Legal Framework for Banking in Nigeria

The Central Bank of Nigeria (CBN) regulates the Nigerian banking sector and derives its primary regulatory powers from a combination of the Central Bank of Nigeria Act 2007, and the Banks and Other Financial Institutions Act 2020. Set out below is a summary of the key laws governing the Nigerian banking sector. 

The Banks and Other Financial Institutions Act 2020 (the BOFIA) 

The BOFIA was re-enacted into law in 2020, repealing the Bank and Other Financial Institutions Act 2004. Two of the key objectives of the BOFIA include regulating the licensing, capital and operating requirements for banks and other financial institutions, and the supervision of the banking and the business of other financial institutions in Nigeria.

Some significant changes introduced by the BOFIA include the expansion of the regulatory powers of the CBN to cover issues such as:

• mergers and acquisitions involving banks;
• the regulation of payment service providers;
• wider powers of the CBN to intervene in relation to failing banks;
• the establishment of a resolution fund for the banking sector;
• netting provisions; and
• the creation of a special tribunal for the enforcement and recovery of eligible loans. 

Companies and Allied Matters Act 2020 (the CAMA)

The CAMA was reenacted in 2020 to replace the Companies and Allied Matters Act 2004. It establishes the Corporate Affairs Commission (CAC), which is the body charged with powers to register and keep corporate records of all registered companies in Nigeria, including banks and other financial institutions. To operate a banking business in Nigeria, a company must be duly incorporated under the CAMA and licensed by the CBN pursuant to the BOFIA. Every registered company must file annual returns with the CAC. The CAMA deals with many things regarding the operations and management of banks and other financial institutions, such as meetings, shareholding, appointment and removal of directors, insolvency, and netting. 

Foreign Exchange Monitoring Provisions Act 2004 (the “FEMM Act”)

In addition to the CBN Revised Foreign Exchange Manual, 2018 (as amended) and the guidelines/circulars issued from time to time by the CBN, the FEMM Act regulates Nigeria’s foreign exchange market. It sets out the conditions for banks and other financial institutions’ dealings in foreign exchange, the operations of the foreign exchange market, and participants/permitted transactions in that market. It makes provisions for the appointment of banks as authorised dealers of the CBN for foreign exchange transactions.

Nigerian Deposit Insurance Corporation Act 2006 (the “NDIC Act”) 

The NDIC Act establishes the Nigerian Deposit Insurance Corporation, which has the primary responsibility of insuring all deposit liabilities of licensed banks and other deposit-taking financial institutions operating in Nigeria. It also sets out the processes for the CBN and NDIC intervening in a failing bank, the setting up of bride banks, and the settlement of deposit liabilities to eligible depositors in failed banks.

Assets Management Corporation Act 2010 (as Amended) (the “AMCON Act”) 

The AMCON Act establishes the Asset Management Corporation of Nigeria, which is a banking sector resolution mechanism. It is charged with the responsibility of acquiring non-performing loans from banks and other financial institutions which have been described under the AMCON Act as eligible financial institutions.

Regulators

In addition to the CBN, other regulators who play key roles in the Nigerian banking sector include the following.

• Nigerian Deposit Insurance Corporation (NDIC): The NDIC has the responsibility of insuring all deposit liabilities of licensed banks and other deposit-taking financial institutions operating in Nigeria and overseeing the liquidation of failed banks.
• Monetary Policy Committee (MPC): This is the highest policy-making committee of the CBN which is charged with the mandate to:
1. review economic and financial conditions in the economy;
2. determine appropriate stance of policy in the short to medium term; and
3. review regularly, the CBN monetary policy framework and adopt changes when necessary. 
• Financial Reporting Council of Nigeria (FRCN): The FRCN is the body responsible for, among other things, developing and publishing accounting and financial reporting standards to be observed in the preparation of financial statements of public entities in Nigeria and other related matters including banks and other financial institutions. 
• Securities and Exchange Commission (SEC): The SEC regulates the Nigerian capital market. It registers the securities of all banks that are public limited liability companies and regulates the issuance of such securities to the public and other related matters. 

In addition to the conditions under the BOFIA, the types of banking licences issued in Nigeria are:

• a commercial banking licence;
• a merchant banking licence; 
• a specialised banking licence (which covers non-interest banks, microfinance banks, development banks and mortgage banks); and
• a payment service banking licence. 

Commercial Bank Licence 

It is unlawful to carry out banking business in Nigeria unless it is by a company duly incorporated in Nigeria and holding a valid banking licence. The CBN issues a commercial bank licence to an applicant that meets the requirements. A commercial banking licence authorises the following activities: 

• taking deposits and maintaining current savings accounts;
• providing retail banking services, including mortgage products;
• providing financial and credit facilities;
• dealing in foreign exchange and providing foreign exchange services, which will be subject to the bank having a foreign exchange authorised dealership license issued by the CBN pursuant to the FEMM Act;
• acting as a settlement bank;
• providing treasury management services, which include the provision of money market, fixed income and foreign exchange investment on behalf of clients;
• providing custodial services, such as bailment and safekeeping of documents and other valuables in the ordinary course of banking business; and
• providing financial advisory services relating to commercial banking business which do not require statutory filings with SEC (ie, advising on financing and business strategies and structures, conducting private placements, arranging loan syndications, and advising on project structures).

The CBN prohibits commercial banks from carrying on activities relating to insurance underwriting, loss adjusting services, re-insurance services, asset management services, issuing house and capital market underwriting services, and any other business activities that may be restricted by CBN from time to time.

Merchant Banking Licence

A merchant banking licence authorises the operation of a merchant bank. Some of the activities authorised for this license include: 

• taking deposits and maintaining current and savings accounts from natural and legal persons, in an amount not below NGN100 million per tranche or any other minimum amount that may be prescribed by the CBN;
• providing finance and credit facilities to non-retail customers;
• dealing in foreign exchange and providing foreign exchange services subject to the requirements of the FEMM Act and other applicable CBN regulations; 
• acting as an issuing house or otherwise managing, arranging or co-ordinating the issuance of securities for or on behalf of any person, subject to the provisions of BOFIA;
• providing underwriting services for equity issuance of securities, subject to prior notification in writing to the CBN;
• providing treasury management services, including the provision of money market, fixed income and foreign exchange investment on behalf of clients;
• providing custodial services;
• issuing, discounting and rediscounting negotiable instruments; and
• providing debt factory services.

