Ethical Challenges in the Nigerian Banking Industry

Ethical Challenges in the Nigerian Banking Industry

Introduction

Between 2000 and 2005 the Nigerian banking industry was tested and failed due to exuberant greed and managerial incompetence (Proshare, 2022).?Due to this, a recapitalization exercise took place in the industry effective in 2006 (Kasum, 2014).?It is the author’s assumption the attempt to rebuild the industry succeeded at first glance but failed to tackle unethical behaviour which continues in many forms to this day.?

Nigerian Banking – The Change

The banking industry in Nigeria has come a long way from the era of British colonial administration to where it is today.?The system has passed through many stages of development that have fundamentally affected the lives of the citizens, the business environment and the nation’s economy (Ojukwu-Ogba, 2009).?

In 2005, the Central Bank of Nigeria introduced a comprehensive list of reforms for the struggling Nigerian banking industry with a compliance deadline of December 31, 2005 (Ojukwu-Ogba, 2009).?To begin with, the number of banks operating in Nigeria was cut from 89 to 25 (Ojukwu-Ogba, 2009).?This programme drastically altered the ownership structure of Nigerian banks, making the ownership structure wider and better diversified, purportedly leading to a greater demand by management for a higher level of ethical standard, transparency and professionalism in the operation of the banking business which will enhance effective corporate governance (Imeokparia, 2013).?Ojukwu-Ogba (2009) states the reforms were a masterstroke and big advantage, a success increasing offshore investment and the insulation from such events as the mortgage collapse in the USA and economic problems.?The author disagrees with Ojukwu-Ogba as the lens with which Ojukwu-Ogba is viewing this situation does not consider the major stakeholders, the banking clients, instead of a profits and shareholder perspective.

Nigeria – The Unethical Country

To analyze the industry, one must first analyze the country it does business in.?Nigeria is commonly known as an unethical country where a lot of cyber crime throughout the world generates from.?Hassan et. Al. (2012) identify the reasons behind this as urbanization, high unemployment, quest for wealth, poor implementation of cybercrime laws, inadequately equipped law enforcement agencies and high poverty.??The Corruption Perceptions Index (CPI)(Transparency, 2021) has Nigeria ranked as 154th of 180 countries with a 24/100 score slowly decreasing from 2012 to 2021 from 27.?The CPI tells how corrupt each country’s public sector, including banks, is perceived to be according to experts and businesspeople.?

The Hofstede Insights website (2022) shows the country of Nigeria is weak in two areas, power distance (80) and indulgence (84).?Hofstede et al. (2010, p.275) explains that a culture with a high score in power distance gives great deference to a person of authority adding “inequality is seen as the basis of societal order.”?According to Hofstede et al. (2010, p. 297), indulgent cultures “will tend to focus more on individual happiness and well-being and leisure time is important.”?These two together are a perfect storm for greed and leaders to ignore being ethical in their business decisions, putting their own interests ahead of the other stakeholders with little pushback.

Unethical Issues in the Nigerian Banking Industry as of Today

One of the main ethical issues with Nigerian banks resides in their poor corporate governance practices.??In the banking industry, proper governance is vital for attraction of investors, company performance and numerous other reasons.?Unfortunately, a substantial number of Nigerian banks lack moral corporate governance practices; the new code was sufficient enough but banks are not adhering to it (“Nigeria’s Banking”, 2016).?Over expansion, corruption of bank officials and improper risk management are the key causes behind the failure of banks and lack of proper corporate governance (“Nigeria’s Banking”, 2016).?Bank boards were also lulled into a sense of well-being by the profits including year over year growth in assets (Lamido, 2010).?

It has been proven that many investors and depositors have lost several billions of Naira due to the anti-social practices of accountants and auditors who collected large amounts of fees in audit and non-audit fees (Lauwo et al., 2010).?Lauwo et al. (2010) continue by stating the accuracy of the audit reports issued is in doubt as banks and auditor firms increased their profits by indulging in anti-social practices that showed scant regard for social norms and even legal rules and regulations.?CEOs and other executives set up special purpose vehicles to lend money to themselves for stock price manipulation or the purchase of estates all over the world (Sanusi, 2010).?One bank, according to Sanusi, Governor of the Central Bank of Nigeria, setup 100 fake companies for the purpose of perpetrating fraud.?Auditors and accountants should have caught these instead it was looked over for their own self interest.?

