Bank Plc, United Bank for Africa, Fidelity Bank, Wema Bank, Stanbic IBTC Holding Plc, and FCMB Group.
This decrease coincided with the implementation of new corporate governance guidelines by the Central Bank of Nigeria, effective from August 1, 2023.
The circular, dated July 13, 2023, and signed by the Director of the Financial Policy and Regulation Department, Chibuzo Efobi, stated that the guidelines, which assign responsibilities to the bank board and executive compliance officers, replace all previous codes, circulars, and directives, as per the apex bank.
The CBN's guidelines on related party transactions state: "Banks must establish a policy on insider trading and related party transactions for directors, senior executives, and employees, and publish the policy or a summary thereof on their websites. The policy should include proper standards and procedures for effective implementation. There should also be an internal review mechanism, conducted by the bank's internal audit function, to evaluate the policy's compliance and effectiveness.
"Any director with a facility or related interests that remain non-performing in any financial institution for over a year must leave the bank's board and will be barred from serving on the board of any other financial institution under the CBN's jurisdiction. No loans or interest related to directors can be written off without prior approval from the CBN."
Fidelity Bank Plc experienced the most significant reduction in loans to related parties and entities controlled by key management personnel, dropping from N92.31bn at the end of December 2022 to N2.09bn at the end of the previous year.
However, the bank noted in its footnotes that certain related parties, such as A-Z Petroleum Limited, Dangote Group, and Genesis Group, had ceased their related party relationship after the 2022 financial year, in accordance with CBN requirements.
In 2022, the total insider loans for 10 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, amounted to N131.04bn.
Fidelity Bank had the largest amount for the year, followed by Unity Bank with N17.32bn and UBA with N13.74bn.
In 2021, the loans to related parties for these financial institutions increased to N139.16bn, with Fidelity Bank and UBA leading at N97.73bn and N15.28bn, respectively. GTCO was third with N6.859bn.
From 2019 to 2020, a total of N226.6bn was disbursed as loans. In 2019, eleven banks loaned a total of N29.65bn to their key management personnel, which also included loans to director-related companies.
An analysis revealed that GTCO loaned N155m, Zenith Bank (N1.76bn), UBA (N297m), Wema Bank (N5.2bn), Stanbic IBTC (N95m), FCMB (N4.8bn), Unity Bank (N7.14bn), and Sterling Bank (N10.12bn) to related parties.
In 2020, the amount increased by 564 percent or N167.32bn to N196.97bn.
Access Bank provided the highest loans with a total of N174bn to its directors and related companies, followed by Unity Bank with N7.55bn, and Sterling Bank with N6.01bn.
Other banks, including Fidelity, loaned their 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), and Sterling Bank (N6.01bn).
Ambrose Omordion, Chief Research Officer at InvestData Consulting, commented on the trend, saying, "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 given to them, then there is no issue. It becomes problematic when they do not repay.
"Given the current economic climate, banks are hesitant to lend to ordinary companies and prefer those with established reputations. If loans to the public are not repaid, Non-Performing Loans will increase. It is preferable for banks to lend to insiders who will repay."
Omordion also cautioned that excessive and unprocedural lending is detrimental.
"It is only when lending is excessive and lacks due process that it becomes problematic. Banks are aware of how to protect depositors' money, which is paramount.
"The reduction in insider loans is beneficial for the industry and regulators."
Ayokunle Olubunmi, Head of Financial Institutions Ratings at Agusto&Co, noted that there is no direct link between insider loans and an increase in banks' NPLs.
"While it is not illegal to extend a loan to someone within the organisation, there are rules, and such loans may not be at arm's length. However, there is no evidence that insider loans necessarily lead to defaults. Some banks have fully repaid insider loans. Nonetheless, the risk exists that due diligence may not have been thoroughly conducted. Some banks are more rigorous regarding insider-related loans.
"Owing to CBN corporate governance, banks must disclose loan amounts, collateral, and account performance. This information is included in bank accounts so that analysts and investors can assess it. A non-performing loan is a red flag."
Segun Aremu, a financial analyst and Chief Responsibility Officer at Peculiar Innovative Consulting, expressed concern over the prevalence of insider loans in the Nigerian banking sector, stating, "Insider loans are common in our Nigerian banking system and have been for some time. These loans reflect a lack of corporate governance, which deters investors.
"This also exposes banks to high NPLs and what I term low profits. Banks should enhance their role as financial intermediaries and extend loans to those who truly need them, such as manufacturers and employers, to stimulate the economy," he said.
From the minority investor community, the consensus is that performing and disclosed loans are not problematic.
Eric Akinduro, Chairman of the Ibadan Zone Shareholders Association, told The PUNCH, "As long as the loan is performing and disclosed, we are content. Issues arise when these conditions are not met.
"A non-performing loan increases the rate of NPLs, which is not only a concern for shareholders but can also harm the business."
Bisi Bakare, National Coordinator of the Pragmatic Shareholders Association of Nigeria, stated, "If the loans are being repaid and are performing, then there won't be an increase in Non-Performing Loans."
