THE fear of recurring financial crisis that may affect economies
have made many European nations, as well as emerging markets like
Nigeria to review policies and develop radical proposals to improve
transparency in financial markets
With the fallout of many financial institutions despite the credit ratings given to them, operations of local and international credit rating agencies have been adjusted in an attempt to prevent any recurrence of the financial turmoil arising from the credit squeeze.
In most countries of the world, economies and financial markets were challenged in 2011 following the Eurozone debt crisis and its undercurrents, which swept through emerging and developed markets albeit in varied dimensions. Heightened sovereign risks for debt-ridden states like Greece and Spain sent shivers down the spines of European banks and the global corporate world with substantial exposures to the Euro.
While financial regulators and governments around the world are putting in place new regulations to forestall financial meltdown that has cost the globe billions of dollars never reoccur, Nigeria has not been left out of the reforms drive.
Precisely, efforts to achieve reforms in the financial sector also include the global adoption of the International Financial Reporting Standard (IFRS), which is believed will foster transparency and corporate governance.
Since 2008, the Central Bank of Nigeria (CBN) has rolled out several new rules to ensure that banks adopt best practices in their operations in a bid to prevent collapse that has cost the nation’s economy trillions of naira.
Hitherto the previous financial crisis, rules and regulations are meaningless as financial institutions were not eager to obey them but devise means to circumvent them. In the long run, voluntary disclosure and adherence to existing rules is known to be more effective than enforcement by regulators.
The 2010 financial transparency index report was jointly prepared by BusinessDay and Source Capital, supported by the Institute of Chartered Accountants of Nigeria (ICAN) and the Chartered Institute of Bankers of Nigeria (CIBN) recently jointly published the Financial Transparency Index (FTI) and released late 2011.
The banks were ranked based on the highest voluntary disclosure of their corporate governance culture and risk management practices in their published financial reports, among other things.
The effectiveness of a bank’s corporate governance and risk management practices is usually the bedrock of a bank’s long term stability, efficiency and profitability. These are the bedrock on which a bank’s future stability is built as banks with a strong corporate governance culture and risk management practices have been proven to stand the test of time.
Banks, which annual reports have shown high levels of voluntary disclosure include Access Stanbic IBTC, Diamond Bank, Ecobank and FCMB. Some other banks ranked quite low due to low levels of corporate governance and risk management disclosure in their published annual reports or the disclosure were vaguely done in a bid to fulfill regulatory requirements and not in the spirit of helping a third party understand the bank’s operations and how it manages the risks it faces in its daily operations.
The Financial Transparency Index seeks to entrench the transparency culture among banks and recognise financial Institutions that voluntarily go beyond the basic regulatory requirements to make its books open for its investors and the public.
The benefits of increased transparency to the individual bank and the public are enormous. To the banks, the most important reason for increased transparency is a reduction in the cost of capital. Increased transparency, reduces the cost of monitoring a bank’s performance by investors, improves confidence and also helps it attract the right type of investors and even customers.
Furthermore, it also helps the bank to attract funds at cheaper rates than less transparent competitors and subsequently lend at better rates to higher quality customers. It also enhances a bank’s brand equity and market share.
For the public, increased transparency means healthier banks and lower cost of credit since healthy banks are able to lend at lower rates than sick banks. More transparent banks also reduce the risk of bank failures and its attendant cost to the economy.
Bank transparency cannot be taken for granted as bank failures have societal consequences. Hence, all hands must be on deck to encourage banks to be open about their operations in a bid to build healthier and more supportive banks.
Though a high level of disclosure is not an assurance that management is following the dictates of practiced disclosures, it helps to hold management accountable and creates room for critical questions to be raised, which may lead to corrections or revelations of wrong management practices that may be in place. High level of disclosure becomes even more important now that companies should be preparing to adopt the International Financial Reporting Standards (IFRS) from January 2012.
Precisely, the 2011 Financial Transparency Ranking (FTI) ended with Access Bank topping the ranking among the Nigerian banks measured. The FTI measures financial transparency in the published annual reports of banks. It uses the published annual report of banks because this is the most accessible document for both the informed and non-informed investor seeking to invest or understand a bank’s operations.
The FTI examines the comprehensiveness of a bank’s corporate governance and risk management disclosure. It aims to examine how each bank explains its corporate governance culture and risk management processes in place to ensure it operates to the highest standards that protects both investors and depositors.