Merchant banks are prohibited from:

• accepting deposits withdrawable by cheque;
• accepting any deposit below the prescribed minimum amount or holding; and
• holding, for more than six months, any equity interest acquired in a company while managing an equity issue except as permitted under Section 20 of the BOFIA.

Specialised Banking Licence 

Specialised banks include non-interest banks, microfinance banks, development financial institutions, and mortgage banks. Under this category of license, the activities that may be carried out are dependent on the type of license obtained.

Payment Service Banking License (PSB)

A PSB is issued as part of the drive to improve the rate of financial inclusion in Nigeria using technology. It authorises the holder to operate mostly the rural areas and unbanked locations targeting financially excluded persons, with not less than 25% financial service touch points in such rural areas. The permissible activities for PSBs include:

• to accept deposits from individuals and small businesses;
• to carry out payments and remittances (including inbound cross-border personal remittances) services through various channels within Nigeria;
• to sell foreign currencies realised from inbound cross-border personal remittances to authorised foreign exchange dealers;
• to issue debit and pre-paid cards on its name;
• to operate electronic wallet;
• to render financial advisory services; and
• to invest in government-issued securities.

PSBs are not permitted to:

• grant any form of loans, advances and guarantees (directly or indirectly);
• accept foreign currency deposits;
• deal in the foreign exchange market except as stated above;
• underwrite insurance;
• accept any closed scheme electronic value (eg, airtime) as a form deposit or payment; and
• establish any subsidiary except as permitted by the CBN.

Statutory or Other Conditions Required for Obtaining a Licence From the CBN

The CBN will only issue a licence to an applicant if the applicant meets the prescribed capital requirements.

For commercial banks, the minimum share capital is NGN25 billion for national authorisation, NGN10 billion for regional authorisation, and NGN50 billion for international authorisation.

For merchant banks, the minimum share capital is NGN15 billion. 

For specialised banks, the minimum share capital required is dependent on the category of licence, as set out below.

• Non-interest banks are required to have a capital of NGN5 billion and NGN10 billion for regional and national licences respectively.
• Primary mortgage institutions are required to have a share capital of NGN15 billion.
• Development finance institutions (such as Bank for Industry and Federal Mortgage Bank of Nigeria) are required to have a minimum share capital as may be prescribed in the enabling instrument.
• Microfinance banks are required to have a minimum share capital of NGN200 million and NGN50 million for tier 1 and tier 2 unit microfinance banks respectively, NGN1 billion for state microfinance bank, and NGN5 billion for national microfinance banks.

Summary of the Application Procedure

There are two stages of approval for the grant of a banking licence in Nigeria and they include the: (i) grant of approval in principle (AIP), and (ii) grant of final approval.

With respect to the AIP, the application is to be made to the director of banking supervision department at the CBN. In addition to the application fees, the applicant is to submit a feasibility report for the proposed bank, including:

• financial projections for at least five years;
• a draft copy of the memorandum and articles of association of the proposed bank;
• a list of shareholders, directors and principal officers of the proposed bank;
• where the application is in relation to non-interest banking, a list of experts on non-interest banking or finance that will serve as its advisory committee of experts; and
• such other information and documents as may be required by the CBN.

With respect to obtaining final approval of the CBN, the promoters of the bank shall not later than six months after the grant of the AIP, apply for the grant of the final licence. In addition to the payment of the prescribed non-refundable licensing fees, the application must be accompanied by:

• the certified true copies of the incorporation documents;
• evidence of the location of the head office/branch building (rented or owned) for the take-off of banking business;
• evidence of strong room, loading bay, and banking hall facilities; 
• bullion lorries with necessary security gadgets; 
• evidence of the installation of IT facilities/computerisation; and 
• copies of letters of offer and acceptance of employment in respect of the management team.

Upon submission of the required documents, the CBN may approve with or without conditions or refuse to grant the application. 

Timelines

The process for obtaining licences from the CBN can take between 6 to 12 months, or longer in some cases. The timeline is largely dependent on the discretion of the CBN and the strength of an application.

Costs

In relation to costs, applicants are required to pay a non-refundable application fee and a licensing fee which differs depending on the category of licence being applied for.

The BOFIA provides that no bank shall enter into an agreement or arrangement which results in a change in control of the bank without the prior written consent of the governor of the CBN. The prior written consent of the governor is also required in relation to:

• the transfer of a significant shareholding in the bank (which is defined under the BOFIA to mean a transfer of shares of up to 5% or more);
• the sale, disposal and transfer of the whole or part of the business of the bank;
• the amalgamation or merger of the bank with another; and
• the restructuring, reconstruction or re-organisation of the bank.

The CBN may grant its approval of such agreement or arrangement if the CBN is satisfied that:

• such agreement or arrangement is not likely to cause a restraint of competition, or tend to create a monopoly in the banking industry; 
• the significant shareholders or directors of the bank that result from the agreement or arrangement are not disqualified under the BOFIA;
• the agreement or arrangement is consistent with public interest; and
• the bank that results from the agreement or arrangement meets the capital requirements prescribed under the BOFIA.

Any transaction as stated above, which is done without the prior written consent of the governor, is void and the transfer therein is ineffectual unless subsequently ratified by the CBN.

The CBN is now the sole regulator responsible for regulating mergers, acquisitions and business combinations in Nigeria in relation to banks and other financial institutions.

In addition to the above requirements of the BOFIA, the Code of Corporate Governance for Banks and Discount Houses in Nigeria 2014 (“the Code of 2014”) and the various Codes of Corporate Governance for Other Financial Institutions 2018 (“the Code of 2018”) (together referred to as “the Codes”) provides that any equity holding of 5% and above by any investor shall be subject to the CBN’s prior approval. Where such shares are acquired through the capital market, the bank shall apply for a no objection letter from the CBN immediately after the acquisition.

