i INTRODUCTION

As is the case with the banking industry of most countries, the Nigerian banking industry is highly regulated. This is no wonder, as it plays a key role in the economic growth of the country, and its regulation is fundamental considering the systemic risks associated with the failure of banks. In its role as the Nigerian apex bank and primary regulator of the banking sector, the Central Bank of Nigeria (CBN) has, over the years, implemented various reforms and policies aimed at developing the industry into one that is reliable and capable of driving efficiency in economic activities. Notable among these reforms is the 2004 Bank Consolidation and Recapitalisation,2 which saw 25 banks emerge from the then-existing 89 legacy banks. As at March 2020, there were 29 licensed banks in Nigeria (excluding microfinance banks, mortgage banks, specialised banks and other entities licensed by the CBN), comprising 22 commercial banks,3 five merchant banks4 and two non-interest banks.5

The following banks are the five largest banks in Nigeria by their market capitalisation on the Nigerian Stock Exchange (NSE):

  1. Guaranty Trust Bank Plc;
  2. Zenith Bank Plc;
  3. Access Bank Plc;
  4. Union Bank of Nigeria Plc; and
  5. United Bank for Africa Plc.6

With the continued focus on financial inclusion, the Nigerian banking industry now features an increased presence of mobile money agents, agent banks and other related platforms that provide financial services (typically limited to sending and receiving money, bill payments, etc.) in rural areas and unbanked locations. In relation to this, there have also been increased activities and engagements (regulatory and otherwise) within the financial technology space (see Section VII).

On a general note, the Nigerian economy has continued to witness a rise in inflation rate, and, to curb this increase, the CBN is looking to adopt a contractionary monetary policy by increasing the cash reserve requirement for banks to 27.5 per cent from 22.5 per cent.7 This is likely to put downward pressure on monetary inflation in the economy.

ii THE REGULATORY REGIME APPLICABLE TO BANKS

The Bank and Other Financial Institutions Act8 (BOFIA) is the principal legislation that sets out the regulatory framework for banking activities in Nigeria.9 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 and the restructuring and reorganisation of banks, as well as the operation of foreign banks in Nigeria. Under Nigerian law, no entity shall undertake any banking business10 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.11 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.12 Accordingly, except for 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 that 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:

  1. take deposits;
  2. maintain current and saving accounts;
  3. provide finance and credit facilities, retail banking, treasury management, and custodial and financial advisory (incidental to commercial banking services) services; and
  4. deal in foreign exchange.

A merchant banking licence permits, inter alia:

  1. the taking of deposits (not below 100 million naira per tranche);13
  2. providing finance and credit facilities;
  3. dealing in foreign exchange;
  4. acting as an issuing house or otherwise arranging issuance of securities; and
  5. 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.14 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,15 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 previous 12 months, and must have operated profitably for the previous 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:

  1. the Nigeria Deposit Insurance Corporation (NDIC)16 has regulatory oversight over deposit money banks (DMBs) – also known as commercial banks – 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 difficulty;
  2. the Corporate Affairs Commission17 is responsible for the incorporation of all corporate entities in Nigeria, including banks and other financial institutions;
  3. the Financial Reporting Council of Nigeria18 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;
  4. the Securities and Exchange Commission (SEC)19 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
  5. the NSE regulates companies, including banks, that are listed on the NSE.

iii PRUDENTIAL REGULATION

i Relationship with the prudential regulator

While some countries have separated their financial regulators along the lines of licensing, prudential regulation and consumer protection, in Nigeria all roles are primarily performed by the CBN. In February 2011, the CBN released its Supervisory Intervention Framework for the Nigerian Banking Sector (the Supervisory Framework 2011), which was designed to complement the CBN's Prudential Guidelines for Deposit Money Banks in Nigeria 2010 (the DMB Prudential Guidelines).20 It reflects the fact that the CBN has adopted a risk-based supervisory approach.

The risk-based supervisory approach is a continuous process of updating risk assessments through on-site and off-site examinations of financial institutions to create an early warning system so the CBN can anticipate and deal with emerging issues. This approach results in the CBN producing a composite risk rating for financial institutions. Under the Supervisory Framework 2011, financial institutions will be awarded one of the following risk scores:

  1. 1: for institutions with low risk profiles;
  2. 2: for institutions with moderate risk profiles;
  3. 3: for institutions with above average risk profiles; and
  4. 4: for institutions with high risk profiles.

