CBN Rule Book Volume 1

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Central Bank of Nigeria

Rule Book
(A Compendium of Policies and Regulations)
Volume I

ii
Volume One

i
Foreword

Pursuant to the provisions of the Central Bank of Nigeria (CBN) Act, 2007 and
other relevant laws, the CBN (or the Bank) issues policies, rules, circulars,
guidelines, regulations and frameworks, and disseminates the required
information to facilitate the achievement of its mandates.

It therefore, gives me pleasure to present the maiden edition of the CBN Rule
Book, representing a compendium of CBN Policies and Regulations. This
publication contains policies, rules, circulars, guidelines, regulations and
frameworks issued by the Bank from its inception on July 1, 1959 to end-
December, 2018. It will serve as a point of reference to all stakeholders,
particularly banks and other financial institutions, to guide their actions and
compliance, and for economic agents to anchor their expectations in line with
the direction of monetary policy.

Since the global financial crisis of 2007/2009, the CBN, like other major central
banks, adopted forward guidance as a major approach in monetary
management towards attaining the primary mandate of maintaining monetary
and price stability for economic growth and development. A key feature of that
process has been the Bank’s pursuit of transparency and accountability to all
stakeholders, including other regulators, market operators, investors and
members of the public. This compendium, therefore, is intended to enhance the
motive of facilitating easy access to previous and existing policies and
guidelines of the Bank, and to complement other channels that have been in
use for the dissemination of all measures and actions taken in the course of time.
Even more important is the fact that the compendium builds on the robust
financial and economic database already established by the Bank.

The compendium will be issued periodically, going forward, and, it is our sincere
hope that it would serve as a useful reference document to all stakeholders. I
therefore, assure that the Bank would continue in this effort to make all its
policies and guidelines readily available, using various channels to reach all and
sundry.

Godwin I. Emefiele, CON


Governor,
Central Bank of Nigeria
September 2019

ii
Preface

The Central Bank of Nigeria plays a pivotal role in the Nigerian economy through
the formulation and implementation of monetary policy, as well as the
regulation of banks and financial institutions. It also carries out developmental
functions by intervening in critical sectors of the economy. As part of its
supervisory and regulatory responsibilities, the Bank, from time to time, issues
circulars, guidelines and regulations that communicate its policy directions to
target financial institutions and other members of the public.

This compendium is intended to enhance ease of access and reference to the


required guide for banks and consumers of banks and other financial services. It
would also provide investors with information for decision making and serve as a
useful historical document, evidencing policy actions necessitated by the
prevailing economic conditions and the stage of development.

The compendium, therefore, is structured in Volumes. This Volume One has two
Sections. Section I enlists “Trade and Exchange Circulars” from 1986 (Volume 1)
to 2011 (Volume 10); “Handbook of Rules and Regulations for Banks and
Discount Houses in Nigeria (1997 – 2012)”; “Compendium of Monetary, Credit,
Foreign Trade and Exchange Policy Guidelines: Monetary Policy Circulars,
Numbers 1 to 40 (1959 – 2015)”; “Compendium of Monetary Policy
Communiques, Numbers 1 to 104 (2001 – 2015)”; and, the “Monetary, Credit,
Foreign Trade and Exchange Policy Guidelines for Fiscal Years 2016/2017”, and
“2018/2019”; all of which had already been published separately and in
circulation for reference. It should be noted however, that from July 1959, when
the Bank came into operation, to June 1969, there were no formal Circulars on
monetary policy, owing to the need to develop internal capacities and
establish appropriate structures to support the enacted central banking
functions and responsibilities. Section II, on the other hand, comprises two Parts,
with the Bank’s policies on banking and payment system in Part A, and those on
banking supervision in Parts B.

The second edition of the CBN Rule Book is Volume Two that comprises Parts C,
D, E and F with guiding policies on consumer protection, currency operations,
development finance, financial markets and part of financial policy and
regulation, respectively. Volume Three continues the remaining part of policies
on financial policy and regulation, in addition to those on monetary policy,
other financial institutions supervision, and trade and exchange.

This compendium of CBN Policies and Regulations, therefore, serves as the most
comprehensive guide to policies, guidelines and circulars issued by the Bank.

Dr. Okwu J. Nnanna

Deputy Governor, Economic Policy

iii
Acknowledgements

This maiden compendium of CBN Policies and Regulations received the


approval of Management at the highest level, by the Governor, Central Bank of
Nigeria, Mr. Godwin I. Emefiele, CON, following the recommendation and
sponsorship of the Deputy Governor, Economic Policy, Dr. Okwu Joseph
Nnanna. I commend Management for the invaluable and unflinching support.

The motivation for this CBN Rule Book was strong and inspiring, to complement
other publications of the CBN such as the “Compendium of Monetary, Credit,
Foreign Trade and Exchange Policy Guidelines: Monetary Policy Circulars,
Numbers 1 to 40 (1959 - 2015)” and “Compendium of ‘Monetary Policy
Communiques, Numbers 1 to 104 (2001 – 2015)”, amongst others, providing
invaluable content of policies and directives of the monetary authority for
economic and monetary management under the prevailing conditions in each
period.

I wish to commend the Directors of Banking Services, Mr. Dipo Fatokum, Banking
Supervision, Mr. Abdullahi Ahmed, Consumer Protection, Barr. Kofo Salam-
Alada, Development Finance, Dr. Mudashir Olaitan, Financial Policy and
regulations, Mr. Kelvin Amugo, Monetary Policy, Mr. Moses K. Tule, Other
Financial Institutions Supervision, Mrs. Tokunbo A. Martins, Payments System
Management, Mr. Samuel C. Okojere and Trade and Exchange, Mr. Ahmed B.
Umar, for their inputs and quality assurance of this publication. I also applaud
members of the Secretariat for the Committee, comprising Mr. Demenongu J.
Yanfa, Deputy Director, as Project Lead and concept guide, Mrs. Pauline C.
Obikaonu, Mrs. Fatimah Sani Bala, Ms. Amina M. Adamu, Abubakar, Aliyu, Mr.
Nnamdi Anyene and Ms. Nkiruka Okwubodu, for painstakingly co-ordinating the
Project in all the phases it went through. In addition, I appreciate the
contributions of other members of the Committee from the stakeholder
Departments of the Bank, who participated at various stages, including sourcing
and collating the policy circulars and guidelines, as well as structuring the
document for Management consideration.

Finally, I am indebted with gratitude to the Management of the Bank for


constantly supporting laudable initiatives as this for posterity, and providing the
building blocks for a strong, resilient and information-driven activities for the
sustenance of economic and financial markets development.
Dr. (Mrs.) Angela A. Sere-Ejembi

Director, Financial Markets Department

September 2019

iv
Table of Contents

Page

Volume One 1

Section I: Published Rules, Regulations and Guidelines 2

Section II: Part A. Banking and Payment System Circulars, Policies and Guidelines 4

S/N Reference Title Date Remark


o. No. Issued

1 BPS/DIR/GEN/CIR/0 Revised Nigerian Cheque 18-Sep-2018 New 5


5/002 Standard (NCS) and
Nigerian Cheque Printers
Accreditation Scheme
(NICPAS)

2 BPS/DIR/GEN/CIR/ Regulation on Instant (Inter- 13-Sep- New 7


05/011 Bank) Electronic Transfer 2018
Services in Nigeria

3 BPS/DIR/GEN/CIR/ Nigeria Bankers’ Clearing 31-Jul-2018 Review 19


05/010 System Rules, May 2018
(Revised)

4 BPS/DIR/GEN/CIR/ Shared Agency Network 05-Jul-2018 New 58


05/009 Expansion Fund Initiative:
Regulatory Data Rendition
Requirements

5 BPS/DIR/GEN/CIR/ Amendment to the 04-Jul-2018 Review 61


05/007 Regulatory Framework for
Bank Verification Number
Operations and Watch-List
for the Nigerian Banking
Industry

6 BPS/DIR/GEN/CIR/ Compliance with the 25-Jun- New 62


05/008 Cybercrime (Prohibition, 2018
Prevention, etc.) Act 2015:
Collection and Remittance
v
of Levy for the National
Cyber-Security Fund

7 BPS/DIR/GEN/CIR/ Extension of the regulatory 1-Jun-2018 New 63


05/005 framework for the use of
Unstructured
Supplemenaryt Service
Data (USSD) in the Nigerian
Financial System

8 BPS/DIR/GEN/CIR/ Regulatory framework for 17-Apr- New 64


05/002 the use of Unstructured 2018
Supplementary Service
Data (USSD) in the Nigerian
Financial System

9 BPS/DIR/CIR/01/00 Regulation for Bill Payments 14-Mar- New 72


6 In Nigeria, 2018 2018

10 BPS/DIR/GEN/CIR/ Regulation for Direct Debit 03-Mar- Revised 77


01/007 Scheme In Nigeria, 2018 2018
(Revised)

11 BPS/DIR/GEN/CIR/ Re: Sanctions on erring 04-Jan- Revised 96


05/001 Banks e-Payments Service 2018
Providers for infractions of
Payments System Rules and
Regulations

12 BPS/DIR/CIR/GEN/ Re: Extension of Settlement 21-Dec- Revised 97


02/041 Banking arrangement to all 2017
the clearing sessions

13 BPS/DIR/CIR/GEN/ Extension of Settlement 10-Nov- New 98


02/039 Banking Arrangement to all 2017
the clearing sessions

14 BPS/DIR/GEN/CIR/ Regulatory Framework for 18-Oct- New 99


04/010 BVN Operations & Watch- 2017
List for the Nigerian
Financial System

vi
15 BPS/DIR/GEN/CIR/ Further clarification on the 11-Oct- New 112
04/010 enforcement of GIFMIS 2017
Revenue Reference
Numbers

16 BPSD/DIR/GEN/CIR Enforcement of GIFMIS 25-Sep- New 113


/04/009 Revenue Reference 2017
Numbers

17 BPS/DIR/GEN/CIR/ Review of Daily MM Wallet 07-Sep- New 118


04/007 Transaction & Balance Limit 2017
& BVN Requirement for
Mobile Money Wallet
Holders

18 BPS/PSV/DIR/GEN/ Statements of Payment 10-Jul-2017 New 119


CIR/01/001 Finality for the Nigerian
Payments Schemes

19 BPS/FPO/DIR/GEN/ Unutilized FX returned to the 23-Jun- New 122


CIR/01/099 CBN for the SMIS Wholesale 2017
and Retail Interventions

20 BPS/DIR/GEN/CIR/ Re: Circular on Nationwide 20-Apr- Review 123


04/004 Implementation of The 2017
Cash-Less Policy

21 BPS/DIR/GEN/CIR/ Re: Circular on the 20-Apr- Review 124


04/003 Implementation of 2017
Interchange Fee

22 BPS/DIR/CIR/01/01 Guidelines on Securities 29-Dec- New 125


3 Settlement in Nigeria 2016

23 BPS/DIR/GEN/CIR/ Implementation of 1-Nov-2016 New 138


03/004 Interchange Fee

24 BPS/DIR/GEN/CIR/ Amendments to the 17-Oct- New 140


03/008 Guidelines on Transaction 2016
Switching in Nigeria

25 BPS/DIR/GEN/CIR/ Prevention of Exposure to 30-Aug- New 141

vii
03/006 Banks through Payment 2016
Solutions

26 BPS/DPD/GEN/CIR/ Further extension of BVN for 29-Jul-2016 New 142


01/002 Nigerian Banks' Customers
in Diaspora

27 BPS/DIR/GEN/CIR/ Circular to all Banks and 28-Jul-2016 New 143


03/005 other Financial Institutions

28 BPS/DPD/GEN/CIR/ BVN Registration of Farmers 20-Jul-2016 New 144


01/001 under the CBN Anchor
Borrowers Programme (ABP)

29 BPS/DIR/GEN/CIR/ Guidelines on Transaction 03-May- New 145


01/011 Switching in Nigeria 2016

30 BPS/DIR/GEN/CIR/ Guidelines on Operations of 03-May- New 167


01/012 Electronic Payment 2016
Channels in Nigeria

31 BPS/DIR/GEN/CIR/ Re: Clarification on 24-Feb- Review 204


16/003 Accounts with BVN Related 2016
Issues

32 BPS/DIR/GEN/CIR/ Guidelines for the 09-Feb- New 205


03/002 Operation of Treasury Single 2016
Account (TSA) by State
Governments in Nigeria

33 BPS/DIR/GEN/CIR/ Extension of BVN for 04-Feb- Review 213


03/001 Nigerian Banks' Customers 2016
in Diaspora (Revised)

34 CBN/GEN/DMB/02 Collection and Remittance 15-Jan- New 218


/006 of Statutory charges on 2016
receipts to Nigeria Postal
Service under the Stamp
Duties Act

35 BPS/DIR/GEN/WEB/ Guidelines for Banking 02-Jan- New 220


01/003 Operations in the Free 2016

viii
Zones in Nigeria

36 BPS/DIR/GEN/CIR/ Implementation of the 04-Nov- New 244


02/011 Global Mobile Payments 2015
Monitoring & Regulation
System

37 BPS/DIR/GEN/CIR/ Extension Of BVN for Nigeria 02-Nov- New 246


02/033 Bank Customers In Diaspora 2015
and other Related Matters

38 BPS/DIR/GEN/05/0 Implementation of e- 14-Sep- New 248


09 dividend Mandate 2015
Management System (e-
DMMS) Portal

39 BPS/DIR/GEN/05/0 Framework for the 18-Aug- New 250


09 Enrolment of Nigerian 2015
Banks’ Customers in
Diaspora for BVN Issuance

40 BPS/DIR/CIR/08/20 Accreditation of Cheque 18-Aug- New 252


15 Printers for 2015/16 2015

41 BPS/DIR/GEN/CIR/ Sanctions on Erring Banks/e- 29-Jul-2015 New 253


02/007 Payment Service Providers
for Infractions of Payments
System Rules and
Regulations

42 BPS/DIR/GEN/CIR/ Re: Nationwide Rollout of 13-Jul-2015 Revised 257


02/006 Cashless Policy to the
Remaining 30 States

43 BPSD/DIR/GEN/CIR Implementation of Controls 06-Jul-2015 New 258


/02/005 on Naira Denominated
Card Transactions
Consummated Overseas

44 BPS/DIR/GEN/CIR/ Extension of the Deadline 30-Jun- New 259


02/008 for Bank Verification 2015

ix
Number

45 BPS/DIR/GEN/CIR/ Establishment of Industry 11-Jun- New 260


02/004 Fraud Desks 2015

46 BPS/DIR/GEN/05/0 Re: Process for linking the 25-May- Review 263


08 BVN with Customer's 2015
Account on the Core
Banking Applications by
Banks

47 BPS/DIR/GEN/CIR/ Regulatory Framework for 01-Apr- New 265


02/010 Licensing Super-Agents in 2015
Nigeria

48 BPS/DIR/GEN/CIR/ Regulatory Framework for 01-Apr- New 275


02/009 Mobile Money Services in 2015
Nigeria

49 BPS/DIR/GEN/CIR/ Guidelines on Mobile 01-Apr- New 284


02/008 Money Services in Nigeria 2015

50 BPS/CSO/CON/DIR Commencement of Federal 25-Feb- New 306


/01/079 Government's Independent 2015
Revenue e-collection
Scheme under the Treasury
Single Account (TSA)
Initiative

51 BPS/DIR/GEN/CIR/ Deposit Money Banks, 11-Feb- New 307


02/001 Switches, Processors, PTSPs 2015
and Other Payments System
Service Providers

52 BPS/DIR/GEN/CIR/ Nigerian Issued Card 19-Jan- New 310


06/002 Present Fraud in Non-EMV 2015
Environments (Signed copy)

53 BPS/DIR/GEN/CIR/ Implementation of Two 19-Jan- New 312


06/001 Factor Authentication for 2015
Internal Banking Processes

x
54 BPS/DIR/GEN/CIR/ The year 2014 Accredited 04-Dec- New 313
02/033 Cheque Printers 2014

55 BPS/DIR/GEN/CIR/ Implementation of SWIFT 19-Nov- New 314


01/014 Sanction Screening Service 2014

56 BPS/DIR/GEN/CIR/ Clarification Circular on 21-Oct- New 315


01/015 Bank Verification Number 2014
(BVN) Enrollment

57 BPS/DIR/GEN/CIR/ Electronic Payments 18-Sep- New 316


01/012 Incentives Scheme and 2014
Awareness Campaign

58 BPS/DIR/GEN/CIR/ Go-Live of Bank Verification 18-Sep- New 317


02/033 Number Project 2014

59 BPS/DIR/CIR/GEN/ Authorized Signatories 19-Aug- New 318


02/033 Verification Portal for the 2014
Nigerian Banking Industry

60 BPS/DIR/GEN/CIR/ Review of Operations of the 13-Aug- New 319


01/011 NIBSS Instant Payment (NIP) 2014
System and other E-
Payment Options with
Similar Features

61 BPS/DIR/GEN/CIR/ Introduction of Fees on 13-Aug- New 321


01/010 Remote-On-Us ATM 2014
Withdrawal Transactions

62 BPS/DIR/CIR/01/00 Guidelines on International 18-Jun- New 322


9 Money Transfer Services in 2014
Nigeria

63 BPS/PSP/DIR/CIR/V Phase III Nationwide Rollout 09-Jun- New 336


OL.1/008 of Cash-Less Policy to the 30 2014
Remaining States

64 BPS/DIR/GEN/CIR/ Guidelines for Card 12-May- New 337


01/005 Issuance and Usage in 2014

xi
Nigeria

65 BPS/DIR/GEN/CIR/ Timeline for PCIDSS 22-Apr- New 350


01/004 Certification by all Deposit 2014
Money Banks, Switches and
Processors

66 BPS/DIR/GEN/CIR/ Implementation of E- 27-Mar- New 351


01/002 Reference Operations in 2014
Nigeria

67 BPS/PSP/GEN/CIR/ Need to install Anti 05-Mar- New 352


05/001 Skimming Device on all ATM 2014
Terminals

68 Guidelines for Nigerian New 353


Banking Industry Electronic
Reference Portal
Operations

69 BPS/DIR/CIR/GEN/ Submission of Fraud Report 02-Jul-2013 New 361


02/031 on Electronic Channels
using a Common Portal for
the Payments Industry

70 BPS/DIR/GEN/CIR/ Extension of Cash-less Policy 17-May- New 362


01/015 to Five States and the FCT 2013

71 BPS/DIR/CIR/04/20 Accreditation of Cheque 09-May- New 363


13 Printers for 2013/2014 2013

72 BPS/DIR/GEN/CIR/ Nationwide Encashment of 04-Mar- New 364


01/001 3rd Party Cheques above 2013
N150,000 over the counter
of banks and stoppage of
charges on 3rd Party
Cheques below N150,000

73 BPS/PSP/GEN/CW Guidelines for the 08-Feb- New 365


D/03/038 Regulation of Agent 2013
Banking and Agent Banking

xii
Relationships in Nigeria

74 BPS/DIR/GEN/CIR/ Timeline for Interoperability 14-Dec- New 391


01/014 and Interconnectivity 2012

75 BPS/DIR/CIR/08/20 Circular to Deposit Money 27-Nov- New 392


12 Banks in Respect of the 2012
Clearing of Financial
Instruments of
Liquidated/Legacy Banks

76 BPS/DIR/GEN/CIR/ Revised Guidelines on 12-Sep- New 393


01/011 Stored Value/Prepaid Card 2012
Issuance and Operations

77 BPS/DIR/GEN/CIR/ Revised Nigeria Bankers' 16-Jul-2012 New 398


01/011 Clearing House Rules

78 BPS/DIR/GEN/CIR/ Recall of Circular to all 12-Jun- New 437


01/009 Nigerian Deposit Money 2012
Banks, Microfinance Banks
and Primary Mortgage
Banks on the use of the
National Identity Number
(NIN) for the "Know Your
Customer" (KYC)
Verification

79 BPS/DIR/GEN/CIR/ Printing of Security 24-May- New 438


01/007 Instruments 2012

80 BPS/DIR/CIR/GEN/ Guidelines for Cheque 04-Apr- New 439


02/06 Truncation in Nigeria 2012

81 BPS/DIR/GEN/CIR/ Industry Policy on Retail 23-Mar- New 457


01/004 Cash Collection and 2012
Lodgment (IITP/C/001) as it
affects Specialized
International Institutions

82 BPS/DIR/GEN/CIR/ Re: Industry Policy on Retail 16-Mar- Review 458


Cash Collection and
xiii
01/003 Lodgment (IITP/C/001). 2012

83 BPS/DIR/GEN/CIR/ Cash Withdrawal Limit for 01-Mar- New 460


01/002 Primary Mortgage 2012
Institutions and
Microfinance Banks.

84 BPS/DIR/CIR/GEN/ Non Compliance With CBN 20-Feb- New 461


03/001 Circular on ATM 2012
Deployment

85 BPS/DIR/GEN/CIR/ Compliance with 05-Jan- New 462


01/015 commencement date for 2012
the implementation of
electronic payments in
Nigeria

86 BPS/PSP/GEN/CIR/ Circular to All Mobile 22-Dec- New 463


02/004 Scheme Operators 2011

87 BPS/DIR/CIR/GEN/ Penalty for non-compliance 25-Nov- New 464


02/031 with NIBSS format for 2011
sending settlement report

88 BPSD/DIR/CIR/01/0 Modalities for Off-Site ATM 04-Nov- New 465


11 Operations / Deployment 2011

89 BPS/DIR/CIR/01/01 Accreditation and Re- 24-Oct- New 467


2 Accreditation of Cheque 2011
Printers

90 BPS/DIR/CIR/01/00 Request for Data On 22-Aug- New 470


9 Payment Card 2011

91 BPS/DIR/GEN/CIR/ Guidelines on Point of Sale 12-Aug- New 471


02/014 (PoS) Card Acceptance 2011
Services

92 BPS/DIR/GEN/CIR/ Accreditation and Re- 07-Jul-2011 New 488


02/013 Accreditation of Cheque
Printers

xiv
93 BPS/DIR/GEN/CIR/ Revised Nigerian Direct 27-Jun- Review 491
02/012 Debit Scheme 2011

94 BPS/DIR/GEN/CIR/ Re: Circular on the Need to 23-Feb- Review 520


02/007 Combat Card Fraud 2011

95 BPS/DIR/CIR/GEN/ Penalty for Non 07-Feb- New 523


02/003 Compliance with CBN 2011
Circulars and Guidelines on
ATM Operations in Nigeria

96 BPS/DIR/GEN/CIR/ Compliance with due 19-Oct- New 525


01/006 Diligence in the 2010
Deployment of Point of Sale
(PoS) Terminals

97 BPS/DIR/CIR/2010/ The Need to Combat Card 30-Aug- New 526


GEN/01/169 Fraud 2010

98 BPS/DIR/CIR/01/51 Nigeria Uniform Bank 19-Aug- New 528


Account Number (NUBAN) 2010

99 BPS/DIR/GEN/CIR/ Nigeria Direct Debit 09-Jul-2010 New 532


01/025B Scheme

100 BPSD/RTP/GEN/RV Standards and Guidelines 14-May- New 560


P/01/007 on Automated Teller 2010
Machine (ATM) Operations
in Nigeria

101 BOD/DIR/GEN/CIR Guidelines on Stored Value 17-Feb- New 568


/01/025 Prepaid Card Issuance and 2010
Operations

102 BOD/DIR/CIR/2010 Implementation of 04-Jan- New 571


/GEN/01/107 Maximum Cap for Cheque 2010
Payments

103 BOD/DIR/CIR/GEN Maximum Limit on Cheque 11-Dec- New 573


/01/106 Payment 2009

104 BOD/DIR/CIR/GEN Harmonisation of Accounts 08-Dec- New 574

xv
/01/101 2009

105 BOD/DIR/CIR/GEN Re: Extension of the 27-Aug- Review 575


/03/028 Deadline for the Removal of 2009
Deposit Money Banks' off-
site ATMs

106 BOD/DIR/GEN/CIR Need to provide adequate 30-Jul-2009 New 576


/03/027 narration for Inter-bank
Transfers over the CBN Inter-
bank Funds Transfer System,
CIFTS

107 BOD/DIR/GEN/SMP Re: Deployment of DMBs' 26-Jun- Review 577


/03/025 Offsite ATMs and 2009
Establishment of ATM
Consortium

108 BOD/DIR/GEN/SMP Dishonouring of Bank Drafts 24-Jun- New 578


/03/024 by Issuing Banks 2009

109 BOD/RTP/GEN/RVP Guidelines on Transaction 11-Jun- New 579


/01/001 Switching Services and the 2009
Operational Rules of the
Nigeria Central Switch

110 BOD/RTP/GEN/RVP Operational Rules and 11-Jun- New 595


/01/001B Regulations for the Nigeria 2009
Central Switch

111 BOD/RTP/GEN/RVP Regulatory Framework for 11-Jun- New 614


/01/002 Mobile Payments Services in 2009
Nigeria

112 BOD/DIR/GEN/SMP Guidelines for 21-May- New 638


/02/117 Custodianship in Money 2009
Market and Other Fixed
Income Instruments

113 BOD/DIR/CIR/GEN Deployment of Automated 07-Apr- New 647


/01/48 Teller Machines (ATMs) 2009

xvi
114 BOD/DIR/CIR/01/2 Lending Rates on the CBN 23-Mar- New 648
4 Window 2009

115 BOD/DIR/CIR/GEN Update on the CBN Lending 16-Mar- New 649


/01/023 Windows 2009

116 BOD/DIR/CIR/GEN Extension of Timeline for 27-Feb- New 652


/01/23 Migration from Magnetic 2009
Stripe to Chip+PIN/EMV

117 BOD/DIR/CIR/GEN Compliance with CIFTS 27-Feb- New 653


/01/22 Operating Hours 2009

118 BOD/DIR/CIR/2008 Access to Intra-day Facility 05-Dec- New 654


/GEN/3/18 2008

119 BOD/DIR/CIR/2008 Expanded Discount Window 28-Oct- New 655


/GEN/03/17 Operations 2008

120 BOD/DIR/CIR/2008 Expansion of the Tenor of 08-Oct- New 672


/GEN/3/15 CBN Repo 2008

121 BOD/DIR/CIR/2008 Harmonisation of Clearing 29-Apr- New 673


/GEN/03/011 Cycle to Three Working 2008
Days

122 BOD/DIR/CIR/08/0 Clearing at the New CBN 01-Apr- New 674


3/09 Currency Centres 2008

123 BOD/CIR/02/2008/ Harmonisation of 02-Jan- New 675


GEN/03/003 Participants' Codes on the 2008
CIFTS Database at CBN and
Participants' TAD

124 BOD/DIR/CIR/2007 CBN Classifies FGN Bonds As 18-Dec- New 676


GEN/03/002 Liquid Assets 2007

125 BOD/DIR/CIR/2007 Ensuring Timely Remittance 27-Nov- New 677


/GEN/03/001 of Government Revenue by 2007
Deposit Money Banks

xvii
Part B. Banking Supervision Circulars, Policies and Guidelines

S/N Reference No. Title Date Remark Page


o. Issued

126 BSD/DIR/GEN/LAB/ Issuance of Risk-Based 10-Oct- New 680


11/25 Cyber-Security Framework 2018
and Guidelines for Deposit
Money Banks and Payment
Service Providers

127 BSD/DIR/GEN/LAB/ Compliance with the 01-Mar- New 748


11/006 Cybercrime (Prohibition, 2018
Prevention, Etc.), Act 2015:
Collection and Remittance
of Levy for the National
Cyber Security Fund

128 BSD/DIR/GEN/LAB/ Re: Internal Capital 31-Jan- Review 749


11/002 Generation and Dividend 2018
Payout Ratio

129 BSD/DIR/GEN/LAB/ Re: Regulatory Reporting of 11-Dec- Review 752


10/045 FGN-Issued Treasury Bills and 2017
CBN-Issued OMO Bills

130 BSD/DIR/GEN/LAB/ Further Guidance to Banks 06-Sep- New 753


10/032 and Discount Houses on the 2017
Implementation of IFRS 9
(Financial Instruments) In
Nigeria

131 BSD/GDB/CON/NIB Monitoring the 01-Aug- New 754


/01/03 Disbursement of Non- 2017
Permissible Income (NPI)

132 BSD/DIR/GEN/LAB/ Revised Guidelines on 31-Mar- Review 755


10/016 Banc-assurance Referral 2017
Model

xviii
133 BSD/DIR/GEN/LAB/ Review of the Limit on 13-Feb- Review 761
10/009 Foreign Borrowing by Banks 2017

134 BSD/DIR/GEN/LAB/ Application of International 06-Feb- New 763


10/006 Standard on Auditing (ISA) 2017
701 (Communicating Key
Audit Matters in the
Independent Auditors’
Report) in the Banking
Sector

135 BSD/DIR/GEN/IFR/0 Guidance Note to Banks 20-Dec- New 764


9/130 and Discount Houses on the 2016
Implementation of IFRS 9
(Financial Instruments) in
Nigeria

136 BSD/DIR/GEN/LAB/ United Nations Security 20-Dec- New 765


09/044 Council Resolution 2270 2016
(2016)

137 BSD/DIR/GEN/LAB/ Discontinuation of 05-Sep- New 767


09/043 Prudential Returns Rendition 2016
through the Electronic
Financial Analysis and
Surveillance System (e-FASS)

138 BSD/DIR/GEN/LAB/ Write-Off of fully provided 28-Jul-2016 New 768


09/038 Non-Performing Loans

139 BSD/DIR/GEN/LAB/ Provisioning for Foreign 27-Jul-2016 New 769


09/037 Currency Loans

140 BSD/DIR/GEN/LAB/ Mandatory Registration and 12-Jul-2016 New 770


09/035 Listing of Commercial
Papers

141 BSD/DIR/GEN/LAB/ Review of Operational 28-Jun- New 771


09/033 Guidelines for Blacklisting 2016

142 BSD/DIR/GEN/LAB/ The Need for Banks to Build 11-Nov- New 777
adequate Loan Loss
xix
08/052 Reserve 2015

143 BSD/DIR/GEN/LAB/ Deadline for Transfer of 07-Sep- New 778


08/048 Federal Government Funds 2015
to Treasury Single Account

144 BSD/DIR/GEN/LAB/ Re: Public Sector Revenue 30-Jun- Review 779


08/032 Accounts with Deposit 2015
Money Banks

145 BSD/DIR/GEN/BAS/ Revised Guidance Notes on 24-Jun- New 780


08/031 Basel II Implementation and 2015
the Reporting Template for
Capital Adequacy Ratio

- Guidance Notes on
Pillar III - Market
Discipline

- Guidance Notes on
Supervisory Review
Process

- Guidance Notes on
the Calculation of
Capital Requirement
for Operational Risk

- Guidance Note on
the Calculation of
Capital Requirement
for Credit Risk –
Standardized
Approach
- Guidance Notes on
Regulatory Capital

- Guidance Notes on
the Calculation of
Capital Requirement
for Credit Risk

- Guidance Notes on
Supervisory Review
Process

xx
146 BPS/DIR/GEN/CIR/ Establishment of Industry 11-Jun- New 965
02/004 Fraud Desks 2015

147 BSD/DIR/GEN/LAB/ Re: New Cash Reserve 20-May- Review 968


08/024 Requirement 2015

148 BSD/DIR/GEN/LAB/ Recovery of Delinquent 22-Apr- New 969


08/022 Credit Facilities 2015

149 BSD/DIR/GEN/LAB/ Currency Substitution and 17-Apr- New 970


08/013 Dollarisation of the Nigerian 2015
Economy

150 BSD/DIR/GEN/MCF Cessation of Rendition of 14-Apr- New 972


/08/20 Returns on Micro Credit 2015
Fund

151 BSD/DIR/GEN/LAB/ Reporting Unethical 02-Apr- New 973


08/017 Conduct/Whistle Blowing 2015

152 BSD/DIR/GEN/LAB/ Need to Implement 31-Mar- New 974


08/016 Measures to Dissuade the 2015
Issuance of Dud Cheques in
the Nigerian Banking System

153 BSD/DIR/GEN/LAB/ Guidelines on Banc- 16-Mar- New 976


08/014 assurance Products- 2015
Referral Model

154 BSD/DIR/GEN/LAB/ Re: Cash Reserve 11-Feb- Review 982


08/009 Requirement Maintenance 2015
Calendar for 2015

155 BSD/DIR/GEN/LAB/ Re - Prohibition from 05-Feb- Review 983


08/008 Borrowing to Capitalize 2015
Banks

156 BSD/DIR/GEN/LAB/ Daily Rendition of Net Open 28-Jan- Review 984


08/006 Position 2015

157 BSD/DIR/GEN/LAB/ Oil and Gas Industry Credit 07-Jan- New 985
08/002 Risk Mitigation 2015

xxi
158 BSD/DIR/GEN/LAB/ Cash Reserve Requirement 05-Jan- New 986
08/001 Maintenance Calendar for 2015
2015

159 BSD/DIR/GEN/LAB/ Oil and Gas Industry Credit 10-Dec- New 987
OAG/07/046 Risk Mitigation 2014

160 BSD/DIR/GEN/LAB/ Prudential Regulation for 24-Oct- New 989


07/037 the Management of 2014
Foreign Exchange Risks of
Banks

161 BSD/DIR/GEN/LAB/ Re: Transfer of all Non- 11-Mar- Review 992


07/008 proprietary Assets to 2014
Licensed Custodians

162 BSD/DIR/GEN/LAB/ Guidelines for Processing 10-Oct- New 994


07/034 Requests from DMBs to 2014
Extend New/Additional
Credit Facilities to Loan
Defaulters and AMCON
Obligors

163 BSD/DIR/GEN/LAB/ Internal Capital Generation 08-Oct- New 997


07/033 and Dividend Payout Ratio 2014

164 BSD/DIR/GEN/LAB/ Re: Incessant Request for 03-Oct- Review 999


02/032 ISPO by Banks to Lend to 2014
States, Local Governments
and Community
Associations

165 BSD/DIR/GEN/LAB/ Prudential Regulation for 24-Oct- New 1,000


07/037 the Management of 2014
Foreign Exchange Risks of
Banks

166 BSD/DIR/GEN/LAB/ Re: Transfer of all Non- 23-Oct- Review 1,004


07/036 proprietary Assets to 2014
Licensed Custodians

xxii
167 BSD/DIR/CON/LAB Framework for the 05-Sept- New 1,005
/07/026 Regulation and Supervision 2014
of Domestic Systemically
Important Banks (SIBs) in
Nigeria

168 BSD/DIR/GEN/LAB/ Exclusion of Non- 05-Aug- New 1,014


07/021 Distributable Regulatory 2014
Reserve and Other Reserves
in the Computation of
Regulatory Capital of Banks
and Discount Houses

169 BSD/DIR/GEN/LAB/ Responsibility of all Banks, 10-Jul-2014 New 1,015


07/19 Discount Houses, and
Development Finance
Institutions with Respect to
Human Rights under the
Nigerian Sustainable
Banking Principles (NSBP)

170 BSD/DSIR/GEN/LAB Bancassurance and other 04-Jul-2014 New 1,017


/07/017 Non-Permissible Activities

171 BSD/GCA/BAS/CO Extension of Parallel Run of 02-Jul-2014 New 1,018


N/01/115 Pillar I of Basel II
Implementation

172 BSD/DIR/GEN/LAB/ Prohibition of Loan 30-Jun- New 1,019


O7/015 Defaulters from Further 2014
Access to Credit Facilities in
the Nigerian Banking System

173 BSD/DIR/GEN/LAB/ Guidelines on the 17-Jun- New 1,021


07/014 Establishment and 2014
Rationalization of Branches
and Other Outlets for Banks
in Nigeria

174 BSD/DIR/GEN/LAB/ Status and Reporting Line of 23-May- New 1,029


07/013 Chief Compliance Officers 2014

xxiii
of Banks

175 BSD/DIR/GEN/LAB/ Timelines for Rendition of 10-Apr- New 1,031


07/011 Statutory Returns through 2014
the Fina Application to the
CBN and NDIC

176 BSD/DIR/GEN/LAB/ Transmutation of Executive 13-Mar- New 1,032


07/009 Directors to Non-Executive 2014
Directors of Deposit Money
Banks

177 BSD/DIR/GEN/LAB/ Transfer of all Non- 11-Mar- New 1,034


07/008 Proprietary Assets to 2014
Licensed Custodians

178 BSD/DIR/GEN/LAB/ Re: The Need for the CBN 05-Feb- Review 1,036
07/004 Prior Clearance of 2014
Prospective Employees of
Banks

179 BSD/DIR/GEN/LAB/ Cash Reserve Requirement 03-Jan- New 1,038


07/001 Maintenance Calendar for 2014
2014

180 BSD/DIR/CIR/GEN/ Regulatory Capital 10-Dec- New 1,040


LAB/06/053/1 Measurement and 2013
Management Framework
for the Implementation of
Basel II/III for the Nigerian
Banking System

- Guidance Notes on
the Calculation of
Capital Requirement
for Market Risk:
Standardized
Approach

- Guidance Notes on
the Calculation of
Regulatory Capital

xxiv
- Guidance Notes on
the Calculation of
Capital Requirement
for Market Risk:
Standardized
Approach

- Guidance Notes on
the Calculation of
Capital Requirement
for Operational Risk:
Basic Indicator
Approach (BIA) and
the Standardized
Approach (TSA)

- Guidance Notes on
Pillar III: Market
Discipline

- Guidance Notes on
the Calculation of
Capital Requirement
for Credit Risk:
Standardized
Approach

- Guidance Notes on
Supervisory Review
Process

181 BSD/DIR/GEN/LAB/ Re: Guidelines for the 14-Nov- Review 1,219


06/051 Licensing, Operations and 2013
Regulation of Credit
Bureaux and Credit Bureaux
related Transactions In
Nigeria

182 BSD/DIR/CIR/RFCB/ Requirement to Surrender 02-Oct- New 1,236


GEN/VOL.1/45 Excess Foreign Currency 2013
Banknotes in Possession of
Banks to the Central Bank of
Nigeria

xxv
183 BSD/DIR/GEN/LAB/ Reporting of all Credit 10-Sep- New 1,237
06/040 Facilities of N1 Million and 2013
above in the Credit Risk
Management System

184 BSD/DIR/GEN/LAB/ Re: Review of the Cash 05-Sep- Review 1,238


06/039 Reserve Requirement (CRR) 2013
for Deposit Money Banks

185 BSD/DIR/GEN/LAB/ Review of the Cash Reserve 25-Jul-2013 Review 1,240


06/034 Requirement (CRR) for
Deposit Money Banks

186 BSD/DIR/GEN/RRTB Regulatory Reporting of 12-Jun- New 1,243


/06/027 FGN-Issued and CBN-Issued 2013
Treasury Bills

187 BSD/DIR/GEN/LAB/ External Auditors 30-May- New 1,244


06/025 Recommendations in the 2013
Management Letters in
Banks Audited Financial

188 BSD/DIR/GEN/LAB/ Re: Review of Risk Weights 02-Apr- Review 1,246


06/017 On Certain Industry 2013
Exposures in the
Computation Of Capital
Adequacy

189 BSD/DIR/GEN/RFS/ Re: Letter to Banks on the 28-Mar- New 1,248


06/016 Recapitalization of Foreign 2013
Subsidiaries

190 BSD/DIR/GEN/LAB/ Review of Risk Weights on 31-Jan- New 1,250


06/003 Certain Exposures in the 2013
Computation of Capital
Adequacy

xxvi
VOLUME ONE

1
SECTION I

PUBLISHED RULES, REGULATIONS AND GUIDELINES

The following is a list of rules, regulations and guidelines of the Central Bank of
Nigeria already in circulation and not contained within this compendium

1. Monetary Policy Department: Monetary, Credit, Foreign Trade and Exchange


Policy Guidelines for Fiscal years 2016/2017[Monetary Policy Circular no.42]
January, 2018.