The Nigerian banking industry is notorious for hidden bank fees and not publicising their fees.?In a survey by Nigeria’s leading opinion poll, 61% of Nigerians polled agreed that the Nigerian banks are exploiting their customers through hidden charges (NOI, 2022).?This is unethical because banks are charging whatever they like on a situational basis with little to zero recourse.?The Innovation for Poverty Action, an American non-profit research and policy organization in 2021 looked at the 29 websites of Nigerian banks only able to find a service fee schedule on two of them and those were difficult to find (Adeoti, 2022).?

The Rationale

The wrongdoers committed unethical actions out of greed and self-interest.?People like them engage in corrupt activities because of greed, weakness, or sociopathic tendencies (Holmes, 2019).?The recapitalization left a blind spot to allow the offenders to look for more innovative ways to commit corrupt practices without being discovered (Holmes, 2019).?Holmes (2019) continues to point out that acting in one’s self-interest, while bringing pleasure (as per the high indulgence ranking) or prosperity to the individual, may do so at risk of harm or at the expense of others.?

There are two main stakeholders which are discussed throughout this paper.?The first is the beneficiary, the transgressors, who gained from the unethical and sometimes illegal behaviour.?These stakeholders consisted of the C-suite employees and upper management of the banks and the accountant firm’s upper management.?As mentioned prior, being a part of the Nigerian society, individual happiness ranks higher than doing it for the greater good seen in the utilitarianism theory of ethics.?Sadly, these already above the poverty line people let greed overcome any sense of empathy for those they were hurting and their organizations allowed it, knocking the poor further down.

The second stakeholder are those who lost money including investors in bank stock and citizens of Nigeria.?The investors who lost money by investing in a scheme, a dreamworld of numbers created by the unethical practices backed by auditors/accountants who also had unethical practices.?The clients of the banks were the big losers who deserved to be treated well, a basic human right.?These clients had no clue what their charges would be or whether they were correct or not.?The already poverty-stricken people of the country of Nigeria were not given an opportunity to use their hard earned money in other ways to improve their lives, instead being charged unreasonable amounts with no explanation.

The Ethical Issues

One of the main questions remains, ?how can someone be unethical if there is no corporate governance or no corporate social responsibility to follow??The author suggests that moral blindness, occurring when one looks directly at a business decision failing to see that there is a moral component to it (Holmes, 2019), is not an excuse.?It is true the society of Nigeria, as mentioned prior, is unethical itself meaning people are raised in an unethical environment, but harming others to benefit yourself is not appropriate no matter how or where you were raised.??Charging higher fees for some making banking too expensive for the already impoverished is unethical in the author’s opinion.?These people have enough hardships in life which now includes the inability to pay for everyday banking.?

The stakeholders who made out great almost hit all the points of Friedman except for one.?The Nigerian banks are making amazing profits with the next point being debatable, conforming to the basic rules of society, which they technically are in Nigeria, but the final point is missed being embodied in law (Friedman, 1970).?Creating fake companies or fraudulently reporting financial information is against the Securities and Exchange Commission (SEC) of Nigeria, the investment and securities Act 2007 (SEC, 2007).?

Current Handling of the Issues

The main issue, in the author’s view, is the stealing from the people below the poverty line who do not necessarily have the intellect or education to know they are a victim of unethical behaviors.?In 2020, the Central Bank of Nigeria (CBN) instituted downward fee revisions to electronic banking charges to protect consumer rights, which not surprisingly, has had a negative effect on banks’ fees and commission income (Kola-Oyeneyin & Kuyoro, 2020).?This was a required step even though it took far too long to implement it.?As Holmes mentions (2019), it is the fiduciary duty of financial professionals to put their client’s best interest above their own which didn’t occur until the CBN laid it out for them.??

Recommendations

???????????There is one method to combat the unethical norms the Nigerian society holds, diversity.?The importance of cross-cultural ethical decision making has become increasingly evident during globalization (Holmes, 2019).?Ethical relativism needs to be tackled and hiring top executives from banking industries in more ethical countries is a solution the author would stand behind.?To build long-term relationships and gain the trust with the clients, have them deal with honest, fair and trustworthy employees (Beck-Dudley & Hartman, 1999).?Also, banks should consider utilizing accounting firms outside of Nigeria in a more ethical country.

