The Code of Corporate Governance for MFB’s in Nigeria which was issued on October 24, 2018 became effective on April 1st 2019.
Prior to now, the CBN on February 27, 2017 issued the Exposure Draft on the Codes of Corporate Governance for Other Financial Institutions in Nigeria which included that of the MFB and called for comments from relevant stakeholders which may be incorporated as appropriate. There are slight differences between the draft code and the code that was finally issued and made effective by the CBN.
As stated, the aim of the code is to facilitate the advancement of the economy through micro and small enterprises. To achieve this, the Central Bank of Nigeria has issued the Code of Corporate Governance to ensure application of high ethical standards among operators and most importantly to increase and retain public confidence in MFB’s. In addition, the apex bank sees a need to define an acceptable minimum standard in the governance and management of MFB’s.
The gamut of the code covers board of directors and management, shareholders, disclosure and transparency, risk management, ethics and professionalism, all of which stand on all fours with the principles of good corporate governance.
The Code shall apply to licensed Microfinance Banks in Nigeria and the CBN means to see total compliance.
This code is a welcome development as it will increase the confidence of investors as a result of which MFB’s can raise capital efficiently and effectively while strengthening the economy. In addition, it is the first of its kind in the sub-sector and in no distant time, sterling results will be the outcome of the application of this code.
This article is intended to highlight and analyse the provisions of the code.
Highlights of the Code of Corporate Governance for MFBs
Board of Directors and Management
A perusal of the Code will show that the Code set out Responsibilities of the Board as follows;
- That the Board shall be accountable and responsible for the performance and affairs of the MFB and states further that the board owes the MFB duty of care and loyalty to act in the interest of the MFB’s shareholders and other stakeholders.
- Members of the board are also by this code made severally and jointly liable for the activities of the MFB.
- The board is required to define and set down the MFB’s strategic goals, approve its long and short-term business strategies and monitor their implemenation by management.
- The board also has the duty to determine the skills, knowledge and experience that members require which shall, at the minimum, be in line with the requirements of the Approved Persons Regime.
Approved Persons Regime refers to the guidelines and minimum criteria issued by the CBN on January 1, 2016 to ensure that only fit and proper persons are appointed to board and top management positions in banks and other financial institutions.
- The Board is also vested with the duty of appointing the CEO as well top management staff and establish a framework for delegation of authority in the MFB, which shall comply with extant regulations issued by the CBN from time to time.
- The Board is to consider, approve and monitor the implementation of the MFB’s budget, including setting expenditure limits for management and Board Committes. It shall also set limits of authority, specifying the threshold for large transactions which it must approve before they take place.
- Most importantly, the Board shall ensure strict adherence to the Code of Conduct for Directors of Banks and Other Financial Institutions in Nigeria.
On the Composition and Size of the Board
- The minimum and maximum number of Directors on the boards of MFBs shall be five (5) and seven (7) for unit MFBs, seven (7) and nine (9) for State MFBs, seven (7) and twelve (12) for National MFBs, respectively. Furthermore, the MD/CEO shall be the only executive director of a unit MFB.
- The Board shall consist of Executive and Non-Executive Directors, and the number of Non-Executive Directors shall exceed the number of Executive Directors. In addition, the Board of MFBs shall consist of a minimum of one(1) Independent Non-Executive Directors(INED) for unit MFBs and two (2) for National MFBs. However, a state MFB with a Board size of more than 7 members shall be required to have a minimum of two (2) INEDs.
Separation of Powers
- No one person shall combine the positions of Board Chairman and the MD/CEO in any MFB at the same time and no executive Vice Chairman shall be allowed in the Board structure. Furthermore, no two members of a family shall occupy the positions of Chairman and MD/CEO or Execuitve Director of the MFB and Chairman or MD/CEO of an MFB’s subsidiary at the same time.
- In addition, not more than two members of a family shall be on the board of an MFB at the same time. Where the MFB is a member of a holding company,not more than two family members shall be allowed to serve on the Boards of the MFB and the holding Company.
Appointment and Tenure
- Members of the Board shall be appointed by the Shareholders and approved by CBN.
- And to qualify for the position of a Non-Executive Director, it is required that the nominee shall not be an employee of a bank or other financial institution, except where the MFB is promoted by the bank or other financial institution and the proposed director is representing the interest of such an institution.
- The appointment to the Board of MFB shall be transparent, formal and documented in the Board charter and shall be in accordance with extant regulations issued by the CBN from time to time.
- In order to ensure continuity and injection of fresh ideas, Non-Executive Directors of MFBs shall serve for a maximim of three (3) terms of four (4) years each.
- An Independent Director on the other hand shall be 4 years for a single term and a maximum of 8 years of two consecutive terms if reelected upon the expiration of the first term.
- For the MD/CEO, the tenure shall be in accordance with the terms of engagement subject to a maximum period of ten (10) years. Such tenure shall be broken down into periods not exceeding five (5) years at a time. In addition, anyone who has served as MD/CEO for the maximum tenure in an MFB shall not qualify for appointment in any capacity in the same MFB or its subsidiaries until after a period of three (3) years after the expiration of his tenure as MD/CEO.
