CBN issues fresh guidance on troubled banks’ contract suspensions

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The Central Bank of Nigeria has issued interpretative guidance clarifying the practical application of Sections 34(2)(b) and 40(2) of the Banks and Other Financial Institutions Act, 2020, setting a maximum period of two business days for the suspension of certain contractual obligations during the resolution of failing banks.

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The clarification was contained in a circular issued on Wednesday by the Acting Director of the Financial Markets Department, Okey Umeano, who said the guidance takes immediate effect.

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According to the apex bank, the absence of a clearly defined maximum duration for the exercise of its powers under the two BOFIA provisions had created uncertainty for banks, financial institutions, and their counterparties in relation to financial contracts.

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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 added that the uncertainty had the potential to impede the effective management of commercial risk.

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To address this, the CBN said the circular provides interpretative and operational guidance on how it will exercise the powers conferred on the Governor under the relevant provisions of BOFIA.

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The guidance applies to banks, other financial institutions, and counterparties to what the CBN described as “Affected Contracts,” defined as contracts to which a bank or other financial institution is a party and which fall within the scope of Sections 34(2)(b) or 40(2) of BOFIA.

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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.”

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The clarification relates to two key provisions of BOFIA 2020 that underpin the CBN’s bank resolution framework.

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Section 34(2)(b) empowers the apex bank to facilitate the acquisition of a failing bank by one or more banks as part of efforts to preserve financial stability, while Section 40(2) allows the CBN Governor, where a banking licence has been revoked and it is considered to be in the public interest, to direct the commencement of resolution actions, including the temporary suspension of certain contractual termination rights.

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By introducing a two-business-day limit, the CBN has clarified that any suspension arising from the exercise of these powers will be temporary, providing greater certainty for market participants and counterparties to financial contracts.

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The circular comes as the apex bank revoked the licences of 46 inactive, insolvent, or non-operational microfinance banks, citing its powers under BOFIA. While the latest guidance is not linked to any specific institution, it provides greater clarity on how contractual obligations will be treated whenever the CBN exercises its statutory resolution powers over troubled banks.

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The CBN said the guidance was issued pursuant to the powers granted to the Governor under Section 56 of BOFIA and Section 33(1)(b) of the Central Bank of Nigeria Act, 2007, and took immediate effect on July 1.

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