In a bid to discourage government(s) from having majority shareholding in banks, the Code of 2014 restricts and limits government(s) direct and indirect equity holding in any bank to 10%.

The CBN requires any investor acquiring a shareholding of 5% and above in a bank and other financial institution to:

• be of good character, honest, reputable, and reliable;
• have financial resources sufficient to meet commitments on a continuing basis as they become due, including outstanding obligations;
• ensure adequate control of financial risks on a continuing basis;
• certify that the funds used in the acquisition of the shares were not borrowed from within the banking system or are the proceeds from money laundering and/or any criminal activity;
• not have been indicted in the failure or mismanagement of any financial institution;
• fulfill all the conditions stipulated in the propriety principles;
• attend an oral interview with the CBN;
• complete an “Approved Persons Regime” questionnaire to be administered by the CBN; and
• provide three reference letters from individuals of reputable standing in the country.

Restrictions on Foreign Shareholding in Banks

Excluding the requirement for CBN’s prior approval for any equity holding of 5% and above by any investor, there are no specific restrictions preventing foreigners from acquiring shares in Nigerian banks.

Regulatory Filings

Banks are required to make various filings with the CBN. In addition, banks must obtain the approval of the CBN before releasing their financial reports to the public.

The Codes set out the framework for regulating corporate governance practices in the Nigerian banking industry. The Codes were issued by the CBN and cover banks and other financial institutions, such as: 

• payment service banks;
• microfinance banks;
• development finance banks;
• primary mortgage banks; and

• mortgage refinance companies.

The Codes deal with issues relating to:

• the structure composition and size of the board of directors (“the board”) including the appointment, tenure and renumeration of members of the board;
• the responsibilities of the board, board committees, and board meetings;
• ownership/shareholding structure and transfer of shares;
• shareholder relationship including the rights and functions of shareholders, equity ownership and protection of minority shareholders, shareholders meetings and associations;
• whistle-blowing guidelines, disclosures in annual reports, and transparency and integrity in business conduct;
• risk management, ethics and professionalism, conflicts of interest; and 
• sanctions for breach of the provisions of the Codes.

In addition to these principal codes, other applicable codes include:

• the Nigerian Code of Corporate Governance 2018 (where the bank is a public company or a private company that is a holding company of a public company or other regulated entity); and
• the Securities and Exchange Commission’s Code of Corporate Governance for Public Companies in Nigeria 2014 (applicable to all listed and non-listed public companies).

These Codes also provide for various minimum conditions for the management and operations of such institutions, categories of directors, meetings, conflicts of interest and others.

Directors are charged with the daily management and operation of banks in Nigeria. Directors are appointed by the shareholders subject to the approval of the CBN. Other senior management positions are appointed by the board subject to the approval of the CBN. Paragraph 2.2.3 of the Code of 2014 stipulates that the board shall consist of executive and non-executive directors (including independent non-executive directors). Similar provisions are found in Paragraph 2.2.3 of the Code of 2018, which applies to payment service banks, microfinance banks, development finance banks, and primary mortgage banks, etc. The procedure for the appointment of directors of banks is required to be formal, transparent and documented, and shall conform with existing CBN guidelines.

The foremost requirement for the appointment of directors is that every bank shall obtain the prior approval of the CBN in writing before appointing new directors or senior management staff. The category of persons who cannot be appointed as directors of any bank include:

• any person of unsound mind or who is incapable of discharging his duties as a result of ill health;
• any person dismissed from the service of the federal, state or local government or any agencies of such government;
• any person declared bankrupt or who suspends payment or compounds with their creditors, including their bankers;
• any person convicted of an offence involving dishonesty or fraud;
• any person guilty of serious misconduct in relation to their duties;
• any person who being a qualified professional is disqualified or suspended from practicing their profession;
• any person whose appointment with a bank was terminated for reasons of fraud or dishonesty; and
• a director of a bank wound up by the Federal High Court cannot be appointed as a director of any other bank except with the express authority of the governor of the CBN.

Additional criteria are found in the CBN’s Revised Assessment Criteria for Approved Persons’ Regime for Financial Institutions, 2015 (“the Approved Persons’ Regime”), which is applicable to banks and other financial institutions under the regulatory purview of the CBN.

The CBN also prohibits the appointment of the following persons as director of any bank:

• any person who is or has been the subject of any proceedings of a disciplinary or criminal nature, or has been notified of any impending proceedings or any investigation, which might lead to such proceedings (this provision will not apply where a person involved in such proceedings has been exonerated);
• any person whose appointment will result in a conflict of interest;
• any person who has been the subject of any justified complaint relating to regulated activities;
• any person who has been dismissed, asked to resign from employment or from a position of trust, fiduciary appointment or similar position because of questions about their honesty and integrity;
• any person who deliberately misled (or attempts to mislead) by act or omission, a client, the institution and/or the regulators;
• any person who deliberately falsified documents to mislead a client, the institution and/or regulators;
• any person who has deliberately failed to inform the client, institution and/or regulator, without reasonable cause, of the fact that their understanding of a material issue is incorrect, despite being aware of their misunderstanding;
• any person who has deliberately failed to disclose the existence of falsified documents;
• any person who has deliberately prepared inaccurate or inappropriate records or returns; and
• any person who or any business in which they have controlling interest or exercises significant influence, has been investigated, disciplined, suspended or criticised by a regulatory or professional body, a court or tribunal, whether publicly or privately.

The other general and specific fitness and propriety assessment requirements for the appointment of directors and senior management personnel of all financial institutions include:

• each person submitting a completed “Approved Persons Regime” questionnaire to be administered by the CBN;
• providing a satisfactory report from the candidate’s last place of work, not later than six months after engagement;
• satisfying the CBN that the candidate is able to meet personal financial obligations/commitments on a continuous basis and demonstrate satisfactory discharge of fiduciary responsibilities;
• providing three reference letters, two of which must be from the last place of work, in the last five years and from persons not below the rank of a director – for non-executive directors, the three reference letters should be from individuals of reputable standing in the country (eg, civil servants of grade level 15 and above or their equivalents in the armed forces or police, senior clergymen, fellows of professional bodies such as ICAN, CIBN); and
• ensuring that non-executive directors undergo directors' training at the institution's expense, aimed at acquiring or having the prerequisite knowledge of their responsibilities and duties as the institution’s non-executive directors.

