The banking regulations in Nigeria embodies various legislations and supervisory regulations.
The primary legislation that regulates and directs the affairs and operations of banks in Nigeria is the Banks and other Financial Institution Act (BOFIA of the Act). This Act grants the Central Bank of Nigeria the power and authority to supervise and regulate all banks and other financial institutions in Nigeria.
Other laws regulating banking activities in Nigeria include the Central Bank of Nigeria Act 2007, the Nigerian Deposit Insurance Corporation Act, Companies and Allied Matters Act 2020, the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act, all of which will be discussed below in details.
The Central Bank of Nigeria (CBN) - The Central Bank of Nigeria establishes the Central Bank of Nigeria Act. The CBN is the lead banking regulator charged with the overall control and administration of the monetary and financial sector policies of the Federal Government in Nigeria. Section 2 of the Act provides for the principal objectives of the CBN as follows;
- To ensure monetary and price stability;
- To issue legal tender currency;
- To maintain external reserves to safeguard the international value of the legal tender currency;
- To promote a sound financial system in Nigeria; and
- Act as a bank and provide economic and financial advice to the Federal Government.
The Central Bank has the responsibility of issuing and granting licenses to banks to carry on the business of banking and supervise banks and other financial institutions. The CBN is empowered to issue guidelines and circulars relating to its responsibility to banks, foreign exchange market, and other financial institutions.
Where a bank in Nigeria is discovered to be failing, the Central Bank is empowered to intervene by directing that the Nigerian Deposit Insurance Corporation (NDIC) takes over the management and control of the bank.
The Central Bank of Nigeria also develops fiscal initiatives that involve formulating and implementing policies, innovating products, and creating enabling environments for banks and other financial institutions to deliver effective services in a resourceful and sustainable manner.
The Nigerian Deposit Insurance Corporation (NDIC)- This regulatory body has the responsibility of insuring all deposit liabilities of licensed banks and other deposit financial institutions operating in Nigeria in the event of failure of the financial institutions. This body also assists monetary authorities in formulating and implementing banking policy to ensure the best sound practices and fair competition among financial institutions.
The Corporation is also charged with supervisory powers to ensure that banks and other financial institutions reduce the potential risk of failure and also to ensure that unsafe banking practices do not go unchecked. This is simply to ensure that the banking system and other financial institutions are safe and sound.
Monetary Policy Committee (MPC)- The Central Bank of Nigeria established this regulatory body under Section 12 of the CBN Act. The Committee is established to facilitate the attainment of price stability and support the economic policies of the Federal Government. The Committee is headed by the Governor of the Bank and has the responsibility of formulating monetary and credit policies for banks and other financial institutions.
There are currently four monetary policy committees under the Central Bank with its composition, meeting schedules, and functions. These committees are;
- The Monetary Policy Committee (MPC)
- The Monetary Policy Technical Committee (MPTC)
- Monetary Policy Implementation Committee (MPIC)
- Monetary Policy Forum.
The varying combined functions of these Committees are as follows;
- To evaluate economic and financial conditions in the economy.
- To determine the appropriate standpoint of policy in short to medium term.
- To regularly review the Central Bank's monetary policy framework and implement changes when required.
- To communicate monetary/financial policy decisions effectively to the public and ensure the credibility of the model of the transmission mechanism of monetary policy.
- To review the technical dependability of monetary policy recommendations.
- To review international and domestic economic developments and the possible impact of the CBN's ability to achieve and monitor domestic price stability.
- Determining the daily injections/withdrawal of liquidity through the CBN.
- Forecasting the daily liquidity gap.
- Designing strategies to close liquidity gaps.
The Financial Reporting Council of Nigeria (FRCN)- This Council is a Federal Government agency established by the Financial Reporting Council of Nigeria Act 2011. The Council has the power to put in force compliance with accounting, auditing, corporate governance, and financial reporting standards. The Council also gives guidance on issues relating to financial reporting and corporate governance to professionals, institutional and regulatory bodies in Nigeria.
The functions of the Council as provided under Section 8 of the Act are highlighted as follows but not limited to;
- Develop and publish accounting and financial reporting standards to be observed in the preparation of the financial statement of public interest entities.
- Review, promote, and enforce compliance with the accounting and financial reporting standards implemented by the Council.
- Receive notices of non-compliance with approved standards from preparers, users, other third parties, or auditors of financial statements.
- The Council also has the power to advise the Federal Government on matters relating to accounting and financial reporting standards.
- Monitor compliance with the reporting requirements specified in the adopted code of corporate governance.
- Review financial statements and reports of public interest entities.
The Council is also empowered to develop and publish accounting and financial reporting standards for the preparation of financial statements of public interest entities, which includes banks and other financial institutions.
The Council seeks to protect investors and stakeholder's interest with financial institutions and to ensure acceptable corporate governance practices in the public and private sectors of the Nigerian economy.
