CORPORATE GOVERNANCE IN FINANCIAL INSTITUTIONS IN NIGERIA: COMPLIANCE AND REGULATORY CHALLENGES

In Nigeria, corporate governance plays a pivotal role in ensuring financial stability, fostering investor confidence, and promoting the integrity of financial institutions. Over the past decade, the Nigerian banking and financial sector has experienced significant regulatory shifts aimed at strengthening governance practices. Despite these advances, financial institutions continue to face considerable compliance and regulatory challenges, which require careful attention to safeguard the sector’s growth and sustainability.

Overview of Corporate Governance in Nigeria

Corporate governance refers to the systems, principles, and processes by which companies are directed and controlled. It ensures accountability, transparency, and fairness in a company’s relationship with all its stakeholders, including shareholders, employees, and the community. For financial institutions, effective corporate governance is critical because of their unique role in mobilizing funds, providing credit, and managing risks in the economy.

In Nigeria, the framework for corporate governance in financial institutions is primarily governed by the Central Bank of Nigeria (CBN), the Securities and Exchange Commission (SEC), and the Nigerian Deposit Insurance Corporation (NDIC). These regulators enforce policies that promote the effective management of risk, ethical leadership, and accountability.

Regulatory Framework

Nigeria’s corporate governance framework for financial institutions is anchored on:

1. Companies and Allied Matters Act (CAMA) 2020[i]
2. Banking and Other Financial Institutions Act (BOFIA) 2020[ii]
3. Central Bank of Nigeria (CBN) Act 2007[iii]
4. Investment and Securities Act 2007 (ISA) [iv]

Key Corporate Governance Regulations for Financial Institutions

1. Central Bank of Nigeria’s Code of Corporate Governance for Banks: In 2023, the CBN introduced the Corporate Governance Guidelines for Commercial, Merchant, Non-Interest, and Payment Services Banks in Nigeria; and the Corporate Governance Guidelines for Financial Holding Companies in Nigeria. The objectives of these guidelines are to provide additional guidance on the principles, recommended practices and responsibilities contained in the Nigerian Code of Corporate Governance 2018; to outline industry-specific corporate governance standards for Banks; and to promote a culture of high ethical standards among banking operators while enhancing public confidence[v].
2. The Financial Reporting Council of Nigeria (FRCN) Code: The FRCN issued a unified National Code of Corporate Governance (NCCG) in 2018 to promote governance best practices across all sectors, including financial services. This code sets standards for transparency, accountability, and the independence of boards, as well as provisions for audit committees.[vi]
3. Securities and Exchange Commission’s Code of Corporate Governance[vii]: The SEC also plays a regulatory role, ensuring that publicly listed financial institutions adhere to good corporate governance practices to protect investors and maintain market confidence.

These regulatory codes have been instrumental in addressing governance issues such as excessive risk-taking, insider abuse, and poor risk management practices that previously plagued Nigeria’s financial sector.

Compliance and Regulatory Challenges in Nigerian Financial Institutions

Despite the regulatory frameworks in place, financial institutions in Nigeria face several compliance and regulatory challenges. These challenges stem from gaps in enforcement, the evolving nature of the regulatory environment, and internal governance weaknesses within institutions.

1. Enforcement Challenges and Regulatory Shortcomings: While Nigeria has a robust regulatory framework, the enforcement of corporate governance principles remains a major challenge. Regulatory bodies often lack the capacity or will to enforce penalties for non-compliance consistently. As a result, some institutions may exploit loopholes, undermining the effectiveness of corporate governance codes.[viii]
2. Independence and Structure of the Board: A key governance challenge is ensuring the independence and proper composition of boards. The Nigerian corporate environment has been criticized for allowing politically exposed persons (PEPs) and family members of dominant shareholders to hold significant board positions, compromising independence. Effective oversight by independent directors is essential for ensuring that boards act in the best interest of all stakeholders.[ix]
3. Ethical Leadership and Accountability: Another challenge is promoting ethical leadership within financial institutions. Cases of insider trading, fraud, and unethical lending practices have marred the reputation of Nigerian financial institutions in the past. To address this, there is a growing need for strong internal controls and a corporate culture that prioritizes accountability.[x]
4. Compliance with Anti-Money Laundering (AML) Regulations: Financial institutions in Nigeria are also grappling with stringent anti-money laundering (AML) laws. The Financial Action Task Force (FATF) has placed Nigeria under scrutiny in the past due to its vulnerability to money laundering activities. Banks are required to implement rigorous Know Your Customer (KYC) policies and reporting mechanisms to ensure compliance with AML regulations.[xi]
5. Technological Innovations and Cybersecurity Challenges: The growing reliance on technology in financial institutions has introduced new governance challenges. Cybersecurity threats pose a significant risk to the financial sector, and institutions must invest in robust cybersecurity governance frameworks to protect sensitive financial data and maintain trust.[xii]

