The Central Bank of Nigeria (CBN) instructs commercial banks to reduce insider lending and bring all related credit facilities within regulatory limits within 180 days. This directive aims to strengthen corporate governance and minimize financial risks associated with loans to influential insiders......CONTINUE READING THE ARTICLE FROM THE SOURCE>>>>>
Insider lending—where banks extend credit to directors, major shareholders, or affiliated entities—poses significant governance risks in Nigeria’s banking sector. The CBN now mandates that all insider-related loans exceeding the limits set by the Banking and Other Financial Institutions Act (BOFIA) 2020 must be brought into compliance within six months.
Under Section 19 of BOFIA 2020, banks can only allocate a limited percentage of their total loan portfolio to insiders. However, some financial institutions have previously obtained approvals for such loans without clear deadlines for compliance. The latest directive eliminates this flexibility, requiring strict adherence to regulatory standards.
In addition to adjusting their loan portfolios, banks must submit periodic reports to the CBN, outlining their progress in meeting the new requirements. Failure to comply may result in regulatory penalties.
Impact on Banks
Larger financial institutions, which have already implemented stronger governance structures, are less likely to be affected. However, smaller and mid-sized banks, where insider lending is more prevalent, may need to restructure their balance sheets significantly to meet the deadline.
To comply, some banks may opt to refinance or reduce existing insider loans. Analysts warn that failure to meet the deadline could result in increased regulatory scrutiny, capital adequacy concerns, and potential sanctions.
Broader Industry Implications
The directive comes at a time of ongoing banking sector reforms, including recapitalization efforts aimed at strengthening financial institutions. By enforcing stricter controls on insider lending, the CBN seeks to reduce systemic risks and prevent governance failures that have contributed to past banking crises.
A key outcome of this policy may be leadership changes in some banks. Directors who hold significant borrowing positions with their institutions must either restructure their loans, repay them, or step down from board positions to remain compliant. This could lead to notable adjustments in bank leadership structures.
Next Steps for Banks
With the six-month deadline now in effect, banks must act swiftly to realign their insider lending practices. Many institutions may turn to loan restructuring, asset sales, or capital injections to meet compliance requirements.
While the directive presents immediate challenges, it ultimately aims to promote transparency, accountability, and financial stability in Nigeria’s banking sector. The CBN remains firm in its position—banks must comply or face regulatory action.