BAF 3304 Banking

Regulations and
Supervision
Module 4 Current Status of Banking Regulations in
Nigeria
Dr Nuruddeen Abba Abdullahi
BUK
Current Status of Banking Regulations in Nigeria

Content
 Banking laws and regulations
 Ethics and Best Practices in Banking Industry
 Corporate Governance in Banking
 Sources of Instability in the Banking Sector
 Regulatory Authorities Efforts at Stabilizing the Financial System
 Critical and Emerging Aspects of Banking Practices Subject to Control and
Regulation
 Forms and Methods by which Regulatory Authorities Carry out Supervisory
Functions in Banks
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 Banking Laws and Regulations
in Nigeria
 Banking Laws
 Banking law is the broad term for laws that govern how banks and other financial
institutions conduct business. Banks must comply with a myriad of laws and regulations.
 In Nigeria, the primary laws are the CBN Act 2007, BOFIA 2020, and the NDIC Act
2006. whereas other laws include the Money Laundering (Prevention and Prohibition)
2022 and the Terrorism (Prevention and Prohibition) Act 2022, the Economic and
Financial Crimes Commission Establishment Act 2004, the Foreign Exchange
(Monitoring and Miscellaneous Provisions) Act 1995, the Advance Fee Fraud and Other
Fraud Related Offences Act 1995, the Failed Banks (Recovery of Debts), Financial
Malpractices in Banks Act 1994, and etc.
 Banking laws and regulations are created in order to ensure that banks conduct
businesses in a fair and transparent way.
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• What do banking laws regulate?
 The objectives of banking laws include:
 Providing transparency for consumers
 Reducing risk for banking customers
 Avoiding misuse of banks for purposes like money laundering
 Allowing consumers to bank with confidentiality
 Preventing other crimes
 Prioritizing bank lending according to economic and social priorities
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 Providing fair banking and equal opportunities for banking
 Preventing terrorism
 Creating fair debt collection practices
 Making credit card agreements fair to consumers
 Preventing banks from making unfair loans to insiders like
officers and principal shareholders
 Allowing customers to reasonably raise disputes
 Other goals
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 Banking regulations
 Bank regulation is the process of setting and enforcing rules for banks and other
financial institutions.
 Main purpose of bank regulation is to protect consumers, ensure the stability of the
financial system, and prevent crime.
 Bank regulation protects consumers by ensuring that banks maintain adequate
capital levels, disclose risks inherent in their business activities, and follow
sound risk management practices.
 Banking regulations are designed to promote safe and sound banking practices by
ensuring that banks have enough capital to cover their risks, preventing them
from engaging in unfair or deceptive practices, and ensuring that consumers
have access to information about their rights and options. 6

 Bank regulations also promote competition and help to keep prices low for
consumers and spur innovation in the banking sector. For example, bank regulations
 Bank regulators supervise the activities of banks and enforce compliance with
regulations; which help to ensure that banks operate in a safe and sound manner and
that consumers are protected from fraud and abuse.
 Bank sector is adjudged to be the most regulated sector in the economy. And
usually there is more than one regulatory agency per country.
 In Nigeria, bank regulation is primarily the responsibility of the Central Bank of
Nigeria (CBN) and the Nigeria Deposit Insurance Corporation (NDIC).
 Bank regulation is a critical tool for ensuring the stability and efficiency of the
banking sector. It promotes financial stability by limiting the ability of banks to
engage in activities that could lead to a systemic crisis.
 In addition, bank regulation helps to ensure that banks can serve as reliable
sources of credit for businesses and households. 7
• Why are banks highly regulated?
 Generally, bank regulation plays a vital role in ensuring the safety and soundness of
the banking sector. Banks are highly regulated for a variety of reasons.
 Banks deal with large amounts of money, which makes them a prime target for crime.
 Banks play a crucial role in the economy, and their failure could have devastating
consequences.
 Banks act as intermediaries between borrowers and lenders, helping to allocate capital
to its most productive uses.
 Without regulation, banks would be free to engage in risky behavior that could lead to
bank failures and a financial crisis. To prevent this, regulators must monitor banks’
activities to ensure that they are sound and stable. Some of the things that are
monitored include the bank's financial stability, its compliance with anti-money 8
laundering laws, and its lending practices.
 By regulating banks, authorities can help to prevent bank failures and protect the
 Bank regulation is the process by which a government or other institution
supervises the activities of banks.
 Common features of bank regulations include:
1. Reserve requirements, which dictate how much money banks must keep on hand;
2. Capital requirements, which dictate how much money banks can lend;
3. Liquidity requirements, which dictate how easily banks can convert their assets
into cash.
4. Restrictions on bank activities, such as limitations on lending to related parties
or investments in certain types of assets.
 By ensuring that banks follow these and other regulations, bank regulators help to
protect depositors and maintain the stability of the banking system.
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 Prudential Guidelines
 Prudential guidelines (PG) are established laws, rules and regulations designed to minimize bank
risk; ensure the safety and soundness of both individual institutions and the banking system.
 PG establish limits and constraints on the banking sector, and the element in preventing, limiting or
stopping the damage caused by poor management.
 PG serve as part of the minimum rules that are set out by the CBN for the conduct of banking
businesses whose need is to prevent banks from illiquidity, capital inadequacy, and poor asset quality.
 According to Kalui (2020), prudential regulation forms a critical part of the operations of banks as it
protects investors, consumers and ensures systemic stability they are required to maintain adequate
capital, liquidity, asset quality, credit risk and management efficiency.
 The goals of current CBN Prudential Guidelines (2010) are to deal with the management of risk
assets, classification of credit facilities, agricultural financing, interest, and provisions among others
which licensed banks are required by the guidelines to manage.

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 Pursuant to Section 13 of BOFIA 2020, the CBN has the power to establish and
enforce capital ratios and prudential standards over all deposit-taking financial
institutions operating in Nigeria.
 The Prudential Guidelines aim to address various aspects of banks’ operations, such as
risk management, corporate governance, KYC and anti-money laundering/ counter
financing of terrorism and loan loss provisioning. The guidelines also aim to address
the peculiarities of different loan types and financing to different sectors.
 The PG are issued based on the nature of the banking institutions: DMBs, Specialized
banks (PMBs, MfBs etc.)
(Students are expected to read and understand the
provisions of the Prudential Guidelines)
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 Ethics and Best Practices in
Banking Industry

 Ethics
• Ethics can be defined broadly as a set of moral principles, rules of conduct or
values which govern a person’s behaviour or the conducting of an activity.
• It deals with rules or principles of behaviour, specifying what is right and what
is wrong.
• Ethics is understood to be a system of principles that guide how people make
decisions and lead their lives.
• Ethics prescribe acceptable standards of conduct for individuals, groups, etc.
• In banking, the basic objective of Code of Ethics is to ensure strict adherence
to best banking practices and strong commitment to ethical and professional
standards of behaviour in the operation of banking business.
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 Key threats to ethical behavior
• Conflicts of interest, including self-interest threats
• Failure to maintain objectivity
• Improper leadership and poor organizational cultures
• Lack of ethical courage to do what is the right
• Lack of ethical sensitivity
• Failure to exercise proper professional judgment
• Shortage of professionals in specific fields may also pose ethical threats
 Today, earnings management is the most common ethical threat for accountants in
business.
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Ethical standards
• Ethical Standards exist in every profession.
• Integrity is a key element of what every profession
considers appropriate ethical behavior.
• So the need for professional ethics and for the consistent
expression of integrity across all professions.
• Every profession has its own set of professional ethics.
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 Ethics in Banking
• Broadly, ethical banking is used to describe banks that operate around a set of principles
and ideals that are used to govern how they interact with their clients, their community,
and the world in general.
• The root of ethical banking is a core set of principles and beliefs. Ethical banks remain
true to their core model of conduct, even if it does not particularly help them realize a
profit.
• Even though, being held to a rigid set of principles can often prove difficult to implement
from a purely practical point of view.
• Ethical banking encourages transparency, helps build strong communities, and
establishes a set of principles and ideals that govern how and to whom finances flow.