Prudential supervisory function

Pursuant to Section 13 of the BOFIA, the CBN has the power to establish and enforce capital ratios and prudential standards over all deposit-taking financial institutions operating in Nigeria. The CBN's website sets out all the prudential guidance notes currently in force.21 The DMB Prudential Guidelines comply significantly with the Basel II framework, but adjust certain sections of the framework to better reflect the distinctive features of the Nigerian economy.

The CBN mandates all banks licensed to carry out banking business22 in Nigeria to perform an annual internal capital adequacy assessment process and forward copies of their reports to the CBN no later than four months after the end of the year.23 Failure to comply with this obligation puts a bank at risk of having its banking licence revoked.24

Furthermore, the CBN's Framework for the Regulation and Supervision of Domestic Systemically Important Banks 2014 (the D-SIB Framework) mandates that banks classified as systemically important banks25 maintain a minimum capital ratio of 15 per cent and set aside an additional surcharge of 1 per cent of their respective minimum required capital adequacy ratio (CAR).26 Failure to maintain the CAR stipulated by the CBN constitutes a ground for the revocation of a bank's banking licence.27

NDIC

The NDIC also supports the CBN by implementing the CBN's banking policy. The NDIC, through its off-site surveillance, ensures compliance with the CBN's prudential standards and guidelines.28 Off-site surveillance is carried out by the NDIC's insurance and surveillance department. This consists of analysing the returns from licensed banks and other deposit-taking financial institutions on a periodic basis to ascertain their compliance with prudential regulations. The analysis culminates with a report on the condition and performance of the bank in question, with recommendations for corrective action in weak areas.

Consequences of a licensed deposit-taking financial institution's failure

Where the financial position of a DMB becomes precarious, the NDIC may, after consulting with the CBN, take over management of the bank to salvage the operations of the bank by the creation of a bridge bank.29 In this regard, the NDIC is empowered to, inter alia, take over the management of the failing bank until its financial position is substantially improved; acquire, manage and dispose of the failing bank's impaired assets either directly or through an asset management company; and incorporate a bridge bank30 to assume the deposits, assets and liabilities of the failing bank, as the NDIC may determine.

Where the restructuring of the bank proves unsuccessful, the Nigeria Deposit Insurance Corporation Act establishes a legal regime for the winding up of a failed bank. Further details are set out in subsection iv.

ii Management of banks

Corporate governance requirements for banks

The corporate governance requirements for banks in Nigeria are laid out in the 2014 CBN Code of Corporate Governance for Banks and Discount Houses (Code).31 The Code is designed to update and align corporate governance in the Nigerian banking industry with international best practices. Compliance with the Code is mandatory for all banks in Nigeria, and they are required to render returns on the status of compliance to the CBN at the end of every quarter.

In this regard, the Code provides that the size of the board of directors (board) of any bank shall be a minimum of five members and a maximum of 20 members; and the board of a bank is required to be composed of more non-executive directors than executive directors. Further to this and to ensure the continuous injection of fresh ideas, the Code stipulates that non-executive directors of banks shall serve for a maximum of three terms of four years each, while the tenure of the MD or CEO shall be subject to a maximum period of 10 years, which may be broken down into periods not exceeding five years at a time.

The Code emphasises the importance of risk governance as part of a bank's general corporate governance framework, and promotes the value of the board and several board committees with effective control functions. Specifically, the Code:

  1. regulates equity holding in banks by investors;
  2. discourages a government majority stake in banks by limiting the maximum holding of any government to 10 per cent;
  3. encourages a whistle-blowing framework and the protection of stakeholders' rights; and
  4. strengthens disclosure requirements and transparency in banks' annual reports.

In addition to compliance with the Code (which is banking sector-specific), the Financial Reporting Council of Nigeria (FRCN) extended the requirement of compliance with, and the application of, the Nigerian Code of Corporate Governance 2018 (NCCG) to Nigerian banks with effect from 1 January 2020.32 Similar to the Code, the NCCG contains broad principles and international best practices on corporate governance applicable to each level of management (i.e., the board, the MD and CEO, independent directors, the chairperson, the company secretary and external auditors). The FRCN requires the relevant entities (including banks) to report compliance with the NCCG in their annual reports for each financial year.

Legal and regulatory duties of management of banks

In accordance with the Code, the management of banks in Nigeria are generally responsible for policy implementation and the development of a sound system of risk management and internal control policies that must clearly define the roles and responsibilities of the board and its risk management committee, as well as the roles and responsibilities of management and the internal audit function.

