Nigeria: Banking And The Law - 2. Regulatory Issues

Last Updated: 11 November 1997
2.1. CAPITAL ADEQUACY

2.1.1. MINIMUM PAID-UP CAPITAL

The Head of State, on the recommendation of the Central Bank, from time to time, determines the minimum paid-up share capital of each category of banks. The minimum paid up capital requirement for both commercial and merchant banks has recently been increased to N500 million, approximately US$6.25 million. Existing banks are to meet this requirement over a transitional period of two years, expiring 31st December, 1998. Banks which fail to meet the requirement by that date shall have their licences revoked, while new banks shall comply fully with that condition before they are licensed.

2.1.2. MAINTENANCE OF RESERVE FUND

In addition, every licensed bank is required to maintain a reserve fund out of the net profit of each year, (after due provision is made for taxation) and before any dividend is declared. Where the amount of the reserve fund is less than the paid-up share capital of the bank, it shall transfer not less than 30% of its net profit to the reserve fund. Where the amounts of its reserve fund is equal to or in excess of the paid-up share capital, it shall transfer 15% of its net profit for each year to the reserve fund.

2.1.3. RESTRICTION ON DIVIDENDS

No bank shall pay dividend on its shares until adequate provisions have been made to the satisfaction of the Central Bank for actual and contingent losses on risk assets, liabilities, off balance sheet commitments and such unearned incomes as are derivable therefrom.

2.2. LEGAL LENDING LIMITS

Prior to 1st October, 1996, banking regulations prescribed lending limits for various sectors of the Nigerian economy. Under the regulations banks were restricted from extending credits to any sector beyond the fixed percentage of its total lending. This sectoral allocation of cedit has now been abolished. Banks are, however, required to maintain a cash reserve of 8% of its total deposit liabilities (i.e. demand, savings and time deposits), certificates of deposit and promissory notes held by the non-bank public. They must also maintain a liquidity ratio of 30% on the same basis stated above.

Section 20 of the Banks and Other Financial Institutions Decree, places some restrictions on lending. For example, a bank shall not, without the prior approval in writing of the Central Bank of Nigeria, grant to any person any advance, loan or credit facility or give any financial guarantee or incur any other liability on behalf of any person so that the total value of the advance, loan, credit facility, financial guarantee or any other liability in respect of the person is at any time more than 20% of the shareholders fund unimpaired by losses or in the case of a merchant bank no more than 50% of its shareholders fund unimpaired by losses.

Furthermore, there are detailed regulations for securitisation and adequate collateral for any loan. The failed Banks (Recovery of Debts) and Financial Malpractices in Banks Decree, 1994, imposes stiff penalties upon bank directors, officers and employees for offences involving the approval or grant of a loan, advance, guarantee or any other credit facility or financial accommodation without adequate security or collateral, contrary to accepted practice or the banks regulations.

2.3. CONFIDENTIALITY

The United Kingdom common law principles of banking confidentiality also apply in Nigeria. A bank is not to disclose any information regarding a customer's banking transactions without his authorisation, except under certain specific circumstances.

MONEY LAUNDERING

Money Laundering Decree was enacted in 1995 with a view to prevention of money laundering by, among other things, limiting the amount of cash payments that can be made or accepted; regulating over the counter exchange transactions; providing for the proper identification of bank customers; and empowering the National Drag Law Enforcement Agency to place surveillance on certain bank accounts.

Except in a transaction through a financial institution, no person may make or accept cash payment of a sum greater than N500,000 or its equivalent in the case of an individual, or N2 million or its equivalent, in the case of a body corporate.

When a banking transaction, whether or not it relates to the laundering of drug money: (a) involves a sum greater than N500,000 or its equivalent, in the case of an individual or N2 million or its equivalent, in the case of a body corporate; (b) is surrounded by conditions of unusual or unjustified complexity; and (c) appears to have no economic justification or lawful object, the financial institution shall seek information from the customer as to the origin and destination of the funds, the aim of the transaction and the identity of the beneficiary. If the financial institution decides to carry out the transaction, it must forward a written report containing all relevant information on the matter to the Central Bank of Nigeria, the National Draw Law Enforcement Agency, judicial authorities, customs officers and such other persons as the Central Bank may, from time to time, by order, specify. The exchange rate of the Naira to the US Dollar is about N80 to $1.

Furthermore, every financial institution or casino has a duty of mandatory written disclosure and report to the Drug Law Enforcement Agency within 7 days, of any single banking transaction, lodgement or transfer of funds in excess of N500,000 or its equivalent, in the case of an individual, and N2 million or its equivalent, in the case of a body corporate. A person, other than a financial institution or casino, may voluntarily give the same information.

Every bank has a duty under the Decree to report to the Central Bank of Nigeria, any transfer to or from a foreign country of funds or securities of a sum greater than $10,000 or its equivalent.

Additional control provisions are contained in the Foreign Exchange (Monitoring and Miscellaneous Provisions) Decree, 1995. By section 22 of this law no person shall, in Nigeria, make or accept cash payment, whether denominated in foreign currency or not, for the purchase or acquisition of landed properties, securities, including stocks, shares, debentures and all forms of negotiable instrument; and motor cars or other vehicles of any description whatsoever. Payment for these items must be made by means of bank transfers or cheques drawn on banks in Nigeria only. Every bank is required to appoint a Compliance Officer who shall report through the chief executive of the bank to the Central Bank of Nigeria all breaches of the law in such a manner as the Central Bank of Nigeria may prescribe.

Penalties for offences under the Money Laundering Decree are stiff prison terms ranging from 15 to 25 years without option of fine.

2.4. LENDER LIABILITY

The concept of lender liability has not been developed by Nigerian case law. There is also no statutory provision in that regard. Nigerian courts will, however, follow English common law should such cases come before them.

2.5. DEPOSIT COMPENSATION SCHEME

The Nigerian Deposit Insurance Corporation has responsibility for insuring all deposit liabilities of licensed banks operating in Nigeria. It guarantees payments to depositors, in case of imminent or actual suspension of payments by insured banks up to a fixed maximum amount.

2.6. OTHER ISSUES RELEVANT TO JURISDICTION

2.6.1. BANK FAILURES

In the last two years alone, not less than six banks have failed in Nigeria, and several more are known to be distressed. The Central Bank takes over management of the failed banks as duly required by law. Three of them have been sold, and would require the injection of fresh and adequate capital by the buyers. All distressed banks have been given a deadline of 31st March, 1997, to recapitalise or be liquidated. The new levels of capital adequacy requirements are aimed at restoring public confidence in the banking system.

This article is intended to provide a general guide to the subject matter and should NOT be treated as legal advice. Specific legal advice should be sought by you about your particular case and special circumstances.

For further information/enquiries, please contact Patrick Abuka on Tel: (234)1-263 4656, 1-263 3024, 1-263 1708, 1-263 3512, 1-263 5115, 1-263 4553 or Fax No: (234) 1-263 1687, 1-263 5189

You may also wish to read through related material on 'Legal Aspects of Investing in Nigeria' provided by Abuka, Ajegbo, Ilogu & Nwaogu. You can view the entire archive via the Internet on Business Monitor Online (http://www.mondaq.com), or via your online provider by entering "Abuka, Ajegbo, Ilogu & Nwaogu" and "Business Monitor" as a free text search.

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