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.

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.