BOFIA and Sanity of Nigeria’s Financial System

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James Emejo writes that the amended Banks and Other Financial Institutions Act (BOFIA) ushers a new era of banking and financial industry regulation that could be a game-changer in efforts to sanitise and achieve sound financial system

On Thursday, President Muhammadu Buhari finally signed the Banks and Other Financial Institutions Act 2020 into law, marking a watershed in financial system regulation in the country. The new Act, which repealed the extant BOFIA 1991 (as amended) had been in operation for about 16 years without an amendment, particularly in the face of increasing complexities emerging from disruptive technologies and associated risks and instances lax corporate governance that had given room for insider abuse and corruption, leading to increase in non-performing loans (NPLs) in the banking system.

Stakeholders had long canvassed for the review of the banking and financial sector framework especially following the 2004 and 2008 financial crises that almost eroded confidence in the system as a result of revelation that banks’ assets quality had significantly deteriorated as a result of excessive risk taking, reckless credit facilities, and other unethical practices.

Banking officials had taken advantage of some limitations in the extant BOFIA including absence of stringent financial sanctions to deter infractions, lack of specialised courts to prosecute financial crimes, as well as absence of a clause that prevents bank officials from giving indiscriminate credit facilities to staff and family members among others.

But according to Buhari, the BOFIA 2020 represented, a “monumental piece of legislation” that is “expected to enhance the soundness and resilience of the financial system for sustainable growth and development of the Nigerian economy.”

In a statement by the Senior Special Assistant to the President on Media & Publicity, Mr. Garba Shehu, the Buhari added that, “The BOFI Act 2020 updates the enabling law in response to developments and significant evolution in the financial sector over the last two decades.

“It will increase the appetite of banks and other financial institutions to channel much needed credit to the real sector to support economic recovery and promote sustainable growth.”

Essentially, one of merits of the new legislation is the introduction “a credit tribunal to improve loan recovery and address the incidence of high non-performing loans within the financial system, which has been a key deterrent to lending by financial institutions.”

Buhari further stated that the law will strengthen the “regulatory and supervisory framework for the financial industry and provides additional tools for managing failing institutions and systemic distress to preserve financial stability amongst others.”

“This enactment of the BOFI Act 2020 is a historic and significant achievement, which is indicative of effective and productive collaboration between the executive and legislature arms of government,” the president added.

Essentially, some of the salient alterations to the BOFIA was the inclusion of Financial Technology (Fintech) companies and microfinance banks in the regulatory framework.

The amendment could be a litmus test with far-reaching implications for banking administration in the country, targeting individuals including chief executive officers, managers and directors of banks, rather than the institutions in arguably one of the stiffest sanction regimes to hit the financial sector.

However, there had been efforts over the years towards amendment of the Act without success.

During the Senate public hearing on amendment bill in July, the Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation (NDIC), had among other things sought to limit litigation over failed banks’ resolution.

The CBN Governor, Mr. Godwin Emefiele, had also proposed the amendment of Sub-section 12 of BOFIA 2004 to restrict remedy for successful action against revocation of license to monetary compensation in line with international best practice adding that this will ensure prompt payment of insured depositors without added complexities from litigations.

He also recommended that compensation be aligned to the value of paid- up share capital of the bank to prevent cases of award of excessive monetary compensation to persons under whose corporate control the bank was run aground.

Emefiele also called for provisions to enhance failed bank recovery and resolution tool kit to give more options for managing failing institutions and systemic crisis without recourse to public treasury.

The apex bank boss further urged the National Assembly to introduce a new sub-section that will invalidate any transaction, which results in the transfer of significant ownership or control of a bank without the approval of the CBN as well as void any transfer of interest there under.

He said this might forestall any change in structure that might compromise corporate governance principles and endanger the interest of depositors.

The CBN governor had further proposed the creation of a Credit Tribunal to strengthen credit recovery processes and enforcement of collateral rights

He explained that such tribunal will boost measures to address the problem of non-preforming loans (NPLs) and create an efficient regime for the recovery of eligible loans of banks and other financial institutions (OFIs).

Among other recommendations to the committee, chaired by Senator Uba Sani, Emefiele called for the strengthening of the framework for reporting insider transactions as part of measures to boost credit administration processes in banks and sought for enhancements to regulatory measures for single obligor limits, transfer of significant holdings as well as strengthening the sanctions regime to make it more deterrent.

The apex bank boss also said there was the need for review of provisions to recognise the unique business models of new entrants into the financial services sector including non-interest banks and payment system service providers.

