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Governance In Banking

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By Agbai Ina Obasi
Retired Bank Executive, Author, and Legal Practitioner.

Corporate governance provides a structure that is supposed to work for the good of all stake holders of the company by ensuring that the enterprises adhere to an acceptable ethical standard, the best practices and their formal laws.

The need for corporate governance cannot be over emphasized in view of the increasing high-profile scandals involving abuse of corporate power and criminal activity by top management of companies especially in the banking industry. Therefore, corporate governance seeks to make provisions for civil or criminal prosecution of company officers who conduct unethical or illegal acts in the name of the company.

I will focus a little bit on the banking industry here. The international basis for the corporate governance is the Basel 11 Accord which requires among other things that financial institutions maintain enough cash reserve to cover risks incurred by operations. Basel 11 is an improvement over the Basel 1 which was first enacted in the 1980s and provides a more complex model for calculating regulatory capital sufficiency.

It does not only mandates banks holding riskier assets to have more capital on hand than those with safer risk portfolios, but also requires banks to publish both details of risky investments and risk management practices. It further seeks to separate credit risks from operational risks and quantify both.

As with any regulations, the practitioners always seek for ways to diminish the impact of the regulations on their business to their selfish end. The general trend has been to move some of the classified risks to a lesser regulated holding companies or securitizing the risky assets into securities that can be traded on an open markets.

A more fundamental issue with corporate governance in Nigeria is the culture of impunity among the top executives of banks. Examples are replete from Citizens bank to Bank Phb, from Oceanic bank to Intercontinental bank, etc.  But for the timely intervention of the CBN, the combined failure of these banks including UBN due to the flagrant abuse of corporate governance would have led to the collapse of the banking industry in Nigeria in 2009. The level of criminal conversion of corporate assets to individual assets by Executive management of banks in Nigeria was alarming during the period preceding 2009. I only hope that they learnt some lessons from that era. You can read more on this in my book titled ” Nemesis: an insight into the root causes of bank crisis in Nigeria” by Agbai Ina Obasi.

We can start tackling this issue by strengthening our internal systems. I have no doubt that both the banks and CBN are already working on this now. Evidently, the internal audit units of banks would have a dominant role to play in this regards. Certainly, more independent auditors can pose a hindrance to the audacity of impunity of the Executive management of these banks. One way of strengthening the independence of the internal auditors will be for CBN to approve the appointment and removal of bank Chief inspectors; and to encourage open communication between them and the CBN; sanctions including criminal prosecution for dereliction of duties by bank management; and encouragement of Whistle blowing.

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