…Banks Reduce Related-Party Lending After CBN Tightens Regulations
A recent analysis revealed that several Nigerian banks, including Stanbic IBTC, granted significant loans to their directors and key personnel over a five-year period (2019-2023). The Punch Newspaper report, based on analyses of annual reports filed with the Nigerian Exchange Limited, found that directors and key management personnel of Deposit Money Banks (DMBs) borrowed about N549 billion during this period.
However, the report also highlights a significant drop in such lending in 2023. Loans and advances to directors and related parties by eight financial institutions dropped to N52.40 billion in 2023, compared to N111.31 billion in 2022, reflecting a 52.92% decline.
This decrease is attributed to new Central Bank of Nigeria (CBN) corporate governance regulations that came into effect on August 1, 2023. These stricter guidelines outline responsibilities for bank boards and compliance officers regarding insider lending and related-party transactions. The CBN regulations emphasize:
- Publicly available policies on insider trading and related-party transactions.
- Internal review mechanisms to ensure policy effectiveness.
- Removal of directors with non-performing loans exceeding one year.
- CBN approval before writing off director-related loans.
The report identifies Fidelity Bank Plc as a leader in reducing loans to related parties, with a decrease from N92.31 billion in December 2022 to N2.09 billion by year-end 2023. The bank attributed this shift to certain related parties exiting the category following the CBN’s new requirements.
The analysis details lending activities across the five-year period. In 2019, eleven banks disbursed a total of N29.65 billion in loans to key personnel and related companies. Stanbic IBTC was among the institutions listed, with N95 million in such loans extended that year.
The trend accelerated in 2020, with a 564% increase to N196.97 billion. Access Bank emerged as the top lender to directors and related entities, disbursing N174 billion. Stanbic IBTC also featured on the 2020 list, with N332 million in loans extended to insiders.
Financial experts acknowledge that insider lending is not inherently problematic if the borrowers are creditworthy. However, concerns arise when such loans turn non-performing. The current economic climate, with its challenges, has made banks more cautious about lending to regular businesses. In this context, some argue that responsible insider lending can be preferable to a rise in non-performing loans among the general public.
The CBN’s new regulations aim to strike a balance by promoting transparency and accountability in related-party transactions while ensuring the financial health of Nigerian banks.