2. Monetary Policy Department: Monetary, Credit, Foreign Trade and Exchange


Policy Guidelines for Fiscal years 2016/2017 [Monetary Policy Circulars no.41]
January, 2016.

3. Monetary Policy Department: Compendium of Monetary Communiques.


Monetary Policy Communiques Number 1 to 104 [2001-2015] December 2015.

4. Monetary Policy Department: The Compendium of Monetary, Credit, Foreign


Trade and Exchange Policy Guidelines Monetary Policy Circulars number 1 to
40. (1959-2015). October 2015.

5. Banking Supervision Department: Hand book of Rules and Regulations for


Banks and Discount Houses in Nigeria 1997-2012.

6. Trade and Exchange Department: The Compendium of Trade and Exchange


Circulars, 2008-2011 volume x, TED/FEM/FPC/GEN/01/001

7. Trade and Exchange Department: The Compendium of Trade and Exchange


Circulars, 2005-2007 volume ix, TED/AD/2/2005

8. Trade and Exchange Department: The Compendium of Trade and Exchange


Circulars, 2002-2011 volume 1, TED/AD/7/2002

2
9. Trade and Exchange Department: The Compendium of Trade and Exchange
Circulars, 2002-2004, volume viii, TED/AD/2/2002

10. Trade and Exchange Department: The Compendium of Trade and Exchange
Circulars, 1997-2001 volume vii, TED/AD/1/97

11. Trade and Exchange Department: The Compendium of Trade and Exchange
Circulars, 1993-1996 volume vi, TED/AD/1/93

12. Trade and Exchange Department: The Compendium of Trade and Exchange
Circulars, 1990-1992 volume v, TED/AD/1/90

13. Trade and Exchange Department: The Compendium of Trade and Exchange
Circulars, 1989 volume iv, TED/AD/1/89

14. Trade and Exchange Department: The Compendium of Trade and Exchange
Circulars, 1988 volume iii, FED/AD/1/88

15. Trade and Exchange Department: The Compendium of Trade and Exchange
Circulars, 1987 volume ii, FIE/AD/1/87

16. Trade and Exchange Department: The Compendium of Trade and Exchange
Circulars, 1986 volume I, ECD/AD/1/86

3
SECTION II

PART A: BANKING AND PAYMENTS SYSTEM CIRCULARS, POLICIES AND


GUIDELINES

4
5
6
7
REGULATION ON INSTANT (INTER-BANK)

ELECTRONIC FUNDS TRANSFER SERVICES IN NIGERIA

JULY, 2018

8
1.0 Preamble
In exercise of the powers conferred on the Central Bank of Nigeria (CBN) under
Sections 2(d), 33 (1)b) and 47(2) of the CBN Act 2007 to promote sound financial
system in Nigeria, issue guidelines, facilitate the development of an efficient and
effective payments system in Nigeria, the CBN hereby issues the following rules and
regulations for the efficient operation of Instant Electronic Funds Transfer Services in
Nigeria.

2.0 Scope
This Regulation covers Instant Electronic Funds Transfer Services in Nigeria on various
payment channels and any payment platform that seeks to provide Instant
Electronic Funds Transfer Services in Nigeria.

3.0 Objectives
1. setting out the rules for the operation of Instant Electronic Funds Transfer
services in Nigeria;

2. prescribing the rights and obligations of the parties to such services;

3. provision of the minimum standards for the operations of the parties to EFT
services;

4. stipulate procedures geared towards the enhancement of the soundness of


instant EFT services, while adequately protecting the interests of instant EFT
customers and operators.

4.0 Stakeholders
Stakeholders of Instant Electronic Funds Transfer Services shall include:
The Central Bank of Nigeria as the Regulator
1. Financial Institutions (FIs)
a. Deposit Money Banks
b. Other Financial Institutions (OFIs) i.e. licensed Primary Mortgage Banks,
Micro-Finance Banks, and Mobile Money Operators
c. Development Finance Institutions (DFI)

9
2. Instant EFT Service Providers
3. Customers (Originator and Beneficiary)
4. Any other stakeholder as may be determined by the CBN from time to time.

5.0 Rights and Responsibilities of Stakeholders to Instant EFT


This section sets out the rights and responsibilities of all stakeholders to Electronic
Funds Transfer under this Regulation.

5.1 Rights and Responsibilities of Instant EFT Service Provider

An Instant EFT service provider shall:


1. ensure compliance with the minimum standards issued by the CBN and as
amended from time to time;

2. establish and implement operational guidelines specifying in clear terms the


responsibilities of each party, operational rules and procedures (including
dispute handling) and liabilities of parties in the event of loss of funds arising
from negligence of any of the parties;

3. develop and circulate user guides to educate and enlighten other


stakeholders on its Instant EFT services;

4. maintain confidentiality of Instant EFT transactions and information obtained


in the course of discharging its responsibilities and shall ensure that these
responsibilities extend to its employees;

5. provide Name Enquiry support to minimize instances of wrong credits


6. put in place a robust Dispute Resolution System (DRS) for users of its platform;

7. establish adequate security procedures to ensure the safety and security of


its information and those of its clients, which shall include physical,
transactions, logical, network and enterprise security;

8. submit to the CBN an Enterprise Risk Management framework annually;


9. maintain a business continuity plan which must have received the ISO22301
certification or any other certification as may be prescribed by CBN from
time to time;

10
10. ensure full compliance with relevant provisions of rules, regulations,
guidelines, policies and directives issued by the CBN in relation to its
operations;

11. provide to the CBN, information on usage, volume and value of transactions
and other relevant information, as and when due, and in the format required
by the CBN;

12. maintain a robust Anti-fraud management system approved by the CBN or


connect to the CBN industry Anti-Fraud system;

13. provide its fraud management returns to NIBSS on daily basis which shall
include all instances of fraud and attempted fraud on its network; notify
customers at the point of onboarding, details of its operating hours and
service support contacts;

14. ensure compliance with AML/CFT regulations, most especially the KYC
requirements;

15. Comply with established transaction limits as prescribed by the CBN from
time to time.

5.2 Rights and Responsibilities of Receiving Sending Party


A Sending Entity in an Instant EFT transaction shall:
1. provide Name Enquiry support to the customer to minimize instances of
wrong credits.;
2. not provide instant EFT services to Walk-in customers without any bank
account in Nigeria;

3. fully secure debit against customer account before initiating transfer;


4. provide notification of debit to customer’s account, as agreed with the
customer;

5. Ensure that EFT messages contain the sender’s name, BVN and account
number, beneficiary name and account number, narration and other

11
information specified by customers at the point of initiating a transfer, to aid
reconciliation;

6. Ensure that EFT messages contain correct information (channel codes, time
stamp, transaction location etc) to facilitate accurate data analytics;

7. Notify customer of the status of Instant EFT as agreed in the terms and
conditions of its platform;

8. Refund into customer’s account full proceeds of failed transactions returned


by the Receiving Entity within 10minutes;

9. refund into customer’s account full proceeds of transaction which the


Sending Entity is unable to process within one (1) hour after the next
settlement closure;

10. Permit transfers from all its service delivery channels – branches, internet
banking, mobile banking, ATM/Kiosks, etc;

11. Publicize instant EFT services and the instant EFT FAQ to its customers;’
12. Receive customer complaints regarding EFT problems, and pursue resolution
to a logical conclusion, in line with the dispute resolution in clause 10;

13. Provide Funds Transfer receipt to the customer as transaction evidence;


14. Comply with the approved Anti-Money Laundering/Combating Financing of
Terrorism (AML/CFT) directive, and transaction value limits as may be set from
time to time by the CBN and other relevant regulatory bodies.

5.3 Rights and Responsibilities of Receiving Entity


A Receiving Entity in an Instant EFT transaction shall:
1. provide Name Enquiry support to EFT Service Provider to minimize instances of
wrong credits, subject to a Non-Disclosure Agreement, which shall limit the
usage to provision of Instant EFT services only;
2. apply Instant EFT proceeds to the customer’s account within 60 seconds;

3. ensure that Instant EFT proceeds have been credited to customer’s account
before confirming to the Sending Entity that transaction was successful;
12
4. where it is impracticable for the Receiving Entity to credit the customer’s
account within 60 seconds, due to security, system or other considerations,
the Receiving Entity shall notify the Sending Entity, beneficiary and/or the EFT
service provider(s) shall be notified of the issue with the assurance that
pending credits will be applied as soon as the issue is resolved but not
exceeding 24 hours;

5. notify customer of the Instant EFT receipt as agreed in the terms and
conditions of its platform;

6. ensure that bank statement of the beneficiary features, in the minimum, the
Sender’s name and Transaction Narration Information as contained in the
inward EFT message, to aid reconciliation by the beneficiary;

7. Provide in the transaction status notification, service support contacts a


customer can report to in case of mis-application of credit to a wrong
account;

8. upon receipt from a customer of a notification of an erroneous credit and


necessary reversal authorization, the Receiving Entity shall reverse the
erroneous credit;

9. process all inward instant debit transactions, subject to valid debit mandates;

10. publicize instant EFT services and the instant EFT FAQ to its customers;

11. Comply with the approved Anti-Money Laundering/Combating Financing of


Terrorism (AML/CFT) directive, and transaction value limits as may be set from
time to time by the CBN and other relevant regulatory bodies.

5.4 Rights and Responsibilities of the Customer


1. Provide accurate beneficiary account details for every EFT instruction.
2. Report problems arising from EFT transactions promptly to the
Sending/Receiving Entity.

13
3. Whenever a credit has been erroneously applied to the customer’s account
with the Receiving Entity, the customer shall promptly notify the Receiving
Entity and authorize the reversal of such erroneous credit.

4. Where the customer account is unfunded, the customer shall provide funds
within 24 hours, failure to provide funds shall be a ground for watch-listing of
the customer in the banking industry, Credit Bureau and reporting to law
enforcement agencies.

6.0 Types of Transaction


The following transaction types shall be allowed for Instant EFT:
1. One to one – single debit and single credit
2. One to many – single debit and multiple credits
3. Many to one – Multiple debits and single credit

7.0 Limitations on Instant Eft Amount


7.1 The limitations on Instant EFT values shall be set by customer, Sending and
Receiving Entities based on individual entity’s’ risk appetite subject to the
single Instant EFT limit per transaction as stipulated by the CBN.

7.2 Sending and Receiving entities shall advise the EFT Service Provider of such
limits who would circulate platform limits to all Sending and Receiving entities,
to guide platform operations.

8.0 Settlement Procedure


8.1 Instant EFT Settlement Cycle
8.1.1 Instant EFT transactions shall be settled as agreed amongst participants but
not later than T+1 basis.

8.1.2 The EFT service provider may operate more than one settlement cycle
per day to minimize the settlement risk associated with Deferred Net
Settlement system
8.2 Instant EFT Settlement Collateral

Sending and Receiving Parties to EFT transfers shall provide adequate


collaterals under CBN approved collateral management system.

14
9.0 Fees and Charges
Instant EFT service providers and Sending entities shall apply fees and charges in
compliance to the approved Guide to Bank Charges. The Receiving entity shall not
earn income on funds transferred. However, statutory levies/charges shall apply.

10.0 Dispute Resolution


10.1 General
10.1.1 The Instant EFT Service Provider shall properly document and circulate
among Sending and Receiving entities a Dispute Resolution System
(DRS) process.

10.1.2 All Instant EFT disputes shall be resolved within 3-working days.
10.1.3 Where the Sending and Receiving entities fail to agree, the aggrieved
entity shall report to the Director, Consumer Protection Department,
CBN within five (5) working days of the failure to resolve the dispute so
as to minimize customer pain

10.2 Wrong Transfer Due to Bank Error


10.2.1 Where a Sending Entity erroneously sends value contrary to customer’s
instructions due to wrong account number, wrong amount,
duplication, etc to a Receiving Entity and requests the reversal in
writing within 14 working days of the transaction, the Receiving Entity
shall oblige within one (1) business day without recourse to the
customer (beneficiary) of the Receiving Entity provided funds are
available. An automatic indemnity shall be inferred against the
Sending Entity making the reversal request.

10.2.2 Where funds are not available, the Receiving Entity shall immediately
notify its customer that the account was wrongly credited and provide
proof of such notification to the Sending Entity.

10.2.3 The Receiving Entity shall notify the customer the consequences of not
funding the account within 24 hours, which includes watch-listing in the
banking industry, Credit Bureau and reporting to law enforcement
15
agencies. The Receiving Entity shall watch-list the customer if he fails to
provide fund within seven (7) days

The Receiving Entity shall refund the transaction as soon as funds are
either partially or fully available.

10.2.4 The Receiving Entity shall not use the wrong credit to settle the
customer’s outstanding indebtedness to it and shall not consider such
credit as the property of the customer

10.3 Wrong Transfer Due to Fraud


The provisions of the CBN circular with reference number
BPS/DIR/GEN/CIR/02/004 dated 11th June, 2015 on the Establishment of
Fraud Desks or any amendment thereto shall apply.

10.4 Transfer Recall Due to Customer Error


Where a customer claims to have made a transfer in error, the following
provisions shall apply:

10.4.1 Where the beneficiary is known to the complainant, the Sending Entity
shall encourage the complainant to contact the beneficiary for an
amicable settlement;

10.4.2 where the beneficiary is not known to the complainant or a known


beneficiary refused to effect a refund to the complainant, the Sending
Entity having received a tenable claim from customer shall notify the
Receiving Entity who shall place a lien on the amount in the account
of the beneficiary and thereafter obtain the consent of the beneficiary
to execute refund;

10.4.3 where the beneficiary does not give consent, the internal auditors of
the Sending and Receiving Entities shall mediate between the two
customers within 2 weeks of the complaint to resolve the issue, and
their decision shall be final. Accordingly, the lien on the amount in the
beneficiary’s account shall not last more than 2 weeks;
16
10.4.4 Where the contested beneficiary has utilized the fund such that lien
could not be placed, and he/she refuses to fund the beneficiary
account to facilitate refund, the Receiving Entity’s Internal Auditors
shall watch-list the customer’s BVN and the Sending Entity may report
the incident to law enforcement agencies.

10.5 Exceptions Handling


The DRS procedure put in place by the Instant EFT service provider shall make
provisions for exception handling where the status of a transaction between the
EFT service provider and the Sending or Receiving Entities is indeterminate.

11.0 SANCTIONS

S/No Abuse Sanction


Monitoring
Mechanism

1 Based on N10,000.00 per item


A failed NIP transaction not
complaints of
reversed into customer’s
sender and/ or
account within 24 hours
beneficiary.

2 Delayed application of inward Based on N10,000.00 per item


NIP into beneficiary’s complaints of
accounts beyond 4 sender and/ or
minutes. beneficiary.
The sanctions above and any other prescribed in the Nigeria Bankers’ Clearing
System Rules or any amendment thereto, shall apply.

12.0 Amendments

Any stakeholder to the Instant EFT Service may propose amendments to this
Regulation. Such amendment proposals shall be formally forwarded to the office of
the Director, Banking and Payments System Department of the CBN for
consideration.

17
13.0 Definitions
13.1 EFT shall mean Electronic Funds Transfer

13.2 Instant (Inter-Bank) Eft or Instant Eft or Instant Payment shall mean Instant EFT
Payments system between two distinct entities when delivery from the Sending
Entity to the Receiving Entity takes place within 1 minute (60 seconds). A
payments system where delivery to the Receiving Entity occurs beyond 1 minute
is considered to be an ACH system.

13.3 Instant (Inter-Bank) Eft Service Provider shall mean a Nigerian company or
Financial Institution licensed by the CBN to carry on the business of facilitating
Electronic Funds Transfer services in partnership with Sending and Receiving
Entities.

13.4 Sending Entity shall mean a Nigerian company or Financial Institution


licensed by the CBN to carry on the business of facilitating Electronic Funds
Transfer services in Nigeria and who initiates an Instant EFT on behalf of its
customers.

13.5 Receiving Entity shall mean a Nigerian company or Financial Institution


licensed by the CBN to carry on the business of facilitating Electronic Funds
Transfer services in Nigeria and who receives the proceeds of Instant EFT on
behalf of its customer.

13.6 Walk-In Customer shall mean a person that does not have a bank
account maintained by the Sending Entity

18
19
NIGERIA BANKERS’ CLEARING SYSTEM RULES
(REVISED)

May, 2018

20
1. Preamble
In exercise of the powers conferred on the Central Bank of Nigeria (CBN) under the
Sections 2(d), 33 (1)(b) and 47(2) of the CBN Act 2007 to promote sound financial
system in Nigeria, issue guidelines, facilitate the development of an efficient and
effective payments system in Nigeria, and prescribe rules and regulations for the
efficient operation of the clearing and settlement system, the CBN hereby issues
the following rules for the operation of the Nigeria Bankers‟ Clearing System (NBCS).

1.1 Objectives

The objectives of the NBCS rules are:

1.1.1 To provide for efficient operation of Automated Clearing System,


speedy and efficient collection of cheques, ACH instrument, bills and
other payment instruments payable or deliverable to member banks of
the NBCS by a system or systems of clearing.
1.1.2 To prescribe appropriate standards for the use of the NBCS.
1.1.3 To provide a mechanism and framework for the clearing and
settlement of payment instruments among member banks.
1.2 Commencement
The Nigeria Bankers‟ Clearing System Rules shall take effect from 1st September,
2018. These rules supersede any previous NBCH rules, Cheque Truncation
Guidelines, NACS Rules and Clearing & Settlement Guidelines.
2. Application For Membership of the NBCS
2.1 Membership of the NBCS shall be restricted to CBN, Deposit Money Banks,
and the operator of the NBCS.
2.2 Any bank wishing to become a member of the NBCS shall present an
application in writing to the Director, Banking and Payments System
Department, CBN which shall contain an undertaking to be bound by these
Rules and such other information as may be prescribed by the CBN from time
to time.

21
2.3 Any licensed bank that is not a member of the NBCS may enter into an
agency agreement with any member bank of the NBCS for the purpose of
accepting cheques and other instruments drawn on it and for collecting
cheques drawn on other banks.
2.4 A list of newly approved members shall be communicated to all clearing
banks by the CBN / NIBSS.
3. Management of Clearing System

3.1 Establishment, Membership and Operation of the Nigeria Bankers’ Clearing


System Committee
3.1.1 There is established a committee to be known as the Nigeria Bankers‟
Clearing System Committee which shall be responsible for the
administration of the NBCS.
3.1.2 The Committee shall comprise representatives of Member Banks.
3.1.3 Each member bank shall nominate its Head of Clearing as a
representative to the Committee.
3.1.4 There shall be a Chairman for the Committee to be appointed by the
CBN.
3.1.5 The Committee shall meet at a place to be provided by the CBN
quarterly to discuss matters relating to the NBCS.
3.1.6 Attendance at meetings of the Committee shall be mandatory and
shall be a prerequisite for continued membership of NBCS.
3.1.7 A member bank may be penalized by suspension from participating in
clearing activities for such periods as shall be determined by the CBN
for non-attendance of two consecutive meetings of the Committee,
without a satisfactory reason communicated in writing within five (5)
working days before or after any scheduled meeting.

22
3.1.8 Meetings of the Committee shall be presided over by the Chairman.
The minutes shall be circulated to all members within one month after
the meeting for necessary adoption at the next meeting.
3.1.9 Where there is a proposed amendment to these rules, a certified copy
of the minutes of the meeting shall be forwarded to the ACH, Cheques
& IP Scheme Board through the Office of the Director, Banking &
Payments System of CBN for necessary action.
3.1.10 The quorum for any meeting of the Committee shall be not less than
half of the number of members.
3.1.11 A member of the Committee shall have one vote. The decisions of the
Committee shall be by a simple majority of members present and
voting. In the event of equality of vote, the Chairman shall have a
casting vote.
3.1.12 The decisions of the Committee shall be binding on all clearing banks.
Any party dissatisfied with the decision(s) of the Committee may
appeal to the Director, Banking and Payments System Department of
CBN.
3.2 Stakeholders
The stakeholders of the NBCS shall include:
a Central Bank of Nigeria
b NIBSS
c Deposit Money Banks
d Clearing System Committee
e Other Financial Institutions
f Payments System Service Providers (PSSP)
4. Eligible Financial Instruments
4.1 Eligible financial instruments for clearing purposes shall include:
4.1.1 Paper-based payment instruments such as cheques, managers‟
cheques, drafts, dividend/interest warrants, debit/credit notes, bankers‟

23
payments. These instruments will be converted to images for clearing
purposes;
4.1.2 Electronic payment instruments i.e. ACH instruments that are approved
for clearing/settlement in the Clearing System;
4.1.3 Any other instrument that may be approved by the CBN;
4.1.4 For the avoidance of doubt, Direct Debit, either in paper or truncated
form, shall no longer be eligible for clearing purposes. .
4.2 Each eligible paper-based payment instrument to be presented for clearing
purposes shall not exceed the maximum limit of N10million naira per face
value or as may be reviewed by the CBN.
5. Duration of Holding Instruments
5.1 Paper-based Payment Instruments deposited by the customer at any
member bank shall be deemed paid by 10pm of the next working day (T+1)
except where:
a) It is returned by the paying bank
b) A special caution or an extension of value date request has been
received from the paying bank;
5.2 Electronic payment instruments shall clear as follows:
5.2.1 Electronic payment Instruments shall be presented to the clearing
system same day if instruction is received from customer at least 2
hours before closure of session available for the financial instrument,
unless the relevant service agreement dictates otherwise;
5.2.2 Electronic payment Instruments shall be presented to the clearing
system in the next applicable session if instruction is received from
customer less than 2 hours before closure of session available for the
financial instrument, unless the relevant service agreement dictates
otherwise;

24
5.2.3 Where the account details are valid, direct credits shall be applied to
the beneficiary‟s account within 2 hours after the close of the clearing
session.
5.2.4 Direct debits shall be deemed paid by the same session next clearing
day, if not returned.

6 Settlement Rules and Procedures


6.1 General
6.1.1 Any bank wishing to become a Settlement Bank shall apply in writing to
the Director, Banking and Payments System Department, CBN. The
Application shall be approved upon the fulfillment of criteria as may
be prescribed by the CBN from time to time.
6.1.2 A non-settlement bank shall apply to a Settlement Bank to settle
payment instruments on behalf of the non-settlement bank.
6.1.3 The relationship between the settlement banks and their respective
non- settlement banks shall be governed by an agency agreement
entered into between the two parties which shall contain in the
minimum obligation set out in Section 6 of this Rules.
6.1.4 A Settlement Bank shall, for the duration of the agency agreement, be
the sole representative of a Non-Settlement Bank on an exclusive basis
for Clearing Settlement provided that a Non-Settlement Bank shall be
entitled to participate in clearing sessions through another settlement
bank where its Settlement Bank is suspended or otherwise unable to
participate in clearing sessions.
6.1.5 A Settlement Bank shall be financially accountable for the settlement
of its payment instruments and those of its non-settlement banks.
6.1.6 A Settlement Bank shall maintain with the CBN the minimum collateral
prescribed by the Bank.

25
6.1.7 The agency agreement shall specify clearing collateral to be pledged
by the non-settlement bank to the settlement bank. The minimum
clearing collateral to be pledged by a non-settlement bank shall be as
prescribed by the CBN.
6.1.8 Where a non-settlement bank‟s account with a settlement bank is not
adequately funded; an appropriate amount of the collateral shall be
immediately rediscounted. The amount of collateral that has been
utilized to fund the account shall be replaced within 24 hours, failing
which the settlement bank may decline to present or receive clearing
instruments on behalf of the non-settlement bank.
6.1.8 A Settlement Bank shall give the CBN and a non-settlement bank it
represents thirty (30) days‟ notice before terminating its agency
agreement for any other reason apart from 6.1.8 above. Similarly, a
non-settlement bank must give the CBN and the Settlement Bank
representing it, thirty (30) days‟ notice before terminating the agency
agreement.
6.1.9 A Settlement Bank shall maintain credit position in its current account
with the Central Bank of Nigeria and pledge to CBN, the required
settlement collateral in the form of securities such as NTB and FGN
Bonds. The value of such collateral shall be determined from time to
time by the CBN.
6.1.10 Where a Settlement bank fails to fund its account with the CBN, the
CBN may without recourse to the Settlement Bank, re-discount the
Settlement bank‟s securities pledged for purposes of recovering.
6.1.11 The Settlement Bank shall provide the Non-Settlement Bank with daily
statement of its Settlement Account, showing the net settlement
position.

26
6.1.12 A non-settlement bank shall maintain credit position in its current
account with its Settlement Bank and pledge to the Settlement Bank
the agreed clearing collateral.
6.1.13 The net settlement positions of a non-settlement bank shall be applied
to its settlement bank‟s account with the CBN
6.1.14 In the event of a Settlement Bank being stripped of its settlement status
for reasons other than those stated in section 6.1.11 above by the CBN,
the Bank shall grant a maximum of one month notice to that
Settlement Bank and its non-settlement banks.
6.2 Obligations of Settlement Banks
6.2.1 A Settlement Bank shall settle for a non-Settlement Bank with which it
has an agency settlement agreement.
6.2.2 A Settlement Bank shall post into the account of a non-Settlement
bank under it the net settlement position of the non-Settlement Bank.
6.2.3 A non-Settlement bank shall within 24 hours credit its settlement
account with the Settlement Bank where the net settlement position is
a debit.
6.2.4 Where a non-Settlement bank fails to fund its account with the
Settlement Bank, the Settlement Bank may without recourse to the
Non-Settlement Bank rediscount the Non-Settlement bank‟s collateral
pledged for purposes of recovering and netting off the debit balance
in the Settlement Account.
6.2.5 Settlement Bank shall agree with the Non-Settlement Bank on the
settlement exposure limit in respect of payment instruments and how to
monitor same.
6.3 Obligations of Non-Settlement Banks
6.3.1 A non-Settlement Bank shall open an account with its Settlement Bank
wherein the net clearing position of non-Settlement Banks would be

27
credited and/or debited as may be appropriate after each clearing
session (hereinafter called “the Settlement Account”).
6.3.2 Non Settlement Banks shall pledge collateral in the sum of an amount
not less than N250,000,000.00 (Two hundred and fifty million naira only)
or any other sum as may be prescribed by the CBN with Settlement
Bank which shall serve as collateral for any debit balance in the
Settlement Account. This amount shall be subject to review based on
transaction volumes.
6.3.3 A Non-Settlement Bank shall indemnify Settlement Bank against any
liability or loss whether direct or indirect that may arise as a result of this
agreement.
6.3.4 A Non-Settlement Bank shall pay an annual Settlement fee to the
Settlement Bank as may be agreed between them from time to time.
6.3.5 In the event of any shortfall in the collateral arising from a
rediscounting, a Non-Settlement Bank shall make up the shortfall in the
collateral before the commencement of the next clearing session from
the date of re-discounting, in order to bring the aggregate value of the
collateral up to the initial value of the collateral.
6.3.6 In respect of 6.3.5 above, Non-Settlement Bank shall undertake to bear
the cost of re-discounting the collateral pledge necessitated by a
need to recover the debit balance in the Settlement Account.
6.3.7 Non-Settlement Bank shall agree with the Settlement Bank on the
settlement exposure limit in respect of payment instruments and shall
keep within the set limit.
6.4 Suspension from the Clearing System
A member bank shall be suspended from participating in any clearing
session on the following reasons:
6.4.1 Where the Settlement Account is not adequately funded, an
appropriate amount of the clearing collateral shall be immediately

28
rediscounted. The amount of clearing collateral that has been utilized
to fund the account shall be replaced within two (2) business days,
failing which the bank shall be suspended from further participation in
clearing activities;
6.4.2 Where the collateral so discounted is insufficient, the bank shall be
suspended forthwith and further measures shall be taken in
accordance with the settlement guideline;
6.4.3 When a bank overdraws its settlement account maintained with CBN for
three consecutive working days, notwithstanding the provisions of
section 6.4.1
6.4.4 When a non-settlement bank, persistently overdraws its account with its
settlement bank and the settlement bank has communicated its
intention to stop settling for such a non-settlement bank to the CBN
and NIBSS.
6.4.5 Failure to provide the requisite infrastructure to enable electronic
exchange of eligible payment instrument.
6.4.6 Failure to maintain adequate collateral with either the CBN in case of a
settlement bank or its settlement bank in case of a non-settlement
bank in accordance to section 6 of these Rules.
6.4.7 When the bank is suspended by the Management of the CBN in the
interest of the system for any other reason not hereto afore mentioned
Every suspension shall last until such a time reinstatement is approved
by the CBN
6.5 Confidentiality of Information
6.5.1. A settlement bank shall maintain strict confidentiality in respect of any
confidential information made available to it pursuant to their
settlement agency agreement and may not disclose same except
with the express permission of the Non-Settlement Bank or as may be
lawfully required.

29
6.5.2. Settlement Bank shall not use any information provided by Non-
Settlement Bank for any purpose other than as permitted or required
under the Agency Agreement.
7. The Nbcs Cheque Truncation Model

7.1 For the purpose of this rule, “cheque” shall include all paper based -
payment instruments

7.2 Model for truncation

The overall model for NBCS shall be any of the following:

7.2.1 Generic model – „Image and Data‟ model:

Cheque images and MICR data flow from the Presenting Bank through
to thePaying Bank.

7.2.2 Data Capture – „Presenting Bank‟ model:

The cheque is dematerialised by the bank where the cheque is initially


presented. Cheques shall be truncated at the Presenting Bank within
prescribed time frame defined by these Rules.

7.2.3 Data and Image Exchange - Clearing System Model:

The Clearing System acts as an intermediary for data and image flow
between the presenting and the paying banks.

7.3 Data and Image Archive:

NIBSS shall be the Central Image Warehousing Agency (CIWA) for storage
and certification of cheque images. The paying bank may request for any
image from CIWA for the purpose of proof of payment up to a period of 10
years. Such data retrieval shall be provided on online real time basis.

7.4 Data Standards

The prescribed data standards for cheque truncation shall be as advised by


NIBSS.

30
7.5 Value Limits on cheque truncation

All cheques that meet the Nigeria Cheque Standard are eligible for cheque
truncation subject to value limits of N10 million each or as may be
prescribed by the CBN.

7.6 Retention of physical cheque

The retention period of physical cheques by the presenting bank shall be


minimum of five (5) years.

7.7 Data Storage

The operator of the Automated Clearing System shall keep electronic


copies of the cheque images for a minimum period of 10 years.

7.8 Minimum Storage Standards

The Cheque front shall be stored in both Grey Scale and Black-and-White
format while the reverse side shall be stored in Black-and-White only.

7.9 Use of Dedicated Secure Network

Images and MICR data, duly encrypted & digitally signed by the
presenting bank, shall travel over a secured network connecting all the
Clearing System Gateways (CSGs) with the Clearing System.

7.10 Transmission of Image / Data

The presenting bank‟s capture system shall transmit the MICR data and
images of the cheques to its Clearing System Interface electronically or
through electronic storage media.

7.11 Media Based Transmission of Exchange Files

All data and image files to be exchanged shall be encrypted using Public
Key Infrastructure (PKI) that is used during network transmission to create the
files for transfer using physical electronic media options.

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8. Clearing Duration and Return Period
8.0 Time limit
The clearing cycle for each category of instruments shall be as stated below
and is subject to review by the CBN from time to time, in consultation with
clearing banks.

S/N INSTRUMENT CLEARING RETURN PERIOD


TYPE PERIOD
1 CHEQUES T+1 5pm T+1
2 ACH CREDIT 24 HOURS 24 HOURS
3. ACH DEBIT 24 HOURS 24 HOURS

8.1 Return of Payment Instruments


8.1.1 All clearing instruments returned unpaid shall bear the appropriate
returned reason code as listed in Appendix A annexed hereto.
8.1.2 Where the unpaid instrument is a fraudulent / spurious instrument, the
Paying bank shall return the instrument as unpaid. The paying bank
shall notify the presenting bank in writing and copy the Chief Inspectors
of both banks, the Director, Banking and Payments System Department
and NIBSS.
8.1.3 The presenting bank shall write the return reason on the physical
instrument in generally acceptable format and must not be at
variance with the actual returned reason code as advised by the
paying bank before delivering the returned physical cheque to the
beneficiary.
8.2 Delayed Application/Return of Direct Credits
8.2.1 Clearing banks are required to apply inward direct credits to
beneficiaries‟ accounts. A receiving bank that delays the application
of direct credits or return such outside the allowed window shall face
appropriate sanction, as stipulated in these Rules.

32
8.2.2 The aggrieved bank shall advise the erring bank in writing with
acknowledgement copy advised to NIBSS; the erring bank has three
working days to engage the other party in dispute resolution process,
failing which NIBSS shall execute the sanction through her interchange
fee service. All disputes shall be resolved by the Director, BPSD, or his
designate, in conjunction with NIBSS, and its decision shall be binding.
9. Procedure for Clearing
9.1 General Procedure
Clearing Period – Under the NBCS, cheques shall clear on a T+1 basis such
that Customers received value in the evening of T+1 by 10pm or as
otherwise advised by CBN.
A typical transaction flow shall be as follows:

TRANSACTION DAY CHEQUE CLEARING CYCLE


DAY 1 (T) Fresh cheques are deposited at bank
branch
DAY 2 (T+1)  Cheques are presented at
the clearing
System

 Paying Bank to return


unpaid instruments same day

 Beneficiary Bank gets value

 Before processing of end of


day (EOD), bank customer
receives value for cheques not
returned.

9.1.1 Clearing Settlement Cutovers


The Clearing System shall operate 4 Settlement cutovers as follows:
a. Settlement Cutover 1 (8am): Permits all clearing instruments
(Cheque, NEFT–fresh and returned items)
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b. Settlement Cutover 11 (10am): Permits all clearing instruments
(cheque, NEFT–fresh and returned items,)
Note: NIBSS Plc. may apply a charge as specified by CBN for Fresh cheque
transmitted during the 11th Settlement Cutover where a bank transmits
more than 100 cheques.

c Settlement Cutover 2 (2pm): Permits only Returned Cheques,


fresh NEFT and Returned NEFT.

d Settlement Cutover 3 (5pm): Permits only Returned Cheques and


Returned NEFT Instruments.

9.1.2. Settlements for Cutovers 1, 11 & 2 shall be same day, while settlement
for Cutover 3 (Return Instruments) shall be next working day.
9.1.3 All unpaid clearing cheques shall be returned same day.
9.1.4 NIBSS shall ensure that all inward files and reports are available to banks
for download within 1 hour of every settlement cutover.
9.1.5. CBN, NIBSS and at least two-third of clearing system members may
change Clearing timeline, as circumstances may require.
9.1.6. NIBSS with the approval of CBN may create a new cutover or delete a
cutover as the case may be with proper notice to clearing system
members.
9.2 Point of Truncation
The determination of the point of truncation shall be at the discretion of the
Presenting Bank. Provided that banks shall put in place a process of proper
authorization and controls to ensure that all cheques are processed
accurately and in accordance with the service prescribed in rule 9.1.1
9.3 Clearing Procedure at the Presenting Bank
9.3.1 Preliminary Verification
It shall be the duty of the Presenting Bank to validate the physical
instrument and it shall observe reasonable precautions such as:

34
 verifying the tenor of the instrument,
 physical feel of the instrument and
 Identifying evidence of tampering that is visible to the eye or under
Ultra Violet light.
9.3.2 The Presenting Bank shall exercise due diligence in accordance with the
minimum security standard specified in the Nigeria Cheque Standard.
9.3.3 Crossing (Stamping)
Every cheque received for the purpose of clearing are required to be
stamped compulsorily on its face (physical or electronic) by the
presenting bank, while presentation stamp on the reverse side shall be
optional. The presenting bank has the responsibility to ensure that all
electronically stamped cheques are stamped physically before they
are archived.
9.3.4 The following processes shall be handled as set out in Appendix B:
I. return processing,
II. capture of images and data,
III. reject repair and balancing,
IV. processing at clearing system gateway (CSG) – Outward, Inward
and return processing
V. Clearing, Image Quality Analysis (IQA) and Failure Handling,
VI. Item Processing and
VII. Special Processing at Clearing System
10. Clearing Session Quorum
Simple majority of member banks may make recommendations to the CBN
for a change in clearing operation or activities.
11. Operational Fees of the Clearing System
11.1 All Clearing members shall pay reasonable fee for transactions processed
on the clearing system to NIBSS based on the approved rate by CBN.

