Banks and other Financial Institutions Act 2020: The Making of a Super Regulator in Nigeria – Uche Mathew and Oluwademilade Odutola

Banking & Finance

30th December 2020

Uche Matthew and Oluwademilade Odutola

 

Banks and other Financial Institutions Act 2020: The Making of a Super Regulator in Nigeria[1]

 

1. Introduction

In recognition of the need to address current realities in the financial landscape and achieve globally acceptable standards in the regulation of the financial sector, President Muhammad Buhari recently signed into law the Banks and other Financial Institutions Act (“BOFIA 2020” or “the Act”) 2020. The Act is intended to usher in a new era in regulation of the finance sector, for the improvement of the business climate in Nigeria. The BOFIA 2020 also expands the scope of the Central Bank of Nigeria regulatory oversight in the financial services industry, adequately captures the regulation of microfinance banks and FinTechs, offers stiffer penalties for regulatory breaches[2] and plugs regulatory gaps in the repealed BOFIA Act 2004.[3]

In view of the significance of the financial sector to the economic well-being of this country, it is no surprise the banking industry is one of the most regulated industries in Nigeria. Credit statistics reports reveal that the banking sector contributes significantly to the effective functioning of other sectors of the economy.[4] Undoubtedly, the passage of BOFIA 2020 is a welcome development to strengthen the legal framework for the regulation of the banking sector and provide necessary support in the performance of its function as a key driver of the Nigerian economy.

The amended legislation, though long overdue, is commendable and progressive because it addresses new and emerging areas of business and banking.[5] However, many stakeholders have raised concerns about certain controversial provisions of the Act which tend to give the Central Bank of Nigeria (“CBN”), the apex regulator of the financial sector, excessive powers to the detriment of financial institutions and the investing public.

Against this background, this article seeks to highlight certain sections of the amended Act which have birthed a super regulator with wide-reaching powers and the likely effect of these powers on the financial sector.

2. Wide Reaching Powers of CBN Under the Amended Act

2.1 Refusal to Grant a Banking License by the Governor

Section 3(3) of the Act vests the Governor of the CBN with absolute powers to refuse to grant a banking license without adducing any reasons for his action, as it was under the repealed Act. Exercising unbridled discretionary powers, not subject to judicial review or any other control mechanism, goes against the principle of checks and balances, enshrined in the constitution to ensure responsibility in governance.[6]

Prospective and existing investors, stakeholders and participants in the financial sector will view this unchecked privilege as arbitrary and prone to abuse or reckless usage by the regulator. The conferment of such arbitrary power on the CBN with respect to approval, refusal and revocation of licenses may constitute a hinderance to participation in the financial sector. It also creates the perception of non-transparency in the regulation of the financial sector, inevitably eroding investor confidence in the banking industry.

2.2 Immunity from Restorative Orders Against Decisions of the CBN

To protect the inordinate discretionary powers granted to the CBN, Section 12(6) of the Act ousts the jurisdiction of the court to grant orders against the Bank or the Governor in any action relating to the revocation of a license by the Bank and limits a claimant’s remedy to only damages. Consequently, establishments regulated by the CBN will be excessively constrained in their dealings with the CBN for fear of disruption of business operations, knowing that the amended Act has limited their access to Court to challenge unlawful actions of the CBN, especially in relation to refusal and revocation of operating licenses.

The unlimited immunity granted the CBN not only sets the pace for unrestrained abuse of power, it also discourages participation in the banking sector as investors will be unwilling to commit their resources in a sector where recourse to the court to seek redress over punitive administrative decisions is curtailed by law.

No financial system in the world thrives under such a hostile regulatory environment, where regulated entities operate at the mercy of the regulator. Although this provision has not been challenged in court, we expect that the courts, jealously safeguarding their constitutional jurisdiction, will nullify the provisions of section 12(6) for being inconsistent with the express provisions of the constitution.[7]

2.3 Immunity from Adverse Claims

Section 51 of the BOFIA 2020 grants immunity from judicial review to the Federal Government, CBN and its officials over actions or decisions undertaken in the exercise of administrative duties. Persons adversely affected by actions of the CBN and its officials are effectively barred from seeking judicial redress. This provision blatantly strips the courts of powers to hold the CBN and its officials accountable for its actions. Inadvertently, but by necessary implication, the CBN has become a law unto itself.

