Introduction
This second blog of the series on Banking Regulation in Africa: The Case of Nigeria and Other Emerging Economies, a book by Dr Folashade Adeyemo , provides critical insights into the modern regulatory framework of the Nigerian Banking system. The book is the only text to provide a comprehensive critique of Nigeria’s new banking law, taking into consideration its merits, and challenges.
While the first blog mapped out the journey to the creation of a banking regulatory environment in Nigeria, this blog considers the regulatory changes introduced by the relatively new Banks and Other Financial Institutions Act 2020 (BOFIA 2020). It discusses its impact, highlighting how BOFIA 2020 has revolutionalised the banking Nigerian banking space. It outlines the new regulator regime on bank licensing and revocation in Nigeria, the revised role of the Nigerian Deposit Insurance Corporation (NDIC) in bank resolution and new resolution tools for distressed banks.
Revolutionising the landscape of Banking Law in Nigeria
The landscape of regulation has significantly changed since the introduction of the first banking law in Nigeria – the Bank Ordinance 1952. Recently, the introduction of the Banks and Other Financial Institutions Act (BOFIA) 2020, Nigeria’s core banking law, has in many ways revolutionalised the banking space. Signed into law in November 2020, BOFIA 2020 amended the previous Act – BOFIA 1991 – after nearly 3 decades. Its stated purpose is to improve and strengthen the regulatory and supervisory environment of Banking in Nigeria, by providing tools which facilitate the management of failing institutions.
BOFIA 2020 departs significantly from the regulatory approach adopted by BOFIA 1991 in material ways, including the licensing of banks; arrangements and transactions; the role of the the Nigerian Deposit Insurance Corporation (NDIC) in bank resolutions; revocation of bank licences and the wider regulatory powers of the Central Bank of Nigeria (CBN). BOFIA 2020 also establishes a bank sector resolution fund. The contributors to this fund include the CBN, NDIC, together with banks, (including specialised banks) and other financial institutions through annual levies. The objective, amongst other things, is to provide for funds to operate bridge banks and to cover the cost of transferring the businesses of troubled banks following the engagement of a resolution measure.
Commendably, the provisions of BOFIA 2020 reflect renewed interest in creating banking regulation that responds to global changes. Such changes include provisions catering to global pandemics, such as Covid-19. In recognition of technology advancements, BOFIA 2020 provides innovative provisions to manage the growth of Fin-Tech companies. Most significantly, it also establishes a special tribunal for the enforcement of eligible loans. This is an interesting development as it mimics the creation of the then Federal Governments promulgation of the Failed Banks (Recovery of Debts) and Financial Malpractices in Banks Decree 1994. This military style tribunal was given jurisdiction to hear offences under the decree. The tribunal also had the power to lift the corporate veil of a corporate body (for example, debts owed by the corporate body to a failed bank) to bring, if necessary, persons behind the veil to trial. The decree provided that the personal property of the directors of any companies in question could be sold and the proceeds used to offset any outstanding debt. Thus, the creation of this special tribunal by BOFIA 2020 is a welcomed provision as it demonstrates some forward thinking on the part of the regulator.
While there is much to commend in BOFIA 2020, the blog will examine 3 important new changes in detail. These are (i) the licensing of banks, including the revocation of these licences, (ii) the limitation of the role of NDIC in the resolution of banks and bank insolvency issues and (iii) resolution tools.
i. The regulatory powers of the CBN for the licencing of banks in Nigeria and the revocation of banking Licenses
BOFIA 1991 provided wide and discretionary powers to the Governor of the CBN. These powers, arguably, were open to abuse as there is no internal regulation of their use. This was evident in the case of Savannah Bank and the ongoing case of Liberty Bank Plc. Previously, where banks sought to obtain a license under s 3, BOFIA 1991, they had to follow a step-by-step procedure. The new Act removes this procedure. S 5 (4) of BOFIA 1991 provided that the CBN Governor shall provide notice of the intention to revoke, vary or impose new conditions of the banks affected. Additionally, the CBN Governor shall give the said bank the ‘opportunity to make representation’. Arguably, these powers were excessive. They also, arguably, infringe on the principle of fair hearing as provided for under S 36 of the Constitution of the Federal Republic of Nigeria 1999. There have been previous calls to create a board which is charged with responsibility of deliberating the merits of varying or revoking licences, or for imposing new conditions on same. However, BOFIA 2020 now states that once a bank has paid the prescribed sum, the CBN must now provide a response within 60 days. This is an improvement on the previous position as it now provides banks with clear reasons why their licence application has been denied.
ii. The role of the NDIC in bank resolutions
Prior to BOFIA 2020, the management of failed banks was the primary responsibility of the NDIC and was covered by s 38 of the NDIC Act. This provision allowed the NDIC to take any steps including:
- Take over management
- Direct managerial changes
- Arrange a merger with, or acquisition by, another bank
- Acquire, manage or dispose of assets
- Take measures to secure and restructure.
BOFIA 2020 has now limited the role of the NDIC in this space by the introduction of s34 (2) that provides that the CBN has the power to revoke a bank licence before responsibility is assumed by the NDIC. Where a bank’s licence has been revoked, the NDIC may apply to the Federal High Court for winding up of the bank’s affairs, thus limiting the function of the NDIC.
The provisions in the NDIC Act 2006 relating to the management of banks however remains unchanged. Thus, it is imperative that the latter is amended to reflect the change set out in BOFIA 2020. Importantly, this change is necessary to ensure that BOFIA 2020 and NDIC Act 2006 work supportively, avoid conflict and maintain effective bank resolutions.
iii. Resolution tools
BOFIA 2020 has also introduced a range of resolution tools, with the objective of improving financial stability as well as to place the CBN in a more advantageous position in response to issues arising from the financial health of banks and/or financial institutions. The new provisions allow the CBN to initiate measures to assist failing banks. These measures also include rescuing a failing bank, which could be at a cost to other important stakeholders such as depositors or creditors. Additionally, the CBN may also allow an eligible instrument issued by a failing bank to be cancelled, modified or converted. It is also important to recognise the implications of this provision in terms of the wider insolvency picture. S 41 of the Act also permits the CBN to make a transfer of assets from a failing bank to one or more Private Asset Management Vehicles (PAMV).
Concluding Thoughts
BOFIA 2020 is an overdue and welcome development. It is an attempt to shift the landscape of banking regulation in Nigeria and recognises that the previous law was incapable of dealing with the developments in banking and on a global level. The insertion of innovative provisions regulates FinTech companies, and the creation of a special tribunal for the enforcement of loans show forward thinking on the part of the regulator. The powers for bank license revocation are an improvement, since the CBN must now provide a response within 60 days for denied applications. The limitation of the NDIC’s role in the resolution of banks shows the CBN taking further ownership of bank resolutions.
Credit: Dr. Folasade Adeyemo