35
11.2 Each member bank shall pay an annual fee as may be determined by
the Clearing System Committee for the Committee‟s activities.
12 Responsibilities of Member Banks
12.1 General Responsibilities
12.1.1 Member banks shall ensure that account opening documentations
contain clauses that clearly specify the liability of customers in respect
of clearing activities.
12.1.2 Subject to the provisions of these Rules, member banks shall not
accept, clear or pay any payment instrument into any account other
than the account of the beneficiary as stated on the face of the
instrument.
12.1.3 At the end of every clearing session, a Settlement Bank shall reconcile
its net settlement position with the figure advised by NIBSS and where
there is any discrepancy, the Settlement Bank shall alert CBN and NIBSS
immediately for corrective action.
12.1.4 Member banks shall participate at each clearing session irrespective of
whether they have instruments to present or not.
12.1.5 Member banks shall document the process flow and ensure that
adequate control mechanisms are in place. Special care and
adequate physical check shall be taken during re-scanning of
instruments and re-presentation of instruments.
12.1.6 Member banks shall generate internal control reports at the end of the
session and day to effectively reconcile same. Any identified
discrepancy shall be resolved not later than the following business day.
12.1.7 Member banks shall put in place a framework for mitigation of
operational, legal and reputational risks, in compliance with the
Electronic Banking Guidelines.
12.1.8 Where a Paying Bank is unable to return a cheque within the clearing
deadline, it shall serve a Special Caution Notice on the Presenting

36
Bank. The Deadline for submission of Special Caution Notice shall be
two (2) hours after the closure of return cheque session.
12.1.9 Special Caution Notice shall be acknowledged by the Presenting Bank
to be binding.
12.1.10 The Paying Bank shall send debit note to the Presenting Bank within 2
working days failing which the Presenting Bank may give value
without further recourse to the Paying Bank.
12.1.11 Where there is a debit note on the Special Caution Notice received
by the Presenting Bank and not returned same working day, it shall be
deemed as honoured.
12.1.12 On the request of the Paying Bank, the Presenting Bank shall release a
physical instrument to the Paying Bank who may retain it for not more
than a period of 3 months effective from the date of the release to
the Paying Bank. Where required by law or regulation, the Paying
Bank may request for an extension after which period, the Paying
Bank shall return the physical instrument to the presenting Bank for
safe keeping.
12.1.13 The Presenting Bank shall reject other banks‟ payment instrument at
the point of deposit or scanning where the payment instrument does
not meet the Nigeria Cheque Standard or where the information on
the payment instrument‟s MICR line is wrong or any other irregularity is
noticed on the payment instrument.
12.1.14 The request for extension of value date must be sent by the Paying
Bank at least 30 minutes before official closure of last session (return
session) by NIBSS.
12.1.15 The Presenting Bank has the right to reject cheques written in colours
other than black or blue.
13 Responsibilities of Presenting Bank
13.1 Presenting Bank shall store physical payment instruments for five (5) years

37
13.2 The Presenting Banks shall put in place arrangements to physically archive
the cleared instruments for ready retrieval, whenever required at a later
date.
13.3 A Presenting Bank shall verify the validity of the payment instrument
presented in respect of its tenor and other features. Images and MICR
data to be sent to the clearing system must match.
13.4 A Presenting Bank shall be liable for any act of omission or commission
that causes any loss of funds as a result of its non-compliance with rule
13.3.
13.5 The Presenting Bank shall ensure that the data transmitted is the data
meant for that day‟s clearing.
13.6 A Presenting Bank shall be deemed negligent if:
(i) A customer‟s account is not properly opened and all necessary
KYC (Know Your Customer) requirements are not met.
(ii) It fails to up-date its customer-information to ensure that its
customers and their referees are genuine with valid and traceable
addresses.
(iii) On the face of the presented payment instrument, irregularities
such as erasures, post-dated or stale mutilation, are evident.
(iv) It allows the withdrawal of cleared funds from payment
instruments lodged into Dormant Accounts without reactivation of the
accounts.
(v) It pays the proceeds of Instruments of unusually large amount(s),
relative to the account‟s transaction history without further inquiry or
exercising due diligence.
(vi) If it presents cheques with alteration/erasures which are visible
under Ultra Violet light or eye.
13.7 The Presenting Bank shall take appropriate care to match the name of
the beneficiary with the account name before processing ACH credit. The

38
Receiving bank shall not be liable if it applies fund into the account
number sent to it. The liability for wrong account shall be that of the
Presenting Bank and not the Receiving Bank.
13.8 Presenting Bank shall include the payee name, payee account number
and payee Bank Verification Number in the data being presented for
payment instruments.
14 Responsibilities of Paying Bank
14.1 A bank that negligently pays a defective instrument shall be liable
provided that a bank shall not be liable for such payment if the payment
is made in good faith, and in accordance with established banking
procedures such as obtaining proper and valid confirmation from its
customer in respect of the payment instrument clearing cheques, where
applicable. (The minimum threshold for confirmation is N500,000.00).
Note: The Member banks shall have the right to set any amount under the
minimum confirmation threshold for their internal cheque processing.
14.1.2 The paying bank shall verify the signature on the image of a cheque.
14.2 Responsibilities of Members to Other Financial Institutions
Member banks shall execute Agency Agreement with other financial
institutions that collect payment instruments (e.g. Primary Mortgage
Institution, Microfinance Bank, Stock Brokers and Finance Systems etc)
14.2.1 The agency agreement shall include indemnity clause in favour of
member banks.
14.3 Responsibilities of Member Banks to their Customers
14.3.1 A member bank shall notify its customers of any un-cleared payment
instruments deposited within 24 hours of the deposit.
14.3.2 A member bank shall give value for the payment instruments at the
end of the due date (where due date is lodgment date + 1) except
where the payment instruments are dishonored or returned unpaid
within the stipulated clearing duration or are the subject of an inquiry.

39
14.3.3 A member bank shall indicate the value date of a lodged cheque on
the cheque deposit slip and a notification to customer (if any) in
respect of the deposit shall also indicate the value date and time
which shall not be later than 10pm local time on the value date.
14.4 Responsibilities of NIBSS Plc.
14.4.1 NIBSS shall ensure that the Clearing System Table is synchronized with
the master table information which may include sort codes,
transaction codes, branch codes, bank codes, calendar, and
designated branches.
14.4.2 NIBSS shall ensure that any change in the Clearing System Table is
automatically updated on the online CSGs, and shall inform member
banks to update their capture systems immediately. CSG supervisors of
member banks shall ensure that their internal systems are updated
accordingly.
14.4.3 It shall be the responsibility of member banks to ensure that their offline
CSGs (CSGs which are not connected to CS over network) are
updated before the commencement of any session after the change.
15 Dispute Resolutions
15.1 A breach of these Rules shall be handled as follows:
15.1.1 The complaining party shall communicate observed breach in writing
to the offending party.
15.1.2 Where the complainant is a customer and no satisfactory response is
received after 10 working days, the complaining customer shall notify
the Director, Consumer Protection Department of CBN with a copy to
the Director, Banking and Payments System Department.
15.1.3 Where the complainant is a bank and no satisfactory response is
received after 3 working days, the complaining member bank shall
forward its complaint to the Director, Banking and Payments System
Department.

40
15.1.4 The parties shall have recourse to the court of law in the event of
unsatisfactory resolution of a breach at the CBN level.
16 Abuses of Clearing Process
16.1 The abuses of the Clearing System are set out in the Sanction Grid in Rule
23.
16.1.1 The CBN may from time to time prescribe sanctions for any other
abuses.
16.1.2 All monetary penalties payable under the Sanctions Grid shall be paid
into the Penalty Account of the CBN.
16.2 Recall of Inter-bank Electronic Fund Transfers (ACH)
Procedure for the recall of funds wrongly credited to beneficiary account
at any member bank as a result of technical issues or operational error from
presenting bank is as follows:
16.2.1 The Presenting Bank shall first notify the Receiving Bank in writing or by
email. Such a notification shall be deemed as an indemnity in favour
of the Receiving Bank by the Presenting Bank.
16.2.2 Upon receipt of the notification, the Receiving Bank shall place a hold
on the amount in the beneficiary‟s account and shall return the funds
to the Presenting Bank within 7 days of receiving the notification
provided the customer has not withdrawn the funds from the account
subsequent to the wrong credit.
16.2.3 Where the wrong credit has been withdrawn by the Paying Bank‟s
customer, the watch-listing provisions under the BVN Framework shall
apply. This is without prejudice to any other rights of the Presenting
Bank to take any legal step to recover the funds from the customer.
16.2.4 The Receiving Bank shall not use the wrong credit to settle the
customer‟s outstanding indebtedness to it and shall not consider such
credit as the property of the customer.

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17. Industrial Action
17.1 Industrial Action at Clearing Member Bank(S)
17.1.1 A member bank affected by an industrial action shall notify the
Director, Banking & Payments System Department of the CBN and
NIBSS immediately the industrial action commences, if the industrial
action is such that prevents the member bank from participating in
any clearing session. NIBSS shall communicate the information of the
industrial action to all other member banks and temporarily exclude
the affected member bank from clearing activities.
17.1.2 If the member bank fails to notify the CBN and NIBSS as required by rule
(17.1.1.) the member bank shall be deemed to be part of the clearing
system for the period.
17.1.3 Member banks may reject financial instruments drawn on a member
bank that is unable to participate in clearing sessions for more than
two (2) working days due to industrial action until the affected
member bank resolves its industrial action and returns to the clearing
System.
17.1.4 A member bank returning to the clearing system after an industrial
action shall give one business day notice to the Director, Banking &
Payments System Department, of the CBN, NIBSS and all member
banks of its intention to return to the clearing system and may return to
the System the next business day.
17.1.5 In the case of payment instruments which had gone through the
clearing before the industrial action started in the member bank, one
additional day of grace shall be counted for the value dates of the
instruments above the normal clearing duration from the date the
member bank returns to the clearing system.

42
18. Operation of Clearing System During an Emergency
In the case of any event that prevents the clearing system from operating for a
period of time, all working days during the period shall not be counted as
working days for purpose of determining clearing duration. The CBN shall inform
all member banks of such event and give appropriate directives.
19. Amendments
19.1 These Rules may be amended by the CBN from time to time, as it may
consider necessary.
19.2 Member banks may propose amendments to the Rules by forwarding same
to the Director of Banking & Payments System Department.
20. Adjudication of Disputes
Any dispute between member banks on clearing activities shall be referred to
the CBN for adjudication. The decision of the CBN shall be binding on the
affected member banks.
21. Sanctions Grid
Appropriate sanctions shall be imposed by the CBN on any member bank that
commits any of the abuses listed in this rule 15.
S/No Abuse Monitoring Sanction
Mechanism
1 Transmission of data Based on N1,000.00 per item
that is not in agreement paying
with the images. bank
complaints
2 Clearing of Based on The presenting and paying
payment paying bank shall be jointly liable
instrument with bank/prese (50:50) if there is a loss.
irregularity such as nting bank
stale, post-dated, complaint
amount in
words and figures differ
which lead to loss of
fund.

43
3 Loss of funds due to Based on Paying Bank shall be fully
failure of Paying Bank customer‟s liable
to detect duplicated complaint.
payment instrument
4 Re-presentment of Based on N1,000.00 per item
already paid payment paying
instrument bank
complain
5 Failure to return an Based on Paying Bank shall be fully
unpaid instrument customer‟s liable
within the clearing complaint.
period/window without
proper notice to the
presenting bank
6 Presenting bank‟s Based on Presenting Bank shall be fully
failure to honour Paying liable
Special Caution Notice Bank
in line with section complaint
12.1.9 of these Rules.
7 Banks Charging Bank or 200% of the charge/fee
beneficiaries for Inward customer subject to a minimum of
ACH credits except as complaint N5,000.00 to be charged per
to
prescribed by the CBN. item against the bank. In
CBN
addition, a refund of the
charge to the beneficiary of
the inward ACH credit.
8 Delayed presentation Based on 10% of ACH item with a cap
of customers ACH customer‟s of
instruments on the complaint N10,000.00 per payment
to instrument
clearing system.
CBN
9 Returning Inward NEFT Based on 10% of instrument value
items outside the return presenting subject to a minimum of
window Bank‟s N10,000.00 per day , per item
complaint.
10 A bank refusing to pay When a 10% flat charge of face value
its own instrument clearing or N10,000.00 flat charge per
drawn on itself member cheque, whichever is higher.
(Manager‟s complains.
In addition, Paying Bank shall
Cheque/Draft) other
pay full instrument value to
than in cases of forgery
44
or theft. Presenting Bank

11 Presenting of As reported N1,000.00 per item.


NonNUBAN transactions by NIBSS.
for clearing.
12 A member bank not As reported N5,000.00 per item per day.
treating (approve or by NIBSS.
reject) Direct Debit
mandates within 48
hours of getting alerts.
13 Frivolous return of Direct Based on N10,000.00 per item.
debit instruments, complaint
where valid mandate of
exists and customer has customeror
sufficient Presenting
funds. Bank.
14 Delayed application of Based on N5,000.00 per item.
inward ACH items beneficiary‟
received from clearing s
into customer account complaint.
i.e. beyond 2 hours
after the closure of the
session where the NEFT
item contains valid
account details.
15 Late transmission of Based on N50,000.00 within the first hour
clearing data i.e. where NIBSS and every N50,000.00 for
NIBSS had to delay the report. every additional hour.
closure of a clearing
session to
accommodate late
transmission by a bank.

45
16 Presenting or Paying Based on N10,000.00 per item.
Bank that applies customer‟s
account maintenance complaint. In addition, refund of the
charge to the customer.
charge on debit entries
arising from returned
cheques processing
17 Undue delay in Based on N10,000.00 per item per day.
transmission of cheques customer‟s
valid for presentment complaint.
18 Presenting Cheques Based on N1,000.00 per item
which do not meet the Paying
requirements of the Bank‟s
Nigerian Cheque complaint.
Standard.
19 Where a Receiving Based on N10,000.00 per item per day
Bank fails to honour an Presenting
ACH credit recall Bank‟s
request (made within complaint. In addition, NIBSS to recover
14 days of the the instrument value from the
erroneous presentment) Receiving Bank in favour of
in accordance with the Presenting Bank.
Rule
16.2
20 Failure to return a Based on N10,000.00 per item per day
wrongly applied inward Presenting
ACH item within 7 Bank‟s NIBSS to recover the
working days after complaint. instrument value from the
receiving a complaint Receiving Bank in favour of
made by the the Presenting Bank.
Presenting
Bank.
21 Payment of Fraudulent As stated As stated below
Instruments: below
21.1 Where the amount of Based on The Presenting Bank shall be
the fraudulent payment Paying fully liable for the value lost.
instrument is below the Bank
confirmation threshold complaint
and the alterations are
visible to the eye or
under Ultra Violet light.

46
21.2 Where the amount of Based on The Paying Bank shall be fully
the fraudulent payment customer liable for the value lost.
instrument is below the complaint .
confirmation threshold
and the payment
instrument was not
altered but the
signature was forged.
21.3 Where the amount of Based on Both presenting Bank and
the fraudulent payment customer‟s paying Bank shall be jointly
instrument is equal to or complaint liable for the value lost on a
50:50 basis.
above the confirmation
threshold and the
alterations are visible to
the eye or under Ultra
Violet light.
21.4 Payment where there is Based on The Paying Bank shall be fully
no confirmation and customer‟s liable for the value lost.
the amount of the complaint
fraudulent payment
instrument is equal to or
above the confirmation
threshold even when
the payment instrument
was not altered.
21.5 Where the fraudulent Based on The Paying Bank shall be fully
payment instrument is a complaint liable
Bank Draft/Manager
Cheque and the
Paying Bank could
have detected the
fraud had it exercised
due care and skill.
21.6 Where the fraudulent Based on The Presenting Bank shall be
payment instrument is a complaint fully liable
Bank Draft/Manager‟s
Cheque, there are
alterations visible under
Ultra Violet light, and
the Presenting Bank
47
failed to detect the
fraud.

21.7 Where the fraudulent Based on The paying bank and


payment instrument is a customer‟s presenting
Bank Draft/Manager complaint Bank shall be fully liable 50:50
Cheque and there are
alterations which
Presenting Bank could
have detected using
Ultra Violet light, and
the
Paying Bank could also
have detected the
fraud.
22 Frivolous return of other Based on Presenting Bank shall pay a
banks‟s payment complaint fine of N10,000.00 per
instrument(s) that meet from Paying payment instrument.
Bank
Nigeria Cheque
Standard for reasons
other than allowed in
Section 12.1.13.
23 Transmission of more Based on Presenting Bank shall pay a
than 100 cheques in NIBSS fine of N50,000.00
the special clearing report
session
(11)
24 Willful presentation Based on Presenting Bank shall pay a
of wrong payment Paying fine of 10% of face value
instruments on Bank‟s
other banks complaint
25 Persistent presentation Based on Presenting Bank shall pay a
of fake/forged Paying fine of 20% of face value of
instruments on other Bank‟s the payment instrument
banks complaint
26 Member banks failing Based on N 250 per instrument
to indicate the correct Presenting
reason for returning a Bank‟s
payment instrument complaint

48
22. Definitions

ACH: Automated Clearing House Any form of electronic payment instruments


(single or bulk items) facilitating direct credit or direct debit to target bank
accounts, through the Automated Clearing System infrastructure.

Member Banks: All banks approved by the CBN to participate in clearing system
activities. These could be settlement or non-settlement banks

Clearing Day: The day of the exchange of payment instruments between the
Presenting Bank and the Paying Bank.

Clearing Session means the period between the commencement and closing of a
clearing cycle.

Clearing System Committee means the committee established under rule 3.

NBCS: means Nigeria Bankers Clearing System

NEFT means NIBSS Electronic Funds Transfer

NIBSS means Nigeria Interbank Settlement System Plc

NTB means Nigeria Treasury Bills

Payment Instruments mean an instrument, authority or a process enabling a payer


to issue a payment instruction and includes currency or any electronic
means of effecting payment

Settlement Banks means CBN, and member banks appointed by the CBN to settle
for themselves and other member banks, known as non-settlement banks.
Stale Cheque means cheque presented for clearing more than six (6) months
after the date on the face of the cheque.

Working days means Mondays through Fridays excluding public holidays.

49
Cheque— an instrument, payable on demand and drawn on or payable through
or at an office of a bank, whether or not negotiable, that is handled for
forward collection or return.
Cheque Truncation— means the conversion of a physical cheque into a substitute
electronic form for transmission to the Paying Bank.
Ordinary Caution Notice – This is an electronic or a physical document issued by the
Presenting Bank to the Paying Bank about a suspicious payment instrument.
Special Caution Notice – This is an electronic or a physical document issued by the
Paying Bank, after the closure of the return window to alert the Presenting
Bank not to give value to such clearing instrument.
MICR‘ (Magnetic Ink Character Recognition)Line (means,the numbers, which may
include the bank routing number, account number, cheque number,
cheque amount, and other information, that are printed near the bottom of
a cheque in magnetic ink in accordance with the Nigeria Cheque
Standards.
Paying Bank means (i) the bank by which a payment instrument is payable.
Person— means a natural person, corporation, unincorporated company,
partnership, government unit or instrumentality, trust, or any other entity or
organization.
Presenting Bank— means the bank that receives the payment instrument from the
customer, either directly or via a third party, and presents to the clearing
System for clearing and settlement.
CTS: Cheque Truncation System

Managers’ Cheque or Bank Draft means A cheque guaranteed by a bank; a


written order directed by a bank to pay; and a cheque drawn on the bank’s
owned fund.

50
23. These Rules supersede the Nigerian Banker‟s Clearing House Rules, Cheque
Truncation Guidelines, Nigeria Automated Clearing System Rules and Clearing &
Settlement Guidelines

51
APPENDIX A

REASONS FOR RETURNING INSTRUMENTS

01 Account Attached due to Legal or regulatory restrictions


02 Account Closed
03 Account Dormant
04 Account Name and Account number differ
05 Account Non-existent
06 Account not funded
07 Account Not valid for Clearing/Electronic Payment
08 Bank not in Clearing
09 Cheque drawn in foreign currency. Please present specially
10 Cheque incompletely drawn
11 Cheque Mutilated
12 Cheque Crossed to two banks
13 Drawer deceased
14 Amount transmitted differs from amount on cheque image
15 Drawer‟s confirmation required
16 Endorsement irregular
17 Incomplete or Irregular Mandate
18 Material alteration requires drawer‟s signature
19 Incomplete Image
20 Payment stopped
21 Crossing stamp required
22 Cheque Already Paid
23 Presented more than 3 times
24 Spurious or Forged cheque
25 Cheque, Stale or Post-dated
26 Amount in Words and figures differ
27 Wrong delivery
28 Blurred or Blank Image
29 BVN Required
30 Cheque Not Valid for Clearing
31 Multiple Presentation
32 Refer to Registrar

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APPENDIX B

PROCEDURE FOR CHEQUE TRUNCATION

1.0 Capture of Images and Data


The images of all the instruments in a batch / file shall be duly captured
along with MICR data using scanners set up for the purpose. The amount shall
be captured or keyed in to complete the data record.
1.1 Reject Repair and Balancing
The presenting bank shall have proper systems and procedures in place
to ensure that the rejects of the MICR line are appropriately repaired
and the batch file is balanced before the same is uploaded from the
capture system to the Clearing System. Banks are required to pass on
the value in the MICR repair tag for any correction / changes / rejects
on the MICR band of the cheques in the capture files.
2.0 Return Processing
The Presenting bank shall receive the return exchange file for each return
session containing the returns on the presentation lodged by them. An item
may be returned as long as its clearing period has not expired, and a session is
available for the particular clearing type. The return file shall contain the item
detail and return reason code. It shall be the responsibility of the presenting
bank to generate the return memo to the customer from the information in the
return file.
3.0 Processing at Clearing System Gateway (CSG) – Outward Clearing
3.1 Receiving Outward Presentment
The CSG shall receive correctly formatted outward MICR Clearing Data files
and Image files from the capture system of the Presenting Bank. The
Presenting Bank shall ensure that the total amount and individual line items
in the MICR Data File are reconciled against the Data Image File.
3.2 Image Quality Analysis (IQA) and Failure Handling
The incoming images are subjected to IQA validations by the presenting
bank. Images which fail IQA validations are rejected with an appropriate
response file. The bank may rescan the instrument and present in line with
the bank‟s internal processes or control procedures. The presenting bank
shall maintain control over such re-presentments.
3.3 Item Processing
The MICR Data Files and Cheque Image files presented by the capture
system are validated by the CSG against the file and item level validations
indicated in the CSG Specifications, as released by the Clearing System
from time to time.
The CSG after validations generates response files which contain
information related to acceptance or rejection of each file and the items
present in each file with appropriate reason codes.

53
Sometimes there may be multiple response files for a MICR Data File and
Cheque Image file. It is the responsibility of the capture system to take these
response files and take appropriate actions. The CSG then sorts the MICR
data and their related images into bundles per paying bank and bundle
collection type and creates exchange files internally and validates these
bundles against the session window to which they shall be attached at the
Clearing System. The CSG, before attaching the items to the session, signs
MICR data as well as image views. It also signs and encrypts the exchange
files before transmission to clearing system.
3.4 Session Attachment
The items are assigned to an appropriate clearing session that is open
based on parameters fixed for a session by the Clearing System. These
parameters are passed on to the capture system through the CSG. The item
inherits „session date‟ that is the business date of the session. If there is no
appropriate session that is open, the items/ bundles wait at the CSG until
such a session opens.
A validation of the item‟s Presentment Date versus the item‟s Session Date is
performed and items that exceed as prescribed shall be rejected by the
Clearing System. The Clearing System shall from time to time prescribe this
parameter.
3.5 Transmission of Files to Clearing System
CSG shall build exchange files for the MICR data and the cheque images
for onward transmission to the Clearing System. Each exchange file is
digitally signed and encrypted before it is transmitted to the Clearing
System.
Banks shall plan transmission of their outward presentation by taking into
account presentation volume, the bandwidth of network with the Clearing
System, and the session window. In the event of an exchange file being
received at the CSG within a session time but not passed to the Clearing
System (due to unforeseen circumstances such as network congestion)
before close of the session, the CSG shall unbundle the exchange file, and
reattach to a new session.
3.6 Reconciliation of Outward Presentation
It shall be the responsibility of the Presenting Bank to verify and ensure that
all the items presented / transmitted by it have been included in the
settlement and reconcile the total credits with the presentation made by it.
After End of Session on the Clearing System, CSG generates an OACK file
containing the details of Items that have been taken up for settlement on
the Clearing System. It shall be the responsibility of presenting bank to
reconcile their entire presentation by collating the information from OACK
file and various response files.
4.0 Processing at Clearing System Gateway (CSG) - Inward Clearing
4.1 Receipt of Inward Data / Images
The Inward processing deals with accepting inward presentment data and
images from the Clearing System and providing data in the form of files for
54
use within the bank‟s in-clearing (paying bank) system. The CSG receives
digitally signed inward financial data exchange files and image exchange
files from the Clearing System.

4.2 Validation
The CSG shall authenticate and load the exchange file data into the
system and send an error exchange file to the Clearing System if the inward
financial data exchange file or image exchange file failed decryption or
authentication. The CSG shall send an acknowledgement exchange file to
the Clearing System if the inward financial data exchange file or image
exchange file gets successfully loaded. The CSG shall also validate the
digital signatures on the Exchange MICR and Image Files.
4.3 Control Mechanism
The Paying Bank shall verify that all the inward items have been received by
it to ensure that there has been no data loss in the transmission from
Clearing System to the CSG. The CSG supervisor may compare the relevant
information available at the „Clearing System Processing Monitor‟ and
„Inward Exchange File Screen‟ for the purpose. If any files are lost in
transmission the bank may request the Clearing System for retransmission of
images and data.
4.4 Generation of Posting File
CSG, for each session, shall generate files for interfacing with the bank‟s
inclearing or exception processing system.
CSG is capable of creating posting files (both image and data files) for
payment processing bank wide in one of the following three ways:
i. Bank wise for the entire bank
ii. Branch wise within each bank
iii. Branch and transaction code wise for each branch.
The type of posting file the paying bank requires is configurable at CSG.
5.0 Processing at Branches / Bank’s In-clearing System
5.1 Transmission of Posting Files
It shall be the responsibility of the paying bank module to fetch the posting
files from CSG and undertake the payment processing.
5.2 Duplication Checking
The CSG detects duplicate items based on MICR code line on the data for
the configured number of days. The duplicate items are indicated in the
SACK files generated by the paying bank‟s CSG, and it is the responsibility of
paying bank module to have processes in place to take necessary
caution/control while processing such items. Additionally, Clearing System
also generates a report of duplicate items for each CSG after each session,
and is available for CSGs to access the same and download, if required.

55
5.3 Payment Processing
Banks shall conduct the payment processing based on images of the
instruments following all the prudent practices. Both the presenting and
paying banks shall be liable for payment of a stale or post-dated instrument.

5.4 Return Request File


It shall be the responsibility of the paying bank to collate all the return items
and create Return Request File/s (RRF) as per specifications provided in CSG
Specification document. The paying bank in-clearing system shall forward
such Return Request File/s to CSG for onward transmission to the Clearing
System.
5.5 Return Processing at the CSG
The CSG shall receive Return Files from paying bank system containing all the
outgoing returns along with return reason codes. The CSG shall validate the
file for file integrity and data integrity, process the data and generates
exchange file for the Clearing System. During return clearing images would
not travel. Each exchange file is digitally signed and encrypted before it is
transmitted to CS.
5.6 Control of Returned Cheques Incidents
The Clearing System (CS) shall update and analyse the list of all returned
cheques monthly. Customers with cases of high frequencies shall be reported
to the CBN and accredited Consumer Credit Bureaus. Appropriate return
reason code shall be specified in the Return File(s) by the Paying Bank.
5.7 Current Account Maintenance Fee
The Presenting and Paying Banks shall not charge Current Account
Maintenance (CAM) fee on Debit entries arising from Returned Instruments.
However the paying bank shall be free to apply returned cheque charges as
provided in the Guide to Bank Charges.
5.8 Transmission Discipline
CSG shall transmit the Outward Return Exchange Files within the given return
window. As there may be a time lag during transmission of a file from CSG to
CS, the paying bank shall ensure that the return exchange files reach the
Clearing System within the timeframe before the closure of the return session.
5.9 Internal Control
While handling the inward clearing, the banks shall search for duplicate MICR
cheques and maintain a duplicate MICR cheques list. In addition to the
inward instruments drawn on branches of a bank, the reports generated by
the Clearing System shall contain the summary position of the total number of
instruments and the total value thereof. After the processing of inward
clearing, banks shall verify the inward clearing figures.

5.10 Reconciliation of Clearing Differences


In CTS Clearing the images and data shall be received in separate files and
hence the possibility of a bank being debited without receiving an image
shall not arise. In the case of a bank being debited with the cheque image
56
of another bank (caused, for example, of data entry error) the same shall be
returned to the presenting bank with appropriate return reason code.

6.0 Special Processing at Clearing System

6.1 Caution Notice


Ordinary Caution Notice shall not be applicable in Cheque Truncation
System (CTS) regime.

6.2 Different Status of CSG / Bank

6.2(i) Suspended: CS shall change the status of a bank from „in clearing‟ to
„suspended‟ under exceptional circumstances such as moratorium or
unwinding. In such a scenario, the suspended bank shall not be able to
participate in any clearing. But banks/NIBSS may return items presented
by the suspended bank in the suspended period.

6.2(ii) Not in Clearing: CS shall put a bank in „not clearing‟ mode when a
bank does not participate in clearing based on member notification to
CBN and NIBSS with copies to clearing members of inability to
participate in clearing activities. Once set as „not clearing‟ the bank
cannot make or receive any presentations during the „not clearing‟
period. Other banks also cannot return items presented on/by the bank.

57
58
59
60
61
62
63
64
REGULATORY FRAMEWORK
FOR THE USE OF UNSTRUCTURED SUPPLEMENTARY SERVICE DATA (USSD)
FOR FINANCIAL SERVICES IN NIGERIA

65
1.0 Preamble
In exercise of the powers conferred on the Central Bank of Nigeria (CBN) by
Section 47(2) of the CBN Act, 2007, to promote and facilitate the development
of efficient and effective system for the settlement of transactions, including the
development of electronic payment systems; and Pursuant to its mandate of
promoting a sound financial system in Nigeria, the CBN hereby issues the
following Regulatory Framework for the Use of Unstructured Supplementary
Service Data (USSD) for Financial Services in Nigeria.
2.0 Introduction
The mobile phone has become a veritable tool for enhancing financial inclusion
with the advent of mobile payments, m-commerce, m-banking and other
implementation for financial transactions based on mobile telephony. The
providers of mobile-based financial services have options of adopting varying
technologies for enabling access and transmitting data including Short
Messaging Service (SMS), Unstructured Supplementary Service Data (USSD),
Interactive Voice Response (IVR) and Wireless Application Protocol (WAP),
stand-alone mobile application clients and SIM Tool Kit (STK).
Recently, providers of mobile telephony-based financial transactions are
increasingly adopting the USSD technology while the range of services
supported by their mobile transaction services, using the USSD channel, is
broadening rapidly. Among services provided through the channel include,
account opening, balance and other enquiries, money transfer, airtime
vending, bill payment, etc

The USSD technology is a protocol used by the GSM network to communicate


with a service provider’s platform. It is a session based, real time messaging
communication technology, which is accessed through a string, which starts
normally with asterisk (*) and ends with a hash (#). It is implemented as an
interactive menu driven service or command service. It has a shorter turnaround
time than SMS, and unlike SMS, it does not operate by store and forward which
indicates that data are neither stored on the mobile phone nor on the
application. USSD technology is considered cost effective, more user-friendly,
faster in concluding transactions, and handset agnostic.
3.0 Objectives
The vast applications of the USSD technology, in terms of available services have
raised the issue of the risks inherent in the channel. In this regard, concerns have
been expressed on the likely exposure of CBN approved entities to the possible

66
breaching of the USSD accessed financial services in view of likely vulnerabilities
in the technology and the ever growing threats.
Furthermore, the implementation in Nigeria has created multiple USSD channels
to customers, thereby increasing their exposure to risk, without a common
standard for all.
This Framework therefore, seeks to establish the rules and risk mitigation
considerations when implementing USSD for financial services offering in Nigeria.
4.0 Participants in the USSD Ecosystem
Service providers that provide financial services through the use of USSD in
Nigeria include the following:

a. Financial institutions: Banks, Other Financial Institutions and Payment


Service Providers, providing products and services using USSD protocol to
their customers.

b. Mobile Money Operators (MMOs): MMOs are Deposit Money Banks or


corporate entities, duly licensed by the CBN to provide mobile payment
services to the banked and unbanked customers.

c. Mobile Network Operators (MNOs): MNOs utilize USSD to interact with, and
provide services to their customers.
d. Value Added Service Providers/ Aggregators (NCC Licensees) – Any person
or organization that engages in the provision of value added mobile/fixed
Services, including premium rated services.

e. Customers: initiate financial transactions or sessions through a USSD string


provided by their financial Institutions
5.0 Eligibility for Unique Short Code
5.1 Mobile Money Operators are eligible for the issuance of USSD short codes
from the NCC after meeting the necessary requirements of the NCC for the
issuance of same.
5.2 For CBN licensed entities, other than Mobile Money Operators, a letter of no
objection/introduction from the CBN would be required before being
considered for the issuance of the USSD short codes by the NCC, subject to
meeting the requirements of the NCC.

67
6.0 Vulnerabilities and Mitigations
USSD based financial transaction requires encryption to protect the integrity of
the financial information. To this end, Financial Institutions providing use of the
USSD channel shall:
6.1 Put in place, a proper message authentication mechanism to validate that
requests/responses are generated through authenticated users. Such
authentication mechanism shall include a minimum combination of any of
International Mobile Subscriber Identity (IMSI), Date of SIM Swaps, Date of
Mobile Station International Subscriber Directory Number (MSISDN) Recycle,
International Mobile Equipment Identity (IMEI), Date of device change, etc.
6.2 Ensure that the customer receives notification on the status of every
transaction conducted through the channel.
6.3 Not use the USSD service to relay details of other electronic banking channels
(in case of banks), to their customers, to prevent compromise of other
electronic banking channels through the USSD channel.
6.4 Ensure encryption of USSD information within its environment by an auditable
process.
6.5 Ensure at least, radio encryption between users’ SIM-enabled device and
base stations.
6.6 Ensure secure transmission of USSD signals between network operator & the
USSD aggregators, and between the USSD aggregators & the bank.
6.7 Customer information that is logged by the USSD application as part of
financial transactions should not include sensitive information such as
customer PIN. Data stored by the USSD application at Financial Institutions
shall be encrypted and the NCC shall define a minimum security standard for
MNOs and aggregators, as may be required.
6.8 Avail the customers the option to opt in/out of the USSD channel for financial
transactions.
6.9 Put a limit of N100,000.00 per customer, per day for transactions as may be
required. However, customers desirous of higher limits shall execute
documented indemnities with their banks or MMOs.
6.10 Mandate the use of an effective 2nd factor authentication (2FA) by customers
for all transactions above N20,000. This shall be in addition to the PIN being
used as 1st level authenticator, which applies to all transaction amounts.

68
6.11 Shall not send the 2FA to the customer’s registered GSM number or device;
and it shall not be generated or displayed on the USSD menu.
6.12 Install a Behavioural Monitoring system with capability to detect SIM-
Swap/Churn status, user location, unusual transactions at weekends, etc. This
shall be achieved by 31st October 2018.
7.0 Dispute Resolution
7.1 Financial Institutions shall be responsible for setting up dispute resolution
mechanism to facilitate resolution of customers’ complaints.
7.2 Financial Institutions shall treat and resolve any customer related issues within
3 (three) working days. Non-compliance shall be subject to penalty, as may
be prescribed by the CBN, from time to time.
8.0 Service Level Agreement
8.1 There shall be Service Level Agreement between the Financial Institutions
and MNOs/VAS & Aggregators, benchmarked against the NCC Quality of
Service (QoS) regulation and service availability requirements of electronic
payment services of the CBN.
9.0 Others
9.1 Service providers should put in place systems that enable users/subscribers to
block their account from operating USSD service
9.2 No USSD Financial Service should be activated for customer unless the
deactivation mechanism is put in place with effect from June, 2018.
10.0 Penalties for Infractions
The appropriate Regulator (CBN and/or NCC) as applicable shall impose
appropriate sanctions for any contravention on any participant that fails to
comply with this Framework.
11.0 Glossary of Terms
Bank: A deposit taking institution duly licensed by the Central Bank of Nigeria.
Mobile Money Operators: provide the infrastructure for the mobile payment systems
for the use of participants that are signed-on to their scheme.
Payment Service Providers: CBN licensed companies that employ the infrastructure
of the scheme operator to provide services to end users.
PIN means Personal Identification Number: A sequence of digits used to verify the
identity of the holder of a token. The PIN is a kind of password.

69
Encryption is a method of protocol for data encryption ensuring secure transmission
from point-to-point.
Financial institutions: Switches, Application vendors and Payment Service Providers
providing products and services using USSD protocol.
NCC: refers to the Nigeria Communications Commission with Regulatory powers
over the Mobile Network Operators (MNOs) and the Value Added Service
Providers
MNOs: Mobile Network Operators. Mobile traffic passes through the mobile
operator‘s network as voice, SMS, or USSD.
VAS Providers Licensed by NCC: Any person or organization that engages in the
provision of value added mobile/fixed Services, including premium rated
services. The VAS provider leverage on the infrastructure of the network
operator to provide the services.
USSD Channel: Unstructured Supplementary Service Data, it provides session-based
communication. It is a technology used by the network to send information
(usually text menus) between a mobile phone and an application on the
network. It will allow the subscriber to request information in short codes
(starting with * and ending with #), or menus from the network, via their
cellphone
Unique Short Code: are short digit sequences that are used to address messages in
the systems of mobile network operators.
GSM: Global System for Mobile Communications is a system used for mobile cellular
communications.
SIM: Subscriber Identity Module. A mini-smartcard that is inserted into a mobile
handset, It is used to authenticate the mobile to the mobile radio network
The SIM may be programmed to provide security services on the mobile
SMS: Short Message Service – A term used to refer to a text message sent to or from
a handset.
STK: Systems Tool Kit, It provides a set of commands which allow applications,
existing in the SIM, to interact and operate with a mobile client which
supports the specific command(s) required by the application. Using the SIM
Toolkit, applications can be downloaded to the SIM in a secure manner.
OTP: One Time Password, the password (usually a random sequence of digits and or
letters) sent from a bank to a customer‘s mobile handset for entry by the
customer to authenticate themselves into the banking channel that they are
using. It is considered as a second authentication factor.
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IMSI: International Mobile Subscriber Identity (IMSI) is a unique number associated
with all Global system for mobile communications (GSM) and Universal
Telecommunications System (UMTS) network mobile users used for identifying
a GSM subscriber.
IMEI: International Mobile Equipment Identity is the unique serial number of every
GSM mobile cell phone.
MSISDN: Mobile Station International Subscriber Directory Number: A number
uniquely identifying a subscription in a GSM or UMTS mobile network. The
mobile phone‘s telephone which it is known to the world

71
CENTRAL BANK OF NIGERIA

REGULATION FOR BILL PAYMENTS IN NIGERIA, 2018

February 2018

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1.0 Preamble
In the exercise of the powers conferred on the Central Bank of Nigeria (CBN)
under Sections 2(d), 33 (1) (b) and 47(2) of the CBN Act 2007 to promote sound
financial system in Nigeria, issue guidelines and facilitate the development of an
efficient and effective payments system in Nigeria, the CBN hereby issues this
Regulation for Bill Payments in Nigeria, 2017.
2.0 Objectives
The objectives of this Regulation are:
2.1 To document the minimum standards that must be complied with for the
processing of bill payment transactions.
2.2 To identify stakeholders in Bill Payment system space
2.3 To ensure achievement of the vision of a ‘nationally utilized and international
recognized’ payments system in Nigeria.
2.4 To ensure adequate protection for the stakeholders in the Bill Payment
system space.
3.0 Scope
This Regulation covers Bill Payments on various payment channels and any
payment platform that seeks to integrate the payment side of commercial
activity and merchant aggregators in Nigeria. The payment methods include
Cheques, Cards, Direct Debit, Instant Payments, and Automated Clearing
House, etc.
4.0 Stakeholders
The following are the stakeholders in Bill Payments:
4.1. Payer – the individual or corporate entity making a bill payment
4.2. Biller – a registered entity/merchant that receives funds from the payer as
consideration for the provision of service or product.
4.3. Payer’s bank – the bank where the payer maintains the account that is
debited to make the bill payment.
4.4. Biller’s bank – the bank where the Biller maintains the account designated
to receive proceeds of payment made by the payer.
4.5. Payments Service Provider (PSP) – a person licensed by the Central Bank of
Nigeria to provide services involving direct interactions with the payment,
settlement and clearing systems and payment system arrangements, as the
Bank may authorize from time to time and may include a bank, Mobile
73
Money Operators or Other Financial Institution that is connected directly to
a Biller without any service intermediary.
5.0 Eligibility Criteria
Any person or entity desirous of operating a bill payment platform shall apply to
the CBN for a license or be integrated to a duly licensed PSP.
5.1 Payment Service Providers
5.1.2. All Inter-Bank transactions initiated and authorized on the bill payment
platform shall be cleared via the Nigeria Clearing System and settled
via Real Time Gross Settlement System (RTGS).
5.1.3. Each component payment method implemented on the platform shall
be in accordance with the rules issued by Central Bank of Nigeria to
guide the conduct of market activities for relevant payment channels.
5.2 Billers
5.2.1. A Biller shall be a customer of a bank/PSP that will receive the
proceeds of bill payments from Payers.
5.2.2. The Bank/PSP shall confirm the legal capacity of the Biller before
onboarding the biller.
5.2.3. After approval of the Biller’s application, the Biller’s bank / Payment
Service provider shall register the Biller on the platform capturing the
following details at a minimum:
a. Corporate entity – Bank Account Number; Registered name; RC
Number/ Business Registration Number as assigned by the Corporate
Affairs Commission; Address; Official Contact email address; Contact
Telephone Number; Service/Product Codes.
b. Individual merchants – BVN; Verified operating address; Contact
Telephone Number; Bank Account Number
5.3 Payer’s Bank
5.3.1 Payer’s bank shall be a member of the clearing system or integrated
with a Payment Service Provider that accept Direct Debit for
processing.
5.3.2 The Payer’s bank shall comply with the authentication protocol as
prescribed by the Electronic Payments Guidelines, where the mandate
is in electronic form.

