The financial sector, which includes banking, capital markets, insurance, and securities, is very important to Nigeria’s growth and development. Like other important aspects of the economy, it requires robust legal frameworks, supervision, and regular monitoring to be effective and sustainable. Without these protections, a crisis in the financial sector could affect many other aspects of the Nigerian economy.
This is why regulation is so important. Financial regulation means the set of laws, rules, and institutions that guide how money and financial services are managed in Nigeria. These rules aim to mitigate financial risks, protect investors and consumers, and support the smooth running of the economy. In simple terms, financial regulation controls how financial products and services are offered and ensures that those offering them follow fair and honest practices.
Regulatory bodies are created by these laws to monitor financial institutions and ensure compliance with the rules. In Nigeria, the Central Bank of Nigeria (CBN) is the main regulatory body in charge of overseeing banks and other financial institutions. It works to ensure that banks operate safely, protect customers, and support the overall health of the financial system. Read further for more details.
Overview of the Nigerian Financial Sector
In Nigeria, the financial system is made up of different institutions, like banks, corporations, and government bodies, as well as markets that work together to raise funds for investment and provide financial services.
Before the Central Bank of Nigeria (CBN) was established in 1959, the main banks operating in Nigeria were branches of foreign banks. These banks mostly gave loans to support foreign-owned businesses, especially those involved in exporting raw materials and importing finished goods. As a result, they had very little impact on Nigeria’s economic development.
Their major decisions were made outside Nigeria, and they often ignored local entrepreneurs. Because of this, many Nigerian business owners, unable to get loans from these foreign banks, set up about 25 fully Nigerian-owned banks between 1925 and 1952. Unfortunately, most of these early banks failed due to poor management and not having enough capital.
At that time, banks mostly offered short-term commercial credit and had little or no long-term investment options. They also invested a large part of their funds overseas instead of within Nigeria. In fact, instead of supporting local development, these banks acted as channels for sending money out of Nigeria because there were few local opportunities for short-term investments.
When the Central Bank was set up, one of its main goals was to change this by encouraging banks to invest more in the Nigerian economy. It did this by introducing local financial tools and markets to give banks better options for investing their extra funds within the country. However, banks were slow to adopt these changes until the government introduced rules and laws that either encouraged or required them to do so.
Over time, as Nigeria’s economy developed and the views of policymakers evolved, the financial system continued to grow and adapt to better meet the country’s needs.
Laws Regulating the Finance System in Nigeria
Several bodies work together to regulate Nigeria’s financial system. Each one has its role, but they often collaborate. Here are some of the key legal frameworks for financial activities in Nigeria.
1. Central Bank of Nigeria (CBN) Act, 2007
The Central Bank of Nigeria (CBN), established by the CBN Act of 2007, serves as the apex monetary authority and regulator of Nigeria’s financial system. Its primary role includes supervising banks and other financial institutions to ensure stability and economic growth. The Bank is governed by a board of directors appointed by the Federal Government.
Key objectives of the CBN (Section 2, CBN Act 2007) include:
- Monetary and price stability: Through the Monetary Policy Committee (MPC), the CBN sets short- and medium-term monetary policy, manages inflation, and ensures price stability.
- Currency issuance: The CBN has the exclusive authority to issue Nigeria’s legal tender.
- External reserves management: It maintains foreign exchange reserves to safeguard the Nigerian Naira and ensure exchange rate stability.
- Sound financial system: The CBN promotes stability through policies and regulations.
- Government banker and adviser: It provides economic and financial counsel to the Federal Government.
2. Banks and Other Financial Institutions Act (BOFIA), 2020
The BOFIA 2020 is a key legislation in Nigeria that governs the operation, regulation, and supervision of banks and other financial institutions. It repealed the earlier BOFIA 1991 and was enacted to align Nigeria’s banking laws with global best practices and address contemporary issues in the financial sector.
