According to the 2007 International Monetary Fund (IMF) report, the consolidation of the banking sector and ongoing reform have re-instilled confidence in the Nigerian financial system. Nigeria, according to the report, is in the process of introducing risk-based supervision. It is also submitting legislation to the National Assembly to amend the Central Bank of Nigeria Act of 1991 and the Banks and Other Financial Institutions Act of 1991, in order to strengthen the CBN's regulatory capacity and improve creditor rights. The IMF report notes that the CBN has enlisted expert assistance to strengthen banking supervision, carry out a financial stability diagnostic, and develop a medium-to-long-term financial sector strategy (called the FSS 2020) in order to enhance financial stability and development in Nigeria. The CBN, in its 2005 Banking Supervision Annual Report, indicates that an African zone-wide assessment undertaken by the FIRST Initiative on national compliance with the Basel Core Principles (BCPs) found that Nigeria fully met 10 and largely satisfied 15 of the 25 BCPs, and adds that Nigeria was making further improvements following the recommendations of an earlier (2003) study. However, the FIRST Initiative assessment is not publicly available. Apart from the information provided in the CBN's 2005 Annual Report, there is little information directly addressing Nigeria's compliance with the BCPs for Effective Banking Supervision.

General Overview

According to the 2007 International Monetary Fund (IMF) report, the consolidation of the banking sector and ongoing reforms have re-instilled confidence in the Nigerian financial system. The strong performance of the economy, the IMF notes, has persisted despite a weakened implementation of reform. The Central Bank of Nigeria (CBN), in its 2005 Banking Supervision Annual Report, mentions than an African zone-wide assessment undertaken by the FIRST Initiative of the UK on national compliance with the Basel Core Principles (BCPs) found that Nigeria fully met 10 and largely satisfied 15 of the 25 BCPs. The CBN added that Nigeria was making further improvements following the recommendations of an earlier (2003) study. However, the FIRST Initiative report itself is not publicly available.

The 2007 IMF report discloses that the CBN had intended to establish prudential standards for consolidated supervision, and planned to begin supervision of the banking groups on a consolidated basis by December 2006, but failed to meet its target. This was attributed to unanticipated problems arising after bank consolidation. According to the IMF, the CBN has requested a waiver and pledged remedial measures, including the development of a time-bound action plan in time for the IMF's scheduled fourth review of the financial sector. The CBN also accepted the help of a long-term technical assistance expert from the IMF starting in mid-2007. With such expert assistance, the CBN will work to strengthen banking supervision; carry out a financial stability diagnostic; and develop a medium-to-long-term financial sector strategy (called the FSS 2020) in order to enhance financial stability and development. It has already made progress in this direction by preparing a draft framework for introducing a system of consolidated supervision, in consultation with key stakeholders, including other Nigerian regulatory agencies, the Securities and Exchange Commission (SEC), the National Insurance Corporation (NAICOM), and the Nigeria Deposit Insurance Corporation (NDIC).

The IMF's 2007 report further notes that the CBN is in the process of paying depositors of the 14 failed banks that could not meet the new capitalization threshold, and has also invited healthy banks to take over the assets and obligations of the failed banks under the Purchase and Assumption resolution method. The purported aim of the CBN is the establishment of fewer but stronger banking conglomerates in Nigeria. A 2006 IMF report states that, on January 3 of that year, the CBN announced that 25 banks or banking groups -- comprising 75 out of the original 89 banks and accounting for 94 percent of the deposit share of the market -- had met the new capital requirement by end-December 2005, and that the remaining 14 failed banks were to be liquidated. However the 2006 IMF report notes that challenges remain for the Nigerian banking sector. These include the full integration of newly merged banks and the passage of enabling legislation critical for the effective resolution of non-performing loans. The report adds that Nigeria was introducing risk-based supervision and submitting legislation to the National Assembly to amend the Central Bank of Nigeria Act (CBN Act) and the Banks and Other Financial Institutions Act (BOFIA) in order to strengthen CBN's regulatory capacity and improve creditor rights.

The CBN website states that its supervisory function is structured into the Banking Supervision Department and the Other Financial Institutions Department. The former unit supervises the deposit money banks and discount houses, whereas the latter supervises other financial institutions, including Community Banks, Micro-finance Banks, Finance Companies, Bureaux-de-change, Primary Mortgage Institutions, and Development Finance Institutions. Both departments engage in on-site as well as off-site supervision. They report to the Deputy Governor of the Financial Sector Surveillance Committee of the CBN. The CBN website reports that supervision of the financial sector was formalized by the CBN with the establishment of the Financial Services Coordinating Committee, now called the Financial Services Regulation Coordinating Committee (FSRCC). The committee was created in 1994 to coordinate the activities of various regulatory bodies in Nigeria through consultations and inter-agency meetings, and was accorded legal status by the 1998 amendment to Section 38 of the CBN Act of 1991.

