REVISED BANKING LAW IN NIGERIA- BOFIA 2020

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by Seun Timi-Koleolu and Praise Adetunmibi

In response to the significant developments in the financial sector, President Muhammed Buhari on the 12th of November 2020 signed the Banks and Other Financial Institutions Act 2020 (“2020 BOFIA”) into Law. This Act repeals the Bank and other Financial Institutions Act 1991, and now regulates the businesses of banks and other financial institutions in Nigeria.

Below are some key revisions introduced in the 2020 BOFIA.

REVISION SECTION IMPLICATION
Application for licence Section 3(1)-(5) Similar to the 1991 BOFIA, the 2020 BOFIA requires any person that wishes to carry on banking and related businesses in Nigeria to obtain a licence from the CBN. The CBN continues to have the right to refuse to grant such licence without reason.

A new restriction is, however, introduced by Section 3(5) of 2020 BOFIA. It specifically states that foreign banks or other entities- (i) without a physical presence in their country of incorporation; or (ii) that are not licensed in their country; or (iii) are not affiliated to any supervised financial group – shall not be permitted to operate in Nigeria or establish a relationship with Nigerian banks.

This would help to restrict the arbitrary and unregulated provision of digital financial services by foreign entities through online platforms.
CBN consent required for transfer of shareholding

 

 Section 7(1)(ii)

 

 

 In the 2020 BOFIA, the consent of the CBN is to be obtained for any agreement involving the transfer of significant shareholding in a bank or other financial institution. This was not clearly indicated in the old BOFIA but in practice, it is typically a licencing requirement.
 Operations of Foreign Banks in Nigeria & offshore banking Section 8(2)-(4) Section 8(2) of 2020 BOFIA suggests that Foreign or Nigerian banks wishing to operate in the free trade or special economic zone are to obtain a licence from CBN in addition to the approval of the Nigeria Processing Zones Authority. Note that banks and financial institutions operating in these zones are to enjoy up to 100% off taxes amongst other incentives.

All banks or persons who provide offshore banking services are to obtain the prior approval of CBN. The 2020 BOFIA now clearly defines offshore banking as the provision from Nigeria of cross border intermediation of funds and provision of financial services to a non-resident of Nigeria (other than Nigerian citizens).
Prohibition of Unlicenced Financial Institutions Section 57(2) The 2020 BOFIA clearly defines “other financial institutions” to include entities that carry on financial businesses electronically, virtually, or digitally. Such entities are to incorporate a company in Nigeria and obtain a licence from the CBN before carrying out financial businesses in Nigeria. Thus, the operations of digital financial service providers/FinTechs in Nigeria are now governed by the 2020 BOFIA and regulated by the CBN.
Establishment of Resolution Fund  Section 74- 78

 

 

 The 2020 BOFIA establishes a “Banking Sector Resolution Fund”. This fund, among other things, is to be used for providing credit facilities to banks and other financial institutions as well as pay the cost of transfer of all or part of the business of a bank or financial institution arising from a resolution measure. Banks and other financial institutions will now be subject to an annual levy of an amount equal to ten points of its total assets. The levy is to be paid in arrears and not later than 30th day of April in each year.
 Introduction of the Special tribunal for the Enforcement and Recovery of Eligible loans (Credit Tribunal) Section 102 The new Act establishes a Credit Tribunal for the enforcement and recovery of eligible loans. This is aimed at improving the loan recovery system in Nigeria.

 

AfCFTA and Trade Benefits to Nigeria

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By Aderonke Alex-Adedipe and Olawale Atanda

 

The Federal Executive Council ratified Nigeria’s membership of the African Continental Free Trade Area (AfCFTA) on the 11th of November 2020. This occurs more than a year after Nigeria signed the African Continental Free Trade Agreement (the “Agreement”) in July 2019. The Agreement establishes a single market for goods and services across 54 countries, allows for the free movement of business travelers and investments, and creates a unified customs union to streamline trade on the continent.

 

The AfCFTA Agreement comes into effect on the 1st of January 2021. Although, full implementation of the Agreement may take some time as countries would have to negotiate aspects of the Agreement such as trade, dispute settlement processes, tariffs and intellectual property rights.