- The code requires the Board to at the minimum establish the following Committees;
- Risk Management Committee
- Audit Committee
- Board Governance and Nomination Committee
- Board Credit Committee
Risk Management and Audit Committee
- The code provides that the functions of the Risk Management and Audit Committee can be performed by one Committee for a unit or State MFB without prejudice to the provisions of the Companies and Allied Matters Act.
- Each MFB shall have a Risk Officer and Internal Auditor who shall report directly to the Committee(s) responsible for Risk Management and Audit functions respectively.
Board Credit Committee
- The Board Credit Committee shall comprise members knowleadgeable in credit analysis and the Board shall not replace members of the BAC and External Auditors at the same time.
Board/ Board Committees Meetings
- The Code provides that to effectively perform its oversight functions and monitor management’s performance, the Board and each of the Board Committees shall meet at least once every quarter.
- Board/Board Committee meetings shall be deemed to be duly constituted where two-thirds of members are present, provided that a najority of directors at the meeting are Non-Executive Directors (NEDs).
- The Board has a duty to declare in the Corporate Governance Section of the Annual Report, the total number of Board and Board Committee meetings held in the financial year and attendance by each Director.
- The code mandates that MD/CEO and other Executive Directors shall not receive sitting allowances and Director’s fees.
- Non-Executive Director’s (NEDs) remuneration shall be limited to Director’s fees, sitting allowances for Board and Board Committee meetings and reimbursable travel and hotel expenses. NEDs shall not receive salaries and benefits whether in cash or kind, other than those mentioned above.
- Where share options are adopted as part of executive remuneration or compensation, the Board shall ensure that the stock options are not pticed at a discount except with the prior authorization of the relevant regulatory agencies.
- Share options shall be tied to performance and subject to the approval of shareholders at AGM.
- The code provides for annual Board and Director’s appraisal covering all aspects of the Board’s structure, composition, responsibilities, processes, relationships and performance or as may be prescribeds by the CBN. The appraisal shall be conducted by an independent consultant.
Rights and Functions of Shareholders
- Shareholders shall have the right to obtain relevant and material information from MFB on a timely and regular basis.
- Shareholders shall have the right to participate actively and vote in general meetings.
- MFBs are encouraged by the code to establish websites, and communicate with shareholders via website, newsletters e-mails.
- The board has a duty to ensure that every shareholder is treated fairly and that minority shareholders are protected from overberaing influence of controlling shareholders.
- The code provides that no person or corporate entity shall own a controlling interest in more than one MFB without the approval of the CBN.
- In addition government direct and indirect equity holding in any MFB shall be divested to private investors within a maximum period of Five years from the date of investment and limited to 10%. For existing investment above five years, the MFB shall within two years from the commencement of this code comply with this provision.
Rights of Other Stakeholders
- The code recognizes the right of stakeholders to freely comunicate their concerns about any illegal or unethical practices to the Board. it provides for such individuals to have recourse to the CBN in accordance with Section 3.4 of the Guidelines for Whistle Blowing for Banks and Other Financial Responsibilities.
Disclosure and Transparency
- In order to foster good corporate governance, the Code encourages MFBs to mkae timely and accurate disclosures beyond the statutory provisions of BOFIA, CAMA and other applicable laws and standards.
Transparency and Integrity Reporting
- MFBs are expected to have structures that can independently safeguard and verify the integrity of financial reporting which shall entail the review and consideration of the financial statements by BAC and enhance the independence and competence of the MFBs internal and external auditors.
- The Code provides extensively on the structure, membership, qualification of members and functions of the BAC (Board Audit Committee).
- The Code provides for MFBs to have compliance officers for monitoring compliance with the corporate governance code and Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)requirements.
- The office of the Code Compliance Officer and that of the Internal Auditor may be combined in a unit or State MFB.
- The code makes provision for the appointment of the Compliance officer/ Head of Internal Audit.
- The appointment, tenure and functions of the External Auditor is provided by the Code.
- MFBs are by the Code mandated to have their whistle-blowing policy known to employees and stakeholders. They are expected to file returns on the compliance with the whistle-blowing policy on a semi-annual basis to the Director, Other Financial Institutions Department, not later than 7days after the end of the relevant period.
- Every MFB is required to have a risk management framework specifying the governance architecture, policies, procedures and processes for the identification, monitoring and control of the risks inherent in its operations.
- The Code provides for the approval, disclosure, risk management mandate of the risk management policy.
Ethics and Professionalism
- The code provides for MFBs to have a code of conduct and the disclosures to be contained in the code including the functions and expectations of the said code.
Conflict of Interest
- Every MFB shall have in place an approved policy on conflict of interest. The policy shall at the minimum contain the following;
- Approval and Revision date
- Definition of conflict of interest
- Purpose of the policy
- Examples of conflict of interest situations and
- Procedures to follow in situations of conflict of interest
- The code puts the function of management of conflict of interest on the Board of Directors.
- This Code of Corporate Governance is expected to act as the conscience and guideline of the MFBs in all ramifications. It is tailor made to recognise all the contemporary issues likely to be experienced in the MFBs with solutions to back it up. The operation of the code will in addition help to elevate the status of the MFB’s in the eyes of investors as the code covers completely all factors necessary to ensure the proper functioning of the MFBs.
The ball now lies in the court of the MFBs to adhere to the code for their progress and financial stability. Thankfully, compliance with the code is compulsory.