According to a 2007 report by the CBN in 2005, the total assets of the banking sector increased by 29.37 percent from Naira (N) 3.393 trillion in 2004 to N4.389 trillion. The aggregate deposits in the banking sector recorded an increasing trend from 2001 to 2005, with N2.546 trillion in 2005 and the statutory minimum liquidity ratio requirement for banks remained at 40 percent during 2005, and the industry met this requirement with an average liquidity ratio of 41.25 percent as at September 30, 2005. The CBN report further indicates that the asset quality of the banking sector deteriorated, with non-performing credits increasing from N316 billion in 2004 to N356 billion in 2005, and the ratio of non-performing credits to total credits of 24.1 percent during the review period was below the trigger level of 35 percent. Similarly the report notes that provision for bad and doubtful debts also increased from N256 billion in 2004 to N282 billion in September 2005. As of December 2005, 25 banks more than met the required minimum capital adequacy ratio (CAR) of 10 percent with a CAR of 17.83 percent.

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

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The 2007 CBN report notes that several amendments have been proposed to the CBN Act and the BOFIA, which would grant the CBN full autonomy and strengthen its supervisory powers, as well as align the provisions of the Nigerian banking laws with international best practices. However, there is insufficient information publicly available regarding Nigeria's compliance with this Principle.

1.(2) Operational independence and adequate resources.

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The 2007 CBN report notes that several amendments have been proposed to the CBN Act and the BOFIA, which would grant the CBN full autonomy and strengthen its supervisory powers. However, there is insufficient information publicly available regarding Nigeria's compliance with this Principle.

1.(3) A suitable legal framework for authorization and ongoing supervision.

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There is insufficient information publicly available regarding Nigeria's compliance with this Principle.

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

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There is insufficient information publicly available regarding Nigeria's compliance with this Principle.

1.(5) Legal protection for supervisors.

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There is insufficient information publicly available regarding Nigeria's compliance with this Principle.

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

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There is insufficient information publicly available regarding Nigeria's compliance with this Principle.

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

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The BOFIA of 1991 spells out the following clause: "No person shall carry on any banking business in Nigeria except when it is a company duly incorporated in Nigeria and holds a valid banking license issued under the Banks and Other Financial Institutions Decree." However, there is insufficient information publicly available regarding Nigeria's compliance with this Principle.

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

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There is insufficient information publicly available regarding Nigeria's compliance with this Principle.

4. Authority to review and reject transfer of ownership.

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There is insufficient information publicly available regarding Nigeria's compliance with this Principle.

5. Authority to review major acquisitions and investments.

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There is insufficient information publicly available regarding Nigeria's compliance with this Principle. However, in its 2007 report, the CBN outlines its efforts to ensure effective implementation of its consolidated supervision program. It states that, under the program, it has designed a comprehensive set of procedures to process requests for approvals for mergers and acquisition (M&A), aimed at monitoring the activities of the banks and whether they have met their capitalization requirement, either by raising additional capital or through M&A. The CBN also enumerates the legal framework under which it authorizes M&As. Accordingly, Paragraph 6.1 of the Guidelines and Incentives on Consolidation in the Nigerian Banking Industry issued by the CBN on August 5, 2004, provides that "banks should comply with the legal requirements on M&A as contained in Section 100 - 122 of the Investments and Securities Act (ISA) No 45 of 1999 and all other regulatory requirements." Paragraph 6.2 also provides that "banks should obtain the prior approval of the Governor of the CBN before any merger and/or acquisition is consummated and/or announced". The CBN asserts that this provision is consistent with the requirements of Section 7 of the BOFIA.

The CBN 2007 report further explains that the consolidation program has three distinct activity phases: (1) Pre-merger Consent; (2) Approval-in-Principle; and (3) Final Approval. Consolidation by means of merger involves the three stages while a takeover arrangement is limited to stages (ii) and (iii). According to the Report, the banks are mandated to meet a set of documentation and procedural requirements for each phase of the approval process.

