Banking Regulation 2022

Last Updated October 26, 2021

Nigeria

Law and Practice

Authors



G. Elias & Co. is one of Nigeria’s leading business law firms, the first Nigerian law firm member of the International Swaps and Derivatives Association (ISDA) and the sole Nigerian member of the Africa Legal Network, an alliance of independent top-tier African law firms. The firm is organised as eight practice groups across ten industry sectors and boasts over 50 lawyers in offices in Lagos and Abuja, Nigeria. At the core of the firm’s banking and finance practice is the provision of bespoke legal advice and services to both local and international clients on the legal and regulatory frameworks underpinning Nigeria’s financial markets. The firm advises on large, complex and innovative financial sector work in the fields of project finance, bank lendings, restructurings and structured finance. The firm’s clients include leading global banks, commercial banks, export credit agencies, multilateral development finance institutions, credit guarantee providers, commercial non-bank lenders, payment service providers and borrowers.

The principal law governing the banking sector in Nigeria is the Banks and Other Financial Institutions Act, 2020 (BOFIA). The BOFIA, which was passed into law in 2020, contains robust provisions on the regulation and supervision of banks and other financial institutions in Nigeria. The BOFIA prohibits any person from carrying on banking business in Nigeria except if it is a company duly incorporated in Nigeria and holding a valid banking licence issued by the Central Bank of Nigeria (CBN) under the BOFIA.

Banking business, as defined under the BOFIA, involves: (i) accepting or soliciting deposits from the public whether orally, electronically or through any form of advertisement or any other means; or (ii) receiving money as deposits which is limited to fixed amounts or for which certificates or other instruments are issued in respect of such amounts providing for conditional or unconditional repayment of such deposits at specified or unspecified dates, or payment of interest, dividend, profit or fees on the amounts deposited at specified intervals or otherwise, or that such certificates are transferrable. This excludes receipt of money for any issue of shares, debentures or non-interest bearing instruments offered to the public in accordance with any law in force in Nigeria.

Other relevant legislation includes the following.

  • The Nigeria Deposit Insurance Corporation Act, 2006 (the “NDIC Act”) – the NDIC Act establishes the NDIC with the responsibility to insure the deposit liabilities of licensed banks and other deposit taking financial institutions and to assist monetary authorities in formulating and implementing banking policy to ensure sound banking practice and fair competition among financial institutions. 
  • The Asset Management Corporation of Nigeria Act, 2010 (the “AMCON Act”) – the primary role of AMCON is to assist eligible financial institutions to efficiently dispose of underperforming or non-performing eligible bank assets.
  • The Companies and Allied Matters Act, 2020 (CAMA) – CAMA is Nigeria’s primary companies legislation. CAMA applies to banks in so far as (i) they are companies incorporated in Nigeria and (ii) the CAMA provisions are not inconsistent with the BOFIA.
  • The Foreign Exchange (Monitoring and Miscellaneous Provisions) Act, 1995 (FEMMA), pursuant to which the Central Bank of Nigeria Foreign Exchange Manual, 2018 (the “Forex Manual”) was issued. The FEMMA and by extension, the Forex Manual, provides the framework for the regulation of foreign exchange transactions in Nigeria.
  • Regulatory guidelines and circulars are issued by the CBN from time to time.

The CBN is the primary regulator of banks in Nigeria. The CBN is empowered, under the BOFIA, to grant banking licences and to supervise and regulate the activities of banks and other financial institutions. The CBN is established by the Central Bank of Nigeria Act, 2007 (the “CBN Act”). CBN’s primary roles are to:

  • ensure monetary and price stability;
  • issue legal tender currency in Nigeria;
  • maintain external reserves to safeguard the international value of the legal tender currency;
  • promote a sound financial system in Nigeria; and
  • act as banker and provide economic and financial advice to the Federal Government of Nigeria.

Other government agencies whose activities affect the operation and business activities of banks include the Securities and Exchange Commission (the SEC) (the primary regulator of the securities market), and NDIC and AMCON (both of whose roles have been discussed in this section).

There are three categories of banking licences recognised and issued by the CBN:

  • commercial banking licence (issued for banking operations at regional, national or international level);
  • merchant banking licence; and
  • specialised banking licence.

The minimum paid-up share capital for commercial banking licence is NGN10 billion for regional authorisation, NGN25 billion for national authorisation, and NGN50 billion for international authorisation.

A commercial banking licence with regional authorisation allows a bank to carry on its banking business within a minimum of six and maximum of 12 states in Nigeria, lying within not more than two geographical zones of the federation plus the Federal Capital Territory. A commercial banking licence with national authorisation entitles a bank to operate in every state of the federation while a commercial banking licence with international authorisation entitles a bank to carry on both onshore and offshore banking business in an offshore jurisdiction of its choice, subject to CBN approval and compliance with the regulatory requirements of such offshore jurisdiction.

