Enhancing Confidence in Banking Sector

Obinna Chima highlights issues that should be considered by members of the National Assembly as they work on the Banks and Other Financial Institutions Act 2004 (Repeal and re-enactment bill 2020) as well as the Electronic Transaction Bill 2020

The Senate Committee on Banking, Insurance and Other Financial Institutions, last week organised a

public hearing on the Banks and Other Financial Institutions Act (BOFIA) 2004 (Repeal and re-enactment bill 2020) as well as the Electronic Transaction Bill 2020.

Both bills were sponsored by Senator Betty Apiafi and Senator Ibikunle Amosun respectively.
Speaking during the introductory session, the Senate President, Dr. Ahmad Lawan, stressed the importance of banks and other financial institutions to the development of the economy of any nation.

According to Senator Lawan, who was represented by the Deputy Senate Majority Leader, Ajayi Boroffice, banking is significant in the facilitation of trade and investment as well as the sustenance of economic activities.
“We cannot therefore undermine the banking and finance sector, which is why the regulatory framework is once more coming under legislative scrutiny,” he said, even as he expressed optimism that re-enacting the BOFIA would also strengthen banking sector regulation and improve confidence.

On his part, the Chairman of the Committee, Senator Uba Sani, said the BOFIA amendment would strengthen financial stability and regulation in the country as well as reposition Nigeria’s economy.
According to him, a strengthened legal framework was very critical and strategic to maintaining the health of the banking sector.

The senator representing Kaduna Central further noted that a, “stable and strengthened banking sector will refocus its activities and concentrate on providing credit access to micro, small and medium sized enterprises (MSMEs) to help grow the economy.”
He added that a properly regulated electronic transaction system would enhance operational efficiency and boost confidence in the banking sector.

Uba maintained that the BOFIA was long overdue for review and amendment, saying its amendment would reposition the economy.
He said a strengthened legal framework is very critical and strategic to maintaining the health of the banking sector.
“A sanctions regime that is effectively implemented will help check sharp practices in the banking sector and prevent future distress,” he said.

CBN’s Position
The CBN thanked the Senate Committee and other lawmakers the foresight in initiating the modernisation of the Nigerian banking legislation and pledged its continued support and collaboration as the National Assembly continues its constitutional responsibility of law-making.

In its presentation, the Central Bank of Nigeria (CBN) recognised that whilst 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 that are being witnessed necessitates review of the legal framework to ensure that it remains fit-for-purpose.

The banking sector regulator alluded to 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 necessitate the need to upscale the legal framework for banking regulation and supervision in Nigeria.
Represented by its Director of Legal Services, Mr. Kofo Alade-Salami, the CBN commended the Senate Committee for the amendments already incorporated into the Bill to address some of the challenges.

It however, recommended additional areas for the Committee’s consideration, based on what it described as practical experiences garnered over time in the course of regulating and supervising banks, specialised banks and other financial institutions in Nigeria.

Some of the areas highlighted by Alade-Salami included the review of framework for managing failing institutions in line with international standards to properly delineate roles for the agency tasked with managing failing banks and other financial institutions and those with responsibility for resolving banks and other financial institutions whose license have been revoked.

“In other words, the CBN does the former as provided in the BOFIA while NDIC is saddled with the latter under the NDIC Act.
“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,” he explained.

In addition, he said there was need to restrict remedy for successful action against revocation of license in line with international standards as well as the enhancement of failing bank recovery and resolution tool kit to give more options for managing failing institutions and systemic crisis without recourse to public treasury.

Furthermore, the CBN called for the creation of a credit tribunal to strengthen credit recovery processes and enforcement of collateral rights; strengthening the framework for reporting for insider transactions as part of measures to boost credit administration processes in banks; and enhancement to regulatory measures for single obligor limits, transfer of significant holdings, among others.

The apex bank also urged the lawmaker to ensure the strengthening of the sanctions regime to make it more deterrent; 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).

“Effective management of dormant accounts to ensure efficient administration for ultimate benefit of the owners of the funds and/or their beneficiaries
“There is need for enhanced requirements for payments, settlement and clearing activities to address unfolding developments
“Standards for regulations and supervision of Systemically Important Banks given the risk that their activities pose to the financial system,” Alade-Salami added.

NDIC’s Position
The Managing Director/Chief Executive, Nigeria Deposit Insurance Corporation (NDIC), Alhaji Umaru Ibrahim, in his presentation, proposed that 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 prohibit and criminalise 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.

Ibrahim also canvassed the need to clarify overlapping mandates between the NDIC and the Central Bank of Nigeria (CBN) in order to avoid any ambiguity in the laws governing their operations.
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.

Other Stakeholders’ Position
Also at the public hearing, presentations were made by other stakeholders such as Body of Banks CEOs/Chartered Institute of Bankers of Nigeria (CIBN), the Nigerian Communications Commission (NCC), Securities and Exchange Commission (SEC). Some others were the Industrial Global Union, the National Union of Banks, Insurance and Financial Institutions (NUBIFE), the Finance Correspondents Association of Nigeria (FICAN), and Institute of Chartered Accountants of Nigeria (ICAN).

The Registrar, CIBN, Mr. Seye Awojobi noted that Section 18(1b) of the BOFIA Bill allows banks to grant credit facilities in accordance with rules and regulations of the Bank.

“This rule also governs security for such facilities. We therefore do not see the need for a sweeping provision of Section 20 (1c) which requires that prior approval of CBN to all secured facilities of N3 million and above. This is a risk management issue.

“Section 38 on crisis management. The Body of Bank CEO does not believe in the inclusion of the Chairman of the Economic and Financial Crimes Commission in the Committee as created.

“Rather, the entire industry believes that professionalism and ethics should also be part of this crisis management. So, we are proposing the inclusion of the CIBN in the committee as an independent professional body,” he explained,
Similarly, FICAN in its presentation on the BOFIA bill called for the provision of special courts for financial system related disputes. The body of financial journalists noted that with the complex nature of some of the banking transactions and considering the length of time it takes to resolve cases at regular courts, “it is important that a dedicated court is established to expeditiously handle banking related disputes.”

“We support this provision as it will no doubt ensure speedy dispensation of these cases and ultimately engender confidence and stability of the banking system,” the association added.
Furthermore, FICAN noted that Section 12 (4) of the bill requires the CBN to settle all uninsured portion of private deposits of a bank which has its licence revoked.

“We believe that the NDIC is already conferred with that responsibility and does not need duplication. As such, in order to avoid overlapping responsibilities in the payment of insured deposits, it is recommended that this provision be reviewed to recognise the NDIC as the proper body to carry out this function,” FICAN added in a presentation by its National Chairman, Obinna Chima.

Also, the association of financial journalist noted that the CBN requires all powers necessary to be able to able to regulate unregulated banking related activities as well as to respond swiftly to disputes in the financial system.

“We are in the field and in contact with members of the public. Suffice it to say that the issue of dormant accounts remains thorny, especially with the advent of the Bank Verification Number (BVN).
“The handling of bank accounts designated as dormant accounts and those without BVN has resulted in much money lying idle there.

“As such, definite provision should be made to accommodate such as ‘abandoned funds’ and further recommend that the bill should make provision for the treatment of dormant accounts,” FICAN added.
Therefore, it is expected that the lawmakers would consider the respective views by the stakeholders in amending the BOFIA in order to strengthen confidence in the banking industry.