In a serious move, the National Assembly is accelerating the process of repealing and reenacting the 29-year-old Banking and Other Financial Institutions Act.
Banks and Other Financial Institutions Act (BOFIA) was first enacted in 1991, about eight years before the military handed over the rein of governance to civilians. It was last amended in 2002, just a year after the revolution of telephony services in Nigeria with the introduction of global system on mobile (GSM) telecommunications. Since then, there have been tremendous social economic and technological changes in the banking and financial firmament locally and globally. The commencement of an amendment process of BOFIA, aimed at modenising the Nigerian banking and financial system is therefore, long overdue.
Titled Bill for an Act to repeal the Banks and Other Financial Institutions Act 2004 and re-enact the Banks and Other Financial Institutions Act 2020 is being co-sponsored by Senators Uba Sani (Kaduna Central) who is Chairman, Senate Committee on Banking, Insurance and other Financial Institutions and Betty Appiafi (Rivers West).
According to Sani, BOFIA’s review was to ensure it conforms to current financial realities. The bill specifically seeks among other things, to enhance efficiency in the process of obtaining and granting banking licenses. According to him while leading the debate, the aim of the amendment is to update and strengthen the existing Act to effectively address challenges being faced in the finance services sector in Nigeria, in line with global best practices. He observed that while in other countries like South Africa and Egypt, the laws regulating banking and other financial institutions are regularly updated, in Nigeria; the law enacted almost 30 years ago has remained in force.
He stated other objectives of the bill to include: update the laws governing Banks, Financial Institutions and Financial Services Companies; enhance efficiency in the process of obtaining/granting banking licenses; accurately delineate the regulatory functions of the Central Bank of Nigeria in the financial services industry; update and incorporate the laws for enacting, licensing and regulation of micro-finance banks. It is also to regulate the activities of financial technology companies (FINTECHs; and update commensurate penalties for regulatory breaches in the financial services sector. When eventually passed, it is expected to strengthen the legal framework for the regulation of banks to prevent distress especially the turbulent period of COVID-19 so that the country can adequately prepare and deal with potential post COVID-19 challenges in the banking sector.
Sani added that beyond the traditional provisions of the BOFIA, the introduction of the Bill will address the better clarification of and accurate delineation of the regulatory functions of the Central Bank of Nigeria (CBN), as well as provide for new areas such as the micro finance banks and the Financial Technology Companies (FINTECHs), which were not in their contemporary status when the BOFIA was first enacted in 1991 as the Banks and other Financial Institutions Decree (BOFID). Although the law was amended in 1997, 1998, 1999, and its transformation to BOFIA in 2002, contemporary developments have dictated its review.
Public hearing
On Wednesday, July 15, 2020, the Senate Committee on Banking, Insurance and Other Financial Institutions held a public hearing on the bill after it earlier passed through first and second reading on the floor of the Senate following which it was passed to the Committee on Banking, Insurance and Other Financial Institutions for further legislative action. The public hearing attracted a diverse group of critical stakeholders within the financial services sector, in addition to other relevant public interest groups.
In its lead presentation, Central Bank of Nigeria (CBN) recognised that whilst the extant BOFI Act 1991 provided appropriate foundation for the growth and development witnessed in Nigerian banking sector over the last three decades, significant financial, socio-economic and technological transformations that are being witnessed necessitate review of the legal framework to ensure that it remains fit-for-purpose. The apex bank’s team, which was led by its Director of Legal Services, Kofo Salam-Alada alluded to widespread innovation in channels for delivering financial services, emergence of new types of regulated institutions, advancements in supervisory techniques and methodologies as some of the contemporary developments that necessitate the need to upscale the legal framework for banking regulation and supervision in Nigeria.
Although he commended the committee for the amendments already incorporated into the bill to address some of the observed areas, he recommended additional areas for the consideration and some clauses, which the CBN felt should be removed from the Bill learning from its practical experiences garnered over time in the course of regulating and supervising banks, specialised banks and other financial institutions in Nigeria. He argued that Several new types of licensed institutions have entered Nigerian financial services sector since the enactment of the 1991 Act, which include the non-interest banks, credit bureau, payment system service providers among others and that there was thus a compelling need to introduce new provisions in the Bill to address the unique peculiarities of these institutions.