Roles and any Accountability Requirements

The board is primarily accountable and responsible for the performance and affairs of a bank. Some other responsibilities of the board include defining the bank’s strategic goals and monitoring its implementation, appointing the CEO and top management staff of the bank, and ensuring that a succession plan is put in place for the CEO, executive directors, and top management staff. Additional responsibilities of the board are found in the Codes.

The members of the board and top management of banks are the individuals subject to the remuneration requirement under the Codes. 

The Codes stipulate that every bank shall have a remuneration policy put in place by the board of directors, which shall be disclosed to the shareholders in the annual report. The levels of remuneration are required to be sufficient to attract, retain and motivate executive officers of the bank and balanced against the bank’s interest in not paying excessive remuneration. Where remuneration is performance-based, it should be designed in a way that prevents excessive risk-taking. The remuneration committee of a bank is required to comprise non-executive directors only and the committee shall determine the remuneration of executive directors. The remuneration of a non-executive director is limited to directors’ fees, sitting allowances for board and board committee meetings and reimbursable travel and hotel expenses. Executive directors, including the MD/CEO, are not entitled to receive a sitting allowance and directors’ fees. 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 authorisation of the relevant regulatory agencies. Share options are to be tied to performance, and should be approved by shareholders at an annual general meeting. In addition, the share option should not be exercisable until one year after the expiration of the tenure of the director entitled to it.

The CBN does not exercise specific supervisory oversight over the remuneration of the board and does not fix any minimum or maximum remuneration to provide guidance to the board. This is left solely to the discretion of the banks, their respective remuneration committees and shareholders.

On sanctions, compliance with the Codes is mandatory for all banks. Each bank is required to file returns on the status of its compliance with the code to the CBN at the end of every quarter. Failure to comply with the code will attract appropriate sanctions in accordance with BOFIA, including the imposition of monetary fines and penalties.

The main laws on anti-money laundering and counter-terrorism financing (ML/TF) in Nigeria are:

• The Money Laundering (Prevention and Prohibition) Act 2022 (MLA); 
• The Terrorism (Prevention and Prohibition) Act 2022 (TPPA); and
• The CBN (Anti-Money Laundering, Combating the Financing of Terrorism and Countering Proliferation of Weapons of Mass Destruction in Financial Institutions) Regulations 2022 (the “AML/CTF/CPF Regulations”).

The above laws and regulations took effect on 12 May 2022, and all banks and financial institutions in Nigeria are required to comply with them. 

The BOFIA also requires all banks, specialised banks, and other financial institutions to adopt policies stating their commitments to comply with anti-money laundering and combating the financing of terrorism obligations under subsisting laws, and to implement internal control measures to prevent any transaction that facilitates criminal activities, money laundering or terrorism.

The MLA 2022 sets out the legal and institutional framework for the prevention and prohibition of money laundering in Nigeria. It provides statutory backing for the establishment of the Special Control Unit Against Money Laundering under the Economic and Financial Crimes Commission (EFCC). Financial institutions are to adopt KYC requirements to:

• ensure that any person purporting to act on behalf of a customer is so authorised, identified and verified;
• establish the source of wealth and funds of customers and beneficial owners identified as politically exposed persons (PEPs); and
• conduct enhanced monitoring of such relationship.

The MLA imposes various thresholds on cash transactions and requires financial institutions not to make or accept cash payments of a sum exceeding NGN5 million or its equivalent in the case of an individual, or NGN10 million or its equivalent in the case of a body corporate. In addition, a financial institution is required to report a transfer to or from a foreign country of funds or securities by a person or body corporate of a sum exceeding USD10,000 or its equivalent to the National Financial Intelligence Unit, CBN and SEC in writing within one day from the date of the transaction.

Other key provisions of the MLA 2022 include:

• extending the scope of suspicious transaction reporting to circumstances where a financial institution is of the opinion that a transaction involves the proceeds of a criminal activity, unlawful act, or money laundering;
• preservation of transaction records within the retention period of five years;
• criminalising any attempt at breaking up transactions in a bid to side-step the threshold value on cash payment transactions; and
• altering the line of reporting of financial transactions exceeding the threshold, as financial institutions are now mandated to report such transactions to the Nigerian Financial Intelligent Unit, while designated non-financial businesses and professions are obligated to report such obligations to the Special Control Unit Against Money Laundering domiciled within the EFCC.

Banks and financial institutions are required to have a chief compliance officer/head of internal audit who shall monitor compliance with the AML/CTF requirements.

Banks are required to:

• identify a customer, whether permanent or occasional, natural or a legal person or any other form of legal arrangements, using identification documents;
• verify the identity of that customer using reliable, independent source documents, data or information;
• identify the beneficial owner using relevant information or data obtained from a reliable source; and
• take reasonable measures to verify that any person purporting to act on behalf of the customer is so authorised and their identity is verified.

Furthermore, banks are required to undertake customer due diligence measures when:

• establishing business relationships;
• carrying out occasional transactions that are wire transfers;
• there is a suspicion of money laundering or terrorist financing, regardless of any exemptions or thresholds; or
• the bank has doubts about the veracity or adequacy of previously obtained customer identification data.

As part of its business, a bank is mandated to:

• conduct ongoing due diligence on a business relationship;
• scrutinise transactions undertaken during the course of the relationship to ensure that the transactions are consistent with the institution’s knowledge of the customer, their business and risk profile and, where necessary, the source of funds; and
• ensure that customer due diligence process is kept up-to-date and relevant by undertaking reviews of existing records, particularly for higher risk categories of customers or business relationships.

The depositor protection regime in Nigeria is administered by a combination of the NDIC in accordance with the provisions of the NDIC Act and the CBN pursuant to the provisions of the BOFIA. The NDIC Act empowers the NDIC to, among other things:

• insure all deposit liabilities of licensed banks and other deposit-taking financial institutions (“Insured Institutions”) operating in Nigeria;
• assist Insured Institutions for the benefit of depositors in the case of an imminent or actual financial failure of an Insured Institution; and
• guarantee that payments are made to depositors in the event of an imminent or actual suspension of payments by an Insured Institution.

