Nigeria: An Overview Of Types Of Banking Licenses In Nigeria

According to the International Monetary Fund (IMF), the principal role of banks is to "take in funds called deposits from those who need them, pool them and lend them to those who need funds."¹ Banks thus play such a vital role in the economy of every nation by rendering critical services such as accepting deposits, and withdrawals, giving loans, "creating money" within its approved "minimum capital ratio," and also transmitting monetary policies, currency exchange, forex trading, wealth management among other roles to make the economy run efficiently while preserving the power of the currency.

Every country, including Nigeria, has an apex bank, usually called a Central Bank, responsible for the supervision and regulations of banks (which would typically run as private and public companies) so that they are not just driven to make a profit but also to align with the economic outlook of the nation. This is because, amongst other reasons, the impact of a bank's failure is more severe as opposed to the failure of a regular company.²

Banks, after crossing the usual hurdles of incorporation, must seek and obtain, among other things, a requisite banking license for their operations.³ Although commercial banks are probably the most popular banks in Nigeria, there are other types of banking licenses that are issued by the Central Bank of Nigeria, which will be discussed below:

• Commercial Banking License

This category of banking license is issued for banking operations on a regional, national, or International authorization basis as provided in the Commercial Banks regulations No. 1 2010.⁴ The minimum paid-up share capital to be maintained for a National level banking license is N25 Billion Naira or any such amount that may be prescribed by the Central Bank of Nigeria, while for a Regional Banking License is N10 Billion Naira and International Commercial Banking License is N50 Billion. To obtain the commercial banking license, the banking operators are to comply with all the prudential guidelines and regulations issued by the Central Bank of Nigeria on the required level of capital adequacy, liquidity, and cash reserve.

A licensed commercial bank is permitted to undertake the following business transactions;

• Take deposits and maintain current savings accounts from natural (individuals) and legal persons (companies).
• Provide retail banking services, including mortgage products.
• Provide financial and credit facilities.
• Deal in foreign exchange and provide foreign exchange services, which will be subject to the bank having a foreign exchange-authorized dealership license and any other law and CBN Regulations.
• Act as a settlement bank subject to CBN approval.
• Provide treasury management services which include the provision of money market, fixed income, and foreign exchange investment on behalf of clients, which is also subject to the approval of the Central Bank.
• Provide custodial services.
• Provide financial advisory services relating to commercial banking business which do not require statutory filings with the securities and exchange commission (SEC)
• Invest in non-convertible debt instruments and enter into derivative transactions subject to the approval of the CBN and permitted under the CBN directives and circulars.
• Provide non-investment banking services subject to the approval of the CBN.
• Undertake fixed-income trading, where duly licensed to act as a Primary Dealer Market Maker to trade in securities such as Federal Government bonds, treasury bills, treasury certificates, and such other certificates as may be prescribed by the CBN.
• Provide non-interest banking subject to CBN approval
• Any other activities that may be prescribed by the CBN in writing from time to time.

A commercial bank with regional banking authorization is entitled to carry on its banking business operations within a minimum of six (6) and a maximum of twelve (12) States of the Federation, which lies within not more than two (2) geographical zones of the Federation as well as within the Federal Capital Territory. While a commercial bank with national banking authorization is entitled to carry on its banking business operations in every State of the Federation. A commercial bank with international banking authorization, on the other hand, is entitled to carry on its banking business operations within all States of the Federation as well as maintain an offshore banking operation in the jurisdiction of its choice, which will be subject to the approval of the Central Bank of Nigeria and compliance with the regulatory requirement of the host country.

There are also about 8 prohibited activities⁵ for commercial banks, imposed in order to make for their efficiency.

• Specialized Banking License

This type of banking license applies to "business of other financial institutions," which include discount houses, bureau de change, credit bureaus, finance companies or money brokerage, international money transfer services, mortgage refinance companies, mortgage guarantee companies, credit guarantee companies, financial holding company or payment service provides, specific businesses⁶ and any other banks designated by the CBN.⁷ Put succinctly, this covers non-interest banks, primary mortgage institutions, microfinance banks, development banks, and Discount Houses. This license is issued in line with the Minimum Standards for Specialized Institutions Regulations No.03 2010. The minimum paid-up share capital for setting up such banking institutions is illustrated in the table below.⁸

It is worthy of note that going by the definition of Other Financial Institutions (OFIs)⁹ in the BOFIA 2020 and the express prohibition of unlicensed companies in Section 57 of BOFIA 2020, Fintech companies (who were not expressly stated to be covered in the previous Act) but who wish to operate or continue to in Nigeria can and must apply for a banking license under this head for their operations.

• Merchant Banking License

This class of banking license is majorly regulated by the Merchant Banks Regulations 2010¹⁰ and is issued by the Governor of the CBN upon the fulfillment of terms and condition authorizing the operation of a merchant bank.

