The Central Bank of Nigeria (CBN) and the International Finance Corporation (IFC) are working to ensure that banks are cautious in financing transactions that may affect the environment. COLLINS NWEZE examines the steps banks must take to achieve this objective and avoid sanctions.
To sustain profitability in banking there is need for lenders to ensure that their activities are not targeted at short term goals. This, experts say, can be achieved when the lenders think of the long term effects in financing projects that have negative impact on the environment.
In this regard, the Central Bank of Nigeria (CBN) and the International Financial Corporation (IFC) have urged banks to consider environmental and social policies in their decision-making and lending.
According to the apex bank, if the oil firms that degrade the environment and their cohorts in other sectors are starved of funds by local and international banks, they will comply. The CBN said there is need to ensure that people do not conduct their businesses in an unfriendly manner and get away with it.
The reason is that as an industry, banks cannot continue to take savings and deposits from Nigerians and then, lend to firms that are destroying the environment.
To ensure that this is achieved and defaulters sanctioned, the regulator also developed a template for banks in filling their reports on loans to firms whose operations have negative impact on the environment.
For the CBN, sustainable banking is aimed at minimising or mitigating the negative impacts of financial institutions’ operations on the environment and local communities in which they operate especially on agric, power and the oil and gas sectors.
Sanctions coming
The CBN Acting CBN Governor, Dr. Sarah Alade said banks that fail to comply with the guidelines on sustainable banking practices will be sanctioned.
She spoke at an International Sustainable Banking Forum organised by the CBN in collaboration with the International Finance Corporation (IFC).
She said lenders that consistently fail to comply with the guidelines would not be spared.
Alade, represented by CBN Deputy Governor, Operations, Dr. Kingley Moghalu, said the regulator would not set guidelines for the lenders, but that their levels of conformity would be assessed at least every two years.
“The banks are trying to apply those principles on their operations. Although the principles have become part of banking system supervision process, we cannot set a compliance timeline for that. However, if a bank does not comply, then we will take sanctions if non-compliance becomes consistent,” she said
She also said the CBN directive on board membership would be assessed by year-end, adding that that would bring them to key board positions. She said the CBN is also partnering with the IFC to create a movable collateral registry that will make lending to women much easier. She said there was need to increase lending to women by ensuring that collateral to loans are creative.
“The CBN recognises that unless social concerns, such as gender disparity and women economic empowerment are addressed, economic and environmental goals and overall sustainable development will be difficult to achieve,” she said.
Alade added that sustainable practices will look at how banks are managing environmental and social risks in lending investment decisions, safeguarding human rights, promoting women economic participation and empowerment and leveraging collaborative partnerships to accelerate sector progress.
NDIC’s role
Also, the CBN and Nigeria Deposit Insurance Corporation (NDIC) want banks to shift focus from profitability and consider other issues around sustainability, before lending.
NDIC Managing Director Umaru Ibrahim said banks should ensure that activities of firms that pollute the environment were not financed. He said the United Nations Environment Programme (UNEP), through its UNEP Financial Initiative on the Environment and Sustainable Development at the Earth Summit in 1992, made it a priority for financial systems across the world.
He said sustainable banking in Nigeria, therefore, is focused on energising the influence of the sector towards transforming the long term interest of environmental preservation and societal balancing into key parameters for allocation of capital.
IFC’s position
IFC’s Country Manager for Nigeria Solomon Adegbie-Quaynor said the CBN has encouraged the adoption of sustainable banking in Nigeria.
“Today’s forum presents a platform for regulators to share insights on environmental and social risk management and sustainability-related tools for long-term economic growth,” he said.
Adegbie-Quaynor also said sustainability is central to inclusive economic growth and aligns with IFC’s strategy for long-term economic development, adding that sustainable banking helps banks and financial institutions to better understand the benefits and risks of environmental and social impacts of their investments and loans.
It provides a framework for them to further integrate these considerations into their policies, operations and procedures. This creates environmental and social responsibility in the financial sector and adds long-term values for clients and other stakeholders, he said.
He said the International Sustainable Banking Forum is a voluntary platform of bank regulators and banking associations established to facilitate knowledge sharing and development of standards, policies and guidelines on environmental and social risk management for regulators in emerging markets. The Network members include Nigeria, Bangladesh, Brazil, China and Colombia. Others are Indonesia, Lao, Mongolia, Peru, Philippines, Thailand and Vietnam.
CBN’s roles
According to the CBN, for the successful implementation of the principles, the institutions would be required to develop a management approach that balances the environments and social ( E &S) risks identified with the opportunities to be exploited through their businesses.
“The adoption of the principles will not only help banks in mitigating the E & S risks associated with their business operation and those of their clients, but also help them to achieve greater efficiencies and better position them to take advantage of opportunities in the global market place where environmental and social issues are becoming increasingly important.
“They will also enjoy higher productivity, higher staff morale, lower turnover and absenteeism due to strong employee relations and workplace practices. The CBN would need to provide the structural mechanism to encourage consistent and widespread implementation of the principles and develop its institutional capacity to support the banks in their implementation of the principles,” it added.
While noting that the process of developing the sustainable banking principles and guidelines has so far been driven by the banks, the apex bank assured that it will create the enabling environment for banks to succeed in their implementation of the principles.
The CBN has also recently set new rules for lending to the agricultural sector of the economy. This resolution stemmed from the reports from banks and discount house, which indicated that lending to the subsector, remains a high-risk, which should be followed with caution.
Women’s role in sustainable banking
According to the CBN, sustainable banking entails ensuring that women are well represented in the banking sector.
Alade said the apex bank will by year-end, review banks’ compliance with its directive that lenders give 40 per cent of board positions to women.
She said the CBN has told the banks that compliance was important, adding that the sector is committed to increasing the number of women in decision-making: 40 per cent of top management positions and 30 per cent of board positions occupied by women within this year.
“Although we want this achieved, we will have to wait till the end of 2014 to assess compliance. We expect that many banks will comply. We recognise that simply issuing the circular is the beginning of the journey. It is not an easy thing to comply, as witnessed in other parts of the world. Even in the United States, there are problems with women being represented on the boards of corporates. Even the European Union has made it compulsory, and mainly because there is a structural impediments, to getting women in corporate leadership position,” she said.
She said the CBN has taken proactive steps to promote gender equality and women empowerment.
The CBN, she said, is promoting women’s economic empowerment to achieve sustainability by launching the N220 billion Micro, Small and Medium Enterprises Development Fund, 60 per cent of which would be committed to women owned or headed businesses and enterprises.
“The CBN recognises that unless social concerns, such as gender disparity and women economic empowerment are addressed, economic and environmental goals and overall sustainable development will be difficult to achieve,” she said.
She explained that just like in every part of the country, there are qualified people to fill any position. It also follows that in firms, there are qualified women to fill vacant position.