In terms of corporate governance, the indices were rated by examining the number of independent directors on a bank’s board. This is one of the measures examined by the FTI. Under this measure, it is expected that banks not only disclose and identify the independent directors on their board but also banks can get additional marks if they clearly show why they classify the independent directors as “independent.”
It is also important that a profile of each director is given. It is not enough to just give the names of directors but a brief background of where they are coming from and their qualification serves to give investors and depositors a better understanding of the men and women taking important decisions at the bank.
Also examined was the bank’s board composition, especially in the last three years. According to the report, this helps investors to see that board members are not giving money to companies that they are closely related to or have been related to recently without disclosing the information.
The report shows that Access Bank scores fairly well on these criteria. It identifies its independent directors on the bank’s board, goes ahead to give the profile of the directors and also explains the board’s processes. The bank’s explanation was not totally satisfactory like not giving fully the past directorships held by board members, but its disclosure on this index was quite detailed.
Since risk management is the bedrock of a bank’s health and as such the FTI board expect banks to provide detailed reports in the published annual reports of their risk management practices. This is expected to cover how the bank manages its risks in both its trading and non-trading banking books.
The trend in most annual report examined is for banks to give detailed reports of how risks are managed in their non-trading banking books ignoring the risks faced in their trading books. It is not clear if this arises from a lack of ability to accurately measure these risks or the fact that most banks consider this form of risks insignificant.
The FTI board’s position is that where the management of these risks processes are not given in the annual report, then the bank should go ahead and explain the reason why it considers the risk insignificant. Some of the risk information the board expects to find in the published annual reports and measured by the FTI board include.
Furthermore, the board also looks out for its whistle blowing policy in the published annual report of banks. It checks if the bank discloses enough information about its whistle blowing policy? As most banks will just state that they have a whistle blowing policy in place without giving further details.
The FTI board encourages that disclosure goes beyond stating the existence of a whistle blowing policy at the bank to disclosing further details of the processes and a contact number for accessing the whistle blowing channel within the bank. Access Bank clearly states in its published annual report that it has a whistle blowing policy in place stating that the bank’s chief compliance officer is in charge of the process.
For the basic risk information, it is expected to cover an explanation of the bank’s board risk management policy as set by the board, the degree of the involvement of the board in setting and monitoring the bank’s risk management processes as well as the description of the risk management processes for each section of the bank’s business.
On the processes for risk management in place within Access bank, the bank states in its annual report that, “the chief risk officer has primary responsibility for risk management and the review of the ERM Framework and to provide robust challenge to the management teams based on quantitative and qualitative metrics. All amendments to the Bank’s ERM Framework require Board approval.
The risk management division is responsible for the enforcement of the bank’s risk policy by constantly monitoring risk, with the aim of identifying and quantifying significant risk exposures and acting upon such exposures as necessary.”
This primarily set the stage for further disclosure of the bank’s risk management processes in the annual report. The risk management report is usually highly detailed and banks are expected to provide detailed information that helps investors and depositors make an informed decision on how the bank’s management is handling the business risks arising from the bank’s operations.
Also, it is expected to cover all the aspects of risks including credit risk, market risk, operational risks and the associated risks. The bank is expected to give detailed explanation on how it manages each of this risk separately and also manage the grey areas where these risks interact.
For example Access Bank in annual report gives examples of the scope of the bank’s risk management to include; credit risk, operational risk, market liquidity risk, legal and compliant risks, strategic risk, reputational risk and capital risk.
For board and individual director appraisal, it must be stated that most banks examined actually conduct this board appraisal on an annual basis. However, the result of that appraisal as published in the annual report is usually vague. The expectation is that the report gives some insight on the evaluation of board processes against best practice benchmarks, evaluation of director skills for both executives and non-executives against the bank’s goals, as well as, an assessment of the board’s effectiveness.
Access Bank disclosed in its published in report the fact that Accenture did an appraisal of the bank’s board. The Accenture report was also contained in the published report though the report was not as detailed as the FTI board would have required so the bank did not score the full marks on this index.
The FTI also examines banks’ Board Committee meetings and attendance. It is expected that banks disclose not only the various committees that the board has in place, but is also expected that the bank discloses who chairs those committees as well as the attendance of board members at the both meetings of the bank’s board as a whole and also at the committee level.
This is important because it is key that investors and depositors are able to see that board members are not just ceremonial board members but take an active interest in how the bank is run and are actively making the decisions for which they have been appointed to the board of the bank.