 

Nigeria is however poised to gain from the investment and trade opportunities that the AfCFTA will inevitably bring. In this article, we highlight some of these benefits.

 

Size of the Nigerian Market

Nigeria has the largest economy and population in Africa with more than $500 billion in GDP and a population of 200 million. This market size allows manufacturers to increase capacity and expand into other African countries. This enables investors benefit not only from the Nigerian market but from other countries on the continent as well.

 

To put this in context, Nigeria contributes an estimated 76% of total trading volume in the ECOWAS region. This is made possible because of the ECOWAS treaty which provides for the free movement of people and goods throughout 15 West African countries. The AfCFTA grants access to 54 countries with a population of 1.2 billion and a market worth a combined $2.6 trillion in GDP.

 

Supply Chain Infrastructure

Producers and retailers expanding their operations to other markets would depend on a distribution network that can efficiently deliver goods to their intended markets. This would give rise to increased investments in the distribution and logistics supply chain to ensure the infrastructure needed for transportation of goods is available. The winners would be investors who invest in the logistics and transportation space to cater for the large volume of goods which would be involved in cross-border trade.

 

Increased Jobs

The AfCFTA also seeks to create a  single liberalized market for trade in services for the continent. Countries such as Nigeria which have an abundant supply of professionals in various services industries such as construction, engineering, technology, and financial services would see increased movement of such professionals to countries with a demand for their services. In addition, labour-intensive trade across borders would require the services of low skilled workers and the free movement of persons guaranteed by the AfCFTA will bring with it the free movement of services these persons will render.

 

Conclusion

Although, there have been valid concerns about the effect the AfCFTA would have on the Nigerian economy, these concerns can be addressed by the government putting in place safeguards to ensure vulnerable industries are protected. Safeguards include improving transport infrastructure and enforcing policies which would see a reduction in the cost of production. This would in turn make goods export friendly.

 

SUITABLE GROUP INVESTMENT STRUCTURE IN NIGERIA; THE TRUST STRUCTURE

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By Seun Timi-Koleolu, Eustace Aroh and Praise Adetunmibi

There is a growing connection amongst people around the world, largely due to the use of technology by startups and other tech companies to solve problems across borders. Technology is also making it possible for investors who see value in such startups to invest in them from any country in the world. Apart from the growing crop of startups arising from Nigeria, there is also a growing crop of investors who are identifying and investing in business opportunities within and out of Nigeria.

Investors in Nigeria range from institutional to individual investors. It is quite common for a group of individuals to pool funds together to invest in businesses (Group Investments).

In establishing an investment group, it is pertinent for the members to utilize a suitable business structure to maximise returns. The business structure an investment group applies will, invariably, affect its returns, tax liabilities, asset protection and operational cost.

What are the available structures for Group Investments in Nigeria?

Group investments in Nigeria may be structured in various ways such as: a Partnership, a Company, a Cooperative Society and a Trust; with each one having its merits and demerits. For Instance, one of the merits of a company structure is its distinct legal personality from its owners. It can own properties as well as enter contracts. There are, however, administrative requirements and tax implications which may make it unsuitable for group investors. A Cooperative Society (CS) structure is another structure that can be considered. The merit of a CS structure is that upon registration, it acquires corporate status and is exempted from Companies Income Tax. The process of establishing a CS is, however, tedious. Another structure an investment group may adopt is a Limited Liability Partnership which enables the partners enjoy limited liability status with minimum tax exposure. Although this structure has been introduced by the Nigerian Companies and Allied Matters Act 2020[i], it is yet to be given effect to at the Corporate Affairs Commission. A useful and typically preferred structure for Group Investment in Nigeria is the Trust structure.

What is a Trust?

A Trust is a legal relationship between a Settlor, a Trustee and a Beneficiary. A Trust is set up by a person called the Settlor through a Trust Agreement or Trust Deed. With this structure, the Settlor transfers property or funds (“Trust Asset”) to a person he appoints as the Trustee who then holds and manages the Trust Assets on behalf of the Beneficiaries.

