The regulatory regime applicable to banks
The Bank and Other Financial Institutions Act (BOFIA) is the principal enactment that sets out the regulatory framework for banking activities in Nigeria. It provides for the regulatory and supervisory powers of the CBN over Nigerian banks, including the issuance and revocation of banking licences, the opening and closing of bank branches, restructuring and reorganisation of banks, as well as the operation of foreign banks in Nigeria. Under Nigerian law, no entity shall undertake any banking business in Nigeria unless it is duly incorporated in Nigeria and holds a banking licence issued by the CBN.
In October 2010, the CBN changed the Nigerian banking model from a universal banking model, which hitherto allowed licensed banks to engage in non-core banking financial activities, to a core-banking model. Under the current banking model, the CBN restricts banking business to commercial banks, merchant banks and specialised banks, and the activities of such licensed banks are restricted to core-banking business. Accordingly, save as expressly permitted under the BOFIA, a licensed bank cannot hold direct or indirect interests (whether or not as subsidiaries) in enterprises undertaking non-core banking business such as capital markets activities. Promoters of banks who wish to undertake such non-core banking financial services typically adopt a non-operating financial holding company structure, and non-core banking businesses are undertaken by subsidiaries of the holding company.
The holder of a commercial banking licence has the authority to, inter alia:
- take deposits;
- maintain current and saving accounts;
- provide finance and credit facilities, retail banking, treasury management, custodial, and financial advisory (incidental to commercial banking services) services; and
- deal in foreign exchange.
A merchant banking licence permits, inter alia:
- the taking of deposits (not below 100 million naira per tranche);
- providing finance and credit facilities;
- dealing in foreign exchange;
- acting as an issuing house or otherwise arranging issuance of securities; and
- providing custodial, underwriting and treasury management services.
Specialised banks include non-interest banks, microfinance banks, development banks and mortgage banks.
Foreign financial institutions are able to provide offshore credit facilities to entities in Nigeria on a 'reach in' basis without the need to obtain a banking licence from the CBN. However, where a foreign bank wishes to establish a physical presence in Nigeria and provide credit facilities in Nigeria, the bank will be required to incorporate a limited liability company in Nigeria and obtain a banking licence. Foreign banks may also apply to the CBN for a licence to open and operate a representative office (typically licensed to only interact and meet with potential clients, and to conduct research activities) in Nigeria.
Furthermore, the BOFIA provides that any Nigerian bank intending to undertake offshore banking business must obtain a licence from the CBN and comply with the CBN's guidelines in that regard. Pursuant to the CBN Circular to all Banks on Offshore Expansion, any Nigerian bank wanting to open an offshore subsidiary must, inter alia, have been in sound financial condition (in terms of liquidity, capital adequacy, etc.) for at least the past 12 months, and must have operated profitably for the past two years, as reflected in the audited financial statements of such applying bank. The Nigerian bank is also required, as part of the application process, to give details of how the operation of the offshore subsidiary would be monitored from Nigeria.
Other than the CBN, which is the primary regulator with the core objectives of ensuring monetary and price stability and promoting a sound financial system in Nigeria, the following statutory bodies also exercise regulatory oversight on Nigerian banks:
- the Nigeria Deposit Insurance Corporation (NDIC) has regulatory oversight over deposit money banks/commercial banks (DMBs), and is responsible for insuring all deposit liabilities of licensed commercial banks and providing assistance to insured institutions in the interest of depositors in cases of financial difficulties;
- the Corporate Affairs Commission is responsible for the incorporation of all corporate entities in Nigeria, including banks and other financial institutions;
- the Financial Reporting Council of Nigeria is responsible for developing and enforcing compliance with accounting, auditing, corporate governance and financial reporting standards by public interest entities, including banks and other financial institutions;
- the Securities and Exchange Commission (SEC) regulates capital market activities and public companies in Nigeria. While a licensed bank will not in the ordinary course of its banking activities fall within the regulatory purview of the SEC, where such a bank is a public company or its affiliate undertakes capital market activities, the bank or the relevant affiliate will fall within the purview of the SEC; and
- the NSE regulates companies, including banks, that are listed on the NSE.