The CBN Scope, Conditions and Minimum Standards for Commercial Banks Regulations No 01, 2010 (the “Commercial Banks Regulations”) sets out the permissible and prohibited activities for commercial banks in Nigeria. Some of the activities which a commercial banking licence holder is authorised to undertake include:

  • the taking of deposits and maintenance of current and savings accounts from natural legal persons;
  • provision of retail banking services, including mortgage products;
  • provision of finance and credit facilities;
  • dealing in foreign exchange and provision of foreign exchange services, subject to the requirements of FEMMA;
  • acting as a settlement bank, subject to CBN approval;
  • providing custodial services (through nominees); and
  • providing financial advisory services incidental to commercial banking business which do not require regulatory filings with the SEC, etc.

Commercial banks are prohibited from carrying on:

  • insurance underwriting;
  • loss adjusting services;
  • re-insurance services;
  • asset management services;
  • issuing house and capital market underwriting services;
  • investment in equity or hybrid-equity instruments, except investments permissible under BOFIA;
  • proprietary trading, except as permitted under the Commercial Banks Regulations;
  • provision of financial advisory, other than as permitted under the Commercial Banks Regulations; and
  • any other business activities that may be restricted by CBN from time to time.

The minimum paid-up share capital required for a merchant banking licence is NGN15 billion or such amount as may be prescribed by the CBN from time to time. A merchant bank may, under the CBN Scope, Conditions and Minimum Standards for Merchant Banks Regulations, No 02, 2010:

  • take deposits from any natural or legal person in a minimum amount of NGN100 million per tranche or such other minimum amount as the CBN may prescribe;
  • provide finance and credit facilities to non-retail customers;
  • deal in foreign exchange and provide foreign exchange services subject to the requirements of FEMMA;
  • act as issuing house or otherwise manage, arrange or co-ordinate the issuance of securities, for or on behalf of any person subject to the BOFIA;
  • provide underwriting services with respect to equity issuance of securities, subject to the BOFIA and prior written notification to the CBN;
  • provide treasury management services including the provision of money market, fixed income and foreign exchange investment on behalf of clients;
  • provide financial, consultancy and advisory services relating to corporate and investment matters, for a fee; and
  • provide asset management services, including fund and portfolio management services, act as dealer of securities for its own account and for the account of its clients, or otherwise make or manage investments on behalf of clients, etc.

Merchant banks are prohibited from accepting deposits withdrawable by cheque, accepting any deposit below the prescribed minimum amount or holding, for more than six months, any equity interest acquired in a company while managing an equity issue except as permitted under Section 21 of BOFIA.

The business of specialised banks and other financial institutions includes bureau de change, credit bureau, finance company or money brokerage, international money transfer services, business of a discount house, credit guarantee, mortgage refinance company, mortgage guarantee company, financial holding company or payment service providers (BOFIA, Section 57).

The CBN Scope, Conditions and Minimum Standards for Specialised Institutions Regulations No 03, 2010 provides for a minimum paid-up capital of NGN5 billion for a non-interest regional bank, NGN10 billion for a non-interest national bank, and NGN5 billion for a primary mortgage institution. 

Microfinance bank licences are categorised into the following:

  • Tier 1 Unit MFB – minimum paid-up capital of NGN200 million;
  • Tier 2 Unit MFB – minimum paid-up capital of NGN50 million;
  • State MFB – minimum paid-up capital of NGN1 billion; and
  • National MFB – minimum paid-up capital of NGN5 billion.

(Guidelines for the Regulation and Supervision of Microfinance Banks, 2020.)

The CBN issues prudential guidelines, circulars and regulatory frameworks from time to time for the various categories of banks and other financial institutions covering minimum capital requirements, capital adequacy ratios, permissible activities, non-permissible activities, reporting requirements, licensing requirements, operational guidelines, exposure limits and liquidity ratios, amongst others.

An application for the grant of a banking licence shall be submitted in writing to the governor of the CBN, accompanied by: 

  • a feasibility report for the proposed bank, including financial projections for at least five years; 
  • a draft copy of the memorandum and articles of association of the proposed bank; 
  • a list of the shareholders, directors and principal officers of the proposed bank and their particulars; 
  • where the application is in relation to non-interest banking, a list of experts on non-interest banking or finance that will serve as its advisory committee of experts; 
  • the prescribed application fee; and 
  • such other information, documents and reports as the CBN may specify (BOFIA, Section 3).

Upon submission of the application and accompanying documents, the shareholders of the proposed bank shall deposit with the CBN a sum equal to the minimum paid-up share capital, pursuant to which the governor of the CBN may, with the approval of the board of directors of the CBN, issue or refuse to issue a licence. An approval-in-principle is usually granted by the CBN at this stage.

For the grant of a licence, the promoters of a bank which has been granted an approval-in-principle shall, not later than six months thereafter, submit an application accompanied by the following documents: 

  • feasibility report for the proposed bank, including financial projections for at least five years; 
  • a draft copy of the memorandum and articles of association of the proposed bank; 
  • a list of the shareholders, directors and principal officers of the proposed bank and their particulars; 
  • where the application is in relation to non-interest banking, a list of experts on non-interest banking or finance that will serve as its advisory committee of experts; 
  • the prescribed application fee; and 
  • such other information, documents and reports as the CBN may specify (BOFIA, Section 3).

