Introduction
A stable and efficient financial system is fundamental to the economic development of any nation. In Nigeria, the legal and regulatory framework governing this sector is a complex and multilayered structure designed to ensure the soundness of financial institutions, protect consumers, and facilitate commerce. This essay provides an assessment of the key national laws and regulations that govern commercial banking and non-banking financial transactions. It will examine the primary statutes and regulatory bodies responsible for oversight, before considering the legal framework for property rights, which are crucial for securing credit. Finally, it will assess the modernising impact of the establishment of a national collateral registry for movable assets. This assessment will show that while Nigeria has a comprehensive legislative framework, its effectiveness is shaped by both long-standing principles and recent reforms aimed at enhancing financial inclusion and stability.
Regulation of Commercial Banking
The regulation of commercial banking in Nigeria is principally coordinated by the Central Bank of Nigeria (CBN), which operates as the apex regulatory authority for the financial sector. The powers and functions of the CBN are derived from the Central Bank of Nigeria Act 2007, which empowers it to issue legal tender, maintain external reserves, and promote a sound financial system (Central Bank of Nigeria Act, 2007). The CBN’s role extends beyond monetary policy to direct supervision and regulation of banks.
The primary legislative instrument governing the activities of banks is the Banks and Other Financial Institutions Act 2020 (BOFIA 2020). This Act repealed the previous 1991 legislation and introduced significant changes to modernise the regulatory landscape in response to developments in the financial services industry, such as the rise of fintech. BOFIA 2020 provides the legal basis for the licensing, supervision, and regulation of banks and other financial institutions. Key provisions of the Act grant the CBN Governor the power to issue and revoke banking licenses, set minimum capital requirements, and prescribe corporate governance standards for banks (Banks and Other Financial Institutions Act, 2020, ss 3-5).
Furthermore, BOFIA 2020 provides a framework for managing financial distress. It empowers the CBN to intervene in failing banks through various means, including ordering a takeover, restructuring the institution, or revoking its license to protect depositors and maintain the stability of the financial system. For instance, the Act introduced the 'resolution fund', a mechanism to support the resolution of failing banks (Osinbajo, 2021). By consolidating and expanding the CBN's powers, BOFIA 2020 represents a clear attempt to create a more robust framework capable of addressing the challenges of the modern banking environment.
The Framework for Non-Banking Financial Institutions
The Nigerian financial system also comprises a diverse range of non-banking financial institutions (NBFIs), including insurance companies, pension fund administrators, microfinance banks, and finance companies. The regulatory approach to these entities acknowledges their distinct functions while ensuring they operate within a cohesive national financial policy. While the CBN maintains a degree of oversight over the entire financial system, specialist regulators are responsible for the day-to-day supervision of specific NBFI sub-sectors.
BOFIA 2020 itself applies not only to banks but also to 'Other Financial Institutions' (OFIs), bringing a wide array of non-banking entities under its general ambit. However, primary regulation is often handled by other bodies. For example, the insurance sector is regulated by the National Insurance Commission (NAICOM) under the National Insurance Commission Act 1997, which oversees the licensing and operations of insurance and reinsurance companies. Similarly, the pension industry is governed by the Pension Reform Act 2014 and regulated by the National Pension Commission (PenCom).
This multi-regulator model allows for specialised supervision tailored to the risks and characteristics of each sub-sector. The CBN often collaborates with these agencies through the Financial Services Regulation Coordinating Committee (FSRCC) to harmonise regulations and avoid regulatory arbitrage (FSRCC, n.d.). This structure provides a reasonably comprehensive regulatory net, ensuring that systemic risk is monitored across both the banking and non-banking financial sectors.
Property Rights and their Use as Collateral
The ability to use property as security for loans is a cornerstone of any credit system. In Nigeria, the legal framework for property rights is a critical component of financial transactions, but it is also a source of significant complexity. The primary law governing land ownership is the Land Use Act 1978.
The Land Use Act fundamentally altered land tenure in Nigeria by vesting ownership of all land within each state in the state governor, who holds it in trust for the people (Land Use Act, 1978, s 1). Private individuals and entities can only hold a 'right of occupancy', which is akin to a long-term lease from the state. This has profound implications for financial transactions, particularly mortgages. A holder of a statutory right of occupancy cannot alienate their interest, including by way of mortgage, without first obtaining the consent of the state governor (Land Use Act, 1978, s 22).
