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CORPORATE GOVERNANCE CODE FOR MICROFINANCE BANKS : |
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ESSENTIAL REQUIREMENTS FOR NIGERIA BANKS |
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1.0 INTRODUCTION |
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Recent disclosures by the Central Bank of Nigeria[CBN] of the large scale mismanagement and gross insider abuses in some of the universal banks taken over by the regulatory authority further strengthened the need for institutionalizing sound corporate governance in every financial institution. Given the large number of over 900 licensed microfinance banks, and the scanty but disturbing public information available on the governance practices in some of those banks, the need for the regulatory authority to establish and enforce implementation of effective guidelines for corporate governance code for this category of banks cannot be over-emphasised. |
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This paper examines the salient provisions in the operating guidelines on corporate governance issued by the CBN; suggest other issues that need to be addressed in the proposed guidelines; identify the major facilitators and expected deliverables for ensuring that the objectives of the guidelines are achieved; and also suggest appropriate sanctions for violations. |
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2.0 ISSUES IN MICROFINANCE CORPORATE GOVERNANCE |
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The operational framework for microfinance banks issued by the Central Bank set a minimum of two and a maximum of seven directors for a microfinance bank. Two directors other than the executive management are required to have banking experience; and no person is to serve as a director in more than two institutions under the regulatory purview of the Central Bank of Nigeria. Directors must be “fit and proper’’ persons; while the board is expected to add value, provide strategic direction and effective oversight through board committees for their respective bank. |
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The CBN requires each bank to have ‘strong’ organisation structure, set authorization limits, and possess appropriate management information system[MIS]. Management must be suitably qualified, experienced, competent, committed and certified microfinance practitioners and must also demonstrate high level of integrity and professionalism. Microfinance banks are expected to operate in line with commercial principles and best practices, and maintain high accounting and auditing standards. They are also expected to comply with the Code of good corporate governance. Among other prudential requirements, microfinance banks Portfolio at risk[PAR] shall not exceed 2.5% , while monetary penalties are specified for late, false and inaccurate returns. |
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The foregoing requirements are helpful in providing some guidance for microfinance banks in understanding some of the salient requirements in corporate governance code for the safety and soundness of the operation of the institutions. However the regulatory objectives will be better achieved if each bank is mandatorily required to articulate and faithfully implement corporate governance code based on a model to be provided by the CBN. We give below a specimen example of a code adopted by a microfinance bank, which could be modified to suit individual bank circumstances. |
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3.0 OBJECTIVES OF CORPORATE GOVERNANCE CODE |
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The cardinal objective for articulating and faithfully implementing a corporate governance code is to ensure that the bank’s affairs are conducted in an orderly and responsible manner in order to ensure that the various stakeholders’ expectations are met and indeed surpassed by the board and management who are entrusted with piloting the affairs of the bank. |
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The Code among other things defines the roles and responsibilities of the board, and also that of the management. In view of the need to ensure that insiders related activities are effectively monitored and controlled to guide against abuses, the code sets acceptable procedures and guidelines for the conduct of insiders related activities. In order to underscore the board members political will to enforce strictly the code provisions, appropriate sanctions are provided for its violations. |
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4.0 BOARD OF DIRECTORS |
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Members of the board of directors are appointed by the shareholders and approved by the Central Bank of Nigeria. Except the Managing Director/Chief Executive who is also a member of the board, every other member is appointed in a non-executive capacity. Every board member is enjoined to recognise that in addition to the direct shareholding represented, he is also responsible for the collective interests of all the other stakeholders of the bank; including the depositors, the employees, the regulators etc. Accordingly the need to ensure that the operation of the bank is at all times conducted in a sound and professional manner is a joint and several responsibilities of all members. Accordingly the board shall have responsibilities, for the following: |
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Enunciate and ensure implementation of sound policies on all matters affecting the bank. |
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Appoint, remunerate, establish a competitive performance incentive schemes, and discipline all management and other staff of the bank. |
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Consider, approve and monitor the implementation of the bank budget, and set budget expenditure limits for management and board committees. |
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Consider and approve all credit facilities proposed by the management; |
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Establish and monitor agreed performance targets for the management; |
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Ensure strict compliance with laws, policies and guidelines issued by the supervisory and regulatory authorities, namely CBN and NDIC. |