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5.4 Biller’s Bank
5.4.1. Biller’s bank shall be a member of the clearing system or integrated
with Payment Service Providers that accept Direct Debit for processing.
5.4.2. The Biller’s bank shall hold an account for the Biller to receive proceeds
of payments
5.4.3. It is the responsibility of the Biller’s bank to give information, advice and
guidance on all aspects of the Scheme to the Biller; where applicable.
5.5 Operational Procedure
5.5.1. There shall be a Service Level Agreement (SLA) executed between the
platform provider and the Biller, as a condition for on-boarding.
5.5.2. The SLA shall provide the terms for engagement, roles and
responsibilities of the parties, minimum service delivery commitments,
obligations of the parties and penalties, as applicable
5.5.3. SLAs shall be reviewed periodically to ensure alignment with
industry/regulatory changes, or appropriate provisions made to take
cognizance of mandatory changes that may come into play after
implementation.
5.5.4. The minimum commitments to service availability shall be defined and
incorporated in the Dispute Resolution System (DRS) and SLA, and
properly communicated to the users of the service.
5.5.5. Transaction status upon completion shall be sent by the Biller to the
Payer.
5.5.6. A procedure shall be in place for change management and shall
include major releases, maintenance calendars and conditions for
emergency upgrades and notification process.
6.0 Dispute Resolution System (DRS)
6.1. Payments shall be final and irrevocable and be consistent with the
provision of the circular on the Statement of Payments Finality.
6.2. All requests for refunds/recalls shall be via a dispute resolution system or
other supplementary rules that guide the operations of the relevant
payment method.
6.3. Service Providers shall make an automated dispute resolution platform
available to facilitate seamless resolution of complaints

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6.4. Disputes arising from Bills Payment transactions shall be resolved
amicably amongst the parties in line with the provisions of the
guidelines on Operations of Electronic Payment Channels in Nigeria.
7.0 Settlement
Each platform shall be able to receive payment for multiple billers, clear
transactions and settle such transactions through existing settlement
mechanisms.
8.0 Customer Support
Billers/PSP shall provide helpdesk services to the Billers and Payers by the Biller’s
bank/PSP as applicable; via advised channels, to aid resolution of service issues.
The helpdesk availability should be such that it coincides with service availability,
and access should be on multi-channel basis (phone, email, web etc.)

76
FEBRUARY 2018

77
1.0 Preamble

In the exercise of the powers conferred on the Central Bank of Nigeria (CBN) under
Sections 2(d), 33 (1)(b) and 47(2) of the CBN Act 2007 to promote sound financial
system in Nigeria, issue guidelines and facilitate the development of an efficient
and effective payments system in Nigeria, the CBN hereby issues this Regulation for
Direct Debits Schemes in Nigeria, 2017.

This Regulation recognizes the existing and emerging multi-channel options (Online
platforms, Instant Payments etc.) applied for direct debit instructions in Nigeria. In
addition, the provisions of this Regulation are harmonized with developments in the
payments system since the release of the previous version.

Direct debit is a cash-less form of financial settlement which facilitates recurring


payments. It permits the originator of the instruction, known as ’’Biller’’, to collect
amounts due from a payer through the Payer’s bank by leveraging an instruction or
mandate provided by the payer. An entity wishing to participate as a Biller in the
Direct Debit scheme will typically contact its bank or payment service provider. The
service may be deployed on channels provided by the Biller through its bank or
Payment Service Provider.

2.0 Participants & Their Roles

The process typically involves five parties –

a. Biller
b. Biller's bank
c. Payer
d. Payer’s bank
e. Payment Service Provider

2.1 Biller

2.1.1 A Biller shall be an entity incorporated or registered by an appropriate


authority to carry on business and shall be on-boarded to the Direct
Debit scheme by a bank or Payment Service Provider after satisfactory
due diligence.

2.1.2 A Biller shall obtain the mandate of the Payer through a platform
provided by the Biller or its appointed agent/partner either in paper or
electronic form, duly verified by the Payer’s bank.

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2.1.3 A Biller shall provide clear terms and conditions which shall be
applicable to a Direct Debit payment arrangement between it and
the Payer.

2.1.4 A Biller shall comply with the terms of the mandate executed by the
Payer for the initiation of a Direct Debit transfer.

2.1.5 A Biller & the Biller’s Bank shall enter into an SLA to govern their
relationship under the Direct Debit Scheme.

2.1.6 The SLA mentioned shall be expressed to be subject to the provisions of


this Regulation.

2.1.7 A Biller shall execute a Direct Debit Indemnity in favor of Biller’s bank
against any wrongful debit arising from Direct Debits.

2.1.8 The Biller’s Bank shall use the Biller’s RC number or Business Registration
Number as a unique Identifier for use as part of the set-up process for
Direct Debit. The Biller’s registration Number e.g. RC Number or Business
Registration Number, as assigned by the Corporate Affairs Commission
(CAC) must be captured as part of the set-up process for the Biller as a
unique identifier. For Non-resident entities, Business Registration Number
and Country of origin must be captured.

2.1.9 The Biller shall notify the Biller’s Bank of any change to its name or
relevant incorporation documents, or information quoted on the
mandate. The Biller’s bank may require the Biller to give notice of such
change to a Payer and/or Payer’s Bank.

2.1.10 A Biller shall maintain documentation/records received from Payer or


Payer’s bank for ease of reference and to ensure that payments made
under separate mandates are managed independently. These records
must be maintained for as long as the mandate is active.
Documentation on expired mandates should be subject to minimum
retention period of six (6) years.

2.1.11 The Biller shall notify the Biller’s bank/ payment service provider (as
applicable) of receipt of the notice of cancellation of the Mandate
from the Payer within 48 hours of receipt. The Biller shall acknowledge
notice of cancellation received from the Payer and give notice
thereof to the Biller’s bank/ Payments Service Provider within two (2)
business days of the receipt and ensure that cancellation is effected
on the due date.
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2.1.12 where any debit is effected after mandate cancellation outside the
notice period, the Biller shall refund the debited amount within 5
business days from the date of the debit.

2.1.13 A Biller shall give an Advance Notice as agreed with the Payer in
respect of a Variable Direct Debit Mandate.

2.1.14 A Biller shall notify the Payer via SMS or Email of failed Direct Debit
transaction within 24 hours.

2.1.15 Billers shall act in good faith and in strict compliance with the provisions
of this Regulation.

2.1.16 Withdrawal of a Biller

A Biller may withdraw from the Scheme voluntarily or be required to


withdraw from the Scheme.

I. Voluntary Withdrawal

Where a Biller wishes to withdraw from the Scheme, it shall in


consultation with its Payment Service Provider or the Biller’s Bank
undertake the following actions:-

a) Arise from subsisting mandates, or any indemnity liability which


may arise subsequent to withdrawal or termination of liability in
respect of Direct Debit initiated prior to either of these events

II. Mandatory Withdrawal

Without prejudice to any agreement between a Biller and Biller’s


Bank/Payment Service Provider, a Biller’s Bank/ Payment Service
Provider shall withdraw a Biller from the Scheme :-

a) Immediately, if the contractual capacity of the Biller is affected by


legal process, such as insolvency, liquidation or the appointment of
a receiver;

b) Upon giving notice in accordance with the agreement between a


Biller and Biller’s Bank/ Payment Service Provider, If in the opinion of
the Biller’s bank or Payment Service Provider.

i. the Biller carries out Direct Debits either in a manner which


constitutes an abuse of the Scheme or is without due regard to
the interests of other participants.
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ii. The Biller is in breach of the provisions of this Regulation or

iii. Upon a directive from the Central Bank of Nigeria

2.2 Biller’s Bank

2.2.1. Biller’s bank shall be a member of the clearing system or integrated


with Payment Service Providers that accept Direct Debit for processing.

2.2.2. The Biller’s bank shall hold an account for the Biller to receive proceeds
of Direct Debit.

2.2.3. It is the responsibility of the Biller’s bank to give information, advice and
guidance on all aspects of the Scheme to the Biller; where applicable.

2.2.4. The Biller’s Bank shall obtain an executed Direct Debit Indemnity from
the Biller before commencement of any debit transfer under this
Scheme.

2.2.5. The Biller’s bank shall accept cancellation of a Direct Debit Mandate
ONLY from the Biller.

2.3 Payer

2.3.1. The Payer shall execute a Direct Debit Mandate in order to participate
in the Direct Debit Scheme.

2.3.2. A Payer may cancel a Direct Debit Mandate at any time upon such
notice to the Biller as specified in the Direct Debit Mandate provided
that such cancellation shall not be effective until the end of the
current billing cycle.

2.3.3. Notwithstanding the provisions of 2.3.2 above, for billing cycles for one
(1) calendar month and above, the Payer shall give a cancellation
notice of not less than 10 business days terminating at the end of the
current billing cycle.

2.3.4. Where a cancellation notice given pursuant to 2.3.2 and 2.3.3 above is
not honoured, a Payer may exercise the right to cancel a Direct Debit
Mandate by advising the Payer’s bank in writing or via provided
electronic channels.

2.3.5. A Payer may raise a claim through the Payer’s Bank against the Biller in
the event of a successful debit after mandate cancellation.

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2.4 Payer’s Bank

2.4.1. Payer’s bank shall be a member of the clearing system or integrated


with a Payment Service Provider that accept Direct Debit for
processing.

2.4.2. The Payer’s bank shall obtain the authority of the Payer either in paper
form or electronic form before activating a Direct Debit Mandate on
the Payer’s account.

2.4.3. The Payer’s bank shall comply with the authentication protocol as
prescribed by the Electronic Payments Guidelines where the mandate
is in electronic form.

2.4.4. The Payer’s bank shall verify or authenticate all mandate authorization
requests within 3 business days, after which the mandate will be
deemed to be activated, unless authentication is declined by the
Payer’s bank.

2.4.5. Payer’s Bank shall not subject an activated Direct Debit Mandate to
further Payer’s confirmation at the point of payment.

2.4.6. The Payer’s bank shall render report of all Direct Debits unpaid due to
insufficient funds on a monthly basis to a licensed Credit Bureau and
the Credit Risk Management System or as may be required by CBN.

2.5 Payment System Service Provider

2.5.1. A Payment System Service Provider shall execute Direct Debits in line
with the Direct Debit Mandate.

2.5.2. A Payment System Service Provider shall give information, advice and
guidance on all aspects of the Scheme to Billers on its platform.

2.5.3. A Payment System Service Provider shall accept cancellation of Direct


Debit Mandate ONLY from the Billers on its platform.

2.5.4. The Payment System Service Provider shall use the Biller’s RC number or
Business Registration Number as a unique Identifier for use as part of
the set-up process for Direct Debit. The Biller’s registration Number e.g.
RC Number or Business Registration Number, as assigned by the
Corporate Affairs Commission (CAC) must be captured as part of the
set-up process for the Biller as a unique identifier. For Non-resident

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entities, Business Registration Number and Country of origin must be
captured.

3.0 Control Mechanisms for Participation in the Scheme and Consumer Protection

3.1 General

3.1.1 The Payer shall be notified of the following activities by SMS and / or
email:

i. Set up and approval of the Direct Debit Mandate by the Biller,


Payment Service Provider or both.

ii. Direct Debit passed into the Payer’s account by the Payer’s
Bank.

iii. On receipt of the mandate, the Biller shall be responsible for


payments collection in respect to Direct Debit collection. A Biller
cannot require the Payer’s Bank to settle by any other means
except with the Payer’s consent

iv. Amendments/modification made to the Direct Debit Mandate


by the Biller or the Payment Service Provider as applicable

v. Cancellation of Direct Debit Mandate by the Biller or the


Payment Service Provider as applicable

3.1.2 Payer’s Banks, Billers and Payment Service Providers shall keep records
of all Direct Debit transaction for a period of not less than six (6) years
from the date of cessation of the Direct Debit Mandate.

3.1.3 Payers’ Bank shall go through its normal confirmation process upon
receipt of a Direct Debit Mandate to verify its authenticity.

3.1.4 There shall be a Direct Debit logo to be utilized under the Scheme in a
form displayed in APPENDIX V or any other form as the CBN may advise
from time to time.

3.1.5 The Payer’s Banks and the Biller’s Banks shall comply with the Nigeria
Bankers’ Clearing System Rules as applicable to the Scheme.

3.1.6 The Biller or Payment Service Provider may notify the Payer of a Direct
Debit prior to the day of debit to the payer’s account.

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4.0 Business and Operational Rules

4.1. Direct Debit transactions are of 2 types:

i) Fixed Direct Debit: enables the debit of fixed amounts from a payer's
account in accordance with the payer’s Mandate.

ii) Variable Direct Debit: enables the debit of variable amounts from a

Payer's account up to the maximum amount stated in the payer’s

Mandate. This is applicable where payable amounts cannot be


predetermined in advance. In this instance, the Biller shall notify the
Payer of the invoice amount before the debit is sent to Payer’s bank.

4.2. Every Direct Debit mandate shall clearly state whether it is a fixed or variable

4.3. There shall be a platform provided by the Biller for the initiation of a Direct
Debit Mandate.

4.4 A Direct Debit instruction is issued subject to the provisions of the Nigeria
Bankers’ Clearing System rules on returned items. An item that is dishonored
must be returned within the local clearing cycle in operation.

4.5. A penalty should be applied to the payer for Direct Debit instructions not
honored due to insufficient funds except where a cancellation instruction has
been received by the Payer’s Bank or evidenced by the Payer to the Payer’s
Bank. The penalty prescribed for returned items (NCBS Rules/ formerly NCHR)
shall apply. No penalty shall apply for multiple re-presentments on the
mandated day. In the event of insufficiency of funds at beginning of next
day only a single penal charge shall apply for all re-presentments on the
mandated day.

4.6. Each Biller shall put in place a process for returning wrongful mandates to
the Payer.

4.7 Any change in the terms of a Direct Debit Mandate shall require a
cancellation of the existing mandate and issuance of a new one.

4.8. If a fixed payment fails, then the Biller’s bank or Payment System Service
Provider is prohibited from collecting arrears via Direct Debit. The prohibition
does not extend to the re-presentment or in situations where the Biller and
the Payer have agreed otherwise.

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5.0 Unpaid Direct Debits

5.1. Payer’s Bank shall return any unpaid Direct Debit instruction within the
clearing cycle. The Biller’s Bank/Payments Service Provider may represent an
unpaid Direct Debit instruction within 24hours or as agreed with the Payer for
the same amount that was originally dishonored.

6.0 Advance Notice

6.1. A Biller shall give an Advance Notice of a minimum of ten (10) business days
or as agreed with the Payer on a Mandate before :-

a. the first payment

b. changes to :-

i. the amount

ii. the due date

6.2. In all cases, an Advance Notice shall allow sufficient time for a Payer to raise
a query, countermand a single payment or, cancel the transfer. Where the
amount or due date is certain, a Biller shall issue an Advance Notice not less
than 10 business days from the due date except the payer executed
superseding terms with the Biller. In the absence of any specific agreement
between a Biller and a Payer, this period shall be the minimum requirement.
The Advance Notice could be in writing or electronic as agreed between the
Biller and Payer.

7.0 Direct Debit Mandate

7.1 General

Direct Debit Mandate shall not constitute an agreement between the Biller
and the Payer’s Bank.

8.0 Indemnity & Limitation of Liability

8.1 The Direct Debit Indemnity

8.1.1. Every Biller shall execute a Direct Debit Indemnity in favour of the Biller’s
Bank.

8.1.2. A Direct Debit Indemnity may be as prescribed in Appendix IV.

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8.1.3. A Biller shall effect settlement of Indemnity claims with Payers’ Banks
immediately or within 5 business days of the date of the claim.

8.1.4. A Biller’s liability under the Direct Debit Indemnity shall be unlimited in
respect of duration and amount

a. Time: there is a continuing liability in respect of Direct Debits initiated


before receipt of a written notice of termination by a Payer’s
Bank

b. Amount: the liability of a Biller shall cover only the Direct Debit
amount plus interest charged at NIBOR from the date of the
debit.

8.2 Claims under the Indemnity

8.2.1. Any claim under a Direct Debit Indemnity should be brought within a
period of one (1) year from the date of the debit.

8.2.2. A Biller shall honour an Indemnity claim within 5 business days from the
date of receipt of claim.

8.2.3. Direct Debit Indemnity issued pursuant to this Regulation shall not cover
funds paid outside the Direct Debit Scheme.

9.0 Compliance with Rules, Penalties and Dispute Resolution

9.1 Compliance with Rules

9.1.1. Each participant in this Scheme shall comply with the provisions of this
Regulation.

9.1.2. Each participant shall comply with the specification and standards
established by the relevant payment system guidelines issued by the
Central Bank of Nigeria from time to time.

9.2 Penalties

9.2.1. Any breach of this Regulation shall be subject to appropriate penalties


as prescribed under penalties in Nigeria Bankers’ Clearing System
Rules.

9.2.2. The Payments Service Providers or Banks may require a Biller to


withdraw from the scheme in accordance with provisions of this
Regulation

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9.2.3. All participants in the scheme shall be subject to these rules and
penalties shall be imposed for any breach thereof.(Consult the
penalties prescribed in the proposed NBCS Rules)

9.3 Dispute Resolution Mechanism

Any dispute, controversy or claim arising out of or relating to this Regulation


or the breach, termination or invalidity thereof shall be settled in accordance
with the CBN’s dispute resolution mechanism and if unresolved, may be
referred to an arbitral panel, as provided under the Arbitration and
Conciliation Act Cap. A18 LFN 2004.

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APPENDIX I

Definition of Terms

The terms below shall have the following meaning, for the purpose of the
Regulation: This is a verifiable written instruction in physical or electronic form given
by a Payer to the Payer’s Bank authorizing the payment from the Payer’s stated
account to the designated account of the Biller.

Direct Debit Indemnity

This is an indemnity issued by the Biller to the Biller’s bank to protect a Payer should
an incorrect amount be debited, a debit occur earlier than specified or in error.

Fixed Direct Debit Mandate

This authority allows for regular fixed/predetermined amounts to be debited from a


Payer’s bank account.

Payer

Payer is the party whose account is to be debited as instructed in a Direct Debit


Mandate.

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APPENDIX II

** Forms below serve as a guide as to what is expected

FORM OF DIRECT DEBIT MANDATE (FIXED AMOUNTS)

Date [•]

Agreement) on the __________ day of each and every month/quarterly/yearly


commencing on __________ and continuing (state the period for which the
underlying contractual arrangement exists for). All such debits from my/our
account by you in accordance with any Direct Debit Instruction issued and
delivered to you by the Biller shall be treated as though they have been signed by
me/us personally.

The amounts are FIXED and shall be debited on ______of each


month/quarter/year.

I/We understand that the debits hereby authorised will be processed by electronic
funds transfer, and I/we also understand that details of each debit will be printed
on my/our bank statement.

I/We agree that bank charges relating to this Mandate shall apply as appropriate.

This Mandate may be cancelled by me/us by giving both you and the Biller--- days’
notice to expire at the end of the current billing cycle. Notice in writing, delivered
to the addresses stated above, but I/we understand that I/we shall not be entitled
to any refund of amounts which may have already been withdrawn while this
Mandate was in force if such amounts were legally owing to the Biller. (For billing
cycles of one (1) calendar month and above the Payer shall give a cancellation
notice of not less than 10 business days terminating at the end of the current billing
cycle).

I/We agree that if a Direct Debit instruction is not honored due to insufficient funds
in my/our account, except where a cancellation instruction has been received by
the Payer’s Bank or evidenced by the Payer to the Payer’s Bank, the penalty
prescribed for returned items in NBCS Rules shall apply.

Signed at __________ on this __________ day of __________ 20 __________

________________________________________

[SIGNATURE AS PER ACCOUNT MANDATE]

For and on behalf of: [Insert name of Payer]


89
In the presence of:

Name: _________________________________________

Address: _______________________________________

Occupation: ____________________________________

Signature: _____________________________________

90
APPENDIX III

FORM OF DIRECT DEBIT MANDATE (VARIABLE AMOUNTS)

Date [•]

FROM [ Insert Name of Payer] Biller’s TIN Number/Service Code Identifier:

[Insert Address of Payer]

TO: [Insert Name of Bank]

[Insert Address of Bank]

CC: [Insert Name of Biller]

[Insert Address of Biller]

Dear Sirs,

MY AGREEMENT [insert details of the underlying commercial transaction between


the Biller and the Payer] dated [•]

The details of my/our bank account are as follows:-

Bank: Account Number: BVN: Phone Number: Email Address:

**For Corporate Payers, The BVN of Authorised Signatories to the account should be
used. **

I/We hereby request, instruct and authorise you to debit my/our account in
accordance with any Direct Debit Instruction issued and delivered to you by the
Biller for such amounts necessary for monthly/quarterly/semi-annual payments due
in respect of the above-mentioned agreement on the __________ day of each and
every month/quarter/half-year commencing on __________ and continuing (state
the period for which the underlying contractual arrangement exists for). All such
debits from my/our account by you in accordance with any Direct Debit Instruction
issued and delivered to you by the Biller shall be treated as though they have been
signed by me/us personally. (Replicate as in fixed above in Appendix ii)

The amounts are variable subject to a maximum of N_______. I/We understand that
the Biller may present varying amount only after giving me/us prior notice.

I/We understand that the withdrawals hereby authorised will be processed by


electronic funds transfer, and I/we also understand that details of each withdrawal
will be printed on my bank statement and/or an accompanying voucher.

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I/We agree to pay any bank charges relating to this Mandate.

This Mandate may be cancelled by me/us by giving both you and the Biller (14)
Business Days’ notice in writing, sent by prepaid registered post, or delivered to the
addresses stated above, but I/we understand that I/we shall not be entitled to any
refund of amounts which may have already been withdrawn while this Mandate
was in force if such amounts were legally owing to the Biller.

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APPENDIX IV

FORM OF INDEMNITY

To: [Biller’s Bank]

[Biller’s Address]

Dear Sirs,

1. IN CONSIDERATION of you accepting instructions from time to time from

_______________________________________ (hereinafter called the

“Biller”) or from an agent of the Biller to debit the account of the Payer with the
amounts specified on instruments drawn in paper form or in automated input form
written in accordance with the Direct Debit Agreement dated [•]

between _______________________, we hereby warrant that the

Payer on whose account a debit is drawn will have signed a Direct Debit Mandate,
and we shall keep you indemnified upon your first demand against all actions,
losses, damages, claims, demands costs and expenses (including legal costs, fees
and expenses on a full indemnity basis) howsoever arising, which you may incur or
sustain directly or indirectly from such debiting or failure to debit and without our
requiring proof of our agreement to the validity of such demand we shall forthwith
pay the amount.

2. We authorise you to admit compromise or reject any claims made upon you
without reference to or authority from the Biller. Furthermore, with respect to any
claims or demand for the refund of any money received by you on our behalf
pursuant to any debit and transfer made on our behalf in accordance with the
[Direct Debit Agreement] [Direct Debit arrangements between ourselves and the
Payer], you are hereby authorised and are at liberty to comply with such demands
and claims and without any further reference or authorisation from us, you may
debit our account and transfer such funds to the account of the Payer.

3. You are not required to verify or check that instructions given to you have
been given and remain in force in respect of any debit and transfer made at the
request of the Biller.

4. You are not required to verify or check that any purpose of payment stated
in the Direct Debit Mandate signed by the Payer is fulfilled or is observed.

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5. This Direct Debit Indemnity is to be in addition to and is not to prejudice or be
prejudiced by any other Direct Debit Indemnity which has been or may now or
hereafter be executed by us in connection with the Direct Debit Agreement, and
shall be binding on us as continuing security notwithstanding any payments from
time to time made to you or any settlement of account or disability, incapacity,
insolvency that may affect us or any other thing whatsoever.

6. You are to be at liberty without thereby affecting your rights hereunder at


any time and from time to time at your absolute discretion to release, discharge,
compound with or otherwise vary or agree the liability under this Direct Debit
Indemnity or make any other arrangements with us.

7. This Direct Debit Indemnity shall be enforceable notwithstanding any change


in your name or any change in the constitution of the bank, its successors or assigns
or by its amalgamation with any other bank or banks.

8. This Direct Debit Indemnity shall be governed by and construed in


accordance with the laws of the Federal Republic of Nigeria.

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For and on behalf of: [ Insert name of Biller ] pursuant to a resolution of the Board of
Directors of the Biller a certified copy of which is annexed hereto

In the presence of:

Name: ______ ___________________________________

Address: _______________________________________

Occupation: ____________________________________

Signature: _____________________________________

APPENDIX V
There shall be a Direct Debit logo to be utilized under t he Scheme in a form as
displayed below or any other form as the CBN may advise from time to time.

Signed By: ……………………………………………………….

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CENTRAL BANK OF NIGERIA

REGULATORY FRAMEWORK FOR BANK VERIFICATION NUMBER (BVN)


OPERATIONS AND WATCH-LIST FOR THE NIGERIAN
BANKING INDUSTRY

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Preamble

In exercise of the powers conferred on the Central Bank of Nigeria (CBN), by


Sections 2 (d) and 47 (2), of the CBN Act, 2007, to promote and facilitate the
development of efficient and effective payments systems for the settlement of
transactions, including development of the electronic payment systems; the
Central Bank of Nigeria hereby issues the Regulatory Framework for the Bank
Verification Number (BVN) Operations and Watch-List for the Nigerian Banking
Industry.

1.0 Regulatory Framework for Bank Verification Number (Bvn) Operations

1.1 Introduction

The Central Bank of Nigeria, in collaboration with the Bankers Committee,


proactively embarked upon the deployment of a centralized Bank
Verification System and launched the Bank Verification Number (BVN), in
February, 2014. This is part of the overall strategy of ensuring effectiveness of
the Know Your Customer (KYC) principles, and the promotion of a safe,
reliable and efficient payments system. The BVN gives a unique identity
across the banking Industry to each customer of Nigerian banks.

This Framework also defines the establishment and operations of a Watch-list


for the Nigerian Banking Industry, to address the increasing incidences, of
frauds, with a view to engendering public confidence in the banking
industry.

This framework, without prejudice to existing laws, is a guide for the


operations of the Watch-List in the Financial System. The Watch-list is a
database of bank customers identified by their BVNs, who have been
involved in confirmed fraudulent activities.

1.2 Objectives

The objectives of the Regulatory Framework for BVN and Watch-list


Operations in Nigeria are as follows:

i. To clearly define the roles and responsibilities of stakeholders;

ii. To clearly define the operations of the Bank Verification Number (BVN)
in Nigeria;
iii. To define access, usage and management of the BVN information,
requirements and conditions;

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iv. To provide a database of watch-listed individuals;

v. To outline the process and operations of the Watch-List; and

vi. To deter fraud incidences in the Nigerian Banking Industry.

1.3 Scope

The Framework provides standards for the BVN operations and Watch-list for
the Nigerian Banking Industry.

The Watch-list comprises a database of bank customers’ identified by their


BVNs, who have been involved in confirmed fraudulent activity in the
banking industry in Nigeria.

1.4 BVN Operations

1.4.1 Participants in the BVN Operations

This Regulatory Framework shall guide activities of the participants in the


provision of the Bank Verification Number (BVN) Operations in Nigeria.

Participants are grouped into five (5) categories:

i. Central Bank of Nigeria (CBN);


ii. Nigeria Inter-Bank Settlement System
(NIBSS);
iii. Deposit Money Banks (DMBs);
iv. Other Financial Institutions (OFIs); and
v. Bank Customers

1.4.1.1 Central Bank of Nigeria


The CBN shall:
Approve the Regulatory Framework and Standard Operating
Guidelines;
i. Approve eligible users for access to the BVN information;
ii. Ensure that the objectives of the BVN initiatives is fully
achieved;
iii. Conduct oversight on BVN operations and systems;
iv. Monitor other stakeholders, to ensure compliance;
v. Issue circulars to regulated institutions on the operations of
the watch-list;
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vi. Review framework for the operations of the watch-list, as
the need arises;
vii. Apply appropriate sanctions for non-compliance with this
document;

ix. The Director, Risk Management Department of the CBN shall review
cases referred to it before issuance of a formal clearance to an
individual for the purpose of delisting from the Watch-List; and

x. The Director, Risk Management Department of the CBN shall


mediate on issues arising from the BVN Watch-list.

1.4.1.2 Nigeria Inter-Bank Settlement System (NIBSS)


The NIBSS shall:

i. Collaborate with other stakeholders to develop and review the


Standard Operating Guidelines of the BVN;
ii. Initiate review of Guidelines, as the need arises, subject to the
approval of the CBN;

iii. Ensure seamless operations of the BVN system;

iv. Maintain the BVN database;

v. Manage access to the BVN information by the approved


users;
vi. Ensure recourse to the CBN on any request for BVN
information by any party;

vii. Ensure adequate security of the BVN information; and

viii. Maintain an on-line real-time Watch-list Portal.

NIBSS shall maintain the Watch-list database on behalf of stakeholders and


shall be responsible for the following:

i.Update the Watch-list database with the enlisted individuals by banks.

ii. Use the Watch-list report submitted by banks and duly endorsed by
the MD/CEO of the bank, with clearance from the Director, Risk

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Management Department of CBN to remove delisted individuals
from the database.

iii. Provide banks with a portal for the verification of watch-listed


individuals in their respective categories.

iv. Provide Application Programme Interface (API) for eligible institutions


to integrate their systems to the BVN database for online validation
of watch-listed individuals at transaction time.

v. Keep audit trail of all activities on the watch-list database.

vi. Put in place a Service Level Agreement (SLA), with relevant


stakeholders. vii. Provide access to the watch-list database to the
Central Bank of Nigeria.

viii. Comply with the ISO standards for security and business continuity.

1.4.1.3 Deposit Money Banks (DMBs) and the other Financial Institutions
(OFIs) the DMBs and OFIs shall:

i. Ensure proper capturing of the BVN data and validate same


before the linkage with customers’ accounts;

ii. Ensure all operated accounts are linked with the signatories’ BVN;

iii. Ensure customer’s name on the BVN database is the same in all of
his/her accounts, across the Banking Industry;
iv. Report confirmed fraudulent individual’s BVN to NIBSS for update
of the Watch-list database;

v. Report the BVN of deceased customers to NIBSS for update on


the BVN database;

vi. Render returns to NIBSS for enlisting individuals involved in


confirmed fraudulent activities. The report should be signed by
the Chief Audit Executives;

vii. The CBN (Banking Supervision Department) shall be granted real-


time online access, to access the Watch-list database;

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viii. The Chief Audit Executive of the customer’s bank shall be notified,
where a bank needs to watch-list a customer of another bank,
with a copy to CBN;

ix. The Chief Audit Executive of the customer’s bank, upon


notification, shall investigate within one (1) month and after
confirmation of the fraudulent activity, watch-list the customer
within two (2) business days;

x. The Chief Audit Executive of the customer’s bank shall be


sanctioned appropriately by the CBN if no action is taken within
one (1) month on the notification received from another bank on
its customer;

xi. Delisting of individuals from the Watch-list, after due clearance;

Xii. Integrating the banking system to the Watch-list database, for


online identification/verification of watch-listed individuals, as
transactions occur;

xiii. Enforcing the appropriate sanctions on customers as stipulated;


and

xiv. Updating the terms and conditions of account opening package


with the following disclaimer for new accounts and
communicating the update to existing customers;

‘If a fraudulent activity is associated with the operation of your


account, you agree that we have the right to apply restrictions to your
account and report to appropriate law enforcement agencies’.

1.4.1.4 Bank Customers


Bank Customers shall:

i. Abide by the Regulatory Framework for BVN Operations and the


Watch-list for the Nigerian Banking Industry;
ii. Customers shall report all suspicious or unauthorized activities on
their accounts.
1.5 The BVN Operational Processes and Procedures

These are as listed below:

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i. Enrollment: The enrolment is the process where individuals have their
biometric and demographic data captured in the BVN central
database system and a unique ID, the Bank Verification Number
(BVN), generated for the customer.
ii. Identification: This refers to the comparison of a person's biometrics
to the biometrics of all enrolled customers, to confirm if the person is
already enrolled or not, before issuing the BVN.
iii. Verification: This refers to the process of verifying the customer by
matching his/her biometric template with what has been captured
in the database.
iv. Linking of Customer’s Unique ID to all related bank accounts: This is
a process of using the customer’s unique ID generated after his/her
enrolment to link all his or her bank accounts, irrespective of which
bank the account is domiciled. This ensures that the customer
would not be able to enroll twice and that the customer’s activities
in other banks (especially suspicious ones) can be easily made
available to all banks where the customer has account(s).
v. Fraud Management: This is a process aimed at using a traceable
Unique Customer Identity to deter, prevent, detect and mitigate
the risks of fraud in the banking industry.
vi. Customer Information Update: This is the process by which the
customer updates his/her information on the central identity
database.

1.6 Eligibility for Access to the BVN

The following entities may have access to BVN information, subject to the
approval of the CBN:

i DMB
ii OFIs
iii MMOs
iv PSPs
v Law Enforcement Agencies
vi Credit Bureaus
vii Other entities as applicable.

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1.7 Access Fees
There shall be access fees payable for accessing information from the
database, subject to the approval of the CBN. Such fees shall be determined
from time to time.
1.8 Security and Data Protection
i. Parties involved in the BVN operations, shall put in place, secured hardware,
software and encryption of messages transmitted through the BVN network;
ii. BVN data shall be stored within the shores of Nigeria and shall not be routed
across borders without the consent of the CBN;
iii. Users of the BVN information shall establish adequate security procedures to
ensure the safety and security of its information and those of its clients, which shall
include physical, logical, network and enterprise security; and
iv. Parties to the BVN operations shall ensure that all information that its employees
have obtained in the course of discharging their responsibilities shall be classified
as confidential.
1.9 Risk Management
BVN participants must ensure that risks mitigations techniques are in place to
minimize operational, technical, fraud risks, etc. BVN operations should not
be susceptible to sustained operational failures, as a result of system outages.
1.10 Consumer Protection and Dispute Resolution
In the event of complaints by a bank customer, disputes shall be resolved by
banks or escalated to the CBN, when unable to resolve.
1.11 Updating Customer’s BVN Records
Change of customer records shall be allowed as follows:

i Name change with supporting documents, subject to a maximum


of twice a year.
ii Change of date of birth shall be allowed once with supporting
documents.
iii Minor correction due to errors supported with valid means of
identification. The Central Bank of Nigeria has issued circulars to this
effect.
2.0 Watch-List for the Nigerian Banking Industry
2.1 Fraud categories
The reporting institution shall use the table below to classify fraudulent activities.
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S/N Description Category

1 Forgery, compromise, complicity, fraudulent duplicate 0


enrolment. Any fraudulent infraction without monetary value.

2 Confirmed successful fraud with monetary value 1

3 When a customer is watch-listed more than once 2

4 Fraudulent individual that is at large 99

2.2 Stakeholders
Watch-list stakeholders include:
i. CBN
ii. Banks/Other Financial Institutions
iii. iii. Nigeria Interbank Settlement System
(NIBSS)

iv. iv. Banks’ Customers


2.3 Sanctions and Penalties

2.3.1 Framework
The following penalty shall apply to a violator of the framework:
i Appropriate penalties shall apply to any bank that fails to enlist
individuals confirmed to be involved in fraudulent activity.
ii Any other stakeholders who fail to perform its stipulated responsibilities
shall be penalized by the CBN.

2.3.2 Watch-list
The following penalties shall apply for customers on the watch-list:
i. A watch-listed individual shall not be allowed to enter into new
relationship with any bank.
ii. A bank may choose not to continue business relationship with account
holder on the watch-list. Where a bank chooses to continue an existing
business relationship with holders of account on the watch-list, the
account holder shall be prohibited from all echannels, such as ATM, POS,
Internet Banking, Mobile Banking, including issuance of third-party

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cheques. A watch-listed customer shall not provide reference to another
customer, neither shall he/she be allowed access to credit facility or
guarantee credit facilities.
iii. A watch-listed individual shall remain in the watch-list for a period as
specified in the penalty table. In the event of a reoccurrence, the tenure
shall begin to count from year one.
iv. Penalties that applied to watch-listed customers shall apply to all
accounts that he or she is a signatory to.
The following table prescribes the period of the penalty for each infraction on
the Watch-list.

