Nigeria: Banking & Finance

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This country-specific Q&A provides an overview of the legal framework and key issues surrounding banking and finance law in Nigeria including national authorities, regulation, licenses, organisational requirements, supervision and assets.

This Q&A is part of the global guide to Banking & Finance.

For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/banking-finance/

  1. What are the national authorities for banking regulation, supervision and resolution in the jurisdiction?

    The national authorities for banking regulation, supervision and resolution of banks in Nigeria are the Central Bank of Nigeria (CBN) and the National Deposit Insurance Corporation (NDIC). The CBN has, amongst others, the overall responsibility for licensing and supervision of deposit money banks, discount houses and other financial institutions as well as the resolution of banks by prescribing the resolution measures, prohibiting a failing bank from extending any further credit facility or requiring the bank to take any steps whatsoever, subject to the CBN’s oversight. The CBN also has the power to remove any manager, officer, or director of a failing bank and appoint such other persons in lieu for an efficient resolution process.

    The NDIC on the other hand guarantees the payment of bank deposits up to a maximum limit of N200,000 from the Deposit Insurance Fund of licensed banks or N100,000 from the Deposit Insurance Fund of other licensed deposit taking financial institutions in the event of failure of an insured financial institution. It also supervises banks so as to protect depositors; reduce the potential risk of failure and ensures the unsafe and unsound banking practices do not go unchecked, and promote competition and innovation in the banking system. It has the mandate for ensuring that failing and failed institutions are resolved in a timely and efficient manner.

    Other regulatory bodies with some form of oversight over banks are the Financial Services Regulations Co-ordinating Committee (FSRCC) which is responsible for supervising and setting out the plans and policies for the promoting best practices to be observed by financial intermediaries carrying out business in Nigeria; and the Financial Regulation Advisory Council of Experts (FRACE) which is responsible for providing expert opinion to the CBN on non-interest (Islamic) banking and finance matters in the Nigerian financial system. The Corporate Affairs Commission (CAC) is vested with the role of incorporation of companies generally (including banks) and maintain a company registry where company records are kept.

  2. Which type of activities trigger the requirement of a banking licence?

    Section 2 of the Banks and Other Financial Institutions Act, 2004 (BOFIA) provides that no person shall carryon any “banking business” in Nigeria except if it is a company duly incorporated in Nigeria and holds a valid banking licence issued by the CBN. Any person who transacts banking business without a valid licence under the BOFIA is guilty of an offence and liable on conviction to imprisonment for a term not exceeding ten years or to a fine or to both such imprisonment and fine. The BOFIA defines banking business as involving the business of receiving deposits on current account, savings account or other similar account; paying or collecting cheques, drawn by or paid in by customers; provision of finance or such other business as the CBN Governor may, by order published in the Federal Gazette, designate as banking business.

  3. Does the regulatory regime know different licenses for different banking services?

    The Nigerian banking system recognizes different licences for different banking services which includes commercial banking license, merchant banking license and specialised and development bank license.

    In line with the CBN Scope, Conditions & Minimum Standards for Commercial Banks Regulations No. 01, 2010, a commercial banking Iicence confers on the operator of the license, the authority to undertake, inter alia, taking of deposits and maintaining current and saving accounts from natural and legal persons; providing retail banking services, providing finance and credit facilities; dealing in foreign exchange, providing treasury management services and custodial services etc.

    The CBN Scope, Conditions and Minimum Standards for Merchant Banks Regulation No. 02 of 2010 provides that a merchant banking license confers on the licensee, the authority to take deposits from any natural or legal person, in an amount not below the N100,000,000 per tranche (or such other minimum amount as may be prescribed by the CBN from time to time), provide finance and credit facilities to non-retail customers; deal in foreign exchange and provide foreign exchange services, act as issuing house, provide underwriting services and treasury management services, financial consultancy and advisory as well as asset management services.

    Specialised banks include non-interest banks, microfinance banks, development banks, mortgage banks and any other banks designated by the CBN as a specialised bank.

  4. Does a banking license automatically permit certain other activities, e.g., broker dealer activities, payment services, issuance of e-money?