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 Code of Ethic for Bankers
 This is a regulatory framework designed to guide the behaviour or conduct of
members of the banking industry.
 The general objectives of the code of ethics for bankers in Nigeria as stated in
Bankers Code of Conduct (Professional Code of Ethics and Business Conduct)
of 2014 include:
1. To guide every member, individual and corporate, in meeting their obligation to
customers and other stakeholders by maintaining and improving standard of
service, performance, and quality of banking products.
2. To ensure that all bank employees conduct their duties fairly and honestly.
3. To maintain best banking practice and strong commitment to sound ethical and
professional standards in the banking industry. 16
4. To guide stakeholders within the banking industry in complying with applicable laws
and regulations.
5. To reaffirm and clarify individual and corporate members rights and obligations.
6. To enable members provide a policy to develop and maintain constructive dialogue
with, seek assistance and advice from colleagues when confronted with difficulties in
matters of judgement.
7. To enable members provide a policy to avoid acceptance of gifts on services arising
from the performance of their official duties which might influence member’s capacity
to make independent judgement.
8. To enable members provide a policy to adhere to generally acceptable principles of
honesty, integrity and fairness so as to uphold the mutual trust and public confidence
reposed in them
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9. To enable members provide a policy to be fair-minded in
their day-to-day dealings both in office and during their
social interactions. All bank employees are expected to
be committed to high standards of conduct in daily social
life in order to uphold the dignity, reputation, and good
standing of the banking profession.
10.To promote (individually and collectively) the efficiency
of bank services as an instrument of economic growth.
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 Basic Principles of Professional Code of Ethics for Bank Staff
 Section 1(1) of Bankers Code of Conduct (Professional Code of Ethics and Business Conduct),
2014 outlines the core principles guiding the professional conduct of individual members
of the banking industry.; specifically provides that a member shall:
a) Conduct himself in relation with customers and third parties on principles of honesty, integrity,
diligence, credibility, transparency, fairness, and trust.
b) In the performance of his professional duties as a banker, attain appropriate levels of professional
education/certification, training, competence, skill and expertise.
c) Advice his customers, where necessary, without deliberately misleading them.
d) Abstain from discrimination but treat all customers and co-employees equally regardless of age, sex,
religion, ethnicity, status, colour, language, disability, etc.
e) Exercise care and caution while discharging his duties.
f) Abstain from physical and verbal assaults of customers, co-employees and other stakeholders. 19
 Section 1(2) of the Code provides for Confidentiality/Dissemination of Information.
The provisions specify that a member shall:
i. Not in the course of discharging his professional duties, knowingly or recklessly
disseminate false or misleading information to his customers or any other party.
ii. Not disclose or permit the disclosure to any third party, any confidential information
concerning his employer’s or his customers’ business during or after employment
except as required or permitted/enjoined by law, thus:
a. Where a bank is compelled by a court of competent jurisdiction or regulatory provision to do so;
b. Where there is duty to the public to disclose;
c. Where the interest of the bank requires disclosure;
d. Where disclosure is made at the request or with the consent (express or implied) of the customer.
iii. Sign a declaration of secrecy to bind himself to confidentiality of information
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 Another important ethical issue is Section 1(3) addresses conflict of interest as it
provides that: A member shall, at the earliest opportunity bring to the notice of his
employer, customer, or any third party, in all cases, where conflicts arise in the
discharge of his duties to such employer, customers or third party.
• Conflict of interest arises when banks or their employees have an incentive to serve
their own interests rather than those of their customers through misuse of information,
provision of false information, or concealment of material information. When there is a
conflict of interest, banks or their employees resort to concealment of vital information
from clients thereby jeopardizing the same interests they are supposed to protect.
• Conflicts of interest can adversely affect the quality of information delivered to
financial markets thereby increasing the challenge of unbalanced or one-sided
(asymmetric) information.

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 Importance of Code of Ethics in Banking
 These include:
a) Specifies principles guiding conduct and practice of banking business;
b) Provides guidance for the resolution of conflict of interest;
c) Removes the use of discretion and promotes professional practice consistent with
acceptable standards;
d) Keeps employees in check thereby upholding the principles of honesty, integrity,
transparency and accountability;
e) Secures the trust and confidence of the public in the banking system; and
f) Helps in moulding the character of the individual employees which thereby impacts
positively on the larger society.
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 Ethical Values
1. Commitment or Responsibility: Banks should be firmly committed to every
component of service delivery necessary to promote customer satisfaction.
2. Honesty and Integrity: Banking business should be conducted with a high level
of honesty and integrity.
3. Confidentiality of Customer Information: banks must uphold fiduciary
responsibility as it relates to banker-customer relationship by ensuring secrecy or
confidentiality of customer information.
4. Transparency: Banking business should be conducted as transparent as possible
when dealing with customers. All relevant information relating to bank products
and services, including associated risks, should be fully disclosed.
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5. Fairness in the treatment of customers: bankers should show fairness,
equity and impartiality in the treatment of customers, who should be
treated with courtesy.
6. Acceptance of Gifts: banks staff should refrain from acceptance gifts for
services rendered or to be rendered to customers; it is capable of
compromising the judgement of the staff in the course of their official
duties
7. Corporate Governance: Banks should adhere strictly to the codes of
corporate governance as an indispensable component of organizational
performance. Sound corporate governance practices promote
accountability, integrity, transparency and profitability.
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 Unethical Conducts in Banking
 Some common unethical conducts found in the banking include:
1. Theft and Illegal Transfer of funds/Falsification of Figures.
2. Colluding with outsiders to commit fraud.
3. Breach of duty of secrecy or confidentiality of customer information.
4. Sexual harassment.
5. Lending without due authorization, e.g to family members, friends, etc.
6. Misuse of internal expense accounts.
7. Fraudulent conversion of bank property to private use.
8. Non-disclosure of other interests which are at variance with the interest of the employer or customers.
9. Borrowings by staff from customers
10. Demand for and/or receipt of gratification for services rendered or yet to be rendered.

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Corporate Governance in Banking

 Corporate Governance
 Good corporate governance is important to the banking business because the
integrity of bank management defines the quality of banking services
delivery and in the process enhances the overall performance of the banking
sector.
 Corporate governance promotes accountability, integrity, transparency and
profitability of corporate entities or banks.
 Whereas the absence of or inadequacy of corporate governance structures is
often blamed for the woeful performance of business entities. Corporate
Governance is a key driver of corporate accountability and business
prosperity.
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• Corporate governance is defined as “The system by which companies
are directed and controlled” (OECD 2001). According to Owojori
(2010), corporate governance is the system of internal controls and
procedures by which individual companies are managed.
• Corporate governance could be described as the combined statutory
and non-statutory framework within which boards of directors exercise
their fiduciary duties to the organizations that appoint them. ‘Directors
owe to shareholders, or perhaps to the company, two basic fiduciary
duties: the duty of loyalty and the duty of care’.

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• Corporate governance provides a framework that defines the rights, roles and
responsibilities of different groups - the management, board, controlling shareowners and
minority or non-controlling shareowners within an organization.
• Corporate governance is primarily aimed to enhance the value of a company through
ethical behavior, embracing a policy of openness and fairness and ensuring informed
decision making throughout the company.
• Many at times, the Board of Directors are caught at cross road indulging in conflict of
interest that often negates the agency relationship with their appointed shareholders;
which in certain cases became a magnet for unethical practices.
• Also, pressured by and stockholders for ever-increasing returns and led by executives
seeking to maximize bonuses based on stock performance, certain boards of directors and
audit committees failed to limit “creative” accounting to keep up their earnings numbers.