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

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According to the CBN's 2007 report BOFIA confers upon CBN the responsibility of determining the capital requirements of banks in Nigeria from time to time, so as to enable them meet their risk appetites and operational requirements. The CBN further mentions that in July 2004, it directed all the licensed banks in Nigeria to raise their shareholders funds to a minimum of N25 billion before end of December, 2005. Accordingly, 25 banks met the required minimum balance, representing a CAR of 17.83 percent. The CBN found this ratio satisfactory when compared with the required minimum CAR of 10 percent. However, there is insufficient information publicly available regarding Nigeria's compliance with this Principle.

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

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There is insufficient information publicly available regarding Nigeria's compliance with this Principle.

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

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There is insufficient information publicly available regarding Nigeria's compliance with this Principle.

9. Prudential limits and management information system on concentration of exposure.

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There is insufficient information publicly available regarding Nigeria's compliance with this Principle.

10. Arm's length rule and monitoring for connected lending.

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There is insufficient information publicly available regarding Nigeria's compliance with this Principle.

11. Policies and procedures for country risk and transfer risk.

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There is insufficient information publicly available regarding Nigeria's compliance with this Principle.

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

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There is insufficient information publicly available regarding Nigeria's compliance with this Principle.

13. Comprehensive risk management processes.

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There is insufficient information publicly available regarding Nigeria's compliance with this Principle. In the area of risk management, the 2006 IMF report encouraged Nigeria to develop, in close cooperation with the Monetary and Financial Systems Department (MFD) of the IMF, additional safeguards to mitigate the risks of international reserve management by domestic banks. According to the report, the CBN, was already encouraging domestic banks to forge partnerships with foreign banks to acquire experience in the management of international reserves and become global players.

The CBN states on its website that sections 28 and 52 of the CBN Act, as amended, created the CBN Credit Risk Management System (CRMS), or Credit Bureau. The Act also empowered the CBN to obtain from all banks returns on all credits with a minimum outstanding balance of N100,000 (now N1million and above of principal and interest), for compilation and dissemination of status report to any interested party (i.e. operators or regulators). The website adds that the CRMS is web-enabled, allowing banks and other stakeholders to dial directly into its database to look for statutory returns or conduct enquiries on borrowers. It is also being integrated with other systems operating in the bank for greater efficiency. The CBN Act mandates banks to update these credits on a monthly basis as well as to make status enquiries on prospective borrowers to determine eligibility. The CBN notes that banks are penalized for non-compliance with these provisions.

In its 2007 report, the CBN mentions that the joint CBN/NDIC Committee on Supervision met six times in 2005 and deliberated extensively on the risk-based supervisory framework, as part of the Nigerian banking system reform agenda. The Committee, according to the Report, prepared guidelines to develop risk management processes to identify, measure, monitor, and control all risks inherent in bank activities, and a timeline for implementation culminating in the commencement of risk-based supervision in September 2006. The Committee also issued guidelines on individual risk elements (credit risk, market risk, operational risk, and liquidity risk) to guide banks in the development of their comprehensive risk management framework.

14. Adequate internal controls.

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There is insufficient information publicly available regarding Nigeria's compliance with this Principle.

15. Strict "know-your-customer" rules and high ethical and professional standards.

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The 2007 CBN report mentions the African zone-wide assessment undertaken by the FIRST Initiative of the UK on national compliance with the Basel Core Principles (BCPs). The assessment found that Nigeria complied with BCP 15 on anti-money laundering/combating the financing of terrorism (AML/CFT). However, the FIRST Initiative report itself is not publicly available and there is no further information publicly available regarding Nigeria's compliance with this Principle.

According to the 2007 CBN report, as part of its statutory responsibilities of ensuring the safety, stability. and soundness of the Nigerian financial system, the CBN has persistently pursued AML/CFT and had embarked on a number of AML/CFT measures in accordance with the Financial Action Task Force recommendations, especially in the areas of customer due diligence, know Your Customer guidelines, and "fit and proper" requirements. In this regard, the CBN has also played a major role in the establishment of the Economic and Financial Crimes Commission (EFCC) and the Nigerian Financial Intelligence Unit, domiciled at the EFCC and charged with receiving, collating, and analyzing Suspicious Transactions Reports and conducting investigations on them. The CBN further mentions that the CBN Act has been amended to empower the Governor of the CBN to freeze accounts of suspects of money laundering and terrorist financing, while the EFCC Act empowers the EFCC to seize and confiscate assets acquired with laundered funds.

