On November 12, 2020, President Muhammadu Buhari signed the Banks and Other Financial Institutions Act 2020 ("BOFIA" or "the Act") into law and thereby effectively repealed the erstwhile Banks and Other Financial Institutions Act 1991. The erstwhile Act had become obsolete and out of tune with the evolving complexities in the financial sector particularly technology driven financial services and other contemporary risks in the sector. Thus, the new Act was enacted to overhaul and reposition the banking and finance sector with a view to enhancing the soundness and resilience of the financial system for sustainable growth and development of the Nigerian economy.
Some of the profound novelties in the new Act are as follows:
Novel Provisions of the BOFIA 2020
Consent Requirement for Transfer of Significant Shareholding
The Act now makes it mandatory for the consent of the Central Bank of Nigeria ("the CBN") to be sought and obtained in respect of any agreement involving the transfer of significant shareholding in a bank or other financial institutions. The Act defines significant shareholding as the beneficial ownership of 5% or more of the paid-up share-capital of a bank or financial institution.
Restriction on Loan Facilities
The Act imposes some restrictions on the grant of credit facilities by banks and other financial institutions. For instance, the Act provides that a bank, specialized bank or other financial institution is prohibited from granting any unsecured advance, loan or credit facility except such grant is in conformity with the regulation on collateralization as may be issued by the Bank. Similarly, banks and financial institutions are precluded from granting insiders, unsecured advances, loans or unsecured credit facilities of an aggregate in excess of N1,000,000 or such amount as may be prescribed by the CBN without first obtaining the prior approval of the CBN.
CBN's Right to Observe Management and Board Meetings of Banks and OFIs
Under the Act, the CBN Governor may appoint examiners who shall have the right to attend (as observers) management and board meetings of banks, other financial institutions and specialized banks to which they are assigned. Whilst we appreciate the regulatory and supervisory powers of the CBN in relation to the activities of banks and other financial institutions, it is our considered view that this provision may be intrusive and may ultimately limit the freedom of these organizations to effectively and independently manage their affairs without undue interference from the CBN.
Powers Of CBN to Move Against Failing Banks
Under the new Act, the CBN is empowered to take certain actions against failing banks. For instance, the CBN Governor may suspend any payment or delivery obligations pursuant to any contract to which the failing bank is a party. Furthermore, the CBN may transfer the whole bank or only part of the banking business to third-party private purchasers or employ any other intervention tool as it deems fit. CBN is also empowered to acquire the shares of any failing bank up to a level that guarantees its control of the bank. Upon failure of all the measure above, CBN may invoke its power to revoke the license of the bank.
Limitation of Liabilities Arising from Unprecedented Events — Force Majeure Provisions
The Act makes provisions for unforeseen events such as an epidemic or a pandemic or a strike that could result in the inability of a bank, a specialized bank or other financial institutions to open for business. In unequivocal terms, the Act exempts banks, specialized banks or other financial institutions from incurring any liability to any of their customers by reason only of failure on the part of the banks, specialized banks or other financial institutions to open for business during a strike, an epidemic or a pandemic. The limitation of liability provision in the Act is significant and indeed commendable especially considering the severe disruptions caused by the Covid-19 pandemic to human lives, livelihood and global economies including Nigeria.
Immunity Of CBN and Other Entities From Suit, Claim Or Liability That May Arise From The Exercise Of Their Powers Under The Act
The Act grants immunity from judicial intervention to the Federal Government, the CBN, or any officer of the Federal Government or the CBN from any action, claim or liability to any person in respect of anything done in good faith in pursuance of the exercise of powers and or duties conferred under the Act. It should be noted that the immunity granted under this provision is not absolute. The Act also limits the remedies that may be sought against the CBN in suits challenging the revocation of a bank's licence, to monetary compensation and forbids restorative orders being issued against the CBN in such actions.
Prohibition of Unlicensed Financial Institutions
Before the enactment of the Act, there was no express statutory provision on the regulation of Fintechs; rather, tacit regulation of Fintech companies was achieved through various CBN Guidelines targeted at OFIs (Other Financial Institutions). However, the Act has now made copious prescriptions on the regulation of Fintechs and the supervisory role of the CBN in regulation of Fintech companies.
Notably, Section 57 (1) of the Act prohibits any person from carrying on specialized banking or business of an OFI except it is a company duly incorporated in Nigeria and holds a valid license obtained from the CBN. By this provision, the operations of digital financial service providers/FinTechs in Nigeria are now governed by the Act and regulated by the CBN. Notably, the Act defines OFIs to include:
"finance company or money brokerage, international money transfer services, financial holding company or payment service providers and businesses whose objects include; project financing, debt administration, private ledger services, investment management and any other business as the CBN may determine from time to time irrespective of whether such businesses are conducted digitally, virtually or electronically only."
This provision widens the scope of CBN's regulatory powers to include certain types of Fintech companies. Such companies that were operating before the commencement of the Act must now make a formal application to the CBN for a license within 3 months of the commencement of the Act.
Establishment of Resolution Fund
The Act establishes a Banking Sector Resolution Fund ("the Fund") which shall be domiciled with the CBN The Fund, among other things, is to be used to pay the operating costs of a bridge bank as well as the cost of transferring all or part of the business of a bank or financial institution arising from a resolution measure. The Fund will also be applied to provide a loan, overdraft, advance and any other credit facility to a bank, specialized bank or other financial institution under resolution or a bridge bank. Further to this provision, Banks and other financial institutions will now be subject to an annual levy of an amount equal to ten basis points of its total assets. The levy is to be paid in arrears and not later than 30th day of April in each year.
Introduction of the Special tribunal for the Enforcement and Recovery of Eligible Loans (Credit Tribunal)
Section 102 -132 of the Act establishes a Credit Tribunal for the enforcement and recovery of eligible loans. This is aimed at improving the loan recovery system in Nigeria. the tribunal will have and exercise jurisdiction on matters pertaining to the enforcement and recovery of eligible loans by banks, specialized banks and other financial institutions. It will be involved in matters connected with or pertaining to the enforcement of security or guarantee or attachment on any assets under an eligible loan made by any bank, specialized bank or other financial institutions in Nigeria to its customers.
Review of Fines and Stiffer Penalties for Default
The Act provides for penalties of a higher threshold of up to N50 million for infractions and violations of the provisions of the Act. More so, bank officials are now personally liable should they fail to seek compliance with the conditions of license of their respective banks. Similarly, fines have been reviewed under the new law to reflect the time value of money.
The passage of the BOFIA 2020 into law has, in no doubt, heralded a new dawn in the banking and finance sector in Nigeria. While there have been a few controversies trailing some of the provisions especially as regards the scope of the statutory immunity granted to the CBN and its officials, the Act is to a large extent a commendable initiative and reflects well on the efforts of the Federal Government at repositioning the financial sector in line with global best practices. It is hoped that the laudable intendments of the Act are actualized by a determined and dispassionate enforcement on the part of the CBN.
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