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• Poor corporate governance has been the root cause of most corporate failures
worldwide. The massive corporate failures experienced in both developed and
developing countries precipitated a new look at the need to improve and reform
corporate governance at both the domestic and international levels.
• In Nigeria, the SEC in 2003 released the Code of Best Practices for Public
Companies in Nigeria. Followed by CBN which issued the Code of Corporate
Governance for banks in Nigeria Post Consolidation (effective from April 3, 2006
and replaced with Code of 2014 ) to deal with issues of transparency, equity
ownership, criteria for the appointment of directors, board structure and
composition, accounting and auditing, risk management and financial
reporting.
• The use of corporate governance as an instrument of regulation is aimed at
ensuring that banks are prudently managed. It requires that senior management 29
of banks should maintain close surveillance over the operations of all departments
of a bank. There is a positive link between quality of governance and bank
• Poor corporate governance in the banking industry gave rise to earnings management which
adversely affected the industry. Earnings management occurs when managers use judgment
in financial reporting and in structuring transactions to alter financial reports to either
mislead some stakeholders about the underlying economic performance of the company or to
influence contractual outcomes that depend upon reported accounting numbers (Healy &
Wahlen,1996).
• There was gross insider abuses in the industry, which include:
 Extending facility by a bank to a shareholder, board member, management staff,
relations or related companies;
 Failure to disclose the interest of the borrower or customer in his business dealings with
the financial institution;
 Diverting assets and income for the insiders own use; misuse of position by approving
questionable transactions for relatives, friends and business associates;
 Abuse of expense accounts; acceptance of bribes and gratification; and 30

 Other questionable dealings related to their positions at the institutions.

• Such insider abuses in the banking industry usually undermines the laid down guidelines and
• The BOFIA 2020 (previously 1991) addresses corporate governance
issues in banks by making specific provisions on conflict of interest and
insider abuse by members of boards and management of banks.
Codes of Corporate Governance for Nigerian Banks
 Corporate governance refers to the rules, processes, or laws by which
institutions are operated, regulated and governed.
 It is developed with the primary purpose of promoting a transparent and
efficient banking system that will engender the rule of law and encourage
division of responsibilities in a professional and objective manner (CBN,
2014).
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• The unprecedented financial crisis globally occasioned by weak or lack of
corporate structures has greatly shifted the attention of regulators away from
issues of bank capitalization to corporate governance.
• Corporate governance has received increased attention because of high-profile
scandals involving abuse of corporate power and, on occasions, alleged criminal
activity by corporate officers.
• Consequent upon the banking consolidation policy, the CBN issued the first Code
of Corporate Governance for Banks in Nigeria in 2006 (which was revised in
2014) designed to enhance corporate governance practices within the banking
industry. The provisions of this Code represent the minimum standard which
banks shall comply, whereas banks are encouraged to aspire to higher standards.

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Guidelines for Whistle-blowing for Banks and Other
Financial Institutions in Nigeria
• The Code of Corporate Governance is further supported by CBN Guidelines for
Whistle-blowing for Banks and Other Financial Institutions in Nigeria.
• The objective of whistle-blowing is to encourage stakeholders to bring unethical
conduct and illegal violations to the attention of an internal and/or external
authority so that action can be taken to resolve the problem.
• Whistle-blowing essentially is the reporting of alleged unethical conduct of
employees, management, directors and other stakeholders of an institution by
an employee or other person to appropriate authorities.

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 What are the legislative and non-legislative corporate governance rules
for banks?
 The relevant laws and rules on corporate governance that are applicable to
banks in Nigeria include:
 CBN Code of Corporate Governance for Banks and Discount Houses 2014 (CBN Code);
which sets out responsibilities, functions and rights of the board and management,
shareholders and other stakeholders of banks and discount houses.
 Code of Corporate Governance for Other Financial Institutions in Nigeria 2019; which is
applicable to non-banks financial institutions, such as microfinance banks, development
finance banks, primary mortgage banks, mortgage refinance companies, finance companies
and bureau de change. It provides for responsibilities, functions and rights of the board and
management, shareholders and other stakeholders of non-banks financial institutions.

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 SEC Code of Corporate Governance for Public Companies 2011 and the
Corporate Governance Guideline which apply to banks that are public
companies. The code and guideline, among other things, provide for board
structure and composition, nomination and governance and board evaluation.
 Federal Reporting Council of Nigeria Code of Corporate Governance 2018
(FRCN Code) applicable to all companies in Nigeria. The code contains
provisions on board structure and composition, business conduct and ethics,
shareholder relationships and risk management.
 CAMA. This introduced certain corporate governance principles which require
a public company to have at least three independent directors and prohibits a
person from being a director in more than five public companies.
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 CBN Code of Corporate Governance for Bank, 2014
 The Code specifies the core elements of corporate governance practices for banks and also
addresses issues like attributes of sound corporate governance practices, risk management,
and the role of internal and external auditors.
 The Code provides clear guidelines on all aspects of governance and is expected to enhance
Corporate Governance practices for banks in Nigeria. The provisions of this Code represent
the minimum standard which banks shall comply; banks are encouraged to aspire to higher
standards.
 The Code applies to banks and discount houses.
 External auditors of banks are required to report annually to the CBN, the extent of the bank’s
compliance with the provisions of this Code. The external auditor must have adequate
experience/knowledge and competence to assess the governance systems in banks and
discount houses.
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 The major highlights of the guidelines on the core elements of the corporate governance:
1. Board and management: the Code clearly spell out –
a) The responsibilities of the Board and Management; the Board is accountable and
responsible for the performance and affairs of the bank. Also, the Board shall ensure
strict adherence to the Code of Conduct for bank Directors.
b) Size and Composition; The size of the Board of any bank or discount house shall be
limited to a minimum of five (5) and a maximum of twenty (20).
i. The Board shall consist of Executive and Non-Executive Directors.
ii. The number of Non-Executive Directors shall be more than that of Executive Directors.
iii. The Board of banks shall have at least two (2) Non-Executive Directors as Independent Directors
while that of discount houses shall have at least one (1) as defined in the CBN guidelines on the
Appointment of Independent Directors.

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c) Separation of Powers; The positions of the Board Chairman and the MD/CEO
shall be separate. No two members of the same extended family shall occupy the
positions of Chairman and MD/CEO or Executive Director of the bank and
Chairman or MD/CEO of a bank’s subsidiary at the same time.
d) Appointment and Tenure; in order to ensure continuity and injection of fresh
ideas, the Code limits the tenure of Non-Executive Directors of banks a
maximum of three (3) terms of four (4) years each. Whereas the CEO will serve
for a maximum period of ten (10) years, such a CEO shall not be eligible for
appointment in that capacity in the bank or its subsidiaries.
e) Board Committees; There shall be established at a minimum the following
Board Committees: (i) A Committee responsible for the oversight of Risk
Management and Audit functions, and (ii) Governance and Nominations
Committee. Board Committees shall be headed by Non-Executive Directors. 38

f) Board Meetings; the Board shall meet at least once a quarter.

g. Remuneration; Banks shall align executive and Board remuneration with the long term interests of the bank and
its shareholders.
h. Board Appraisal; There shall be annual Board and Directors’ review/appraisal covering all aspects of the Boards’
structure, composition, responsibilities, processes and relationships, as may be prescribed by the CBN. The
annual Board appraisal shall be conducted by an independent consultant. The report shall be presented to
shareholders at the AGM and a copy forwarded to the CBN.
2. Shareholders:
a) Rights and Functions of Shareholders; Shareholders shall have the right to obtain relevant and material
information from the bank on a timely and regular basis. They shall have the right to participate actively and vote
in general meetings.
b) Equity Ownership; The approval of the CBN is required for an individual to hold more than 5% of a bank’s share
capital. Governments (direct and indirect) equity holding in banks shall be limited to 10%.
g. Protection of Shareholders’ Rights; every shareholder shall be treated fairly. Also, the Board shall ensure that
minority shareholders are adequately protected from overbearing influence of controlling shareholders.
h. Meetings; Notice of general meetings shall be as prescribed by the Companies and Allied Matters Act (CAMA) 1990.
i. Shareholders’ Associations; The Board shall ensure that dealings of the bank with shareholders’ associations are in
strict adherence with the Code for Shareholders’ Associations published by the SEC. 39
3. Rights of Other Stakeholders:
a) Stakeholders shall be able to freely communicate their concerns about illegal or
unethical practices to the Board. Where such concerns border on the activities of
the Board, such individuals shall have recourse to CBN in accordance with
Section 3.4 of the provisions of the Whistle Blowing Guidelines.
b) Banks shall demonstrate good sense of corporate social responsibility to their
stakeholders such as customers, employees, host communities, and the general
public.
4. Disclosure and Transparency: To foster good corporate governance, banks are
encouraged to make robust disclosures beyond the statutory requirements in
BOFIA 2020 (as may be amended), CAMA 2020 and other applicable laws.
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a) Transparency and Integrity in Reporting; Banks shall have a
structure to independently verify and safeguard the integrity of their
financial reporting. More so, the BAC (Bank Audit Committee) shall
review the integrity of the bank’s financial reporting and oversee the
independence of the external auditors. External auditors of banks
shall not provide client services that shall amount to conflict of
interest such as Bookkeeping or Accounting record services,
Actuarial services, Appraisal or valuation services, fairness opinion or
contribution-in-kind reports, Internal audit outsourcing services, and
Management or human resource functions.

