Need for transparency in the banking sector
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.
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.
Up until the previous financial crisis have shown, 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.
Hence, 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) that measures voluntary disclosure among Nigerian
banks.
The 2010 financial transparency index did not throw up any
surprises. The report released late 2011 ranked banks with the highest
voluntary disclosure of their corporate governance culture and risk management
practices in their published financial reports.
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.
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.
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