???????????The next recommendation has to do with the leaders of the organizations.?Unfortunately, most employees can be socialized into behaving unethically, especially if they have little work experience in contrast with the messages being sent by the current unethical leaders and culture (Trevino, 2014).?Employees, especially poverty living uneducated ones living in a high-power distance country, will not know any better to report any unethical behavior and are likely to imitate it.???Trevino adds most employees are at the cognitive level of cognitive moral development, meaning they are looking outside of themselves for guidance on how they should think and act which sometimes is learned through socialization.?According to Trevino (2014), leaders can change a culture by articulating a new vision and values by paying attention to and controlling policy decisions, hiring personnel who fit their vision and holding people accountable for their actions.?An organization in the industry can search for strong leaders with a vision that is ahead of the society/industry standards in order to acquire a competitive advantage over their slower moving unethical rivals.

Recommendations – Changes to practices and policies

?The broader view of corporate governance should be adopted in the case of banking institutions in Nigeria because of the peculiar contractual form of banking which demands that corporate governance mechanisms for banks should encapsulate depositors as well as shareholders (Olayiwole, 2010).?There are many different areas of corporate governance, but the easiest to begin with would be creating a code of ethics and a code of conduct.?The code of ethics, according to Holmes (2019), is the set of values the organization holds and desires its employees to emulate which forms the culture of the organization.?Holmes (2019) defines the code of conduct as providing the employee with a prescriptive guidance with respect to their actual behavior.?These codes are longer more detailed than value and mission statements (Trevino, 2014).?A formalized code communicated to the employees can also create a sense of unity, pride, and a common purpose while providing insight to new employees speeding up their assimilation into the now ethical cultural environment (Holmes, 2019).?For the codes to be effective, it must have teeth meaning employees must be held accountable for adhering to the code and subject to discipline if they do not (Holmes, 2019).?To succeed, these codes must proactively encourage and facilitate ethical behaviors and help prevent moral transgressions from occurring, underpinning the culture and behavior of the organization (Holmes, 2019).?

Once the culture is in place explaining expectations of right from wrong, a whistleblower program can be instituted.?This program will not work if the first step is not taken as employees need to understand what is unethical in the eyes of the corporation.?This program will allow an employee to safely report unethical actions internally to solve the problem instead of going externally (Mesmer-Magnus & Viswesvaran, 2005).?It is extremely important to institute this program properly in order to ensure there is not retaliation against the whistleblower.?It is assumed a whistleblower’s experience after the event will have strong effects on others’ willingness to do so in the future (Mesmer-Magnus & Viswesvaran, 2005).?

The author suggests the government get more involved but also organizations take it upon themselves.?The most obvious form of external government control is through oversight and regulation which gives the ability to the government to exert significant influence over corporate activities (Holmes, 2019).?The government of Nigeria is moving forward with vehicles such as the SEC, but more could be done.?While the government does move in a more positive direction, why not go ahead and self govern as societies are becoming more increasingly aware of the existence of unethical behavior (Holmes, 2019) including Nigeria.?Holmes advocates businesses must not only be aware of the consequences of their unethical actions, but they must also develop the capacity to govern themselves and manage the ethical environment within their own organizations.?The Canadian Bankers Association adopted several voluntary codes of conduct to influence behavior in the interest of protecting the industry, its customers, and other stakeholders (Holmes, 2019).?The Nigerian banking industry could take a page from the successful Canadian banking industry.

A further recommendation by the author is to begin corporate social responsibility (CSR).?A growing number of companies in developing countries have developed an interest in CSR (Crane et al., 2015).?This includes the areas of infrastructure of health, education and transportation which are important when it comes to a developing country with a great deal of poverty.?It is possible this may come with incentives in the future from the government as many governments create incentives for voluntary enrollment in CSR (Crane et al., 2015).?Shareholders should not be the only priority for organizations because they rely on consumers, other businesses, suppliers, and local communities to prosper.?(Crane et al., 2015).?Inside of the organization they can create humane working conditions, provide decent housing and healthcare, and donate to charities (philanthropy being the final stage)(Crane et al., 2015).?One thing to remember, self-induced vices, regulatory laxity, inauspicious macro-economic environment, and endemic corruption in the economy are seen as major constraints to instituting CSR in the Nigerian banking system (Achua, 2008).

?

