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BOFIA review: X-raying CBN’s stance

Given that the Central Bank of Nigeria (CBN) is the apex financial sector regulator, it is imperative that members of the Senate Committee on Banking, Insurance, and other Financial Institutions give a lot of thought to the submissions that the bank made last week at the public hearing on the Bill seeking to repeal and reenact the Banks and Other Financial Institutions Act (BOFIA), writes TONY CHUKWUNYEM

Having been enacted 29 years ago before the rapid growth of digital banking, fintech and other such technologically driven developments, the Banks and Other Financial Institutions Act (BOFIA), was clearly due for a review. In fact, in recent years, there have been several unsuccessful bills to update the existing Act and bring it in line with global best practices.
The current Bill for an Act to repeal the BOFIA 2004 and re-enact the Banks and Other Financial Institutions Act 2020, is co-sponsored by Senators Uba Sani, who is the Chairman, Senate Committee on Banking, Insurance and other Financial Institutions and Betty Appiafi (Rivers West).
Giving details of the Bill before it passed second reading in the Senate in May this year, Sani explained that the aim of the amendment is to update and strengthen the existing Act in line with global best practices, to effectively address challenges being faced in the finance services sector in Nigeria.
Sani noted that while the laws regulating banking and other financial institutions in other countries such as Egypt and South Africa are regularly updated, Nigeria had not reviewed BOFIA in almost 30 years.
According to him, apart from the traditional provisions of BOFIA, other objectives of the Bill include updating the laws governing banks, financial institutions and financial services companies; enhancing efficiency in the process of obtaining/granting banking licenses; accurately delineating the regulatory functions of CBN in the financial services industry; updating and incorporating the laws for enacting, licensing and regulation of micro-finance banks.
He added that the Bill was also aimed at regulating the activities of financial technology (fintech) firms and updating commensurate penalties for regulatory breaches in the financial services sector.
The senator further stated that the Bill, when eventually passed, will strengthen the legal framework for the regulation of financial institutions to prevent distress especially with the economy reeling from the devastating impact of COVID-19.
Indeed, the consensus among analysts is that another review of the Act is particularly needed at this time so that the country can adequately prepare and deal with post COVID-19 challenges in the banking sector.
Thus, given the importance of the Bill, it was not unexpected that the public hearing on it last Wednesday attracted a diverse group of key stakeholders within the financial services sector, in addition to other relevant public interest groups.
Clearly, the apex financial regulatory authority’s presentation at the hearing attracted the most attention.

Apex bank’s submissions
Supporting the decision to review the Act, CBN, through its Director, Legal Services, Kofo Salam-Alada, said at the hearing that while the extant BOFI Act 1991 (and amended in 1997, 1999 and 2002) 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 recorded, since then, necessitate a review of the Act.
The bank cited 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 made it imperative for BOFIA to be reviewed.
Although it commended the Senate committee for the amendments already incorporated into the Bill, CBN, speaking from “its practical experiences garnered over time in the course of regulating and supervising banks, specialized banks and other financial institutions in Nigeria,” recommended additional areas for the committee’s consideration.

Review of framework for managing failing institutions
For instance, the CBN proposed a review of the framework for managing failing institutions in line with international standards to properly delineate roles for the authority tasked with managing failing banks and other financial institutions(CBN) and those with responsibility for resolving banks and other financial institutions whose license have been revoked (NDIC).
It said: “We noticed that the powers of CBN to intervene in the process of managing a failing bank and reinstatement of a bank in a grave situation and bring it back to sound financial health was omitted in the Bill.
“The omission erodes the powers of CBN and creates a huge gap in the regulatory and resolution framework. Therefore, we propose that the extant provisions should be reinstated.”
According to the apex bank, “the 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.”
It also proposed that the remedy for successful action against revocation of license should be restricted in line with international standards.

Resolution Fund
Furthermore, CBN said that failing bank recovery and resolution tool kit should be enhanced “to give more options for managing failing institutions and systemic crisis without recourse to public treasury.”
Specifically, CBN said it was seeking the establishment of what it called “a resolution fund” to pool together resources for managing banking sector distress.
It also proposed the adoption of additional resolution tools such as bail-in – which ensures that losses are absorbed by shareholders and creditors; sale of business – which allows the resolution authority to sell all or part of the failing bank to a private acquirer; and asset separation – which entails isolating the “bad” assets of the bank is an asset management vehicle for an orderly wind-down if immediate liquidation is not justified in current market conditions.

Credit tribunal
In addition, CBN said it was seeking powers in the new Act to freeze accounts linked to criminals, while also canvassing the creation of a credit tribunal – a special court- that would help address the perennial problem of non-performing loans in the country.
According to Salam-Alada, fraud and finance crimes would be curbed if the CBN Governor has powers to apply to the court for orders to freeze accounts which are deemed to be linked with criminal and other civil infractions.
The legal director said: “As part of measures to address the role of non-performing loans, we propose the creation of a credit tribunal. The overarching objective is to create an efficient regime for the recovery of eligible loans of banks and Other Financial Institutions (OFls) and enforcement of rights over collateral securities.”

Systemically important banks
The apex bank further proposed that the new BOFIA should allow the CBN governor to designate systemically important banks based on clear parameters and prescribe additional supervisory requirements for them considering their size, complexity, and the risk they pose to the entire banking system and the economy.
Strengthening sanctions
CBN also sought powers in the new law to strengthen the sanctions regime in the banking industry in order to make it more deterrent. It noted that the Bill as drafted bit its sponsors does not clearly differentiate between criminal and administrative sanctions, adding that it should be made to empower the apex bank to enable it impose administrative sanctions or penalties.
“We suggest an upward review of all financial penalties stipulated in various sections of the bill to align with current realities. They should be stated as minimum amounts to allow for flexibility to impose higher penalties to address any future diminution in money values,” Salam-Alada noted.

Dormant accounts
Equally, the CBN said it wanted additional powers in the new BOFIA for the effective management of dormant accounts in order to ensure efficient administration for ultimate benefit of the owners of the funds and/or their beneficiaries.
“We propose the inclusion of provisions to improve the administration of dormant accounts in the Nigerian banking sector. The provisions should address such requirements as the criteria for determining dormancy, the processes for managing the funds in dormant accounts and procedure for reclaiming funds by beneficiaries,” the bank stated.
Other recommendations that the CBN made at the hearing include that the Bill should contain a review 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) and also have enhanced requirements for payments, settlement and clearing activities to address unfolding developments.

Clearly, there have been no such significant developments in the financial sector in the last 29 years that make it imperative for the country to have a new BOFIA.
Given that in the last three decades, CBN has been able to effectively regulate Nigerian banking industry that it is now one of the biggest and strongest on the continent, many analysts are of the view that members of the Senate committee should collaborate closely with the apex bank to ensure that the Bill, when eventually passed into law, is in line with global best practices and also meets the expectations of Nigerians.

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