2.4 Extension of Central Bank’s Regulatory Oversight Beyond the Scope of Banking Business

Section 2(5)(a) and (b) of the Act expands the Central Bank of Nigeria (CBN)’s regulatory ambit and licensing over and beyond the collection and solicitation of deposits from the public. The section provides as follows:

2(5) For the purposes of this Bill, a person shall be deemed to be receiving money as deposits and thus, conducting banking business:

(a) if the person accepts deposits from the general public as a feature of its business or if the person solicits for deposits orally, electronically or through any form of advertisement or otherwise by any other means; or

(b) If the person receives moneys as deposits which are limited to fixed amounts, or for which certificates or other instruments are issued in respect of any such amounts providing for the repayment to the holder thereof either conditionally or unconditionally of the amount of the deposits at specified or unspecified dates, or for the payment of interest, dividend, profit or fees on the amounts deposited at specified intervals or otherwise, or that such certificates are transferable:”

There are several instances where a company receives deposits as contemplated under section 2(5) of the Act while not conducting banking business. Major examples include crowdfunding initiatives, collection of funds either as deposit for shares or loan notes, or such similar transactions. The interpretation and application of this ambiguous provision may cause unanticipated issues for non-bank institutions and other businesses within the purview of other regulatory agencies.

While the CBN has a duty to protect the investing public from fraudulent schemes, attempting to regulate bodies outside the scope of banking business is largely considered an administrative overreach, which should be curtailed. We expect that the CBN would provide clarity on this ambiguous provision, in the foreseeable future.

2.5 Licensing of Foreign Banks

Section 8(2) of the BOFIA 2020 seems to suggest that the CBN may grant a license to foreign banks to undertake domestic or offshore banking business within a designated free trade or special economic zone in Nigeria.[8] This provision contradicts Section 2(1) of the Act that allows banking licenses to be granted only to companies duly incorporated in Nigeria. It is also inconsistent with the provision of the Companies and Allied Matters Act (“CAMA”) 2020 that requires foreign companies to incorporate a separate entity for the purpose of doing business in Nigeria.[9]

Authorising the CBN to grant licenses to foreign banks to undertake domestic banking business conflicts with the fundamental requirement of establishing local presence to do business in Nigeria,[10] giving such foreign banks undue advantage over home-grown banks. Not to be caught in the crossfire between the Corporate Affairs Commission (“CAC”) and the CBN, foreign-owned banks looking to obtain banking licenses to operate in any part of Nigeria including free trade zones, should incorporate a local subsidiary for that purpose.

2.6 Opening and Closure of Banks

Any bank or financial institution intending to open or shut down any of its branches must first obtain the prior written consent of the CBN. The requirement for approval, carried over from the repealed Act, now covers the establishment and closure of cash centers and representative offices. Given that there is no prescribed timeline for approval, the process of obtaining CBN’s consent may delay or worse still, disrupt banking operations. We hope that CBN will issue a directive prescribing definite timelines for approval to avoid disruption of business operation in the banking sector.

In addition, the six months’ notice period was introduced as a requirement for any bank intending to close any of its branches, outlets or subsidiaries.[11] Unfortunately, the Act fails to provide for notices to be given to customers who are the most affected by the closure of branches.

2.7 Approval of Financial Statement

Under the new provisions, financial statements of banks for each fiscal year are to be forwarded to CBN for approval, prior to publishing, within three months to the end of each financial year.[12] As earlier stated, the CBN would do well to set a duration for the approval of financial statements. Delay in the approval of financial statements may interfere with the holding of the Annual General Meeting and other reporting and compliance obligations imposed on banks by other regulatory agencies, especially the CAC.

2.8 Enlarged Powers of CBN Examiners to Attend Board Meetings of Banks

As part of additional supervisory powers implemented in the new Act, examiners appointed by the CBN have the right to attend and observe management and board meetings of financial institutions.[13] This provision is contrary to the CBN efforts in time past to foster independent corporate governance arrangements in financial institutions. Our position is that this provision, possibly intended to ensure strict adherence to corporate governance principles, should apply only to failing or distressed banks. The presence of CBN examiners at these meetings, in whatever capacity, will limit expressiveness, erode confidence in the banking system and portray banks and other financial institutions as typically non-compliant.