Upon submission of the application and accompanying documents, the shareholders of the proposed bank shall deposit with the CBN a sum equal to the minimum paid-up share capital, pursuant to which the governor of the CBN may, with the approval of the board of directors of the CBN, issue or refuse to issue a licence. An approval-in-principle is usually granted by the CBN at this stage.

For the grant of a licence, the promoters of a bank which has been granted an approval-in-principle shall, not later than six months thereafter, submit an application accompanied by the following documents: 

  • evidence of payment of prescribed licensing fee; 
  • three certified true copies of the certificate of incorporation, memorandum and articles of association, Form CAC 2 (allotment of shares) and Form CAC 7 (particulars of directors) of the proposed bank; 
  • evidence of location of head office/branch building for the take-off of banking business; 
  • evidence of strong room, loading bay and banking hall facilities; 
  • bullion lorries with necessary security gadgets; 
  • evidence of installation of IT facilities/computerisation; and 
  • copies of letters of offer and acceptance of employment in respect of the management team.

The prior written consent of the CBN governor is required for a bank to enter into an agreement or arrangement which results in a change in the control of the bank or the transfer of a significant shareholding in the bank (BOFIA, Section 7). 

The CBN may approve such agreement or arrangement if it is satisfied that:

  • such agreement or arrangement is not likely to cause a restraint of competition, or tend to create a monopoly in the banking industry;
  • the significant shareholders or directors of the bank that results from the agreement or arrangement are not disqualified under BOFIA;
  • the agreement or arrangement is consistent with the public interest; and
  • the bank meets the capital requirements prescribed under BOFIA.

Paragraph 3.2.1 of the Code of Corporate Governance for Banks and Discount Houses in Nigeria, 2014 (the “Code”) requires any investor who wants to acquire 5% and above in the share capital of a bank to seek the prior approval of the CBN. In the event that such shares are acquired through the capital market, for instance where the bank is a publicly listed company, the bank must obtain a “no objection” letter from the CBN immediately after the acquisition. State governments are also restricted from holding, directly or indirectly, more than 10% in the share capital of any bank.

The approval of the SEC is also required for the acquisition of controlling interest in the shareholding of banks. A foreigner may acquire shares in a Nigerian bank subject to the requirement of obtaining the prior approval of the CBN where the equity holding is 5% and above.

The Code is the primary corporate governance framework applicable to banks. The Code sets out the standards, processes, systems and controls required of banks to promote an efficient banking system. In addition, where the bank is a public company, the SEC Code of Corporate Governance for Public Companies will also apply to the bank.

The Code tasks the board of directors of a bank with the responsibility of performing oversight functions and monitoring the performance of the management of the bank. The board is required to meet at least once a quarter to effectively carry out this responsibility. Beyond the statutory requirements in the BOFIA and the CAMA, banks are required to make robust and material disclosures in their annual reports, including but not limited to: 

  • corporate governance structure and composition of board committees;
  • details on directors (including the bank’s remuneration policy, performance evaluation of board of directors, details of directors and their related entities who own 5% and above of the bank’s shares, total executive compensation, total non-executive remuneration, details and reasons for share buy-backs during the period under review, if any);
  • major items that have been estimated in accordance with applicable accounting and auditing standards;
  • risk assets (including loan quality, lending/borrowing to/from subsidiaries and associates, related party transactions, insider-related credits, loans and advances or commitment lines from institutions outside Nigeria);
  • risk management (all significant risks and risk management practices indicating the board’s responsibility for the entire risk management process as well as external auditors’ observed lapses);
  • information on strategic modification to the core business;
  • capital structure/adequacy;
  • all regulatory/supervisory contraventions during the year under review and infractions uncovered through whistle-blowing, including actions taken thereon;
  • frauds and forgeries;
  • contingency planning framework; and
  • any matter not specifically mentioned in the Code but which is capable of affecting the financial condition of the bank or its status as a going concern in a significant way.

The Code (paragraph 2.4.1) provides that the procedure for appointment to the board of directors of a bank shall be formal, transparent and documented. Every appointment of a person to the position of director, chief executive officer or management staff of a bank shall be subject to the written approval of the CBN. 

BOFIA (Section 47) excludes the following individuals from employment as a director, manager, secretary or officer of a bank: 

  • a person of unsound mind or who is incapable of discharging his duties as a result of ill health; 
  • a person dismissed from the service of the federal, state or local government or any agencies of such government; 
  • a person who is declared bankrupt or suspends payments or compounds with their creditors, including their bankers; 
  • a person convicted of an offence involving dishonesty or fraud; 
  • a person who is guilty of serious misconduct in relation to their duties; or
  • a person who is disqualified or suspended from practicing their profession by the order of any competent authority made in respect of them personally.

