The Central Bank of Nigeria (CBN) has introduced new measures to tighten oversight in the financial sector, barring closely related financial institutions from granting loans or guarantees to each other without prior regulatory approval.
New Draft Guidelines on Ring-Fencing
The directive is contained in the CBN’s Exposure Draft on ring-fencing operations among closely linked entities in Nigeria’s financial system. Under the proposed rules, financial institutions with close ownership or operational ties must obtain written approval from the CBN before extending credit or acting as guarantors for affiliated entities.
The apex bank stated: “Except with the prior written approval of the CBN, no closely linked entity shall extend a loan to, or guarantee the obligations of another.”
Objectives of the New Rules
The central bank said the move aims to reduce risks from interconnected operations, prevent financial troubles in one entity from affecting others in the same group, address concerns related to different licence categories, and prevent the mixing of customer funds with those of related entities. It also seeks to strengthen governance standards and support orderly resolution of distressed institutions.
Independent Operations and Governance
Under the new framework, closely linked entities must operate as separate and independent businesses, maintaining sufficient capital and liquidity to function without relying on affiliated companies. Each entity must have its own governance structure, risk management systems, internal controls, and a dedicated board of directors.
The CBN emphasized: “The boards of closely linked entities shall ensure that transactions between such entities are conducted at arm’s length and are properly documented.”
Penalties for Non-Compliance
Institutions violating the proposed guidelines could face regulatory sanctions, including monetary penalties, replacement of management personnel, or revocation of operating licences, in line with the Bank and Other Financial Institutions Act (BOFIA) 2020 and other applicable regulations.
The CBN’s Payment System Vision 2028 aims to increase financial inclusion to 95% of Nigerian adults by 2028, bringing about 50 million more Nigerians into the formal financial system through improved digital payment services and infrastructure. The central bank also plans to deploy over 10 million digital payment points nationwide and strengthen fraud prevention using artificial intelligence.
