The Banks and Other Financial Institutions Act, 2020’s Sections 34(2)(b) and 40(2) can be suspended for up to two business days while failing banks are being resolved, according to interpretive guidance released by the Central Bank of Nigeria.
Okey Umeano, the Acting Director of the Financial Markets Department, provided the clarification in a circular that was released on Wednesday. He stated that the guidance is effective immediately.
The central bank claimed that banks, financial institutions, and their counterparties had experienced ambiguity regarding financial transactions due to the lack of a clearly defined maximum length for the execution of its powers under the two BOFIA rules.
“The Central Bank of Nigeria has observed that the lack of a defined maximum duration period pursuant to the exercise of its powers under Sections 34(2)(b) and 40(2) of the Banks and Other Financial Institutions Act, 2020 has created some uncertainty for counterparties dealing with Nigerian banks and other financial institutions in respect of financial contracts,” the circular said.
It further stated that the ambiguity might make it more difficult to effectively manage commercial risk.
In response, the CBN stated that the circular offers operational and interpretive direction on how it will use the authority granted to the Governor under the pertinent BOFIA laws.
Banks, other financial institutions, and counterparties to what the CBN designated as “Affected Contracts”—contracts to which a bank or other financial institution is a party and which fall under the purview of Sections 34(2)(b) or 40(2) of BOFIA—are all subject to the guidelines.
According to the new guidelines, any suspension of termination rights under contracts covered by Section 40(2) and any suspension of payment or delivery obligations under an affected contract involving a failing bank under Section 34(2)(b) “shall not exceed a period of two business days commencing from the date on which the written order or notice of suspension is issued by the CBN Governor.”
The two main BOFIA 2020 clauses that support the CBN’s bank resolution framework are the subject of the clarification.
While Section 40(2) permits the CBN Governor to direct the start of resolution actions, including the temporary suspension of certain contractual termination rights, when a banking license has been revoked and it is deemed to be in the public interest, Section 34(2)(b) empowers the apex bank to facilitate the acquisition of a failing bank by one or more banks as part of efforts to preserve financial stability.
The CBN has made it clear that any suspension resulting from the use of these authorities will be temporary by imposing a two-business-day restriction, giving market players and counterparties to financial contracts more assurance.
Citing its authority under BOFIA, the central bank canceled the licenses of 46 microfinance institutions that were non-operational, bankrupt, or inactive. The most recent guidance offers further clarity on how contractual obligations would be handled whenever the CBN uses its statutory resolution powers over struggling banks, even though it is unrelated to any particular institution.
According to the CBN, the guidelines went into effect immediately on July 1 and were issued in accordance with the authority afforded to the Governor by Section 56 of BOFIA and Section 33(1)(b) of the Central Bank of Nigeria Act, 2007.
