Insider Credit Forces Bank Owners, Directors Out as CBN Tightens Rules

The Central Bank of Nigeria (CBN) has revealed that some bank owners, shareholders and board members exited the banking industry following stricter enforcement of rules on insider credit, even as it warned that directors and board members could lose their seats if insider credit risk persists.

An insider credit is when a financial institution extends a line of credit or loan to an individual or entity that is closely connected to it, such as its directors, senior executives, major shareholders, or companies owned or controlled by them.

According to the CBN Director, Banking Supervision, CBN, Dr Olubukola Akinnwunmi, the apex bank had in some instances told banks that directors involved in persistent insider lending could no longer remain on their boards.

He said the action followed the CBN’s February 2025 insider credit circular and formed part of efforts to strengthen corporate governance and prevent a recurrence of problems that necessitated the banking sector recapitalisation.

“In addition to that, you are all aware of the insider credit circular that was released in February 2025. You would have seen that some owners of banks or some shareholders of banks are big, and maybe some of the board members have exited the banking system because the bank is strictly monitoring that.

“We have had occasions where we had to point out to banks, if this insider credit persists, this person can no longer continue to be in your bank on the board of your bank, because corporate governance is the bedrock of resilience.”

Akinnwunmi warned that unchecked insider lending and weak governance could undermine the stability achieved through recapitalization. “If there is poor corporate governance, if insider credit pervades the industry, in a short time we will all live to see a repeat of the problem that we have battled or we have dealt with through recapitalization,” he said.

He noted that CBN’s enforcement of prudential rules had reached an unprecedented level, including rules on insider credit, large exposures and single obligor limits, saying the apex bank “under the leadership of Mr. Olayemi Cardoso, has made it clear to the banking system that we will follow the rules to the letter, and it’s all in the interest of the banking system and its resilience.”

The CBN director said experience from banking crises showed that strong capital alone was not sufficient to prevent bank failures, noting that while capital, liquidity, and risk management are essential to banking stability, experience across the world has shown that the success of or failure of banks often depends on the quality of corporate governance.

“Bank failures are often preceded by governance weaknesses rather than capital deficiencies alone” as he identified excessive risk taking, insider abuses, weak board oversight, poor credit decisions and ineffective internal controls among the major causes of financial distress.

Akinnwunmi said the CBN’s new risk based capital framework would also make banks with higher risk exposures hold more capital. “There is a minimum capital requirement for all banks, but there is also a risk based minimum capital requirement that is dependent on the type of risk and the level of risk that you are exposed to as a result of your business model, as a result of your corporate governance,” he said.

He specifically pointed to insider credit as an area that would attract tougher capital treatment. “What that means is that you require more capital when you engage more in insider credit, which may be a source of problem or has been the source of problem in the past, with respect to the resilience of our Nigerian banks,” he said.

He said the framework was intended to ensure that banks maintain capital commensurate with the risks they assume, rather than simply meeting a uniform minimum requirement.

“It is not just about maintaining a minimum capital requirement. It’s about maintaining a capital requirement that speaks to the level of risk exposure or risk taking that a bank has decided to embark on based on its business model,” he said.