Business
Banks on edge over CBN’s new policy on directors’ bad loans
Commercial banks in Nigeria are expressing concerns over the Central Bank of Nigeria’s (CBN) new policy aimed at tightening regulations on directors’ non-performing loans (NPLs). This policy holds bank executives accountable for bad debts associated with their loans, leading to anxiety within the financial sector.
The new directive requires banks to report and take strict action against directors whose loans become non-performing, which may include their removal from the board. This initiative is part of the CBN’s broader efforts to curb insider abuse and enhance the overall health of the financial system. As a result, many banks are reassessing their exposure to loans given to directors to avoid regulatory penalties.
Experts define a non-performing loan (NPL) as a bank loan that is either late on payments or unlikely to be repaid in full by the borrower. Non-performing loans pose a significant challenge for the banking sector as they decrease profitability. Furthermore, it is often claimed that they hinder banks from lending more to businesses and consumers, which, in turn, can slow economic growth. However, this perspective is not universally accepted.
Non-performing loans (NPLs) have significant consequences for both banks and the broader economy. For banks, high levels of NPLs reduce profitability because these loans do not generate interest income and require larger provisions for potential losses. This weakens a bank’s capital base, limiting its ability to lend to productive sectors. Increased NPLs can also erode investor confidence, leading to lower stock prices and higher funding costs.
In the broader economy, a rise in NPLs can slow economic growth by restricting credit availability. When banks are hesitant to lend due to bad loans, businesses and individuals struggle to access funds for expansion and consumption, resulting in lower investment and reduced economic activity. Additionally, systemic issues with NPLs can destabilize financial institutions, potentially triggering banking crises that require government intervention and taxpayer bailouts. This situation may lead to inflation, currency depreciation, or fiscal strain. In extreme cases, persistently high levels of NPLs can undermine public confidence in the banking system, prompting deposit withdrawals and financial instability.
Sources within the banking sector indicate that some directors have already begun restructuring their loan facilities to comply with new policies. However, others are concerned that these stringent regulations could lead to upheaval in the boardroom, especially in banks with high levels of insider-related debts. Analysts believe that the policy will promote greater transparency, but it may also create friction between the Central Bank of Nigeria (CBN) and the banks affected.
A senior banking executive, who spoke on the condition of anonymity, described the new policy as “a necessary but aggressive step” to cleanse the industry. “There’s no doubt that insider lending has been a significant issue, but this policy could disrupt operations if not implemented carefully,” the executive stated.
Mr. Emma Nwosu, Chairman of Momentum & Pace Limited—a consortium of researchers and trainers—told Business Hallmark that while it is uncommon for bank directors to have substantial non-performing loans, such behavior contradicts banking ethics. Nwosu, a former Managing Director of one of the defunct banks, supported the Central Bank of Nigeria’s (CBN) decision to require any director with significant bad loans to resign from their financial institution.
He emphasized that allowing directors to accumulate large amounts of bad loans poses a significant risk that could potentially lead to a bank run. “Directors of banks who owe money or have bad loans should be treated the same as other debtors of the institutions,” he asserted.
Other financial experts argue that this policy could help restore confidence in the banking sector by ensuring that directors do not misuse their positions to obtain loans without proper risk assessments. However, some caution that banks might become more hesitant to lend to directors, which could affect internal investments and growth strategies.
The Central Bank of Nigeria (CBN) has defended the policy, stating that it aligns with global best practices in financial governance.
Dr. Adetona Adedeji, the acting Director of Banking Supervision, who spoke for the regulatory body, emphasized that banks must adhere to strict lending standards, regardless of a borrower’s position. “No individual, no matter how influential, should be exempt from loan repayment obligations,” he stated.
As banks prepare for the implications of this policy, industry observers anticipate a period of adjustment. While the directive may cause short-term challenges, many believe it will ultimately strengthen Nigeria’s banking sector by promoting accountability and reducing the risk of financial instability.
Non-performing loans were a significant factor in the 2008/2009 banking crisis, affecting not only Nigeria but countries worldwide. While the current non-performing loan ratio stands at about 5 percent, the asset quality of Nigerian banks was severely impacted as this ratio soared from 9.9 percent in 2007 to 37.3 percent in 2009.
The banks most affected included Afribank, Oceanic Bank, Intercontinental Bank, Finbank, and Union Bank. In response, former CBN Governor Sanusi Lamido Sanusi intervened by injecting N420 billion to strengthen the capital base of these institutions. On August 13, 2009, Sanusi also dismissed the Managing Directors/Chief Executives and Executive Directors of these five banks due to reckless management. Those who lost their positions were Mr. Sebastine Adigwe (Afribank), Mr. Okey Nwosu (Finbank), Dr. Erastus Akingbola (Intercontinental Bank), Dr. (Mrs.) Cecilia Ibru (Oceanic Bank), and Dr. Barth Ebong (Union Bank).
Sanusi attributed the high levels of non-performing loans in these banks to inadequate corporate governance, poor credit administration processes, and failure to adhere to credit risk management practices. Consequently, the non-performing loan ratios for these banks ranged from 19 percent to 48 percent, necessitating additional provisions of N539.09 billion.
For lenders, non-performing loans jeopardize capital requirements, making it challenging to extend new loans, especially those of higher quality. These loans burden a bank’s balance sheet, and the resulting charge-offs reduce profitability. Research has shown that countries with lower non-performing loan ratios tend to experience faster GDP growth rates. This decline in the willingness and ability of banks to lend stems from the time spent attempting to recover on bad loans rather than focusing on issuing new loans, according to an unnamed expert.
As a result of huge non-performing loans incurred by the banks, the Asset Management Corporation of Nigeria (AMCON) is seeking assistance from the Nigerian Senate to recover approximately N5 trillion in problem loans as it nears the end of its operational period, set for 2026. As AMCON works to address this substantial challenge, support from the Senate is seen as crucial in facilitating effective recovery efforts. The agency has been instrumental in managing non-performing loans within the financial sector, and its success in regaining these funds is vital for the overall stability of Nigeria’s banking system. With only a few years left in its mandate, AMCON is focused on implementing strategies to maximize loan recoveries and minimize financial losses.
Meanwhile, in December 2020, the European Commission revised its action plan to expedite the development of a secondary market for non-performing loans and to support national Asset Management Companies. This proposal faced criticism from various civil society groups.
