Recently, the Central Bank of Nigeria (CBN) announced that it was intervening in Skye Bank Plc to see through a swat of corporate governance changes at the bank’s top governance structure. Firstly, the members of existing Board of Directors (except two) as at 30 June 2016 stepped down. (The CBN claims this was voluntary, but it is not clear whether this was truly a voluntary action or a result of regulatory pressure). Secondly, the CBN appointed a new Chairman and Board for the bank in exercise of its regulatory powers.
Since the set of consolidations in the banking sector brought about by regulatory reforms in 2008, Skye Bank has evolved. Recall that in 2014, Skye Bank acquired the entire shares and assets of Mainstreet Bank Limited, one of the bridge banks created after the intervention of the CBN and Nigerian Deposit Insurance Corporation (NDIC) in the affairs of then Afribank Plc. One of the reasons given for the intervention was the failure of the Board to stabilize the fundamentals of the bank pre- and post-acquisition of Mainstreet Bank Limited.
Another rationale for CBN’s action as stated by the CBN Governor was Skye Bank’s persistent failure to meet minimum thresholds for critical prudential and adequacy ratios. This had culminated in the bank’s persistent presence at the CBN’s lending window. Banking-industry insiders have pointed out that certain critical factors have led to this precarious position that Skye Bank finds itself. Key among these are: high incidents of insider and non-performing loans; exposures to the currently semi-liquid power sector; loans to NNPC’s local Joint Venture (JV) partners; acquisition of Mainstreet Bank; and fine by the Federal Government of Nigeria.
How does this recent action situate within relevant laws?
The CBN, under the relevant laws – Central Bank of Nigeria Act and Banks and Other Financial Institutions Act – has wide regulatory powers so that it can ensure stability within the banking system, and thus protect depositors in the event of any bank’s collapse.
Under section 42(1)(b) of the CBN Act, the CBN has to ensure high standards of conduct and management throughout the banking system. In doing this, it can seek the cooperation of any bank in Nigeria or NDIC. By this alone, some analysts have taken the view that the CBN can intervene in banks to uphold these high standards of conduct and management in the bank in particular and in the entire banking system at large.
Sections 31 and 32 of the Banks and Other Financial Institutions Act (BOFIA), empowers the CBN to routinely conduct examinations into the books of banks and other financial institutions. The report produced by this routine examination must then be adopted by the bank (in the case of a bank). The bank would then face a fine for not acting or taking steps as required by the report produced after the routine examination. Thus the only punitive product of a routine examination is a fine on the bank.
Section 33 of BOFIA also requires CBN to conduct a special examination under certain circumstances. These circumstances include situations where: (1) it is in the public’s interest; (2) the bank is carrying on business contrary to its depositors and creditors; or (3) a director, shareholder, depositor, or creditor of the bank requests the CBN to carry out such examination. Section 35 then provides that should CBN find a bank to be in a ‘grave situation’ after a special examination has been conducted, CBN can exercise one of several options, including removing a director and appointing in his/her place another director. This is clearly within the context of a ‘failing bank’ or a bank in a ‘grave situation’.
Why CBN’s Actions May Be Unlawful
I am of the view that for the CBN to interfere in the corporate governing of a bank in Nigeria the crucial step must be a special examination of that bank. Note that banks are corporate entities, and from a company law perspective, the corporate-governance structure of a bank should be determined by its members, i.e. the shareholders, who can vote at general meetings to determine who they deem fit to govern the bank. But from a banking law perspective, banks are companies in a class of their own. The effects of their wellbeing go beyond their shareholders. Their wellbeing affect members of the public (who the government has a duty to protect) including shareholders of other banks. As the ill-health of one bank can be seen as reflective of the health of the banking system. Such that where illness of a bank results in deposits devaluation, the depositors and shareholders of other banks may see the value of their holdings decline due to a ‘sentimental rob-off’ on the banking system. Despite this, the governance of a bank cannot be exclusively devoid of shareholders input, except in extreme circumstances.
From CBN’s press statement on the removal of members and appointment of new members to the Board of Skye Bank, it is not clear whether CBN conducted a special examination on Skye Bank. If CBN did, its press statement did not say so. The main reason given by the CBN Governor is the persistent failure of Skye Bank to meet minimum thresholds for critical prudential and adequacy ratios, which culminated in the bank’s persistent presence at the CBN’s lending window. But interestingly, the CBN Governor also stated that ‘I maintain that Skye Bank is not in distress.’ The CBN maintained this position in its press release as well.
Assuming it is the case that the CBN did not conduct a special examination of Skye Bank, CBN would be acting ultra vires. But it would be a far-fetched to presuppose that CBN would interfere in the corporate governance affairs of Skye Bank in the manner it had done without examining the bank’s affairs, even if routinely. It may be safer to assume that CBN’s decision on Skye Bank was based on several examinations of the bank. The law permitting CBN to interfere in the corporate-governance affairs of a financial institution contemplates a special examination of that institution, not ‘a routine examination’ as I surmise is the case here. This would be clearly unlawful as the provisions of the law empowering CBN to remove or appoint a director of a bank only contemplates a situation where the CBN has carried out a special examination of the bank and finds the bank to be failing or in grave situation.
The critical questions then are: (1) what amounts to a failing bank in the opinion of the CBN? (2) Does persistent failure of Skye Bank to meet minimum thresholds for critical prudential and adequacy ratios mean that Skye Bank is a failing bank? (3) Could Skye Bank be a failing bank or in grave situation and yet not in distress or vice versa? (4) Could CBN be relying on not wanting to fail ‘in its duties if it does not take immediate action to nip the steadily declining health of the bank in the bud and correct the situation’ as ground to wield the big stick?
One tripod upon which CBN’s decision can stand is that the interference is borne out of the need to protect depositors’ funds. Depositors are most at risk should a bank fail. But again this doesn’t obviate the need for the CBN to show that the bank is in such a situation that deposits’ monies are at risk.
From the above analysis, the legality of CBN’s action in Skye Bank seems an unsettled question. Power to interfere in a bank is one that Central Banks take very seriously and exercise very cautiously, as it could immediately signal to the whole system that there is some distress around the corner. My two pennies on this would be that it is possible Skye Bank is in dire straits but CBN does not want to go public with this. The challenge then is that if CBN cannot admit that Skye Bank is in a grave situation or is failing, CBN’s legitimacy to interfere in Skye Bank’s corporate-governance structure is severely eroded for being contrary to the spirit of BOFIA.
 ‘The Untold Story of Skye Bank’, back page, This Day of Wednesday 13 July 2016.
 Cap C4 LFN 2010.
 Cap B3 LFN 2010.
 The term special examination seems to be a term of art adopted by the Banks and Financial Institutions Act.
 Section 1 of the Managing Directors/Chief Executive Officers of Banks Limit of Tenure Elongation Regulation 2010.
 http://www.channelstv.com/2016/07/06/no-nigerian-bank-distress-cbn/ assessed on 21 July 2016. See also CBN Press Release available at https://www.cbn.gov.ng/Out/2016/CCD/CBN%20Press%20Statement%20on%20Skye%20BankJuly%20040716.pdf