A fundamental objective of financial regulation is the safety and soundness of financial institutions, and the ability of regulators to mitigate systemic risk through effective policy/reforms. This assertion represents the statutory mandate of the Central Bank of Nigeria (CBN) under the Central Bank of Nigeria Act, 2007; the Banks and Other Financial Institutions Act (BOFIA); and the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act 1995 and other subsidiary legislations.

Admittedly, financial systems cannot function effectively without confidence in the markets. However, due to the volatile nature of the financial market, regulatory actions or inactions may cause disruption to the financial system; thereby reducing confidence in the ability of markets to function effectively. This in turn could impair the availability of credit and overall economic activities in the country. It is against this background and the overarching responsibility of the CBN to ensure soundness of the financial system (whilst encouraging foreign capital investment) that this writer examines the impact of CBN's sanction on MTN Nigeria Communications Limited (MTN). 

The Central Bank of Nigeria on Wednesday, August 29, 2018, directed MTN to refund the sum of $8.13 billion for alleged illegal conversion of shareholders' loans to preference shares; and the repatriation of same out of Nigeria. Other affected parties are four Banks namely – Citibank, Diamond Bank, Stanbic IBTC and Standard Chartered Bank (the Banks)- all directed to refund the sum of NGN2.5 billion for allegations of illegal remittances of foreign exchange with irregular certificates of capital importation (CCIs) issued on behalf of some offshore investors of MTN between 2007 - 2015. CBN's investigation was primarily on three key "infractions" to wit; issuance of Certificates of Capital Importation (CCI's) for the following items; foreign currency sourced locally; falsely declared capital importation; and interest-free loans converted to preference shares without authorization.

In response, MTN described the allegation as regrettable, and reiterated its intention to vigorously defend its position before a court of competent jurisdiction. At the time of going to print, we understand MTN has instituted an action in this regard at the Federal High Court of Nigeria.

CCI is a certificate issued by an authorized dealer (usually a licensed commercial bank) confirming an inflow of foreign capital either in form of cash (loan or equity) or goods. CCI is usually issued in the name of the investor with 24-48 hours of the inflow of the capital into Nigeria. Its primary purpose is to guarantee access to the foreign exchange market for the repatriation of capital/returns on investment - dividend, interest and capital on divestments, as well as repayment of principal and interest accruing on a foreign loan.

Assuming to be correct, the allegation against MTN and the Banks, the question which arises is whether the CBN has effectively discharged its responsibility of financial supervision given the length of time (8 years) it took to realise, investigate and sanction the affected parties.

As stated, foreign investors are permitted to import capital or invest in any enterprise in foreign currency, through authorized dealers - who are permitted to issue CCIs within 24 (sometimes 48) hours of receiving the capital inflow. It may then be argued, that the inability of the CBN to effectively and promptly monitor the inflow and outflow of foreign capital, is effectively a failure to discharge its statutory obligation. Put differently, the CBN should have sanctioned the affected entities long ago to avoid the disruption now caused because of the delay in this regard. An unintended effect of this regulatory lapse may be the resultant lack of confidence and transparency in the financial market, that tends to stifle foreign investment activities.

The CBN Manual 2006 (the operating manual at the time the actions of the above-named entities were carried out) provides that foreign investors are guaranteed unconditional transfer of their capital, profits and dividends attributable to their investments in any convertible currency through authorized dealers. This means that a company/investor intending to repatriate its capital will be required to provide a CCI as evidence that the original investment was imported into Nigeria.

Following the CBN sanction, MTN has witnessed a drop in its share price by 23%. Even in the event the allegations are false and MTN succeeds in its claim against the CBN, the reputational damage to the nation may be irreversible. For the savvy investor desirous of repatriating capital returns, economic headwinds would seem to warn against bringing in capital investment. Investors would find it easy to conclude that bringing in funds would be unwise because of a perceived inability to access and repatriate same when required. Thus, by failing to proactively supervise the instant issue, the CBN; despite acting within its statutory powers, may occasion a ripple effect on investor's confidence in Nigeria's financial system.

Looking forward, instead of taking similar (delayed) reactionary measures, this writer suggests that the CBN should look to strengthen its monitoring, and processing of CCIs of foreign investment flows in and out of the country. To achieve this, it can adopt a twin approach to its supervisory role to ensure transparency, market integrity, and consumer protection. This approach of coupling the power of sanction with proactive regulation, will also ensure that the CBN acts as a catalyst for foreign direct/portfolio investment as opposed to becoming an inadvertent market disruptor. It will better reinforce the CBN's commitment towards ensuring a transparent and stable financial system. A regulator such as the CBN must always weigh the outcome of its actions or inactions on the market before taking any step. Although it is difficult to have near perfect supervision, it is possible to implement stronger financial supervision measures to reduce the chances of putting foreign capital investment to flight. Financial regulation in this regard can serve as not just a means of maintaining stability, but as an instrument for growth and development of the financial system.  

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