OPINION: BOFIA Amendment Bill 2020: A Capital Market Perspective

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Professor Uche Uwaleke

The Central Bank of Nigeria, in its communique No. 30 of the Monetary Policy Committee meeting of 28th May 2020 noted that ‘’though the equities market was largely bearish in the first quarter of 2020, moderate improvement continued to be recorded since the beginning of the second quarter’’ attributing the trend to ‘’improved investor sentiments in response to the mitigating measures introduced at the onset of the pandemic by the monetary and fiscal authorities’’.

This goes to demonstrate that the nation’s apex bank takes more than a cursory interest in the growth of the stock market in line with one of its objects of ensuring stability of the financial sector of which the capital market is a part.

In addition to facilitating real sector growth through various intervention schemes that positively rub-off on the capital market, getting financial institutions operating in the country to comply with the law governing Banks and Other Financial Institutions is one other way to ensure that they support the development of that capital market.

It goes without saying that the banking sector, which comes under the direct supervision of the CBN, supports the capital market in several ways. Indeed, the two intermediaries, banks which mobilize short term funds and the capital market concerned with medium to long term funds actually complement and reinforce each other. Empirical studies present evidence in support of this interrelationship.

In a 1999 study on the macroeconomic determinants of stock market development in selected Latin American and Asian countries, Garcia and Liu found that a strong banking sector has a positive impact on stock market development.

Similar result was obtained by Naceur who, in 2007, investigated the main determinants of stock market development in MENA countries and concluded that the Banking sector- as proxy for the money market- complements the capital market in economic development.

A developed capital market, for instance, can lower the cost of banks’ equity capital, elevating them to a stronger pedestal to access additional capital needed to create riskier assets than they ordinarily would not, in view of capital constraints.

By the same token, banks help to develop the capital market when they participate as investors, playing in the equity and mutual funds space, for example, as part of their fund management. As key players in the capital market, they often act as market makers and by so doing contribute to the market liquidity.

In August 2018, the DMO licensed 13 Commercial and Merchant Banks as Primary Dealers (PDMM) to make market in the federal government of Nigeria Bonds via a two-way price quote on the securities.

Banks equally assist in ensuring market liquidity by making Margin Loans, where permitted, with company stocks as collateral security.

Also, banks play a major role in asset Securitization involving the creation of a reference portfolio and the eventual sale of the securities to investors in the capital market through a Special Purpose Vehicle.

In fact, in securitisation, banks actually certify borrowers’ credit quality while the capital market finances the borrowers, thereby lowering financing risks.

In the secondary market, banks represent an important aspect of post-trade infrastructure- the clearing and settlement process that kicks-in soon after the execution of a trade in the capital market.

In their role as Custodians, banks hold securities either in electronic or physical form.

In Nigeria, the ‘Association of Asset Custodians’, the umbrella body for Nigerian custodian banks, provide custodial services to foreign and domestic institutional investors such as Pension Funds, Insurance companies and Collective Investment Schemes. In the primary market, the role of Banks as Coordinating Institutions/Issuing House, Underwriters and Collecting agents is very critical to the success of any issue.

Furthermore, banks dominate the Financial Services Sector on the Nigerian Stock Exchange accounting for a significant proportion of daily market activity. There are fourteen Deposit Money Banks quoted on the Nigerian Stock Exchange as of May 28th 2020: Four on the Premium Board (‘’the listing segment for the elite group of issuers that meet the Exchange’s most stringent corporate governance and listing standards’’) and ten on the main Board.

On the premium Board are Access, FBNH, UBA and Zenith Bank while the rest namely Ecobank, FCMB, Fidelity, GTB, Jaiz, Stanbic, Sterling, Union, Unity and Wema are listed on the main Board. A total of 8 companies are on the NSE Premium Board while 144 are on the main Board and together account for over N13 trillion in equity market capitalization, a significant part of which is contributed by the banks.

Without a doubt, a strong banking system is essential for a successful derivative market and is also a crucial part of the commodity trading ecosystem. It bears repeating therefore that a well-regulated banking industry is critical for the growth and development of the capital market.

It is against this backdrop that the Banks and Other Financial Institutions Bill, 2020 which seeks to amend the Banks and Other Financial Institutions Act (2004) in order to ensure a more effective supervision of banks by the CBN gives reason to cheer. Section 2(1) makes it an offense for any person to transact banking business without a valid license issued by the CBN.

What is new in this Bill is that a stiff penalty of 10 years imprisonment or a fine not less than N20 million or both is slammed on anyone who violates this provision. This should serve as a deterrent to operators of Ponzi schemes who swindle naïve investors through fraudulent means.