Bank holding company structure: decision-making over subsidiaries

The Nigerian bank holding company (HoldCo) subsidiary structure is based on the principle of corporate personality such that the subsidiary banks are different and distinct from their HoldCos. Accordingly, pursuant to the CBN Guidelines for Licensing and Regulation of Financial Holding Companies in Nigeria, 2014 (the HoldCo Guidelines), no financial HoldCo shall arrogate for itself any of the powers or functions of the board of directors, or internal management responsibilities and obligations of any of its subsidiaries or associates of any such subsidiaries. In addition, no financial HoldCo shall interfere with the day-to-day activities of the subsidiaries; nor shall it be involved in the credit administration and approval process of its subsidiaries.

Restrictions on bonus payments

There are no regulations currently in place in Nigeria that restrict bonus payments to the management and employees of banking groups. However, it is noteworthy that the Code requires every bank to have a remuneration policy established by its board, and to disclose the policy to the shareholders in the bank's annual report. Under the Code, it is also expected that a committee of non-executive directors would be responsible for determining the remuneration of executive directors.

iii Regulatory capital and liquidity

The prudential standards relating to regulatory capital for Nigerian banks are found in the DMB Prudential Guidelines, which are based on the standards of Basel II, and the CBN's Guidance Note on Regulatory Capital 2018 (Regulatory Capital Guidelines), modelled on Basel III.

Risk-weighted capital

Under the DMB Prudential Guidelines, a DMB with a national banking licence must maintain a minimum of 10 per cent of the total risk-weighted assets as capital funds on an ongoing basis.33 DMBs that have been authorised by the CBN to carry out banking activities outside Nigeria must maintain a higher CAR of 15 per cent.34

Tier 1 capital

The capital a DMB must maintain to achieve its CAR must be made up of Tier 1 and Tier 2 capital. Under Section 2 of the Regulatory Capital Guidelines, Tier 1 capital includes disclosed reserves and shareholder equity, which constitute issued and fully paid up ordinary shares or perpetual non-cumulative preference shares.

Tier 2 capital

Under Section 3 of the Regulatory Capital Guidelines, Tier 2 capital is made up of two components: hybrid debt instruments and subordinated debt. Hybrid debt instruments feature characteristics of equity and debt.

The CBN has determined that hybrid instruments may be included in Tier 2 capital where they are able to support losses on an ongoing basis without triggering liquidation. To qualify as Tier 2 capital, hybrid instruments, inter alia:

  1. must be unsecured, subordinated and fully paid up;
  2. must be available to participate in losses without the bank being obliged to cease trading;
  3. must not be redeemable at the initiative of the holder or without the prior consent of the CBN;
  4. may carry an obligation to pay interest, but that obligation cannot permanently be reduced or waived;
  5. should allow the obligation to pay interest to be deferred where the profitability of the bank would not support payment; and
  6. where redeemable, must have an original maturity of at least 10 years, and must clearly specify that repayment is subject to authorisation by the CBN.35

In calculating the amount of Tier 1 and Tier 2 capital that comprise a bank's capital base, net of all permitted deductions, the calculation is subject to certain limits. Fundamental Tier 2 capital can constitute, at most, 33.33 per cent of net Tier 1 capital. There is no limit on the inclusion of Tier 1 capital for the purpose of calculating regulatory capital.

Consolidated supervision

Neither the DMB Prudential Guidelines nor the Regulatory Capital Guidelines impose specific requirements for DMBs in Nigeria that form part of a group. The HoldCo Guidelines stipulate that a financial HoldCo must have at least two subsidiaries, and the conglomerate's focus must be in the financial services sector.36 The consolidated supervision approach for Nigerian banks is the solo-plus approach,37 complemented by a quantitative and qualitative assessment of the banking group to assess the potential impact of other members of the group on the operations of the supervised bank.

Liquidity

The CBN requires all banks operating in Nigeria to ensure that their level of cash flow is matched by expected receipts, so that banks always have enough cash to meet the requests of their depositors. This is to ensure that each bank's cash balance plus assets, when compared to the total liabilities owed by each bank, is high enough for the bank to meet its obligations as they fall due. The CBN sets out the minimum liquidity ratio benchmarks for the banking sector in its Monetary, Credit, Foreign Trade and Exchange Policy Guidelines (the MCFT Policy Guidelines).

