ABUJA, Nigeria (VOICE OF NAIJA)-The Central Bank of Nigeria has issued interpretative guidance clarifying how Sections 34(2)(b) and 40(2) of the Banks and Other Financial Institutions Act, 2020, will be applied in practice, setting a maximum suspension period of two business days for certain contractual obligations during the resolution of distressed banks.
The clarification was contained in a circular issued on Wednesday and signed by the Acting Director of the Financial Markets Department, Okey Umeano, who stated that the guidance takes immediate effect.
The apex bank explained that the lack of a clearly defined maximum duration for the exercise of its powers under the two BOFIA provisions had created uncertainty for banks, other financial institutions and their counterparties with respect 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.”
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It noted that the uncertainty could hinder the effective management of commercial risk.
To address this, the CBN said the circular provides interpretative and operational guidance on how it intends to exercise the powers vested in the Governor under the relevant BOFIA provisions.
The guidance applies to banks, other financial institutions and counterparties to what the apex bank described as “Affected Contracts,” referring to contracts involving a bank or other financial institution that fall within the scope of Sections 34(2)(b) or 40(2) of BOFIA.
Under the new guidance, the CBN said any suspension of payment or delivery obligations under an affected contract involving a failing bank pursuant to 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 2020 that form part of the CBN’s bank resolution framework.
Section 34(2)(b) authorises the apex bank to facilitate the acquisition of a failing bank by one or more banks in order to safeguard financial stability, while Section 40(2) empowers the CBN Governor, where a banking licence has been revoked and such action is deemed to be in the public interest, to direct the commencement of resolution measures, including the temporary suspension of certain contractual termination rights.
By setting a two-business-day limit, the CBN said any suspension arising from the exercise of these powers will be temporary, providing greater certainty for market participants and counterparties to financial contracts.
The circular follows the recent revocation of the licences of 46 inactive, insolvent or non-operational microfinance banks by the apex bank under its BOFIA powers.
Although the latest guidance is not tied to any specific institution, it clarifies how contractual obligations will be handled whenever the CBN invokes its statutory resolution powers over troubled banks.
The CBN said the guidance was issued pursuant to the powers conferred on the Governor under Section 56 of BOFIA and Section 33(1)(b) of the Central Bank of Nigeria Act, 2007, and took effect immediately from July 1.