In order to strengthen the liquidity position of banks, Section 13 of the Bill requires every bank to maintain at all times, capital funds unimpaired by losses as may be specified by the CBN failing which such bank may be prohibited from paying cash dividends to shareholders. Section 17 further imposes restriction on the payment of dividends by any bank until all reasonable expenses have been written off.

The Bill has also made provisions to safeguard the asset quality of banks, reduce non -performing loans and insider dealings. While Section 18 imposes a heavy fine of N10 million or prison term of 3 years on any Director, Manager or Officer of a bank who fails to disclose his interest in any credit facility, Section 20 (1) precludes banks from granting credit facility to any person in excess of twenty per cent of the shareholders fund unimpaired by losses.
It is a fact that Investors in the capital market require timely information to be able to take calculated risks. Section 27(1) facilities timely submission of financial statements required for investing decisions.

Under this section, banks are required to prepare financial statements in accordance with the relevant accounting standards and to forward to the CBN, for approval to publish its financial statements, not later than three months after the end of its financial year. The SEC and the NSE, as capital market regulators, equally make similar demands on quoted banks all geared towards adequate disclosure and enhancing market transparency.

The Bill strengthens Banking Supervision by empowering the Governor under section 33(1) to ‘’order a special examination or investigation of the books and affairs of a bank where he is satisfied that it is in the public interest to do so or the bank has been carrying on its business in a manner detrimental to the interest of its depositors and creditors’’.

The inclusion of the Director General of the Securities and Exchange Commission in the Crisis Management Committee to be set up by the Governor of the CBN under Section 38 (1) in the event that banks ‘’that are critically distressed control 30 per cent or such percentage of the total assets of all licensed banks as the Bank may from time to time prescribe’’ will avail the CBN the opportunity of getting evidenced-based inputs on the best way such crisis can be handled in order not to destabilize the capital market.

There is a seeming conflict though between Section 58(1) of the Bill and Sections 13(a) and 38(1b) of the Investment and Securities Act 2007. Whereas the latter empower the SEC ‘’to regulate investments and securities business in Nigeria as well as register and regulate the workings of venture capital funds and collective investments schemes in whatever form’’ and provide in Section 38(1b) that ‘’no persons shall carry on investments and securities business unless the person is registered with the Commission’’, Section 58 (1) of the BOFI Bill 2020 stipulates that ‘’no person shall carry on specialized banking or business of other financial institution in Nigeria other than insurance, pension fund management, collective investment schemes and capital market business as defined respectively in the Insurance Act, the Pension Reform Act and the Investment and Securities Act except it is a company duly incorporated in Nigeria and holds a valid license granted under the provisions of this Act.

The contradiction is contained in Section 58 (2) of the Bill where it goes on to define “business of other financial institutions” to include: fund management and investment management, which fall under investments and securities business mentioned in Section 38 (1b) of the ISA 2007.

Perhaps one of the novel and remarkable aspects of the amendment Bill 2020 is found in Section 69 which makes some provisions for the regulation of the operations of Fintech Companies, increasingly becoming visible in the country’s financial space especially the capital market where Fintech is being leveraged to improve market infrastructure.

Subsection (2) makes it a punishable offense for any person transacting Fintech business without a valid license. The sanction for violation, which is in the nature of ‘’a fine not exceeding N50,000 for each day during which the offence continues’’, is rather ambiguous and should be made more specific.

For a better and more effective regulation, the CBN should collaborate with the SEC given the cross-cutting nature of Fintech business. The SEC is already in a fruitful engagement with many of them.

In November 2018, the Commission had inaugurated a Fintech Roadmap Committee, comprising key stakeholders, that was charged to come up with a framework for the application of Fintech in deepening the capital market.

So, a lot will be achieved with respect to regulation of Fintech companies if the CBN collaborates with the SEC in this regard. Quoted banks licensed by the CBN are also regulated by the capital market authorities.

This model can still be replicated in the case of Fintech companies with the SEC responsible for aspects of Fintech that have to do with the capital market.

By and large, strengthening the Banks and Other Financial Institutions law via the 2020 amendment Bill will go a long way in enhancing the role of banks in supporting medium-to-long term funds’ mobilization in the capital market which ensures the overall stability of the financial system.

The BOFIA amendment Bill 2020 will achieve this and more when it becomes law eventually. The Sponsor of the Bill Distinguished Senator Uba Sani and indeed the entire National Assembly deserve a pat on the back for rising to the challenge of upgrading the Banks and Other Financial Institutions law in line with global best practices.

Uche Uwaleke is a Professor of Capital market at the Nasarawa State University Keffi and the President of the Association of Capital Market Academics of Nigeria.

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