S/N Infraction Category Penalty

1 Forgery, compromise, 0 As stipulated in Section 2.3.2


complicity, fraudulent above for a period of five (5)
duplicate enrolment. Any years.
fraudulent infraction without
monetary value

2 Confirmed successful fraud 1 As stipulated in Section 2.3.2


with monetary value above for a period of ten
(10) years
3 When a customer is watch- 2 As stipulated in Section 2.3.2
listed more than once above for a period of ten (10)
years and transactions are
limited to the branch where
account is domiciled

4 Individual who committed 99 As stipulated in Section 2.3.2


fraud and is at large above and POST-NO- DEBIT
flag on all accounts linked to
the BVN

1.4 Delisting from the Watch-list

All aggrieved individuals listed in the watch-list shall go to their bank to


obtain formal request for delisting.Only a bank that places an individual on
the watch-list can request for such delisting.
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2.4.1 Reasons for Delisting
i. Upon expiration of term in the watch-list

ii. Erroneous listing of a BVN on the watch-list

2.4.2 Process for Delisting

2.4.2.1 Automatic Delisting


Once a watch-listed BVN has served its term in the watch-list, the NIBSS
system shall automatically delist the BVN and notify the bank.

2.4.2.2 Manual Delisting


i. Where a bank realizes that an individual was placed on the watch-list
in error, the bank shall apply in writing, with supporting documents to
the Director, Risk Management Department of the CBN, for approval
to delist. The supporting documents shall be duly authorized by the
MD/CEO and the Chief Audit Executive of the bank.

ii. Upon approval from CBN, the bank shall forward the approval to NIBSS
for delisting.

iii. NIBSS shall effect the delisting within one (1) business day of receiving
the letter.

iv. The bank shall notify the customer appropriately.

Glossary of Terms

BANKING INDUSTRY – CBN licensed entities which includes DMBs, MFIs, MMOs & OFIs

BANKS- DMBs, MMOs & OFIs

BVN- Bank Verification Number

CBN- Central Bank of Nigeria

DMBs- Deposit Money Banks

KYC- Know Your Customer

MFIs – Micro Finance Institutions

MMOs – Mobile Money Operators

NIBSS- Nigeria Inter-Bank Settlement System


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OFIs - Other Financial Institutions

PIN- Personal Identification Numbers

PSP-Payments Service Providers

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SECURITIES & EXCHANGE COMMISSION

&

CENTRAL BANK OF NIGERIA

GUIDELINES

ON

SECURITIES SETTLEMENT IN NIGERIA

December 2016

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1.0 Preamble
Pursuant to the powers of the Securities & Exchange Commission (SEC)
conferred on it by section 13 and further section 312 (3) of the ISA 2007 and in
exercise of the powers conferred on the Central Bank of Nigeria (CBN) by
section 47 (2) of the CBN Act 2007 to promote and facilitate the
development of efficient and effective systems for settlement of transactions,
the SEC and the CBN hereby issue the following guidelines for the settlement
of all types of securities in Nigeria
1.1 Objectives
The main aim of this guideline is to promote competitive, efficient, safe
and sound post trading arrangements in Nigeria. This should ultimately
lead to greater confidence in securities markets and better investor
protection and should in turn limit systemic risk. In addition, the
guidelines seek to improve the efficiency of the market infrastructure,
which should in turn promote and sustain the integration and
competitiveness of the Nigerian securities markets.
1.2 Scope of the Guidelines
The guidelines set out the procedures for the settlement of securities in
Nigeria, including the rights and obligations of the parties. It also
covers the settlement procedures and settlement cycle for the trades
executed in the following exchanges:
i. The Nigerian Stock Exchange traded securities.
ii. FMDQ Over The Counter (OTC)b Securities.
iii. NASD Over The Counter (OTC) Securities
iv. Nigerian Commodity Exchange (NCX) traded securities.
v. Afex Commodities Exchange.
1.3 Parties to Securities Settlement in Nigeria
Parties to Securities Settlement in Nigeria shall include but not limited
to:
i Capital Market Registrars.
ii Central Bank of Nigeria
iii Central Securities Clearing System (CSCS) PLC (Central
Securities Depository- Clearing & Settlement Agent)
iv Custodians
v Dealing Members Firms
vi Deposit Money Banks (DMBs).
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vii Discount Houses.
viii FMDQ OTC
ix Investors.
x NASD OTC
xi Nigerian Commodity Exchange (NCX)
xii Nigeria Inter-Bank Settlement System PLC (NIBBS)
xiii Nigerian Stock Exchange (NSE)
xiv Payment Infrastructure Service Providers.
xv Securities & Exchange Commission
xvi Commodity Warehouses
xvii Other Financial Institutions (OFIs) as may be approved by
the CBN or SEC in the future.
xviii Afex Commodities Exchange
The below table depicts the details of trading, post-trade clearing and
settlement.

Table 1: The details of trading, post-trade clearing and settlement in Nigeria


Market Asset Class Trading Clearing Settlement
Platform Securities Cash
Stock Market Equities, NSE CSCS Delivery Via
ETFs, Mutual Versus settlement
Funds Payment banks CBN
CSCS RTGS
Unlisted Equities NASD CSCS Delivery Via
Company Versus settlement
Equities Payment banks CBN
CSCS RTGS
Bonds Bonds NSE, CSCS Delivery Via
FMDQ Versus settlement
Payment banks
CSCS, CBN and
S4 CBN S4

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Money Treasury Bills, CBN, CBN CBN S4
Market, CPs and FMDQ CSCS CSCS DMBs
other notes
Commodities Commodities NCX CSCS Delivery Via
market Versus settlement
Payment banks CBN
CSCS RTGS
Securities Equities & NSE CSCS CSCS Settlement
lending) Bonds banks
Currency FX FMDQ CBN CBN CBN RTGS

2.0 Securities Settlement Rules and Procedures


As a general rule, any securities transaction must trade or be reported
through a licensed Exchange in line with the standard settlement guidelines

2.1 The Exchange Traded Securities (Equities, ETFs, State, Corporate &
Supranational Bonds
2.1.1 After each day’s transaction (Day T), the clearing/settlement agent
(CSCS) shall generate the financial obligations of each dealing
member firms.
2.1.2 The clearing/settlement agent shall sort the financial positions of the
dealing member firms based on their respective settlement banks to
arrive at net position per settlement banks.
2.1.3 The clearing/settlement agent shall alert both the settlement banks and
the dealing member firms of their net positions on Day T
2.1.4 On Day T+2 for Equities and T+1 for Bonds, the clearing/settlement
agent shall transmit the final financial net settlement obligation of
dealing member firms to settlement banks through a payment system
agent (if the clearing/settlement agent has no direct access to the
CBN RTGS)
2.1.5 Where the clearing/settlement agent has direct access to the CBN
RTGS, the clearing/settlement agent shall transmit the final financial net
settlement obligation of the settlement banks to the CBN RTGS at the
same time when the security records are updated so as to achieve
simultaneous Delivery versus Payment (DVP).

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2.1.6 On settlement day (i.e. Day T+3 for Equities and day T+2 for Bonds), the
clearing/settlement agent deliver the security while the payment
system agent applies the net settlement advice against the settlement
bank account with CBN. On same day, settlement banks shall equally
credit or debit (funds) the bank account of the respective dealing
member firm.
2.1.7 On settlement day, the clearing/settlement agent shall update the
record of the investors (buyers & sellers) with the registrar.
2.1.8 On settlement day, the dealing member firms shall update the cash
accounts of their respective investors/customers with the proceeds
from the trade less charges/commission.
2.1.9 The dealing member firms shall debit/credit the customer account not
later than the next working day.
2.2 The Exchange Traded Securities (Federal Government Securities)
2.2.1 After each day’s transaction (Day T), the clearing/settlement agent
shall generate the financial obligations of each dealing member firms.
2.2.2 The clearing/settlement agent shall generate the financial positions of
the dealing member firms based on their respective settlement banks
to arrive at net position per settlement banks.
2.2.3 The clearing/settlement agent shall alert both the settlement banks and
the dealing member firms of their net positions on Day T
2.2.4 On Day T+1, the clearing/settlement agent shall transmit the final
financial net settlement obligation of dealing member firms to
settlement banks through a payment system agent (if the
clearing/settlement agent has no direct access to the CBN RTGS)
2.2.5 Where the clearing/settlement agent has direct access to the CBN
RTGS, the clearing/settlement agent shall transmit the final financial net
settlement obligation of the settlement banks to the CBN RTGS at the
same time when the security records are updated so as to achieve
simultaneous Delivery versus Payment (DVP).
2.2.6 On settlement day i.e. day T+2, the clearing/settlement agent delivers
the security while the payment system agent applies the settlement
advice against the settlement bank account. On same day,
settlement banks shall equally credit or debit (funds) the bank account
of the respective dealing member firm.

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2.2.7 On settlement day, the clearing/settlement agent shall update the
record of the investors (buyers & sellers) with the registrar.
2.2.8 On settlement day, the dealing member firms shall update the cash
accounts of their respective investors/customers with the proceeds
from the trade less charges/commission.
2.2.9 The dealing member firms shall debit/credit the customer account not
later than the next working day.
2.3 Federal Government Securities (Primary Auction)
2.3.1 After the release of auction result, the Government Securities Issuing
Agent shall notify each successful Bidder (primary dealer) their
financial obligations.
2.3.2 The successful Bidder shall fund its account with the Government
Securities Issuing Agent for settlement on or before Day T+2.
2.3.3 The Government Securities Issuing Agent shall debit the cash account of
successful Bidder on Day T+2 and credit their securities portfolio
account (DVP)
2.3.4 Where the cash account of successful Bidder is not funded on Day T+2,
the Government Securities Issuing Agent reserves the right to cancel
the trade.
2.3.5 On settlement day, Day T+2, the primary dealer shall transfer the
securities to the respective investor CSD or Custodian account as
indicated on their application
2.4 Commodities Exchange Spot Market Trades
2.4.1 All buying dealing members shall adequately fund their trading
accounts before carrying out any trading transactions. The selling
dealing members must deposit their commodities in any of the
accredited/delivery warehouses before making an offer on the
Exchange.
2.4.2 Buying dealing members shall fund their accounts to the full value of
their trading volume before commencement of trading session on Day
T.
2.4.3 After the trading session on Day T, the Commodity Exchanges shall
transmit the trading/transaction details to the clearing/settlement
agent (CSCS) for computation of settlement obligations of all parties of
the transaction

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2.4.4 On Day T + 2, clearing/settlement agent shall transmit the final financial
net settlement obligation of the transactions parties to settlement
banks through a payment system agent (if the clearing/settlement
agent has no direct access to the CBN RTGS)
2.4.5 On settlement day i.e. day T+3, the clearing/settlement agent will
electronically deliver the commodity while the payment system agent
applies the settlement advice against the settlement bank account.
On same day, settlement banks shall equally credit or debit (funds) the
bank account of the respective transaction parties.
2.4.6 On settlement day, the clearing/settlement agent shall update the
record of the commodity holders (buyers & sellers) with the warehouse.
2.5 Investor’s Payments Procedure
2.5.1 Customers account should be credited with proceeds from sale of
their securities directly into their bank account or deposit into their
stock broking account or other acceptable payment modes.
2.5.2 Payments shall reach the beneficiary’s account not later than the next
working day after settlement.
2.6 Dividend and Interest Payment
2.6.1 Issuers issuing dividends/interests shall make funds available to the
Registrar not later than seven working days after approval.
2.6.2 Registrars shall obtain account details of investors for the purpose of
electronic payment of dividend and interest.
2.6.3 The Registrars shall pay dividend to investors electronically on due date
and advise the investors through a credit advice.
2.6.4 Banks shall credit the account of investors not later than T+1 from the
date of receipt of mandate and funds from the Registrars.
2.6.5 Where the banks cannot apply funds into some investors account, the
funds and a schedule containing the list of the affected investors shall
be returned to the Registrar on or before Day T+2 with reasons for the
rejection.
2.6.6 The Registrar shall contact the affected investors within two working
days to correct or supply the required information and a copy of the
list of affected investors and reasons for rejection shall be sent to SEC.
2.6.7 Upon receipt of the required information, the Registrar shall re-send the
funds and the payment details to the banks within two working days.
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2.6.8 From the date of operations of these guidelines, all new issuance of
securities should indicate that dividend will be paid into bank account of
the investor electronically.
3.0 Rights and Responsibilities of the Parties
(A) Registrars
The Registrar shall have the following responsibilities:
(i) Select the bank or service provider for electronic payments.
(ii) Provide the basic infrastructure requirements for electronic payments.

(iii) Define and adhere to appropriate operational processes for initiating


electronic payments.
(iv) Obtain correct details of investors and validate them.
(v) Provide credit advice to investors for all dividend and interest
payments.
(B) Rights and Responsibilities of CSCS Plc.
(i) Financial Market Infrastructure that provides Central Securities
Depository (CSD) and sub-registry services for Nigerian Capital markets
(ii) Provides electronic clearing and settlement services for all eligible
Securities on the principle of Delivery versus Payment (DVP)
(iii) Define requirements for Settlements Banks
(iv) Advice Settlement Banks and NIBSS/CBN on dealing member firms
financial obligations arising from Securities transactions.
(C) Rights and Responsibilities of Custodians
(i) Custodians as clearing members are to ensure that bank accounts are
funded on or before Settlement day.
(ii) To ensure asset separation between Custodians and clients at all times
(iii) Periodic account update to the investors.
(D) Rights and Responsibilities of PDMMS
(i) Dealers to fund their settlement account on behalf of their clients
on/before settlement day
(ii) Dealers to transmit proceed to investors latest by the next day after
settlement.

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(E) Rights and Responsibilities of Investors; An Investor has the following
responsibilities:
(i) Maintain an account with a DMB.
(ii) Confirm and provide proper details of the account to the Registrar and
Stockbrokers.
(iii) Alert the Registrar or Stockbroker if payment is not effected after being
advised.
(F) Rights and Responsibilities of Banks
Banks have the following responsibilities:
(i) Process electronic payments instructions in accordance with the terms
defined by the payments system.
(ii) Provide correct account numbers and bank sort codes to
beneficiaries.
(iii) Provide timely information on customer enquiries.
(G) Payment Service Providers
The Payment Service Providers have responsibility for the payment
initiation platform and the electronic reporting system used by the
Registrars and Stockbrokers. Their responsibilities include:
(i) Provision of a secure electronic platform for payment initiation and
online transaction reporting.
(ii) Implementation and support of the electronic payment platform.
(iii) Validation of received payment instructions to ensure that transactions
are from the purported originator and have not been manipulated.
(iv) Processing of received instructions and onward transmission to
the DMBs for Registrars and Stockbrokers using appropriate ACH
Infrastructure with capabilities for bulk processing.
(v) The capability to generate and send Credit Advice to funds
beneficiary via email and/or SMS when payments are made provided
the Registrars and Stockbrokers pays for the service.
(H) Payment Infrastructure Service Providers
The Payment Infrastructure Service providers include all organizations that
provide switching and settlement services for electronic payments. Their
responsibilities include:

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(i) Provision of electronic payments and clearing services in accordance with
the Nigeria Bankers Clearing House Rules and other appropriate
guidelines issued by the CBN.
(I) Central Bank of Nigeria and Securities & Exchange Commission
The CBN and SEC shall have the following responsibilities:
(i) Provide oversight functions on securities settlement systems.
(ii) Ensure adequate laws are put in place to safeguard the interest of all
parties.
(iii) Apply appropriate sanctions in the event of default.
(iv) Review and amend the Guidelines from time to time.
4.0 Tariff/Charges
(i) Payment by the Registrars and Stockbrokers: Charges for transactions
should be agreed between the Registrars/Stockbrokers their banks, and
Service Providers and included in their SLA
(ii) Payment to Investors: There shall be no charges to investors on e-
payment of dividend/interest.
5.0 Dispute Resolutions
Dispute Resolution mechanism in respect of securities settlement shall be
governed by the relevant rules issued by CBN, SEC, The Exchanges, CIS
and IST’s directives.
6.0 Sanctions
Regulatory bodies shall review and apply appropriate sanctions in the event of
default and/ or infractions in securities settlement.

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7.0 Glossary of Terms

Clearing/Settlement Agent: This refers to a corporate body responsible for


processing/determining net positions of institutions arising from a trading/clearing
session and or further processing the settlements into the account of affected
institutions.
Delivery versus Payment: A securities settlement mechanism that links a securities
transfer and a funds transfer in such a way as to ensure that delivery occurs if and
only if the corresponding payment occurs
The Exchanges: Any trading platform owned by a self-regulatory organization and
approved by the SEC.
Settlement System: Infrastructure for settlement of trade (Gross or net)
Net Settlement Positions: Value of total sales less total purchase for each institution
Settlement Banks: Banks that receive net position on behalf of the owner institutions
Net NTB: Total NTB purchased less total NTB sales

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List of Abbreviations
ACH: Automated Clearing House
ASCE: Abuja Securities and Commodity Exchange
ATS: Automated Trading System
CBN: Central Bank of Nigeria
CBN RTGS: Central Bank of Nigeria Real-Time Gross Settlement System
CDF: Certificate Deposit Form
CHN: Clearing House Number
CIS: Chartered Institute of Stockbrokers CSCS:
Central Securities Clearing System Plc.
Day T: Transaction Day
DMBs: Deposit Money Banks
DVP: Delivery versus Payment
FGN: Federal Government of Nigeria
FMBN: Federal Mortgage Bank of Nigeria
IST: Investment & Securities Tribunal
MMD: Money Market Dealers
NCX: Nigeria Commodity Exchange
NIBSS: Nigeria Inter-Bank Settlement System
NTB: Nigeria Treasury Bills
NSE: The Nigerian Stock Exchange
OBB: Open Buy Back
OTC: Over-The-Counter
PDMMs: Primary Dealers and Market Makers
Repo: Repurchase
RTGS: Real-Time Gross Settlement System
SEC: Securities & Exchange Commission
WDAS: Wholesale Dutch Auction System
SLA: Service Level Agreement
SRO: Self-Regulatory Organization
NASD: National Association of Securities Dealers
FMDQ: Financial Markets Dealers Quotation

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APPENDIX I: FORM OF COLLECTING INVESTORS’ ACCOUNT DETAILS

Dear Sirs,

The details of my/our bank account are as follows:-

DMB

Address of Bank Branch:

Account Name:
Account Number:

Sort Code:

Phone Number
Email Address

Signed at __________ on this __________ day of __________ 20 __________

________________________________________
[NAME OF INVESTOR]

In the presence of:

Name:_________________________________________

Address:_______________________________________

Occupation:____________________________________

Signature:_____________________________________
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GUIDELINES ON TRANSACTION SWITCHING IN NIGERIA

1.0 Preamble
In exercise of the powers conferred on the Central Bank of Nigeria (CBN), by
Sections 2 (d) and 47 (2) of the CBN Act, 2007, to promote and facilitate the
development of efficient and effective systems for the settlement of
transactions, including the development of electronic payment systems; the
CBN hereby issue the following Guidelines on Transactions Switching in Nigeria.
This Guidelines supersede the previous Guidelines on Transaction Switching
Services and the Operational Rules and Regulations for the Nigeria Central
Switch (NCS).
2.0 Transactions Switching Services
2.1 Scope
The Guidelines set out the procedures for the operation of switching services in
Nigeria, including the rights and obligations of the parties to the switching
contract. It also compels the switching companies to meet with minimum
standards for switching, as approved by the CBN.
2.2 License of Switching Companies
For a switching company to operate in Nigeria, it shall obtain a Switching
license from the CBN.
2.3 Parties to Transaction Switching
Parties to Transaction Switching include, but not limited to:
i. Nigeria Central Switch
ii. Switching Companies
iii. Card Issuers
iv. Merchant Acquirers
2.4 Rights and Responsibilities of a Switching Company
A switching company shall:
2.4.1 Operate its switch in accordance with these guidelines
2.4.2 Ensure compliance with minimum standards on Transaction Switching,
as provided in this Guidelines
2.4.3 Open its network for reciprocal exchange of transactions/messages
between it and the Nigeria Central Switch

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2.4.4 Enter into agreement with member institutions, specifying in clear
terms the responsibilities of each party, operational rules and
procedures and liabilities of parties in the event of loss of funds
arising from negligence of any of the parties. A copy of the
agreement shall be submitted to the CBN for record purposes.
2.4.5 Ensure that all notifications and information that its employees have
obtained in the course of discharging their responsibilities are treated
as confidential.
2.4.6 Establish adequate security procedures to ensure the safety and
security of its information and those of its clients, which shall include
physical, transactions, logical, network and enterprise security.
2.4.7 Submit to the CBN, its security plans and periodic updates. Any security
breach shall have a record and such instances shall be reported to
CBN for record purposes.
2.4.8 Have a Business Continuity Plan, approved by the CBN.
2.4.9 Ensure full compliance with relevant provisions of payments system
guidelines, policies and Circulars issued by the CBN, in relation to its
operations.
2.4.10 Not be an issuer of payment cards.
2.4.11 Supply to the CBN, information on usage, volume and value of
transactions and other relevant information, as and when due, and in
the format required by the CBN.
2.4.12 Report all instances of fraud/attempted fraud on the switch to the
CBN.
2.4.13 In addition to the primary site, maintain a business continuity
arrangement, to ensure failsafe operation.
2.5 Rights and Responsibilities of Member Institutions
2.5.1 Acquirers whose transactions are switched shall maintain databases
that can handle information relating to cardholders, merchants and
their transactions for a minimum period of seven (7) years.
2.5.2 Information on usage, volume and value of transactions and other
relevant information shall be forwarded to the CBN as and when due
and in the format required by the CBN.

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2.5.3 Each member institution shall settle fees charged for the services
provided by the switching company in relation to the operation of
the switching network, in accordance with the agreed tariff.
2.5.4 The issuer shall be held liable (where proven) for frauds with the card
arising from card skimming or other compromises of the issuer’s security
system.
2.5.5 An acquirer shall be responsible for ensuring that merchants put in
place reasonable processes and systems for confirming payee identity
and detecting suspicious or unauthorized usage of electronic payment
instruments, both where customer/card is physically present at point of
sale or in cases where customer/card is not physically present, like in
Internet/web and telephone payment systems/portals.
2.6 Rights and Responsibilities of the Nigeria Central Switch
The Nigeria Central Switch shall:
2.6.1 be licensed by the CBN
2.6.2 be independent of other switching companies
2.6.3 not own or promote any card business or retails products and shall be
run in accordance with international best practice
2.6.4 NIBSS shall make available to the Industry Stakeholders APIs and
specifications that will enable licensed PSPs have access to services
developed or hosted at NIBSS on behalf of the industry.
2.6.5 Allow connection by all switching companies that meet its
requirements for participation and have obtained the necessary
license from the CBN.
2.6.6 Enter into a written agreement with switching companies, specifying in
clear terms the responsibilities of each party, and operational rules and
procedures and copy shall be submitted to the CBN.
2.6.7 Ensure that all notification and information that its employees have
obtained in the course of discharging their responsibilities shall be
treated confidentially
2.6.8 Establish adequate security procedures to ensure the safety and
security of its information and those of its clients, which shall include
physical, transaction, logical, network and enterprise security
2.6.9 Charge fees for the services provided, in accordance with agreement
reached under sub-guideline 2.6.6
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2.6.10 Have a Business Continuity Plan approved by the CBN
2.6.11 Supply information on usage, volume and value of transactions and
other relevant information to the CBN as and when due and in the
format required by the CBN
2.6.12 Maintain database of transactions for a minimum period of seven (7)
years.
2.6.13 Report all instances of fraud / attempted fraud to the CBN
2.6.14 Have primary site, hot backup site and contingency site, as minimum
requirement
2.7 Technical Requirements/Standards
2.7.1 Interface Specification
The interface specifications will be provided to all Parties to Switching
Services, as part of the NCS Interconnectivity requirements.
All interface specifications will conform to the international ISO 8583
standards.
All NCS Partner Institutions will have to develop both Issuer and
Acquirer Interfaces that comply with the NCS Interface Specification.
2.7.2 Communication and Message Protocol
The NCS ISO 8583; Host External Message is based on the standard
external message developed by the International Standards
Organization (ISO). It is a variable-length and variable-content
message that can be configured differently, based on the type of
message being sent.
The NCS ISO Host Interface component creates and interprets external
messages according to the specifications in the NCS Interface
specification document.
The NCS ISO 8583; host external message allows incoming and
outgoing messages to be configured individually by a host, depending
on the information the host chooses to send and receive.
The message format shall be ISO 8583. Details are provided in the
NCS Interface Specification document.
i. All Partner Institutions shall maintain secure dedicated Virtual
Private Network TCP/IP data communication to the NCS.
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ii. The communication protocol shall be TCP/IP.
iii. The Hardware Security Module (HSM) Connectivity - TCP/IP
2.7.3 Connection to NCS by Institutions
The Nigeria Central Switch project requires a secure connectivity to all
existing Switches in Nigeria and new entrants. A secure
interconnectivity has to be established with the NCS.
2.7.4 Security
Parties to Switching Services involved in card-operated devices, must be
capable of providing secure hardware encryption/decryption of
customer PINs and messages for onward transmission to the NCS network.
The Central Switch and Switching Companies shall:
2.7.4.1 Conduct half-yearly planned system tests to ensure ability to
seamlessly switch from primary to back-up systems. Such tests shall
be communicated in advance to all member institutions and the
CBN. These tests shall take place at times during the week and
day when the least amount of network traffic occurs, in order to
minimize impact on customer service. The results of the tests shall
be shared with all member institutions and Director, Banking and
Payments System Department of CBN within 3 business days.
2.7.4.2 Publish a monthly report of all downtimes experienced to all
member institutions and the CBN. Such reports shall include the
duration of the downtime, the cause(s) of the downtime, and the
remedial actions taken to prevent recurrence
2.7.4.3 Ensure that all devices/software used for transmitting financial
data within their switching networks are EMV Levels 1 & 2
compliant (or any newer EMV version)
2.7.4.4 Be in regular compliance with PCI Data Security Standards (PCI
DSS)
2.7.4.5 The Nigeria Central Switch shall, subject to CBN approval and in
consultation with member institutions, maintain minimum
technical standards on interoperability, messaging, network
connectivity, network monitoring, security, disaster recovery,
fraud management, and programming interfaces

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2.7.4.6 An acquirer/member institution shall be responsible for
deploying terminals/payment devices that are EMV Levels
1 & 2 compliant (or any newer EMV version).
2.7.4.7 An acquirer/ member institution shall be responsible for
deploying terminals/payment devices with PIN Entry Devices
(PED) that are PCI PED complaint.
2.7.4.8 The Central Switch shall maintain a list of approved network/link
service providers. All connecting switches for their connection to
NCS, are required to maintain a minimum of two (2) network/
link service providers as the primary and secondary link.
2.7.4.9 The central switch shall stipulate the minimum network/link
bandwidth that must be provided by each network/link
provider
2.7.4.10 The Nigeria Central Switch shall stipulate the network/link
standards and specifications for all equipment provided by
each network/link provider at all terminating points
2.7.4.11 all switches have the duty to transmit all messages or financial
transactions emanating from the Nigeria Central Switch to their
expected destinations, without regard to the originating switch
of such message or financial transaction.
2.7.4.12 No switch shall reject, degrade, give lower priority or service, or
in any way negatively affect any message or financial
transaction originating from the Nigeria Central Switch
2.7.4.13 all switches shall connect to the Nigeria Central Switch
3.0 Operational Rules and Procedures

3.1 Types of Transactions

The central switch/switching companies shall only handle switching


services in accordance with the provisions of these guidelines.

3.2 Operating Hours

3.2.1 The central switch/switching companies shall operate 24 hours a day and
7 days a week.

3.2.2 In case of system failure, the central switch / switching companies shall
automatically switch to its / their back-up site (s).
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3.3 Settlement Mechanism

3.3.1 The Nigeria Central Switch shall work out the daily net settlement
positions of member institutions and forward same through the ACH to
the CBN for settlement

3.3.2 Member Institutions shall provide adequate collaterals, as deemed


sufficient by the CBN, in form of Federal Government Securities in line
with their contract agreements with Switching Companies.

3.3.3 Alternatively, member institutions may utilize existing cheque clearing


collaterals held with the CBN, to meet the collateral requirement for
transaction switching mentioned in 3.3.2 above.

3.3.4 The CBN shall effect the posting of the net settlement positions of
member institutions into their accounts.

3.4 Fees and Charges

3.4.1 Fees and charges for transactions switching, processing, etc. are to be
agreed between service providers and banks / entities to which the
services are being provided.

3.5 Special Provision

3.5.1 The central switch/switching companies and their members shall be


required to undertake measures to prevent the use of their networks for
purposes associated with money laundering and other financial crimes.

3.6 Penalties

3.6.1 Sanctions, in the form of monetar y penalties and / or suspension of the


specific service switching service (s), would be imposed on erring
switching companies and / or their member institutions for failure to
comply with any of the provisions of these Guidelines and other relevant
Guidelines, issued by the CBN from time to time

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4.0 Nigeria Central Switch

4.1 Background

The Nigeria Inter-Bank Settlement System (NIBSS) Plc was incorporated in April
1993 on the mandate of The Bankers Committee, to facilitate transfer of funds
between the banks and discount houses. NIBSS is owned by all Licensed Banks
and Discount Houses in Nigeria, including the Central Bank of Nigeria (CBN). It
commenced operation in June 1994. The operations of NIBSS takes the form of
banks transmitting financial transaction data on-line and retrieving reports and
statements of accounts on-line via secure technology networks.

Highlight of the mandate of NIBSS, as entrenched in her memorandum and


article of association is to:

4.1.1 Carry on business as a service oriented institution that provide the


mechanism for same day clearing and settlement of inter-bank
transfers and payments

4.1.2 Provide the infrastructure for the automated processing and settlement
of transactions between banks

4.1.3 Initiate and develop an integrated nationwide network for the


electronic or paperless funds transfer and settlement of transactions.

The mandate to develop and operate a national switch for Nigeria


was formally issued by The Bankers Committee to NIBSS Plc in May
2006.

4.2 The Objectives of the Nigeria Central Switch (NCS)

The Nigeria Central Switch is designed to:

4.2.1 Provide interconnectivity and interoperability amongst approved EFT


switch initiatives, Banks, MMOs and other Payment Service Providers in
Nigeria as may be directed by CBN ;

4.2.2 Specify the Nigeria EFT interface standards;

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4.2.3 Provide vital retail payment statistics for tactical & strategic planning
purposes; provide a mechanism for proactive detection of card frauds;

4.2.4 Provide a central switch which integrates modules for accessing


external content, transaction service networks, internal billing
applications and related packages;

4.2.5 Provide seamless integration of the Nigeria retail payment system with
the West

4.4.1 Switching Companies

These are electronic funds transfer and transaction switching and


processing service providers that operate within Nigeria. It also
includes future service providers. The switching companies facilitate
the exchange of value between financial service providers,
merchants, their customers and other stakeholders.

4.4.2 Deposit Money Banks

These are financial institutions operating in the country and are otherwise
called issuers of payment tokens (cards, vouchers, etc), which are used
on the network of switches.

4.5 Responsibilities

4.5.1 Partner Institutions

Each partner institution shall undertake to satisfy and ensure continued


compliance with the eligibility criteria and conditions for admission, as
outlined in the operational rules and regulations of the Nigeria Central
Switch and should:

a. Implement the interface connectivity to the NCS.


b. Ensure the availability of secure connectivity to the NCS and duly notify
of any service failure.

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c. Maintain a record of all service failure times in a log report, which shall
include date, time and period of service failure.
d. Ensure message format conform to the ISO 8583 standard.
e. Ensure that their banks pledge securities that provide 110% protection
for their operations

f. Maintain and provide audit trails of transactions flowing through its


systems and the NCS for a minimum period of six years.

g. Adhere to confidentiality and privacy rules.

h. Ensure that all its transaction acquiring channels (ATM, POS, Web,
etc) accept payment tokens of all NCS partner switches, in
compliance with the NCS minimum transaction set.

i. Shall provide transaction logs and traces when requested, to aid


resolution of disputes arising from financial transactions.

j. Shall provide a transaction log promptly to any requesting partner


institution concerning any NCS-routed transaction, to aid resolution of
card transaction complaints and disputes.

4.5.2 The Nigeria Central Switch (NCS)

The NCS shall after certification of the partner Institutions ensure:

A secure connectivity to the central switch

a. Routing and switching of transactions amongst Partner Institutions.

b. Switching of transactions between all transacting parties

c. Maintenance and distribution of statistics relating to availability and


service performance of the NCS and Partner Institutions.

d. The enforcement of all agreements reached with the participating


institutions and communications providers.

e. To apply the appropriate fees and charges to all transactions passing


through the through the NCS
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f. Generation and secure distribution of reports, as illustrated in the
Service Level Agreement.

g. The maintenance of transaction integrity and security for all


transactions passing through the NCS.

h. Notification of Partner Institutions on status of Settlement of


Transactions.

i. Notify all existing partner and institutions of the joining of a new partner
institution to enable them configure their systems to accept payment
tokens of the new institution

j. NCS shall provide full support to services of all stakeholders

4.6 Technical Requirements

4.6.1 Interface Specifications

The interface specifications will be provided to all Parties to Switching


Services as part of the NCS interconnectivity requirements.

All interface specifications will conform to the ISO 8583 standards

All NCS Partner institutions will have to develop both Issuer and Acquirer
Interfaces that comply with the NCS Specification:

4.6.2 Communication and Message Protocol

The NCS ISO 8583; Host External Message is based on the stansard external
message developed by the Internaional Standard Organization (ISO). It is
a variable-length and variable-content message that can be configured
differently, based on the type of message being sent.

The NCS ISO Host Interface component creates and interprets external
messages according to the specifications in the NCS Interface
specification document.

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The NCS ISO 8583; host external message allows incoming and outgoing
messages to be configured individually by a host, depending on the
information the host chooses to send and receive.

i. The message format shall be ISO 8583. Details are provided in the
NCS Interface Specification document.

ii. All Partner Institutions shall maintain secure dedicated Virtual


Private Network TCP/IP data communication to the NCS.

iii. The communication protocol shall be TCP/IP.

iv. The Hardware Security Module (HSM) Connectivity – TCP/IP

4.6.3 Connection to NCS by Institutions

The Nigeria Central Switch project requires a secure connectivity to all


existing Switches in Nigeria and future new entrants. A secure
interconnectivity has to be established with the NCS.

4.6.4 Security

Parties to Switching Services involved in card-operated devices, must be


capable of providing secure hardware encryption/decryption of
customer PINs and messages for onward transmission to the NCS network.

4.7 Nigeria Central Switch (NCS) Operations

4.7.1 The NCS Minimum Transactions Standard

The following minimum transaction set must be supported by the NCS, in


order to achieve interoperability:

4.7.1.1 POS Transaction Types

a. Purchase

b. Purchase Reversal

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4.7.1.2 ATM Transaction Types

a. Withdrawal

b. Balance Enquiry

c. PIN Change

Reversal Transaction shall be available for each applicable transaction


type. The NCS shall support new transaction type within six (6) months of a
request. Within 30 days of the request, the NCS shall revert on feasibility
and timelines.

4.7.1.3 Transactions from Other Devices/Channels

Because the source of all transactions will be the Custom NCS


Interface, recognized by that interface, regardless of which type of
device or channel was used to initiate the transaction at the acquiring
switch.

This will allow the system to process transactions from, for example, the
internet, mobile phones, and IVR (interactive voice response) systems.

4.7.1.4 Modus Operandi

Transactions that route to or through the NCS for authorization do so in


a series of transaction messages.

4.7.1.5 Stand-in Processing

The NCS shall not provide stand-in processing of transactions.

4.7.1.6 Reports

The NCS shall generate and circulate the following reports via secured
online mode.

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S/N Description
1 Daily Activity Report By Source Switch; By
Bank, MMO and by any other party switching its transaction
through NCS
2 Daily Activity Report By Destination Switch; By Bank, MMO and by any
other party switching its transaction
through NCS

3 Net Settlement Report By Switch; By Bank, MMO and by any other


party switching its transaction through NCS

4 Detailed transaction report

5 Transactio volume and value by terminal type and location

4.8 Fees and Charges


The NCS shall be kept operational at all times and as a result; all participants
in the network shall bear the joint responsibility of supporting its operations.
NIBSS considers the opportunity of participants to share networks that do not
belong to them and thereby reducing investments in building infrastructures
as a huge cost saving benefit.

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The associated cost for the discharge of the functions of the NCS is as follows:

4.8.1 Joining Fees

All parties to the Switching Services joining the NCS will be uired
reqto pay a one off fee. It
is expected that these joining fees will cater for the efforts in infrastructure installation and
systems delivery , as well as contributory license for the development of payment system in
Nigeria.

4.8.2 Transaction Charges

The Transaction Charges are of two types;

1. Switching Charge – NIBSS shall charge for every financial transaction that hits
the NCS; as shown in the table below.

Device Payer
ATM Issuer
POS/WEB Acquirer or Acquirer Network
Processor
MOBILE MONEY Ope rator

2. Settlement Charge – NIBSS shall charge for every settlement transaction which
normally is received on net basis.

Charges will be reviewed at regular intervals by the Management of NIBSS and


approved by the Board of Directors, to ensure continuous operations of the NCS,
for the benefit of all stakeholders.

4.9 Service Level

The four basic design goals that govern the development of the NCS are:

a. Availability
b. Data Integrity

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c. Performance and Scalability
d. Open Interfac es
e. Cost Reduction

It is therefore expected that all other connecting Partner Institutions must have similar
architecture, as transactions are mission critical and pivotal to EFT processing.

As a result, the following draft service levels are expected , a s a minimum requirement.

The NCS would be available for transactions 24 hours and 7 days a week.

The NCS system’s performance will be measured in terms of:

I. Up -Time
II. Response Time

The performance of the Partner Institutions systems will be measured by:

i. Success Rates – successful transactions as a percentage of all transactions


switched to Partner Institutions for authorization.

ii. Response Times

The NCS would maintain an uptime of at least 99% during any 24 hour period, to all
Partner Institutions.

Partner Institutions connected to the NCS as Issuers must achieve transaction


success rates of at least 97% any 24-hour period.

For all transaction requests routed to authorizing institutions a timeout period will be
set, after which the institution node will be deemed to be down and the
transaction will be classified as a failed transaction and declined. This period will be
agreed with the authorizing institution, but will be no longer than 90 seconds.

Switching Companies may not be held responsible for unsuccessful transactions


due to failures that occur at the upstream authorizing entity.

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The NCS will be responsible for maintaining and distributing all statistics relevant to the
above.

All NCS Partner Institutions will conform to these and other perfor mance standards, which
may be agreed from time to time.

All NCS Partner Institutions will maintain and provide audit trails for all transactions which
pass between their system s and the NCS for a minimum of 7 years.

The timeout parameters on every term inal that allows access to the NCS must be no less
than 40 seconds and not more than 90 seconds.

4.10 Settlement

4.10.1 Business Day

A Business Day for the NCS will be a 24 -hour period. A typical business day will start
from 12.00.00am to 11.59.59 pm.

