ESTABLISHMENT OF RESOLUTION FUNDS IN NIGERIA
In 2020, the Federal Government established the resolution fund to support struggling banks.
ESTABLISHMENT OF RESOLUTION FUNDS IN NIGERIA
The Banks and Other Financial Institutions Act (BOFIA), which was recently brought into law, allows the Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation (NDIC) to create a banking sector resolution fund to help struggling banks.
President Muhammadu Buhari signed the Banks and Other Financial Institutions Act 2020, in response to developments in the financial sector over the previous 20 years on November 12.
The act specifies that the governor of the Central Bank of Nigeria (CBN) would decide when the resolution fund will begin. Each bank, specialised bank and other financial institutions in Nigeria under the regulation of CBN, will be required to pay an annual levy.
Under the new law, Commercial banks and other lenders will pay annually 10 basis points of their total assets into the fund. Lenders will not be allowed to pay dividends if they fail to contribute, according to the law’s provisions. The governor of the Central Bank of Nigeria (CBN) has to decide when the resolution fund will be activated, according to the act.
The fund will be used to pay operating costs of a bridge bank; as well as the costs of transferring all or part of a bank's business as part of a resolution action.
In addition, the fund will offer a loan, advance, overdraft, or other credit facilities to a bank under resolution or a bridge bank; to reimburse any other costs reasonably incurred in the resolution measure.
The new law gives more powers to the central bank in managing any crisis. The regulator can intervene where a lender is unable to meet its obligation or becomes insolvent. It has the ability to transfer the assets of a failed lender to new purchasers.
According to the new rule, it can also buy shares in a struggling bank where the central bank has guaranteed it against failing and dispose of the equity at a later date, according to the new law.
The resolution fund shall not be subject to tax and accordingly, all monies accruing to, payments made from, and instruments and transactions relating to, the resolution fund shall be exempt from all forms of taxes, levies, duties, charges, or imposition howsoever described,” the act read.
Under the new law, the central bank will invest 10 billion naira ) while the Nigerian deposit insurer NDIC will contribute 4 billion naira. Nigeria set up Asset Management Corporation of Nigeria (AMCON) in 2010 to help stabilise the banking sector after a $4 billion bailout of eight lenders in 2009.
Prior to that, distressed banks were left to fail while the NDIC stepped in to redeem deposits. This fund is separate from the Asset Management Corporation of Nigeria (AMCON), which was created to buy bad debts after the 2009 banking crisis. AMCON has a sunset date of 2023.
In 2018, the licence of Skye Bank was withdrawn by the CBN after it collapsed and a bridge bank, Polaris Bank, was created to take over its assets and liabilities. AMCON, due to be wound up in 2023, has acquired a total of 3.7 trillion naira in bad loans from 22 lenders and has recovered more than 1 trillion naira. It owes 4 trillion naira to the central bank, its guarantor.
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WRITTEN BY CHAMAN LAW FIRM TEAM
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