This requirement for governor's consent has long been identified as a significant bottleneck in the process of creating and perfecting mortgages. The procedure can be bureaucratic, costly, and time-consuming, thereby acting as a disincentive for banks to accept landed property as collateral (Nwoke, 2017). While the law is intended to regulate land use, its practical effect can be to constrain the flow of credit, particularly for individuals and small businesses. This demonstrates a tension between the public policy objectives of land administration and the needs of a modern commercial credit market.
The National Collateral Registry and Movable Assets
In response to the difficulties associated with using land as collateral and to broaden access to finance, Nigeria has taken significant steps to formalise security interests in movable assets. The enactment of the Secured Transactions in Movable Assets Act 2017 (often called the Collateral Registry Act) was a landmark reform in this area.
The main objective of the STMA Act is to enhance financial inclusion for Micro, Small and Medium Enterprises (MSMEs) by enabling them to use their movable assets, such as equipment, inventory, accounts receivable, and farm products, as collateral for loans (STMA Act, 2017). The Act established the National Collateral Registry (NCR), a public online database managed by the CBN. The NCR allows lenders to register their security interests in movable assets, providing them with priority over subsequent or unregistered creditors (CBN, 2019).
The creation of the NCR represents a significant modernisation of Nigerian commercial law. By creating a transparent and centralised system for securing transactions, it reduces the risk for lenders and makes them more willing to extend credit against non-traditional forms of collateral. This has been noted as a key factor in improving Nigeria’s position in the World Bank’s 'Ease of Doing Business' rankings in previous years (PwC, 2019). The STMA Act and the NCR provide a clear illustration of a legal reform designed to address a specific economic problem, showing the legal framework’s capacity to evolve.
Conclusion
The Nigerian legal and regulatory framework for financial transactions is extensive, with a structure that attempts to be both comprehensive and dynamic. The CBN, armed with the strengthened powers under BOFIA 2020, stands as the central pillar for regulating commercial banks and other financial institutions. The system is further supported by a network of specialised regulators for NBFIs. However, significant challenges remain, particularly within the property rights regime, where the Land Use Act 1978 continues to present practical obstacles to the efficient use of land as collateral. In contrast, the successful implementation of the Secured Transactions in Movable Assets Act 2017 and the National Collateral Registry demonstrates a progressive approach to modernising credit infrastructure. Overall, Nigeria's legal framework for finance is a work in progress, characterised by a robust institutional structure that is increasingly adapting to the demands of a modern economy, although established legal principles continue to pose certain limitations.
References
Banks and Other Financial Institutions Act, 2020.
Central Bank of Nigeria (CBN). (2019) The National Collateral Registry (NCR) of Nigeria: Revolutionizing lending and borrowing in Nigeria. Available at: https://ncr.gov.ng/resources/NCR%20(2)%20approved%20printables2.pdf (Accessed: 23 May 2024).
Central Bank of Nigeria Act, 2007.
Financial Services Regulation Coordinating Committee (FSRCC). (n.d.) About FSRCC. Available at: https://fsrcc.gov.ng/about-us.php (Accessed: 23 May 2024).
Land Use Act, 1978 (Cap L5, Laws of the Federation of Nigeria 2004).
National Insurance Commission Act, 1997.
Nwoke, U. (2017) 'The Hurdle of Governor’s Consent in Land Transactions in Nigeria', SSRN Electronic Journal.
Osinbajo, Y. (2021) 'The Banks and Other Financial Institutions Act (BOFIA) 2020: A new dawn in financial-services regulation', The Journal of International Banking Law and Regulation, 36(5), pp. 201-206.
Pension Reform Act, 2014.
PwC. (2019) Nigeria's new collateral registry: Unlocking credit and improving the ease of doing business. Available at: https://www.pwc.com/ng/en/assets/pdf/nigeria-collateral-registry.pdf (Accessed: 23 May 2024).
Secured Transactions in Movable Assets Act, 2017.