In determining the eligibility for a person as fit and proper for board and senior management position, the provisions of the CBN Revised Assessment Criteria for Approved Persons’ Regime for Financial Institutions (the “Approved Persons’ Guidelines”) will be taken into account. The scope of the Approved Persons’ Guidelines extends to commercial banks (regional, national and international), merchant banks, non-interest banks, primary mortgage banks, discount houses, development finance and other financial institutions under the regulatory purview of the CBN.

In assessing a candidate’s integrity and suitability, the criteria for propriety to be considered by the CBN include, but are not limited to:

  • whether such appointment would result in a conflict of interest, thus contravening the provisions of BOFIA;
  • whether the candidate or any business in which they have controlling interest or exercises significant influence has been investigated, disciplined, suspended or criticised by a regulatory or professional body, court or tribunal, whether publicly or privately;
  • whether the candidate has been dismissed, asked to resign from employment or from a position of trust, fiduciary appointment or similar position because of questions about their honesty and integrity;
  • whether the candidate has deliberately falsified documents to mislead a client, institution and/or regulators; or 
  • whether the candidate has deliberately prepared inaccurate or inappropriate records or returns.

In addition to the position-specific academic and professional qualifications as well as experience required, the general requirements for assessing a candidate’s competence for board and top management positions, capacity to fulfill the responsibilities of their positions and ability to understand the technical requirements of the business include:

  • submission of a completed “Approved Persons Regime” questionnaire administered by the CBN;
  • provision of a satisfactory status report from the candidate’s last place of work, not later than six months after engagement;
  • satisfying the CBN that they are able to meet personal financial obligations/commitments on a continuous basis and demonstrate satisfactory discharge of fiduciary responsibilities;
  • provision of three reference letters, two of which must be from the last place of work in the last five years and from persons not below the rank of a director (for non-executive directors, the three reference letters should be from individuals of reputable standing in the country eg, civil servants of grade level 15 and above or their equivalent in the armed forces or police, senior clergymen, fellows of professional bodies such as ICAN, CIBN, etc); and
  • non-executive directors must undergo directors’ training at the bank or financial institution’s expense, aimed at acquiring or having the prerequisite knowledge of their responsibilities and duties.

The responsibility of the board of directors, among others, is to:

  • act in the interest of the bank and its stakeholders;
  • define and monitor the implementation of the bank’s strategic goals by management; and
  • ensure that the human, material and financial resources of the bank are effectively deployed towards the attainment of the set goals of the bank.

The board of directors of each bank are responsible for putting in place a remuneration policy which is required to be disclosed to the shareholders in the annual report. The levels of remuneration should be sufficient to attract, retain and motivate executive officers of the bank and balanced against the bank’s interest in not paying excessive remuneration. Where remuneration is performance-based, it should be designed in a way that prevents excessive risk taking.

The responsibility for determining the remuneration of executive directors is designated to a committee of non-executive directors, and executive directors are not entitled to receive sitting allowances and directors’ fees.

The remuneration of non-executive directors is limited to directors’ fees, sitting allowances for board and board committee meetings and reimbursable travel and hotel expenses. Non-executive directors are not entitled to receive benefits or salaries, whether in cash or in kind.

Where stock options are adopted as part of executive remuneration or compensation, the board is required to ensure that the stock options are not priced at a discount unless approved by the relevant regulatory agencies.

All banks, specialised banks and other financial institutions are required to adopt policies stating their commitments to comply with anti-money laundering (AML) and combating financing of terrorism (CFT) obligations under subsisting laws and implement internal control measures to prevent any transaction that facilitates criminal activities, money laundering or terrorism (BOFIA, Section 66).

The CBN (Anti-Money Laundering and Combating the Financing of Terrorism in Banks and Other Financial Institutions in Nigeria) Regulations, 2013 (the “CBN AML/CFT Regulations”) provides a comprehensive framework for compliance by CBN-regulated banks and other financial institutions as required under the Money Laundering (Prohibition) Act, 2011 (as amended), the Terrorism Prevention Act, 2011 (as amended) and other relevant laws and regulations.

Financial institutions are required to formulate and implement internal controls and other procedures to deter the use of their facilities for money laundering and terrorist financing. Financial institutions are further required to adopt a risk-based approach in identifying and managing their AML/CFT risks in line with the CBN AML/CFT Regulations. Financial institutions are to comply promptly with requests made pursuant to extant AML/CFT legislation and provide the CBN, the Nigeria Financial Intelligence Unit (NFIU) and other competent authorities with such information as they may require (Section 4 of the CBN AML/CFT Regulations).

Other AML/CFT compliance requirements which financial institutions are subject to include:

  • rendering statutory reports to appropriate authorities;
  • reflecting AML/CFT policies and procedures in their strategic policies;
  • conducting on-going and enhanced due diligence, where appropriate, on all business relationships and obtaining information on the purpose and nature of the business relationships of potential customers;
  • identifying, reviewing and recording other areas of potential money laundering and terrorist financing risks not covered by the CBN AML/CFT Regulations; and
  • ensuring that their employees, agents and others doing business with them clearly understand the AML/CFT programme (Section 4 of the CBN AML/CFT Regulations).