4.10.2 Transaction Settlement Procedure


1. Settlement among the NCS Partner Institutions will be processed through
the NIBSS Inter Bank Engine.
2. The NCS end-of-day processing cycle will commence at 12.00am, at the
close of each Business Day.
3. A Settlement report file, consisting of the net position of each Partner
Institution will be generated.
4. The Settlement report file will be sent to Partner Institutions in a secure
electronic format.
5. Postings to the CBN accounts will take place after each settlement session

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4.10.3 Settlement during Weekends/Non-Working Days

1. Transaction settlement will be done every day except on weekends


and/or public holidays or non-working days. However, Settlement
Report Files will be generated every day, including weekends and
on non working days
2. Settlement Report Files generated for each non-working day will be
processed on the next working day.
3. NIBSS will send settlement confirmation reports to Partner Institutions,
confirming the settlement (or non-settlement) of daily transactions
4.11 Penalties and Dispute Resolution
4.11.1 Penalties
Failure to comply with the provisions of these guidelines shall be
referred to the CBN for the appropriate regulatory sanctions.
4.12 Dispute Resolution
Should any dispute arise from the operation and performance of the
NCS, it shall be settled first by a meeting of at least one senior
executive officer of each Party. If upon exercise of due diligence,
the latter does not resolve a dispute within 15 days of the notifying
Party’s calling of the meeting, either Party may refer the matter to
CBN.
4.13 Confidentiality Rule and Prohibitions
The rule governing the NCS is such that each of the Parties and their
Advisors will disclose and provide to each other, such Confidential
Information as the Disclosing Party deems necessary for the relevant
business purpose under the NCS.
4.13.1 Confidential Information” shall for the purposes of these Rules mean
any and all information that a Party discloses to the other, in
connection with the relevant business purpose, which includes, but
is not limited to the following:
Any customer information, technical, commercial, financial,
marketing or business information and know-how, including without
limitation, all correspondence, notes, computer disks and tapes,
documents, records, data, services, financial information,
marketing brochures or other information, in whatever form, relating
to the parties, their operating documents, standard forms, which
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information has been communicated to the other, or otherwise
acquired by the other during the course of these services, whether
such information is formally designated as confidential or not.
4.13.2 The Receiving Party will not disclose Confidential Information to any
person, firm, corporation, association or any other entity for any
reason or purpose whatsoever, provided however, that the
Receiving Party may disclose the Confidential Information on a
need-to-know basis to its internal management who are directly
involved in the development and operation of the NCS, legal and
financial advisors retained specifically to provide advisory services
and provided that the Receiving Party ensures that such persons
are bound by an equivalent duty of confidentiality.
4.13.3 The Disclosing Party may give notice in writing at any time requiring
that any part of the Confidential Information disclosed be either
returned or destroyed, such return or destruction to be combined
with a notice to the Disclosing Party to the effect that upon such
return or destruction the Receiving Party has not knowingly retained
in its possession or under its control, either directly or indirectly, any
Confidential Information or copies thereof. In any case, the
Receiving Party must comply with any such request within thirty (30)
days of receipt of such request.
4.13.4 All parties to Switching Services shall ensure that all notifications
and information that its employees have obtained in the course of
discharging their responsibilities are treated as confidential.
4.14 Prohibition of Anti-competition Agreements
No parties to Switching Services in Nigeria shall enter into any
agreement in respect of any switching service that shall cause or is
likely to cause adverse effect on competition. Any agreement
entered into in contravention of this provision shall be null and void
and of no effect.
4.14.1 Any agreement entered into between parties to Switching Services or
decision taken by any association of switching companies or
association of persons, including cartels engaged in identical or similar
provision of switching services, which:
a) Limits or controls markets, technical development, investment or
provision of Switching Services

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b) Shares the market or provision of services by way of allocation of
geographical area of market, or number of customers in the
market or any other similar way; shall be considered an anti-
competition agreement.
4.14.2 Any agreement amongst parties to Switching Services, in respect
of switching services, including:
a) Tie-In Agreement;
b) Exclusive Service Agreement
c) refusal to deal;
Shall be considered an agreement in contravention of anti-
competition agreement if such agreement causes or is likely to
cause adverse effect on competition in Nigeria.
4.15 Prohibition of Abuse of Dominant Position
4.15.1 No parties to Switching Services shall abuse its dominant position by
directly or indirectly imposing unfair or discriminatory condition and
fees in the provision of its services.
4.15.2 Equally, no parties to Switching Services shall limit or restrict the
provision of switching services or market thereof or technical or
scientific development relating to switching services to the
prejudice of consumers.
4.15.3 No parties shall indulge in practice or practices resulting in denial of
market access.
4.16 Prohibition of Competition by NIBSS/NCS
Nigeria Inter-Bank Settlement System Plc (NIBSS), the Nigeria Central
Switch (NCS) and any company, person or group of persons performing
the roles, duties or functions of the Nigeria Central Switch SHALL NOT
under any circumstance whatsoever or howsoever engage in
competition with any Payment Card Industry Scheme, Operator or Service
Provider. Accordingly, Nigeria Inter-Bank Settlement System Plc (NIBSS),
the Nigeria Central Switch (NCS) and any company, person or group of
persons performing the roles, duties or functions of the Nigeria Central
Switch shall not:
4.16.1 Be or engage in any business as:
a. A Card Scheme
b. Issuer of Payment Cards
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c. Issuer-Processor
d. Acquirer
e. Acquirer-Processor
4.16.2 Support or promote any Card scheme
4.16.3 Own, deploy, maintain or install acceptance and acquiring devices
such as Point of Sale terminals and Automatic teller Machine.
5.0 Definition of Terms
The terms below shall have the following meaning for the purpose of those
Guidelines.
1) Acquirer means bank or any other legal person concluding
contracts with merchants concerning acceptance of payment by
means of electronic payment instrument.
2) Cardholder means any person who holds a payment card for the
purpose of effecting payment in respect of good services.
3) Competent Authorities include Courts, EFCC, ICPC, Regulatory
Authorities such as the CBN, NDIC etc
4) Interconnectivity means ability for reciprocal exchange of
transactions/messages between two or more switching networks.
5) Interoperability means ability to issue cards and deploy devices in
such a way that all customers (card holders, merchants and issuers)
perceive operations, while obtaining service, as if the
interconnected networks were one.
6) Member Institutions means banks and other financial institutions that
are on the network of a particular switching company;
7) Merchant means an organization or entity that undertakes to
conclude a contract with an acquirer and / or issuer concerning
accepting payment by means of an electronic payment instrument;
8) MPR means Minimum Policy Rate
9) NCS stands for Nigeria Central Switch, an organization mandated to
provide a single point of access, interconnectivity and
interoperability amongst Payment Service Providers in Nigeria.
10) NIBSS stands for Nigeria Inter-Bank Settlement System, it was
mandated to among others, act as the Automated Clearing House

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(ACH), Payment Terminal Service Aggregator (PTSA) and Nigeria
Central Switch (NCS) for Nigeria.
11) Offline transaction means a transaction in which no direct
connection is made between the device(s) involved in the
transaction and a centralized computer system for the purpose of
effecting settlement, or authenticating the transaction before it is
executed.
12) Online transaction means a transaction in which there is a direct
connection between the device(s) and a centralized computer
system for effecting settlement or authorization or validation before
a transaction can be executed.
13) PIN means Personal Identification Number
14) Switching means a system that captures electronic financial
transactions from touch-points, applies rules, determines
destinations, delivers the transactions and gives appropriate
feedback;
15) EMV (Europay, MasterCard, Visa) is the global standard that ensures
smart (Chipand-PIN) cards, terminals and other systems can
interoperate.
16) PCI DSS stands for Payment Card Industry Data Security Standard. It
was developed by the major credit card companies as a guideline
to help organizations that process card payments prevent credit
card fraud and various other security vulnerabilities and threats.
17) PCI PED security requirements are designed to secure personal
identification number (PIN)-based transactions globally and apply to
devices that accept PIN entry for all PIN based transactions

Central Bank of Nigeria,


April, 2016.

166
CENTRAL BANK OF NIGERIA

GUIDELINES ON OPERATIONS OF ELECTRONIC PAYMENT CHANNELS IN NIGERIA

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GUIDELINES ON OPERATIONS OF ELECTRONIC PAYMENT CHANNELS IN NIGERIA

Preamble
In exercise of the powers conferred on the Central Bank of Nigeria (CBN) by
Sections 2 (d) and 47 (2) of the CBN Act, 2007, to promote and facilitate the
development of efficient and effective systems for the settlement of
transactions, including the development of electronic payment systems; the
CBN hereby issue the following Guidelines on Operations of Electronic Payment
Channels in Nigeria.
These Guidelines supersede the previous Standards and Guidelines on ATM
Operations in Nigeria and Guidelines on PoS Card Acceptance Services, issued
by the CBN.
1. Guidelines on Automated Teller Machine (ATM) Operations
1.1 The Standards
1.1.1 Standards on ATM Technology and Specification:
a. All ATM deployers/acquirers shall comply with Payment Card Industry
Data Security Standards (PCI DSS)
b. All ATMs shall be able to dispense all denominations of Naira.
c. For deposit taking ATMs, acceptable denominations shall be displayed
by the deployer.
d. All terminals shall be levels 1 & 2 EMV compliant at a minimum, and
shall be upgraded from time to time, to comply with the latest version,
within twelve months of release of the version.
e. All ATM systems shall have audit trail and logs capabilities,
comprehensive enough to facilitate investigations, reconciliation and
dispute resolution.
f. Card readers shall be identified by a symbol that:
i. represents the card;
ii. identifies the direction for which the card should be inserted into
the reader;
iii. All new ATMs shall accept card horizontally with the chip
upwards and to the right;

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g. 2% of ATMs deployed by each acquirer shall have tactile graphic
symbol for the use of visually impaired customers. Locations of such
ATMs are to be visibly publicized on their corporate website at the
minimum. This should be complied with within five years from the
release of these standards.
1.2 The Guidelines
ATM deployment
a. All Banks or independent ATM deployers may own ATMs; however such
institutions must enter into an agreement with a card scheme or a
scheme operator or their designated settlement agent for acceptance
and settlement of all the transactions at the ATM.
b. All ATM transactions in Nigeria shall be processed by a Nigerian company
operating in Nigeria as acquirer-processor.
c. No card or payment scheme shall compel any issuer or acquirer to send
any transaction outside Nigeria for the purpose of processing,
authorization or switching, if the transaction is at an ATM or at any
acceptance device in Nigeria and the issuer is a Nigerian bank or any
other issuer licensed by the CBN.
d. All transactions at an ATM in Nigeria shall, where the issuer is a Nigerian
bank or any other issuer licensed by the CBN be settled under a domestic
settlement arrangement operated by a Nigerian Company. All collaterals
for such transactions shall be in Nigerian National Currency and deposited
in Nigeria.
e. No card scheme shall discriminate against any ATM owner or acquirer.
Every card-scheme must publish for the benefit of every ATM owner or
acquirer and the Central Bank of Nigeria, the requirements for acquiring
ATM transactions under the card scheme.
f. No ATM owner or acquirer shall discriminate against any card scheme or
issuer.
g. Stand-alone or closed ATMs are not allowed.
h. ATMs should be situated in such a manner as to permit access at
reasonable times. Access to these ATMs should be controlled and
secured so that customers can safely use them.
i. Lighting should be adequate for safe access and good visibility. It should
provide a consistent distribution and level of illumination, particularly in the
absence of natural light.
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j. ATMs should be sited in such a way that direct or reflected sunlight or
other bright lighting is prevented from striking the ATM display, for
example, through the use of overhead sun shelter
k. Privacy shall be provided by the design and installation features of the
ATM so that in normal use the cardholder does not have to conspicuously
take any protective action.
l. All ATMs shall accept all cards issued in Nigeria under CBN regulations for
any card-based value added service made available on the machine.
1.3 ATM Operations:
A bank or independent organization that deploys an ATM for the use of the
public shall ensure that:
a. The ATM downtime (due to technical fault) is not more than seventy-two
(72) hours consecutively, where this is not practicable, customers shall be
duly informed by the deployer;
b. The helpdesk contacts are adequately displayed at the ATM terminals. At
the minimum, a telephone line should be dedicated for fault reporting
and such telephone line shall be functional and manned at all times that
the ATM is operational.
c. All ATM charges are fully disclosed to customers.
d. The ATMs issue receipts, where requested by a customer, for all
transactions, except for balance enquiry, stating at a minimum, the
amount withdrawn, the terminal identity, date and time of the
transaction.
e. Receipt prints and screen display are legible. The dispensing deposit and
recycling component of the machine is in proper working condition.
f. Cash retraction shall be disabled on all ATMs.
g. There is appropriate monitoring mechanism to determine failure to
dispense cash.
h. There is online monitoring mechanism to determine ATM vault cash levels.
i. ATM vault replenishment is carried out as often as necessary to avoid
cash-out.
j. ATMs are not stocked with unfit notes.
k. Cash is available in the ATMs at all time. The funding and operations of
the ATM deployed by non-bank institutions should be the sole
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responsibility of the bank or institutions that entered into agreement with
them for cash provisioning. In this regard, the Service Level Agreement
(SLA) should specify the responsibilities of each of the parties.
l. Change of PIN is provided to customers, free of charge.
m. Acquirers monitor suspicious transactions and report same to CBN, based
on the agreed format and timeframe.
n. Back-up power (inverter) is made available at all ATM locations, in such a
way that the machine would not cease operation while in the middle of a
transaction.
o. Paper disposal basket is provided at all ATM locations
p. A register of all their ATMs in Nigeria with location, identification, serial
number of the machines, etc is maintained.
q. Provision is made for extending the time needed to perform a specific
step by presenting a question, such as, "Do you need more time?"
r. Information sufficient to construct a usable card is not displayed on the
screen or printed on a transaction record. This will guard against the
possibility that such information may become accessible to another
person should the cardholder leave the ATM while a transaction is
displayed, or abandon a printed transaction record.
s. Precautions are taken to minimise the possibility of a card being left, by a
message or voice, alerting the customer to take his card.
t. Cash out first before card is out of the ATM is adopted, to minimise the
possibility of customers leaving cash uncollected at ATM.
u. ATM acquirers shall disable cash-retract and display such notice at the
ATM or on the screen.
v. Acquirers shall reconcile and refund all funds in their possession, belonging
to customers as a result of ATM’s non-dispense and partial dispense errors.
w. Acquirers shall also install appropriate mechanism to immediately initiate
refunds without the prompting of the issuing bank or the customer.
1.4 ATM Maintenance
A bank or independent organization that deploys an ATM for the use of
the public shall ensure that:
a. Notice is displayed at the ATM for planned maintenance period and
disruption to service, due to maintenance for public.
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b. An ATM maintenance register or log is kept properly.
c. All ATMs and cash in the machines are insured.
d. They physically inspect their ATMs, at least fortnightly.
1.5 ATM Security
a. Every ATM shall have cameras, which shall view and record all persons
using the machines and every activity at the ATM, including but not limited
to: card insertion, transaction selection, cash withdrawal, card taking, etc.
However, such cameras should not be able to record the key strokes of
customers using the ATM.
b. Where a surveillance camera is used, it should be kept secret to avoid
illegal removal or damage or compromise.
c. Networks used for the transmission of ATM transactions must be
demonstrated to have data confidentiality and integrity
d. All ATMs must be located in a manner that guarantees safety and security
of users and confidentiality of their transactions.
e. ATMs should not be placed outside buildings, unless such ATM is bolted to
the floor and surrounded by structures, to prevent removal.
f. Additional precaution must be taken to ensure that any network
connectivity from the ATM to the bank or switch is protected, to prevent
the connection of other devices to the network point.
g. Where the user of an ATM blocks his image for camera capture, the ATM
shall be capable of aborting the transaction.
h. ATM key management processes must ensure that keys are changed
regularly (every year) and the same keys must not be used at multiple
ATMs.
i. ATMs shall be installed with Anti-Skimming devices that would ensure
effective mitigation against fraud incidents.
1.6 Dispute Resolution
In the event of irregularities in the account of an ATM customer, arising from
the use of card on ATM, the following shall apply:
a. All cardholders’ complaints should be treated within T + 3 from the date of
receipt of the complaints; Acquirer must respond to Issuer’s request within
2 days.

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b. Where records are falsified by any party, appropriate sanctions shall
apply.
1.7 Regulatory Monitoring
a. Any institution which operates an automated teller machine shall file an
updated list of such ATMs, including the detail location of their addresses
with the Director, Banking & Payments System Department of the Central
Bank of Nigeria for compliance monitoring.
b. The CBN shall conduct onsite checks of ATMs with a view to ensuring
compliance with cash and service availability.
c. Acquirer shall report volume and value of transaction on monthly basis to
the Director, Banking & Payments System Department, CBN
1.8 Penalties
Sanctions, in the form of monetary penalties / or suspension of the acquiring
/ processing service (s) or both would be imposed on erring institutions for
failure to comply with any of the provision of this Guidelines, or any other
relevant Guidelines, issued by the CBN from time to time.
2.0 Guidelines on Point Of Sale (POS) Card Acceptance Services
2.1 Objectives
These guidelines have been developed to provide minimum standards and
requirements for the operation of POS card acceptance services.
2.2 Point of Sale Card Acceptance Services Stakeholders
POS Card Acceptance Services Stakeholders include, but not limited to:
i. Merchant Acquirers
ii. Card Issuers
iii. Merchants
iv. Cardholders
v. Card Schemes
vi. Switches
vii. Payments Terminal Service Aggregator (PTSA)
viii. Payments Terminal Service Providers (PTSP)
2.3 Minimum Standards
All industry stakeholders who process and/or store cardholder information
shall ensure that their terminals, applications and processing systems comply
with the minimum requirements of the following Standards and Best
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Practices. In addition, all terminals, applications and processing systems,
should also comply with the standards specified by the various card
schemes. Each vendor must provide valid certificates, showing compliance
with these standards, and must regularly review status of all its terminals, to
ensure they are still compliant, as standards change. There will be a
continuous review and recertification on compliance with these and other
global industry standards, from time to time.
2.3.1 PA DSS –Payment Application Data Security Standard.
2.3.2 PCI PED – Payment Card Industry Pin Entry Device.
2.3.3 PCI DSS – Payment Card Industry Data Security Standard.
2.3.4 Triple DES – Data Encryption Standards should be the benchmark for all
data transmitted and authenticated between each party. The triple DES
algorithm is the minimum standard.
2.3.5 EMV – The deployed infrastructure must comply with the minimum EMV
requirements.
2.4 Roles and Responsibilities of:
2.4.1 Merchant Acquirers
2.4.1.1 Only CBN licensed institutions shall serve as Merchant Acquirers.
2.4.1.2 Merchant Acquirers can own POS Terminals, but shall only deploy and
support POS terminals through a CBN licensed Payment Terminal
Services Provider (PTSP). However, exceptions can be granted by the
CBN, where PTSP services are not available.
2.4.1.3 Merchant Acquirers shall ensure that POS terminals purchased and
deployed at merchant/retailer locations through CBN licensed
Payment Terminal Services Provider shall accept all cards (card
agnostic).
2.4.1.4 Merchant Acquirers shall enter into agreements/contracts with
merchants for accepting payment by means of electronic payment
instrument. All agreements /contracts shall clearly spell out the terms
and conditions, including roles, responsibilities and rights of the
acquirer and the merchant. The contract should also clearly spell out
requirements for the merchant’s responsibilities in ensuring proper
upkeep of the POS terminal.

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2.4.1.5 Every Merchant Acquirer shall connect all its PoS terminals or other
acquiring devices directly to a Payments Terminal Service
Aggregator.
2.4.1.6 Merchant Acquirers shall switch all domestic transactions through the
preferred local switch of their choice for purpose of seeking
authorization from the relevant Issuer and shall not under any
circumstance be routed outside Nigeria
2.4.1.7 To achieve interoperability, all POS terminals deployed in Nigeria shall
accept all transactions arising from any card issued by any Nigerian
bank. Accordingly, Acquirers and other service providers shall be
card neutral entities that have no reason to promote or favour any
card brand over the other.
2.4.1.8 Every acquirer must be able to accept all cards issued by Nigerian
Banks, whether through a direct license or via an arrangement with
any other acquirer that is licensed under the relevant card
scheme/association.
2.4.1.9 Merchant Acquirers, in conjunction with their Payment Terminal
Service Providers, shall be responsible for ensuring that merchants are
trained and made to put in place, reasonable processes and systems,
for confirming cardholder identity and detecting suspicious or
unauthorized usage of electronic payment instruments, where
customer/card is physically present at point of sale.
2.4.1.10 Merchant Acquirers shall be required to undertake measures to
prevent the use of their networks for purposes associated with money
laundering and other financial crimes.
2.4.1.11 Merchant Acquirers shall conduct proper KYC on all their merchants
with POS.
2.4.1.12 Merchant Acquirers shall set merchant limits, based on the volume of
business/type of commercial activities. In addition, Merchant Acquirers
shall provide guidelines to merchants on payment procedures for large
ticket transactions e.g. review of Identification, etc.
2.4.1.13 Merchant Acquirers shall, in conjunction with banks, switches and
other stakeholders, ensure resolution of disputed transactions between
the merchant and the cardholder within T + 5 days. All transactions
from POS devices shall be routed through the PTSA to the relevant
acquirer or its appointed third party processor. Merchants shall provide

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evidence to dispute requests from the Acquirers within 3 days, failure of
which their accounts shall be debited for the value of transaction.
2.4.1.14 there shall be no exclusivity arrangements that bundle third party
switching activities. Each acquirer shall be free to process transactions
on its own, or leverage the services of a third party processor; and
these services shall be independent of the switch used to facilitate
such exchange.
2.4.1.15 Banks shall maintain and reconcile merchant accounts on behalf of
the Merchant.
2.4.2 Payment Terminal Services Provider (PTSP)
2.4.2.1 To ensure effectiveness of POS operations and a proper
Support/maintenance infrastructure, only CBN licensed Payments
Terminal Service Providers shall deploy, maintain and provide support
for POS terminals in Nigeria. PTSPs shall offer services to acquirers,
covering all aspects relating to terminal management and support,
including, but not limited to purchase and replacement of spare
parts, provision of connectivity, training, repairs, and development of
value-added services, amongst other things.
2.4.2.2 CBN shall license a limited number of Payments Terminal Service
Providers, to enable the PTSPs build scale and maximize efficiency.
Criteria for PTSPs shall be defined by CBN, and the performance of
licensed PTSPS shall be reviewed annually, to confirm they meet
defined performance targets. Licenses of PTSPs that fail to meet
performance expectations can be withdrawn and fresh licenses issued
to qualifying companies.
2.4.2.3 PTSPs can identify merchant opportunities and market potential
merchants on behalf of acquirers.
2.4.2.4 Only the PSTPs shall be allowed to deploy POS terminals. Any party,
other than a PTSP that deploys POS terminals, shall be fined 50,000
Naira per each day that the terminal remains deployed. PTSPs shall
clearly agree SLAs on deployment timelines with acquirers, to ensure
efficient deployment of POS terminals.
2.4.2.5 PSTPs shall ensure that their deployed POS terminals are functional at all
times. Appropriate mechanism must be put in place to remotely
detect failures, which shall be rectified or replaced within 48 hours.

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2.4.2.6 All terminals deployed by PTSPs must have stickers with the PTSP’s
support service contact information. In addition PTSPs must have a
support infrastructure that ensures support coverage for merchants, 7
days a week.
2.4.2.7 PTSPs will be required to enter into contracts/SLAs with the acquirers
that will clearly state the terms and conditions of their support services.
2.4.2.8 PTSPs shall work with the PTSA to ensure all POS terminals deployed by
them meet all required certifications and the minimum POS
specifications, defined in these Guidelines.
2.4.2.9 PTSPs shall work with acquirers and the terminal manufacturers to
ensure that terminals are phased out/replaced/upgraded as
appropriate, as their certifications become obsolete.
2.4.3 PoS Terminal Owner
2.4.3.1 Banks, Merchants, Acquirers, and PTSPs can be PoS Terminal Owners.
2.4.3.2 PoS Terminal Owners shall ensure all POS terminals procured by them
are compliant with the minimum POS specifications.
2.4.3.3 PoS Terminal Owners shall cover the costs of repairs and replacements
of parts for their terminals.
2.4.4 Payments Terminal Service Aggregator (PTSA)
2.4.4.1The Nigeria Interbank Settlement Systems (NIBSS) - owned by all
Nigerian banks and the Central Bank of Nigeria, shall act as the
Payments Terminal Service Aggregator for the financial system.
2.4.4.2 As the Payments Terminal Service Aggregator for the industry, NIBSS
shall establish communication network for reliable POS data traffic that
shall satisfy the service and availability standards and expectations of
the industry, on a cost effective basis.
2.4.4.3 As the Payments Terminal Service Aggregator for the industry, NIBSS
shall, on an annual basis, or more frequently, as may be required, on
behalf of the industry, certify POS Terminals that meet the POS Terminal
standards, approved for the industry.
2.4.4.4 As the Payments Terminal Service Aggregator, NIBSS shall, participate
on a joint committee of industry stakeholders, to negotiate a price list
with 2 – 3 terminal equipment providers for bulk purchase of POS
terminals for the Nigerian market. It is expected that a bulk purchase
agreement will enable cost reduction on POS terminals, as well as the

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ability to define special requirements for the Nigerian market, and
ensure a sufficient support infrastructure from the terminal
manufacturers. Any Terminal Owner may subscribe to the negotiated
global price list for the purchase of POS Terminals to take advantage of
these benefits.
2.4.4.5 As the Payments Terminal Service Aggregator, NIBSS shall be the only
entity permitted to operate a Terminal Management System. All POS
terminals operating in Nigeria must be connected to the Payments
Terminal Service Aggregator. This is to ensure comprehensive oversight,
reporting/performance monitoring, and also in line with our objectives
of shared industry infrastructure and best practice. NIBSS shall provide
Acquirers and Payments Terminal Service Providers and their
merchants (where required) the ability to view transactions and
monitor performance of their devices.
2.4.4.6 All PoS Terminals deployed shall be technically enabled to accept all
cards issued by Nigerian banks.
2.4.4.7 The Payments Terminal Service Aggregator shall route all transactions
from PoS terminals to the relevant Acquirer or its designated third party
processor. This enables Acquirers who are Issuers handle On-Us
transactions appropriately and all Acquirers to manage their risks and
accept responsibility for such transactions in line with Charge-back
Rules of relevant Card Schemes. This does not preclude any Acquirer
from using the services of Third Party Processor (TPP) or the Acquirer’s
in-house processing services to process its acquired transactions.
2.4.4.8 All domestic transactions, including, but not limited to POS and ATM
transactions must be switched, using the services of a local switch, and
shall not, under any circumstance, be routed outside Nigeria for
switching.
2.4.4.9 The Payments Terminal Service Aggregator shall monitor the availability
and transaction traffic on all POS terminals on a continuous basis and
shall provide analysis and reporting on POS terminal performance and
transaction trend to the Central Bank and the industry.
2.4.4.10 The Payments Terminal Service Aggregator shall ensure all merchants
and other relevant parties are settled within the T+1 settlement period,
upon receipt of settlement reports from all card schemes or the
switches they have appointed to provide such reports on their behalf.
Failure to execute the T+1 settlement cycle shall result in a sanction to

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the PTSA, including, but not limited to refunding the entire Merchant
Service Charge for that day’s transactions.
2.4.4.11The Payments Terminal Service Aggregator shall have clear Service
Level Agreements for certifying terminals quickly and efficiently, as well
as for integrating new value-added services on behalf of acquirers,
PTSPs, or 3rd party application developers.
2.4.5 Merchants
2.4.5.1 A merchant shall enter into agreement with Merchant Acquirer,
specifying in clear terms, the obligations of each party.
2.4.5.2 Merchant shall accept cards and other payment tokens as methods of
payment for goods and services.
2.4.5.3 The POS shall display the amount to be authorised on the screen
requesting PIN entry, so that the customer can see the amount being
paid before authorization.
2.4.5.4 The merchant shall be held liable for frauds with the card arising from its
negligence, connivance etc.
2.4.5.5 A merchant shall under no circumstance, charge a different price,
surcharge a cardholder or otherwise discriminate against any member
of the public who chooses to pay with a card or by other electronic
means.
2.4.6 Cardholders
2.4.6.1 A cardholder shall:

a) Store the payment card and protect his/her PIN with due care

b) Not keep his payment card together with the PIN

c) Notify the issuer without delay, about missing, stolen, damaged, lost or
destroyed card

d) Not make the payment card available to unauthorized persons.


2.4.6.2 The cardholder may withdraw from the contract for payment card
without prior notice to the issuer, provided he does not owe for any
charges or transactions on the payment card.
2.4.6.3 The cardholder shall present, when required by a merchant, a
document confirming his identity.

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2.4.6.4 The cardholder shall receive value for the operations performed by
means of a payment card, and by so doing, the holder commits
himself to pay the amount of the operations, together with charges
due to the issuer, from a specified account.
2.4.6.5 The cardholder shall be held liable for fraud committed with his card,
arising from the misuse of his PIN or his card.
2.4.6.6 The cardholder shall be entitled to receive a receipt, or any other form
of evidence at the time a transaction is performed with his/her card.
2.4.6.7 The cardholder shall be entitled to receive, within a reasonable
period, at least monthly, a statement of all transactions performed with
his/her card.
2.4.6.8 If a cardholder notifies his bank that an error involving his card has
occurred, the institution must investigate and resolve the claim within T
+ 5 days.
2.4.6.9 A cardholder shall be given reasonable notice before changes are
made to the terms and conditions of his card contract and shall be
given the option to opt out of the card contract, without penalty.
2.4.7 Card Schemes
2.4.7.1 All card schemes in Nigeria are bound by these Guidelines and other
relevant CBN Guidelines/Circulars.
2.4.7.2 CBN shall reserve the right to assess the rules to confirm objectivity, vis-
a-vis international standards/best practice. Any Card Scheme that
wrongfully denies membership or unnecessarily delays the process of
certification to potential players, would be penalized by CBN –
including, but not limited to paying a fine, equivalent to the expected
revenue of the payment services provider for that period, suspension
and/or revocation of license, and CBN licensing new schemes.
2.4.7.3 No Card Scheme shall engage in the business of acquiring; neither
shall any entity that has a management contract with a Card scheme
engage in the business of acquiring. In addition, no entity in which a
Card Scheme, its subsidiary, or the majority shareholder of a card
scheme, has 20% shareholding or more, shall engage in the business
of acquiring.
2.4.7.4 No Card Scheme shall engage in any antitrust activity or any act that
will lead to abuse of dominant position, monopoly or unfair
competition. Accordingly, there shall not be any form of arrangement
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or collusion between two or more Card Schemes, or Payment
Schemes in respect of Issuing, Acquiring, Processing or Switching.
2.4.8 Switching Companies
2.4.8.1 All local switches in Nigeria shall ensure that transactions relating to all
cards issued by Nigerian banks are successfully switched between
Acquirers and Issuers.
2.4.8.2 To achieve the interconnectivity of all new and existing switching
companies, all switching companies shall open their networks for
reciprocal exchange of transactions/messages with the Nigeria
Central Switch and Payment Terminal Service Aggregator.
2.5 Settlement Mechanism
2.5.1 The settlement for domestic POS transactions must be done to the
merchant account on T+1 basis, where T is the date the transaction is
performed. Failure to execute the T+1 settlement cycle shall result in a
sanction to the NIBSS.
2.5.2 Card schemes or their appointed switches shall provide their settlement
reports to NIBSS daily by 10am, for the previous day. The settlement
information should contain sufficient details, to enable NIBSS credit
merchant accounts directly, and shall be provided in a format as
advised by NIBSS. Failure to provide this information in the required
format or by the required timeline will result in a sanction, including, but
not limited to the offending party solely refunding the entire Merchant
Service Charge for that day’s transactions.
2.5.3 NIBSS shall also directly credit the accounts of other parties with their
share of the Interchange.
2.5.4 NIBSS will be paid by the banks for the settlement done to the merchant
account, in line with the NEFT fee transaction charges.
2.6 Fees and Charges
2.6.1 Fees and charges for POS Card Acceptance services are to be agreed
between the service providers and banks / entities to which the services
are being provided, subject to the following limits:
I. The maximum total fee that a merchant shall be charged for any POS
transaction shall be subject to negotiation between the acquirer and
the merchant after taking into account, the provisions of the
Interchange Guidelines.

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II. The fees and charges stated above are applicable to only POS
transactions performed with naira denominated cards. POS
transactions done with cards issued in foreign currencies will still follow
the pricing arrangement put in place by the relevant international
card scheme.
2.7 Transition to achieve Interoperability
All commercial switches, processors or entities driving PoS terminals in Nigeria
shall ensure full and secure connection to the Central Switch and all
transactions in respect of any card that the switch, processor or other entity is
not licensed to process or switch shall be routed through the NCS to a licensed
switch or processor for purpose of processing such transaction on behalf of the
relevant Acquirer, and for seeking authorisation from the relevant Issuer.
All terminals must be plugged to the PTSA.
2.8 Exclusivity Agreements
There shall be no form of exclusivity in any area of payment service,
including, but not limited to Issuing, Acquiring, Processing, and Sale and
Maintenance of hardware and software. .Any payment scheme,
operator, processor, infrastructure provider, switching company, service
provider or bank that contravenes this policy may be suspended for a
minimum of one (1) month by the CBN as a payment service or payment
infrastructure service provider in the first instance, to be followed by
stricter sanctions if the practice persists.

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2.9 Minimum POS Terminal Specifications

Parameters Specifications

Card Readers EMV Chip/Smart cards, Magnetic stripe. Optional:


Contactless reader, 2 SIM Slots

Communications GPRS, Ethernet, Dial-up Modem. Optional: CDMA, Wi-Fi

Certifications EMV levels 1 & 2, PCI DSS, PA-DSS, PCI PED online & offline
(All PCI certifications should be Level/Version 2.1
minimum)

CPU ARM9/11, 32Bits. Optional: Dual processors

Memory 16MB Flash, 32MB SDRAM

Keypad PCI PED Approved, Backlit

Display TFT LCD graphics, 128/64 pixel, Backlit. Optional: Colour


screen

Power 100-240V, 50-60Hz; 24hrs battery power (operating)


Optional: DC support, Car jack charger, Docking fast
charger

Printer 15 -18 lines per sec Thermal printer

Multi-Application Supports Multiple Applications

Customization / Optional: Coloured or branded housing,


Others Labelling/embossing, RS232 & USB interfaces, Protocol
implementation

2.10 Compliance

All parties shall comply with the provisions of these Guidelines and other
relevant Guidelines issued by the CBN. This guideline shall prevail, in the
case of conflict with any prior Guidelines. Non compliance with these
Guidelines shall attract appropriate sanctions from the CBN.

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3.0 GUIDELINES ON MOBILE POINT OF SALE (mPOS) ACCEPTANCE SERVICES
3.1 Objectives

These Guidelines have been developed to:


3.1.1 Provide minimum standards and requirements for the operation of
mPOS.
3.1.2 Promote safety and effectiveness of mPOS, and thereby enhance user
confidence in the service.
3.1.3 Identify the roles and responsibilities of stakeholders.
3.2 Minimum Standards
All industry stakeholders who process and/or store cardholder information
shall ensure that their applications and processing systems comply with the
following minimum requirements and standards:
3.2.1 All applications and processing systems shall comply with the standards
specified by various card schemes. The minimum requirements shall
be PCI DSS certification.
3.2.2 Acquirers shall be required to provide mPOS solutions that utilize
Payment Card Industry PIN Transaction Security (PCI PTS) in
accordance with the PCI Point-to-Point Encryption (P2PE) Solution
Requirements.

3.2.3 Each solution provider shall provide valid certificates, showing


compliance with the standards in 3.1 and 3.2; and shall regularly
review the status of its applications, to ensure they are in compliance
with the following:
i. PA DSS –Payment Application Data Security Standard.
ii. PCI PED –Payment Card Industry Pin Entry Device.
iii. PCI DSS – Payment Card Industry Data Security Standard.
iv. Triple DES – Data Encryption Standards should be the benchmark
for all data transmitted and authenticated between each party.
v. EMV – The deployed infrastructure must comply with the
minimum EMV requirements.

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3.2.4 Merchants shall use mPOS solutions that utilize P2 PE solutions in
accordance with the PCI Point - to - Point Encryption Solution Requirements .

3.3 mPOS Stakeholders

The parties involved in payments acceptance and processing for mPOS shall
include:

i. Acquirer

ii. Issuer

iii. PTSA

iv. Merchant

v. Cardholder/User

vi. Card Schemes

vii. S witches/Processors

viii. PTSP

3.4 Roles and Responsibilities of:

3.4.1 Acquirers

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3.4.1.1 Only CBN licensed institutions shall serve as Acquirers.

3.4.1.2 Either Acquirer or Merchant may own an mPOS device

3.4.1.3 Acquirers shall ensure that mPOS devices purchased and deployed
at merchant/retailer locations accept all cards (card agnostic).

3.4.1.4 Acquirers shall enter into agreements with merchants for the
acceptance of payments by means of electronic payment
instruments. All agreements shall clearly spell out the terms and
conditions, including roles, responsibilities and rights of the Acquirer
and the merchant.

3.4.1.5 Every Acquirer shall connect all its mPOS devices directly to the
Payment Terminal Service Aggregator.

3.4.1.6 The Acquirers shall switch all domestic transactions through the
preferred local switch of their choice for the purpose of seeking
authorisation from the relevant Issuer.

3.4.1.7 The Acquirers shall be required to undertake measures to prevent


the use of their networks for purposes associated with money
laundering and other financial crimes and shall conduct proper
KYC on all their merchants.

3.4.1.8 The Acquirers shall set merchant limits based on the volume of
business/type of commercial activities. In addition, Acquirers shall
provide guidelines to merchants on payment procedures for large
ticket transactions (e.g. review of Identification, etc)

3.4.1.9 There shall be no exclusivity arrangements that bundle third party


processing with switching activities. Each Acquirer shall be free to
process transactions on its own, or leverage the services of a third
party processor; and these services shall be independent of the
switch used to facilitate such exchange.

3.4.1.10 The Acquirers shall maintain and reconcile merchant accounts.

3.4.1.11The Acquirer shall provide the merchant with a PTSA certified card
reader and the mPOS application for the handheld device; and
where the card reader is in-built, the Acquirer shall ensure that the
device is certified by the PTSA.

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3.4.1.12 The Acquirer shall ensure that the mPOS application is PA-DSS
certified.

3.4.1.13 The Acquirer shall assess and determine the suitability of mPOS for
a merchant, with consideration for the merchant’s control
environment and other additional responsibilities for using mPOS.

3.4.1.14 An Acquirer shall not acquire transaction through mPOS for a


merchant it assesses as having a weak control environment, for
managing mPOS devices.

3.4.1.15 The Acquirer shall ensure an effective patch and version control
management for the mobile application on the merchant’s mPOS
devices.