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b) Whistle – Blowing; Banks shall have a whistle-blowing policy, which shall contain
mechanisms, including assurance of confidentiality, that encourage all stakeholders to
report any unethical activity to the bank and/or the CBN. The policy shall be made
known to employees and other stakeholders.
5. Risk Management: every bank shall have a risk management framework specifying
the governance architecture, policies, procedures and processes for the
identification, measurement, monitoring and control of the risks inherent in its
operations. The Board is responsible for the bank’s policies on risk oversight and
management.
6. Ethics & Professionalism and Conflict of Interest:
a) Ethics & Professionalism; To make ethical and responsible decisions, banks shall
comply with their legal obligations and have regard to the reasonable expectations of
their stakeholders. Banks shall establish a code of conduct.
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b) Conflict of Interest; Banks shall adopt a policy to guide the Board and
individual Directors in conflict of interest situations.
7. Sanctions:
a) Compliance with the code is mandatory for all banks and discount houses.
b) Returns on the status of each institution’s compliance with the code shall
be rendered to the CBN at the end of every quarter or as may be specified
from time to time by the CBN.
c) Failure to comply with the code will attract appropriate sanctions in
accordance with Section 60 of BOFIA 2020 or may be specified in any
applicable legislation or regulation.
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 Guidelines for Whistle-blowing for Banks and Other Financial Institutions in
Nigeria (2014)
 Whistle-blowing is the reporting of alleged unethical conduct of employees,
management, directors and other stakeholders of an institution by an employee or
other person to appropriate authorities.
 A whistle-blower is any person(s) including the employee, management, directors,
depositors, service providers, creditors and other stakeholder(s) of an institution
who reports any form of unethical behavior or dishonesty to the appropriate
authority.
 The objective of whistle-blowing is to encourage stakeholders to bring unethical
conduct and illegal violations to the attention of an internal and or external authority
so that action can be taken to resolve the problem.
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 All banks and other financial institutions are required to comply with the CBN Guidelines on
Whistle-blowing issued in 2014.
 Stakeholders are expected to report any act of impropriety to the appropriate authorities, such as:
• All forms of financial malpractice or impropriety or fraud;
• Failure to comply with a legal obligation or Statutes;
• Actions detrimental to Health & Safety or the environment;
• Any form of criminal activity;
• Improper conduct or unethical behaviour;
• Failure to comply with regulatory directives;
• Other forms of corporate governance breaches;
• Connected transactions;
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• Insider abuses; Non-disclosure of interest; Attempts to conceal any of these, etc.
 Whistle – Blowing Procedures
• Banks and other financial institutions shall have a whistle– blowing policy which shall be made
known to employees, management, directors and other stakeholders such as contractors,
shareholders, job applicants and the general public. The policy should be disclosed in their web sites.
• It is the responsibility of the board to implement such a policy and to establish a whistle-blowing
mechanism for reporting any illegal or unethical behavior.
• Banks and other financial institutions shall establish whistle-blowing procedures that encourage
stakeholders by assurance of confidentiality, to report any unethical activity/breach of these
Guidelines using, among others, a dedicated email or hotline to the bank, other financial institution
and the CBN.
 Protection of the Whistle-blower
• Banks and other financial institutions shall treat all disclosures resulting from whistle-blowing in a
confidential manner. The identity of the whistle-blower shall be kept confidential.

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• No bank or other financial institution shall subject a
whistle-blower to any detriment whatsoever on the
grounds that s/he has made a disclosure in accordance
with the provisions of the Guidelines on Whistle-blowing.
• Where a whistle-blower has been subjected to any
detriment in contravention of the above, s/he may present
a complaint to the CBN. This is without prejudice to the
right of the whistle-blower to take appropriate legal
action.
47
References:
• Adams, A. A. (2012). Ethics and professionalism in banking services. Basic
Research Journal of Business Management and Accounts, 1(1), 1-5.
• Adeyanju, O. D. (2014). Code of ethics and professionalism: Implication for bank
failure in Nigeria. Research Journal of Finance and Accounting, 5(19), 75-86.
• CBN (2014) Code of Corporate Governance for Banks and Discount Houses in
Nigeria.
• Chartered Institute of Bankers of Nigeria (2014), Code of Conduct in the
Nigerian Banking Industry (Professional Code of Ethics and Business Conduct),
Lagos: CIBN.

48
BAF 3304 Banking
Regulations and
Supervision
Module 4 Banking Stability
Dr Nuruddeen Abba Abdullahi
BUK
 Banking Stability
Content
Sources of Instability in the Banking Sector
Regulatory Authorities Efforts at Stabilizing the
Financial System
Critical and Emerging Aspects of Banking Practices
Subject to Control and Regulation
Forms and Methods by which Regulatory Authorities
Carry out Supervisory Functions in Banks
50
Sources of Instability in the Banking Sector

 Banking crises
 The banking sector is an important component of the financial system; it can affect the economic
growth through raising and mobilizing the savings, channeling the funds to the productive uses
and enhancing the efficiency.
 The deteriorations in the banking sector stability may negatively affect the economic growth
through preventing the efficiently functioning of the aforementioned interaction channels.
 The term "banking crisis" refers to a situation of major disruptions in a country's banking sector
which may not just be minor downturns or disturbances.
 Banking crises are often associated with bank runs, banking panics, and systemic banking crises.
 Many countries around the world have experienced various episodes of banking crises
throughout the history.
 Banking crisis occurs when the capital of the banking sector has been depleted due to loan
losses, resulting in a negative net worth of the banking sector.
51
 There are a number of exogenous and endogenous factors that can precipitate instability
in the banking system.
 The exogenous or external factors include macroeconomic shocks which emanate from
negative effects of financial liberalization, globalization and rapid technological changes.
 The endogenous or internal factors include inappropriate corporate governance and
inadequate regulatory and supervisory capacity among others.
 Some of these internal factors are:
• Macroeconomic Environment
• Asymmetric Information
• Weak Management
• Inappropriate Corporate Governance Structures
• Inadequate or Poor Regulatory and Supervisory Capacity
52
• Macroeconomic Environment - It is easier to achieve sound banking system under a stable
macroeconomic environment than an unstable one. Whereas an unsound banking system could
trigger off macroeconomic instability, hence the symbiotic relationship between the banking system
and macroeconomic environment.
• Asymmetric Information - any misinformation about the soundness of banks and the safety of
their deposits can cause panic withdrawals, creating runs on the banks with potentials of contagion
and loss of credit confidence. Similarly, poor loan selection due to information asymmetry leading to
funding of unviable projects could lead to having very high volume of non-performing loans.
• Weak Management - poor management is often reflected in poor asset quality, insider abuse,
inadequate internal controls, and fraud, including unethical and unprofessional conduct, squabbles
and high staff turnover rate. Weak risk-control systems have been a major factor in the emergence of
a number of crises, leading to a variety of balance sheet differences, including large and undetected
mismatches on the balance sheet or poor asset quality, leading to large unrealizable losses.

