On the 13th of July, 2023, the Central Bank of Nigeria ("CBN") made a significant stride in reinforcing the nation's financial sector by issuing the Corporate Governance Guidelines for Commercial, Merchant, Non-interest, and Payment Services Banks (the "Guideline"). These guidelines are set to take effect on August 1, 2023, ushering in a new era of corporate governance for the banking/financial sector.

At Pavestones, we understand the significance of proactive adaptation to new regulatory standards. In this newsletter, we provide a concise overview of the Guideline's key provisions, focusing on its impact, applicability, and some significant changes from the previous version, Code of Corporate Governance for Banks and Discount Houses (the "Code").

KEY PROVISIONS AND THEIR IMPLICATIONS:

This Guideline introduces crucial provisions that demand meticulous attention from the financial industry In this section, we highlight some of the key provisions that Banks must adhere to:

  1. APPLICABILITY: In addition to the Nigeria Code of Corporate Governance ("NCCG") 2018, the Guidelines apply to all Commercial, Merchant, Non-interest, and Payment Service Banks (herein collectively referred to as "Banks") in Nigeria. Unlike the Code, the scope of application of the Guideline is broader as it applies to not only commercial banks but also merchant, non-interest and payment service banks. This wider scope is indicative of the regulatory authorities' concerted effort to address a more extensive range of financial institutions and foster robust governance practices across various banking sub-sectors.
  2. BOARD STRUCTURE & COMPOSITION: Diverging from the Code's stipulation of a minimum of 5 (Five) and a maximum of 20 (Twenty) directors, the Guideline prescribes that Banks must maintain a board of at least 7 (Seven) directors and not exceed 15 (Fifteen) directors. With respect to the composition of the board, the Guideline requires that the board of commercial banks with international and national authorization, merchant banks, and Non-Interest Banks ("NIBs") with national authorization should have at least 3 (Three) independent non-executive directors ("INEDs"), while payment service banks (PSBs), commercial banks with regional authorization, and NIBs with regional authorization should have at least 2 (Two) INEDs. These adjustments represent a departure from the Code's requirement of 2 (Two) INEDs and are designed to enhance the governance structure and independence of boards across different categories of banks. By imposing higher INED quotas, the Guideline aims to bolster transparency, accountability, and prudent decision-making within the banking sector. Additionally, regarding the committees of the board, the Guideline requires that Banks should in addition to the typical committees have a Board Credit Committee (BCC) with oversight responsibility on credit matters.
  3. COMPLIANCE AND IMPLEMENTATION: To ensure regulatory compliance and accountability across control functions (e.g., audit, risk management, finance, AML/CFT/CPF) and operational areas like foreign exchange transactions, IT, and cyber-security, the Guideline mandates the appointment of an Executive Compliance Officer ("ECO") in addition to the Chief Compliance Officer (CCO) as in the Code. The ECO will also be responsible for the prompt reporting of all regulatory infractions and concerns to the Board for resolution.
  4. NON-INTEREST BANKS: Acknowledging the unique nature of Non-Interest Banks (NIBs), the Guideline presents tailored provisions concerning their internal audits and compliance functions. NIBs are mandated to establish a Shariah Review/Compliance (SRC) function, responsible for regular assessments to ensure alignment with shariah requirements in their operations and activities. Additionally, NIBs must appoint an Internal Shariah Auditor (ISA) as the head of the internal shariah audit function, holding a position not lower than Assistant General Manager. These provisions aim to reinforce adherence to shariah principles and bolster transparency within Non-Interest Banks.
  5. SANCTIONS: Adherence to the Guidelines is of utmost importance, as any failure by a Bank to comply with the requirements outlined therein and the recommended practices in NCCG 2018 will be considered a regulatory breach. Such breaches shall attract penalties as prescribed by the CBN. In the event of a breach by a director, manager, or officer, they will face appropriate sanctions, including monetary penalties and administrative measures. The responsible individual may be subject to a six-month suspension from their position on the Bank's board and possible removal in instances of continued recurrence of the breach.

CONCLUSION

In conclusion, the Central Bank of Nigeria's new Corporate Governance Guidelines for Commercial, Merchant, Non-interest, and Payment Services Banks signify a transformative shift in the financial sector. With a broader scope of applicability and enhanced board structure requirements, these Guidelines promote transparency, accountability, and prudent decision-making. It is vital for Banks to adhere to the provisions of the Guideline not only to avoid potential sanctions by CBN but also to ensure long-term success in this dynamic banking sector. For further information on the key provisions of the Guideline, please do not hesitate to contact us!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.