In the past decade, industry stakeholders have consistently argued that the Banks and Other Financial Institutions Act (BOFIA) Cap B3 Laws of the Federation of Nigeria was obsolete and needed to be updated to reflect the true position of the industry.
What they did not count on, however, was the direction and the extent to which the new laws would go to regulate these new realities. BOFIA 2020, just a few days after being signed into law is proving to be a game-changer in the industry, as it continues to polarize experts – all for good reasons.
On one hand, the sponsors and supporters of this bill claim that it will strengthen the legal framework for the regulation of banks to prevent distress like that seen in 2009, where an estimated loss of N5trillion was incurred by the industry in addition to a significant erosion of shareholders’ value and reputational damage to the sector. The auspicious timing of the BOFIA 2020 bill, they believe, would prevent distress in the sector – as the economy adequately adapts to deal with post-COVID-19 challenges.
They based their optimism on the following highlights of the bill:
Responsibility and stiff penalties
The new law, in Section 5(6), seeks to hold Bank officials personally liable for any failures to seek compliance with their conditions of license. The rationale being that when individuals face imprisonment of up to 5 years and/or a fine of N15,000,000.00 (as stipulated in the new law) for negligence, they would most likely sit up to their duties of compliance, than in the old days when the faceless banks were summarily fined pittance for non-compliance.
About the fines also, they have been adjusted to reflect new financial realities, especially given the profitability of banks these days. N50,000 fines have been hijacked to N1,000,000.00 (and N100,000 daily) for non-compliance in Section 5 (3). This trend of increase holds constant for every policy breach with a penalty of a fine.
MFBs and Fintechs
One of the most important gains of this new law is how it seeks to regulate the newest and fastest-growing sectors of the industry- Fintech and MFBs. The document addresses the permissible and non-permissible activities of microfinance banks, while section 69 of the law speaks particularly to the provisions for application and granting of licenses for fintechs.
More grounds for regulation
Not only does the new law increase the powers of the CBN and its Governor, but it also increases the instances where these new powers can be exercised. Littered in the sections of the new law are cases of wider CBN controls, ranging from approval for shutting down of branches in section 6 to the consent for the transfer of significant shareholding of the Bank in section 7.
The discretionary powers of the CBN in matters of approval and revocation of license, minimum capital ratio requirements per time, the appointment of bank auditors, and scope of sanctioning of erring banks were also covered in the new law, culminating in the immunity from legal proceedings against the Federal Government, the CBN, or any of its agents in carrying out its duties.
This immunity clause is the bane of the outcry against this new law. Economists, financial advisors, and other stakeholders have opined that the immunity enshrined in the new law could lead to recklessness on the part of the regulators. They have also suggested that some of the discretionary powers of the CBN and its Governor, especially as regards to approval and revocation of licenses will erode investors’ confidence in the sector, as the system would no longer be deemed as being fair, nor offering a level playing ground.
Another major aspect of the law that has been unsatisfactory includes the many contradictions the law poses for stakeholders. There are remarkable differences between the CBN’s economic drive, its stance on salient issues, and implementation of the law. Also, between the law and existing laws.
An example is Section 19 of the law which prohibits banks from granting above N3,000,000.00 in uncollateralized loans to customers. This means that customers who meet their Bank’s pre-approved risk criteria may now be at risk of being left out of the CBN’s drive of capital injection to their sectors because their loans had hitherto been dependent on cash flow and not collateral.
Although exceptions to this law are possible with CBN’s approval, the process will likely reduce the ease of doing business for the customers.
Another example is the creation of a credit tribunal by the law. Although this tribunal is borne out of good intentions at expediting issues of credit, there is a level of misgiving amongst stakeholders as to how well this fits into the current legal framework of the nation and whether it alienates the role of AMCON in debt recovery. The projected cost of filing (0.5 % of the claim amount) by the Banks is also another cause of concern.
Lastly, it’s around the stance the CBN has taken on corporate governance over the years, which has seen Nigerian banks build independent boards and exemplified ideals for model corporate governance in Nigeria’s boardrooms. That the law now allows for CBN Examiners to have observatory status at banks’ management and board meetings could be counterproductive to the expressiveness in these meetings. Whatever the benefits of these self-contradictory laws, they seem to pale in comparison to the risk of losing investors’ confidence in transparent financial institutions and ease of doing business.
The CBN once claimed that Nigerian banks are one of the most regulated in the world. President Buhari’s signing of BOFIA 2020 into law makes this statement sound truer than ever, as previously exploited loopholes have been plugged. However, what remains to be seen are the advantages, or otherwise, of this extra regulation.
There are no perfect banking systems anywhere in the world, but BOFIA 2020 may just have moved Nigerian banks along that line. In the coming weeks, as this new law is explained and implemented by the CBN, we will begin to have an idea of how far we have moved towards (or away from) a perfect banking system.