With the fallout of many financial institutions despite the credit ratings given to them, operations of local and international credit rating agencies have been adjusted in an attempt to prevent any recurrence of the financial turmoil arising from the credit squeeze.
In most countries of the world, economies and financial markets were challenged in 2011 following the Eurozone debt crisis and its undercurrents, which swept through emerging and developed markets albeit in varied dimensions. Heightened sovereign risks for debt-ridden states like Greece and Spain sent shivers down the spines of European banks and the global corporate world with substantial exposures to the Euro.
While financial regulators and governments around the world are putting in place new regulations to forestall financial meltdown that has cost the globe billions of dollars never reoccur, Nigeria has not been left out of the reforms drive.
Precisely, efforts to achieve reforms in the financial sector also include the global adoption of the International Financial Reporting Standard (IFRS), which is believed will foster transparency and corporate governance.
Since 2008, the Central Bank of Nigeria (CBN) has rolled out several new rules to ensure that banks adopt best practices in their operations in a bid to prevent collapse that has cost the nation’s economy trillions of naira.
Hitherto the previous financial crisis, rules and regulations are meaningless as financial institutions were not eager to obey them but devise means to circumvent them. In the long run, voluntary disclosure and adherence to existing rules is known to be more effective than enforcement by regulators.
The 2010 financial transparency index report was jointly prepared by BusinessDay and Source Capital, supported by the Institute of Chartered Accountants of Nigeria (ICAN) and the Chartered Institute of Bankers of Nigeria (CIBN) recently jointly published the Financial Transparency Index (FTI) and released late 2011.
The banks were ranked based on the highest voluntary disclosure of their corporate governance culture and risk management practices in their published financial reports, among other things.
The effectiveness of a bank’s corporate governance and risk management practices is usually the bedrock of a bank’s long term stability, efficiency and profitability. These are the bedrock on which a bank’s future stability is built as banks with a strong corporate governance culture and risk management practices have been proven to stand the test of time.
Banks, which annual reports have shown high levels of voluntary disclosure include Access Stanbic IBTC, Diamond Bank, Ecobank and FCMB. Some other banks ranked quite low due to low levels of corporate governance and risk management disclosure in their published annual reports or the disclosure were vaguely done in a bid to fulfill regulatory requirements and not in the spirit of helping a third party understand the bank’s operations and how it manages the risks it faces in its daily operations.
The Financial Transparency Index seeks to entrench the transparency culture among banks and recognise financial Institutions that voluntarily go beyond the basic regulatory requirements to make its books open for its investors and the public.
The benefits of increased transparency to the individual bank and the public are enormous. To the banks, the most important reason for increased transparency is a reduction in the cost of capital. Increased transparency, reduces the cost of monitoring a bank’s performance by investors, improves confidence and also helps it attract the right type of investors and even customers.
Furthermore, it also helps the bank to attract funds at cheaper rates than less transparent competitors and subsequently lend at better rates to higher quality customers. It also enhances a bank’s brand equity and market share.
For the public, increased transparency means healthier banks and lower cost of credit since healthy banks are able to lend at lower rates than sick banks. More transparent banks also reduce the risk of bank failures and its attendant cost to the economy.
Bank transparency cannot be taken for granted as bank failures have societal consequences. Hence, all hands must be on deck to encourage banks to be open about their operations in a bid to build healthier and more supportive banks.
Though a high level of disclosure is not an assurance that management is following the dictates of practiced disclosures, it helps to hold management accountable and creates room for critical questions to be raised, which may lead to corrections or revelations of wrong management practices that may be in place. High level of disclosure becomes even more important now that companies should be preparing to adopt the International Financial Reporting Standards (IFRS) from January 2012.
Precisely, the 2011 Financial Transparency Ranking (FTI) ended with Access Bank topping the ranking among the Nigerian banks measured. The FTI measures financial transparency in the published annual reports of banks. It uses the published annual report of banks because this is the most accessible document for both the informed and non-informed investor seeking to invest or understand a bank’s operations.
The FTI examines the comprehensiveness of a bank’s corporate governance and risk management disclosure. It aims to examine how each bank explains its corporate governance culture and risk management processes in place to ensure it operates to the highest standards that protects both investors and depositors.