In the case of a group investment, the Trust should be structured to make the investors both the  Settlors and the Beneficiaries, with one or more of the investors appointed as the Trustees. The investors (as Settlors) will then pool funds together to invest in equity or other target assets and the Trustee will enter into the investment deal on behalf of the Trust. The Trustee is to be responsible for managing and distributing proceeds of the investments to all the investors (in their capacity as Beneficiaries). This structure is also referred to as an ‘Unincorporated Syndicate’.

What are the useful clauses to include in a Group Investment Trust Agreement?

The Trust Agreement must specifically create the Trust and a name should be given to the Trust. The Agreement should clearly appoint one or more of the investors as a Trustee and grant him/her rights to manage the investment on behalf of the Trust. The investors should be identified as Settlors and Beneficiaries unless the proceeds of the investment are to go to a third party (in that case, the third party will be identified as the Beneficiary). The contribution ratio and the profit/asset sharing ratio should be clearly stated in the Agreement. Liability of each of the parties to the Agreement should be clearly detailed.

Conclusion

Where a trust structure is adopted for a Group Investment in a startup, the stock purchase agreement should be reviewed to ensure it allows for the free transfer of shares amongst members of the Group (for instance, transfer of shares should not be limited by a ‘right of first refusal’ which is typically granted to companies.

[i] Please see our article on Companies and Allied Matters Act 2020 https://pavestoneslegal.com/the-nigerian-companies-and-allied-matters-act-2020/

Legal and Regulatory Considerations for Business Acquisitions in Nigeria

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By Aderonke Alex-Adedipe and Olawale Atanda

The main objective of every business is to make profit. Companies continually explore methods of increasing their bottom line and sometimes, that may mean acquiring companies in the same industry for several operational or economic reasons which ultimately would lead to increased revenue.

Recently, the fintech space in Nigeria was given a significant boost following the acquisition of Paystack by international payments company, Stripe in a record-breaking deal. For companies seeking to make similar acquisitions in Nigeria, there are certain legal and regulatory requirements to be considered when acquiring a business.

  1. General Applicable Legislations

Acquisitions in Nigeria are governed by key legislations. These are the Federal Competition and Consumer Protection Act (FCCPA) 2019 and the Companies and Allied Matters Act 2020 (CAMA).

Prior to the passage of the FCCPA in 2019, the Investment and Securities Act (ISA) 2007 and the Securities and Exchange Commission Rules and Regulations 2013 (SEC Rules) governed mergers and acquisitions in Nigeria. By the provisions of the FCCPA however, the Federal Competition and Consumer Protection Commission (“the Commission”) took over the regulation of mergers and acquisitions from SEC.

Under the FCCPA, all acquisitions are required to be approved by the Commission. However, acquisitions classified as “small mergers” are not required to be notified to the Commission except otherwise requested by the Commission. Small mergers are classified as such, where the combined assets and turnovers of the acquiring and target company fall below NGN1 billion.

It should be noted that acquisitions of shares qualify as “mergers” and fall under the regulation of the Commission whenever they result in an acquisition of controlling stake in the acquired company.

  1. Sector-Specific Legislations

There are other legislations that are specific to individual industries. Companies operating in these sectors are required to follow the rules of acquisitions specified in the legislations or required by regulators. These laws and regulatory requirements operate in addition to the primary legislations stated above.

In the banking sector for example, the Banks and Other Financial Institutions Act and the Central Bank of Nigeria’s Guidelines regulate acquisitions in the banking sector. Also, the Central Bank of Nigeria (“CBN”) generally requires other financial institutions which the CBN regulates to seek its consent prior to a change in the ownership structure of such institutions.

  1. Taxes

Acquisition transactions should not take place without the prior direction from the Federal Inland Revenue Service (FIRS) in connection with taxes/duties which may be applicable to such transaction. It is important that both the acquirer and target companies settle all outstanding tax obligations to the FIRS. Where the acquisition involves the sale of assets, capital gains tax will be payable. In situations where an acquisition results in the creation of more shares, stamp duties tax will be payable on the new shares.

Conclusion

Acquisition transactions are major deals which require several legal considerations. Acquiring companies should ensure that, in addition to the economic factors already considered, legal and regulatory requirements should be met when closing an acquisition deal to prevent regulatory sanctions and legal liability.