Salient Corporate Governance Compliance Requirements for Finance Companies in Nigeria

Based on the company law, every Nigerian company is required to constitute a Board of Directors (‘the Board’). Finance Companies (‘FCs’) are no exemption. The Board is usually saddled with the responsibilities of ensuring that the company's objectives are met by collectively directing the company's activities, with the interests of shareholders and other relevant stakeholders in mind. The Central Bank of Nigeria (CBN) is one of the relevant stakeholders.

Generally, FCs are required to comply with the provisions of the Code of Corporate Governance for Finance Companies in Nigeria 2018 (‘the Code’) issued by the CBN.

What is a Finance Company?

The Finance Company is a sub-sector of the Banks and Other Financial Institutions and plays within the middle tier of the financial services system of the economy, with a particular focus on the Micro, Small, and Medium Enterprises (MSMEs). According to the CBN Revised Guidelines for Finance Companies in Nigeria, 2014, “a Finance Company refers to a company licensed and permitted to carry on the business of providing financial services to individual consumers and industrial, commercial, or agricultural enterprises. It plays a complementary role to banks, bridging financing gaps and meeting the financial needs of its target customers”.

FCs can carry out the following activities, amongst others:

• Consumer Loans
• Fund Management
• Asset Finance (e.g., Finance Lease and Hire Purchase)
• Project Finance
• Local and International Trade Finance
• Debt Factoring
• Financial Consultancy

Corporate Governance Compliance Requirements

As part of the CBN initiatives to establish financial stability and transparency in the finance company sub-sector, the CBN issued the Code. Compliance with the Code is not optional for any FC. Highlighted below are some of the key compliance requirements of the Code:

Succession plan

The Board shall ensure a succession plan is put in place for both the managing director/chief executive officer (‘MD/CEO’), executive directors, and other management staff.

Approval threshold for financial transactions

The Board shall set approval thresholds for every financial transaction, and have these thresholds included in its standard operating manual (SOP).

Board composition and size

The Board of any FC shall have a minimum of five (5) and a maximum of nine (9) directors at any given time, with not less than fifty-one percent of the Board members being non-executive directors (‘NEDs’). It is also mandatory for every FC to have at least one (1) Independent Non-executive Directors (‘INEDs’) on their Board of directors.

Separation of powers

Separate person shall hold the position of the Board Chairman and the MD/CEO. These two positions are not permitted to be awarded to a single person. It is also important to note that no member of the same family shall hold these two (2) positions.

Appointment of directors

Every appointment of directors must be approved by the CBN. FCs are encouraged to first seek the CBN approval after the shareholders’ resolution before onward returns filing with the Corporate Affairs Commission (‘the CAC’).

Tenure of directors

NEDs shall be on the Board for a maximum period of three (3) terms of four (4) years each. INEDs shall have a maximum of two (2) terms of four (4) years each. While the MD/CEO shall have a maximum period of ten (10) years with no specific minimum term. The MD/CEO of any FC shall not qualify for reappointment in the same company or its subsidiaries until after three (3) years after the expiration of his tenure as MD/CEO.  It is worth noting that for any Board member to qualify for re-election, he/she must attend at least two-thirds of all Board and Board Committee meetings that he/she belongs to each financial year.

Board committees

It is mandatory for the Board of any FC in Nigeria to establish the following Board committees: Risk Management Committee, Audit Committee, Board of Governance and Nominations Committee, and Board Credit Committee. Each of these committees shall have a charter approved by the CBN.

Board meeting disclosure

The Board of any FC must disclose in the Annual Report the total number of Board members and Board Committee meetings held in the year and the attendance of each member.

Remuneration policy

Every FC shall put a remuneration policy in place and disclose it in the Annual Report to the shareholders.

Disclosure of shares held by the directors

Every FC shall disclose the number of shares held by each director and its related parties in its Annual Report.

Annual board appraisal

Every FC shall formally appraise its Board and Directors each financial year. This appraisal must be performed by an independent consultant and the report of which shall be pitched to the shareholders at the annual general meeting. A copy of the annual board appraisal must also be forwarded to the CBN by the Consultant on or before 31 March of every fiscal year.

Final Note

Although, the Companies and Allied Matters Act 2020 generally requires every company, not being a small company, to have at least two (2) directors, the Code contains specific provisions for FC. The Code further increased the board size requirement for every FC to a minimum of five (5) and a maximum of nine (9) directors, with not less than fifty-one percent of the Board members being NEDs. Compliance with the requirements of the Code is mandatory for every FC, and this is strictly being monitored by the CBN.

Hence, every FC in Nigeria should regularly conduct a corporate governance audit to ensure compliance with the Code and avoid possible regulatory sanctions. FCs should consider establishing a compliance unit within the company whose functions would include, amongst others, monitoring compliance with the Code and other regulatory requirements.

We are more than happy to work with FCs interested in setting up or enhancing its existing corporate governance system.