Inability to act contributed to risk management failures in banks

The Nigeria Deposit Insurance Corporation (NDIC) has said delays by regulators culminated in the poor risk management and poor corporate governance in many banks. Jacob Ade Afolabi, deputy director, research department of the NDIC said at the height of the banking sector rot, suggestions made by technical committees set up by both the Central Bank of Nigeria (CBN) and the NDIC were largely ignored by the management of both institutions. “Efforts and suggestions made to higher authorities were neglected which was why many of the banks that were doing wrong continued to do wrong,” Mr. Afolabi said, adding, “If action had been taken on time, it would have promoted sound risk management”,

Mr. Afolabi, who was speaking at a workshop organised by the NDIC for finance correspondents holding in Kaduna, also said as part of the functions of the corporation, the NDIC carried out periodic checks to determine the true state of the banks.

He said under risk assessment system process, the regulators are supposed to take anticipatory measures in order to create a safety net in the financial sector. “We could do a stress test or scenario analysis. A typical robust supervisory approach could suppose that if the price of shares or oil crashes, what would have happened?” He said such anticipation could have enabled the regulators to take preemptive measures before the situation got out of control.

According to Mr. Afolabi, it is important to understand the differing roles that managments of banks play vis-a-vis that of regulators such as the NDIC and the CBN. According to him, the proper running of banks rests with the management of the banks. “All that the NDIC and CBN do is to monitor the banks and ensure that they play by the rule. The deployment of policemen does not prevent crime. It is not for lack of supervision. No safety net prevents failure. All we can do is to ensure that infractions are quickly discovered and reported in the banks’ annual report,” he said.

The CBN and the NDIC, two key regulators in the banking sector, have received lots of flak recently over what is perceived as their failure to regulate the industry properly, thus leading to the banking crisis. While the CBN has been blamed for certifying many of the banks as healthy prior to the current weaknesses discovered by the recent stress audits, the NDIC has been criticised for its reports on the state of the banks.

Trying to throw clarity on the seeming disparity between previous reports issued by the NDIC and stress audit, Mr. Garba Donli, who is the director of the research department of the corporation said the result of any examination depends on the purpose of the examination. “You can be certified fit today and found not to be fit the next day. It depends on the purpose of the examination.” He said the NDIC cannot be blamed for the failure of management of banks to operate within their mandates. “We have always stated the true state of the banks,” Mr. Donli insisted.

The role of legislators

At the same event, the NDIC also sought to explain the importance of the right legislation on regulatory activities. According to Mr. Afolabi, there is an absence of laws that would enable regulators police the banking sector effectively. He then went on to give examples of cases where he believes a lack of legislation hindered the NDIC from fulfilling its mandate. “Since 2007, the draft for the setting up of an Asset Management Company has been ready but up till now, it has not come up for consideration at the National Assembly, let alone for passage.” To illustrate his point further, Mr. Afolabi said the corporation has made a case for advance payment of insured deposits to depositors of weak banks.

“We need some enhancement from the National Assembly. We have proposed for the NDIC to be allowed to make advanced payments to depositors of weak banks when there is threat or suspension of payment by banks. The current laws only allow us to pay insured deposits only to depositors of liquidated banks or when the banks have been wound up.” According to him, in the case of Peak Merchant Bank, the NDIC had commenced the payment of depositors before the promoters of the bank secured a court judgment stopping it from continuing.

He said “the moment the bank was under threat, the NDIC started to pay depositors but we were stopped by the court that we can only pay when the bank has been declared insolvent or has been wound down.” The role of legislators in strengthening the NDIC’s capacity to do its job is, therefore, paramount, Mr. Afolabi said.

Commentary from stakeholders and analysts has continued to trail CBN’s stress audits that were conducted on all 24 of Nigerian banks, leading to the sacking of nine chief executive officers.