Represented by CBN Director, Legal Services Department, Kofo Salam-Alada, Emefiele, also urged the legislature for amendment to allow for effective management of dormant accounts to ensure efficient administration for ultimate benefit of the owners of the funds and/or their beneficiaries as well as enhanced requirements for payments, settlement and clearing activities to address unfolding developments.

He, specifically, asked for provisions to empower the CBN governor to designate systemically important banks based on clear parameters and prescribe additional supervisory requirements given the risk that their activities pose to the financial system.

The CBN also sought for a provision in the bill to empower legal practitioners employed by the bank to appear in court to prosecute and defend the bank in relations to matters under the BOFIA and other relevant laws without prejudice to the right of the CBN to engage external solicitors for the same purpose.

On his part, Managing Director/Chief Executive, NDIC, Alhaji Umaru Ibrahim, agreed to the need to review the BOFIA, adding that insider NPLs are major cause of bank failure and should be addressed.

He said while existing penalties for infractions were laughable, fines should be increased and recovery mechanism equally enhanced by going after culpable directors of failed banks.

Ibrahim said directors of banks should be held personally liable without any limitation for the causes of the failure of their banks where they have been found to be negligent in managing the institutions.

He said the imposition of penalties and prosecution of various offences would serve as a deterrent to officers and directors of banks as well as ensure that the banking industry ensures compliance with available laws and regulation in order to avoid paying stiff penalties

He further asked the Senate to make provision for an express prohibition and criminalisation of insider loans by making it an offence punishable with imprisonment and fine for directors of licensed banks to obtain credit facilities from their own banks, whether such credit facilities are secured or not.

The NDIC boss made the recommendation as part of the corporation’s presentation to the Senate Committee on Banking, Insurance and Other Financial Institutions, during the public hearing for the Amendment of the BOFIA 2004 towards the repeal and re-enactment of the Bill to BOFIA 2020.

The NDIC boss further canvassed the need to clarify overlapping mandates between NDIC and CBN in order to avoid any ambiguity in the laws governing their operations.

He added that the need for clarity was specifically critical in the area of the resolution of failing banks where the NDIC should be recognised as the primary actor in the resolution process while the CBN can intervene in the event of systemic crisis.

He expressed the need for the corporation to be involved in the process of licensing banks in collaboration with the CBN in order to ensure the necessary fit and proper checks and to establish clearer assessment of the status of financial institutions before licensing.

The NDIC boss further noted that the bill seems to suggest the option of the appointment of other entities in the liquidation of failed banks adding that the bill should be amended to reflect the NDIC as the sole liquidator of failed banks based on the corporation’s core mandate of bank liquidation.

He said the clear delineation of roles between the NDIC and CBN would strengthen the legal framework and contribute towards effective and efficient collaboration in the supervision and regulation of the banking sector.

Ibrahim further argued that there was no need to seek the approval of the CBN in the implementation of supervision, control, management and distress resolution of banks as reflected in the bill as this constitutes the core mandates of the corporation.

“Corporation should therefore carry out these functions in consultation with the CBN not with the consent of CBN as both institutions are independent and compliment the functions.”

Nonetheless, analysts have commended the passage of the new bill into law, believing that it will sanitise the industry and restore confidence of all stakeholders.

Professor of Capital Market and President, Capital Market Academics of Nigeria, Prof. Uche Uwaleke, said the new Act was a welcome development for the financial sector as it is consistent with modern banking practices.

In an interview with THISDAY, he said: “This is cheering news for the financial sector in Nigeria. BOFIA 2020 is consistent with modern banking legislation that recognises the need to improve and strengthen regulation given recent developments in the banking and financial sector space.

“Unlike its predecessor, BOFIA 2020 has now adequately captured microfinance banks and Fintech companies engaged in money market activities.

“Stiffer penalties for infractions by bank directors and other insiders will enhance financial systems stability if enforced.

“It has also clearly delineated the roles of CBN and NDIC especially with respect to issues of bank distress which is superintended by the NDIC.

“The establishment of Credit Tribunals will go a long way in ensuring speedy resolution of credit disputes as well as reducing the non-performing loans of deposit money banks.

Also, former Director General, Abuja Chamber of Commerce and Industry (ACCI), Dr. Chijioke Ekechukwu, commended the amendment which he said was long overdue.

He said: “This is a welcome development that gives authority to the Act. The establishment of a tribunal for speedy hearing of cases of default and bank fraud as contained in the amended BOFIA is long overdue.

“I am concerned, however, on how banks have been completely denied the privilege of giving unsecured loans above N1million. Many credit facilities are self-liquidating and may not need collateral.

“Some other ones may be secured using the stock of goods being financed. It is really not all the time that all credit facilities be secured. Banks should be given some leeway in this area.”