The MCFT Policy Guidelines are a periodic publication of the CBN designed to provide guidance to financial institutions for the medium-term fiscal period, and to demonstrate the CBN's direction and policy objectives. The latest version of the MCFT Policy Guidelines covers the period from January 2018 to December 2019. Under the current guidelines, the CBN requires that banks maintain minimum liquidity ratios as follows: DMBs: 30 per cent; merchant banks: 20 per cent; and non-interest banks: 10 per cent. The CBN is yet to issue new MCFT Policy Guidelines that will apply in 2020 but the Monetary Policy Committee held a meeting in January 2020 and resolved that the liquidity ratio for DMBs be retained at 30 per cent.38 It is likely that the liquidity ratios for merchant banks and non-interest banks will also be maintained at their current ratios.39

Local regime divergence from Basel III

The Basel frameworks have been progressively implemented in Nigeria since January 2013. The Basel II and III Framework Guidelines list all areas of national discretion set out under the International Convergence of Capital Measurements and Capital Standards, although these deal mostly with the International Convergence of Capital Measurement and Capital Standards, June 2006 (Basel II Framework).

Key areas of divergence include the fact that under the Basel II and III Framework Guidelines, the CBN departs from Paragraph 49(xii) of the Basel II Framework by not permitting banks in Nigeria to employ short-term subordinated debt as a third tier of capital.

iv Recovery and resolution

Resolution of failed banks in Nigeria

The NDIC is the main body responsible for the resolution of failed banks in Nigeria. The BOFIA also mandates the CBN to step in when a bank is in crisis, to turn over management and control of such bank to the NDIC. The NDIC is empowered to provide financial and technical assistance to failing or distressed banks in the interest of depositors. Financial assistance can take the form of loans, guarantees for loans taken on by the bank or the acceptance of accommodation bills. Similarly, technical assistance may include taking over the management and control of the bank, changes in management or assistance in a merger with another viable institution.40

In 2002, in collaboration with the CBN, the NDIC introduced the Contingency Planning Framework for Banking Systemic Crises to facilitate the prompt resolution of failing banks. The aim of the Framework is to reduce the incidence of systemic distress by improving the supervisory processes, providing transparent and objective thresholds for regulatory intervention, and promoting self-regulation among banks. Some of the mechanisms that the NDIC (in collaboration with the CBN) has adopted for the resolution of failed banks are open bank assistance (OBA), purchase and assumption (P&A) transactions and bridge banks.41

OBA

The NDIC may decide to offer a failing bank financial assistance if it meets certain requirements. Financial assistance in the form of OBA is made available to a failing bank without interrupting its operation as a going concern. The NDIC does this by offering a loan to the failing bank, guaranteeing a loan that the bank has taken on or accepting an accommodation bill. In addition to such conditions as may be stipulated by the NDIC, the bank must also meet the liquidity threshold prescribed by the NDIC.

P&A transactions

This is a resolution transaction in which a healthy bank purchases some or all the assets of a failed bank and assumes some or all its liabilities. If the whole bank is purchased, the acquirer may receive a government payment covering the difference between the market value of assets and liabilities. If only some deposits are assumed, the acquirer may be given the option of assuming any of the others, and take their pick of the failed bank's assets.

Bridge bank

A bridge bank is a temporary bank established and operated by the NDIC to acquire the assets and assume the liabilities of a failed bank until a final resolution can be accomplished. In some instances, the bridge bank will retain the failed bank's licence, but it will operate under a different name in the same premises used by the failed bank. In other instances, the CBN may revoke the failed bank's licence and issue a new licence to the bridge bank. The bridge bank would permit continuity of banking services to all customers and fully protect the depositors and creditors of the failed bank.

Another form of bank resolution for failed banks is the acquisition of non-performing loans of failed banks by the Asset Management Corporation of Nigeria.

In accordance with the BOFIA, in the event that a failed bank over which NDIC has assumed control cannot be rehabilitated, the NDIC may recommend to the CBN other resolution measures, which may include revocation of the failed bank's licence. Where the licence of a failed bank has been revoked, the NDIC may apply to the relevant court for a winding-up order in respect of the failed bank. Upon the court's order for the winding up of the failed bank, the NDIC shall give notice by advertising in national newspapers or other news media requiring all depositors with the failed bank to forward their claims to the NDIC. The NDIC, acting as liquidator of the failed bank, shall have power to realise the assets of the failed bank.