    A banking license does not automatically permit other activities, rather it permits only the activities expressly authorized by the regulatory authorities (please see Question 3). Prior to 2010, Nigeria allowed the issuance of universal banking licences, which allowed banks with such licenses to carry out activities including broker dealer activities etc. However, following the Great Financial Crises of 2008, the CBN by the Regulation on the Scope of Banking Activities & Ancillary Matters, NO. 3, 2010 repealed the Universal banking regime and by virtue of the Commercial Banking Regulation, the Merchant Banking Regulation and Specialized Institutions Regulation separated the categories of banking licenses into Commercial and Merchant Banking Licenses. Specialised banking licences had existed even before then. Other than Merchant Banks (which are authorized to carry out investment activities, the Securities and Exchange Commission (SEC), existing under the Investment and Securities Act, 2007 (ISA) regulates and supervises broker dealer firms, which are not banks but are allowed to carry out broker dealer activities.

    The management, operation and supervision of payment services on the other hand is licensed and regulated by the CBN.

  5. What is the general application process for bank licenses and what is the average timing?

    The application process for applying for a banking licence in Nigeria, involves 3 stages:

    Grant of approval in principle (AIP)
    This requires a formal application to the Governor of the CBN for the grant of a banking license, accompanied with the following documents;

    a. a feasibility report of the proposed bank (contain information on the ownership structure, detailed bio-data resume of shareholders, an undertaking on capital adequacy; in the case of a corporate investor, it’s certificate of incorporation and board resolution; the objectives of the bank; the branch expansion programme; its staff training programme; the IT programme, etc;

    b. a draft copy of the Memorandum and Articles of Association (Memart) of the proposed bank;

    c. details of the shareholders, directors, and principal officers of the proposed bank and their particulars; and

    d. the prescribed application fee, as well as other information required by the CBN from time to time.

    Upon submission of the above requirements, the promoters of the proposed bank shall then deposit with the CBN a sum equal to the minimum paid-up capital, upon which the Governor of the CBN may issue the AIP license (with or without conditions) or refuse to issue the license. It is important to note that before the grant of an AIP, the applicant must be registered as a company with the Corporate Affairs Commission (CAC). The CAC aims to incorporate a company within 2 days of submission of proper incorporation documents, however, in practice, incorporation should be finalized within one week.

    Grant of Final License
    Within 6 months of granting the approval in principle, the promoters are required to submit an application for the grant of a final license, accompanied with the following documents:

    a. the CBN prescribed licensing fee

    b. 3 certified true copies of Certificate of Incorporation of the bank, memorandum and articles of association of the bank, statement of allotment of shares, particulars of directors of the bank and details of the location of head office/branch building;

    c. evidence of availability of strong room, loading bay and banking hall facilities;

    d. evidence of availability of bullion lorries with necessary security gadgets;

    e. evidence of installation of I.T. facilities; and

    f. details of letters of offer and acceptance of employment of the management team.

    Pre-commencement of operations requirements
    Upon the grant of a final banking license by the CBN, the bank is then required to submit the following documents before commencing business in Nigeria;

    a. evidence of admission into the clearing house;

    b. copy of Shareholders register;

    c. copy of share certificate issued to each investor;

    d. draft copy of opening statement of affairs signed by the directors and auditors;

    e. evidence of insurance coverage and the insurance policies;

    f. evidence of readiness of cheques and other security documents;

    g. minutes of pre-commencement board meeting;

    h. evidence of adequate security arrangements.

  6. Is mere cross-border activity permissible? If yes, what are the requirements?

    Cross border activities are permissible in Nigeria and on this note, the CBN developed a framework for cross border supervision in 2010 which requires as a precondition, the presence of Nigerian banks in other countries and the execution of a Memoranda of Understanding (MoU) with the host country. Working in union with the CBN, the FSRCC, coordinates the regulation of the financial system including cross border financial activities, as specified by Section 43(2) of the Central Bank of Nigeria CBN Act 2007.