Depositors covered under the NDIC Act include Nigerian resident individuals and corporate entities, and Insured Institutions include:

• deposit money banks;
• microfinance banks;
• primary mortgage banks; and 
• non-interest banks

The NDIC Act requires all deposit-taking licensed banks and financial institutions in Nigeria to insure their deposits with the NDIC. The NDIC provides insurance cover for all deposits of a licensed bank or any other financial institution, excluding:

• insider deposits (that is, deposits of staff including directors of the insured institutions);
• counterclaims from a person who maintains both deposit and loan account, the former serving as a collateral for the loan; or
• such other deposits that the board of directors of the NDIC (“the Board”) may specify from time to time. 

What this means is that funds deposited by a director or staff of an insured financial institution with that financial institution will not be covered under the scheme. However, funds deposited by a director or staff of an Insured Institution with another financial institution will be covered under the scheme.

The current insured limit under the scheme is a maximum of NGN500,000 for each depositor in respect of deposits held in each insured deposit money bank (including non-interest banks) and primary mortgage bank, and NGN200,000 for depositors in a microfinance bank. Section 20 (2) of the NDIC Act, however, empowers the Board to periodically review the maximum deposit insurance coverage for licensed banks and other deposit-taking financial institutions having taken into consideration changes in deposit structure, income levels, and in line with global best practices. Where the NDIC is required to pay the insured deposit due to the failure of an Insured Institution, payment is required to be made within 90 days either in cash, a negotiable instrument or through a transfer to another insured institution with instructions to effect payment to depositors on its behalf. In practice, the NDIC does not generally comply with this timeline as it would usually take longer to settle such claims.

The scheme is funded through the Insurance Fund (“the Fund”) established by the NGIC. All Insured Institutions are required to deposit the assessed premiums into the Fund, and it is out of the Fund that the NDIC pays the insured deposits in the event that an Insured Institution fails. The NDIC is, in the exercise of its powers, permitted to invest the money in the Fund in government securities or in such securities as the Board may from time to time determine. The NDIC is also authorised to borrow funds from any source for its operations with the approval of the Board. 

The NDIC Act foresees an event where the funds of the NDIC are not sufficient to assist Insured Institutions in the case of imminent or actual financial difficulties. As a result, it requires that, in such an event, all Insured Institutions or categories of Insured Institutions may be obliged to pay, as a special contribution out of its profits before tax, a sum equal to its annual premium or such other sum as the Board may require not exceeding 200% of its annual premium on such terms and conditions as the Board may from time to time determine. 

In view of the limited insured amount payable to a depositor, to further protect depositor funds, the BOFIA provides deposit liabilities that shall have priority over all other liabilities of a bank. 

Banks and their customers have a contractual relationship that invokes the duty of confidentiality in relation to information provided to facilitate financial transactions. Banks are required to keep strictly confidential and make no unauthorised disclosure or use of any information that the banks receive in the course of their interaction with customers. Banks are also required to keep a customer’s personal and transactional information confidential as a general rule. This duty is in tandem with the constitutional right of customers to privacy and private life, including the right to keep their information private under Section 37 of the Constitution of the Federal Republic of Nigeria 1999 (as amended). Further to this right, the CBN has published the Bank Customers’ Bill of Rights in which it stated that customers of banks in Nigeria have certain rights and duties guaranteed by law, one of which includes the right to freedom from the disclosure of their account details by their bank.

In addition, the Chartered Institute of Bankers of Nigeria has published a Code of Conduct in the Nigerian Banking Industry, 2014 (CCNBI) which is applicable to all employees of banks in Nigeria. The CCNBI requires that banks do not disclose customers’ account details. Banks shall protect customers’ information from unauthorised access by a third party. Specifically, banks are required to:

• observe a strict duty of confidentiality about their customers’ and former customers’ affairs and shall not disclose details of customers’ accounts/transactions or their names and addresses to any third party, including other companies in the same group; and 
• insist on directors, management and staff signing a “Declaration of Secrecy” to ensure the confidentiality of customers’ information.

Exceptions to the above rule cover cases where a bank is compelled by a court of competent jurisdiction or regulatory provision to disclose, public duty or the bank’s interest requires disclosure, or the customer consents to the disclosure.

In addition, the Nigeria Data Protection Regulation (NDPR) imposes an obligation on banks to develop security measures to protect the data of their customers. The data under the purview of the NDPR includes the name, address, photo, email address, bank details, medical information, IMEI number, SIM, and Personal Identifiable Information (PII). These requirements envisage the existence of a banker/customer relationship in its application to the affected parties. 

There are existing exceptions to the right of confidentiality, including where the bank is required by law to make a disclosure; or where the customer consents to the disclosure. With respect to disclosures required by law, Section 11 (2) of the MLA requires financial institutions (which includes banks) to report to the Nigerian Financial Intelligence Unit any single transaction, lodgement, or transfer of funds in excess of NGN5 million or its equivalent, in the case of an individual; or NGN10 million or its equivalent in the case of a body corporate. Furthermore, data privacy will not be invoked under Nigerian data privacy rules where information is needed to investigate criminal and tax offenses, or in the interest of national security, or public health and safety. 

The failure of a bank to make the disclosure as required under the MLA is considered an offence that attracts, upon conviction, a fine of at least NGN250,000 and not more than NGN1 million for each day the contravention continues. 

Pursuant to the provisions of Section 13 of the BOFIA and the regulations issued by the CBN from time to time, banks are required to maintain and comply with the prescribed licensing, capital, liquidity, reserves, and ratio requirements prescribed by the CBN. Banks are also subject to the capital requirements of Nigeria’s companies’ law, the CAMA. In addition, all banks are required to comply with all the reserves requirements prescribed by the BOFIA and prudential guidelines and regulations issued by the CBN on the required level of capital adequacy ratio (CAR), liquidity requirements, and cash reserves.

