Regulatory Alerts2004-06-02 | TED-AD-52-2004Accepting Bank's Own Shares as Security for Credit Facilities
This circular from the Central Bank of Nigeria's Director of Banking Supervision highlights that accepting a bank's own shares as security for credit facilities and granting them to directors violates BOFIA (Banking and Other Financial Institutions Act) provisions. The practice is considered an instance of capital reduction by illicit means and constitutes insider abuse against good corporate governance practices. Accordingly, banks are advised not to accept their own shares as collateral unless they include it in their credit policy rules, adhere strictly to BOFIA's provisions, and do so under exceptional circumstances for directors.
09 61636403 09 61636418 BSD/DO/CIR/04/2004 April 28, 2004 CIRCULAR TO ALL LICENSED BANKS: ACCEPTING BANKS' OWN SHARES AS SECURITY FOR CREDIT FACILITIES It has been observed that most banks grant facilities to their customers, especially their directors against the security of such banks' own shares without the prior approval of the Central Bank of Nigeria. Such practice contravenes the provisions of Section 20 (1) (b) of BOFIA, 1991, as amended, which precludes banks from granting credits fac ilities against the security of their shares. It also amounts to capital reduction by such banks through means other than those provided for in Sections 106 and 161 of Companies and Allied Matters Act (CAMA) 1990, as amended. In the case of directors, any facility granted to them under such collateral arrangements without adhering to the provisions of BOFIA amounts to insiderabuse, which is against good corporate governance and the code of conduct which the directors had undertaken to uphold.
For the avoidance of doubt, BOFIA only provides for acceptance of own shares as security if the bank involved includes such provisions in its rules and regulations (credit policy) and the security is considered adequate.
Accordingly, banks are advised to desist from the practice of accepting own shares as security for credit facilities extended to their customers and in the case of directors, this should be entertained only under very exceptional circumstances in which case, strict adherence to the provisions of Section 20 (1) (b) of BOFIA, 1991, as amended should be observed. O. I. IMALA DIRECTOR OF BANKING SUPERVISION Dbs, banks own shares