Bail-in powers

Currently, there are no bail-in powers in the Nigerian banking industry, and we are not aware of any proposals for bail-in powers of banks or regulatory bodies.

iv CONDUCT OF BUSINESS

The BOFIA is the primary legislation that governs banks' conduct of business in Nigeria. Other laws and rules that govern banks' conduct of business include:

  1. the Companies and Allied Matters Act;
  2. the Nigerian Deposit Insurance Corporation Act;
  3. the Foreign Exchange (Monitoring and Miscellaneous) Act;
  4. the Financial Reporting Council of Nigeria Act; and
  5. the Code of Conduct in the Nigerian Banking Industry (the Code of Conduct).

Where banks act in contravention of the provisions of the BOFIA, they may be subject to civil, criminal or regulatory liability; for example, where a bank fails to comply with the conditions of its banking licence, this amounts to an offence with a fine (on conviction) not exceeding 50,000 naira for each day during which a condition is not complied with.

Furthermore, the CBN Consumer Protection Framework 2016, made pursuant to the Central Bank of Nigeria Act (the CBN Act), sets high standards for efficient customer service delivery and market discipline, and provides that financial institutions are obliged to safeguard the privacy of their customers' data. The Code of Conduct also imposes confidentiality obligations on banks and their employees. In particular, Section 1(1.2) of the Code of Conduct requires banks to observe a strict duty of confidentiality about their customers' and former customers' affairs, and prohibits them from disclosing details of customers' accounts, transactions, names and addresses to third parties.

Furthermore, the Code of Conduct requires banks to insist that all directors, management and staff sign a declaration of secrecy to ensure the confidentiality of customers' information. The foregoing confidentiality obligations are subject to the general reporting obligations borne by Nigerian banks:

  1. to anti-graft and anti-money laundering agencies in respect of transactions exceeding certain thresholds;
  2. when compelled to make disclosures pursuant to court orders in proceedings (such as a garnishee process);
  3. where the interests of the bank requires disclosure; and
  4. where disclosure is made at the request, or with the consent (express or implied), of the customer.

v FUNDING

With over 79 million active bank accounts,42 Nigerian banks primarily raise funds to carry on their activities from customer deposits. In addition, Nigerian banks access funding from the capital market through the issuance of bonds and other financial instruments; and access loans from development finance institutions, foreign institutional (impact) lenders and international banks, the proceeds of which are typically on-lent to customers and used to fund other activities. They also source their funds from trading in securities (particularly treasury bills and other government-backed securities) as well as from interest on moneys lent to customers.

The CBN is also empowered under the CBN Act to lend money to Nigerian banks facing liquidity issues on such terms and interest rates as it deems fit. To guide banks in the management of their liquidity, the CBN in 2003 issued the Guidelines for the Development of Liquidity Management Policies43 (the Liquidity Management Guidelines). The Liquidity Management Guidelines seek to monitor banks' liquidity at all times, ensuring that banks maintain adequate and sufficient liquidity to meet the financial obligations of their operations.

Under the Liquidity Management Guidelines, each bank is expected to have a steady cash flow, hold a reasonable stock of liquid assets and have the capacity to borrow. The Liquidity Management Guidelines thus suggest different liquidity management strategies that may be adopted by banks to ensure adequate liquidity, including:

  1. having a well-defined mix of assets and liabilities;
  2. diversifying their funding base;
  3. maintaining an adequate stock of liquid assets; and
  4. restricting dependence on intra-group liquidity.

vi CONTROL OF BANKS AND TRANSFERS OF BANKING BUSINESS

i Control regime

The Nigerian banking sector has a wide variety of control mechanisms used to regulate the holding of a substantial stake in a commercial bank. The most instructive of these regulations is the Code of Corporate Governance for Banks and Discount Houses 2014, which provides that an equity holding of 5 per cent and above by any investor shall be subject to the CBN's prior approval. Where this 5 per cent share capital threshold is acquired through the capital market, the bank shall apply for a no objection letter from the CBN immediately after the threshold is reached.

The ownership and control of the holding company is also regulated by the HoldCo Guidelines, which provide that the prior approval of the CBN shall be obtained for any shareholding of 5 per cent and above or any change in ownership that results in a change in the control of a financial holding company. In situations where such shares are acquired through the secondary market, the financial holding company shall apply for approval from the CBN within seven days of the acquisition.