By Virtue of Part 2 of the Merchant Banks Regulations, a licensed Merchant Bank has the authority to carry out the following banking activities:

• Take deposits and maintain current savings accounts from natural and legal persons at least N100 Million per tranche or any other minimum amount that may be prescribed by the CBN;
• Provide finance and credit facilities to non-retail customers;
• Deal in foreign exchange and provide foreign exchange services subject to the provision of the foreign exchange (Monitoring and Miscellaneous Provisions) Act and CBN regulations;
• Act as an issuing house for managing, arranging, and coordinating the issuance of securities, subject to the provisions of BOFIA;
• Provide underwriting services for equity issuance of securities, subject to the provisions of BOFA and prior notification in writing to the CBN;
• Provide debt factory services;
• Issuing, discounting, and rediscounting negotiable instruments;
• Provide treasury management services, including the provisions of money market, fixed income, and foreign exchange investment on behalf of clients.
• Provide custodial services;
• Engage in trading of fixed income securities, where duly licensed to act as a Primary Dealer/ Market Maker to trade securities such as Federal Government bonds, treasury bills, treasury certificates, and any other debt certificates as may be prescribed by CBN;
• Engage in proprietary trading such as an investment in debt instruments of any person, investing in equity or hybrid equity instruments subject to BOFIA and CBN rules and guidelines;
• Provide asset management services, including fund and portfolio management services, act as a dealer of securities for its account and the account of its clients or otherwise make or manage investments on behalf of clients.
• Engage in trading of fixed-income securities where duly licensed to act as a primary dealer/market marker to trade in securities such as Federal Government bonds, treasury bills, treasury certificates, and such other debts certificates as may be prescribed by the CBN from time to time
• Provide custodial services
• Issue discount and rediscount negotiable instruments
• Provide debt factoring services
• Such other activities may be prescribed in writing by the CBN from time to time.

While the above are permissible activities, there are also express prohibited activities¹¹ for Merchant banks that are also restrained from engaging.

The minimum paid-up share capital required for a merchant banking license is N15 Billion naira or any other amount that would be prescribed by the CBN. The merchant bank is instrumental in investing majorly in wealth and assets management and also to raise funds for companies.

Conclusion

No person can carry out banking operations legally in Nigeria without being issued and granted a valid banking license under the Banks and other Financial Institution Act (BOFIA) 2020. Thus, it is imperative to appreciate the differences, scope, and limitations of each of the available banking licenses in order to be able to know which bank to approach for specific transactions and also be able to flag or "whistle blow" any bank that contravenes the terms of its banking license.

Footnotes

1. Jeanne Gobat, "What is a Bank" 2012, Finance and Development, March 2012, Vol, No 1 accessed from https://www.imf.org/external/pubs/ft/fandd/2012/03/basics.htm#:~:text=Although%20banks%20do%20many%20things,whom%20the%20bank%20lends%20money on 15/12/22

2. The impact of the failure of a bank depends on the size of the bank but typically causes panic among the failed bank customers, causes liquidity issues and can trigger the failure of other banks, the community, and the market as a whole.

3. Section 2, Banks and Other Financial Institutions Act, 2020

4. CBN Scop, Conditions and Minimum Standards for Commercial Banks Regulations No 1, 2010 accessed from https://www.cbn.gov.ng/OUT/2010/CIRCULARS/BSD/COMMERCIAL%20BANKING%20LICENSING%20REGULATIONS%20-%20FINAL%20RELEASED.PDF n 15/12/2022

5. Part 2, Section 4 of the above-quoted regulation lists insurance underwriting, loss adjusting, reinsurance activities, asset management services, issuing house and capital market underwriting, investment in equity or hybrid-equity instruments save those expressly permitted under BOFIA, proprietary trading save those permitted, provision of financial advisory other than in accordance with section 3(h) and any other business that may be restricted from time to time.

6. Whose objects include factoring, project financing, equipment leasing, debt administration, private edger services, investment management, local purchases order financing, export finance

7. Insurance companies, pension fund management, and collective schemes as defined respectively in the Insurance Act, The Pension Reform Act, and the Investment and Securities Act do not fall under this category as provided in Section 57 of BOFIA 2020.

8. CBN Scope, Conditions and Minimum Standards for Specialized Institutions Regulations No 3, 2010 accessed from https://www.cbn.gov.ng/OUT/2010/CIRCULARS/BSD/REVIEW%20OF%20GUIDELINES%20FOR%20SPECIALISED%20INSTITUTIONS%20-%20FINAL%20RELEASED.PDF on 15/12/2022

9. OFIs are broadly defined in the BOFIA 2022 as "finance company or money brokerage, international money transfer services, financial holding company or payment service providers and businesses whose objects include; project financing, debt administration, private ledger services, investment management and any other business as the CBN may determine from time to time irrespective of whether such businesses are conducted digitally, virtually or electronically only."

10. CBN Scope, Conditions and Minimum Standards for Merchant Banks Regulations 2010 accessed from https://www.cbn.gov.ng/OUT/2010/CIRCULARS/BSD/MERCHANT%20%20BANKING%20LICENSING%20REGULATIONS%20%2016%20JULY2010A.PDF on 15/12/2022

11. Acceptance of any deposit withdrawable by cheques, granting of retail loan or engagement in retail banking, holding for more than 6 months any equity interest acquired in a company while managing an equity issue, providing of such insurance services (underwriting, loss adjusting, reinsurance amongst others) and other activities that may be restricted from time to time by CBN

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.