Furthermore, the CBN Guidelines for Whistle-blowing for Banks and Other Financial Institutions in Nigeria 2014 and the Code of Corporate Governance For Banks And Discount Houses both require banks and other financial institutions to have a whistleblowing policy for the reporting of alleged illegal or unethical conduct of employees, management, directors and other stakeholders of a bank or any other financial institution. We maintain that an effective whistleblowing framework extinguishes the need for and provides a better alternative to direct monitoring of the internal operations in financial institutions.

3. Recommendation and Conclusion

The BOFIA 2020 not only confers more powers on the CBN and its leadership, it also increases the instances where these powers can be exercised, with far reaching implications to be borne by the banks and financial services consumers.

The immunity conferred on the CBN makes its regulatory powers essentially limitless.  Good law making should place constraints on a regulator’s arbitrary power to do as it pleases, without consideration to the impact on stakeholders and investing parties. Actions, inactions, and decisions of the CBN should be subject to judicial scrutiny. Likewise, the range of matters requiring CBN approval may reduce the ease of doing business, stifle growth and adaptability of banks to developments in the financial sector.

Although this legislation is borne out of good intentions, certain provisions, if not clarified or amended, may be inimical to the government’s focus of creating an enabling business environment. Given the importance of the legislation, it is our hope that the grey areas highlighted in this article would be addressed by the law makers and relevant authorities, to achieve the purpose for which the BOFIA was reviewed.[14]

We also hope that the CBN, in the exercise of its enlarged powers under the amended act, will act in the interest of stakeholders in the industry, in furtherance of its mandate to promote a sound financial system in Nigeria.

 

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For further information on this article and area of law,

please contact Uche Matthew or Oluwademilade Odutola at S. P. A. Ajibade & Co.,

Lagos by Telephone (+234.1.270.3009; +234.1.460.5091) Fax (+234 1 4605092)

Mobile (+234.8151191 865, +234.8097904768)

Email: umatthew@spaajibade.com, oodutola@spaajibade.com

www.spaajibade.com

[1]       Uche Matthew and Oluwademilade Odutola, Associates, Corporate Finance and Capital Markets Department, SPA Ajibade & Co., Lagos, Nigeria.

[2]       Tony Chukwunyem BOFIA Review: X-Raying CBN’s Stance (July 22, 2020) available at: https://www.newtelegraphng.com/bofia-review-x-raying-cbns-stance/ accessed 16 December 2020.

[3]       Banks and Other Financial Institutions Act Cap. B4 LFN 2004.

[4]       This is evident in the Gross Domestic Product figures (GDP), which shows that financial sector grew by 28.41% (real terms) in Q2 2020, despite the economy contracting by 6.1%.

[5]       Taiye Adegoke Comprehensive Analysis of the BOFIA 2020 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3670773 available at accessed 5th December 2019.

[6]       Section 4, 5 and 6 of the Constitution of the Federal Republic of Nigeria, Cap C23 LFN 2004.

[7]       See Section 6(a) and (b) of the Constitution of the Federal Republic of Nigeria Cap C23 LFN 2004.

[8]       BOFIA Bill 2020: A Call for Reflection, Rethinking and Resurgence available at https://www.proshareng.com/news/NIGERIA%20ECONOMY/BOFIA-Bill-2020–A-Call-for-Reflection–Rethinking-and-Resurgence/53178 accessed 10 December 2020.

[9]       See section 78 of the Companies and Allied Matters Act, 2020 No. 124

[10]     Section 57(1) of the BOFIA 2020

[11]     Agusto Consulting Economic Newsletter: The Review of the BOFIA 2020 (December 2020) available at: https://www.agusto.com/publications/the-review-of-the-bofia-2020/ accessed 17 December 2020.

[12]     Section 26 of the Banks and Financial Institutions Act 2020.

[13]     Ibid, Section 29(4)(d).

[14]     Agusto Consulting Economic Newsletter: The Review of the BOFIA 2020 (December 2020) available at: https://www.agusto.com/publications/the-review-of-the-bofia-2020/ accessed 17 December 2020.

 

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