A financial institution is obliged to identify and file suspicious transaction reports to the NFIU, where funds, assets or property are suspected to have been derived from any of the following criminal activities (this list is not exhaustive):

  • corruption;
  • bribery;
  • fraud;
  • currency counterfeiting;
  • participation in an organised criminal group and racketeering;
  • terrorism, include terrorist financing;
  • trafficking in persons and migrant smuggling;
  • illicit arms trafficking;
  • murder;
  • robbery or theft;
  • kidnapping, illegal restraint and hostage-taking;
  • sexual exploitation, including sexual exploitation of children;
  • illicit trafficking in stolen and other goods;
  • grievous bodily injury;
  • environmental crime;
  • extortion;
  • forgery;
  • piracy;
  • insider trading and market manipulation;
  • smuggling, including smuggling done in relation to customs and excise duties and taxes;
  • tax crimes, related to direct and indirect taxes;
  • illicit trafficking in narcotic drugs and psychotropic substances; and
  • counterfeiting and piracy of products.

(Section 9 of the CBN AML/CFT Regulations)

The depositor protection scheme in Nigeria is administered by the Nigerian Deposit Insurance Corporation (NDIC). 

All deposit-taking licensed banks and other financial institutions are required to insure their deposit liabilities with the NDIC (Section 15(1) of the NDIC Act). It is immaterial whether the depositor is a natural person, small business, club, or school etc (NDIC Act, Section 16).

The maximum amount guaranteed to depositors of institutions insured with NDIC is NGN500,000 for a depositor with a deposit money bank and NGN200,000 for a depositor with a microfinance bank.

The depositor protection scheme is funded from:

  • premiums provided by the insured institutions to the NDIC
  • income from the investments of the NDIC (treasury bills and bonds issued by the Federal Government; and
  • monies borrowed from any source with the approval of the NDIC board; and
  • monies from any other source as may be approved by the NIDC.

(NDIC Act, Section 10(1))

The NDIC does not receive government subvention for its operations. 

There is no specific statute in Nigeria that provides for bank secrecy. However, reference is made to Section 39 of the 1999 Constitution of the Federal Republic of Nigeria (as amended) which provides that the privacy of citizens, their homes, correspondence, telephone conversations and telegraphic communications is guaranteed and protected. Also, a bank’s duty of secrecy and confidentiality to its customers is borne out of the contractual relationship between the bank and the customer. A bank customer has the right to freedom from unauthorised or wrongful disclosure of their account details or otherwise confidential information. 

A bank must not disclose a customer’s account information to a third party and must also protect a customer’s information from unauthorised access by a third party. This duty is not restricted to account transactions – it extends to all the information that the bank has about the customer. 

However, the customer’s right to secrecy is not absolute. Some of the exceptions that apply include:

  • where the bank is required by law (including a court of competent jurisdiction) to make the disclosure;
  • where the customer consents to the disclosure;
  • where there is a public duty to disclose such information, for example, where a bank seeks to recover a debt from its customer; or 
  • where it is in the interest of the bank to disclose such customer’s information.

Where a bank is in breach of its duty of confidentiality to a customer, a customer has the right to sue for damages or for an injunction to prevent (further) disclosure.

Basel III Standards

The CBN completed the development of guidelines for the implementation of Basel III standards in 2020 and by its circular dated 2 September 2021 (the “Circular”) stated that it would commence with a parallel run effective from November 2021 for an initial period of six months, which may be extended by another three months, subject to milestones achieved in the supervisory expectations. 

Also, during the parallel run, the Basel III guidelines shall operate concurrently alongside the existing Basel II guidelines. The circular also stated that the capital add-on would be introduced in a phased manner as part of the overall process of pillar II assessment (of the Basel Framework) to enhance better risk management practices and better align banks capital with risk profiles. 

In addition, the CBN has issued certain guidelines/reporting templates for implementation of the Basel III guidelines.

Risk Management 

The board of directors of banks are mandated to set up a committee responsible for oversight of risk management and audit functions, which may be carried out by one committee particularly in small institutions (the Code, paragraph 2.5.1). 

Banks are also required to have a risk management framework specifying the governance architecture, policies, procedures and processes for the identification, measurement, monitoring and control of the risks inherent in its operations (the Code, paragraph 6.0).

Further, the Code expressly provides that its requirements relating to the establishment of a committee on risk management and audit functions are without prejudice to the requirements of the CAMA on statutory audit committees. 

CAMA provides that all public companies must have audit committees consisting of five members comprising of three members (with at least one member being a member of a professional accounting body established by an Act of the National Assembly), and two non-executive directors. 

Thus, where the bank is a public company, it shall annually elect a statutory audit committee which shall examine its auditors’ report and make recommendations to the annual general meeting as it may deem fit (CAMA, Section 404). 

