CBN bans linked financial entities from extending loans to each other

By Elizabeth Adegbesan

The Central Bank of Nigeria, CBN, has banned closely linked financial entities from extending loans or guaranteeing the obligations of one another without the bank’s prior approval.

The apex bank disclosed this, yesterday, in its Exposure Draft on ring-fencing operations of closely linked entities in the Nigerian financial system.

The apex bank stated: “Except with the prior written approval of the CBN, no closely linked entity shall extend a loan to, or guarantee the obligations of another.”

The guidelines also outlines measures to address different licence categories; mitigate risks from the co-mingling of customer funds with those of closely linked entities; provide additional governance requirements for closely linked entities; and support orderly resolution of distressed closely linked entities.

The guidelines stated, among other key principles, that closely linked entities shall operate independently and shall maintain adequate level of capital and liquidity resources sufficient to operate independently.

On other ring-fencing measures, CBN said: “The board of a closely linked entity shall ensure that the entity is legally, structurally and operationally independent of other entities that it is closely linked to.

“Each closely linked entity shall maintain its own governance, risk-management and control framework, including a dedicated Board.

“The boards of closely linked entities shall ensure that transactions between such entities are conducted at arm’s length and are properly documented.”

The apex bank warned that breach or failure to comply with the provisions of the guidelines shall attract appropriate sanctions, including penalties, replacement of management, and or revocation of licence in line with Bank and Other Financial Institutions Act, BOFIA 2020, and other relevant extant regulations.

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