53
• Inappropriate Corporate Governance Structures – effective corporate
governance practice incorporates transparency, openness, accurate
reporting and compliance with statutory regulations, among others. From
history, a lack of good corporate governance in banks leads to financial
crisis.
• Inadequate or Poor Regulatory and Supervisory Capacity – can
contribute to instability in the financial system. Thus, there is the need for
strong regulatory and supervisory capacity capable for effective
monitoring of the system. Regulatory Supervisors must exhibit a high level
of integrity, competence and be equipped with modern facilities, in order
to meet the challenges of contemporary banking practices
54
Regulatory Authorities Efforts at Stabilizing the
Financial System

 Banking Regulation
Regulation focus is to reduce the risk of bank insolvency
and the potential cost of bank failure to depositors.
The bank also strengthened its regulatory framework,
with emphasis on creating an environment for
competitiveness, efficiency, financial soundness and
sustainable growth.

55
 Banking Supervision
 CBN undertakes both off-site and on-site supervisory activities on banks and non-
bank financial institutions.
 Emerging issues from such supervisory efforts include poor/weak management
structure, weak internal control systems, under-capitalization, inadequate
collateralization of facilities granted and exceeding the single obligor limits are
quite revealing, and are of great concern to the monetary authorities.
 In addressing these problems, the CBN introduced prudential guidelines
encompassing capital adequate ratio, mandatory uniform accounting standards and
strict enforcement of licenses which are issued to only those who are fit and proper
to operate. All banks and non-bank financial institutions are required to comply with
the appropriate guidelines relevant to them. compliance.
56
Good Corporate Governance
 Poor corporate governance has been identified as a major challenge to the
survival of banks in Nigeria.
 Major causes of distress in the Nigerian banking sector in the 1990s were
identified to include weak management, poor capital base, inadequate credit
policy and fraudulent and corrupt practices. These undoubtedly were
reflections of unsound and inadequate corporate governance structures in the
sector.
 The enthronement of the good corporate governance framework for DMBs
and other financial are geared towards sound and stable banking business in
the country.
57
 Critical and Emerging Aspects of Banking
Practices Subject to Control and Regulation

Emerging Issues
 Globalization and Financial Openness
 Transparency Information Disclosure
 Emphasis on Good Corporate Governance
 Combating Money Laundering, Advance Free Fraud (419) and Terrorism
 Competitiveness
 Superior Service Quality
 Market Orientation
 Product Innovation 58
Adequate Capitalization
Investment in Technology
Capacity Building
Social Demand on Financial Institutions
Imposition of Sanctions
Legal Tussle between CBN and Other Banks

59
 Control measures and possible remedial actions
 The authorities have developed control measures with a view to making the banking sector
secure. These include:
• Good corporate governance
• Leadership by good example
• Transparent compliance with regulations and guidelines as well as - financial sector
standards
• Emplacement of corporate contingency plan and framework for risk management (including
effective internal control systems)
• Self-regulations by operators
• Due customer diligence 60

• Manpower training and development (Human capacity building)

• Co-operation and where necessary dialogue with regulatory authorities
• Collaborative competition
• Policy stability with only needful fine-tuning
• Ethics and professionalism
• Respect for law, order and rights of others
• Consumer care and sensitivity
• Proactive supervisory and surveillance activities
• Research and development
• Use of modern technology
• Good corporate citizenship
• E-banking regulation
• A new sanction execution regime. 61
 Methods Use by Regulatory Authorities in
Carry out Supervisory Functions in Banks

• Concept ‘Supervision’
• Forms of Supervision
• Conditions for Effective Banking Supervision
• Global Supervision, Foreign Bank Branches and Cooperation with
Foreign Supervisors
• Roles and Responsibilities of Stakeholders in ensuring Good Ethical
Conduct in the Banking Industry
• Ethical Principle for Using Organisational Assets
• Intellectual Property
62
 Concept of Bank Supervision
 This is a supervisory function charged with the responsibility of ensuring the safety and soundness of the banking
system as a whole. Books and affairs of every licensed insured institution are examined as a means of meeting its
supervisory mandate.
• It is performed through the off-site surveillance and on-site examination of the books and affairs of the banks, which
exceptions are reported and recommendations made on how the observed lapses can be corrected, and the
implementation of such recommendations is monitored through scheduled post examination visits to the affected banks.
• Bank supervision comprises the enforcement of rules and regulations as well as judgments concerning the soundness of
bank assets, its capital adequacy and management (Volcker, 1992).
• Regulation involves providing input into developing and interpreting legislation and regulations, issuing guidelines, and
approving requests from regulated financial institutions.
• Regulation and effective supervision leads to healthy banking industry.
• To maintain confidence in the banking system, the monetary authorities have to ensure banks play by the rule.
Accordingly, the deposit insurance scheme and prudential guidelines were adopted to improve the assets quality of
banks, reduce bad and doubtful debt, ensure capital adequacy and stability of the system, and protect depositors’ funds
(Oladipo, 1993, Oguleye, 2005).
63
• The three main types of supervision are Transaction
Based, Consolidated and Risk Based Supervision.
 Transaction Based Supervision; this supervisory approach
focuses on individual group entities. Individual entities are
supervised on a solo basis according to the capital
requirements of their respective regulators.
 It is complemented by a general qualitative assessment of the group
as a whole and, usually, by a quantitative group-wide assessment of
the adequacy of capital.
64
 Consolidated supervision; is a group-wide approach to
supervision whereby all the risks undertaken by a group of
companies are taken into account in the supervisory process.
 This will entail the identification of the risks to which the components of
the group are exposed to and the impact of such risks on the group
operational activities.
 Consolidated supervision entails the process whereby the supervisor can
satisfy himself about the health of the entire group’s activities which
may include bank and non bank companies, financial affiliates as well as
branches and subsidiary companies.
65
 Consolidated supervision will entail the following:
o adequate knowledge of the structure of a group and the risks there in;
o adequacy or otherwise of capital measured on a group basis;
o measurement of larger exposures on a group basis.
 Consolidated supervision should not be seen as a substitute for the supervision
of individual bank, but rather be regarded as being complementary.
 There is the need for the various supervisory agencies to cooperate to ensure
that the group financial activities are comprehensively supervised taking into
consideration various risks that could affect the health of the individual entities
and the group.

66
 Risk Based Supervision; RBS is a robust, proactive and sophisticated supervisory
process, essentially based on risk profiling of a bank. It enables the supervisor to
prioritize efforts and focus on significant risks by channeling available resources to
banks that have high-risk profiles.
 RBS assesses the efficacy of a bank’s ability to identify, measure, monitor and control
risks. It designs a customized supervisory programme for each bank and focuses
more attention on banks that are considered to have potentially high systemic
impact.
 RBS has assumed added importance for two main reasons.
o New technologies, product innovation, size and speed of financial transactions have changed the
nature of banking.
o The need to comply fully with the Basel Core Principles on Supervision and to prepare an
enabling environment for the implementation of the New Capital Accord.
67
 RBS presents a framework with which banks are assessed regarding the probability and
impact of risks as opposed to the intuitive assessment by the traditional approach. (The
traditional form of supervision which is biased in favour of risk-avoidance and hence
against innovative products and services, risk-based supervision treats risks mitigating
and offsetting as valid approaches to risk management.)
 Risk-based supervision identifies, measures and controls risks; and monitors the risk
management process put in place by a financial institution during a supervisory period.
 The main objective of risk-based supervision is to sharpen supervisory focus on:
1. The activity(ies) or institution(s) that pose the greatest risk to banks and financial institutions
and/or financial system; and
2. The assessment of management process to identify, measure, monitor and control risks

