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NIGERIA: An Introduction to Banking & Finance

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NIGERIA: BANKING & FINANCE PRACTICE AREA OVERVIEW

Nigeria’s economy, prior to the COVID-19 pandemic and its devastating consequences, showed signs of steady recovery after a period of contraction, high inflation and exchange rate volatility. Nigeria’s GDP grew by 1.89% in the first quarter of 2020 on the back of improved crude oil prices, but witnessed a decline by 6.10% and 3.62% in the second and third quarters of 2020, respectively.

The Nigerian economy suffered two consecutive quarters of negative growth in 2020 and formally slid into recession in the third quarter of 2020. This was primarily due to the devastating effects of the restrictions on human, commercial and economic activity implemented in the second quarter of 2020 in response to the COVID-19 pandemic.

The negative effects of the COVID-19 pandemic on the Nigerian economy have been far-reaching. For example, the second and third quarters of 2020 witnessed low levels of economic activity occasioned by the lockdown measures put in place by government, as well as a low crude oil price and the resultant reduction in the amount of foreign exchange available to the Nigerian government.

The Finance Act 2019 and the Finance Act 2020 

The year 2020 and the first quarter of 2021 also witnessed the introduction of some fiscal policy measures by the Nigerian government with the enactment into law of the Finance Act 2019 and the Finance Act 2020.

The Finance Act 2019 sought to:

(a) promote fiscal equity by mitigating instances of regressive taxation;

(b) reform domestic tax law to align with global best practice;

(c) introduce tax incentives for investment in infrastructure and capital markets;

(d) support small businesses to align with ease of doing business reforms implemented by the government; and

(e) raise revenue for government, by various fiscal measures, including an increase in the Value Added Tax (“VAT”) rate from 5.0% to 7.5%.

The Finance Act 2020 also introduced significant changes to Nigeria’s tax and regulatory landscape and clarified some controversial issues surrounding the Finance Act 2019. Some of the notable changes introduced by the Finance Act 2020 include:

(i) a reduction in the minimum tax rate for Companies Income Tax from 0.5% to 0.25% in order to cushion the impact of COVID-19 on companies;

(ii) VAT exemption for commercial airline tickets;

(iii) VAT exemption on disposition of land, and on securities issues; and

(iv) the reduction of import duty on vehicles.

The Nigerian economy officially emerged out of recession in February 2021. With it came the slow and steady increase in the price of crude oil. The hope is that Nigeria’s foreign exchange liquidity crisis will peter out with the resultant increase in revenues available to government.

The Companies and Allied Matters Act 2020 and the Banks and Other Financial Institutions Act 2020

The Companies and Allied Matters Act, 2020 (“CAMA”) and the Banks and Other Financial Institutions Act, 2020 (“BOFIA”) also came into effect on August 7, 2020 and November 12, 2020 respectively. The amendments to these legislations are notable as they are aimed at promoting the ease of doing business in Nigeria, as well as recognizing the evolution of the Nigerian corporate and financial markets.

For instance, netting, which was largely unrecognized under Nigeria’s financial statutory legal regime prior to August 2020, received statutory backing in both BOFIA and CAMA. The netting provisions were highly anticipated by foreign investors, especially global banks who regularly execute repurchase, securities lending, currency swaps and other derivative transactions with Nigerian banks and corporates. The benefit of the recognition of netting to Nigeria’s financial markets are enormous: efficient use of capital; credit, settlement and liquidity risks mitigation; and effective regulatory control of capital.

Significantly, leading global banks, now armed with a clean netting opinion, can take critical and deliberate steps in executing financial contracts with Nigerian counterparties. With the recognition of netting, the expectation is that it would drive and promote investments in the Nigerian economy, instil confidence in foreign investors contracting with Nigerian counterparties and hopefully assist in deepening the Nigerian financial markets.

The Central Bank of Nigeria 

As the regulator of the Nigerian banking sector and the agency of the Federal Government charged with general surveillance over the Nigerian foreign exchange system, the CBN periodically issues supervisory frameworks and guidelines in line with global best practice. The aim is to facilitate the evolution of the banking and financial services industry as a whole through stress-testing and other methods, and to bring to the attention of regulators the risks which the operations of each entity within the industry presents.

For example, in 2020, the CBN through regulation increased the minimum capital requirements for microfinance banks; a development which has posed a challenge for startup companies in the Fintech space, who normally require microfinance bank licences to carry out business operations. In another instance, the CBN by its circular dated February 5, 2021 abruptly prohibited banks from facilitating dealings in cryptocurrency and by doing so, created a lot of uncertainty in the sector.

Carrying out business in Nigeria especially in the banking and finance sector comes with its challenges, some general and others unique to a particular transaction or deal. There is always the possibility that the policy framework upon which a business structure or model was built may change at any time.