3.4.1.16 The Acquirer shall ensure that it does not acquire transactions from
an mPOS device whose payments processing application is not
updated with most recent patches, anti-virus and upgrades.

3.4.1.17 The Acquirer shall ensure the implementation of an enterprise


mobility management system for the mPOS devices of the
merchants it is acquiring.

3.4.1.18 The Acquirer shall ensure that payments data are transmitted using
secured communication channels and protocols with end-to-end
encryption, as specified in POS guidelines.

3.4.1.19 The Acquirer shall be responsible for the back-end payment


processing. The back-end payments processing and settlement
shall comply with extant POS guidelines.

3.4.1.20 The Acquirer shall be responsible for sensitizing/educating the


merchant on security measures required for the mPOS device.

3.4.1.21 The Acquirer shall ensure that the mPOS is capable of issuing
receipts either in electronic or paper form upon consummation of a
transaction.

3.4.1.22 The Acquirer and the merchant shall be responsible for the
maintenance of the card reader.

3.4.1.23 The Acquirer shall ensure that card readers are configured as
merchant-specific.

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3.4.1.24 The Acquirer shall ensure that mPOS applications are lockdown,
such that other mobile applications on the mPOS devices of the
merchants do not interact, store or transmit payment data.

3.4.2 Issuers
The responsibilities of Issuers shall be as stipulated in the extant POS
Guidelines.
3.4.3 Payments Terminal Service Aggregator (PTSA)
3.4.3.1 Nigeria Interbank Settlement Systems (NIBSS) shall act as the
Payments Terminal Service Aggregator for the financial system.

3.4.3.2 As the Payments Terminal Service Aggregator for the industry, NIBSS
shall establish communication network for reliable data traffic that
shall satisfy the service and availability standards and expectations
of the industry on a cost effective basis.

3.4.3.3 As the Payments Terminal Service Aggregator for the industry, NIBSS
shall on an annual basis or more frequently as may be required,
certify mPOS devices that meet the industry standards.

3.4.3.4 All payment transactions shall be routed through the Payment


Terminal Service Aggregator.
3.4.3.5 The Payments Terminal Service Aggregator (s) shall route all
transactions from mPOS devices to the relevant Acquirer or its
designated third party processor. This enables Acquirers who are
Issuers to handle On-Us transactions appropriately and all Acquirers
to manage their risks, and accept responsibility for such
transactions in line with Charge-back Rules of relevant Card
Schemes. This does not preclude any Acquirer from using the
services of any Third Party Processor (TPP) or the Acquirer’s inhouse
processing services to process its acquired transactions.
3.4.3.6 All mPOS transactions in Nigeria must be switched, using the
services of a local switch and shall not under any circumstance be
routed outside Nigeria.
3.4.3.7 The Payments Terminal Service Aggregator(s) shall monitor the
availability and transaction traffic on all mPOS devices on a
continuous basis and shall provide analysis and report on
performance and transaction trend to the Central Bank of Nigeria.

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3.4.3.8 The Payments Terminal Service Aggregator shall have clear Service
Level Agreements for certifying devices quickly and efficiently, as
well as for integrating new value-added services, on behalf of
Acquirers and third party application developers.
3.4.5 Merchants
3.4.5.1 A merchant shall enter into agreement with the Acquirer, specifying
in clear terms, the obligations of each party.
3.4.5.2 Merchant shall accept cards as a method of payment for goods
and services.
3.4.5.3 The merchant shall display the payment device conspicuously for
the cardholder/user to observe the amount entered into the
device before the cardholder/user enters his/her PIN.
3.4.5.4 The merchant shall be held liable for frauds involving the use of
mPOS device due to its negligence, connivance etc.
3.4.5.5 The merchant shall under no circumstance, charge a different
price, surcharge a cardholder/user or otherwise discriminate
against any member of the public who chooses to pay with a card
or by other acceptable electronic means.
3.4.5.6 The merchant shall ensure that it complies with the minimum
security guidance provided by the Acquirer.
3.4.5.7 The merchant shall determine the location and condition of the
mPOS device at all times and shall inform the Acquirer immediately
it is unable to do so

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.

3.4.5.8 The Merchant shall be responsible for determining and maintaining


inventory of other applications that co - exist on mPOS devices.

3.4. 5.9 The merchant and the Acquirer shall be responsible for the maintenance
of the mPOS device.

3.4.5.10 Merchant shall be responsible for restricting physical and logical access to
the mPOS device.

3.4.6 Cardholders/Users

3.4.6.1 A cardholder/user shall:

i. Protect the payment card, mobile device and PIN with due care.

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Notify the issuer immediately a PIN is compromised.
ii. Notify the issuer without delay about missing, stolen, damaged, lost
or destroyed card and/or mobile device.

3.4.6.2 The cardholder may withdraw from the contract for payment card
without prior notice to the issuer, provided he does not owe any
charges for transactions on the payment card.
3.4.6.3 The cardholder shall present, when required by a merchant, a
document confirming his identity.
3.4.6.4 The cardholder shall receive value for the operations performed by
means of a payment card, and by so doing, the holder commits
himself to pay the amount of the operations together with charges
due.
3.4.6.5 The cardholder shall be held liable for fraud committed with his
card arising from the misuse of his PIN or his card.
3.4.6.6 The cardholder/user shall be entitled to receive a receipt or any
other form of evidence at the time a transaction is performed with
his/her card.
3.4.6.7 The cardholder/user shall be entitled to receive, within a
reasonable period, at least monthly, a statement of all transactions
performed with his/her card.
3.4.6.8 If a cardholder/user notifies his bank of a transaction error, the issuer
shall investigate and resolve the claim within T + 5 days from the
day of notification, irrespective of the dispute resolution process of
the card scheme. Acquirer must respond to Issuer’s request within 3
days, in the process.
3.4.6.9 A cardholder/user shall be given not less than 5 working days notice
before changes are made to the terms and conditions of his card
contract and shall be given the option to opt out of the card
contract without penalty.
3.4.7 Card Schemes
All card schemes in Nigeria are bound by these Guidelines and other
relevant CBN Guidelines/Circulars.
3.4.7.1 Any Card Scheme that wrongfully denies membership or delays the
process of certification to potential players, would be penalized by
CBN – including but not limited to paying a fine equivalent to the
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expected revenue of the payment services provider for that period,
suspension and/or revocation of license, and shall not be eligible
for further participation in CBN licensing schemes.
3.4.7.2 No Card Scheme, or any entity that has a management contract
with a Card Scheme, shall engage in the business of acquiring. In
addition, no entity in which a Card Scheme, its subsidiary, or the
majority shareholder of a card scheme, has 20% shareholding or
more shall engage in the business of acquiring.
3.4.7.3 No Card Scheme shall engage in any antitrust activity or any act
that will lead to abuse of dominant position, monopoly or unfair
competition. Accordingly, there shall not be any form of
arrangement or collusion between two or more Card Schemes, or
Payment Schemes in respect of issuing, acquiring, processing or
switching.
3.4.8 Switches (Switching Companies)
3.4.8.1 All local switches in Nigeria shall ensure that transactions relating to
all cards issued by Nigerian banks are successfully switched
between Acquirers and Issuers.
3.4.8.2 To achieve the interconnectivity of all new and existing switching
companies, all switching companies shall open their networks for
reciprocal exchange of transactions/messages with the Nigeria
Central Switch and Payment Terminal Service Aggregator.
3.5 Settlement Mechanism
3.5.1 The settlement for all domestic mPOS transactions shall be done to the
merchant account on T + 1 basis, where T is the date the transaction is
performed. Failure to execute the T+1 settlement cycle shall result in a
sanction to the NIBSS.
3.5.2 Card schemes or their appointed switches shall provide settlement
reports to NIBSS on daily basis by 10:00 a.m. for the previous day’s
transactions. The settlement information shall contain sufficient details
in the required format, as advised by NIBSS, to enable direct credit into
merchant accounts. Failure to provide this information within the
timeline and in the prescribed format will result in a sanction.
3.5.3 NIBSS shall also directly credit the accounts of other parties with their
share of the Interchange.

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3.5.4 NIBSS will be paid by the banks for the settlement done to the
merchant account in line with the NIBSS Electronic Funds Transfer (NEFT)
fee transaction charges.
3.6 Fees and Charges
3.6.1 Fees and charges for mPOS Card Acceptance services are to be
agreed between service providers and banks/entities to which the
services are being provided, subject to the following limits:
i. The maximum total fee that a merchant shall be charged for any
mPOS transaction shall be subject to negotiation between the
Acquirer and the merchant, after taking into account, the provisions of
the Interchange Guidelines.
ii. The fees and charges stated above are applicable to only mPOS
transactions performed with Nigerian issued cards. mPOS transactions
done with cards issued by foreign issuers will still follow the pricing
arrangement put in place by the relevant international card scheme.
3.7a Transition to Achieve Interoperability
All commercial switches, processors or entities driving mPOS devices in
Nigeria shall ensure full and secure connection to the Central Switch,
and all transactions in respect of any card that the switch, processor or
other entity is not licensed to process or switch shall be routed through
the NCS to a licensed switch or processor for the purpose of processing
such transaction on behalf of the relevant Acquirer and for seeking
authorisation from the relevant Issuer.
All mPOS devices must be plugged to the PTSA.
3.8 Exclusivity Agreements
There shall be no form of exclusivity in any area of payment service
including but not limited to issuing, acquiring, processing, and sale and
maintenance of hardware and software. Any payment scheme,
operator, processor, infrastructure provider, switching company, service
provider or bank that contravenes this policy may be suspended for a
minimum of one (1) month by the CBN in the first instance, to be
followed by stricter sanctions if the practice persists.

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3.9 Minimum mPOS Technical Specifications

Parameters Specifications
Card Readers EMV Chip/Smart cards, Magnetic stripe,
supporting audio jack interface and/or
Bluetooth communications interface.
Optional: Contactless reader.
Communications GPRS, Dial-up Modem. Optional: CDMA,
Wi-Fi
Certifications EMV levels 1 & 2, PCI DSS, PA-DSS, PCI
PED online & offline (All PCI certifications
should be Level/Version 2.1 minimum)
Printer 15 -18 lines per sec Thermal printer
(optional).
Means of notification should also
support email/SMS notification.
Multi-Application Supports Multiple Applications
Customization / Optional: Coloured or branded housing,
Others Labelling/embossing,RS232 & USB
interfaces, Protocol implementation

3.10 Consumer Protection/Dispute Resolution


3.10.1 Acquirers shall, in conjunction with issuers, switches and other
stakeholders ensure resolution of disputed transactions between the
merchant and the cardholder within T + 5 days. Acquirers must
respond to Issuer’s request within 3 days.
3.10.2 Stakeholders/Parties may escalate complaints to the CBN, where
they are dissatisfied with the result of 3.10.1 above.
3.10.3 Any dispute, controversy or claim arising out of or relating to this
Guidelines or the breach, termination or invalidity thereof, shall be
settled in accordance with the CBN’s dispute resolution mechanism
and if unresolved, may be referred to an arbitral panel, as provided
under the Arbitration and Conciliation Act Cap.
3.11 Compliance
All parties shall comply with the provisions of these Guidelines and other
related Guidelines issued by the CBN. Noncompliance with the Guidelines
shall attract appropriate sanctions by the CBN. These Guidelines shall
prevail in the case of conflict with any prior guidelines issued by the CBN.
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4.0 Guidelines on Web Acceptance Services
4.1 Scope of the Guidelines
These Guidelines shall include all forms of transfer of monetary value on the
website of a merchant or a payment aggregator in fulfillment of
consideration for the purchase of goods and services on the web (internet).
4.2 Objectives
These Guidelines shall:
4.2.1 Provide minimum standards and requirements for the processing of
transactions via the web (internet) channel.
4.2.2 Promote safety and effectiveness of Web Acceptance Services and
thereby enhance user confidence in the service.
4.2.3 Identify the roles and responsibilities of stakeholders.
4.2.4 Encourage the development of effective, low risk, low cost and
convenient payment and financial services to customers and
businesses through the internet.
4.3 Minimum Standards for Web Acquiring
All web acquirers shall only utilize the services of gateway providers that
comply with the following minimum standards:
i) PCI DSS- Payment Card Industry Data Security Standard ii) PA DSS-
Payment Application Data Security Standard
ii) Triple DES- Data Encryption Standards should be the benchmark for
all data transmitted and authenticated between each party.
iii) 2FA- Second Factor Authentication
4.4 Stakeholders
The following parties in a web payment scenario have responsibilities for web
payments transactions:
i. Acquirer: including a CBN licensed web payment aggregator
ii. Issuer
iii. Merchant (website owner)
iv. Payments Gateway Providers
v. Customer

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4.5 Roles and Responsibilities of Stakeholders
4.5.1 Acquirer
In addition to the basic responsibilities of an acquirer as stipulated in extant
guidelines, the acquirer shall:
4.5.1.1 Be responsible for engaging and managing the web payments
gateway provider.
4.5.1.2 Evaluate the merchant web application, technology and control
environment and ensure that it is implemented securely to
acceptpayments.
4.5.1.3 Ensure that merchants carry out appropriate regular threat scan
on the merchant’s website and avail the merchant with updates
on emerging threats to ensure that appropriate measures are
taken by the merchant to mitigate risks.
4.5.1.4 Test website payment integration and ensure that sensitive
customer data are not retained on the merchant’s website.
4.5.1.5 For the minimum Web Capabilities of ecommerce websites/web
portal, Acquirers and service providers shall comply with scheme
rules as defined by the various card schemes, however, where
there is conflict, this Guidelines supersedes.
4.5.1.6 The acquirer can also be a merchant and deploy/implement a
website to accept card payments for its own services or services
provided by merchants acquired by them.
4.5.1.7 The Acquirer shall assist the Merchant in setting up the accounts
in the bank and any back-end processing for settlement of
payments done on the merchant website using cards.
4.5.1.8 The Acquirer shall acquire all transactions done on the website
of Merchants acquired by them.
4.5.1.9 The acquirer shall sign an agreement with the merchant for
accepting card payment via the web channel.
4.5.1.10 The acquirer shall perform adequate Customer Due Diligence
(CDD), Know-your-Customer (KYC) and Know-your-Customer-
Business KYC/B on the merchant.
4.5.1.11 The acquirer shall maintain and reconcile merchant accounts
on behalf of the merchant.

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4.5.1.12 The Acquirer reserves the right to discontinue acquiring for a
merchant at any time for proven cases of fraud, consistent failed
deliveries and other situations involving the Merchant, which
may impact negatively on the industry.
4.5.1.13 Acquirers shall implement a fraud management system that will
detect customer usage pattern and decline/accept
transaction, based on rules defined on the fraud management
system.
4.5.1.14 Acquirers shall profile merchants, based on the services being
offered, and define transaction limits.
4.5.2 Merchants
The merchant, in addition to the basic responsibilities as stipulated in extant
guidelines, shall:
4.5.2.1 Ensure that the terms and conditions for its products and services
are properly communicated and conspicuously displayed on its
website.
4.5.2.2 Ensure that it cooperates with the Acquirer in implementing
appropriate security measures.
4.5.2.3 Provide the customer with clear instructions on the process for
making payments on its websites.
4.5.2.4 Provide information to customers on the charges applicable to
each web payment option on its website.
4.5.2.5 Carry out appropriate regular threat scan on its website and
ensure that appropriate measures are taken to mitigate risks
4.5.3 Issuer
The issuer, in addition to its responsibilities under the Guidelines on Card
Issuance, shall:
4.5.3.1 Be responsible for the issuance of the cards. Only licensed
deposit taking banks shall serve as the issuers of payment cards.
4.5.3.2 Commit to authorize the cardholder transaction made from the
card linked to a specified account in the issuing bank and settle
the operations performed by the means of the card.
4.5.3.3 Provide additional security measures e.g. second factor
authentication to cardholders who intend to utilize their cards for
transactions via the web channel.
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4.5.3.4 Be held liable for card fraud in the event that payments are
made with hot listed cards or where a card is reported as lost or
stolen and subsequently used to make payments on any other
channel.
4.5.3.5 Provide means through which cardholders can, at any time,
notify the issuer of any loss, theft or fraudulent use of the card
and the issuer shall take all necessary steps to stop any further
use of the card.
4.5.3.6 Maintain internal records over a minimum period of seven (7)
years to enable audit trails on card-related transactions.
4.5.3.7 Be responsible for setting overall transaction limits on cards per
day, and transaction limits of such cards by channel, according
to their card products and risk guidelines.
4.5.3.8 Acknowledge the dispute or complaints from cardholders within
24hours, and in conjunction with the Acquirer and platform
provider, resolve such disputes or complaints within T + 3 days .
4.5.3.9 Furnish its cardholders with a detailed list of contractual terms
and conditions prior to activation. Such terms shall include at a
minimum, fees and charges, withdrawal limits (including offline
transaction limits and terms where applicable), billing cycles,
termination procedures, default/recovery procedures and
loss/theft/misuse of card procedures.
4.5.3.10 Implement authentication at the “highly secured level” requiring
2 factor authentication
4.5.3.11 Implement behavioral monitoring and SMS/email alerts as
additional controls to further protect the payer.
4.5.3.12 Not enable a card for web transactions, unless requested by the
customer.
4.5.4 Payments Gateway Provider
Payment Gateway Provider (PGP) Shall:
4.5.4.1Provide services with respect to the processing of online payment
transactions related to the sale of goods and/or services.
4.5.4.2 Act as facilitator on behalf of cardholder/users:
i. To enable Payment Transactions; and
ii. Processing authorisation requests.
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4.5.4.3 Be responsible for the security of the data related to the payment
Instrument that is possessed or otherwise stored, processed or
transmitted on behalf of cardholders/users.
4.5.4.4 Not store card details on any server maintained by either the PGP or
any third party, without first undergoing a security audit carried out by
a Qualified Security Assessor (QSA).
4.5.4.5 Hold all forms of customer data securely and take
responsibility for the security of the data.
4.5.5 Cardholder
The cardholder shall:
4.5.5.1 Guard his card, PIN and hardware token with utmost care.
4.5.5.4 Immediately notify the issuer if the card, or token is PIN
lost/compromised.
4.6 Settlement Mechanism
4.6.1 The settlement for all WEB transactions shall be made to the merchant
account on a T+1 basis, where T is the date the transaction is
performed.
4.6.2 The Acquirer shall settle the funds to merchant’s account.
4.7 Fees
4.7.1 Fees shall be based on CBN Interchange Guidelines.
4.7.2 The interchange will be regulated by the Central Bank
4.7.3 Fees and charges for Web transaction are to be agreed between
service providers and banks/entities to which the services are being
provided subject to the following limits:
i. The maximum total fee that a merchant shall be charged for any
Web transaction shall be subject to negotiation between the
Acquirer and the merchant, after taking into account the provisions
of the Interchange Guidelines.
4.7.4 Other service providers will be free to negotiate their fees with the party
that service is being rendered to
4.7.5 Web transactions done with cards issued in foreign currencies will follow
the pricing arrangement put in place by the relevant international
scheme.
4.8 Consumer Protection/Dispute Resolution
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Any dispute, controversy or claim arising out of or relating to this Guidelines or
4.9 Compliance
All parties shall comply with the provisions of these guidelines, and other
related Guidelines issued by the CBN. Non-compliance with the guidelines
shall attract appropriate sanctions by the CBN. These Guidelines shall prevail
in the case of conflict with any prior guidelines issued by the CBN.

5.0 DEFINITION OF TERMS

The terms below shall have the following meaning, for the purpose of the
Guidelines.
1) Acquirer means bank or any other legal person concluding contracts with
merchants concerning acceptance of payment by means of an electronic
payment token.
2) Card Reader is an apparatus that reads data from a payment card. It may
have an audio jack that is attachable to a port or may connect via
Bluetooth to the mobile device.
3) Card Schemes define the rules of the card system (e.g. interchanges,
licenses, fraud responsibilities), and choices of technical functionalities (e.g.
standards, protocols, security requirements).
4) Cardholder means an individual or company issued with a payment card
linked to an account at a licensed financial institution
5) Competent Authorities include Courts, Economic and Financial Crime
Commission (EFCC), Independent Corrupt Practices Commission (ICPC),
Regulatory Authorities such as the CBN, Nigeria Deposit Insurance
Commission (NDIC).
6) Contactless refers to a process of performing a transaction via an NFC
antenna embedded within a mobile device.
7) EMV (Europay, MasterCard, Visa) is the global standard that ensures smart
(Chip-and-PIN) cards, terminals and other systems interoperate.
8) Hot list means list of deactivated cards by the issuer, that were reported
missing, stolen, lost or damaged by the card holders.
9) Interconnectivity means ability for reciprocal exchange of
transactions/messages between two or more switching networks.

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10) Interoperability means ability to issue cards and deploy devices in such a
way that all customers (card holders, merchants and issuers) perceive
operations, while obtaining service, as if the interconnected networks were
one. (refer to http://www.bis.org/cpmi/).
11) Issuer: Licenced Financial institution that issues payment tokens to customers
12) Merchant Acquirer means a CBN licensed institution that has agreement
with the relevant card scheme to contract with merchants to accept
payment cards as means of payment.
13) Merchant means an organization or entity that contracts with a Merchant
Acquirer for accepting payment by means of payment card or any other
electronic payment instrument.
14) Member Institutions means banks and other financial institutions that are on
the network of a particular switching company.
15) MPR means Minimum Policy Rate.
16) mPOS stands for mobile Point of Sale. A device such as a tablet or any
mobile phone with card accepting device attached to it that performs the
functions of an electronic Point of Sale (PoS) terminal.
17) Near Field Communication (NFC) is the set of protocols that enables
devices to establish radio communication with each other by touching
each other or bringing them into proximity of a distance typically 10 cm (3.9
in) or less.
18) NIBSS stands for the Nigeria Inter-Bank Settlement System, it was mandated
to among others, act as the Automated Clearing House (ACH), Payment
Terminal Service Aggregator (PTSA) and Nigeria Central Switch (NCS) for
Nigeria.
19) Offline transaction means a transaction in which no direct connection is
made between the device(s) involved in the transaction and a centralized
computer system for the purpose of effecting settlement, or authenticating
the transaction before it is executed.
20) Online transaction means a transaction in which there is a direct
connection between the device(s) and a centralized computer system for
effecting settlement or authorization or validation before a transaction can
be executed.
21) PA-DSS stands for Payment Application Data Security Standard. PA-DSS
compliant applications help merchants and agents mitigate compromises,

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prevent storage of sensitive cardholder data, and support overall
compliance with the PCI DSS.
22) Payments GP Payment Gateway is an e-commerce application service
provider that authorizes card payments for e-businesses, online retailers, etc.
23) Payment tokens: Any electronic payment instruments provided by an issuer
to initiate a payment transaction.
24) PCI DSS stands for Payment Card Industry Data Security Standard. It was
developed to encourage and enhance cardholder data security and
facilitate the broad adoption of consistent data security measures globally.
25) (See www.pcisecuritystandards.org/documents/PCI_DSS_v3-1.pdf)
26) PCI PED stands for Payment Card Industry Pin Entry Device. PCI PED security
requirements are designed to secure personal identification number (PIN)-
based transactions globally and apply to devices that accept PIN entry for
all PIN based transactions.
27) PCI PTS stands for Payment Card Industry PIN Transaction Security
requirements. These are used primarily by ATM and point-of-sale device
manufacturers to secure cardholder’s details at physical point of entry.
28) PIN means Personal Identification Number.
29) Processor processes card transactions.
30) Point-to-Point Encryption (P2PE) is a method of protocol for data encryption
ensuring secure transmission between two points.
31) Settlement Agents: Institutions that generates financial data and compute
net settlement position for each financial institution in a payment
scheme(s).
32) Smart phone is a phone built on advanced mobile computing platform with
superior capabilities than a feature phone.
33) Switching means a system that captures electronic financial transactions
from touch-points, applies rules, determines destinations, delivers the
transactions and gives appropriate feedback.
34) T means transaction day, or the date a customer logs the complaint.
35) Tablet is a mobile computer that is larger than a typical smart phone, with
integrated features, such as touch screen and is typically operated not by
keyboard but through touching screen.

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36) Web Acceptance is the process of accepting payments through the web
channel.
37) Web is an information space, where documents and other web resources
are identified by uniform resource identifiers, interlinked by hypertext links,
and accessible via the Internet.

Central Bank of Nigeria


April, 2016

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GUIDELINES FOR THE OPERATION OF TREASURY SINGLE ACCOUNT (TSA)
BY STATE GOVERNMENTS IN NIGERIA

February, 2016

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1. Background and Introduction
State Governments continue to face intense pressure on their cash flows in the
face of dwindling revenues and the need to meet increasing statutory and
social responsibilities.
To address this issue, State Governments are undertaking financial and treasury
management reforms of which the Treasury Single Account (TSA) scheme is a
major component. This is consistent with the strategic public sector
transformation initiatives and also in line with the provision of Section 120 of the
1999 Constitution.
The Central Bank of Nigeria (CBN), in exercise of its powers, as provided in the
CBN Act, 2007, Section 47, sub section 2(2d), hereby issues the following
guidelines on the management and operation of the Treasury Single Account
(TSA), hosted with the CBN, by State Governments.
2. Goals of the Guidelines
The objective of this Guideline is to provide State Governments with a clear
framework to support their successful implementation of the TSA initiative, based
on standardized banking arrangements, operational processes and IT
infrastructure.
3. TSA Concept
The Treasury Single Account (TSA) initiative is the operation of a unified structure
of Government Bank Accounts, in a single account or a set of linked accounts
for ALL Government payments and receipts.
4. Tsa Objectives
The TSA is primarily designed to bring ALL Government funds in bank accounts
within the effective control and operational purview of the Treasury, in order to:
Enthrone centralised, transparent and accountable revenue management;
Facilitate effective cash management; Ensure cash availability; Promote
efficient management of domestic borrowing at minimal cost; Allow optimal
investment of idle cash; Block loopholes in revenue management; Establish an
efficient disbursement and collection mechanism for Government funds;
Improve liquidity reserve; and Eliminate operational inefficiency and costs
associated with maintaining multiple accounts across multiple financial
institutions.
5. TSA Essential Requirements
i. Government agencies are not to operate ANY bank account under any guise,
outside the purview and oversight of the Treasury.
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ii. The consolidation of government cash resources should be comprehensive
and encompass all government cash resources, both budgetary and extra-
budgetary. This means that all public monies, irrespective of whether the
corresponding cash flows are subject to budgetary control or not, should be
brought under the direct control of Government.
iii. Government banking arrangement should be unified, to enable the relevant
Government stakeholders such as the Ministry of Finance (MOF) and the
Accountant General (AG) have full oversight of Government cash flows
across bank accounts.
iv. There are two TSA models: (i) The main TSA and associated ledger sub-
accounts (where they exist) are to be maintained in a single banking
institution OR (ii) The main TSA is maintained in a single banking institution and
associated zero balance ledger sub-accounts (ZBAs) (where they exist) are
maintained in other institutions from where balances are swept daily to the
main TSA in CBN or the appointed main TSA hosting financial institution.
6. TSA General Requirements
i. Each State Government shall select any TSA model of its choice. The choice
of a TSA model shall be informed and guided by the availability of clear
operational processes and basic technology infrastructure that supports the
implementation of the model of choice.
ii. Each State Government shall inform the Governor of the Central Bank of
Nigeria of its decision to introduce the TSA scheme, detailing; the State’s
preferred TSA model (banking structure) and level of preparedness to
commence, operate & support the scheme, which shall include, but not
limited to project organization and resourcing, operational process workflow,
available technology infrastructure, etc.
iii. Each State Government shall ensure that all legal framework, extant laws,
cash management processes and policies, financial regulations, Treasury
Circulars, etc. are put in place to guide the TSA operation, as well as ensure
that, clear information is regularly issued to relevant internal and external
stakeholders before, during and after the commencement of the TSA
scheme
iv. Each State Government shall maintain contractual Agreement(s) with parties
involved in the design, delivery and ongoing support of its TSA scheme. Such
Agreement shall clearly define the terms and the roles and responsibilities of
the State Government and the relevant parties. Such stakeholders may
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include, but not limited to the CBN, Deposit Money Banks, Payment
Technology Solution Providers, etc.
v. Each State Government shall have a clear and unambiguous position of ALL
outstanding debts owed Deposit Money Banks (inclusive of debts incurred by
its MDAs) before the commencement of the TSA scheme. Where a State is
unable to fully liquidate its debts with DMBs before the commencement of
the TSA, it shall put in place a firm repayment schedule, before commencing
the TSA scheme, with the CBN.
vi. Each State Government shall establish a TSA Project Team to be led by an
official not below the position of a Director in the public service, to
coordinate the implementation of the State’s TSA initiative. The Team shall
have primary responsibility for coordinating all pre-implementation,
implementation and postimplementation programmes required for the
successful implementation of the State Government’s TSA scheme. This shall
include but not limited to organising sensitization workshops, system
specifications gathering, project documentation, user training, change
management, risk management, project reporting, etc.
vii. Each State Government shall undertake a comprehensive review,
harmonization and update of its financial and treasury management
processes, procedures and system, as may be necessary, to support the
successful implementation and operation of the TSA initiative. This shall
include but not limited to the establishment of a State Cash Management
Unit (CMU), which shall be guided by the State’s cash management
provisions, processes, procedures, etc.
viii. Each State Government shall be responsible for the provision of adequate
sustainable capacity and resources at different levels across all MDAs. This is
required to ensure the long-term success of the State’s TSA initiative.
b TSA Account Opening & Maintenance
i. Each State Government shall apply for the opening and maintenance of TSA
accounts at the CBN or a DMB, through an application letter endorsed by
any two persons of; the State Governor, the State Commissioner in charge of
Finance or the State Accountant-General. Such application shall clearly state
the type of account to be opened, such as; revenue, payments, etc.
ii. Each State Government shall undertake a comprehensive inventory of ALL
bank accounts maintained with all financial institutions by the State and all
her MDAs without exception. Such accounts must be harmonized and

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aligned before the commencement of the TSA scheme, to avoid the
exclusion or replication of accounts.
iii. Each State Government shall open only one main TSA account and other
such ledger sub-accounts as it deems fit with the Central Bank of Nigeria or
any Deposit Money Bank of its choice, provided such ledger sub-accounts
shall be limited to one for each MDA and shall always be linked to the main
TSA account. The choice of a State Government to host the TSA main
account with a DMB and sub-ledger accounts with the same or other DMBs
shall be guided by the same considerations as hosting the Main TSA account
with the CBN.
iv. The administration and operation of a State Government’s main TSA and
ledger sub-accounts hosted by the CBN shall be through the CBN branch in
the State Government’s capital.
v. The operation of the TSA scheme hosted by the CBN for each State
Government shall be operated at all times through the use of approved
electronic channels and shall exclude the handling of cash or processing of
manual cheque transactions by the CBN at any of its offices.
c. TSA Payments Infrastructure
i. TSA operations are conceptualized and designed to be operated on a full
endto-end basis, across various approved electronic channels, for all
payment and collection transactions.
ii. Each State Government shall adopt a CBN licensed payment platform for
the operation of its TSA scheme. Approved platforms for the controlled take-
off of the TSA scheme are; SystemSpecs, Interswitch, Unified Payment
Services, e-Transact and NIBSS. Other approved platforms shall be advised as
the TSA initiative matures.
iii. Each State Government shall ensure the availability of a functional
Government Financial Information Management System (GIFMIS) or such
other application, that enables it to handle the different aspects of its
activities, covering; budgeting, budget control, transactions workflow
management, chart of accounts management, payables & receivables
ledger management, Purchase Requisition Management, Purchase Order
Management, Supplier & Vendor Payments Processing, Revenue Receipting,
Treasury Management, Transactions Monitoring, Reconciliation, Payment
Gateway Interface, Reporting & Data Analytics, etc.

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iv. Each State Government shall ensure the availability of basic Information
Technology infrastructure and training programs required for the successful
implementation and ongoing support of the TSA scheme.
7. TSA Stakeholders’ Roles & Responsibilities
The long-term success of the TSA scheme requires the effective collaboration of
different stakeholders, during the pre-implementation, implementation and post-
implementation phases of the initiative. TSA stakeholders shall include, but not
limited to;
Central Bank of Nigeria (CBN)
I. Issue payment policies and guidelines to Banks
II. Ensure compliance of Banks with issued guidelines
III. Provide and maintain the TSA payment gateway Infrastructure
IV. Host and maintain the TSA accounts on behalf of Government
V. Play advisory & supervisory roles on required TSA infrastructure
VI. Maintain help desk to provide support to users of the CBN Remita Payment
Gateway
VII. Participate in the reconciliation of accounts,
VIII. Perform account management functions
IX. Ensure availability of standard TSA payments and collections reports e.g.
electronic bank statements, budget status reports, transaction status and
monitoring reports, etc.
State Accountant-Generals (SAG)
I. Assume primary responsibility for the State Government’s TSA initiative
II. Coordinate the development of the State’s TSA Policy and framework
III. Issue TSA operational guidelines to MDAs and other stakeholders
IV. Develop cash management policies and procedures
V. Liaise and serve as primary contact point with CBN, Banks, Payment Service
Providers and other stakeholders
VI. Manage registration and user enrolment processes for MDAs
VII. Maintain a TSA transactions reconciliation and settlement center

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VIII. Set up and maintain TSA help desk to coordinate all support activities to
stakeholders such as MDAs, banks, corporate and individual payment
beneficiaries and payers
IX. Ensure integration of Payment Gateway with the State Financial Information
Management System
X. Create and ensure smooth operation off the State Cash Management Unit
(CMU)
Ministries, Departments and Agencies (MDAs)
I. Close all DMBs accounts as directed by the State Treasury
II. Transfer balances at DMBs to CBN through designated electronic channel
 Guide payers on e-Collection processes, including how to pay 
Monitor transactions to confirm that payments are made.
III. Deliver relevant services upon confirmation of payment.
IV. Cooperate with State Treasury for the purpose of IGR monitoring. 
Participate and complete all configuration processes.
V. Have appropriate access to the TSA Infrastructure  Register/create and
classify all payers appropriately.
VI. Pre-assign unique payment code to each payer to foster seamless
revenue payment and ease reconciliation process. The payment code is
to capture the MDA’s code, amount to be paid, service for which
payment is meant and other relevant details.
VII. View all categories of payments due and made to them.

VIII. Generate various reports


IX. Reconcile the TSA sub-account assigned to them.
Deposit Money Banks (DMBs)
I. Close all existing accounts of MDAs as may be directed by the State
Government
II. Offer multiple payment and collection channels to corporate and
individual payers and payment beneficiaries (Bank Branch, Online
Banking, Mobile Wallet, Mobile App, USSD, etc.)
III. Process payments promptly in accordance with existing CBN payment
guidelines
IV. Provide prompt and quality service to payers
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V. Cooperate with relevant Departments of State Treasury, CBN and MDAs
VI. Provide receipts for payers.at the point of payment

VII. Automatically sweep payments through the CBN payment Gateway to


the State Government TSA Main Account or Sub-Accounts

8. Guidelines Review
This Guidelines is subject to periodic review by the Central Bank of Nigeria

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CENTRAL BANK OF NIGERIA

GUIDELINES FOR BANKING OPERATIONS IN THE FREE ZONES IN NIGERIA,


2016

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GUIDELINES FOR BANKING OPERATIONS IN THE FREE ZONES IN NIGERIA, 2016

In exercise of the powers conferred on it by sections 2(d) and 47 of the Central


Bank of Nigeria Act, No. 7, 2007 (“the Act”) and all other powers enabling it in
that behalf, the Central Bank of Nigeria (“CBN”) issues the following Guidelines –

PART I
OBJECTIVES OF THE GUIDELINES
1. Objectives
The objectives of these Guidelines are to -
a. complement and enhance the provisions of the Free Zones (FZs) Acts;
b. provide details of regulatory and supervisory requirements necessary to
promote efficient and sustainable banking services in Nigeria‟s FZs;
c. spell out details of permissible and prohibited activities of banks in Nigeria‟s
FZs;
d. Provide details of incentives available to banks in Nigeria‟s FZs.

PART II
ESTABLISHMENT OF A BANK TO OPERATE IN THE FREE ZONES
2. Banks Operating in Nigeria’s Free Zones
(1) Banks and other financial institutions in Nigeria are licensed under the Banks
and Other Financial Institutions Act (BOFIA), Cap B3, Laws of the Federation
of Nigeria, 2004 (as amended), complemented by the directives and
guidelines issued from time to time by the Central Bank of Nigeria (hereinafter
referred to as “CBN”) to carry on banking business in accordance with the
provisions of the Act.
(2) As from the commencement of these Guidelines, only banks or financial
holding companies licensed under BOFIA, or licensed foreign banks shall
qualify to apply to the Authority for approval to establish presence to carry
on banking business in Nigeria‟s FZs.
(3) The banks currently operating in the FZ before the issuance of these
Guidelines shall, from the commencement of these Guidelines, regularize

221
and comply with the provisions for establishing presence in the FZ. This should
be done within six months of the issuance of the Guidelines.
(4) The provisions of Nigerian Export Processing Zone Authority (NEPZA) Act, Oil
and Gas Free Zone Act, BOFIA, CBN Act, and NDIC Act and all guidelines
and regulations issued pursuant to these Acts shall apply to banks operating
in the FZs.
3. Application to Establish a Bank in a Free Zone
(1) Without prejudice to the powers of NEPZA to grant Licenses, no enterprise
shall carry on banking business in any FZ in Nigeria without:
a. a prior approval granted to the parent bank by the Authority, after
meeting the requirements to establish the subsidiary in the FZ and,
b. a banking license granted to the subsidiary by the CBN, after meeting the
requirements to carry on banking business.
(2) An application to establish a bank in a FZ shall be submitted by the parent
bank to the Authority along with the relevant fees.
(3) The application shall be forwarded to the CBN by the Authority with the
following documents -
a) An application letter;
b) Evidence of payment to the CBN of a non-refundable application fee of
USD 10,000 or such other amount as the CBN may prescribe from time to
time.
c) Evidence of deposit of the prescribed minimum paid-up share capital with
the CBN.
d) Board Resolution detailing the strategic objectives for the establishment of
the subsidiary;
e) A copy of the Authority‟s acknowledgment of a formal request by the
parent bank for consent to establish the subsidiary;
f) Initial assessment report by the parent bank detailing specific benefits
derivable from the subsidiary;
g) Board approval for capital allocation to meet the minimum capital
requirement for the subsidiary;
h) Feasibility report which shall include -
i. justification of the request including the business model and strategy
for the establishment of the proposed subsidiary,
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ii. the capacity of the bank to cope with such expansion considering its
capital adequacy, liquidity, management effectiveness and
availability of free funds,
iii. viability of the proposed subsidiary,
iv. details of the shareholding structure of the proposed subsidiary,
v. range of products or services to be offered by the proposed subsidiary
vi. a breakdown of the estimated initial capital expenditure and other
operational costs for the proposed subsidiary, and
vii. The sources of foreign exchange to finance the establishment and
running of the subsidiary.
i) Financial projections of the subsidiary bank for at least 3 years, including
Statement of Financial Position, Income Statement, Notes to the accounts
and Assumptions;
j) Memorandum and Articles of Association of the proposed subsidiary;
k) Organogram and detailed profile of the directors and key management
staff of the proposed subsidiary;
l) Human Resource requirements ;
m) Detailed Enterprise Risk Management Framework of the proposed
subsidiary,
n) Details of how the operations of the subsidiary would be monitored.
(4) Any amendment to the Memorandum and Articles of Association of the
parent bank shall be communicated to the CBN within two weeks.
(5) The CBN in reviewing the application and supporting documents may
request for additional information, documents, and reports, as it may
consider necessary.
(6) Where the application for a license is unsuccessful, the CBN shall release the
capital deposit plus accrued interest within thirty (30) days on receipt of a
formal request by the promoters.
(7) Where the CBN considers the application satisfactory, it shall grant an
approval-in-principle (AIP) not later than three (3) months from the date of
the receipt of complete information/documents.
(8) In the event that the CBN considers the application unsatisfactory, it shall
issue the applicant a deficiency letter, stating the inadequacies identified in
the application within the stated time.
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(9) Any bank, which has been granted an AIP, shall ensure that from the date of
such AIP, it shall conduct its affairs in accordance with the terms and
conditions of the AIP and the requirements of the Authority.
(10) Any bank that has been granted an AIP shall apply to the CBN for a final
license within six (6) months of the grant of an AIP.
(11) The AIP shall lapse after six (6) months if not utilized.
(12) Where the CBN considers the application satisfactory, it shall grant a final
license not later than three (3) months from the receipt of complete
information/documentation upon the payment of a license fee of $20,000 or
such amount as the CBN may prescribe.
(13) For the avoidance of doubt, any license issued under these Guidelines shall
be valid only for the FZ in respect of which it is issued.
4. Prudential Requirements
(1) The required minimum paid-up capital to operate in a FZ of Nigeria shall be
US$10 million or such other amount as the CBN may from time to time
prescribe.
(2) In addition, a bank in the FZ shall meet all the prudential requirements as may
be specified from time to time by the CBN
(3) Banks in FZs shall appoint fit and proper persons to key management
positions, as prescribed by the CBN.
5. Disclosure Requirements
(1) A bank in the FZs shall disclose to the CBN, the equity interests of its directors
and key officers in any enterprise in the zones within fourteen days of
acquisition of such interest.
(2) It shall be the duty of a director of a bank in a FZ who is in anyway, interested
in the grant of an advance, loan or credit facility with the bank in the FZ to
declare the nature of his interest to a meeting of the Board of Directors of the
bank.