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Carry out other functions and responsibilities as spelt out by the relevant statutes, namely BOFIA, NDIC ACT CAMA. |
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5.0 MANAGEMENT |
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The Managing Director/ Chief Executive[MD/CE] is the head of the management team and he is responsible for the day to day operation of the bank. The appointment of the MD/CE shall be by the board for an initial period of two years commencing from the date of first appointment; and renewable for another two years subject to satisfactory measurable performance. |
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The MD/CE shall have primary responsibilities for recommending all credits presented to the board or its Credit Committee for consideration. Accordingly the disbursement and performance of all credits recommended and approved by the board or its Credit Committee is also the primary responsibility of the MD/CE. |
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The MD/CE shall propose for consideration to the Board Annual Budget for the bank, not later than two months before the commencement of the accounting year to which the budget applies. After approval by the board, the MD/CE shall have responsibility for its implementation. In furtherance to this responsibility, the MD/CE shall be responsible for the efficient management of the bank’s resources with a view to ensure very competitive returns to all stakeholders. The MD/CE shall present at every board meeting the financial position of the bank, on monthly and cumulative basis, together with the comparative variance analyses which will show a true and reliable performance evaluation of the bank. |
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The MD/CE shall have responsibility to ensure that all information on the bank provided to the board or any of its committees are accurate and reliable for the purposes intended in order to provide reliable basis for decision making. |
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The performance of the MD/CE shall be periodically evaluated by the board based on among other things on the bank’s competitive superior performance; impressive return on investment; effectiveness of cost-reduction measures; quantum of non-performing loans; level of frauds and forgeries; provision for losses incurred; level of infractions of statutory regulations; and other evaluation factors to be determined from time to time by the board. |
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6.0 CONTROL OF INSIDER-RELATED ACTIVITIES |
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The IMFB is not averse to insiders, especially the directors obtaining or guaranteeing credit facilities or having interest in providing any remunerative services for the bank. However, the interests of the directors concerned must be fully disclosed as required by the CBN guidelines. Furthermore, such facilities must be granted without compromising the bank’s established rules and procedures. It is however paramount that any such facility granted must fully comply with the CBN lending limits. Furthermore all insider-related facilities must be consistently performing. |
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Regarding award of remunerative services contracts to interested directors, the bank must ensure that the price is competitive. In this regard the board shall establish a uniform mark-up on the profit to be added to the realistic estimated cost of executing the project to guide the contract cost. |
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7.0 SANCTIONS FOR VIOLATIONS OF THE CODE |
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In order to underscore the importance of effective compliance with the contents of the corporate governance code, the following sanctions shall apply for their violations: |
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Where the MD/CE performance for consecutive two years fell below 50% of the budgeted target, his performance shall be adjudged not satisfactory, and appointment may not be renewed. |
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Where a loan granted to or guaranteed by a director remains non-performing for a period exceeding six months and is classified doubtful or loss, the director concerned will be called upon to repay the loan, failing which his membership of the Board may be suspended. If the failure to repay persist for an additional period of six months, his removal from the board may be recommended to the shareholders at the annual general meeting. |
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No director’s related loan or any credit facilities nor the interest accrued thereon shall be written off without CBN written approval. |
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Where a contract awarded to an interested director is unsatisfactorily executed, such a director will be compelled to refund the bank’s fund disbursed for the contract, in addition to being blacklisted from enjoying the privilege of introducing or recommending anyone for future contracts |
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The Board of Directors may review the contents of this code from time to time as the need and developments warrant. |
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8.0 CONCLUSION |
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The importance of ensuring that every licensed microfinance bank in Nigeria articulates and implement sound corporate governance code cannot be over-emphasised. However given the realistic level of the technical and operational knowledge and competence of the members of the board that are in charge of most of the institutions, the CBN and NDIC will have to provide further necessary guidance and capacity building to assist them to put in place model code. More importantly, the authorities must ensure that violations of approved codes are sanctioned to minimise failure rates in those institutions. |
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FIRAS CONSULTS LTD |
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FEBRUARY, 2010 |
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This article was submitted for publication in a Nigerian publication Microfinance bulletin |
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