Quality and Quantity of Minimum Capital Requirements

A minimum pillar 1 regulatory Capital Adequacy Ratio (CAR) of 15% is applicable to all banks and banking groups with international authorisation and those that have been categorised by the CBN as Domestically Important Banks (D-SIBs), while a minimum CAR of 10% is applicable to other banks (paragraph 25 of the CBN Guidelines on Regulatory Capital, 2021) (the “Guidelines”). The Guidelines were issued on 2 September 2021, pursuant to the CBN’s adoption and proposed implementation of the Basel III guidelines.

The Total Regulatory Capital (TRC) of the bank is a sum of sum of Common Equity Tier 1 (CET1), Additional Tier 1 Capital (AT1) and Tier 2 Capital (T2), net of regulatory adjustments. The Tier 1 (T1) capital is a sum of CET1 and AT1 capital, net of the regulatory adjustments applied to those categories. CET1 and AT1 capital are going-concern capital (which can absorb losses without constituting an event of default on the holders of the instrument) while T2 capital is going-concern capital (which can absorb losses only when T1 capital has been eroded and a bank is in liquidation) (the Guidelines, paragraphs 19, 20, 21). 

The CET1 includes common shares, audited retained earnings and statutory reserves; AT1 includes Instruments issued by the bank that meet the criteria for inclusion in AT1 and not included in CET1; and T2 includes instruments issued by the bank that meet the criteria for inclusion in T2 (and are not included in Tier 1) (the Guidelines, paragraphs 32-47).

The CAR is to contain a minimum percentage of the CET1 and the AT1. The CET1 is to constitute 7.0% for national/regional banks and 10.5% for international banks/D-SIBs of the Total Risk Weighted Assets (TRWA). T1 is to constitute 7.5% for national/regional banks and 11.25% for international banks/D-SIBs of the TRWA (the Guidelines, paragraphs 27,28 and 29).

Capital Buffers

All banks shall be required to hold and maintain capital buffers above the regulatory minimum, as specified by the CBN from time to time. 

The capital buffers should be in the form of CET1 and should be above the minimum CET1, Tier 1 and total capital adequacy levels. The capital buffers shall comprise the sum of the following:

  • Capital Conservation Buffer (“CCB1”) of 1.0% of TRWA; and
  • Countercyclical Capital Buffer (“CCB2”), which will be determined by the CBN from to time. 

(Guidelines, paragraphs 80 and 96)

Liquidity Requirements

The CBN, on 2 September 2021, issued the Guidelines on Liquidity Coverage Ratio (LCR) (the “LCR Guidelines”) in furtherance to its adoption and proposed implementation of the Basel III guidelines. 

The LCR shall apply to all commercial and merchant banks operating in the Nigerian Financial System at both entity (standalone) and consolidated basis (LCR Guidelines, paragraph 6). The LCR is aimed at promoting the short-term resilience of the liquidity risk profile of reporting entities. This is achieved by ensuring that the entities have an adequate stock of unencumbered High Quality Liquidity Assets (HQLA) that can easily and immediately be converted into cash at little or no loss of value in private markets to meet their liquidity needs for a 30-calendar-day liquidity stress scenario (LCR Guidelines, paragraph 5).

The LCR is a ratio, expressed as a percentage of a reporting entity’s stock of HQLA to its total net cash outflows over 30 calendar days, ie, the LCR period. It has the following two components.

  • Value of the stock of the HQLA in stressed conditions which shall be at least equal (100%) to its total net cash outflows over the next 30 calendar days. During periods of stress, reporting entities can draw on their stock of HQLA, subject to notifying the CBN.
  • Total net cash outflows calculated according to the scenario parameters which are a combination of idiosyncratic and market-wide shocks that would result in the run-off of a proportion of retail deposits, a partial loss of unsecured wholesale funding capacity, etc.

(LCR Guidelines, paragraphs 20–24.)

Reporting entities must notify the CBN immediately if their LCR has fallen, or is expected to fall, below 100% (LCR Guidelines, paragraph 19).

Reporting entities are required to comply with the minimum LCR on an on-going (daily) basis to help monitor and control their liquidity risk. However, for the purposes of supervisory oversight, reporting entities shall submit their respective LCR returns to the CBN in the periods provided for in the LCR Guidelines (LCR Guidelines, paragraph 17).

In addition, in introducing a global liquidity standard, the Basel III standards developed two minimum standards for funding liquidity. In response to promoting short-term resilience of a bank’s liquidity, the committee developed the LCR to achieve this while, in response to promoting resilience over a longer time horizon, it developed the Net Stable Funding Ratio (NSFR) which has a time horizon for one year and has been developed to provide sustainable maturity structure of assets and liabilities. The NSRF is not contained in the LCR Guidelines.

The Basel III standards regarding global liquidity standards are comprised mainly of specific parametres which are internationally “harmonised” with prescribed values and certain parameters contain elements of national discretion to reflect jurisdiction-specific conditions (Basel III Standards 2011). Further to this, the LCR Guidelines provide that while most of the parametres in the LCR are internationally “harmonised”, national differences in liquidity treatment may occur in items subject to national discretion (eg, deposit run-off rates, contingent funding obligations, market valuation changes on derivative transactions, etc) and where more stringent parametres are adopted by some supervisors (LCR Guidelines, paragraph 10).