    Foreign bank may lend money across borders, but to carry out banking services in Nigeria, they are required to be duly incorporated as a local company and comply with the requirements for obtaining a valid banking license (see question 5). Prior to obtain the banking license from the CBN, a foreign bank may open a representative office in Nigeria, such representative office is not permitted to carry out any form of banking activities in Nigeria, rather, it may only act as liaison offices for the customers of the foreign bank and if need be, engage in research activities.

  7. What legal entities can operate as banks? What legal forms are generally used to operate as banks?

    Under the BOFIA, only companies duly incorporated in Nigeria can carry on banking business in Nigeria. This means that a legal entity seeking to operate as a bank must first be incorporated as a company with the CAC in accordance with the Companies and Allied Matters Act, Cap C20, Laws of the Federation of Nigeria, 2004.

  8. What are the organisational requirements for banks, including with respect to corporate governance?

    The CBN Code of Corporate Governance for Banks and Discount Houses 2014 (CBN Code) which is mandatory for all banks provides that all banks must have the following organizational policies in place: risk management framework aimed at monitoring and controlling of the operation risks; code of conduct policies which require the management and other stakeholders to maintain the highest standards of professional behavior and best practices; conflict of interest policies; carry out quarterly stress tests of their capital and liquidity under the CBN’s review; and a whistle-blowing policy containing procedures that encourage stakeholders to report any unethical conduct to the bank or the CBN. The CBN Code also sets out guidelines on the number of director, independent directors, the qualification of directors, separation of powers of the managing director and chief executive officer (MD/CEO), the maximum tenure for CEO and the board of directors, the establishment of board committees etc.

  9. Do any restrictions on remuneration policies apply?

    In line with the provisions of section 2.7 of the CBN Code, banks in Nigeria are required to align executive and board remuneration with the long term interests of the bank and its shareholders. The levels of remuneration should be sufficient to attract, retain and motivate executive officers of the bank and this shall be balanced against the bank’s interest in not paying excessive remuneration.

    This is however subject to the following restrictions:

    a. where remuneration is linked to performance, it should be designed in such a way as to prevent excessive risk taking;

    b. executive directors shall not receive sitting allowances and directors’ fees.

    c. non-executive directors’ remuneration shall be limited to directors’ fees, sitting allowances for board and board committee meetings and reimbursable travel and hotel expenses. They are not to receive benefits, salaries, etc, whether in cash or in kind, other than those mentioned above.

    d. where stock options are adopted as part of executive remuneration or compensation, the board is to ensure that they are not priced at a discount except with the authorization of the relevant regulatory agencies.

    e. share options should be tied to performance and subject to the approval of the shareholders at the annual general meeting.

  10. Has the jurisdiction implemented the Basel III framework with respect to regulatory capital? Are there any major deviations, e.g., with respect to certain categories of banks?

    In December, 2013, the CBN issued a Circular to all Nigerian Banks and Discount Houses on the implementation of Basel II/III framework with respect to regulatory capital in Nigeria. The Circular attached, in line with the provisions of section 13 of the BOFIA, the CBN Guidance Notes on Regulatory Capital Measurement and Management for the Nigerian Banking System for the implementation of Basel II/III in Nigeria (Basel Guidance Notes). The Basel Guidance Notes apply to all Banks in Nigeria.

    The Basel Guideline adopts the standard of Basel 2 for the capital requirements on the computation of credit, market and operational risk, and also incorporates some of the standards of Basel 3 by making provision for capital buffers and new capital and liquidity standards to strengthen the regulation, supervision, and risk management of the banking sector.

  11. Are there any requirements with respect to the leverage ratio?

    The CBN’s Guidance Notes on Regulatory Capital requires Nigerian banks to maintain healthy leverage ratios to ensure their ability to meet financial obligations. Banks are required to maintain a minimum regulatory capital adequacy ratio of 10% - 15% on an on-going basis. A minimum regulatory Capital Adequacy Ratio (CAR) of 15% will be applicable to banks with international authorisation and Systemically Important Banks (SIBs) while a CAR of 10% will be applicable to other banks.

  12. What liquidity requirements apply? Has the jurisdiction implemented the Basel III liquidity requirements, including regarding LCR and NSFR?

