The Central Bank of Nigeria has issued fresh interpretative guidance on the implementation of Sections 34(2)(b) and 40(2) of the Banks and Other Financial Institutions Act (BOFIA), 2020, stipulating that the suspension of certain contractual obligations during the resolution of distressed banks cannot exceed two business days.
The Punch reported that the directive, which took effect immediately, was contained in a circular signed by the Acting Director of the Financial Markets Department, Okey Umeano, on Wednesday.
According to the apex bank, the guidance became necessary because the absence of a clearly defined time limit for exercising its powers under the relevant BOFIA provisions had created uncertainty for banks, other financial institutions and parties to financial contracts.
The circular stated, “The Central Bank of Nigeria has observed that the absence 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.”
It added that the uncertainty had the potential to impede the effective management of commercial risk.
To resolve this, the CBN said the circular provides interpretative and operational guidance on how the Governor will exercise the powers granted under the relevant sections of BOFIA.
The guidance covers banks, other financial institutions and counterparties to what the CBN described as “Affected Contracts”—agreements involving a bank or financial institution that fall within the scope of Sections 34(2)(b) or 40(2) of BOFIA.
Under the new framework, the apex bank said any suspension of payment or delivery obligations involving a failing bank under Section 34(2)(b), as well as any suspension of termination rights under contracts covered by Section 40(2), “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 clarification concerns two major provisions of BOFIA that form part of the CBN’s bank resolution framework.
Section 34(2)(b) authorises the CBN to facilitate the acquisition of a failing bank by one or more financial institutions in a bid to safeguard financial system stability. Meanwhile, Section 40(2) empowers the CBN Governor, following the revocation of a banking licence and where it is deemed to be in the public interest, to initiate resolution measures, including the temporary suspension of specific contractual termination rights.
By introducing a maximum suspension period of two business days, the regulator said it aims to provide greater certainty for financial institutions, investors and other counterparties whenever its statutory resolution powers are invoked.
The clarification comes shortly after the CBN revoked the operating licences of 46 inactive, insolvent or non-operational microfinance banks under the provisions of BOFIA.
Although the latest guidance is not tied to any particular institution, it outlines how contractual obligations will be handled during future bank resolution exercises.
The CBN noted that the guidance was issued pursuant to the powers vested in the Governor under Section 56 of BOFIA and Section 33(1)(b) of the Central Bank of Nigeria Act, 2007, and became effective from July 1.
