In the count- down to common year end policy

With uniform financial year-end, all the banks are expected to present their score cards from January to December of every year. Before the directive was passed, companies issued quarterly reports based on varying financial calendars, making it difficult for analysts to compare one bank with another. Everyone will be standing on common ground, which makes […]

With uniform financial year-end, all the banks are expected to present their score cards from January to December of every year. Before the directive was passed, companies issued quarterly reports based on varying financial calendars, making it difficult for analysts to compare one bank with another. Everyone will be standing on common ground, which makes it better to analyze banks and rank them, according to Wole Famurewa, Head of Research at PHB Asset Management.

He believes that with banks adopting a common financial year-end accounting standard, it would further restore investor confidence and enable comparisons within the sector.

Why common year end

Weak disclosure requirements, coupled with higher levels of unsecured risk have largely contributed to the recent sack of seven bank chief executives by CBN. Minimal reporting standards only demand the quarterly publication of gross earnings, pre-tax profit, and net profit. The stricter reporting rules will provide a clearer picture of a financial institution’s balance sheet and spotlight the country’s strongest and weakest banks.

The delay

CBN, under erstwhile governor, Chukwuma Soludo had in 2008 announced the introduction of the policy but at the time Nigeria’s economy was in a state of turmoil due to the global economic meltdown.

And with their huge financial exposure to the Nigeria Stock Market and huge unsecured loans, it seems to be an impossible task as banks went hay wire, embarked on aggressive deposits mobilization drive, with short-term deposit rates peaking at 18 per cent per annum, an indication of the increased competition for deposits in the banking industry. CBN alleged that banks were fond of sharp practices. It cited issues such as: de-marketing, burning desire to mobilize deposits, late disclosure of financial statements as some of the practices that banks indulged in.

Also, the crisis in the nation’s financial industry has affected the activities of banks. Most of the banks have allegedly given out margin loans to stockbroking firms.

The banks equally sweetened premiums on deposits against near capped loan rates.

The capital crisis

These developments had their tolls on the equity market recovery too. The Nigerian capitalmarket which had hitherto ridden on the back of growing local equity culture, largely driven by bank’s newly raised funds seeking opportunity for returns to investors slumped. The market capitalization which was around N12.5 trillion around February went down to as low as N4.9 trillion by November 2008.  The market has been starved of the much needed liquidity, a run kick started by the CBN directive on margin lending.

There were series of calls and different measures to bring investors’ confidence into the capital market, all to no avail. There were even calls by major stakeholders to CBN to postpone indefinitely the proposed common year end policy. Soludo acted on the advice, suspended the policy until the economic atmosphere is favourable to accommodate it.

The directive

Surprisingly, in its February 2009 Monetary Committee Meeting, CBN directed the 24 banks operating in the country to adopt uniform common year-end financial account beginning from December 2009. Access Bank Managing Director, Aig Imokuede who read the communiqué at the end of the meeting said the essence of the action was to encourage banks to disclose their financial capacity and their level of margin loans into the nation’s stock market.

He said, “This will definitely give a better view about the health of the banking sector. Since the suspension of the policy which was introduced early last year by CBN, many banks have already adopted the common year end policy for their financial accounting,” he said.

Also, representative of the United Bank for Africa (UBA) Plc, Vincent Osadolor said UBA was fully prepared for the common year policy adding that the bank had published its third-quarter report early this month. The bank had recorded a N5 billion loss in the third-quarter, but Osadolor said the bank would recover the rest before the end of the year.

The compliance

With only a month to the end of the year, the apex bank’s efforts seem to be paying off. Already, some of the banks notably: Ecobank Nigeria Plc, Intercontinental Bank Plc, Access Bank Plc and Guaranty Trust Bank Plc said they have adopted the principle of a common accounting year in December . Some financial institutions are not left out. Investigations conducted by Sunday Trust revealed that some institutions are equally changing their auditors and signing-in new ones.

The Managing Director, Guaranty Trust Bank, Mr Tayo Aderinokun said complying with the directives on common year-end is very important for the banking industry.

Aderinokun said the bank had changed its accounting year end from 28 February to 31 December. He said the measure was to comply with the CBN’s directive adding that the development had made the bank to present its tenth month financial statement in its annual report.

According to the bank, the 10th month financial statement cover February to December 2009, all to ensure that the bank meets the deadline.

No basis for common year

However, the former Deputy Director, Risk Management Department, CBN, Dr Jonathan Aremu said that there is no basis for putting in a place a common financial year for banks in the country. Aremu said that it is not within the monetary policy of CBN to change the date in which banks closed their account books.

He said, “CBN should put in place a good management system that would lead to the discovery of irregularities in the banking industry. When we say CBN has the right to change the accounting year of banks, we are not being fair at all. By telling banks to synchronize their accounts, CBN is indirectly saying that it’s not capable of managing the financial system.” Many analysts gave vent to Aremu’s assertions, demanding that CBN should allow banks to have separate accounting times.

President of the Manufacturers Association of Nigeria (MAN), Bashir Borodo, though he lauded the CBN policy, said the reform was also with its cost. He said for audit firms to adopt the policy, over N200 million would be expended. “So when we are introducing reform,” he said “we must also think about the burden it would bring.”

The former CBN governor said the issue of the common financial year end was paramount to CBN. He added that it was one of the issues highlighted during the meeting with the Chief Executive Officers of the 24 banks.

He said CBN would not spare any efforts at in ensuring that some of the abuses in the industry were checked, adding that the apex bank would be able to check the excesses of the banks through a uniform accounting year.

No hiding Place

Managing Director, Nigeria Deposit Insurance Corporation (NDIC), Ganiyu Ogunleye said that by the time the banks fully embrace common year end policy, there would not be any hiding place for undisclosures as there would be periodic and regular disclosures on the banks’ activities

Based on this, CBN has been making efforts at ensuring that banks evolved a common accounting year to stimulate growth in the industry.

Okereke’s revolt

But the Director General of the Nigerian Stock Exchange (NSE) Ndi Okereke-Onyiuke berated the apex bank for the re-introduction of uniform year end for banks, saying that the policy was not recommendable, considering the peculiar situation of the Nigerian economy.

According to her, the policy would pose serious challenges for banks as they would be struggling to meet up with deadlines and regulatory requirements, thereby putting pressure on the few auditing firms in the country and on their activities.

Okereke-Onyiuke said the policy would affect activities on the floor of NSE, as the approach of the year-end and the attendant expectations by investors would buoy activities in the market, while a lull would be recorded after the period, adding that it would be advisable for the CBN to make it a double-year-end, instead of a uniform year-end.

However, other operators disagreed with Okereke-Onyiuke’s views. The Executive Director, Treasury and Financial Institutions, Ecobank Nigeria Plc, Mr Jubril Akpu said common year-end would help the nation’s banking industry by removing certain abuses.

Akpu argued that the industry is not without unethical practices, a development that has unsettled some of the banks.

He said, “The behaviour of the operators were erratic when the Central Bank of Nigeria declared its intention to have a uniform accounting year-end for all the banks. Banks are trying to outdo one another then. We saw that this development is not healthy for the industry. However, it has helped moderated the market. We should commend CBN for bringing in this kind of measure.”