Insider Loans by Bank Directors and Key Management Personnel in Nigerian Banks

Directors and key management personnel of Deposit Money Banks in Nigeria borrowed approximately N549 billion from their financial institutions over a five-year period, according to an analysis of the banks’ annual reports filed with the Nigerian Exchange Limited between 2019 and 2023.

However, there was a significant drop in the banks’ loans and advances to these insiders in 2023. The transactions decreased to N52.40 billion for eight financial institutions, compared to N111.31 billion in 2022, indicating a 52.92 per cent decline in one year.

This decline coincided with the release of new corporate governance guidelines by the Central Bank of Nigeria (CBN), which came into effect on August 1, 2023. The guidelines impose responsibilities on bank boards and executive compliance officers, superseding previous codes, circulars, and related directives.

The CBN guidelines on related party transactions stipulate that banks establish a policy concerning insider trading and related party transactions by directors, senior executives, and employees. The policy should contain appropriate standards and procedures for effective implementation, including an internal review mechanism by the internal audit function of the bank to assess compliance and effectiveness.

Fidelity Bank Plc experienced the most significant decline in loans to related parties and entities controlled by key management personnel, dropping from N92.31 billion at the end of December 2022 to N2.09 billion at the end of last year.

The trend of insider loans has raised concerns among financial analysts and shareholders. While some analysts highlight the importance of insider loans being repaid to avoid non-performing loans, others emphasize the need for banks to focus on lending to the public, particularly to manufacturers and employers of labor, to drive economic growth.

Overall, if insider loans are performing and disclosed, minority investors and shareholders see no cause for concern. However, they urge regulators to ensure that non-performing insider loans are not written off, as this could negatively impact the business and lead to a higher rate of non-performing loans.