16. Effective supervisory system consisting of on-site and off-site supervision.

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There is insufficient information publicly available regarding Nigeria's compliance with this Principle. The CBN website, however, states that the Banking Department's on-site supervisory function includes the independent on-site assessment of the banks' corporate governance, internal control system, reliability of information provided, and so on. According to the CBN, the on-site examinations serve different purposes, depending on when they are scheduled. Maiden examinations are conducted within six months of a new bank's commencement of operation. In addition to routine examinations, targeted exams address specific areas of a bank's operations, and special exams are carried out as the need may arise, as provided in section 32 of the BOFIA. Further, the Department also conducts spot-checks for quick verification of issues.

The CBN also mentions off-site reviews, stating that they serve the purpose of analyzing the financial conditions of banks using prudential reports, statutory returns, and other relevant information. The Banking Department also monitors trends and developments for the banking sector as a whole, and generates reports on a monthly and quarterly basis (CBN website).

17. Regular contact with bank management and understanding of bank's operations.

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There is insufficient information publicly available regarding Nigeria's compliance with this Principle.

18. Analytical reports and statistical returns on solo and consolidated basis.

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There is insufficient information publicly available regarding Nigeria's compliance with this Principle.

19. Independent validation of supervisory information through on-site examination or external auditors.

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A 2003 World Bank Report on Banking Supervision in 151 countries (including Nigeria) observes that although external bank audits are compulsory, and the audit reports are made available to the CBN, bank auditors are not legally required to report the misconduct of managers or directors to the CBN, nor can CBN supervisors take legal action against external bank auditors for negligence. Also, bank auditors are neither licensed nor certified by the CBN or any independent organization. However, there is insufficient information publicly available regarding Nigeria's compliance with this Principle.

20. Ability to supervise on a consolidated basis.

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The 2007 report by the CBN states that the FSRCC is an umbrella body of regulatory agencies and has been charged with the responsibility of effective consolidated supervision of the financial sector in Nigeria. However, there is insufficient information publicly available regarding Nigeria's compliance with this Principle. The CBN's 2007 report mentions that it has proposed a consolidated supervision framework for Nigeria that would draw strongly from international best practices. The proposed consolidated supervisory framework, according to the report, would comprise the following: "(1) Consolidated Financial Statements(CFS); (2) Consolidated Prudential Returns (CPR); (3) Application of prudential regulations on capital adequacy, large exposures and liquidity gaps on group-wide basis; (4) Information sharing arrangements amongst the various financial sector supervisors; and (5) Cross border supervision."

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

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There is insufficient information publicly available regarding Nigeria's compliance with this Principle. However, the World Bank and the International Monetary Fund published a joint "Report on the Observance of Standards and Codes: Accounting and Auditing - Nigeria" (ROSC) in 2004. According to the ROSC, the BOFIA charges the CBN with the regulation of accounting requirements for prudential regulatory reporting and general purpose external financial reporting of banks, as well as non-banking financial institutions. In addition, the CAMA also contains provisions on financial reporting by banks. Further, the Banks Act requires banks to submit audited financial statements to the CBN for approval before publication in a national daily newspaper within four months of year end. The ROSC further observes that the CBN issues guidelines in consonance with Nigerian Accounting Standards, which are based on the International Financial Reporting Standards (IFRS). The Council of Nigerian Accounting Standards Board has expressed its commitment for and was working toward convergence with IFRS in 2004, and expected completion by September 2005.

22. Adequate supervisory measures to ensure timely corrective action.

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The 2007 CBN report has articulated several strategies to address the potential problems of failed banks in the system. The IMF's 2007 report states that failed banks, would be offered one of four resolution options: (1) Open Bank Assistance (OBA) wherein the bank would receive assistance in the form of a direct loan, an assisted merger, or purchase of assets; (2) Purchase and Assumption (P&A) wherein a healthy bank would be called upon to purchase assets and assume obligations of the failed bank; (3) a bridge bank would be created by the regulatory authority as a stop-gap arrangement to acquire assets and assume obligations of the failed bank until the issue was resolved; or (4) liquidation. However, there is insufficient information publicly available regarding Nigeria's compliance with this Principle.

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

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There is insufficient information publicly available regarding Nigeria's compliance with this Principle.

24. International exchange of information with other supervisors.

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The 2007 CBN report notes that several amendments have been proposed to the CBN Act and the BOFIA, which would permit the CBN to enter into agreements or memoranda of understanding with counterpart supervisors for supervisory and information sharing purposes (CBN 2007). However, there is insufficient information publicly available regarding Nigeria's compliance with this Principle.

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

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There is insufficient information publicly available regarding Nigeria's compliance with this Principle.