History of Banking Regulations in Nigeria

Before 1952, there was no Banking regulation in Nigeria as there was laissez-faire banking in Nigeria.

Foreign banks dominated the banking sector, and there was a lack of comprehensive regulatory oversight.

However, in 1952, the first banking legislation in Nigeria the Banking Ordinance was established based on the recommendations of the G.D Paton Commission of 1948.

Banking Ordinance of 1952

The key features of the Banking Ordinance are as follows:

1. The ordinance established a clear definition of banking business and made it mandatory for all banks to obtain a license from the governor of Nigeria. Indeed, it defined the banking business as “the business of receiving from the public on current account, money which is to be repayable on demand by cheque and on making advances to customers.”
2. It set specific minimum paid-up capital requirements for banks. Indigenous banks were required to have a minimum paid-up capital of £12,500 (or N25,000), while expatriate banks had to meet a higher minimum of £100,000 (or N200,000).
3. The ordinance also introduced the provision for banks to maintain a reserve fund. Banks were obligated to allocate at least 20 per cent of their profits annually to this reserve fund.
4. Additionally, banks were also required to submit periodic returns.
5. Another important provision of the Ordinance was the periodic examination and supervision to which the banks were subjected.
6. The provisions of the ordinance were to be complied with immediately by new banks. In contrast, Existing banks were given a 3-month grace period to comply with the provisions of the Ordinance.

Even though the Banking Ordinance was hailed as an important step in the regulation of banks in Nigeria, It has its inherent drawbacks, which are explained below:

1. It didn’t assist banks in need, and indigenous banks faced the risk of liquidation if they couldn’t comply within three years.
2. There was no deposit insurance scheme to protect depositors in case of liquidation, leading to a loss of confidence in undercapitalized indigenous banks.
3. The specified single obligor limit didn’t consider bank-specific risk or capacity to absorb losses.
4. In a bid to meet the required liquidity requirement, many banks held idle cash. However, since there was no avenue for them to invest these funds, it was indeed an economic waste.
5. The credibility of bank examinations was undermined by window-dressing techniques used by banks to deceive examiners.
6. Finally, the banking ordinance focused on preventing undercapitalized banks but couldn’t effectively prevent malpractices and abuses in banking.

Banking Ordinance of 1958

The introduction of the Central Bank of Nigeria in 1958 resulted in the implementation of a new banking ordinance called the Banking Ordinance of 1958.

Under this ordinance, the authorized capital for expatriate banks was increased from N200,000 to N400,000, while the authorized capital for indigenous banks remained unchanged at N25,000.

Some other important features of the Banking Ordinance of 1958 include:

1. It raised the proportion of profits to be transferred to the reserve fund from 20 per cent to 25 per cent.
2. The Ordinance provided for a reserve requirement, the amount and composition of which could be changed by the Central Bank.
3. It prohibited banks from trading or owning real estate except when it was deemed necessary.

In 1962, the Banking Ordinance of 1958 was amended, and the following provisions were given:

1. Foreign banks were required to provide a satisfactory undertaking to the Minister of Finance, pledging to retain funds equivalent to a minimum of £250,000 in Nigeria.
2. The minimum share capital requirements for banks were increased: indigenous banks and foreign Banks were required to have a minimum share capital of £250,000. So, for the first time, the minimum capital requirement for indigenous and foreign Banks was the same.
3. The definition of liquid assets was revised.
4. Unlike the 1958 version of the ordinance, which prohibited banks from engaging in real estate business or ownership, the 1962 amendment allowed banks to own real estate for future development purposes.
5. Existing banks were given a grace period of seven years to comply with the new regulations. This grace period was longer compared to the three years provided in the 1952 Banking Ordinance.

Banking Decree of 1969

In 1969, the banking decree was implemented under the military dictatorship at that time.

This decree was more comprehensive compared to the previous regulations, as it provided further clarification on the powers and responsibilities of the Central Bank of Nigeria (CBN) in regulating banks and financial institutions.

The key features of the Banking Decree are as follows:

1. The minimum paid-up capital requirements were increased. Indigenous banks were required to have a minimum paid-up capital of £300,000 (or N600,000), while expatriate banks had to increase their capital to a minimum of £750,000 (or N1,500,000).
2. All banks were mandated to be locally incorporated per the Companies Act of 1968.
3. The Central Bank was granted the authority to monitor and approve banks’ advertisements, as well as authorize the opening and closure of bank branches.
4. The powers of the CBN were strengthened to ensure the maintenance of monetary stability within the economy.
5. In addition to the existing requirement of transferring 25% of net profit into a reserve fund until the total sum equalled the paid-up capital, the decree introduced a new provision. It mandated a transfer of 12.5% of net profit when the amount of reserve funds reached or exceeded the paid-up share capital.
6. Limits were imposed on interest rates and bank lending to the private sector.

Banks and Other Financial Institutions (BOFI) Act 24 and 25 of 1991

This repeals all previous banking decrees and spells out the legislative and regulatory conditions for establishing banks in Nigeria.

It was enacted to strengthen and extend the powers of the CBN to cover new financial institutions that emerged as a result of economic liberalization and deregulation measures occasioned by the Structural Adjustment Program of 1986.

It outlined the licensing requirements, capital adequacy standards, and prudential regulations for banks.

Other highlights of the Act are as follows:

1. No person shall carry on any banking business in Nigeria except if it is a company duly incorporated in Nigeria and holds a valid license under the Act.
2. The CBN acquired the powers to compile and circulate to all banks in Nigeria, a list of bank debtors whose debts to any bank had been classified by bank examiners.
3. The CBN was vested with the powers to deal with any failing (or ailing) bank and failed bank. For instance, the CBN, with the approval of the President, can assume control and management of a failing bank (S.34) and apply to a court either to purchase a failing bank for a nominal fee, to restructure it or liquidate it.
4. It also gives the CBN the right to from time to time determine the minimum paid-up share capital requirement of each category of banks licensed under this Act.

Banks and Other Financial Institutions Act (BOFIA) 2020

The Banks and Other Financial Institutions Act (BOFIA) 2020 is a new law that regulates the banking and financial sector in Nigeria.

It was signed by President Buhari on November 13, 2020, and it replaces the previous BOFIA of 1991.

The highlights of the BOFIA Act of 2020 are:

1. It expands the jurisdiction and powers of the Central Bank of Nigeria (CBN) to supervise and regulate banks, specialized banks, and other financial institutions. For example, the regulation of non-interest banks which was not covered by the previous act was included in this Act.
2. It establishes a resolution fund to support the CBN in resolving failing or distressed banks and financial institutions.
3. It prohibits banks and financial institutions from granting unsecured loans or advances without the prior approval of the CBN and sets out the conditions and penalties for such transactions.
4. It recognizes the emerging sectors of the banking and financial industry, such as fintech and microfinance banks, and provides a legal framework for their licensing and regulation.
5. The act also enhances the corporate governance and accountability of banks and financial institutions and prescribes sanctions for non-compliance with the CBN’s directives and regulations.
6. The BOFIA Act of 2020 reduces the period within which the revocation of a bank’s license may be challenged in court to 30 days. 
7. The Act emphasizes compliance with prudential ratios, particularly the capital adequacy ratio. Non-compliance with prudential ratios may result in revocation of license.
8. It prohibits foreign banks without a physical presence in their country of incorporation or licensed in their country of incorporation but not affiliated with a financial services group subject to effective consolidated supervision from operating in Nigeria.