Analyst says adoption of Nigerian Sustainable Banking Principles will foster transparency, accountability

The principles are based on leading international sustainable finance standards.

Nigerian banks’ adoption and compliance with the Nigerian Sustainable Banking Principles is a welcome development and would go a long way in enhancing transparency and accountability in the banking industry, a finance analyst has said.

The Nigerian Sustainable Banking Principles, also known as The Principles, are a set of doctrines or policies that the Central Bank of Nigeria has mandated the banks to comply with. They are guidelines approved by the Bankers’ Committee last year, after which the Central Bank issued a circular for its adoption.

In September 2012, the regulatory body had issued a circular directing banks, discount houses and development finance institutions to implement the Nigeria Sustainable Banking Principles. The institutions were also informed that the Central Bank will subsequently issue reporting requirements to guide the reporting of their compliance with the Principles and Guidelines.

The Central Bank said the principles are based on leading international sustainable finance standards and established industry best practice, but they are developed in line with the Nigerian context and development needs.

“We have adopted a mitigation approach to our Business Activities and Business Operations in which we commit to avoid, minimise or offset negative E&S impacts where possible, At the same time, we have also sought to be pro-active about promoting positive development impacts where we can, recognising that the benefits to society can also drive business opportunities for Banks,” the Central Bank said.

“We have taken a Principles-based approach which means that we have not prescribed specific implementation requirements or rules” it said, adding that the principles would be interpreted and applied by each Bank in a manner that provides for and is appropriate with the bank’s core values, business model and enterprise risk management framework.

Last month, the regulatory body released exposure draft on its desired reporting template for banks operating in Nigeria. This, it says, is to ensure compliance with the Principles by the banks and in view of the need to ensure uniformity in reporting their implementation efforts towards the required compliance.

According to the Central Bank, the adoption of these principles would enhance the adopting institution’s financial success over the longer term while ensuring that they remain environmentally and socially responsible.

Ayodeji Ebo, Analyst at Afrinvest West Africa Limited, a management majority-owned securities firm involved in investment banking, securities trading, asset management and investment research with a focus on West African investment advisory and market research and analysis firm, said this development is a welcome one.

“I feel the Central Bank had to come up with some comprehensive reporting package such as this for the industry, considering the past crisis. Looking at the phase of the crisis, the Central Bank came in with the help of the Asset Management Company (AMCON) to clean up the banks.

Though the banks are now relatively healthy, Mr. Ebo said the banks still have work to do, such as growing their loan books, hence the need for a close watch by the regulatory body. “The Central Bank would not want to be caught unawares or be in shock should any unfavourable event break out so there is the need for close monitoring. It is a welcome development and it will go a long way to aid transparency in the sector” he said.

The Banks’ 2012’s books were according to some analysts, uninspiring.

For instance, Renaissance Capital, an investment bank, said the banks fourth quarter 2012 performance generally disappointing. It said this has unfortunately been the theme for Nigerian banks over the last few years and 2012 was no different. The firm said this highlights a prevalence of weak risk management in the sector, and is worrisome.

“We expect investors have become weary of fourth quarter clean-ups. Regrettably, fourth quarter 2012 was not without its issues with several banks reporting higher than expected impairment charges. We find it frustrating that three years into the sector clean-up, we are still seeing last quarter adjustments to provisions and write-offs.

“In our view it underscores the prevalence of weak risk management in the sector. Auditors’ assessment of book quality and required provisions seems to differ significantly from internal forecasts. This is worrying, especially as we move into an environment of higher loan growth. It suggests that where banks report very low impairment charges on a quarterly basis, it may be prudent to assume the profits and returns are overstated, in other words, the trends cannot be annualised and extrapolated for the full year,” the firm said.

Reporting requirement

Each bank, according to the Central Bank, will need to develop an Environment and Social Risks (E&S) management system which incorporates the Principles and balances the identification of E&S risk and opportunities. The degree and level of E&S management should commensurate with the scale and scope of a Bank’s Business Activities and Business Operations. Each bank will also apply the Principles to its domestic operations.

The Principles apply to a bank’s Business Activities and Business Operations. The Principles include: Environmental and Social Risk Management, Human rights respect, Promotion of Women’s Economic Empowerment, Promotion of Financial Inclusion, Capacity Building, Collaborative partnerships among others.

The regulatory body said industry requirement will be grouped into two phases: Year one milestones and the second, all other subsequent years.

By June 30, the banks are expected to have developed and submitted to the Central Bank an overarching Sustainable Banking Commitment, which articulates how banks will apply the Principles and Guidelines, How E&S risk management considerations have been integrated into the Enterprise Risk management framework and their implementation targets and milestones, including a five-year plan.

The banks are also required to make other submissions regarding the implementation and compliance of the Principles by September 30, December 31, and April 30, 2014 –submissions for the year one milestone.

The banks are expected to engage their respective Board of Directors on the Principles and Guidelines, designate a sustainable banking desk or unit responsible for implementation of the Principles and Guidelines as well as reporting to the Central Bank and other relevant stakeholders where appropriate, begin capacity building with relevant stakeholders among other responsibilities.

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