68
 The main benefits of RBS approach to supervision include:
1. The allocation of supervisory resources according to perceived risk, i.e.
focusing resources on the bank’s highest risk or devoting more supervisory
efforts to those banks that have a high-risk profile. It will, therefore, enable
the regulator to target and prioritise the use of available resources.
2. The supervisor will be better placed to decide on the intensity of future
supervision and the amount and focus of supervisory action in accordance
with the perceived risk profile of the bank.
3. The supervisor may also focus more attention on banks whose failure could
precipitate systemic crisis.
69
 Forms of Supervision
 Supervisory authorities (CBN & NDIC) carry out their functions through bank
examinations.
 Bank examination may be defined as the examination of the books and records
of a bank for the purpose of ascertaining that the affairs of the bank are being
conducted in a safe and sound manner.
o Main areas of focus are: adequacy of capital, asset quality, board and management,
earnings, liquidity, adequacy of internal controls, adequacy of accounting system and
record keeping as well as compliance with both the individual banks’ internal policies and
prudential regulations.
o This task of examination is accomplished by bank examiners through both off-site and on-
site supervision functions.
70
• On-site supervision - entails physical presence of regulators (CBN and NDIC) in
the financial institutions to evaluate their internal controls, compliance with the
laws and regulations governing their operations with a view to determining their
overall risk exposure. On-site supervision is carried out by the Bank Examination
Department of the regulatory bodies.
• Off-site supervision - is carried out by the Banking Supervision Department of
the CBN/NDIC and involves essentially the appraisal of banks returns. Essentially,
it serves as an early warning device to detect a bank’s emerging financial
problem. It involves analyzing key bank financial ratios covering such areas as
earnings, asset quality, capital and reserves and liquidity as well as analyzing
other financial data that are generated from periodic bank financial reports that
are submitted to the supervisor.
71
 Nature of Bank Examination
• Maiden examination - usually carried out after six months of operations by a new bank to
determine if the conditions and premises for granting of banking license by the CBN and the
business objective of a bank are being pursued.
• Routine examination - is the normal examination, currently carried out on a yearly basis
to review the prudential operations, information-processing systems, foreign exchange
operations and the anti-money laundering control of banks to determine the continued
conduct of banking business in a safe and sound manner.
• Target/Special examination - usually carried out when serious issues of regulatory
concern arise in bank, e.g. persistent illiquidity, lingering boardroom squabbles,
deteriorating assets quality etc. In such a situation, the examination effort is concentrated
primarily on the identified areas of regulatory concern.
• Investigation/Spot checks - These arise from the discovery of abnormal banking practices,
72

complaints and petitions by the banking public and other stakeholders of issues bordering
on unprofessional and unethical conduct by a bank.
Conditions for Effective Banking Supervision
A suitable legal framework for banking supervision is in
place to provide each responsible authority with the
necessary legal powers to:
o authorise banks,
o conduct ongoing supervision,
o address compliance with laws, and
o undertake timely corrective actions to address safety and
soundness concerns. 73
 The conditions necessary for effective banking supervision include:
1. Sound and sustainable macroeconomic policy is a critical success factor in the application of the core
principles for effective banking supervision (BCBS) , which set out the best practices in supervision
worldwide.
2. Effective market discipline which requires that there exist a culture of financial transparency and the
presence of good corporate governance.
3. Procedure for the efficient resolution of problems in banks. The BCBS core principles note the need
for supervisory authorities to be vested with the power and authority required for effective distress
resolution.
4. Mechanism for providing an appropriate level of systemic protection for financial safety net. The key
aspects of financial safety net include prudential regulation and supervision, a lender of last resort
facility and deposit insurance according to financial stability form (FSF) in 2001.
5. A well developed public infrastructure. This is another profound aspect for effective banking
supervision.
74
 Global Supervision, Foreign Bank Branches and Cooperation with Foreign Supervisors
 Few Nigerian banks operate offshore. Currently there are only 8 DMBs with international authorisation:
• Access Bank Plc.,
• Fidelity Bank Plc.
• First City Monument Bank Limited.
• First Bank of Nigeria Limited.
• Guaranty Trust Holding Company Plc.
• Union Bank of Nigeria Plc.
• United Bank for Africa Plc.
• Zenith Bank Plc.
 These banks operate branches outside Nigeria, with their offshore operations always been subject to supervision
by the authorities with the cooperation of the host supervisors.
 Indeed, issues related to cross-border supervision are not relevant to Nigerian banks as their activities are
predominantly domestic in nature.
75
 Roles and Responsibilities of Stakeholders in ensuring Good Ethical Conduct in the
Banking Industry
 The code of ethics and professionalism serves as the foundation upon which banks must make
decisions based on honesty, integrity, confidence and trust (Sanusi, 2010).
 A code of ethics reflects the standards and establishes a realistic mode of behaviour that applies to
everyone in the bank, from the board of directors to the lowest level of workers in the bank. Thus,
high ethical standards are expected to guide operations in the banking industry.
 Organizational ethics is understanding what is right or wrong in the workplace and then doing
what is right.
 'Stakeholder' is any group which has an interest in, involvement with, dependence on,
contribution to, or is affected by, the organization.
 So, the term stakeholder is broader than the conventional ideas about shareholders, investors and
partners, etc.
76
 A Stakeholder is any individual or group of people who could lose or gain something
because of the actions of the organization.
 Some important Stakeholders in the operations of the CBN include groups such as
Board of Directors, Top Management, Staff, the Nigerian Public/the Parliament,
Contractors, Consultants, Suppliers, Financial Services Sector Operators,
Government MDAs, Customers, Civil Society, The Mass Media, The International
Business Community, Foreign Governments, Local and international businesses,
Operators in the informal sector of the economy.
 The banking code of ethics has given all stakeholders the right to raise issues related
to unethical behavior that may emanate from the board, management, or customers;
where the board is involve such complaint can be raise to the regulatory authorities
through the whistle-blowing mechanism.
77
 Notwithstanding that the banks want to uphold the principles of
profitability and productivity, they are obliged to obey certain ethical
principles of banking profession and organizational ethics, which include
honesty, integrity, social responsibility, accountability and fairness.
 The Banks and Financial Institutions Act (BOFIA) 2020, S.3 provides that
“any person whose appointment with a bank has been terminated or who
has been dismissed for reason of fraud, dishonesty or conviction for an
offence involving dishonesty or fraud shall not be employed by any bank
in Nigeria”. This is aimed at sanctioning wrong ethical behavior of
banking employees.

78
• Corporate Code of Ethics - Each bank is expected to have
Corporate Codes of Ethics to guide their staff of what is expected of
them. The code should be made available to each staff right from the
point of entry and should form part of the induction process.
• Code of Corporate Governance for Banks - The Bankers’
Committee has issued a Code of Corporate Governance for banks and
other Financial Institutions in Nigeria in 2003. This is to strengthen
the need for corporate managers to adhere to processes to ensure
good ethical behaviour in matters bordering on decision making and
management of the organization.
79
 The Stakeholders' Roles and Ethical Responsibilities
 The expected roles and responsibilities of the Stakeholder must be properly defined and every Stakeholder would be expected
to be guided in all action by the Rule of Law.
 Ethical Principles for Using Organisational Assets
 "Assets" are not limited to money but include assets such as Physical Property, Funds, Intellectual Property ( Official
Information, or other Intangible Property), and Official Records.
 These principles should be codified as rules, and should cover matters like ethical use of organizational assets, responsibility
for physical property, responsibility for funds, etc.
 Intellectual Property
 This includes the ideas discoveries, and inventions of the people who work for the organization. These original ideas and
creations have value in the marketplace. Just like physical property, they have an owner/creator and are given rights of
protection.
 Examples of banks intellectual property are Technical data, Bids/Pricing, Personnel information, Investment/Financial data,
Confidential information, Future plans, Market studies and Proposed products.
 It is employee duty and responsibility to protect the organization's intellectual property, and act responsibly with the sensitive
information of others; protect private personnel information from those inside or outside the organization, among others.

80
Conflicts of Interest
 A conflict of interest happens when personal interests influence (or appear
to influence) ability to act in the best interest of an organization.
 Organizational information and resources should not be used for personal
gain. Employees should never use their contacts or positions with the
organization to advance their own private businesses or financial interests.
 The adverse effect of conflict of interest may arise from different
perspectives, including employees at all levels, family members and close
associates engaging in organisational business transactions.