The Act mandates that all banking business in Nigeria must be licensed by the CBN and subjects these institutions to rigorous supervision, including the authority to examine, sanction, or revoke licenses for non-compliance or insolvency.
The Act enhances the CBN’s powers to intervene in troubled institutions through measures like management takeovers, appointment of interim administrators, or facilitation of mergers, acquisitions, or liquidation where necessary. It also lays down a framework for resolving failing banks and recovering assets, aiming to protect depositors and maintain system stability
It also introduces stricter enforcement tools, including administrative sanctions, fines, and criminal penalties for violations such as insider abuse, fraud, or unauthorized banking activities. This ensures discipline within the financial sector and deters misconduct.
3. Investment and Securities Act (ISA), 2007
The ISA regulates Nigeria’s investment and securities sector, primarily through the Securities and Exchange Commission (SEC), which serves as the apex regulator of the capital market. The SEC is responsible for registering and regulating capital market operators like stockbrokers, issuing houses, and fund managers, protecting investors, and ensuring orderly, fair, and efficient capital market operations.
ISA empowers the SEC to oversee securities offerings, trading, mergers, acquisitions, and takeovers. It regulates the issuance and registration of securities such as shares, bonds, and derivatives, and ensures disclosure obligations are met by public companies to enhance investor confidence.
The Act authorizes the SEC to impose sanctions, conduct investigations, and set up committees like the Administrative Proceedings Committee (APC) to handle disputes and enforce compliance. Appeals from SEC decisions can be made to the Investment and Securities Tribunal (IST), a specialized adjudicatory body with exclusive jurisdiction over capital market disputes.
4. Companies and Allied Matters Act 2020
The Companies and Allied Matters Act (CAMA) serves as the foundational legislation for the registration, incorporation, and regulation of all companies operating in Nigeria, including banks and other financial institutions.
Although it is not exclusively a banking law, CAMA plays a vital role in the financial sector because any institution intending to carry on banking or financial services must first be duly registered under its provisions.
CAMA outlines various compliance requirements that banks must meet, ranging from the issuance of shares to the conduct of corporate meetings and other internal governance procedures. Additionally, the Act mandates that all registered companies, including banks, file annual returns with the Corporate Affairs Commission (CAC). This filing is a compulsory requirement and a key aspect of corporate accountability and transparency in the sector.
5. Nigeria Deposit Insurance Corporation (NDIC) Act, 2006
The NDIC, established under the NDIC Act of 2006, is a key financial regulator that safeguards depositors’ funds and promotes public confidence in the Nigerian banking system. Its primary role is to insure deposits in licensed banks and deposit-taking institutions, ensuring that in the event of bank failure, depositors are compensated up to a legally set limit.
Beyond deposit insurance, the NDIC supervises financial institutions to ensure sound banking practices, collaborates with the Central Bank of Nigeria (CBN) in formulating banking policies, and manages the liquidation process of failed banks. It also possesses legal authority to examine banks, enforce compliance, and remove errant officers.
By providing a safety net for depositors and encouraging prudent financial management among banks, the NDIC plays an important role in maintaining systemic stability and trust in Nigeria’s financial system.
Conclusion
The importance of a solid legal and regulatory framework in Nigeria’s financial system can’t be overstated. These laws form the foundation of Nigeria’s financial system, and failing to understand them can result in serious legal and financial consequences. From a legal standpoint, we have seen how costly mistakes can be when individuals or businesses overlook or misunderstand regulatory requirements.
Compliance is not just a formality; it helps to protect your financial interests. As financial policies continue to evolve, staying informed is no longer optional. Whether you are running a business or managing personal finances, navigating this complex space without proper legal guidance can be risky.
Therefore, we strongly encourage you to seek the support of experienced legal professionals who understand the intricacies of Nigeria’s financial laws. With the right guidance, you can stay compliant, make informed decisions, and safeguard your future in an increasingly regulated financial environment.
By Resolution Law Firm Team
Email: info@resolutionlawng.com