The HoldCo Guidelines contain provisions that deal with the ownership, control and permissible activities of HoldCos. Where a HoldCo loses control in one or all of the banking subsidiaries in the group for a period exceeding six consecutive months, the HoldCo shall cease to be a HoldCo for the purposes of the HoldCo Guidelines and will be required to return its licence to the CBN for cancellation.44 Furthermore, the guidelines prohibit a HoldCo from engaging in any transaction or maintaining any business relationship with any of its subsidiaries unless such transaction is conducted at arm's length.45

ii Transfers of banking business

Until 2019, the transfer of business activities in Nigeria pursuant to mergers, acquisitions, takeovers and other forms of business combinations was primarily regulated by the SEC. However, following the recent enactment of the Federal Competition and Consumer Protection Act (FCCPA),46 Nigeria's competition regulatory framework has been transformed. The Federal Competition and Consumer Protection Commission (Commission) is now empowered to promote and maintain competitive markets in Nigeria.47 Once a proposed merger exceeds the thresholds laid down by the Commission, that merger cannot be implemented without first being approved by the Commission. Section 92(4) of the FCCPA makes it clear that the Commission alone has the power to set the thresholds for what qualifies as a small or large merger under the FCCPA.

Consequently, under the provisions of the FCCPA, mergers of banks that are private companies will no longer require the SEC's approval: rather, the approval of the CBN and the Commission will be required. However, where a merger involves banks that are public companies, it will fall within the regulatory purview of the SEC in addition to that of the Commission.

Additionally, when the entities concerned are banking organisations, Section 7(1) of the BOFIA also regulates such transactions, and provides for certain circumstances where the prior consent of the Governor of the CBN must be obtained.

Where a bank is publicly quoted on the NSE, the Rulebook of the NSE states that the NSE's consent to the merger must also be obtained.

Finally, the FCCPA has not repealed the provisions of the Investment and Securities Act 2007 (ISA) that govern takeover bids48 or the SEC's innate power to make rules and regulations prescribing the procedure and criteria for the approval of takeovers under Section 313(1)(e) of the ISA. This means that Sections 131 to 151 of the ISA and Rules 445 to 449 of the SEC Rules, which regulate takeovers, are still applicable and will govern any proposed takeover bid for a Nigerian bank that is a public company.

vii THE YEAR IN REVIEW

The past year has seen significant strides and developments within the banking industry in Nigeria. In 2019, the CBN aimed to refocus banks on their traditional role by raising the minimum loan to deposit ratio (LDR). Furthermore, the CBN excluded non-bank locals (individual and corporate) from participation in its open market operations (OMO) in both primary and secondary markets. The year also witnessed increased activities and regulatory engagements within the fintech space. A major highlight of the current year is the enactment of the new Finance Act through which the Nigerian government has undertaken a robust reform of various domestic tax laws with far-reaching fiscal implications.

i Increased LDR

In a bid to drive credit extension to the private sector and ramp up growth of the Nigerian economy through investment in the real estate sector, the CBN raised the LDR to 65 per cent.49 Failure to meet the minimum LDR would result in a levy of additional cash reserve requirement equal to 50 per cent of the lending shortfall implied by the target LDR. The increase in the minimum LDR has enhanced credit into key sectors of the economy, encouraging banks to undertake lending to small and medium-sized enterprises and consumers and the retail and mortgage sectors. Since the increase in the LDR in July 2019, lending in the Nigerian banking industry has increased to over 1.1 trillion naira with the manufacturing sector receiving the highest amount of 459.69 billion naira.50

ii CBN's ban of non-bank locals from participation in its OMO

In October 2019, the CBN announced the exclusion of domestic corporates and individuals from purchasing its OMO bills in both the primary and secondary markets. As a result of this ban, everyone other than banks and foreign portfolio investors will have to shift focus to other investment options (such as treasury bills, bonds, fixed deposits, commercial papers and equities), thereby creating liquidity in other assets. Just as with the drive for the increase in the LDR, it is generally believed that the CBN's policy is aimed at diverting liquidity away from risk-free instruments to the real estate sector of the economy.51

iii The Finance Act

The Finance Act (the Act)52 amended various domestic tax laws in Nigeria. While the Act creates a far-reaching effect on different sectors of the economy, the key highlights that impact the Nigerian banking sector are as follows:

