EXPLAINER: Why the CBN’s New BOFIA Guidance Matters for Banks, Investors and Financial Contracts

By Àkànní Olúwaségún Michael

The Central Bank of Nigeria (CBN) has drawn a clear line on how long it can suspend certain contractual rights when intervening in a troubled bank, introducing a maximum period of two business days for restrictions on payments, deliveries and contract terminations.

The clarification, contained in a circular titled Interpretative Guidance on the Practical Operation of Sections 34(2)(b) and 40(2) of the Banks and Other Financial Institutions Act (BOFIA), 2020, took effect immediately upon its release on 1 July.

While the circular does not change the law, it provides the financial industry with something it previously lacked, and that is CERTAINTY.

For banks, investors, lenders and other counterparties, that certainty could prove significant, particularly when dealing with distressed financial institutions or negotiating complex financial contracts.

Why did the CBN issue the guidance?

According to the apex bank, the absence of a clearly defined timeframe under Sections 34(2)(b) and 40(2) of BOFIA had created uncertainty for parties entering financial contracts with Nigerian banks and other financial institutions.

Those provisions empower the CBN Governor to intervene in troubled banks and temporarily suspend certain contractual obligations during the resolution process. However, BOFIA did not expressly state how long such suspensions could last.

Without a clear limit, counterparties faced uncertainty over when they could enforce contractual rights, terminate agreements or recover obligations if a financial institution became distressed.

The CBN said the guidance is intended to remove that ambiguity and support more effective commercial risk management.

“This Circular is intended to guide all banks, financial institutions, and counterparties to an Affected Contract on the operational approach the CBN will adopt when exercising the powers conferred on the CBN Governor by Sections 34(2)(b) and 40(2) of BOFIA,” the regulator stated.

What exactly has changed?

The most important clarification is straightforward.

The CBN has stated that any suspension of payment obligations, delivery obligations or restrictions on the exercise of termination rights under qualifying financial contracts cannot exceed two business days from the date the Governor issues a written order.

In practical terms, the regulator may temporarily prevent counterparties from exercising certain contractual rights while stabilising a distressed bank, but such intervention must now end within two business days.

Previously, the law provided no express maximum duration.

The guidance therefore introduces a defined timeline that financial market participants can now factor into their legal and commercial risk assessments.

What are “affected contracts”?

The circular applies to what the CBN describes as Affected Contracts—financial agreements involving banks or other financial institutions that fall within the scope of Sections 34(2)(b) and 40(2) of BOFIA.

These include qualifying financial contracts under which parties may have rights to receive payments, demand delivery of assets, terminate agreements or accelerate obligations when a counterparty becomes financially distressed.

Such contracts are fundamental to modern financial markets.

Banks, institutional investors, asset managers and other financial institutions rely on them to manage credit risk, liquidity, funding and market exposures.

Because these contracts often involve substantial financial obligations, uncertainty over their enforceability can significantly increase transaction costs and discourage market participation.

Why is the clarification important?

Bank resolution frameworks are designed to allow regulators to stabilise troubled financial institutions without triggering wider disruption across the financial system.

During that process, regulators may temporarily suspend certain contractual rights to prevent counterparties from simultaneously terminating agreements or demanding immediate settlement, actions that could accelerate the collapse of an already distressed institution.

However, while regulators require sufficient time to implement resolution measures, investors and counterparties also require certainty.

Without a clearly defined timeframe, financial institutions and investors may struggle to assess their legal exposure, price risks accurately or structure transactions with confidence.

By establishing a maximum two-business-day suspension period, the CBN has introduced greater predictability into Nigeria’s bank resolution framework.

That certainty is particularly important for sophisticated financial market participants who routinely evaluate legal and regulatory risks before entering transactions.

Why should investors care?

The guidance extends beyond distressed banks.

It affects how investors, lenders and financial counterparties evaluate transactions involving Nigerian financial institutions.

Greater legal certainty generally reduces commercial uncertainty.

Where counterparties have confidence that regulatory interventions will operate within clearly defined limits, they are better able to assess risks, negotiate contracts and allocate capital.

Conversely, prolonged or uncertain intervention powers can increase legal risk, discourage transactions and raise the cost of doing business.

The clarification therefore has the potential to strengthen confidence in Nigeria’s financial markets by providing greater transparency around the CBN’s operational approach during bank resolution.

What does it mean for banks?

For banks, the guidance establishes a clearer operational framework for managing relationships with counterparties during periods of regulatory intervention.

It also provides institutions with greater certainty when negotiating financial contracts, particularly those involving sophisticated domestic and international counterparties that require clarity over default and termination provisions.

The circular is also expected to improve communication between banks and their counterparties by reducing uncertainty around the duration of regulatory suspensions.

Could this improve investor confidence?

Potentially, yes.

Legal certainty is a critical factor in financial markets.

International investors, financial institutions and counterparties generally prefer jurisdictions where the rules governing contract enforcement and bank resolution are transparent and predictable.

By defining the maximum duration of temporary suspensions, the CBN has reduced one area of legal uncertainty that could otherwise influence investment decisions or transaction pricing.

Although the circular does not alter BOFIA itself, it provides market participants with a clearer understanding of how the regulator intends to exercise its statutory powers.

Over time, this could contribute to greater confidence in Nigeria’s banking resolution framework and support broader efforts to align the country’s financial regulatory environment with internationally recognised resolution practices.

What happens next?

The interpretative guidance takes immediate effect and will govern how the CBN exercises its powers under Sections 34(2)(b) and 40(2) of BOFIA.

Issued pursuant to Section 56 of BOFIA and Section 33(1)(b) of the Central Bank of Nigeria Act, 2007, the circular does not amend existing legislation. Rather, it provides an operational interpretation of how the regulator intends to apply the law when intervening in troubled banks.

Its practical significance will become clearer the next time the CBN is required to resolve a distressed financial institution.

For now, the message to banks, investors and financial counterparties is straightforward: regulatory intervention remains available, but the period during which certain contractual rights may be suspended now has a clearly defined limit.