CBN issues fresh guidance on troubled banks’ contract suspensions

The Central Bank of Nigeria (CBN) has clarified rules regarding the suspension of contractual obligations for failing banks. New guidance limits such suspensions to a maximum of two business days. This move aims to reduce uncertainty for financial institutions and their counterparties, which could otherwise impede commercial risk management.

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The Central Bank of Nigeria has observed that the absence of a defined maximum duration period pursuant to the exercise of its powers under Sections 34(2)(b) and 40(2) of the Banks and Other Financial Institutions Act, 2020 has created some uncertainty for counterparties dealing with Nigerian banks and other financial institutions in respect of financial contracts.

The clarification, issued by the Financial Markets Department, addresses Sections 34(2)(b) and 40(2) of the Banks and Other Financial Institutions Act (BOFIA), 2020. These provisions allow the CBN Governor to suspend payment or delivery obligations and termination rights during bank resolutions. The absence of a defined time limit had created ambiguity.

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The uncertainty had the potential to impede the effective management of commercial risk.

The new guidance applies to "Affected Contracts," defined as those involving a bank or financial institution that fall under the specified BOFIA sections. The two-business-day limit begins from the date the CBN Governor issues a written order or notice of suspension. This aims to streamline the resolution process for failing banks and ensure greater predictability in financial dealings.

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shall not exceed a period of two business days commencing from the date on which the written order or notice of suspension is issued by the CBN Governor.