The apex bank called for review of framework for managing failing institutions in line with international standards to properly delineate roles for the agency tasked with managing failing banks and other financial institutions and those with responsibility for resolving banks and other financial institutions whose license have been revoked. In other words, the Central Bank of Nigeria does the former as provided in the BOFIA while NDIC is saddled with the latter under the NDIC Act. Salam-Alada argued that global best practice is to have the banking legislation empower the financial services industry regulator to regulate banks, promote their soundness and stability; superintend issuance and revocation of operating licence without recourse to any other institution; while the Deposit insurer is in charge of bank resolution activities after the revocation of operating licence.
He also advocated a restriction remedy for successful action against revocation of license in line with international standards, including:
Enhancement of failing bank recovery and resolution tool kit to give more options for managing failing institutions and systemic crisis without recourse to public treasury.
Creation of a Credit Tribunal to strengthen credit recovery processes and enforcement of collateral rightsStrengthening the framework for reporting for insider transactions as part of measures to boost credit administration processes in banksEnhancements to regulatory measures for single obligor limits, transfer of significant holdings, etc.
Strengthening of the Sanctions Regime to make it more deterrentReview of provisions to recognize the unique business models of new entrants into the financial services sector (e.g. non-interest banks and payment system service providers)Effective management of dormant accounts to ensure efficient administration for ultimate benefit of the owners of the funds and/or their beneficiariesEnhanced requirements for payments, settlement and clearing activities to address unfolding developmentsStandards for regulations and supervision of Systemically Important Banks given the risk that their activities pose to the financial system
Although the committee’s expressed determination was to modernize the country’s banking firmament and properly segregate the roles of each regulator in the industry, experts advise on the need to be careful so as not to turn the CBN into a toothless bulldog.
For instance, the revised fines and penalties proposed by the Committee seem not sufficient as a deterrent in some instances given the current economic conditions while the Bill as proposed did not differentiate between criminal and administrative sanctions. The Bill should therefore empower the CBN to impose administrative sanctions or penalties without recourse to the court of law first which will cause much delay.
There is need for an upward review of all financial penalties stipulated in various sections of the Bill to align with current realities and that they should be stated as minimum amounts to allow for flexibility to impose higher penalties to address any future diminution in money values. In dealing with regulations to peculiarities of Non-interest banks and Expansion of Permissible Investments by banks to Private Equity, carve outs should be introduced to sections 3, 4, and 20 to take account of the peculiarities of non-interest banking as it relates to documents to be submitted with an application for a banking license (Section 3), return on investment on paid-up capital deposit (Section 4), and acquisition of shares in SMEs etc (Section 20).
“The opportunity should also be taken to expand the type of businesses in which banks may invest (subject to the existing condition) to include private equity companies whose purpose is the promotion of the development of indigenous technology in Nigeria. Such private equity companies are of the same genus as venture capital companies in which banks are already permitted to invest by the current provisions of BOFIA.”
There is need to review the provisions of Section 12 (4) which mandatorily requires CBN to immediately pay all uninsured portion of private deposits of a bank upon revocation license. This provision would create moral hazard in the banking system and undermine the purpose of deposit insurance. The obligation to settle the private deposit liabilities of a bank whose license has been revoked lies with the Nigeria Deposit Insurance Corporation (NDIC), the agency of government charged with administering the deposit insurance scheme, and the liquidator, who distributes the liquidation proceeds among the depositors pro-rata. The committee’s attention is further drawn to the additional burden that section 12 (4) places on government and taxpayers and the fact that the proposal in Section 12(4) is not globally accepted practice.
Section 12 of the Bill introduces new subsections five and six which stipulates a time limit within which court actions regarding license revocation are to be completed whilst also conferring exclusive jurisdiction for such matters to the Federal High Court, among others. Whilst we consider the express provision for exclusive jurisdiction of Federal High Court appropriate, we recommend the removal of the timeframe within which lawsuits should be heard and determined. This is because similar provisions of time for hearing and determination of lawsuits have been struck down as they were seen as fettering the constitutional powers of the court. To avoid constitutional challenges, we propose replacement with a new language that enjoins the court to determine matters on an accelerated and expedited basis.
The suggestion by the Bill for application of same Single Obligor Limits (SOL) in Section 20 to Merchant and Commercial banks regardless of their different capital requirements and the peculiarities of their operations should be reconsidered. The provisions of the Extant Act should be reinstated to provide for separate single obligor limits to take account of the peculiarities of different business models. The language of the Bill should also be amended to extend the extant provisions to specialised banks and OFIs, with power being granted to the CBN to prescribe the SOL for different types of OFIs. This change of language is also proposed in respect of many other provisions of the Bill to permit adequate coverage of OFIs and specialised banks.