In terms of corporate governance, the indices were rated by examining the number of independent directors on a bank’s board. This is one of the measures examined by the FTI. Under this measure, it is expected that banks not only disclose and identify the independent directors on their board but also banks can get additional marks if they clearly show why they classify the independent directors as “independent.”
It is also important that a profile of each director is given. It is not enough to just give the names of directors but a brief background of where they are coming from and their qualification serves to give investors and depositors a better understanding of the men and women taking important decisions at the bank.
Also examined was the bank’s board composition, especially in the last three years. According to the report, this helps investors to see that board members are not giving money to companies that they are closely related to or have been related to recently without disclosing the information.
The report shows that Access Bank scores fairly well on these criteria. It identifies its independent directors on the bank’s board, goes ahead to give the profile of the directors and also explains the board’s processes. The bank’s explanation was not totally satisfactory like not giving fully the past directorships held by board members, but its disclosure on this index was quite detailed.
Since risk management is the bedrock of a bank’s health and as such the FTI board expect banks to provide detailed reports in the published annual reports of their risk management practices. This is expected to cover how the bank manages its risks in both its trading and non-trading banking books.
The trend in most annual report examined is for banks to give detailed reports of how risks are managed in their non-trading banking books ignoring the risks faced in their trading books. It is not clear if this arises from a lack of ability to accurately measure these risks or the fact that most banks consider this form of risks insignificant.
The FTI board’s position is that where the management of these risks processes are not given in the annual report, then the bank should go ahead and explain the reason why it considers the risk insignificant. Some of the risk information the board expects to find in the published annual reports and measured by the FTI board include.
Furthermore, the board also looks out for its whistle blowing policy in the published annual report of banks. It checks if the bank discloses enough information about its whistle blowing policy? As most banks will just state that they have a whistle blowing policy in place without giving further details.
The FTI board encourages that disclosure goes beyond stating the existence of a whistle blowing policy at the bank to disclosing further details of the processes and a contact number for accessing the whistle blowing channel within the bank. Access Bank clearly states in its published annual report that it has a whistle blowing policy in place stating that the bank’s chief compliance officer is in charge of the process.
For the basic risk information, it is expected to cover an explanation of the bank’s board risk management policy as set by the board, the degree of the involvement of the board in setting and monitoring the bank’s risk management processes as well as the description of the risk management processes for each section of the bank’s business.
On the processes for risk management in place within Access bank, the bank states in its annual report that, “the chief risk officer has primary responsibility for risk management and the review of the ERM Framework and to provide robust challenge to the management teams based on quantitative and qualitative metrics. All amendments to the Bank’s ERM Framework require Board approval.
The risk management division is responsible for the enforcement of the bank’s risk policy by constantly monitoring risk, with the aim of identifying and quantifying significant risk exposures and acting upon such exposures as necessary.”
This primarily set the stage for further disclosure of the bank’s risk management processes in the annual report. The risk management report is usually highly detailed and banks are expected to provide detailed information that helps investors and depositors make an informed decision on how the bank’s management is handling the business risks arising from the bank’s operations.
Also, it is expected to cover all the aspects of risks including credit risk, market risk, operational risks and the associated risks. The bank is expected to give detailed explanation on how it manages each of this risk separately and also manage the grey areas where these risks interact.
For example Access Bank in annual report gives examples of the scope of the bank’s risk management to include; credit risk, operational risk, market liquidity risk, legal and compliant risks, strategic risk, reputational risk and capital risk.
For board and individual director appraisal, it must be stated that most banks examined actually conduct this board appraisal on an annual basis. However, the result of that appraisal as published in the annual report is usually vague. The expectation is that the report gives some insight on the evaluation of board processes against best practice benchmarks, evaluation of director skills for both executives and non-executives against the bank’s goals, as well as, an assessment of the board’s effectiveness.
Access Bank disclosed in its published in report the fact that Accenture did an appraisal of the bank’s board. The Accenture report was also contained in the published report though the report was not as detailed as the FTI board would have required so the bank did not score the full marks on this index.
The FTI also examines banks’ Board Committee meetings and attendance. It is expected that banks disclose not only the various committees that the board has in place, but is also expected that the bank discloses who chairs those committees as well as the attendance of board members at the both meetings of the bank’s board as a whole and also at the committee level.
This is important because it is key that investors and depositors are able to see that board members are not just ceremonial board members but take an active interest in how the bank is run and are actively making the decisions for which they have been appointed to the board of the bank.
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