?References

Achua, J.K. (2008).?Corporate social responsibility in Nigerian banking system.?Society and Business Review, (3)1, 57-71.?https://doi.org/10.1108/17465680810852748

Beck-Dudley, C. & Hartman, C. (1999).?Marketing Strategies and the Search for Virtue: A Case Analysis of the Body Shop, International .?Journal of Business Ethics,?20(3), 249-263. ?https://www.jstor.org/stable/25074136

?Crane, A. & Dirk, M. (2015).?Chapter 2: Framing business ethics. In?Ethics: Managing Corporate Citizenship and Sustainability in the Age of Globalization, 4th edition. Oxford University Press (pp. 44-79).

CPI. (2021).?Corruptions Perceptions Index. https://www.transparency.org/en/cpi/2021/index/nga

Friedman, M (1970), The social responsibility of business is to increase its profits ,?New York Times Magazine, 13 September 1970, reprinted in W. Ch. Zimmerli, M.?Holzinger, K. Richter (Eds) (2007).?Corporate Ethics and Corporate Governance .?(pp. 173-178).?Springer.??

Hassan A. B., Lass F. D. and Makinde J. (2012). ?Cyber crime in Nigeria: Causes, Effects and the Way Out. ?ARPN Journal of Science and Technology 2(7), 626 – 631.

Hofstede, G., Hofstede, G. J., Minkov, M. (2010). Cultures and Organizations: Software of the Mind. 3rd Edition. USA: McGraw-Hill.

Hofstede Insights (2022).?Accessed Aug 20, 2022.?https://www.hofstede-insights.com/country-comparison/canada,nigeria,south-africa,the-usa/

?

Info Guide Nigeria (2016).?Top 6 Challenges Facing Banks in Nigeria.?https://infoguidenigeria.com/challenges-facing-banks-nigeria/ ???

Imeokparia, L. (2013). Corporate governance and financial reporting in the Nigerian banking sector: An empirical study. Asian Economic and Financial Review, 3(8), 1083-1095. https://archive.aessweb.com/index.php/5002/article/view/1072

Kasum, A.S., Etudaiye-Muthar, O.F. (2014). Corporate Governance Breach: An Overview of the Owner-Manager Agency Problem in the Nigerian Banking Industry. In: Idowu, S., ?aliyurt, K. (eds) Corporate Governance. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-45167-6_10

Lamido, S. (Feb 26, 2010). The Nigerian Banking Industry: what went wrong and the way forward.?Convocation Lecture at Bayero University in Kano. ?https://www.cbn.gov.ng/OUT/SPEECHES/2010/THE%20NIGERIAN%20BANKING%20INDUSTRY%20WHAT%20WENT%20WRONG%20AND%20THE%20WAY%20FORWARD_FINAL_260210.PDF

Lauwo S.&?Olatunde, J.?(2010). The Role of Auditors in Nigerian Banking Crisis. Accountancy, Business and the Public Interest, 9. pp. 159-204.?https://visar.csustan.edu/aaba/Otusanya2010.pdf

NOI Polls (2013).?Hidden Charges in Bank Transactions Seen As An Exploitation of The Customer.?https://noi-polls.com/hidden-charges-in-bank-transactions-seen-as-an-exploitation-of-the-customer/

Ojukwu‐Ogba, N.?(2009).?Banking sector reforms in Nigeria: legal implications for the banker–customer relationship,?Commonwealth Law Bulletin,?35(4),?675-686,?DOI:?10.1080/03050710903387790 .

?

Olayiwola, K. (2010).?Practice and Standard of Corporate Governance in the Nigerian Banking Industry.?International Journal of Economics and Finance, (2)4, 178-189.?https://pdfs.semanticscholar.org/4c41/98a7e02c3ea9a06985ee72604f0a8204f4ac.pdf

Proshare Research (2022).?Nigeria’s Banking Industry:?The Case for Redfining Tier 1 Banks.?https://proshare.co/articles/nigerias-banking-industry-the-case-for-redefining-tier-1-banks?menu=Economy&classification=Read&category=Proshare+Confidential

SEC. (2022).?SEC Nigeria.?https://sec.gov.ng/ accessed Aug 20, 2022.

Trevino, L. Nelson, K. (2014).?Chapter 5: Ethics as Organizational Culture (excerpt) . In?Managing Business Ethics, (6th edition). Wiley.