According to the former banker: “The amended BOFIA has, however, given CBN more teeth to bite and extended their supervisory frontiers to Fintech.

“Above all, the overall purpose is to protect the Banking and Other Financial institutions Sector more, and to forestall frequency of bank failures.”

Meanwhile, after several attempts, the eventual journey leading to the emergence of the BOFIA 2020 started in December 2017 when the House of Representatives Committee on Banking and Currency indicated that it will move for an amendment of the BOFIA on the House floor.

The bill, which was introduced for the first reading sought to among other things, curtail current excesses and insider abuses, which had led to increased portfolio of non-performing loans (NPLs) in banks.

The then Chairman of the committee, Hon. Jones Chukwu Onyereri, had told THISDAY he believed the bill would be a game-changer that will sanitise the industry.

He said even though the banks were said to be healthy, the ratio of non-performing loans were higher and unprecedented.

He said the amendment will forbid anyone including a director or managing director from borrowing “a kobo” from any bank without paying back as there’ll also be a limit to which “you can borrow from a bank that you are also part of the ownership.”

Onyereri said: “If in 2009, we had a banking crisis due to the high level of non-performing loans, it’s also worrisome that at this point in time, even after the intervention, we still have the non-performing loans.

“And that’s why as a committee, we’ve taken it upon ourselves and as a matter of fact, the Speaker, I believe will be signing on our amendment of Banks and Other Financial Institutions Act (BOFIA), which will come up as first reading on the floor of the House.

“And I believe that’ll change everything in the banking sector because it doesn’t make sense when you have insider abuse because that’s the crux of why we have this high non-performing loans in the banks and we need to put a stop to that.”

However, in February 2018, during the public hearing on the bill by the House committee, the lawmakers argued that it was meant to instill discipline in the banking and other financial services sector to protect public deposits, particularly against the backdrop of banking failures occasioned by insider abuses, corporate governance breaches and other unethical practices.

Also, the amendments seek to, among other things, prohibit the operation of unlicensed banks- Shell Banks- and significantly increased the amount of fines paid for infractions of the Act.

During the House hearing, Emefiele and the NDIC Managing Director, Alhaji Umaru Ibrahim, both described the proposed amendments to BOFIA as apt and long overdue, particularly in the incremental sanctions directed mainly at individuals rather than the institutions.

Emefiele said operators are often ahead of operators because of the sheer financial power at their disposal and had often exploited loopholes in the BOFIA to perpetrate unwholesome activities.

He said penalties no longer served as deterrence to banks- knowing they could break laws and get away with payment of fines which are nothing compared to what they stand to achieve by refusing to comply with established rules.

While cautioning, however, that increases in fines may not necessarily deter the banks from breaching regulatory guidelines, he expressed hope that the monumental increment in money penalties in the proposed alteration would ameliorate the situation.

Emefiele had further asked that the apex bank be granted reserved powers in the amendments to be able to take decisions to manage banks in times of crisis.

He said the reserve power would further enable the CBN powers to revoke licences of non-compliant financial institutions where necessary, while any challenge of such powers by affected banks, in a law court will be penalised.

He said even if affected banks go to court, it claims should be limited to damages, if it felt the revocation was done in bad faith- and not ask for reversal or restoration of the revoked licence.

But, lawmakers feared that granting such express powers to the CBN could lead to abuses- a claim which Emefiele strongly denied, giving practical examples where though it could have taken harsh measures against some banks- but restrained itself in order not to send the wrong signal to bank customers.

The governor said there were currently legislative brick walls, which bank operators capitalised on to perpetrate breaches.

However, the NDIC boss, who was represented by NDIC Director, Legal Services, Mr. Belema Taribo, further said the power of banks to reverse revoked licenses should be removed from the Act as the case is in other jurisdictions.

He said the banks could, however, challenge the revocation if done in bad faith- where only damages could be sought.

The emergence of the new BOFIA could as well assuage the recent concern expressed by the NDIC boss that increase in banking industry non-performing loans (NPLs) portfolio had put financial regulators under pressure.

Speaking in Lagos at the opening of the 2020 Workshop for Business Editors and the Finance Correspondents Association of Nigeria (FICAN), themed:“COVID-19 and Fintech Disruption: Opportunities and Challenges for Banking System Stability and Deposit Insurance,” he added that the threat of a pending economic recession and a potential financial crisis had further put regulators on their toes.

Ibrahim added that though the emergence of digital financial services enabled by financial technology (Fintech) had enhanced efficiency in the financial sector, it had also posed new challenges to financial regulators and consumers.