Resolution and Insolvency of Banks

Bank failure resolutions are the primary responsibility of the NDIC and the CBN. In addition, AMCON acquires non-performing loans of failing banks in accordance with the provisions of the AMCON Act. 

However, by virtue of the BOFIA, where any provisions of the NDIC Act or any other applicable law in so far as they relate to banks and other financial institutions are inconsistent with the provisions of the BOFIA, the BOFIA shall prevail (BOFIA, Section 53). In summary, the CBN (the administrator of BOFIA) takes pre-eminence in the resolution of bank failures. 

BOFIA grants the CBN certain intervention powers for the rescue of a failing bank. The CBN governor may:

  • prohibit a failing bank from extending any further credit facility for a certain period;
  • suspend any payment or delivery obligations pursuant to any contract to which the bank is a party;
  • remove for reasons to be recorded in writing any manager or officer of the bank; or
  • at any time acquire the shares of a failing bank up to a level that guarantees it control of the bank. 

Where any of the measures stipulated above or any other measure does not improve the bank’s position, the CBN may invoke its power to revoke the licence of the bank (BOFIA, Section 34). 

Where the licence of the bank is revoked, the NDIC shall apply to the Federal High Court (the insolvency court) to make a winding-up order in relation to the bank (BOFIA, Section35).

The NDIC is empowered to provide financial and technical assistance to failing or distressed banks in the interest of depositors. Some of the types of failure resolution mechanisms employed by the NDIC in conjunction with the CBN (depending on the severity and peculiarity of the situation) have been the following.

  • Open bank assistance – a failing or endangered bank is allowed to continue to operate in the same name as a going concern and is given assistance by the NDIC and other relevant authorities such as the CBN in the form of a direct loan, guarantee for loan taken by the bank or acceptance of accommodation bills.
  • Depositor reimbursement – the reimbursement of deposits in accordance with the amount insured by the failed bank with the NDIC. 
  • Purchase and assumption transaction – a healthy bank purchases some or all the assets of a failed bank and assumes some or all the liabilities of the failed bank. If the entire bank is purchased, the acquirer may receive a payment from government covering the difference between the market value of the bank’s assets and liabilities. If only some deposits are assumed, the acquirer may be given the option of assuming any of the others and get their pick of the failed bank assets. What is purchased is, however, decided upon through negotiation. 
  • Bridge bank – a temporary bank is established and operated by the NDIC to acquire the assets and assume the liabilities of a failed bank until a final resolution can be accomplished. The bridge bank will retain the failed bank’s licence but operate under a different name preferably in the same premises used by the failed bank permitting continuity of banking services to all customers and fully protecting the failed banks depositors and creditors. 

Furthermore, for the purpose of rescuing a failed financial institution, the CBN may apply its bail-in powers by cancelling, modifying, converting or changing the form of an eligible instrument issued by the failing bank or to which the bank is subject and a party. This is applied by the CBN where it is of the opinion that such action will facilitate the rescue of the bank or the bank's available assets do not, or are unlikely to, support the bank’s payment of its liabilities as they become due and payable (BOFIA, Sections 37-39). 

Further to the operations of the CBN and NDIC in the resolution of financial institutions, the BOFIA introduced the Banking Sector Resolution Fund ("the Fund"). The Fund is to be financed with specified contributions from the CBN, the NDIC, all banks, specialised banks and other financial institutions in Nigeria. The Fund will be utilised exclusively to provide financial assistance to failing banks and bridge banks, as well as incidental operational costs (BOFIA, Sections 74–78).

FSB Key Attributes of Effective Resolution Regimes

Nigeria is not a member of the Financial Stability Board (FSB) and, to the best of our knowledge, Nigeria has not adopted the FSB Key Attributes of Effective Resolution Regimes.

Bank Insolvency Preference Rules

Insolvency preference rules are applicable to deposits in the Nigerian banking system. The BOFIA provides that where a bank is unable to meet its obligations or suspends payment or where its management and control has been taken over by the CBN or where its licence has been revoked, the assets of the bank shall be available to meet all the deposit liabilities of the bank in priority to all other liabilities of the bank (BOFIA, Section55).

Introduction of the eNaira

Nigeria made history on 25 October 2021 by becoming the first African country to digitise its currency. The “eNaira” designed by the CBN was unveiled by Nigeria’s President Muhammadu Buhari. This has put Nigeria on the global Central Bank Digital Currency (CBDC) tracking map as the sixth country after The Bahamas, Saint Kitts and Nevis, Antigua and Barbuda, Saint Lucia, and Grenada to launch a centralised national electronic currency.

The eNaira is a CBN-issued digital currency that provides a unique form of money denominated in Naira. It serves as both a medium of exchange and a store of value. The major difference between the eNaira and cryptocurrency is that while the former is issued by the CBN, a centralised authority and has the backing of traditional financial institutions, the latter is built on blockchain technology which ensures the decentralisation of its creation, regulation and use by decentralised computer networks. 

