CBN and corporate malpractice cover-up

Until last week, many Nigerians without insider knowledge of what goes on behind the banking halls, thought the country could count on a stable financial system as it pulls through the battered economy.

Sadly, on Thursday, the Central Bank of Nigeria (CBN) exposed what had become ‘clandestine affairs between it and the country’s topmost old generation financial institution, First Bank of Nigeria Limited. And it took rather an attempt at corporate assertiveness by the now-ousted boards of the bank for the CBN to move into action, which raises a question on the genuineness and sincerity of the intention of the regulator.

The bank, known for its historic conservative approach, had on Wednesday rejigged the board with Gbenga Shobo, who was the Deputy Managing Director, elevated to the position of Managing Director and Chief Executive Officer.

A statement issued by the now-dismissed chairman, Ibukun Awosika, said that “the board is confident that Shobo has the experience and understanding of the bank and the know-how to lead the bank through this next phase of growth, which is focused on positioning First Bank as the preeminent bank in our chosen markets, delivering value to our stakeholders”.

What remained undisclosed then was that the appointment, which was “awaiting regulatory approval”, was made contrary to an existing understanding between the board and the Central Bank. It was not surprising the CBN responded with a query, which came after the effort to have the board shift ground failed.

The letter signed by the Director, Banking Supervision, Haruna Mustafa, said: “The CBN was not made aware of any report from the board indicting the managing director of any wrongdoing or misconduct; there appears to be no apparent justification for the precipitate removal.

“We are particularly concerned because the action is coming at a time the CBN has provided various regulatory forbearances and liquidity support to reposition the bank, which has enhanced its asset quality, capital adequacy and liquidity ratios amongst other prudential indicators.

“It is also curious to observe that the sudden removal of the MD/CEO was done about eight months to the expiration of his second tenure, which is due on Dec. 31, 2021

“The removal of a sitting MD/CEO of a systemically important bank that has been under regulatory forbearance for five to six years without prior consultation and justifiable basis has dire implications for the bank and also portends significant risks to the stability of the financial system.

“In light of the foregoing, you are required to explain why disciplinary action should not be taken against the board for hastily removing the MD/CEO and failing to give prior notice to the CBN before announcing the management change in the media.”

In another letter, the CBN revealed that the bank was yet to divest its interest in Honeywell Flour Mills, Barti Airtel and other interests not allowable.

“We are concerned that the bank has not complied with regulatory directives to divest its interest in Honeywell Flour Mills despite several reminders. We further noted that after four years the bank is yet to perfect its lien on the shares of Oba Otudeko in FBN Holdco, which collateralised the restructured credit facilities for Honeywell Flour Mills contrary to the conditions precedent for the restructuring of the company’s credit facility.

“Given the bank’s failure to perfect the pledge and satisfy conditions for regulatory approval, the restructuring has thus been invalidated and the credit facilities now payable immediately,” the bank noted.

Thus, the regulator directed that Honeywell fully repaid its loan obligation to First Bank within 48 hours failing, “which the CBN will take appropriate regulatory measures against the insider borrower and the bank”.

“Furthermore, the Bank notes the untenable delay in resolving the long outstanding divestment from Bharti Airtel Nigeria Ltd in line with extant regulations of the CBN. Accordingly, you are required to divest the equity investments in all non-permissible entities such as Honeywell Flour Mills and Bharti Airtel Nigeria Limited within 90 days. Please you are to forward evidence of compliance in accordance with the timelines above to the Director of Banking Supervision,” CBN added.

The hitherto board chairman of First Bank of Nigeria Limited’s holding company, FBN Holdings Plc Oba Otudeko, is the Founder and Chairman of Honeywell, an account on which an insider abuse allegation was raised.

For years, the CBN, in a fashion typical of civil society organisation, exchanged memos with an institution it has regulatory oversight over but was either too timid to invoke the relevant provisions of the laws or too partisan to act as expected. This raises questions as to how many other regulatory breaches the CBN is covering up and how many more years the regulator would have looked the other way while the financial system was subjected to “systemic risks” supposing the board continues to pander to the undeclared interest of the regulator.

It could have been any other bank. But First Bank matters as it is not only among the five systemic important banks alongside Zenith, UBA, GTB and Access but also perceived as among the most risk-averse. Its status as a systemic important bank implies that in event of a major financial crisis the CBN is at liberty to use taxpayers’ money, according to the provision of the Bank and Other Financial Institution Act (BOFIA), to rescue the institution considered as too big to fail (TBTF).

Indeed, while the CBN dilly-dallied on how to deal with unyielding boards of both the financial institution and its holding company, the bank slipped in the key asset management quality index. Under the watch of the CBN-reinstalled Managing Director/Chief Executive Officer, Adesola Adeduntan, the bank’s non-performing loan (NPL) was 7.7 per cent as of 2019 as against the five per cent tolerable level. It had the highest NPL among the five systemic-important banks and far above the industry average.

In 2020, it recorded the steepest rise in NPL besides Access Bank, which had less than five per cent until last year when it rose to 5.8 per cent. And while Access increased by 25.9 per cent last year, First Bank’s NPL went up by 22.2 per cent to 9.9 per cent at a time the industry average was six per cent.

If this is the scorecard of Adeduntan in the area the bank has been accused of mismanaging – loan transparency and risk control – then there are unanswered questions on why the CBN considers the reinstalled chief executive the most suitable contrary to the wish of the board.

The ousted board was handed 90 days to divest the bank’s equity interests in Honeywell and Bharti Airtel. The conglomerate (Honeywell) was also given 48 hours to settle its outstanding obligation to the bank.

Already, there are grumblings in the financial system that the apex bank may be quiet about these conditions since the previous boards have been shown the exit.

Last week’s announcement marks the beginning of a possible takeover of the bank, and what eventually happens going forward depends on how the underlying issues are managed, market leaders have observed.

At the last trading session of last week, of course, the share of the bank took a haircut following the growing uncertainty about the future of the financial powerhouse. And there is a caution from the market – the apex should recognise that, indeed, First Bank is too big to fail at this critical time of the economy.

Perhaps, the caution calls for tact and transparency in the management of the now-exposed corporate malpractice, which the apex bank has been accused of covering up for too long.