The Implementation of Basel Standards in Nigeria 

The CBN has adopted Basel II Standards and Basel III Standards (with various modifications) for implementation by Nigerian banks.

The Implementation of Basel II Standards by Nigerian Banks

The CBN issued a circular number BSD/DIR/CIR/GEN/LAB/06/053 dated 10 December 2013 by which it issued, among other things, guidance notes on regulatory capital measurement and management for the Nigerian banking system (for the implementation of Base II/III in Nigeria) (the “Guidance Notes”). The Guidance Notes specify the approaches for quantifying the risk-weighted assets for credit risk, market risk, and operational risk for the purpose of determining the regulatory capital in compliance with Pillar 1 of the Basel II Standards. While the CBN did not wholly adopt Basel II but adjusted the provisions to reflect the peculiarities of the Nigerian banking sector, the CBN stated in the above-mentioned circular that the implementation of Basel II would involve a parallel run of Basel I and Basel II minimum adequacy computation with effect from January 2014, while computation under Basel II would commence in June 2014. By a circular dated 2 July 2014 with reference number BSD/GCA/BAS/CON/01/115, the CBN extended the period for the full adoption of Basel II Standards to 1 October 2014. Following this, on 24 June 2015, the CBN issued, among other guidance notes, the Revised Guidance Notes on Regulatory Capital and a new Reporting Template for the monthly submission of CAR (the “Basel II Regulatory Capital Guidelines”) all aimed at implementing the parts of Basel II adopted by the CBN. This means that Nigerian banks commenced the implementation of Basel II standards on 1 October 2014.

The Implementation of Basel III Standards by Nigerian Banks

On 11 September 2020, the CBN announced its intention to commence a phased implementation of Basel III Standards and revise the existing Basel II Guidelines on Regulatory Capital and Supervisory Review Process during the 2020/2021 fiscal years. Due to the effects of the COVID-19 pandemic in early 2020 on Nigerian banks and the economy, the CBN suspended the implementation of Basel III to reduce the regulatory compliance obligations Nigerian banks had at the time. On 2 September 2022, the CBN issued circular number BSD/DIR/PUB/LAB/14/063, titled “Basel III Implementation by Deposit Money Banks In Nigeria” (the “Basel III Circular”), through which it notified all deposit money banks of the release of the Basel III Guidelines/Reporting Templates.

The CBN also stated in that circular that the implementation of the new guidelines was to commence from November 2022 for an initial period of six months, subject to an extension of three months. This initial period and a possible extension will be subject to the milestones achieved in the supervisory expectations. The CBN indicated that the Basel III guidelines are expected to run concurrently with the existing Basel II guidelines pending the full implementation of the Basel III guidelines. The effect of this is that Nigerian deposit money banks are currently implementing Basel II concurrently with Basel III. The full implementation of Basel III will commence after the initial test period as indicated above, however, subject to the successful conclusion of the parallel run.

Current Capital Adequacy Ratio (CAR) of Nigerian Banks

The Basel III Regulatory Capital Guidelines contain the most recent provision on CAR for Nigerian banks. Further to paragraph 25 of the Basel III Regulatory Capital Guidelines, the CBN still retains the same minimum CAR of 15% for all banks and banking groups with international authorisation and those that have been categorised by the CBN as being Domestic Systemically Important Banks (D-SIBs), and 10% for all other banks. The Basel III Regulatory Capital Guidelines have, however, changed the categorisation of the qualifying capital that is used to compute the CAR. The Basel III Regulatory Capital Guidelines define CAR as the ratio of the Total Regulatory Capital (TRC) to Total Risk-Weighted Asset (TWRA). TRC is the sum of Common Equity Tier 1 (“CET 1”) Capital, Additional Tier 1 Capital (“AT1”) and T2 (“Tier 2”) Capital, net of regulatory adjustments. T1 Capital is the sum of CET1 Capital and AT1 Capital, net of the regulatory adjustments applied to those categories. The minimum CET 1 Capital ratio is 7.0% for banks with regional or national authorisation, while it is 10.5 % for banks with international authorisation and D-SIBs. 

The minimum T1 Capital Ratio is 7.5% for banks with national and regional authorisations, while it is 11.25% for banks with international authorisations and D-SIBs. The minimum ratios do not take into consideration the additional capital buffers which the CBN may require banks in Nigeria to maintain from time to time. The inclusion of eligible T2 Capital in the calculation would only be permitted by the CBN subject to the minimum thresholds stated above being met. In the absence of AT1 Capital, the minimum T1 Capital ratio would be met from CET1 Capital. Furthermore, the Basel III Regulatory Capital Guidelines require D-SIBs to further enhance their minimum CAR with the Higher Loss Absorbency (HLA) requirement of additional 1.0% consisting wholly of CET1 Capital. 

The level of a bank’s CAR will determine how the CBN will classify and treat the bank. Based on a level of CAR below the acceptable limit, a bank may be classified as:

• undercapitalised;
• significantly undercapitalised;
• critically undercapitalised; and
• insolvent.

Current Liquidity Ratio of Nigerian Banks

One of the guidelines introduced under the Basel III Circular is the Guidelines on Liquidity Coverage Ratio (LCR) (the “LCR Guidelines”). The LCR Guidelines define the LCR as a ratio, expressed as a percentage of a reporting entity’s stock of high-quality liquid assets (“HQLA”) to its total net cash outflows over 30 calendar days, ie, the LCR period. The LCR Guidelines further state that the aim of the LCR is to promote short-term resilience of the liquidity risk profile of reporting entities by ensuring that an entity has an adequate stock of unencumbered assets that could be converted easily and immediately into cash in private markets to enable such an entity to survive a significant stress scenario lasting 30 calendar days. 

The LCR Guidelines require a reporting entity to maintain an LCR of at least 100% on an ongoing basis. The LCR Guidelines apply to all commercial and merchant banks operating in Nigeria at both stand-alone and consolidated basis, and require that reporting entities submit their returns, in the case of a bank operating as a stand-alone, monthly, and in the case of a bank operating on a consolidated basis, quarterly. Where the LCR, however, falls below 100%, the reporting entity affected must notify the CBN immediately. 