Recommendations for Strengthening Corporate Governance

1. Enhancing Regulatory Enforcement: There is a need for more robust enforcement mechanisms to ensure strict adherence to governance codes. Regulators should invest in capacity building and introduce punitive measures for non-compliance that can act as a deterrent.
2. Improving Board Independence: Financial institutions must ensure that their boards are composed of independent directors who are free from conflicts of interest. This will improve oversight functions and reduce undue influence from dominant shareholders.
3. Promoting a Culture of Ethical Leadership: Institutions should invest in leadership training programs that emphasize ethical decision-making and accountability. Encouraging whistleblowing mechanisms and promoting transparency can also foster ethical conduct.
4. Addressing Regulatory Overlaps: Regulatory agencies need to collaborate more effectively to harmonize their oversight functions. This would reduce the compliance burden on financial institutions and create a more streamlined regulatory environment.
5. Enhancing Cybersecurity Governance: As technology continues to transform the financial landscape, institutions must prioritize cybersecurity by adopting robust frameworks that address both technological risks and governance challenges.

Conclusion

Corporate governance in Nigerian financial institutions is essential for ensuring stability, promoting investor confidence, and fostering economic growth. However, despite the existence of regulatory frameworks, compliance and governance challenges persist. Financial institutions must address these issues by enhancing internal controls, improving board independence, and ensuring robust oversight from regulators to create a sustainable and transparent financial sector.

References

[i] Companies and Allied Matters Act (CAMA) 2020, Section 119 which addresses the requirements for issuing shares and the obligations of shareholders to disclose their capacity. In essence, the section aims to promote transparency and accountability in the issuance and ownership of shares in Nigerian companies, it is a part of the broader efforts to strengthen corporate governance and regulation in Nigeria.

[ii] Banking and Other Financial Institutions Act (BOFIA) 2020, Section 33 grants the CBN the authority to conduct special examinations or investigations into the affairs of banks and other financial institutions, thus supporting effective corporate governance in Nigerian financial institutions by promoting oversight, transparency, accountability, and regulatory compliance

[iii] Section 2, Central Bank of Nigeria (CBN) Act 2007

[iv] Section 27, Investment and Securities Act 2007

[v] CBN Corporate Governance Guidelines. Available at: https://corpgovnigeria.org/wp-content/uploads/2024/02/Circular-and-Guidelines-for-Corporate-Governance.pdf

[vi] Financial Reporting Council of Nigeria (FRCN) (2018). National Code of Corporate Governance. Available at: https://pwcnigeria.typepad.com/files/nigerian-code-of-corporate-governance-2018-1.pdf

[vii] SEC Corporate Governance Guideline and Revised FORM 01. Available at: https://sec.gov.ng/sec-corporate-governance-guideline-and-revised-form-01

[viii] Nworji, I.D., Adebayo, O.I. & Adeyanju, O.D. (2011). Corporate Governance and Bank Failure in Nigeria: Issues, Challenges, and Opportunities. Research Journal of Finance and Accounting, 2(2), 37-44.

[ix] Ogbechie, C. (2006) ‘Corporate governance: challenges for banks in Nigeria’, Economic and Policy Review, 12(2), pp. 47-53. Available at: https://www.ajol.info/index.php/epr/article/view/39246

[x] Uwuigbe, O. & Fakile, S.A. (2012). The Effect of Board Size on Financial Performance of Banks: A Study of Listed Banks in Nigeria. Research Journal of Finance and Accounting, 3(4), 99-107.

[xi] Okoye, L.U. and Gbegi, D.O. (2013) ‘Anti-money laundering policy and its effects on bank performance in Nigeria’, ResearchGate. Available at: https://www.researchgate.net/publication/309458514

[xii] Reis, O., Oliha, J.S., Osasona, F. & Obi, O.C., (2024) ‘Cybersecurity dynamics in Nigerian banking: trends and strategies review’. Computer Science & IT Research Journal, 5(2), pp.336-364.