The CBN Regulatory Guidelines of the eNaira (the "eNaira Guidelines”), approved and dated 25 October 2021, states that the eNaira is the digital form of the Fiat currency (Naira) which is a direct liability of the CBN, a legal tender,. It will form part of the currency-in-circulation and will be at par with the physical Naira.

The eNaira will complement the traditional Naira as a less costly, more efficient, generally acceptable, safe and trusted means of payment. In addition, it will improve monetary policy effectiveness, enhance government’s capacity to deploy targeted social interventions and boost remittances through formal channels. The eNaira speed wallet is required to access, use and hold eNaira and will be exchangeable for other CBDCs. 

The eNaira Guidelines shall apply to all financial institutions and users of the eNaira (the eNaira Guidelines, Section 1.1).

The five participants in the eNaira regime are as follows.

  • The CBN which shall have the responsibility of issuing the eNaira and monitoring compliance with applicable regulations.
  • The financial institutions which shall act as the intermediaries between the CBN and customers including:
        • facilitating the eNaira speed wallet onboarding for bank customers (including merchants and individuals);
        • managing the eNaira across its branches; and
        • developing and/or updating reports and internal frameworks to ensure compliance with KYC an AML/CFT requirements. 
  • Merchants who shall be responsible for providing customers with alternative channels for making transactions using the eNaira and publicising the option of eNaira payment for transactions at merchant locations.
  • Ministries, departments and agencies of government who may receive revenue and make payments in eNaira.
  • Customers who are the end users of the e-Naira and who shall have the role of creating eNaira speed wallets and funding it as well as utilising eNaira as an alternative payment option for legitimate transactions as well as notifying financial transactions in the event of fraud/complaints/disputes (the eNaira Guidelines, Section 4).

The services that shall be available for individual customers specifically on the eNaira platform are:

  • person to person;
  • person to business/business to person;
  • person to government/government to person;
  • cash or bank account to eNaira speed wallet;
  • eNaira speed wallet to cash or bank account; and
  • any other services as may be approved by the CBN from time to time (the eNaira Guidelines, Section 8.1).

The charges for transactions that originate from the eNaira platform shall be free for the first 90 days commencing from 25 October 2021 and then revert to applicable charges as outlined in the Guide to Charges by Banks, Other Financial and Non-bank Institutions.

Some of the prospective advantages of the eNaira are as follows.

  • It will foster economic growth by offering easier access to capital and financial services thereby increasing economic activities at low/no interest transaction rate.
  • It will provide a secure and cheaper diaspora remittance option and an increase in the speed of such transactions. 
  • Its traceability limits its use for illicit or fraudulent purposes. It will also have a stronger securer because it cannot be forged or counterfeited as a result of its unique identity and security structure. 
  • It will increase local and international trade by making transactions cheaper, safe, quick and better.
  • It will provide financial inclusion by making financial services available to people or communities who do not have (enough) banking opportunity.
  • It will aid revenue collection by reducing cash handling costs.

One of the major concerns surrounding the launch of the eNaira is the determination of the effect the implementation of the eNaira will have on commercial banks in their role as intermediaries between the consumers and the CBN. This is because there is a tendency that it will reduce the volume of business executed by banks and transaction revenues. 

The eNaira, like every other electronic money, including privately issued stable coins and cryptocurrencies, leverages blockchain technology to facilitate peer-to-peer transactions and remove intermediaries. However, it is believed that similar to every other disruptive technology, banks will have to adapt to the changes introduced by the eNaria. While the concerns are not unfounded, it is unlikely that the eNaira will destabilise traditional banks. Instead, it will supplement existing banking products and services. 

CBN Naira 4 Dollar Scheme

The CBN introduced the “CBN Naira 4 Dollar Scheme” via its circular dated 5 March 2021, wherein the CBN provided that all recipients of diaspora remittances through the CBN licensed international money transfer operators shall be paid NGN5 for every USD1 received as remittance inflow.

The scheme was introduced by the CBN to sustain the "encouraging increase" in inflows of diaspora remittances in Nigeria and commenced on 8 March 2021 to end on 8 May 2021. However, by its circular dated 5 May 2021, the CBN extended the scheme until further notice.

G. Elias & Co.

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Law and Practice

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G. Elias & Co. is one of Nigeria’s leading business law firms, the first Nigerian law firm member of the International Swaps and Derivatives Association (ISDA) and the sole Nigerian member of the Africa Legal Network, an alliance of independent top-tier African law firms. The firm is organised as eight practice groups across ten industry sectors and boasts over 50 lawyers in offices in Lagos and Abuja, Nigeria. At the core of the firm’s banking and finance practice is the provision of bespoke legal advice and services to both local and international clients on the legal and regulatory frameworks underpinning Nigeria’s financial markets. The firm advises on large, complex and innovative financial sector work in the fields of project finance, bank lendings, restructurings and structured finance. The firm’s clients include leading global banks, commercial banks, export credit agencies, multilateral development finance institutions, credit guarantee providers, commercial non-bank lenders, payment service providers and borrowers.

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