President Muhammadu Buhari signed the “Banks and Other Financial Institutions Act” 2020 (also known as “the New Act” or “BOFIA 2020”) into law on November 13, 2020, repealing the prior BOFIA 1991 (as revised in 1997, 1998, 1999, and 2002). In order to reflect the development of the Nigerian financial industry over the past 30 years, the BOFIA 2020 establishes and modifies significant provisions that regulate the operations of banks, specialist banks, and other financial institutions. The Act aims to improve investor trust in the financial sector and boost regulatory control, among other things.
Under the new Act, some sections were altered to cover more scenarios. Sections that had only one or two subsections before underwent revision to include more events and rules. The eight significant sections that were changed to reflect the current state of the Nigerian financial sector and to improve regulatory monitoring moving forward are noted in the paragraphs that follow. The modifications deal with penalties, minimum capital requirements, branch establishment and shutting, information display, restrictions on specific banking activities, failing banks and rescue mechanisms, the role of CBN Examiners, operations of foreign banks in Nigeria, and offshore banking.
Minimum Capital Ratio
For any type of bank, the CBN may now prescribe a greater or lower capital adequacy ratio in addition to maintaining minimum capital levels. Any bank with a holding company, a subsidiary, or both may be required by the CBN to determine and maintain minimum capital ratios on a consolidated basis. This is a change from the previous Act, which gave the CBN discretion to impose greater or lower capital ratios. For instance, the CBN had advocated greater capital adequacy ratios for systemically significant banks (SIBs) over the statutory minimum to guarantee that enough capital is set aside in these large banks to sustain unforeseen losses. We see that the suggested SIB capital adequacy ratio was never put into practice.
Restriction on certain banking activities
According to the BOFIA 2020, banks, specialized banks, and other financial institutions are not allowed to offer any unsecured advances, loans, or credit facilities unless they comply with any applicable regulations on collateralization that may be issued by the Central Bank of Nigeria. We are aware that major, low-risk conglomerates are frequently granted short-term loans (also known as overdrafts) by the banking sector based on cash flow. Given that the interest rates on these loans tend to be a little bit higher than those for longer terms of credit, the recurrent cycles in which they are provided increase the industry’s earnings. This clause may also have an impact on personal loans, such as “payday” loans, which are dependent on anticipated wage cash flows. This additional provision does, however, prompt a few rhetorical inquiries. Given that a sizeable portion of the credits provided by the banking sector are unsecured overdrafts, what would be the expected impact of this provision on the credit environment in Nigeria? What effects will this have on the operational effectiveness of financial institutions’ loan administration processes as they rush to get regulatory permission for unsecured lending?
Failing banks and rescue tools
The CBN governor may suspend any payment or delivery obligations under any contract to which the bank is a party in the event that a bank is determined to have failed under the circumstances specified in Section 34 (1). The previous act does not include this. Additionally, the governor may sell the entire bank, only the banking operations, or use any other intervention mechanism that the CBN may judge appropriate. The CBN now has the authority to purchase shares of any bank that is about to go under, up to the point where doing so ensures its control of the bank. If all else fails and the situation at the concerned bank does not improve, CBN may use its authority to revoke the bank’s license.
CBN Examiners
In accordance with the new Act, the Governor may designate examiners who will be permitted to attend management and board meetings of banks, other financial institutions, and specialty banks (as observers). We think that the regulatory body’s efforts over the years to improve corporate governance, which led to more robust independent boards and corporate governance structures, are somewhat contradicted by this statute. We believe that having CBN examiners present during these management and board meetings would limit attendees’ ability to express themselves and ultimately be detrimental. If this clause is kept, we think it should only be applied to banks that are in serious financial trouble.
Operations of Foreign banks in Nigeria and offshore banking
A license to conduct domestic (not allowed under the previous Act) or offshore banking activity inside a specified free trade or special economic zone in Nigeria may be granted by the CBN to any bank registered in Nigeria or a foreign bank. A current law that states that only entities lawfully formed in Nigeria may be awarded licenses to conduct banking business in Nigeria is partly contradicted by this provision, which is an amendment to the earlier provision. Therefore, international banks should establish a Nigerian subsidiary in order to secure banking licenses in any region of Nigeria, including any designated free trade or special economic zone. According to Agusto & Co., this clause could eventually put Nigerian banks at a disadvantage compared to their global counterparts.
Penalties
To account for the effects of inflation and the depreciation of the native currency, all fines listed in the BOFIA of 1991 were increased. BOFIA 2020 imposes severe financial penalties on officials in the financial services industry, which, in our opinion, would promote responsibility and accountability while possibly reducing high-risk activity. Financial institutions will also make sure that this Act’s rules are followed to minimize penalties for violations.
CONCLUSION
To accomplish the goal for which the BOFIA was reviewed, we think that there are some murky areas in the new Act that need to be explained or altered. We anticipate that these issues will be resolved soon, as some provisions of the Act are thought to be detrimental to efforts aimed at luring domestic and foreign investment, promoting industrialization, fostering the growth of Nigerian enterprises, and generally enhancing the ease of doing business in Nigeria.