Current Cash Reserve Ratio (CRR) of Nigerian Banks 

As of September 2022, the minimum CRR for deposit money banks remains 27.5%.

Risk Management

As part of its corporate governance requirements, the Code of 2014 provides that the board of directors of banks shall establish a committee responsible for the oversight of risk management and audit functions. This provision does not, however, obviate the need for compliance with the requirements of the CAMA on the Statutory Audit Committee for public companies.

Other requirements as stated in the code include:

• disclosure of material information on risk assets such as: concentration of assets, liabilities, and off-balance sheet engagements by sector, geography, and product; loan quality; lending/borrowing to/from subsidiaries and associates, etc;
• disclosure of material information on risk management which shall include details of all significant risks and the risk management practices indicating the board’s responsibility for the entire process of risk management as well as a summary of external auditors’ observed lapses;
• external auditors to render reports to the CBN on banks’ risk management practices, internal controls and level of compliance with regulatory directives; and
• every bank to have a risk management framework specifying the governance architecture, policies, procedures, and processes for the identification, measurement, monitoring, and control of the risks inherent in its operations.

The CBN and the NDIC are primarily responsible for resolving bank insolvency issues. In addition, the AMCON is charged with the responsibility of acquiring non-performing loans from eligible financial institutions which include banks and other financial institutions duly licensed by the CBN as well as those whose licence has been revoked by the CBN.

When a bank deems that it is likely to become unable to meet its obligations, or about to suspend payments, or becomes insolvent, the bank may inform the CBN. The CBN may also, at its initiative, carry out an examination of the records of a bank, following which it may exercise any of its resolution powers under the BOFIA.

Some of the resolution powers of the CBN in relation to failing banks include the power to:

• prohibit a failing bank from extending any further credit facility for a period of time; 
• suspend any payment or delivery obligations under any contract to which the failing bank is a party; 
• require third-party service providers to continue providing services to the failing bank for a specified period of time; 
• require the failing bank to take any steps or any action or refrain from any act in relation to the failing bank, its business, directors or officers which the CBN may consider necessary for a specified period of time;
• remove any manager, officer or director, or appoint any person as a director of the failing bank;
• transfer of the failing bank, in part or in whole, to third-party private purchasers; and
• employ any other intervention tool as the CBN may deem fit. 

The CBN also has the power to acquire the shares of any failing bank to a level that guarantees the CBN’s control over the failing bank. The CBN is, however, expected to dispose of its equity investment in such a bank at the earliest suitable time. In addition to this, the CBN may cancel, modify, convert or authorise a change in form in respect of any eligible instrument issued by a failing bank. In extreme situations, the CBN may also decide to revoke the licence of a failing bank. Where the CBN revokes the licence of a failed bank, the CBN is empowered to appoint the NDIC to act as a liquidator in respect of the activities of the affected bank. 

Implementation of the FSB Key Attributes of Effective Resolution Regimes

While Nigeria is not a member of the Financial Stability Board (FSB), Nigeria has over the years enacted laws and regulations which address some of the FSB's key attributes of effective resolution regimes for financial institutions. Some of the key principles espoused by the FSB are covered under the provisions of the CBN Act, the BOFIA, the NDIC Act and the various regulations and guidelines issued by the CBN from time to time. For instance, in relation to the powers to establish a temporary bridge institution, the CBN and the NDIC are empowered to exercise this resolution power under Section 39 of the NDIC Act and Sections 78 and 74 of the BOFIA. Some other key attributes which have been addressed in Nigeria include the power to:

• transfer or sell assets and liabilities of the affect bank;
• write down and convert liabilities of the affected bank;
• impose a temporary stay on early termination rights; 
• resolve systemically important financial institutions; and
• require changes to a bank’s structure and operations to improve resolvability.

The insolvency rules applicable to deposits are as stated in the NDIC Act and already discussed at 6.1 Depositor Protection Regime. 

Non-oil Export Proceeds Rebate Scheme

In February 2022, the CBN published the Operating Guidelines for RT200 Non-Oil Export Proceeds Repatriation Rebate Scheme (the “Guidelines”) to establish the Non-Oil Export Proceeds Repatriation Rebate Scheme (the “Scheme”) as part of its efforts to reduce Nigeria’s current exposure to volatile sources of foreign exchange and to earn a more consistent flow. The objectives of the Scheme include to:

• enhance foreign exchange inflow;
• diversify the sources of foreign exchange inflow;
• increase the level of contribution of non-oil exports;
• ensure stability and sustainability of foreign exchange inflows; and
• support export-oriented companies to expand their export operations and capabilities.

Under the Scheme, the CBN’s aims to raise USD200 billion in foreign exchange earnings exclusively from non-oil exports over the next three to five years to provide long-term funding for businesspersons interested in building new plants or expanding existing ones to add significant value to Nigeria’s non-oil commodities prior to the exportation of such commodities. The Scheme is being managed by the Trade and Exchange Department of the CBN and is available for all exporters of finished and semi-finished goods. The exporters eligible to benefit under the Scheme are those who have repatriated export proceeds and sold them at the Investors’ and Exporters’ Window (“I&E Window”). The Guidelines provide for a list of eligible transactions, which include: (a) export of finished and semi-finished goods that have been wholly or partly processed or manufactured in Nigeria; and (b) export of goods and services that are permissible and excluded under existing export prohibition list. In addition, exporters are required to complete the e-form NXP, be registered with the CAC and the Nigeria Export Promotion Council, and then sell the repatriated export proceeds at the I&E Window.

Under the Scheme, the CBN is to pay exporters NGN65 for every USD1 repatriated and sold at the I&E Window to authorised dealer banks (“ADBs”) for other third-party use. The CBN is also to pay exporters NGN35 for every USD1 repatriated and sold into the I&E Window for their own use on eligible transactions. However, the spread should not be more than 10 kobo. Payments are to be made on a quarterly basis and the accounts of qualified exporters are credited a week after the end of the quarter at the latest. 