Companies and Allied Matters Act 2020 (CAMA)- This Act establishes the Corporate Affairs Commission (CAC), which is charged with the regulatory powers over all registered companies in Nigeria, including banks and other financial institutions. To operate the banking business or any other financial institutions in Nigeria, the company to use as a vehicle for the business must be duly incorporated under the CAMA. Every registered company must file annual returns with the CAC. Additionally, the CAMA provides various regulations and compliances the banks must follow, ranging from issuance of shares to meetings of companies, among others.
Foreign Exchange (Monitoring and Miscellaneous Provisions) Act 1995- This Act establishes the Autonomous Foreign Exchange Market and the regulatory structure for all foreign exchange transactions in Nigeria. According to the provisions of the Act, transactions in the foreign exchange market are to be conducted in convertible foreign currency.
There are specific money instruments that can be used in the market, and these instruments are provided under Section 2(2) of the Act as follows;
- Foreign banknotes;
- Foreign coins;
- Travelers' cheque;
- Bank drafts;
- Mails or telegraph transfers and
- Any other money market instruments that the Central Bank may with the approval of the finance Minister determine.
The Central Bank plays an important responsibility in appointing as an authorized dealer or buyer of foreign currency, any bank or non-banking organization that shows evidence of adequate resources and capacity to operate under the Act. The authorized dealer, when appointed, must operate in the market subject to the terms and conditions imposed by the Central Bank in the letter of appointment.
Licensing of Banks in Nigeria
As stated earlier, banking regulations also require that no entity can carry out banking operations in Nigeria without being issued and granted a valid banking license under the Banks and other Financial Institution Act.
The issuing authority of banking licenses in Nigeria is the Central Bank of Nigeria. The license gives the right to a company to operate a banking business in Nigeria. There are three forms of licensing that can be obtained with the CBN, and these are highlighted as follows;
Commercial Banking License- This category of bank license is issued for banking operations on National Commercial Level, Regional, or International basis. The minimum paid-up share capital for the National level banking license is N25 Billion Naira; for Regional Banking License is N10 Billion Naira, and International Commercial Banking License is N50 Billion or any other amount that can be prescribed by the CBN. The license gives the bank the authority to do the followings;
- Take deposits and maintain current savings accounts from natural (individuals) and legal persons (companies).
- Provide retail banking services, including mortgage products.
- Provide financial and credit facilities.
- Deal in foreign exchange and provide foreign exchange services, which will be subject to the bank having a foreign exchange authorized dealership license.
- Act as a settlement bank subject to CBN approval.
- Provide treasury management services, which include the provision of money market, fixed income, and foreign exchange investment on behalf of clients, which is also subject to the approval of the Central Bank.
- Provide custodial services.
- Provide financial advisory services relating to commercial banking business which do not require statutory filings with the securities and exchange commission (SEC)
- Invest in non-convertible debt instruments and enter into derivative transactions subject to the approval of the CBN and permitted under the CBN directives and circulars.
- Provide non-investment banking services subject to the approval of the CBN.
- Any other activities that may be prescribed by the CBN.
Specialized Banking License - This category of license applies to particular banks, which include non-interest banks, microfinance banks, development banks, mortgage banks, and any other banks designated by the CBN.
Merchant Banking License- This category of bank license allows financial institutions to provide specialist services such as wholesale banking and investment banking services. The bank offers commercial loans, investment, and advisory services to large firms and high net-worth individuals in Nigeria and not to the general public. The Central Bank of Nigeria regulates the banking activities of the merchant bank.
The minimum paid-up share capital required for a merchant banking license is N15 Billion naira or any other amount that would be prescribed by the CBN. The license gives the bank the authority as provided under Part 2 of the Merchant Banks Regulations, 2010 to;
- Take deposits and maintain current savings accounts from natural and legal persons at least N100 Million per tranche or any other minimum amount that the CBN prescribes;
- Provide finance and credit facilities to non-retail customers;
- Dealing in foreign exchange and provide foreign exchange services subject to the provision of the foreign exchange (Monitoring and Miscellaneous Provisions) Act and CBN regulations;
- Act as an issuing house for managing, arranging, coordinating the issuance of securities, subject to the provisions of BOFIA;
- Issuing, discount, and rediscount negotiable instruments;
- Provide custodial services;
- Trading in fixed income securities, where duly licensed to act as a Primary Dealer/ Market Maker to trade securities such as Federal Government bonds, treasury bills, treasury certificates, and any other debt certificates as may be prescribed by CBN;
- Engage in proprietary trading such as investing in debt instruments of any person, investing in equity or hybrid equity instruments subject to BOFIA and CBN rules and guidelines;
- Provide financial consulting and advisory services relating to corporate and investment matters;
- Any other activities that may be prescribed in writing by the CBN.
