Regulatory and compliance questions arise in respect of criteria for appointing directors of Tiers 2 and 1 microfinance banks (here referred to as “Tier 2 MFB”) in Nigeria. April 1, 2022, is the end-time of the revised deadline for microfinance banks that are categorized as Tier 2 and 1, State, and National MFBs to fully recapitalize or cease to exit.
The Central Bank of Nigeria (“CBN”) is consistent that the revised deadline will suffer no further revision. Indeed, April 1, 2020, was the initial time limit but due to MFBs’ lack of investors’ readiness together with the harsh effects of COVID 19 pandemic on Nigeria’s economy, the CBN revised the deadline to April 1, 2022, tops.
Agency banking and financial technology services in Nigeria greatly invested in acquiring MFB licences as a business model for driving fin tech services. Preliminary compliance and regulatory are about to be closed at the CBN – given the April 1, 2022, end-time.
Acquisition may result in changes in the board of directors (directors) of the MFBs and we offer this commentary as a guide to appointment of directors in Tiers 2 MFBs.
The scope of our work include:
- minimum number of board seats;
- Competency framework;
- Criteria for Fitness (competence) Test
- Propriety (integrity and suitability) Test
- Steps after Naming candidates
Minimum Number of Board Seats
CAMA 2020 (Companies and Allied Matters Act, 2020) provides that “every company, not being a small company shall have at least 2 directors.” BOFIA 2020 (Banks and other financial institutions Act) effectively exclude application of CAMA 2020 to appointment and removal of directors of companies supervised by the CBN.
CBN’s code of corporate governance (“CBN’s CCG”) mandates banks that include Teir 2 MFB to have at least 5 directors and a maximum of 20 directors.
CBN’s CCG provides that 2 non-executive directors (“NED”) should be independent non-executive directors (“INED”).
INEDs are directors who have no direct material relationship with the bank or any of its officers, major shareholders, subsidiaries or affiliates. That is, any relationship which may impair the director’s ability to make independent judgments or compromise the director’s objectivity in line with Corporate Governance best practices.
A managing director of Tier 1 MFB must be a member of the board of directors (the “board”) otherwise the MFB is liable to a daily fine payable to CBN.
Clearly, the minimum number of directors for Tier 2 MFB may be 5 directors. 2 NEDs will be INEDs while a director would be the MD and the remaining 2 directors may be EDs or NEDs or a combination.
Under CBN’s 2015 revised assessment criteria for approved persons’ regime for financial institutions (the CBN’s Assessment Criteria”), which is subject to CBN’s CCG, candidates for Tier 2 MFB board must have at least 2 directors other than EDs who possess a minimum of three (3) years financial services industry experience. No academic qualification is required for Unit MFBs only.
We recommend that candidates should generally be persons with reasonable academic qualifications given that CBN may at its discretion, approve or disapprove the appointments of candidates under special circumstances.
Criteria for Fitness (Competence) Test
Any candidate to the board must satisfy fitness or competence test in CBN’s Assessment Criteria. Such candidates must not be:
- a director in any other bank;
- a director of any company or entity which has significant influence on a Tier 1 MFB provided that directors in a parent company that are candidates to the board will not exceed 30% of Tier 2 MFB’s membership. In our view this appears unworkable given that CBN’s CCG forbids “no Director, either Executive or Non-Executive, to be allowed to serve on the Boards of a bank and a holding company within a Group at the same time (we are not aware how this is applied by CBN);
- of unsound mind or as a result of ill-health is incapable of carrying out his duties;
- declared bankrupt or suspends payments or compounds with his creditors including his bankers;
- convicted of any offence involving dishonesty or fraud;
- guilty of serious misconduct in relation to his duties;
- disqualified or suspended from practicing his profession except at his own instance;
- a director of a financial institution or any candidate directly involved in the management of a financial institution under the purview of the CBN which has been wound up by the Federal High Court;
- dismissed from the service of any tiers of governments in Nigeria including their respective agencies;
- subject of any proceedings of a disciplinary or criminal nature, or has been notified of any impending proceedings or any investigation, which might lead to such proceedings (except that the candidate has been exonerated in writing);
- a candidate whose appointment would result in conflict of interest;
- either personally or any of his business in which he has controlling interest or exercises significant influence, was or is being investigated, disciplined, suspended or criticized by a regulatory or professional body, a court or tribunal, whether publicly or privately;
- subject of any justified complaint relating to regulated activities;
- have been dismissed, asked to resign from employment or from a position of trust, fiduciary appointment or similar position because of questions about his honesty and integrity;
- deliberately misled (or attempts to mislead) by act or omission, a client, the institution and/or the regulators;
- deliberately falsified documents to mislead a client, the institution and/or regulators;
- deliberately fail to inform the client, institution and/or regulator, without reasonable cause, of the fact that their understanding of a material issue is incorrect, despite being aware of their misunderstanding;
- deliberately fail to disclose the existence of falsified documents;
- deliberately prepare inaccurate or inappropriate records or returns.
Propriety (Integrity and Suitability) Test
Propriety test for candidates to the board of Tier 2 MFB include understanding of general banking regulations and business and, the candidate must have, where applicable:
- A first degree or its equivalent in any discipline plus membership of any other relevant and recognized professional institute;
- A minimum of eight (8) years post-graduation experience;
- Proven skills and competencies in their fields;
- Knowledge of the operations of banks/development finance institutions/discount houses and relevant laws and regulations guiding the financial services industry; and
- Ability to interpret financial statements and make meaningful contributions to board deliberations;
- Constructively challenge and contribute to strategy development;
- Scrutinize performance of management in meeting agreed goals, objective and monitoring, and where necessary removing, senior management and in succession planning;
- Satisfy themselves that financial information is accurate and that the financial controls and systems of risk management are robust and defensible;
- Bring independent judgment as well as necessary scrutiny to the proposal and actions of the management and executive directors especially on issues of strategy, resources, performance evaluation and key appointments and standards of conduct;
- Broad experience, integrity and credibility, general managerial/administration, team building/conflict management and leadership
Steps after Naming Candidates
Having identified and selected candidates, Tier 2 MFB is required to:
- submit a completed Approved Persons Regime Questionnaire to CBN;
- provide a satisfactory status report from the candidate’s last place of work not later than six months after engagement;
- satisfy CBN that candidate is able to meet personal financial obligations or commitments on a continuous basis and demonstrate satisfactory discharge of fiduciary responsibilities;
- provide 3 reference letters, two of which must be from the last place of work, in the last five years and from persons not below the rank of a director. For Non- Executive Directors, the 3 reference letters should be from individuals of reputable standing in the country that include civil servants of grade level 15 and above or their equivalents in the armed forces or Police, senior clergymen, fellows of professional bodies such as ICAN, CIBN.
Ensure that Non-Executive Directors undergo directors’ training at the MFB’s expense, aimed at acquiring or having the prerequisite knowledge of their responsibilities and duties as the institution’s non-executive directors.
MFBs have to embrace corporate governance, regulatory and compliance in order to realize its objective of deepening financial inclusion in un-banked and under-bank areas across Nigeria.
Due diligence practice opportunities are wide open for law firms and legal practitioners who are prepared to profit from derivative services in the ongoing compliance and regulatory issues resulting from recapitalization of MFBs, following its acquisition.
A hand-holding exercize for fin techs and other major investors in MFBs in Nigeria.
Osita Enwe heads SRJ’s Fin Tech, Education law and Agribusiness law practice groups