CBN issues fresh guidance on troubled banks’ contract suspensions

The Central Bank of Nigeria has issued fresh guidance clarifying how contractual obligations will be handled during the resolution of failing banks, setting a maximum suspension period of two business days.

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

According to the CBN, the absence of a clearly defined maximum duration under Sections 34(2)(b) and 40(2) of the Banks and Other Financial Institutions Act (BOFIA) 2020 had created uncertainty for banks, financial institutions and counterparties involved in financial contracts.

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.”

New guidance

The CBN explained that the new directive provides interpretative and operational guidance on how the Governor will exercise powers granted under the relevant provisions of BOFIA.

The guidance applies to banks, other financial institutions and counterparties to what the apex bank described as “Affected Contracts” covered under the relevant sections of the law.

According to the circular, any suspension of payment or delivery obligations involving a failing bank, as well as the temporary suspension of contractual termination rights, “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.”

Resolution framework

The apex bank explained that Section 34(2)(b) of BOFIA empowers it to facilitate the acquisition of a failing bank by one or more financial institutions to preserve financial stability.

It added that Section 40(2) allows the CBN Governor to commence resolution actions, including temporarily suspending certain contractual termination rights, where a banking licence has been revoked and such action is considered to be in the public interest.

The CBN said the new two-business-day limit provides greater certainty for banks, investors and counterparties whenever the statutory resolution powers are invoked.

The guidance comes shortly after the apex bank revoked the licences of 46 inactive, insolvent or non-operational microfinance banks. Although the circular is not linked to any specific institution, it provides clarity on the treatment of contractual obligations whenever the CBN intervenes in troubled financial institutions.

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