The AML/CTF/CPF Regulations 

On 20 June 2022, the CBN published the AML/CTF/CPF Regulations, which are applicable to all financial institutions under the regulatory purview of the CBN whether operating digitally, virtually or electronically. The AML/CTF/CPF Regulations revoked the previous anti-money laundering regulations issued by the CBN in 2013 and mandates financial institutions to:

• adopt policies reiterating their commitment to comply with AML, CFT, and CPF obligations under subsisting laws and to actively prevent any transaction that otherwise facilitates criminal activities, money laundering (ML), terrorism financing (TF), and proliferation financing (PF);
• formulate and implement internal control measures and other procedures to deter criminals from using its facilities for ML, TF, and PF;
• adopt a risk-based approach in the identification, assessment and management of their ML, TF and PF risks in line with the requirements of the AML/CTF/CPF Regulations; 
• conduct ongoing due diligence and, where appropriate, enhanced due diligence on all business relationships and obtain information on the purpose and the intended nature of the business relationship of their potential customers;
• identify, review and record other areas of potential ML, TF or PF risks not covered by the AML/CTF/CPF Regulations and report same to the CBN;
• comply promptly with requests made pursuant to AML, CFT and CPF legislation and provide information to the CBN, the Nigerian Financial Intelligence Unit and other competent authorities; 
• reflect AML, CFT and CPF policies and procedures in their strategic policies;
• render statutory reports to competent authorities as required by law and guard against any act that will cause a customer or client to avoid compliance with AML, CFT and CPF legislation;
• not in any way inhibit the implementation of the provisions of the AML/CTF/CPF Regulations and co-operate with the regulators and law enforcement agencies in the implementation of a robust AML, CFT and CPF regime in Nigeria; and
• ensure that their employees, agents and others doing business with them clearly understand the AML, CFT and CPF programme.

Other Developments 

The passage of the BOFIA in 2020 brought about a number of changes in the Nigerian banking sector. Under the BOFIA, the CBN has assumed a significant role in the resolution of failing banks. Under the BOFIA, the CBN has purportedly taken over the functions of the NDIC’s powers in respect of failing banks’ resolution under Sections 30 and 38 of the NDIC Act. This development has limited the NDIC’s role to filing for the winding-up upon revocation of the failing bank’s licence under Section 34(2) of BOFIA. However, the managerial powers of NDIC under the NDIC Act remain unchanged. However, the NDIC Act 2006 (Amendment) Bill, 2017, if enacted into law, is expected to eliminate overlapping functions, promote effective bank resolutions, and reinforce the stability of Nigeria’s financial system. 

Operational Guidelines for Open Banking in Nigeria 2022 (the “Open Banking Regulations”)

The CBN has issued the exposure draft of the Open Banking Regulations to regulate, among other things, open banking activities and operations of financial institutions in Nigeria. The Regulations will apply to banking and other related financial services as determined by the CBN and will recognise the ownership and control of data by customers of financial and non-financial services, and their right to grant authorisations to service providers for the purpose of accessing financial products and services. 

The Open Banking Regulations envisage that any organisation that has customers' data (which may be exchanged with other entities to provide innovative financial services within Nigeria) can be an eligible participant in the open banking ecosystem in Nigeria. As such, it is believed that these Regulations may impact the operations of banks in the future. Participants in open banking will, however, be required to strictly adhere to security standards when accessing and storing data, and will be subject to minimum privacy standards, operational standards, risk management standards and customer experience standards as determined by the CBN. 

Risk management will be the responsibility of all participants operating within the Nigerian open banking system. Participants shall avail the CBN with risk assessment reports on partner participants and provide the CBN with reports on the assessments of its control environment. 

The Open Banking Regulations will become mandatory once they are issued. They currently state that registered participants shall establish a regular reporting mechanism to provide competent authorities with an updated assessment of security risks and the measures taken. 

Nigeria also has in place a number of laws and regulations which seek to address and offer guidance in relation to ESG. For instance, the CAMA imposes an obligation on all directors of a Nigerian company to, while discharging their duties, consider the impact of the company’s operations on the environment in the community in which the company carries on business. Some other relevant laws and regulations are set out below.

Nigeria Sustainable Banking Principles by Banks, Discount Houses and Development Finance Institutions in Nigeria 2012 (NSBP)

The NBSP is aimed at ensuring the protection of communities and the environment in which financial institutions operate. All banks have been directed by the CBN to fully adopt and implement the provisions of the NSBP.

As a means of ensuring that financial institutions in Nigeria are compliant, the CBN requires all banks and other financial institutions to regularly submit reports to the CBN in line with the reporting requirements provided by the CBN. Financial institutions covered by the NSBP are required to ensure that their activities include sustainable banking principles, such as business operations (environmental and social footprint), financial inclusion, capacity building, collaborative partnerships, women’s economic empowerment, and ESG, to name but a few. 

Codes of Corporate Governance

In a bid to strengthen governance at the helm of affairs of financial institutions in Nigeria, the CBN and other regulatory bodies have from time to time issued various codes of corporate governance and other regulations providing for minimum governance standards that must be maintained by financial institutions under its regulatory purview. 

The various codes set out basic corporate governance principles and requirements which cover issues such as board composition, the number of directors, the tenure of directors, and board committees. For instance, the Code of 2014 provides that the board of any bank in Nigeria shall have a minimum of 5 and a maximum of 20 directors who are knowledgeable in business and financial matters. It is expected that the board shall have at least two non-executive directors as independent directors, and the number of non-executive directors shall be more than that of executive directors. 

Abuse of power is curbed through the separation of the role of the chairman and the MD/CEO. In all cases, members of the same extended family cannot occupy the position of the chairman and the MD/CEO of any bank or its subsidiary at the same time. The restriction on familial relations extends to banks that are members of a holding company. A limit is placed on the tenure of the directors to promote transparency and efficiency in service delivery. 

Climate Change Act 2021 (CCA)

One of the key legislations in the Nigerian environmental space is the CCA, which provides a framework for, among other things, carbon budgeting and the establishment of the National Council on Climate Change (NCCC). The NCCC is responsible for developing Nigeria’s National Climate Change Action Plan (NCCAP).