    The Monetary, Credit, Foreign Trade and Exchange Policy for fiscal years 2016 and 2017 released by the CBN pegs the minimum LCR for commercial banks in Nigeria at 30%. The CBN provides that merchant and non-interest banks shall continue to maintain a minimum Liquidity Ratio of 20% and 10%, respectively, subject to review from time to time. The CBN has not prescribed any NSFR requirements for banks in Nigeria.

  13. Do banks have to publish their financial statements?

    Banks operating in Nigeria are required by Section 27 of BOFIA, subject to the written approval of the CBN, to publish, not later than four months after the end of each financial year, their audited financial statements in a national newspaper printed and circulated in Nigeria. Any bank which fails to comply with this requirement is in respect of each such failure guilty of an offence and liable on conviction to a fine of N10,000 each day during which the offence continues.

  14. Does consolidated supervision of a bank exist in the jurisdiction? If so, what are the consequences?

    In the year 2007, the CBN released an exposure draft framework for the Consolidated Supervision of Banks in Nigeria, calling for comments from relevant stakeholders. This draft is however not yet effective as a substantive regulation.

  15. What reporting and/or approval requirements apply to the acquisition of shareholdings in, or control of, banks?

    Paragraph 3 of the CBN Code of Corporate Governance for Banks and Discount Houses in Nigeria (Code) provides that the acquisition of a shareholding of 5% and above by any investor in a bank shall be subject to the CBN's prior approval. Where shares are acquired through the capital market, the bank shall apply for a no objection letter from the CBN immediately after the acquisition. Thus, no single shareholder can acquire more than 5% in the share capital of any bank without the CBN’s prior approval.

    The notification and approval of the Securities and Exchange Commission (SEC) is required for the acquisition of controlling interest in the shareholding in banks. Also, with a view to discourage government from having majority shareholding in banks, the Code provides that the government's equity holding in any bank is limited to 10%.

  16. Does the regulatory regime impose conditions for eligible owners of banks (e.g., with respect to major participations)?

    Under the CBN Code of Corporate Governance, ownership of a shareholding of 5% and above by any person in a bank shall be subject to the CBN's prior approval and the government's equity holding in any bank is limited to 10%. (See question 15).

  17. Are there specific restrictions on foreign shareholdings in banks?

    Other than the provisions of the CBN Code of Corporate Governance for Banks and Discount Houses which requires the prior approval of the CBN for the acquisition of an equity holding of 5% by any investor in a bank, there are no restrictions on foreign shareholdings in banks in Nigeria.

  18. Is there a special regime for domestic and/or globally systemically important banks?

    In Nigeria, there exists a special regime for Domestic Systemically Important Banks. The CBN and the NDIC in 2014 issued a Framework for the Regulation and Supervision of Domestic Systemically Important Banks (SIBs) In Nigeria. The Framework took effect in 1 March 2015. The objective of the Framework is to ensure that all SIBs are subjected to appropriate degree of oversight and regulation such as maintaining in addition to the stress test and Liquidity Coverage Ratio (LCR) imposed on other banks, SIBs are required to maintain a CAR of 15%, set aside Higher Loss Absorbency (HLA) or additional capital surcharge of 1% to their respective minimum required CAR. This entails defining the regulatory parameters and calibrating the intensity of oversight by the regulators in Nigeria.

  19. What are the sanctions the regulator(s) can order in the case of a violation of banking regulations?

    Section 64 of the BOFIA empowers the Governor to impose a fine penalty or suspend the licence issued to a bank or any other financial institution for the bank's/financial institution's failure to comply with any of its rules, regulations, guidelines or administrative directives made, given or issued by the CBN.

  20. What is the resolution regime for banks?

    Under the BOFIA, where a bank informs the CBN that-

    a) it is likely to become unable to meet its obligations; or

    b) it is about to suspend payment to any extent; or

    c) it is insolvent; or

    where, after an examination of the banks records, the CBN is satisfied that the bank is in a grave situation.

    The resolution measures which may be taken by the CBN include:

    a) prohibiting the bank from extending any further credit facility for a particular period;

    b) requiring the bank to take any steps whatsoever, in relation to the bank or its business or its directors or officers which the CBN may consider necessary;

    c) removing any manager or officer of the bank;

    d) removing any director of the bank from office;

    e) appointing any person or persons as directors of the bank, or

    f) appointing any person to advise the bank in relation to the proper conduct of its business.