  1. increase in the rate of value added tax (VAT) from 5 per cent to 7.5 per cent;
  2. banks and other financial institutions are now required to request tax identification numbers as a precondition for opening and maintaining an account;
  3. all electronic receipts or transfers (via bank transfers, point-of-sale transactions, etc.) of at least 10,000 naira in value now attract a singular one-off duty of 50 naira with the exemption of bank transfers between own accounts;
  4. microfinance banks are now specifically exempt from VAT;
  5. electronic instruments (including finance documents) are now chargeable to stamp duties; and
  6. the hitherto existing 100 per cent tax exemption on withholding tax (WHT) rate on interest payments on certain classes of foreign loans has now been removed with the maximum tax exemption that can be claimed being 70 per cent of the WHT rate on loans with tenor of above seven years and a moratorium of two years, with consequent reductions in exemption rates for loans with lower tenors and moratoria.

iv Increased activity in the fintech space

Between 2018 and 2019, Nigeria witnessed a major boost in its reputation as one of the leading African markets leveraging technology to democratise financial services, and the fintech space has continued to witness increased activity and engagement, both regulatory and otherwise.

One such activity is the emergence of payment service banks (PSBs), which indicates a trend of increased collaboration in Nigeria between financial services companies and technology, media and telecommunications companies. PSBs are banks licensed by the CBN to operate mostly in rural areas and unbanked locations, targeting financially excluded persons and offering traditional banking services, although they are unable to grant loans. The CBN PSB Guidelines were issued in 2018 and allow telecommunications companies acting through their subsidiaries to operate PSBs. In 2019, Money Master PSB and 9PSB, subsidiaries of leading telecommunications companies Globacom and 9mobile, respectively, were granted approvals in principle by the CBN to operate PSBs, while MTN Nigeria is currently awaiting approval for its PSB licence. It is, therefore, expected that these PSBs will be fully operational in 2020.

The CBN also recently issued the Nigerian Payment Systems Risk and Information Security Management Framework, which introduces principles and compliance measures that must be adopted by stakeholders in the Nigerian payment system to mitigate risk factors that negatively impact the operations and effectiveness of the Nigerian payment system framework. The implementation of the Framework will increase stakeholder operation efficiency in the Nigerian payments system.

viii OUTLOOK and CONCLUSIONS

While the CBN has indicated that the LDR will be maintained at 65 per cent in the short term, the market forecast is that it may increase the LDR to 70 per cent by the end of 2020. Accordingly, owing to the increase in LDR, we expect to see more lending by commercial banks in 2020. We also expect that the volume of loans will be further impacted by the ban of domestic corporates and individuals from the CBN's OMO as an alternative destination for extra liquidity is (fixed) bank deposits. An increased placement of deposits may, in turn, force DMBs to increase their lending to meet the LDR requirement. Furthermore, with the increased activities in the fintech industry, conventional banks may face immense competition from the smaller fintech companies, telecommunications companies and other industry players within the fintech industry in relation to the provision of financial services. We expect this to ultimately result in efficiency and the delivery of better service within the financial services sector.


Footnotes

1 Ibrahim Hassan, Oluwatobi Pearce, Basirat Raheem and Ezomime Onimiya are associates at Banwo & Ighodalo.

2 Under the recapitalisation exercise, the CBN increased the minimum capital base requirement for commercial banks to 25 billion naira.

8 Cap B3, Laws of the Federation of Nigeria, 2004.

9 Other relevant enactments include the Central Bank of Nigeria (Establishment) Act 2007, the Nigeria Deposit Insurance Corporation Act 2006 and the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act, Cap F34, Laws of the Federation of Nigeria, 2004.

10 Section 66 of the BOFIA defines 'banking business' as 'the business of receiving deposits or current account, savings account or other similar account, paying or collecting cheque drawn by or paid in by customers; provision of finance or such other business as the Governor may, by order published in the Gazette, designate a banking business'.

11 The CBN repealed the Universal Banking Guideline 2000 and issued new rules and guidelines for banking licences entitled the Regulation on the Scope of Banking Activities and Ancillary Matters, No. 3, 2010.

12 Such as receiving deposits on current accounts, savings accounts or other similar accounts, paying or collecting cheques drawn by or paid in by customers, advancing loans, issuing letters of credit and bank guarantees, and the general provision of finance.

13 Or such other minimum amount as the CBN may prescribe from time to time.

14 Currently, four of the licensed commercial banks in Nigeria are owned or operated by foreign or international bank groups: Citibank Nigeria Limited, Ecobank Nigeria Limited, Stanbic IBTC Bank Plc and Standard Chartered Bank Limited. The South African group FirstRand Bank Limited also owns one of the merchant banks in Nigeria, Rand Merchant Bank Limited.

