New guidance provides greater certainty for financial contracts during failing bank resolutions, with the Central Bank of Nigeria capping temporary contractual suspensions at two business days

The Central Bank of Nigeria has introduced a maximum two-business-day period for the suspension of certain contractual obligations during the resolution of failing banks, in a move aimed at improving certainty for financial institutions and market participants.

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The clarification was announced in Abuja on Wednesday, July 1, through a circular signed by the Acting Director of the Financial Markets Department, Okey Umeano.

The guidance, which took immediate effect, provides an operational interpretation of the apex bank’s powers under the Banks and Other Financial Institutions Act 2020.

The Central Bank of Nigeria said the absence of a clearly defined maximum duration for the exercise of its powers under Sections 34(2)(b) and 40(2) of BOFIA had created uncertainty for banks, other financial institutions and counterparties involved in financial contracts.

According to the circular, “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 apex bank added that the uncertainty had the potential to impede the effective management of commercial risk, making it necessary to clarify how the statutory powers would be exercised during bank resolution processes.

Under the new guidance, any suspension of payment or delivery obligations under an affected financial contract involving a failing bank, as provided under Section 34(2)(b) of BOFIA, must not exceed two business days from the date the Governor of the Central Bank of Nigeria issues a written suspension order.

Similarly, any temporary suspension of contractual termination rights under Section 40(2) will also be limited to a maximum of two business days from the date the relevant notice is issued.

The circular stated, “Any suspension of payment or delivery obligations under an affected contract involving a failing bank pursuant to Section 34(2)(b), as well as any suspension of termination rights under contracts covered by Section 40(2), 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.”

The guidance applies to banks, other financial institutions and counterparties to what the apex bank described as “Affected Contracts”, referring to agreements involving financial institutions that fall within the scope of the relevant BOFIA provisions.

Section 34(2)(b) of BOFIA empowers the Central Bank of Nigeria to facilitate the acquisition of a failing bank by one or more financial institutions as part of efforts to preserve financial stability.

Section 40(2) authorises the CBN Governor, following the revocation of a banking licence where considered to be in the public interest, to commence resolution measures that may include temporarily suspending certain contractual termination rights.

By introducing the CBN Two-Business-Day Limit, the regulator has sought to reassure financial markets that any disruption arising from bank resolution measures will be temporary and subject to a clearly defined timeframe.

Industry observers say the clarification is expected to strengthen confidence among investors and counterparties by reducing legal and operational uncertainty during periods of financial distress.

The guidance comes shortly after the Central Bank of Nigeria revoked the operating licences of 46 inactive, insolvent or non-operational microfinance banks under its statutory powers provided by BOFIA.

Although the latest circular is not connected to any specific institution, it establishes a more predictable framework for handling contractual obligations whenever the regulator intervenes in troubled financial institutions.

The Central Bank of Nigeria said the clarification was issued under the authority granted to the Governor by Section 56 of BOFIA and Section 33(1)(b) of the Central Bank of Nigeria Act, 2007, with immediate effect from July 1.

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The latest measure forms part of the apex bank’s broader efforts to strengthen Nigeria’s bank resolution framework, align regulatory practices with international financial stability standards and provide a more transparent environment for financial markets during periods of institutional stress.