81
References:
• National Open University of Nigeria, e-Courseware:
BFN305 BANKING LAWS AND REGULATION.
• Paseda, O. (2020). Banking Regulation in Nigeria: A
Review Article. IOSR Journal of Humanities And Social
Science (IOSR-JHSS), 25(8), Series 4,38-58.
www.iosrjournals.org

82
Thank you.

83
BAF 3304 Banking
Regulations and
Supervision
Module 5 Banking Licence
Dr Nuruddeen Abba Abdullahi
BUK
The various banking licences issued by the CBN include:
Commercial banking. Merchant banking
Specialised banking

85
Types of Banking Licences
 Banking licenses in Nigeria are issued by the Central Bank of Nigeria (CBN). It was
established by the Central Bank of Nigeria Act 2007, and it is charged with the duty of
supervisions and regulations of banks and other financial institutions.
 The purpose of the application and issuance of a banking license is to ensure that no person
can carry out banking operations legally in Nigeria without being issued and granted a valid
banking license under the Banks and other Financial Institution Act (BOFIA) 2020.
 Broadly there are three classes or categories of banks that can obtain licenses from the CBN:
• Commercial Banks, which can be regional, national or international.
• Merchant Banks.
• Specialized Banks, which include non-interest Banks, Microfinance Banks,
Development Banks and Mortgage Banks.
86
 Commercial Banking Licence
 Procedures for Obtaining license for Deposit Money Banks (Commercial
Banks). This category of banking license is issued for banking operations on National
Commercial Level, Regional, or International authorization basis.
 The minimum paid-up share capital to be maintained for :
• National level banking license is N25 Billion Naira, or any such amount that may be prescribed by
the CBN
• Regional Banking License is N10 Billion Naira, or any such amount that may be prescribed by the
CBN
• International Commercial Banking License is N50 Billion. or any such amount that may be prescribed
by the CBN
 To obtain the commercial banking license, the banking operators are to comply with all
the prudential guidelines and regulations issued by the CBN on the required level of
capital adequacy, liquidity, and cash reserve.
87
 The license confers on the bank operators the authority to undertake the following business
transaction:
• Take deposits and maintain current and savings accounts from natural (individuals) and
legal persons (companies).
• Provide retail banking services including mortgage products.
• Provide financial and credit facilities.
• Deal in foreign exchange and provide foreign exchange services, which will be subject to
the bank having a foreign exchange authorized dealership license and any other law and
CBN Regulations.
• Act as a settlement bank subject to CBN approval.
• Provide treasury management services which include the provision of money market,
fixed income, and foreign exchange investment on behalf of clients, which is also subject
to the approval of the Central Bank. 88
• Provide custodial services.
• Provide financial advisory services relating to commercial banking business which do not
require statutory filings with the securities and exchange commission (SEC)
• Invest in non-convertible debt instruments and enter into derivative transactions subject
to the approval of the CBN and permitted under the CBN directives and circulars.
• Provide non-investment banking services subject to the approval of the CBN.
• Undertake fixed income trading, where duly licensed to act as a Primary Dealer Market
Maker to trade in securities such as Federal Government bonds, treasury bills, treasury
certificates, and such other certificates as may be prescribed by the CBN.
• Any other activities that may be prescribed by the CBN in writing from time to time.

89
 The setting up of a DMB must be in absolute compliance with the principles provided for by the
CBN as all financial institutions seeking operations in Nigeria must be licensed by the Bank.
 Obtaining a Deposit Money Bank (DMB) license in Nigeria depends on the category of bank –
Regional, National or International Authorization.
 A commercial bank with regional banking authorization is entitled to carry on its baking business
operations within a minimum of six (6) and a maximum of twelve (12) States of the Federation,
which lies within not more than two (2) geographical zones of the Federation as well as within the
Federal Capital Territory.
 A commercial bank with national banking authorization is entitled to carry on its banking business
operations in every State of the Federation and the Federal Capital Territory.
 A commercial bank with international banking authorization is entitled to carry on its banking
business operations within all States of the Federation as well as maintain an offshore banking
operation in the jurisdiction of its choice, which will be subject to the approval of the CBN and
compliance with the regulatory requirement of the host country.
90
Requirements for New Banking Licence
The 3 stages for obtaining license for banking business are; (1) Grant of approval in
principle (2) Grant of final license (3) Pre-commencement of operation requirement.
I. Grant of Approval In-principle (AIP). The preliminary requirements for AIP comprises a
formal application for the grant of a licence to carry on the business of banking in
Nigeria addressed to the CBN, which will be accompanied by the following:
1. Non-refundable Application fee of N500,000.00.
2. Deposit of Minimum Capital of N 25 Billion with Central Bank of Nigeria on application with
evidence of deposit by each shareholder. The source of capital contribution by each shareholder/
subscriber would subsequently be verified by Bank Examiners.
3. Feasibility Report/Business Plan. The report should contain information on the following:
a) Minimum paid–up capital requirement of =N=25 billion for new banking licence
91
b) Ownership structure in columnar format showing name of proposed investor(s),
profession/business and percentage shareholding. Detailed bio-data/resume of
shareholders should be attached:
• Fitness and properness of the promoters would be ascertained through security screening
and status enquiry from SEC, NDIC, NAICOM, Credit Bureau (CRMS) and reference to
CBN's black book maintained by the Bankers Committee.
• Explanation of the sources of capital contribution by each investor.
• Where equity is financed by loan, such loans must be long term (at least of 5 year tenor)
and must not be taken from the banking system.
• Undertaking by promoters that the bank will be adequately capitalized for the volume and
character of its business at all times.
• Foreign investors should not be companies incorporated in off-shore centres or tax havens
such as Gibraltar, The Cayman Islands, etc
92
 For corporate investors, promoters should forward:
• Certificate of Incorporation
• Board Resolution supporting company's (ies) decision to invest in the
equity shares of the proposed bank.
• Names and addresses (business/residential) of owners/directors and their
related companies, if any.
• Latest 3 years audited accounts & reports of the company and Tax
Clearance Certificate.
• Certified true copy of Memorandum and Articles of Association.
• Certified true copies of the companies forms CO2 and CO7
93
c) Objectives of the bank.
d) Services to be rendered.
e) Branch expansion programme.
f) Organizational structure, showing functional units, reporting
relationships and grade (status) of heads of departments/units.
g) Staff Training Programme.
h) I.T. Programme requirements/facilities.
i) Five (5) year financial projection. The assumptions underlying the
projections must be stated.
94
4. Board & Management
a) Board
• Board composition should not be unwieldy (10-20 directors)
• Roles and responsibilities of the Board & its sub-committees must be spelt out in the business plan.
• Criteria for selecting board members should be stated in Business Plan. This must be proportional
to shareholding.
• List of proposed directors and their detailed resume should be submitted
b) Management Team
• List of identified top / senior management staff (AGM and above) and detailed curriculum vitae
stating their qualification and experience, track records etc should be submitted.
• * See Circular ref. BSD/DO/CIR/VOL.I/01/2001 dated January 4, 2001 on the “pre-qualification for
appointments into the Board and top management positions in Nigerian banks.”

95
c) Organizational structure, showing functional units,
responsibilities, reporting relationships and grade (status) of heads
of department/unit.
d) Internal Controls:
• Delegation of functions
• Need for involvement of four eyes (i.e. at least two officers to be involved
in all major decisions) in running the bank. Dual Control. No sole
signatory powers
• Succession plan for key officers
• Corporate planning
96
5. Memorandum and Articles of Association (MEMART)
Relevant issues to be addressed in the draft MEMART include,
but are NOT limited to:
a) Name of proposed bank
b) Object clauses
c) Subscribers to the MEMART
d) Procedure for amendment
e) Procedure for share transfer/disposal
f) Appointment of directors
97
6. Other Documents
a) Shareholders Agreement providing for Disposal/transfer of
shares as well as authorization, amendments, waivers,
reimbursement of expenses etc.
b) Statement of intent to invest in the bank.
c) Technical Services Agreement (where applicable).
d) Any other documents/information that may be demanded from
time to time.

98
II. Requirements for Grant of Final Licence. Not later than six (6)
months after the grant of A.I.P, the promoters of a proposed bank must
submit application for the grant of a final banking license to the CBN
with following documents:
1. Non-refundable licensing fee of N5,000,000 in bank draft payable to CBN.
2. 3 copies each of:
a) Certified true copy (CTC) of Certificate of Incorporation of the bank.
b) CTC of MEMART
c) CTC of Forms CO2 (Allotment of shares) and CO7 (particulars of directors) of
the bank.