15 Dated 7 October 2008.

16 Established pursuant to the Nigeria Deposit Insurance Corporation Act 2006.

17 Established pursuant to the Companies and Allied Matters Act, Cap C20, Laws of the Federation of Nigeria, 2004.

18 Established under the Financial Reporting Council of Nigeria Act of 2011 and supervised by the Federal Ministry of Industry, Trade and Investment.

19 Established under the Investments and Securities Act.

20 In August 2019, the CBN issued an exposure draft of revised Prudential Guidelines for Commercial, Merchant and Non-Interest Banks. Although the revised guideline is yet to be effective, it is poised to deal with significant changes (such as the foreign exchange crisis, liquidity issues, increase in the incidence of non-performing loans, deteriorating corporate governance practice, increasing competition from fintech companies, the review of major global prudential standards) that have occurred in the Nigerian banking landscape since the issuance of the DMB Prudential Guidelines in 2010.

22 See footnote 11.

23 CBN Circular to All Banks and Discount Houses on the Implementation of Basel II/III in Nigeria, reference No. BSD/DIR/CIR/GEN/LAB/06/053, dated 10 December 2013.

24 Section 12 of the Central Bank of Nigeria Act.

25 The CBN has classified First Bank of Nigeria, Guaranty Trust Bank, Untied Bank for Africa, Access Bank, Polaris Bank and Ecobank Nigeria as systemically important banks.

26 Section 6 of the D-SIB Framework.

27 Section 14 of the BOFIA.

28 The NDIC also performs on-site surveillance with the CBN's banking supervision department for DMBs, and the CBN's other financial institutions department in respect of microfinance banks and primary mortgage banks. The equivalent departments in the NDIC are the bank examination department, which deals with DMBs, and the special insured institutions department, which carries out on-site surveillance on microfinance banks and primary mortgage banks.

29 For example, following the failure of the now-defunct Skye Bank, the NDIC, in consultation with the CBN, incorporated Polaris Bank as a bridge bank, withdrew Skye Bank's operating licence and transferred its assets and liabilities to Polaris Bank.

30 A bridge bank is an entity incorporated by the NDIC and licensed by the CBN as a bank to act as a stop-gap arrangement between the failure of a bank and the time when the NDIC can arrange the acquisition of this newly incorporated bank by a third party, while the failing bank is wound up.

31 On 26 October 2018, the CBN issued Codes of Corporate Governance in respect of the following other financial institutions: microfinance banks; development finance banks; primary mortgage banks; mortgage refinance companies; finance companies and bureaux de change.

32 Pursuant to the FRCN's circular on the 'Adoption and Compliance with Nigerian Code of Corporate Governance 2018', of 15 January 2019, the FRCN extended the application of the NCCG to the following entities, among others: all pubic companies whether listed or not; all regulated private companies being private companies that file returns to any regulatory authority other than the Federal Inland Revenue Service and the Nigerian companies' registry, the Corporate Affairs Commission. These categories of entities to which the NCCG applies will include banks considering that most Nigerian banks are public companies, and even where they are organised as private companies, they are statutorily required to file returns to the CBN.

33 Section 3.16 of the DMB Guidelines.

34 Section 1 of the Regulatory Capital Guidelines.

35 Subordinated debt can qualify as part of Tier 2 capital only if it satisfies the 13 requirements set out in Section 3.2 of the Regulatory Capital Guidelines.

36 Section 2.3.1 of the HoldCo Guidelines.

37 Solo supervision consists of the risk-based supervision of banks on a solo basis by the CBN and the NDIC.

38 See footnote 7.

39 We expect that the new MCFT Policy Guidelines will be issued later in 2020.

41 ibid.

44 Section 4.1(e) of the HoldCo Guidelines.

45 Section 6.2.1(i) of the HoldCo Guidelines.

46 The FCCPA was signed into law on 30 January 2019.

47 Section 1(a) of the FCCPA.

48 Sections 131 to 151 of the ISA and SEC Rules 445 to 449 govern takeover bids in Nigeria. Section 131 of the ISA and Rule 445 of the SEC Rules require that a takeover bid be submitted to the shareholders of a public quoted company, where a person or group of persons acquires or wishes to acquire a minimum 30 per cent share of such a company with the intention of taking over control of that company.

49 The LDR was first raised to 60 per cent in July 2019, and subsequently raised to 65 per cent in September 2019. By a circular dated 7 January 2020, the CBN has indicated that it will retain the minimum LDR at 65 per cent in the interim.

52 Signed into law on 13 January 2020.