Sanctioning Fraudulent Banks

Charles Soludo, Governor, Central of Nigeria

The Central Bank of Nigeria (CBN), plans to sanction banks engaged in unwholesome practices, even as there are revelations that Nigerian banks routinely defraud their customers
By Udo Onyeka
As banks operating in the country continue to grow in leaps and bounds since the consolidation exercise that moved their minimum capital base from two billion naira to N25 billion, sharp practices seem to also be on the increase according to revelations.
The Source gathered that as a result of increasing reports of banks engaging in sharp practices to cheat on their customers as unearthened by the House of Representatives committee on banking and currency, the Central Bank of Nigeria (CBN), has vowed to descend on banks found wanting.
The governor of the CBN, Professor Chukwuma Soludo who was taken aback owing to some of the revelations indicting the banks, said that henceforth, the apex bank would “come down heavily on any bank or officials that refuse to play the banking game according to the rules.”
Soludo said that the apex bank in accordance with the laws establishing it may go as far as dissolving the board, suspending the management staff, or other staffers involved in scams, it would also impose fines as sanctions or even withdraw the operating license of defaulting outfits, depending on the offence(s).
The governor at a recent forum in Lagos said the practice of defaulting in the submission of monthly returns and any other return as at when due was unacceptable.
His words: “Henceforth, failure to render monthly returns on target shall attract appropriate sanctions, in addition to the monetary penalties for late submission, false reports or non-submission.”
But to some people, the CBN is still being perceived as a toothless bulldog. This is so largely because financial institutions that contravene the apex bank’s rules and regulatons are hardly ever punished.
But if the current plan of the CBN to deal with erring banks is anything to go by, tough penalties await banks that do not comply with the rules and regulations set by the apex bank.
For instance, Soludo stated that two years after the recapitalisation of banks operating in the country, it is believed that adequate foundation would have been laid for the building of strong financial institutions.
According to an official of the apex bank, “the CBN would begin a thorough investigation of the banks to see how far they have compiled with all the guidelines since January 2006. I tell you, any of the banks found wanting would be penalised.
Last year, the CBN issued a new set of guidelines concerning appointment of independent bank directors in pursuance of section 536 of its code of corporate governance issued on April 3, 2006. The section states that two independent non-executive director board members (who do not represent any particular shareholders interest and hold no special business interests in the bank), shall be appointed by the bank on merit.
According to the CBN circular, independent directorship, “would be a member on the board of directors who has no direct material relationship with the bank or any of its officers, major shareholders, subsidiaries and affiliates – relationship which may impair the directors’ objectivity in line with corporate governance best practices.”
The CBN guideline also stated that such people would be persons that are qualified academically and by experience. It further pointed out that no family should have more than one person on the board of the same bank.
Some banks have not fully compiled with the law as it concerns appointment of directors as the CBN official revealed that the apex bank is currently compiling a list of banks and names of officers involved.
The Source was told that though some banks are yet to comply with the CBN directive on corporate governance directive, such banks would be surprised that very soon the apex bank would begin to penalise them.
Furthermore, the CBN said that non-compliance in the industry would no longer be tolerated due to the grave danger such act poses to the sector and the economy at large.
Meanwhile, statistics from the CBN indicates a grim picture of what non-observance of these guidelines has cost the economy. Apart from the fact that it affects the services which banks render to their customers, several banks have failed owing to the abuse of corporate governance by operators of such banks. The reasons for the demise of such banks range from director-related credits, unsecured lending, low capital base, loss of confidence by customers who were defrauded at one time or the other and erosion of capital through loan losses.
Investigations also reveal that huge provisions made for bad loans and high operating costs often eat deep into the profit margin of banks.
Another area which the CBN is focusing its searchlight on is frivolous claims, especially ratings by banks.
Though Nigerian banks are huge making inroads into the international financial market, signing and sealing big ticket transactions running into several millions of dollars, these can largely be attributed to the banking consolidation which has made them (banks) very strong.
However, apart from some of the awards that are from known global and local rating institutions, other awards which banks parade, a CBN official said, are frivolous.
According to the insider, some of these awards are intended to deceive customers who may not know the true position of the banks.
Many financial experts have therefore called for the broadening of the rating criteria in the light of new developments in the industry.
Many, infact, believe that the move by the CBN to come down strongly on banks that engage in fraudulent and unwholesome practices is long overdue.
Although the interests of Nigerians in banks operating in the country is increasing by the day, there are yet many complaints from customers of these banks of incidences of unwholesome practices.
For instance, many Nigerian banks are said to charge their customers indiscriminately. The CBN stipulated lending rate is 18 per cent per annum, but according to revelations by a Forensic Accountant, Ori Adeyemo, the practice in the sector is that most banks charge as high as 40 per- cent per annum, oftentimes without the customers being aware of such charges.
Adeyemo also faulted the practice of charging of commission on turn- over Cash On Transfer (COT) shortfall by the banks. Although section 3 sub-section I and 2 of the CBN Guideline allows banks to charge (COT) on all instruments and on all renewals and rollover thereof, including discountable instruments such as Bankers acceptance, commercial papers among others, sub section 2 of the Guideline stipulates that debit representing transfer to other accounts in this same name in same bank shall be free.
Also, many banks are said to over charge their customers on bank-drafts. Adeyemo revealed that the maximum fee chargeable on bank drafts is N210, but some banks charge their customers as high as N700 for such service.
Still on the issue of excess charges against the bank, the Forensic Accountant said although section 11.6 of the Guideline states that 0.5 per cent and a maximum of five naira be charged on returned cheques by the bank and that such charges be borne by the drawer in the case of a returned cheque but also debited to the account of the supposed beneficiary, such action, he said, is illegal and in breach of the dishonoured cheque (offence) Act CAP 102 of May 20, 1977.
Section 2.7 of the Guideline states that 0.25 per cent flat sum is payable on a fresh credit facility granted or on an enhanced sum. Adeyemo revealed that most banks breach this Guideline by charging as high as two per cent flat.
He also disclosed that Nigerian banks short-change their customers on their savings accounts by not negotiating saving account interests with them at the point of opening such accounts. Section 1.1 of the Guideline gives the customer the right to negotiate on interest for deposit accounts. Again, he said that the banks do not enter into any negotiation regarding customers' deposit, be it savings, current or term accounts, and most times the banks do not pay interest to them, with credit balance on their account because they take customers credit deposit as free funds.”