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3. Evidence of location of Head Office/Branch Building (rented or
owned) for the take-off of banking business.
4. Changes (if any) in the Board, Management and Shareholding
should be clearly stated for necessary appraisal.
5. Evidence of strongroom, loading bay and banking hall facilities.
6. Bullion lorries with necessary security gadgets.
7. Evidence of installation I.T. facilities/computerization.
8. Copies of letters of offer and acceptance of employment in
respect of the Management Team.
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III. Pre-commencement of Operation Requirements. Letter informing CBN
of its readiness to commence operation with the following:
1. Evidence of admission into the clearing house.
2. Copy of shareholders register
3. Copy of share certificate issued to each investor.
4. Draft copy of opening statement of affairs signed by directors and auditors.
5. Evidence of insurance coverage for cash such as Cash-In-Transit (CIT), Cash
on Counter, Strongroom/ Vault, etc, insurance policies.
6. Manual of Operation.
7. Evidence of readiness of cheques and other security documents.
8. Minutes of Pre-Commencement Board Meeting.
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9. Evidence of adequate security arrangements - physical
and logical such as:
a) Uniformed and/or plain cloth policemen
b) Uniformed security guards
c) CCTV especially in the banking hall, strongroom and loading
bay areas
d) Raid alarm (especially foot operated type) inside the teller
cubicles, and fire alarms at strategic points within the
premises
e) Regiscope camera
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f) Cash movement & escort vans fitted with communication
equipment
 Merchant Banking License
 Merchant Banking Licence
• This type of banking license is regulated by the Merchant Banks Regulations 2010.
The license is issued by the Governor of the CBN upon the fulfilment of terms and
condition authorizing the operation of a merchant bank.
• The merchant banks allow such a financial institution to provide specialist services
such as wholesale banking and investment banking services.
• The bank offers commercial loans, investment, and advisory services to large firms
and high net-worth individuals in Nigeria and not to the general public.
• The CBN regulates the banking activities of the merchant bank.
• The minimum paid-up share capital required for a merchant banking license is N15
Billion naira or any other amount that would be prescribed by the CBN.
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• The license gives the bank the authority as provided under Part 2 of the Merchant Banks
Regulations, 2010 to:
 Take deposits and maintain current savings accounts from natural and legal persons at least
N100 Million per tranche or any other minimum amount that may be prescribed by the CBN;
 Provide finance and credit facilities to non-retail customers;
 Dealing in foreign exchange and provide foreign exchange services subject to the provision of the
foreign exchange (Monitoring and Miscellaneous Provisions) Act and CBN regulations;
 Act as an issuing house for managing, arranging, coordinating the issuance of securities, subject
to the provisions of BOFIA;
 Provide underwriting services for equity issuance of securities, subject to the provisions of BOFA
and prior notification in writing to the CBN;
 Provide debt factory services;
 Issuing, discount, and rediscount negotiable instruments;
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 Provide treasury management services including the provisions of money market, fixed income, and
foreign exchange investment on behalf of clients.
 Provide custodial services;
 Engage in trading of fixed income securities, where duly licensed to act as a Primary Dealer/ Market
Maker to trade securities such as Federal Government bonds, treasury bills, treasury certificates, and
any other debt certificates as may be prescribed by CBN;
 Engage in proprietary trading such as an investment in debt instruments of any person, investing in
equity or hybrid equity instruments subject to BOFIA and CBN rules and guidelines;
 Provide asset management services, including fund and portfolio management services, act as a
dealer of securities for its account and the account of its clients or otherwise make or manage
investments on behalf of clients.
 Provide financial consulting and advisory services relating to corporate and investment matters for a
fee;
 Such other activities that may be prescribed in writing by the CBN from time to time.
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Specialized Banking Licenses
 This type of banking license applies to special banks which include non-interest
banks, microfinance banks, development financial institutions, mortgage banks,
and any other banks designated by the CBN.
 It is issued in line with the Minimum Standards for Specialized Institutions
Regulations No.03 2010. The minimum paid-up share capital for setting up such
banking
Typesinstitutions is illustrated in theMinimum
of Institution
Paid-up Share
table below.
capital
Non-interest bank (regional) N5 Billion
Non-interest bank (national) N10 Billion
Primary Mortgage Institution N5 Billion
Microfinance Bank N200M (U); N1 Billion (S); N5 106
Billion (N)
 Microfinance Banking Licence
 The categories of MFB in Nigeria and current financial requirements for set up are
as follows:
1. Unit Microfinance bank - This is a type of microfinance bank having authorization in one
location. It is restricted from having any other branch. The minimum capital requirement for
this category of MFB is N200,000,000 (Two Hundred Million Naira).
2. State Microfinance Bank - A state microfinance bank is one having a single state
authorization or that of the Federal Capital Territory (FCT). The CBN via its written approval
allows for the opening of various branches within that particular state, or within the Federal
Capital Territory (FCT).
• However, a State Microfinance Bank is not allowed to open more than two branches within the same
Local Government Area (LGA) unless it has established at least one branch or cash centre in every LGA
of the State.
• The minimum capital requirement for this category of MFB is N1,000,000,000 (One Billion Naira).107
3. National Microfinance Bank - This is one having more
than one state authorization inclusive of the Federal
Capital Territory (FCT). The CBN restricts their
operation to not more than (10) branches.
• The minimum capital requirement for this category of MFB is
N5,000,000,000 (Five Billion Naira).

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 The procedure for obtaining an MFB license are as follows:
1. A formal application is made to the Governor of the Central Bank of Nigeria indicating the exact
category of Microfinance Bank to be established. The application must be accompanied by the
following documents:
a) Non-refundable application fee of N50,000, N100,000 and N250,000 for Unit, State and National
MFBs respectively in bank drafts or e-payment, in favour of the Central Bank of Nigeria;
b) The deposit of the minimum capital requirement for the relevant category of MFB, which shall be
made through e-payment into the MFB Share Capital Deposit Escrow Account with the CBN. The
capital deposited together with the accrued interest shall be released to the promoters after the
grant of a license;
c) Satisfactory, verifiable and acceptable evidence of payment by the proposed shareholders of the
minimum capital requirement for the category of the license being applied for; including a
personal statement that capital does not originate from bank credit, any form of credit,
questionable sources and any activity that relates to money laundering or any illicit activity;
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d) Certificate of capital importation issued by an authorized dealer [banks]
in the case of foreign capital;
e) A copy of a detailed feasibility report.
f) A copy of the draft Memorandum and Articles of Association.
g) A letter of intent to subscribe and pay for the shares of the proposed
microfinance bank, which is to be signed by each subscriber.
h) List of promoters or proposed shareholders in a tabular form, showing
their business and residential addresses, as well as the names and
addresses of their bankers.
i) Particulars of the proposed board of directors.
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• The CBN before granting a license considers the following:
i. The promoters and the proposed management team are approved persons to invest in
and manage the financial services industry in Nigeria by regulatory standards.
ii. The promoters have submitted the names, curriculum vitae and credentials of the top
management team of the proposed MFB.
iii. The minimum paid-up capital of the shareholders’ funds of the relevant category being
applied for is acceptable and the source is verifiable and found satisfactory to the CBN;
iv. The quality of the management of the proposed MFB is sound.
v. The earnings prospect of the company is realizable.
vi. The objects of the company as disclosed in its Memorandum and Articles of Association
agree with the permissible activities listed

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2. The CBN reviews the application and the accompanying documents within three months to
determine if an Approval in Principle (AIP) would be granted. Where satisfied, an AIP is
granted. However, an AIP does not translate to a license as it is merely required for the
incorporation of the MFB at the Corporate Affairs Commission (CAC).
3. After the incorporation process is satisfactorily completed, a final operating license is
granted.
4. Following the grant of a final operating license, the CBN conducts a physical inspection of
the premises before the MFB can begin operations.
5. Upon a satisfactory physical inspection of the premises, the CBN shall in writing inform the
MFB when it may commence business and the MFB must also inform the CBN in writing of
the date the business is commenced.
 It is noteworthy that where the CBN declines in granting a license, the decision would be
communicated to the promoter(s) in writing followed by a refund of capital deposit.
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Thank you

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