Nigeria gets Credit Tribunal as Buhari Signs BOFI Act 2020

President Muhammadu Buhari has signed the Banks and Other Financial Institutions, BOFI, Act 2020 into law, which among other things provides for a credit tribunal to deal with issues of bad debt and loan recovery in the nation’s economy.

Nigeria’s banking system is plagued by the incidence of high non-performing loans, a key deterrent to lending by financial institutions.

The bad bank, Asset Management Corporation of Nigeria, AMCON, which began operation in 2011 to mop up bad loans, has up to N5 trillion irrecoverable debts in the books.

The new law repeals the extant Banks and Other Financial Institutions Act 1991 as amended. It is expected to enhance the soundness and resilience of the financial system for sustainable growth and development of the Nigerian economy.

The BOFI Act 2020 updates the enabling law in response to developments and significant evolution in the financial sector over the last two decades, according to Garba Shehu, the Senior Special Assistant to the President on Media and Publicity. 

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Shehu made this known in a statement issued on Friday, disclosing that the President signed the piece of legislation yesterday.

“It will increase the appetite of banks and other financial institutions to channel much-needed credit to the real sector to support economic recovery and promote sustainable growth. 

“In this respect, it introduces a credit tribunal to improve loan recovery and address the incidence of high non-performing loans within the financial system, which has been a key deterrent to lending by financial institutions.

“Furthermore, it strengthens the regulatory and supervisory framework for the financial industry and provides additional tools for managing failing institutions and systemic distress to preserve financial stability amongst others.

“The Central Bank of Nigeria will hold structured engagements with stakeholders across various sectors of the economy on critical aspects of the Act in the coming months.

“This enactment of the BOFI Act 2020 is a historic and significant achievement, which is indicative of effective and productive collaboration between the Executive and Legislature arms of government,” Shehu’s statement read.

Why the new BOFA Act?

While the Nigerian banking sector has always been plagued by the issue of bad loans, the collapse in oil prices earlier this year only aggravated the problem. The once-lucrative oil sector loans turned sour, leading to a surge in non-performing loans and creating capital problems for lenders.

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The CBN has made several efforts to reduce the rate of non-performing loans. Earlier this year, it introduced the Global Standing Instruction (GSI), a scheme that allows banks to debit the accounts of loan holders in rival lenders to settle defaults. Under the programme, banks recovered N50.32 million bad loans from debtors within nine days of it becoming operational, according to the apex bank.

“Before the new law, Nigeria majorly depended on bank’s corporate governance standards to manage such issues. That has not proved to be very effective,” a credit risk analyst at a top Nigerian bank said. “So the new Act, along with the credit tribunal it is birthing, will most likely give more powers to the central bank in managing the banking sector, especially in the area of lending to the economy.” 

The banking industry saw a 14 percent rise in non-performing loans in the first half of 2020, according to a report released by the National Bureau of Statistics (NBS), ending a 2-year trend of continued decline since Q3 2018. Bad loans in Nigerian banks increased to N1.212 trillion in the six months ending June when lenders had to restructure over a third of loans as debtors ran into repayment problems due to the pandemic.