This bank is instrumental in investing majorly in wealth and assets management and also to raise funds for companies.
Application Process for obtaining Banking License in Nigeria
The process for making an application for a bank license in Nigeria is categorized into two phases, these are;
- Applying for the Grant of Approval-in-Principle.
- Applying for the Grant for a Final Banking License
Grant of Approval-in-Principle (AIP) - In making this application, the applicant is to direct the application to the Director of Banking Supervision Department at the Central Bank of Nigeria. The application is to be accompanied with the following but not limited to;
- Application fee of N500 000, which is non-refundable in bank draft payable to the CBN or any other amount that may be prescribed from time to time by the CBN.
- Deposit of the minimum capital with CBN, with evidence of deposit by each shareholder.
- Feasibility report of the proposed bank with the inclusion of the ownership structure of the proposed investors and percentage of their shareholdings, the objectives if the proposed bank, services to be rendered, the branch expansion program, and a seven-year financial projection.
- List of shareholders, directors, and principal officers of the proposed bank and their particulars.
- Shareholder's agreement where applicable.
- Statement of intent by the promoters to invest in the bank.
- Technical services agreement where applicable.
- Any other documents that are required by the issuing authority.
Where the CBN receives the application with complete and satisfactory documentation, the CBN will communicate the decision to the applicant within 90 days and issues an Approval-in-Principle (AIP) to the applicant.
The proposed bank is not to incorporate or register its name with the CAC until an AIP has been obtained from the CBN in writing, a copy of which will be presented to the CAC for registration.
Grant of a Final Banking License- The application for the final banking license is made six (6) months after the grant of the approval in principle. The promoters of the bank are to apply for the grant of final license directing it to the Director of Banking Supervision of the Central bank accompanied with the following documents;
- A non-refundable licensing fee of N5 Million Naira in bank draft payable to the Central Bank of Nigeria.
- Three copies of the certified true copy of the certificate of incorporation of the bank certified true copy of the memorandum and articles of association, and certified true copy of CAC Form 2 (Allotment of share capital) and CAC Form 7(Particulars of Directors).
- Evidence of the location of the head office or branch building, which can be rented or owned for the take-off of the banking business.
- Evidence of strong room, loading bay, and banking hall facilities.
- Evidence of bullion Lorries with necessary security equipment.
- Evidence of IT Facilities and computerization.
- Copies of letter of offer and acceptance of employment of the management team of the bank.
- Detailed resumes of top management staff.
- Board and staff training programme.
Before the final license is granted, the CBN will inspect the proposed bank premises and facilities to check the physical structure of the office building and infrastructure provided for the take-off of the bank. They shall also demand to sight the original copies of the document submitted in support of the application, meet with the management team whose resumes have been submitted to the CBN, etc.
Upon the submission of the above documents and paying the prescribed fees to the Central Bank, the Governor of the CBN may issue a license with or without conditions. The CBN has the right to refuse the grant of a license, and it may not give reasons for its refusal.
A banking license issued can be revoked or suspended by the CBN at any time if the following situations occur;
- The bank ceases to operate the banking business for which the license was issued for six months during a continuous period of 12 months.
- The bank goes into liquidation, is wound up or dissolved.
- The bank has insufficient assets to meet its liabilities.
- It fails to comply with the conditions subject to which the license was granted.
- The bank fails to comply with any obligations imposed on by the Bank and other Financial Institutions Act or by the Central Bank of Nigeria Act.
- Fails to comply with the minimum share capital ratio prescribed by the CBN.
Having highlighted the application process of obtaining the banking license to operate banking business in Nigeria, it is important to briefly state the banking regulations in respect of banks going into liquidation.
Banks go into liquidation because it can no longer meet the requirements of the CBN and BOFIA, especially in terms of the paid-up share capital of the bank and liquidity crisis generally. The following legislations govern the liquidation of the bank;
- Bank and other Financial Institutions Act- The Act approves that failing banks should be controlled by the Nigerian Deposit Insurance Corporation (NDIC).
- The Companies and Allied Matters Act, 2020- the Act sets out the winding-up process for liquidated banks. It also sets out the qualifications of a receiver and the procedure for appointing one.
- The Nigerian Deposit Insurance Corporation Act- the Act seeks to ensure that liquidation proceeds carried out by the bank is orderly and ensures the efficient closure of failed banks and financial institutions without any disruption of the banking system. It also ensures cost-effective realization of assets and settlement of claims to depositors, creditors, and shareholders.
- Investment and Securities Act- the Act empowers the Securities and Exchange Commission to intervene timeously before a bank and financial institutions become insolvent
The above-highlighted legislations and process for application of bank licenses help to give an overview of banking regulations in Nigeria. The banking sector is an integral part of the Nigerian economy; it is only right for the rules, regulations, and guidelines that are all implemented for an efficient banking system in the country.
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.