First Bank And The Controversies Surrounding CBN’s Sweeping Actions

By Akorede Folarin

A lot of noise has been made about the sweeping actions taken by the Central Bank of Nigeria with respect to the affairs of the foremost Nigerian commercial bank, First Bank of Nigeria Limited, and the legal propriety of doing so. While most of this noise is from those who may not (understandably) be in the know of how things are run in the banking industry, it becomes imperative to restate that banking is a highly regulated industry due to its importance to the financial and economic health of a country. The Central Bank of Nigeria (CBN) is the foremost banking regulator in Nigeria and is responsible for the administration of the primary legislation for the regulation of banks in Nigeria – the Banks and Other Financial Institutions Act 2020 (BOFIA). The Central Bank of Nigeria (Establishment) Act 2007 (CBN Act) also mandates the CBN to supervise and regulate banks and other financial institutions (OFIs) in Nigeria.

The present controversies surrounding First Bank of Nigeria Limited and FBN Holdings derives from the exercise of the powers given to the CBN under BOFIA. The Act was passed into law in 2020 to improve on the regime under its predecessor (BOFIA 1990) whereby poor corporate governance had given room for insider abuse, excessive risk-taking, and corruption, which culminated in the mismanagement of the affairs of some banks and the humongous increase in non-performing loans (NPLs) in the country’s banking system.

BOFIA 2020 regards a bank as being in a “grave situation”, and thus failing, if its business is conducted in a manner detrimental to its depositors or creditors or inconsistent with BOFIA or any other relevant laws, or has insufficient assets to cover its liabilities to the public. As a systemically important bank (SIB), it is therefore not surprising that the CBN has taken a special interest in the running of the affairs of First Bank, which has necessitated the rigorous actions taken so far to stabilize the bank.

On the back of the dramatic drop in the price of oil over the years and over-exposure to oil and gas industry lending, most banks are grappling with monstrous non-performing loan portfolios. COVID-19 has ramped up the pressure even more. And First Bank has inarguably been one of those banks caught in the line of fire. The lender’s delinquent debt which was up to 24% in 2016, although now reduced, stayed for a long while at a level that at a point threatened its continued existence. Besides, the bank’s books show that that the bank has extended up to NGN1 Trillion in bad debts in the last six (6) years alone. The fact that the Central Bank has on different occasions given the bank regulatory forbearances is what has held up the bank’s liquidity position and capital adequacy ratio (CAR) and kept the bank afloat.

Another controversy surrounding the bank is its insider lendings i.e. loans by a bank to one or more of its officers or directors. This is especially the case with the dicey situation of the loans the bank made to Oba Otudeko, the Chairman of Honeywell Group who until 2010 served as the Chairman of the bank and who was, until the present clear out of its management, the Chairman of its holding company, FBN Holdings. This insider lending, while not outrightly illegal, did not observe the relevant regulatory measures it was subject to and this has caught the attention of the CBN. One example of such infraction is that the loan which is circa NGN75 billion is above and beyond the single-obligor limit, especially for a director of the bank or its Holdco.

The CBN also alleges that First Bank has afforded Honeywell Flour Mills special treatment in the recent restructuring of its loan facility in breach of applicable regulation/condition precedent. Another regulatory concern is that First Bank has not perfected its lien on Oba Otudeko’s shares in FBN Holdco which were used as collateral for the credit facilities granted to Honeywell Flour Mills, putting in doubt the bank’s capacity to legally claim the collateral upon default of the loan and casting in bad light the lending due diligence regime in the bank. What’s more? Oba Otudeko had previously also used some other part of the collateral for the facility – his shares in Bharti Airtel Nigeria Ltd. – to obtain an earlier loan from Ecobank, which loan is presently the subject of litigation at the Supreme Court, meaning that First Bank cannot move in and claim those assets. This is why the CBN has insisted that Honeywell liquidates its facility to First Bank within 48 hours failing which the apex bank will take hardline regulatory measures against the bank and the company.

Yet another controversy is the actions of the bank with respect to the summary/forceful retirement of its MD/CEO, Dr Adesola Adeduntan, and the appointment in his place of Mr Gbenga Shobo – all without consultation with the CBN. Taking a hard stance against this, the Central Bank stated that “the sudden removal of the MD/CEO was done about eight months to the expiration of his second tenure which is due on Dec. 31, 2021.” The CBN also revealed that:  “[it] was not made aware of any report from the board indicting the managing director of any wrongdoing or misconduct; there appears to be no apparent justification for the precipitate removal” and has consequently ordered his reinstatement.

All the above show that not only has the affairs of First Bank been conducted in a manner detrimental to its depositors or creditors but also inconsistent with BOFIA. It is against this background that the CBN has taken the sweeping actions it has taken against the bank. Upon becoming aware of the failing/grave condition of an affected bank, BOFIA 2020 empowers the CBN to, amongst other things, prohibit the bank from extending further credit facilities for a period, mandate the bank to take specified steps in respect of its business and management (including removing its officers and directors), appoint new directors or any other person to advise the bank on the proper conduct of its business, or acquire at any time the shares of the affected bank up to a level that guarantees it gains control over it.

The CBN Governor may also employ any other intervention tools as the Central Bank of Nigeria may deem fit to improve the state of affairs of the bank, which explains the forbearances that the apex bank has afforded First Bank to prevent it from failing as a result of its huge NPL and poor CAR. It is on this basis that the CBN has removed and replaced most of the directors of the bank and its holding company, given an ultimatum for the bank to immediately call in the Honeywell credit facility, and directed the bank to divest of its non-permissible holdings in non-financial entities in line with extant regulations. The apex bank believes that given that it was its regulatory forbearance that saved the bank from collapsing and prevented it from being taken over, it has to have a major say in how the bank is run, which underscores its present sweeping actions.

Overall, given the interconnectedness of the Nigerian banking sector and the fact that Systemically Important Banks (SIBs), of which First Bank is a strong one, hold the majority of the assets and liabilities in the sector (64% and 66% respectively), it is little surprise that the CBN has stepped in quickly and firmly to regularize the mismanagement of the affairs of the bank the way it has done. This is in line with the apex bank’s responsibility of forestalling banking crises in the country and ensuring financial system stability. Banks are simply too important in Nigeria’s financial system to be allowed to fail or suffer for too long from the uncertainty of destiny. In Hendrith Smith’s hallowed words, “Banks are to the economy what the heart is to the human body.”

**Akorede Folarin is a corporate/commercial lawyer in Lagos. He specializes in Banking & Finance, Capital Markets, Private Equity and Mergers & Acquisitions.