Nigeria: The CBN Take-Over Of Some Banks In Nigeria: Serious Legal Questions Remain Unanswered

Last Updated: 29 September 2009
Article by Virtus Igbokwe

September 2009 Vol. 22: Issue #9

In the past two weeks, Nigeria has witnessed certain radical measures imposed on some banks by the new Governor of the Central Bank of Nigeria (CBN), Sanusi Lamido Sanusi on August 14, 2009.

For purposes of clarity, the orders issued by the CBN Governor may be categorized into three, namely:

  1. The removal of various officers constituting the executive management of the affected banks and their replacement by certain persons appointed by the CBN Governor;
  2. The unilateral advancement of various sums of money into the respective operating funds of the banks with the proviso that the said advance, shall at the option of the CBN be convertible into fully paid up securities of the affected banks; and
  3. Other further orders ostensibly designed to put the bank on stronger footing both in terms of corporate governance and with respect to increased liquidity.

In sum, the orders made by the CBN Governor constitute a take-over of the affected banks for a period that would last at least 5-7 years but could also fundamentally restructure the future ownership and control of the affected banks. By all accounts, these measures are radical and constitute an unprecedented takeover or seizure of private investments by a governmental agency in Nigeria.

The alleged basis for these radical measures undertaken by the CBN Governor is that the affected banks, in the opinion of the CBN Governor, appears to meet the criteria of a "failing bank" as contemplated by Section 35 of the Banks and other Financial Institutions Act, Cap B3 Laws of the Federation of Nigeria, hereinafter, BOFIA.

This newsletter addresses three key questions, namely:

  1. Whether under the enabling legislation, the CBN Governor has the power or vires to remove any officer or officers of the affected banks and appoint new officers on the grounds that the banks are "failing" under the definition contained in section 35 of the BOFIA? And if so, whether under the present circumstances, the CBN Governor exercised such powers judiciously;
  2. Whether having regard to the laws of Nigeria the CBN Governor and/or the Central Bank of Nigeria may lawfully position itself to hold and/or control shares in Nigerian banks;
  3. Whether it is lawful for the CBN Governor and/or investigative agencies in Nigeria to monitor and or question the aforesaid sacked officials of the affected banks.

The full extent of the powers of the CBN Governor and the CBN itself to regulate banks registered in Nigeria is contained in two pieces of legislation, namely, the Central Bank of Nigeria (Establishment Act) Act, Cap C4 Laws of the Federation of Nigeria 2006, hereinafter, CBN Act and BOFIA, respectively.

A combined reading of both legislations supports the view that under Nigerian banking law, there are only two avenues by which the CBN may intervene in a bank which appears to have liquidity problems. The first avenue is captured by the provisions of section 35 (1) (a)-(c) of BOFIA by which a bank informs the CBN of its liquidity problems. Where a bank has by itself informed the CBN of such state of affairs, the CBN Governor may, among other things, order the removal of a director or directors of the 'failing' bank. It would appear that the present circumstances do not fall into this category.

However, the second avenue by which the CBN Governor may intervene in a bank is captured by the combined provisions of sections 33 and 35 (1) (d) of the BOFIA. These provisions empower the CBN Governor to unilaterally order an investigation into the accounts or finances of a bank, if in his opinion; it is the "public interest" to do so. The term "public interest" is an expansive phrase with little or no limits. After such an investigation, the CBN Governor may, pursuant to the enabling provisions of section 35 (2) 9c)-(e) remove any officer(s) of the failing bank and appoint new officers if in his opinion, it is necessary to do so.

However, the central question is whether the "investigations" leading to the radical measures imposed by the CBN Governor was conducted in a manner which guaranteed the constitutional right to fair hearing. In other words, IF the investigation by the CBN was conducted in a manner in which the banks and their affected officers were not given adequate and reasonable opportunity to explain or rebut the allegations of impropriety/incompetence by CBN, it would be unlawful and unconstitutional for the CBN Governor to remove the affected officers on the basis of a flawed investigative report. Sections 33 and 35 of BOFIA do not override or trump the constitutional guarantees to fair hearing and presumption of innocence.

In the light of the provisions of BOFIA, the CBN Governor is circumscribed by the provisions of the Nigerian Constitution on fair hearing. UNLESS, the procedure and manner of the investigation conducted by the CBN is demonstrably fair and judicious, the alleged power of the CBN Governor to remove any officer or officers of a bank is questionable under Nigerian law.

The second issue is the unilateral advancement of certain sums of money to the affected banks. In addition, the CBN has strongly indicated an intention to pursue an option by which the advance may be secured by way of securities issued by the banks. This is very alarming.

Although section 2 of the CBN Act empowers the CBN to "ensure monetary and price stability" and also "promote a sound financial system in Nigeria", it is hard to find a statutory or juridical support for the attempted restructuring or revaluation of the shareholding structure of a bank by the CBN. By providing an advance and signalling the intent to convert the advance into securities of the affected banks, it seems that the CBN Governor and the CBN have overstepped their bounds.

Nigerian banking law forbids the CBN from owning securities in a bank or by whatever means diluting or reconfiguring the shareholding of a private bank in the guise of fiscal governance. Section 34 (b) of the CBN Act expressly provides that:

The Bank (CBN) shall not (a) .....purchase the shares of any corporation or company including the shares of any banking institution.

Further, section 34 (c) prohibits the CBN from "granting loans upon the security of any shares". Indeed, section 34 (d) reinforces this statutory prohibition when it forbids the CBN from granting "secured advances or advances secured otherwise..."

Clearly, the clear intention of the National Assembly is to limit the CBN to regulation of the financial sector and to be an independent authority on national monetary and fiscal policy issues. It is not the intention of the National Assembly that the CBN or the CBN Governor would be advancing money to banks on the basis of securities issues by the receiving bank(s).

It would seem that the potential conditionality on securities attached to the monies advanced to the banks contradict s the prohibitions contained in section 34 of the CBN. A judicial challenge of the order relating to the future conversion of the CBN advance to bank securities, to the extent that it purports to alter the securities and/ or shareholding of the banks ought to succeed.

On the issue of police investigations of the books of the affected banks, the provisions of the Economic and Financial Crimes Commission Act empower the police and other investigative agencies to monitor and invite for questioning any person suspected of committing or of having relevant information concerning an offence of an economic or financial nature. However, it is doubtful whether indebtedness to a bank constitutes a crime or warrants the use of the police as a debt collection agency.

The current saga clearly shows that the CBN Governor has acted unwisely and probably illegally in some of the measures he has imposed and/or authorized.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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