    Where after taking any of the above steps/measures, the state of affairs of the bank concerned does not improve, the CBN may turn over the control and management of such bank to the NDIC on such terms and conditions as the CBN may stipulate.

    Where after assumed control over a failing bank as set out above, and such bank is significantly under-capitalised to the extent that its risk weighted assets ratio is below 5% but above 2%, the NDIC may require the bank to submit a recapitalisation plan, prohibit the bank from extending any further credit and incurring any additional capital expenditure without its approval, require the bank to take any steps or action in relation to its business or its directors or officers, remove with the approval of CBN any director, manager, officer, or employee of the bank; or with CBN’s approval, appoint new directors for the bank.

    The NDIC will then remain in control and continue to carry on the business of the bank in the name and on behalf of the bank until such a time as in the opinion of the CBN, it is no longer necessary.

    Where the failing bank cannot be rehabilitated, the NDIC may recommend to the CBN other resolution measures which may include the revocation of the bank's license. Where the license of a bank has been revoked, the NDIC shall apply to the Federal High Court for the winding up of the bank.

    Alternatively, the CBN in conjunction with the NDIC may set up a bridge bank, operated by the NDIC which will administer the deposits and liabilities of a failed bank for a period during which it will finding buyers for the bank as a going concern, or liquidate its portfolio of assets. Another option is the good bank – bad bank approach which involves the AMCON purchasing the toxic assets from the banks, leaving the banks with “clean” balance sheets. This allows for specialized management of the bad debts, thereby allowing the good banks to focus on its core business of lending.

  21. How are client’s assets and cash deposits protected?

    The CBN’s Consumer Protection Guideline requires banks to ensure the protection of consumer assets by adopting appropriate measures. These measures include maintaining an insurance policy with the NDIC and observing the CBN’s Prudential Guidelines on risk mitigation and others. The NDIC offers an insurance coverage for all deposits of licensed deposit taking institutions, except for insider deposits, counterclaims from a person who maintains both a deposit and a loan account, the former serving as a collateral for the loan; and other deposits excluded by the authority from time to time. The maximum claim was previously N50,000 per depositor per insured bank, but same was increased pursuant to section 20 of the NDIC Act which provides that a depositor shall receive from the NDIC a maximum amount of N200,000 from the Deposit Insurance Fund of licensed banks or N100,000.00 from the Deposit Insurance Fund of other licensed deposit taking financial institutions in the event of the revocation of operating licence of that bank or other deposit taking financial institution.

  22. Does your jurisdiction know a bail-in tool in bank resolution and which liabilities are covered?

    The Nigerian banking system generally provides for bail out tools in banks resolution with the establishment of the NDIC and AMCON. There is no regulated framework for bail in tools in bank resolution.

  23. Is there a requirement for banks to hold gone concern capital (TLAC)?

    Banks are required to observe the Standards on Total Loss-Absorbing Capacity (TLAC) requirements, as this has been implemented in Nigeria under the CBN Guidance Notes on Supervisory Review Process. The Guidance Notes provides for Internal Capacity Adequacy Assessment Process and the adoption of the principle of proportionality in the determination of internal capital (the total amount of capital needed to cover losses exceeding a given expected level).

  24. In your view, what are the recent trends in bank regulation?

    The CBN in January 2018 announced its plans to impose sanctions on licensed operators in the National Payments System by imposing a penalty of N10,000 per day for failure to apply for the renewal of an operating license within three (3) months before the date of expiration of the existing license or failure to regularize and respond to observations/exceptions noted by the CBN in the course of processing an application for the renewal of an operating license within three (3) weeks. This policy is to come into effect from 1 April, 2018.

  25. What do you believe to be the biggest threat to the success of the financial sector ?

    We believe the key threat to the success of the financial sector in Nigeria, is corruption. Corruption in the banking sector has, in the past, led to high rate of non-performing loans, financial instability and failure of banks in Nigeria.