PART III
INCENTIVES AND PERMISSIBLE ACTIVITIES
6. Incentives for Banks Operating in Nigeria’s Free Zones
(1) Pursuant to the relevant provisions of the Free Zones Acts, a bank operating in
Nigeria‟s FZ shall enjoy the following incentives -
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(a) freedom to move funds in and out of the zone on all eligible transactions;
(b) exemption from stamp duties on all its documents;
(c) exemption from withholding tax deductions on interest payable on
deposits, dividends and royalties;
(d) exemption from corporate and capital gains taxes;
(e) exemption from payment of duties on imports of furniture, office
equipment and other facilities necessary for its operations; and
(f) exemption from payment of value added tax and any other incentives as
may be approved by the Authority, from time to time.
(2) Banks in the FZs may maintain correspondent banking relationships with
licensed banks in the Nigeria Customs Territory and overseas.
7. Permissible Activities A licensed bank in the FZ may -
a) Take deposits and maintain current and saving accounts from natural and
legal persons; b) provide retail banking services;
c) grant to any person, advance, loans, or credit facility, or give any financial
guarantee, or incur any other liability on behalf of any person;
d) make remittances of funds abroad or to Nigeria Customs Territory on behalf
of any nonresident;
e) deal in foreign exchange and provide foreign exchange services, subject to
the requirements of the Foreign Exchange (Monitoring & Miscellaneous
Provisions, etc) Act Cap. F35 Laws of the Federation of Nigeria 2004, any
other law and CBN Regulations made pursuant thereto;
f) provide treasury management services including but not limited to the
provision of money market, fixed income, and foreign exchange investment
on behalf of clients, subject to the approval of the CBN;
g) provide custodial services;
h) provide financial advisory services incidental to commercial banking business
which do not require regulatory filings with the Securities and Exchange
Commission such as: advising on financing and business strategies and
structures, conducting research and economic intelligence services, building
financial models, writing business plans, conducting private placements,
arranging loan syndications and advising on project structures;
i) invest in non-convertible debt instruments and, subject to CBN approval,
enter into derivative transactions;

225
j) undertake fixed income trading, where duly licensed to act as a Primary
Dealer/ Market Maker to trade in securities as may be prescribed by the CBN
from time to time;
k) provide non-interest banking services subject to CBN approval; and
l) such other activities as may be approved by the CBN from time to time.

PART IV
PROHIBITED ACTIVITIES AND ADHERENCE TO THE PROVISIONS OF THE MONEY
LAUNDERING (PROHIBITION) ACT, 2011.
8. Prohibited Activities
The following banking and related activities are prohibited in the FZs -
a) sourcing foreign exchange from the official foreign exchange market of the
Nigeria Customs Territory;
b) opening an account for a customer in contravention of the Know-Your-
Customer (KYC) principles;
c) insurance underwriting;
d) Loss adjusting, Re-insurance, Asset Management, Issuing House and Capital
Market underwriting services;
e) investment in equity or hybrid-equity instruments, save and except for the
investments permissible under BOFIA;
f) Proprietary trading, save as permitted by these Guidelines;
g) provision of financial advisory other than in accordance with provisions in
Section 7(h) ; and
h) undertaking any other transactions which are inimical to the interest of the FZ;
and any other activity that may be specified by the CBN or other relevant
authorities, from time to time.

9. Adherence to the Provisions of AML/CFT Legislations


Banks within the FZs are required to ensure strict adherence to the provisions of
the Money Laundering (Prohibition) Act, 2011 (as amended), Terrorism
(Prevention) Act, 2011 (as amended) and the Central Bank of Nigeria AML/CFT
Regulations for Banks and Other Financial Institutions in Nigeria, 2013.

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PART V
MISCELLANEOUS
10. Resolution of Disputes
(1) Disputes between banks and their customers may be resolved:
(a) under the CBN‟s dispute resolution framework; or
(b) by reference to an arbitral panel for resolution which shall comprise of:
(i) two persons appointed by the CBN ; and
(ii) a person representing the Authority.
(2) A decision in any dispute does not preclude a dissatisfied party from seeking
redress in the law courts.
11. Surrender and Revocation of Banking License
(1) A bank operating in a FZ may voluntarily surrender its license. Such bank shall
obtain the prior written approval of the CBN, through the Authority.
(2) The CBN may revoke the license of a bank operating in the FZ–
(a) pursuant to the provisions of BOFIA;
(b) Where the Operating License of the bank is withdrawn by the Authority in
consultation with the CBN.
(c) For failure to comply with the provisions of these Guidelines, the Authority
Regulations or any other directives as may be issued by the CBN from time
to time.
PART VI
OPERATING MANUAL FOR BANKS OPERATING IN THE FREE ZONES
The operation of banks in the Free Zones shall be guided by the following:
12. Sources of Funds
The sources of funds shall include -
(a) Deposits from non-bank customers such as Multinational Corporations,
International Corporations, Non-resident or resident persons or entities,
approved Enterprises in the FZs, Regional Financial Agencies or Institutions
and Euro-Money Markets;
(b) Inter-bank borrowing within the FZs or with licensed foreign banks;
(c) Export Proceeds;
(d) Equity Capital; and
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(e) Such other sources of funds as may be approved by the CBN from time to
time in consultation with the Authority.
13. Utilization of Funds
The bank shall apply the funds at its disposal to -
(a) loans and advances to residents and non-residents
(b) investments
(c) settlement of operational expenses;
(d) payment of dividends;
(e) payments of interest on deposits;
(f) payments for imports; and
(g) such other utilization of funds as may be approved by the CBN from time to
time in consultation with the Authority.
14. Rules for Sourcing and Utilization of Funds
(1) Banks shall not source for foreign exchange from the official market in the
Nigeria Customs Territory for transactions in the FZs;
(2) Exports from the Nigeria Customs Territory to the FZs shall attract payment in
foreign exchange and be subjected to mandatory repatriation of proceeds;
(3) The relevant processes, documentation requirements and procedures
applicable in the Nigeria Customs Territory, including any form of inspection,
shall also apply to trade transactions in the zone (import and exports)
(4) The sourcing and utilization of funds by banks in the FZs shall, in addition to
the provisions of these Guidelines, be governed by such other guidelines or
regulations as may be issued by the CBN, from time to time.

15. Rendition of Returns


(1) Banks in the FZs shall render returns to the CBN in the manner specified below
(a) Remittances for Imports – monthly;
(b) Foreign Exchange inflows – monthly;
(c) Naira Transactions (External Accounts) – monthly;
(d) Statements of Assets and Liabilities – monthly;
(e) Other Foreign Exchange Payments – quarterly;
(f) Breakdown of Total Credits – quarterly;
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(g) Foreign Exchange Investment – quarterly;
(h) Annual Audited Financial Statement; and
(i) Any other returns as may be required by the CBN or relevant authorities from
time to time.
(j) Except in the case of (1) (h) above, all returns must reach the CBN not later
than the 10th day after the month in which they are due.
PART VII
REQUIREMENTS FOR PROCESSING FOREIGN EXCHANGE APPLICATIONS
16. Document Incorporated into these Guidelines.
The provisions of the CBN Foreign Exchange Manual shall apply to banks
operating in the FZs. Extracts from the said Manual are attached as Appendix
to these Guidelines to guide banks and the general public in the FZs on the
requirements for processing foreign exchange applications.
Regulations, Guidelines and Circulars that would be issued from time to time by
the CBN will apply to future requirements for processing foreign exchange
applications.
PART VIII
INTERPRETATIONS AND CITATIONS
17. Interpretations
For the purpose of these Guidelines - o “Authority” means Nigeria Export
Processing Zones Authority established under the Nigeria Export Processing Zones
Act Cap N107 LFN 2004 and the Oil and Gas Free Zone Act Cap O5 LFN 2004 o
Banks” means banks licensed under BOFIA Cap B3, LFN 2004 (as amended) and
authorized to deal in foreign exchange in the Nigeria Customs Territory.
I. “Nigeria Customs Territory” means areas in Nigeria outside the Free Zones.
II. “Eligible Transactions” means all transactions (visible and invisible) that are
neither prohibited by the Free Zone Acts, nor suspended by current
regulations. o “Free Zones (FZs)” mean Zones created under the Nigeria
Export Processing Zones Act Cap N107 LFN 2004 and the Oil and Gas Free
Zone Act Cap O5 LFN 2004 o “Foreign Exchange” means foreign
currency. o “Licensed Foreign Bank” means any enterprise licensed under
the laws of any country other than the Nigeria Customs Territory to carry
on banking business.

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III. “Non-Resident” means any person who is resident outside the Free Zone or
an enterprise registered or incorporated outside the Free Zone.
IV. Resident” means a person granted permission to reside permanently in
the Free Zone or enterprise registered and operating in the Free Zone.
V. “Parent Bank” means any bank or a financial holding company that has
controlling interest over a subsidiary bank.
VI. “Subsidiary” means any bank within the FZ whose parent bank holds 51%
or more of its share capital.
VII. Form “AFZ” means CBN Form A adapted for use in the Free Zones.

18. Citation
These Guidelines shall be cited as Guidelines for Banking Operations in Free
Zones, 2014.

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APPENDIX
REQUIREMENTS FOR FOREIGN EXCHANGE APPLICATIONS
[Guideline 16]
A. Direct Foreign Capital Investment in the Free Zone
Any person whether resident in or outside the Free Zone may invest in any
enterprise in the Free Zone. In addition, the Authorised Dealer shall issue a
Certificate of Capital Importation (CCI) to the investor within 24 hours of the
receipt of the capital. The Authorised Dealer shall issue the CCI on the basis of
the following documents:
1. Where the Investment is in form of Inflow of Funds:
i) Authenticated SWIFT message advising payment;
ii) Board resolution of the local beneficiary authorising the investment in the
Free Zone;
iii) Purpose of capital importation (e.g. equity, portfolio, loan);
iv) Evidence of incorporation where applicable.
2. Where Capital is in form of Equipment/Machinery or Raw Material
a) Original Combined Certificate of Value and Origin (CCVO) and Pre-Arrival
Assessment Report (PAAR)
b) Certified copy of Bill of Lading (original to be sighted)
c) Certified copy of Bill of Entry/Single Goods Declaration Form (original copy to
be sighted)
d) Single Goods Declaration (SGD) Form number.
Authorised Dealers are required to render monthly returns to CBN on capital
importation for the purpose of investment in the Free Zone.
3. Remittances in respect of Investment under the Debt Conversion Programme
a) A status report must be obtained from the Debt Management Office (DMO)
before repatriation of capital, profit, interest and/or dividends, in respect of
transactions which have been approved under the DMO Scheme.
b) Evidence of payment of the mandatory 2.5% transaction cost paid to the
Nostro account of CBN.

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Note:
Registration of Foreign Investment
It is required that non-resident investors in the Free Zone shall register their
Investments for records and statistical purposes with the Free Zone Authority. The
FZA shall forward monthly returns of all registered foreign investments to the
Trade and Exchange Department of the CBN for monitoring and record
purposes. Authorised Dealers are to ensure that the FZA registration
certificate/evidence is provided before funds are repatriated on behalf of the
non-resident investor.

B. Capital Outflows and Outward Transfer in Respect of Dividends, Profits and


Investments
Foreign investors are guaranteed unconditional transfer of their capital, profits
and dividends attributable to their investments in any convertible currency
through the Authorised Dealers.
1. Capital Transfer (Other than Securities)
Applications for capital transfer or withdrawal of investment may be processed
by the Authorised Dealers subject to the following documentation requirements:
i) Copy of Sales Agreement;
ii) Certificate of Capital Importation as evidence that the original investment
was imported into the Free Zone whether in the form of cash or goods (raw
materials, machinery and equipment), or Approved Status in the case of an
old company/investment or evidence of previous remittance of profits and
dividends;
iii) Documentary evidence that the beneficiary has sold or transferred the
assets;
iv) Valuation Report by an independent third party indicating the value of
assets;
v) Completed and approved Form “AFZ”.
2. Transfer of Shares
Transfer of shares can be done by companies subject to:
i) Board Resolution authorising such transfer;
ii) Transfer agreement;

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iii) Letter of clearance from the Securities and Exchange Commission that the
transfer is duly authorized. (if the transfer involve parties outside the FZ);
iv) Letter of clearance from the Free Zone Authority that the transfer is duly
authorised. (if the transfer involve only parties in the FZ);
v) A valuation report by a reputable Auditing firm indicating the value of the
shares, where the company is not quoted on the Stock Exchange.
After such transfer, enterprises are required to notify the Free Zone Authority and
the CBN for monitoring and record purposes.
3. Capitalisation/Rights Issue
Capitalisation/Rights Issue can be carried out by enterprises in the Free
Zone subject to the following:
a) Board Resolution authorising such capitalisation;
b) Payment of relevant stamp duty to the Free Zone Authority;
c) Approval from the Securities and Exchange Commission (SEC) where the
investment involves entities outside the Free Zone.
4. Remittance of Dividends, Profits, etc
The documentation requirements for the remittance of dividends and
profits are as listed below:
(a) Duly completed and approved Form “AFZ”
(b) Audited accounts for the year dividends were declared.
(c) Board of Directors/AGM resolution, authorising the payment of
dividends/profits to both local and foreign shareholders.
(d) Evidence of capital importation into the Free Zone, e.g. CCI or Approved
Status and evidence of previous remittance of dividends/profit.
(e) Evidence of what is due to each shareholder for the period dividends is
declared, and/or dividend warrant.
Note: For individuals, provisions in 4(b and c) would not be applicable.
Authorised Dealers are required to submit monthly returns to the Central Bank of
Nigeria on capital transfer/repatriation and remittance of profits and dividends.
5. Utilisation of Certificates of Capital Importation (CCI)
Certificate of Capital Importation issued by any Authorised Dealer that initially
handled the transaction that qualifies for issuance of CCI can be utilized
through another bank subject to the following:
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(j) a formal application by the customer to the bank that initially issued the CCI,
requesting for transfer to another bank;
(ii) the initial bank effects the transfer to a bank of the customer‟s choice within
5 working days of the request, attaching the following:
(a) copy of the CCI;
(b) Transaction history of the CCI, stating purpose of CCI, amount remitted so
far (interest, loan repayment, dividends), amount outstanding and an
indemnity by the issuing bank to the receiving bank against double
remittance. A copy of the CCI transaction history should be forwarded to
Director, Trade & Exchange Department, CBN, Abuja.
iii) The new bank accepts the transfer and issues to CBN, a letter of indemnity
against double remittance and commences remittance on the CCI subject
to relevant documentations being fully met.
iv) In all cases and where final remittance has been effected, the original CCI
should be retrieved and cancelled by the bank that last handled the
transaction involving the CCI. The bank should retain a photocopy for its
records and surrender the cancelled original CCI to the Director, Trade and
Exchange Department, CBN, Abuja, within 5 working days from the date of
cancellation.
C. Purchase and Sale of Securities
1. Securities Payable in Nigerian Currency
1.1 A non-resident who wishes to establish an enterprise in the Free Zone shall first
of all comply with the provisions of the FZA guidelines i.e. via registration with
the Free Zone Authority.
1.2 A non-resident investor may buy the shares of any enterprise in the Free Zone.
Such purchase of shares, shall be completed through any of the Stock
Exchanges in Nigeria.
1.3 Procedure for Purchase of Securities Through the Stock Exchange
(i) The prospective investor appoints a local stock broker of his choice.
(ii) The broker and investor agree on the bank in Nigeria for the investor; the
investor then informs the bank on how much he is investing.
(iii) The capital is imported e.g. by electronic transfer to the designated Bank.
Please note that cash movement for dealing in securities is not allowed.
(iv) On receipt of the funds, the bank issues the investor with a Certificate of
Capital Importation within 24 hours.
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(v) With the certificate, the investor through the stock-broker, enters the market;
invests in any company of his choice
(vi) If at any point in time the investor wants to divest, he shall go back to the
bank with the following documents:-
(a) Evidence that the shares were sold in line with guidelines by the Securities
and Exchange Commission, the relevant Stock Exchange;
(b) Evidence of capital importation/approved status/evidence of previous
remittance of dividends on the shares;
(c) Evidence of offer and acceptance (i.e. sales agreement).
(d) In the case of companies whose shares are not quoted on the stock
exchange, a valuation report by a reputable Auditing Firm indicating the
value of the shares, is required in place of (a) above
1.4 Global Depository Receipts (GDRs) and Certificate of Capital Importation
(CCI) Issuance
In order to align the issuance of GDRs with the requirements of CCI issuance to
foreign investors and also build confidence in the minds of investors who may
want to invest in the GDRs, Authorised Dealers are to note the procedure as
follows:
(i) Certificate of Capital Importation shall continue to be issued in respect of
foreign exchange inflow for loans, investment purposes and/or capital,
subject to existing guidelines;
(ii) Where foreign exchange inflow is in respect of GDR, a master CCI should be
issued in favour of the Depository bank (DB) to the tune of the foreign
exchange inflow; Upon issuance of the master CCI, the receiving
bank/Authorised Dealer should furnish the CBN with a copy with the details of
the beneficial investors to the GDR endorsed at the back of the master CCI;
(iii) Where the portion of the GDR is cancelled offshore by the investor, the DB
shall inform the Custodian/sub-custodian of the cancellation and provide the
latter with the necessary documentary evidence of same;
The Depository‟s nominee custodian shall have valid CCI covering the
number of shares withdrawn from the GDR and also effect a “mark down” of
the CCI from the master CCI;
(iv) With the valid CCI covering the number of shares withdrawn from the GDR,
the direct non-resident equity investor can trade with the underlying shares in

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the local market. The investor shall also be entitled to repatriate funds
outside the Free Zone;
(v) Repatriation of funds outside Nigeria shall be through Authorised Dealers
subject to the following:
(a) The guidelines on utilization of CCI in the Foreign Exchange Manual
and/or relevant circulars on same;
(b) Duly completed Form „AFZ‟;
(c) Letter of evidence of conversion from GDRs to shares and confirmed by
the Depository and the nominee custodian;
(d) Documentary evidence of cancellation of the GDR from the depository;
(e) Letter from the direct non-resident equity investor, stating relevant details
to the Authorised Dealer via his broker, requesting for repatriation of sales
proceeds;
(f) Photocopy of the original CCI;
(g) Sale Contract Note or evidence of sale of shares from a FZ broker.
(vi) The Authorised Dealer responsible for the repatriation of proceeds of sale on
behalf of the GDR holder is required to perform book-keeping and paper trail
procedures evidencing:
(a) Proof of sale of GDR
(b) Identity of GDR holder
(c) Proof of CCI
(d) “Mark down” of the original CCI
2. Securities Payable in Foreign Currency
Residents of the Free Zone may buy from or sell to a non-resident, any security
denominated in foreign currency subject to the following documentations:
(i) Form “AFZ”
(ii) Broker‟s Quotation or Purchase Contract Note
(iii) Certified evidence of offer for sale of the specified shares
(iv) Prospectus or current annual report of company offering the shares for sale
3. Investment in Securities Denominated in Foreign Currency
(a) Form “AFZ‟

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(b) Purchase confirmation of the securities by the broker shall be forwarded to
the dealing bank.
(c) Submission of periodic statement of investment holdings by the broker to the
dealing bank
(d) Monthly returns on the investment by the bank to the CBN
(e) Appointment of custodian by the investor who shall be duly acceptable to
the dealing bank.
(f) Authorised Dealers are required to apply KYC principles on the prospective
investors before consideration of such application.
Authorised Dealers are to note that funds from the official foreign exchange
window of the customs territory shall not be eligible for investment in securities
denominated in foreign currencies abroad and setting up of offshore
subsidiaries/branches of free zone enterprises. For the avoidance of doubt,
only funds generated in the Free Zone shall be used to finance such
transactions.
D. Purchase of Money Market Instruments
A non-resident national or entity may invest in Nigeria by way of purchase of
money market instruments such as Commercial Paper, Negotiable Certificates
of Deposit, Bankers Acceptance, Treasury Bills, etc.
1. The following guidelines should be noted:
(a). Investment in the Nigerian Treasury Bills (NTB) and Federal Government
Bond (FGB) by foreign entities is allowed;
(b). However, prior to the maturity of these instruments, foreign investors are
allowed to discount their investment in the secondary market to either a
local or foreign investor;
(c). Where the new investor is in the Free Zone, the CCI issued to the initial
foreign investor who is now divesting, shall be cancelled after the
repatriation of the proceeds of the divestment. The new investor will now
receive interest payment and on maturity collect the principal in Naira or
USD;
(d). In the case where a foreign investor is buying over the instrument from the
investor divesting, the CCI issued to the foreign investor (seller of CCI) will
be cancelled. A new CCI will be issued to reflect the name of the buyer.
The new investor in this case is guaranteed easy remittance of interest

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that shall accrue from the investment as well as the remittance of the
principal at the maturity of the instrument.
Note: For the avoidance of doubt, it should be noted that in both cases
(c) and (d), the repatriation and or payment of the principal will only be
effected to the holder of the instrument after its maturity.
2. Procedure for investing in Nigerian Money Market Instruments
(i) The prospective investor appoints a local bank or Discount House as an
agent to purchase the instrument
(ii) The funds for the investment are transferred electronically to a designated
bank
(iii) On receipt of the funds, the bank issues the investor with a Certificate of
Capital Importation within 24 hours.
(v) With the certificate, the investor through the bank or discount house, enters
the market; invests in any instrument of his choice
(v) If at any point in time the investor wants to divest, he shall go back to the
bank with the following documents:-
a) Certificate of Capital Importation
b) Evidence of redemption of the money market instrument.
Authorised Dealers are to note that after repatriation of the investment, the
certificate of capital importation should be recovered and cancelled. The
cancelled original of the CCI should be forwarded to Director, Trade and
Exchange Department, Central Bank of Nigeria, Abuja, while the bank retains a
copy for records.
E. External Loans, Including Suppliers’ Credit
1. Procurement of Foreign Loan
Request for foreign loans by enterprises registered in the Free Zone, from
corporate bodies/institutions offshore shall be processed through Authorised
Dealers supported with the necessary documents:
1.1 Where the loan is in form of inflow of funds:
(a) Board Resolution to obtain the loan
(b) A copy of agreement, showing terms and conditions of the facility, including
moratorium, date of maturity, interest rate and schedule of repayment of
principal and interest.
(c) A copy of letter of offer of loan/facility or credit.
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(d) A copy of letter of acceptance.
1.2 Where Loan is in form of Equipment/Machinery or Raw Material
(a) Original CCVO and Pre-Arrival Assessment Report (PAAR)
(b) Certified copy of Bill of Lading (original to be sighted)
(c) Certified copy of Bill of Entry/Single Goods Declaration Form (original copy to
be sighted)
(d) Single Goods Declaration (SGD) Form number.
After such foreign loans/facilities shall have been obtained, Authorised Dealers
shall forward the details of the loans/facilities to the Free Zone Authority and the
Trade and Exchange Department of CBN, for record and monitoring purposes.
2. Repayment of External Loans
(i) Completed Form “AFZ”
(ii) Copy of Agreement, showing schedule of repayment
(iii) Schedule of drawdown of the loan/facility
(iv) Evidence that the loan/credit was brought into the Free Zone (CCI, CCVO
and PAAR, etc.) where applicable (v) Single Goods Declaration Form
number.
(vi) Demand note.
(vii) Authenticated SWIFT message in respect of inflow of funds.
F. Foreign Nationals’ Personal Home Remittances
1. Family Maintenance Allowance
1.1 Remittances by resident foreign nationals/expatriates for the maintenance of
dependants on their own accounts or for any purpose whatsoever are
allowed up to 100% of their net income while physically resident in the Free
Zone. An expatriate wife with accompanying husband (immigration status)
and resident permit cannot enjoy the PHR facility, but can transfer funds
outside the Free Zone for any other purpose.
1.2 Authorised Dealers may approve applications made by foreign nationals
resident in the Free Zone to remit monies outside the FZ for family
maintenance subject to the following documentation requirements:-
(a) Duly completed Form “AFZ”
(b) Certified Tax Deduction Card
(c) Photocopy of Relevant Pages of Passport
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(d) Resident Permit (for the period applied for)
(e) Evidence of operation of current account with the bank and of payment of
salaries into the account.
1.3 Actual transfer may be made once in a month on the basis of the
remuneration received for the previous month. However, where remittances
have fallen into arrears, Authorised Dealers can determine the applications
based on the documents listed in 1.2 above.
1.4 Family maintenance allowance may be continued only while the applicant is
actually resident in Free Zone and receives salary. These shall cease
immediately it is known that the applicant has left the Free Zone.
2. Naturalised Aliens/Foreigners Married to Residents
2.1 A limit of 50 per cent of the annual income of naturalised aliens (which
include an expatriate woman married to a resident) may be allowed to be
remitted abroad in any fiscal year, subject to documentation requirements in
paragraph 1.2 above, except (d).
2.2 Naturalised aliens shall be treated as residents for the purpose of foreign
exchange remittances. Consequently, remittances of premiums payable by
them on any life or endowment policy expressed in foreign currency will be
allowed until such policy matures, after which the foreign exchange
proceeds shall be repatriated and credited into a Domiciliary Account
operated by the beneficiary. Like other residents holding such policies, they
shall be required to deposit such policies with an Authorised Dealer until
maturity.
3 Leave Pay
3.1 Non-residents working in the Free Zone are allowed to remit 100% of their
leave allowance during any calendar year.
3.2 In all cases, the amount remitted must not exceed the leave allowance of
the applicant.
Authorised Dealers shall note that the leave pay allowance granted under
this guideline is inclusive of travel allowance approved for the related leave
period.
3.3 Applicants‟ passports shall be endorsed by the Authorised Dealers to reflect
the grant of leave pay remittance for each year. Where there is evidence of
accumulated leave, the leave pay remittance shall be proportionate to the
period(s) of accumulation and the passport shall be endorsed to indicate the
period(s) accordingly.
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3.4 Application for leave pay shall be supported with the following documents:-
a) Duly completed Form “AFZ”
b) Photocopy of relevant pages of the applicant‟s passport
c) Letter from employer stating that the applicant is going on leave and the
amount of leave allowance paid to applicant.
d) Photocopy of Resident Permit (for the period applied for).
4. Provident Fund Payments
Authorised Dealers may approve applications made by non-residents to remit
Provident Fund Payments provided documentary evidence of the amount due
is produced and income tax has been paid or that the monies are exempted
from taxation. Such remittances form part of the repatriable 100% of net
income.
5. Bonus and Gratuity
Applications for permission to remit Gratuity/Bonus should be determined by the
Authorised Dealers on presentation of the following documents:-
(k) Duly completed Form “AFZ”
(ii) A letter from the applicant‟s employer confirming payment.
(iii) Evidence of payment of tax on the amount to be remitted.
6. Company’s Share of Provident/Pension Fund Liabilities Due to Expatriate Staff
Such applications shall be determined by Authorised Dealers subject to the
following documentation requirements:-
(i) Duly completed Form “AFZ”
(ii) Approved rules of the pension scheme
(iii) Schedule of contribution (where applicable)
(iv) Joint Tax Board approval of the scheme/appraisal of the scheme by
National Social Insurance Trust Fund (NSITF) in case of Provident Fund. (v)
Resident permit of individual contributor.
7. Final Balance/Terminal Pay:
All applications for remittance of terminal pay and proceeds from sales of assets
(all within remittable limits) shall be determined by the Authorised Dealers,
subject to the following documents:
(a) Duly completed Form “AFZ”
(b) Photocopy of Resident Permit
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(c) Photocopy of Relevant pages of applicant‟s Passport
(d) Letter from the employer stating that the applicant is leaving the country
finally, where applicable.
(e) The applicant‟s statement of assets in the Free Zone.
(f) Receipts of sale of Personal effects (if any).
(g) Employer‟s confirmation of payment of fringe benefits (if any).
The Form titled “Non-Residents – particulars for Home Remittance” and
evidence of tax payment in the Free Zone such as copies of P.A.Y.E. tax
deduction cards, etc. which are valid for at least one year shall be submitted to
the Authorised Dealers at the time of making the initial application. Authorised
Dealers are to retain such forms, cards, etc., for use in dealing with subsequent
applications.

MADE AT ABUJA this ……….……………….…day of …………….………….20....

GOVERNOR
Central Bank of Nigeria

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EXPLANATORY NOTE

(This Note does not form part of these Guidelines but is intended
to explain its purport)

These Guidelines complement and enhance the provisions of the Free Zones
(FZs) Acts, provide details of regulatory and supervisory requirements
necessary to promote efficient and profitable banking services in Nigeria‟s
FZs, spell out details of permissible and prohibited activities of banks in
Nigeria‟s FZs, provide details of incentives available to banks in Nigeria‟s FZs;
and facilitate the attainment of the goals for which FZs are established in
Nigeria.

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REGULATORY FRAMEWORK FOR LICENSING SUPER-AGENTS IN NIGERIA

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FRAMEWORK FOR LICENSING SUPER-AGENTS

1.0 Application and Approval Requirements

Any institution that wishes to be licensed as a Super-Agent shall submit an


application for approval to the CBN. The application shall be submitted to
the Director, Banking & Payments System Department, Central Bank of
Nigeria, Abuja.

All applicants shall supply information to the CBN as may be required from time to
time.

3.0 Minimum Requirements For A Super-Agent

A Super-Agent shall be licensed by the CBN under the following requirements:

a. Must be a company with an existing business, operational for at least 12


months

b. Must be registered with the Corporate Affairs Commission (CAC)

c. Must have a minimum Shareholders’ Fund, unimpaired by losses of N50million

d. Must obtain a reference letter from a Financial Institution (FI) as part of its
documentation for licence

e. Must have a minimum of 50 agents


3.0 Documentary Requirements

All applications for Super-Agent licence shall be accompanied with


the following:

i. Board Approval

ii. Certificate of Incorporation


iii. The company’s profile and functional contact e-mails, telephone numbers,
office and postal addresses
iv. Memorandum & Articles of Association
v. Shareholding structure of the Company
vi. Forms C02 (Return on Allotment of shares) and C07 (Particulars of Directors)

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vii. CVs of Board and Management of the Company
viii. Organogram of the Company
x. Feasibility Report
xi. Information Technology Policy of the Company
ix. Enterprise Risk Management Framework
x. Contingency and Disaster Recovery Plan (Business Continuity Programme)
xii. A document that shall outline the strategy of the shared agent network
including current and potential engagements, geographical spread and
benefits to be derived
xiv. Qualifying criteria for engaging agents e.g.
a. Outreach
b. Competence
c. Integrity
d. Others
xv. Draft Service Level Agreements (SLAs) with sub-agents and FI Agent Banking
Contract
xvi. Risk management, internal control, operational procedures and any other
policy and procedures relevant to the management of an agent banking
arrangement.
xvii. Procedures for KYC and AML/CFT compliance
xviii. Fraud detection plan and standard of care
xix. Consumer protection policy and procedure
4.0 Responsibilities of Super-Agents

The Super-Agents shall:

i. Be responsible for monitoring and supervising the activities of the agents.


ii. Have information on the volume and value of transactions carried out for
each type of service by each agent. (which should be made available to the
Principal)
iii. Monitor effective compliance with set limits and establish other prudential
measures in each case.
iv. Take all other measures, including onsite visits, to ensure that agents operate
strictly within the requirements of the law, guidelines and the contract.

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v. Notwithstanding the responsibility by the Super-Agent (SA) to monitor and
supervise their agents, the CBN may at any time request for any information or
carry out inspection as it deems necessary.

5.0 Renewal of Engagement

Operating license of Super Agents shall be renewed every two (2) years, subject to
satisfactory performance.

6.0 Platform and Interoperability

This section describes the various platforms, which shall be used for the provision of
mobile money services:

a. Platform

i. NIBSS shall provide the switching infrastructure to enable inter-


scheme Cash-In-Cash-
Out (CICO) at all agent locations
ii. The Super-agents’ platform shall be for the management and
monitoring of the activities of their agents only, and shall not
hold electronic money value, whereas, the FI shall provide and
operate the mobile money platform and hold electronic money
value

iii. All MMO platforms shall at all times be upgraded to the latest
technology (inclusive of mandatory integration to NIBSS), tested
and active to ensure interoperability between
MMOs

iv. CICO services for Inter-scheme payments shall be a basic


function at all agent locations, other add-on services may be
provided. All MMO platforms shall facilitate inter-scheme
CICO services

b. Interoperability

i. Super-Agent’s platform shall be enabled to communicate with all its


agents and shall have visibility of its agents' transactions through
integration with NIBSS.

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7.0 Fee Sharing Formula for Inter-Scheme Transactions

The major parties to the sharing formula for the interchange fee (inter-
scheme CICO) are; NIBSS, Issuer, Acquirer, Agent and Super-Agent and
the following fees shall apply.

i. Minimum Interchange fee for inter-scheme Cash-Out transactions


shall be N50. However, the FI could charge up to a maximum of
N100. The additional N50 is to give the FI room to further incentivize its
agents

ii. Cash-In transactions shall be free to the customer for intra-scheme


payments to encourage usage and savings.

iii. The minimum interchange fee for inter-scheme Cash-In transactions


shall be N35. The issuer will cover the interchange cost.

iv. The maximum balance that can be held by an agent shall be


N1,000,000, subject to categorization and risk profiling of the agent
by the FI

7.1 Fee Sharing Structure Table

Service NIBSS Issuer Acquirer Super-Agent Agent Total

Cash-In N1 N4 N5 N5 N20 N35

Cash-Out N1 N9 N10 N10 N20 N50

The CBN shall review this interchange fee from time to time, as may be deemed
necessary.

8.0 Branding and Advertisement

a. Branding

i. A common logo (attached as Appendix1) shall be adopted by


all agents. To ensure standardization of the logo’s features and
to clarify the terms of use, branding policy has been defined in
Appendix 2.

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ii. The Super-Agent number assigned by the CBN during licensing
shall be conspicuously displayed at its outlets.

iii. Customers shall be provided a channel (web, SMS, USSD short-


code, etc.) to validate the Agent Number and address.

b. Advertisement

i. All advertisement shall carry the mobile money logo and made
conspicuous at branded agent outlets.

ii. Advertisement of mobile money products shall be the


responsibility of the FI in conjunction with the Super Agents.

iii. Primary brand of agent outlet shall remain the responsibility of the
super-agent/agent, provided the CBN approved logo is
conspicuously displayed.

iv. Super-Agents could advertise their primary business as well as the


availability of mobile money services

9.0 Dispute Resolution

i. For over-the-counter (OTC) transactions, the period for holding


funds not withdrawn by a receiving customer shall be 30 days.
Thereafter, it shall be reversed to the sender or notifications sent
to the sender where the transaction does not emanate from a
wallet. The receiving customer shall be notified of the expiry
date for the transaction.

ii. FIs shall be responsible for setting up dispute resolution


mechanism for their agents to facilitate resolution of customers’
complaints.

iii. The FI shall treat and resolve any customer related issues within
48 hours. Non- compliance shall be subject to penalty as may
be prescribed by CBN from time to time

iv. A Super-Agent shall facilitate the resolution of customer related


issues

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v. Disputes from transactions apart from OTC, shall be handled by
the agents, in conjunction with the mobile money operators.
Agents shall handle the OTC transactions disputes.

10.0 Submission of Statutory Returns

A Super-Agent shall, at the end of every month and not later than the 10th day of
the following month, submit to the CBN, data and other information on agent
operations including:

i. Nature, value and volume of transactions;


ii. Incidents of fraud, theft or robbery; and
iii. Nature and number of customer complaints and remedial measures taken.
11.0 Annual Reporting
A Super-Agent shall include in its annual reports and accounts, in the prescribed
form, all activities of its agent operations.
12.0 Powers of the Cbn Over Super-Agents
CBN shall:

i. Request for information from agents at any time as the CBN may deem
necessary;
ii. Carry out spot or scheduled inspection of the books and premises of the
agent;
iii. Direct an agent to take such actions or desist from such conduct as the CBN
may find necessary;
iv. Direct the termination of the agency contract as the CBN may find
necessary;
v. Direct the FI to take such actions against or on behalf of the agent as the
CBN may find appropriate;
vi. Direct the FI to take such remedial action arising from the conduct of an
agent as it may deem fit.
13.0 Remedial Measures

If an FI or its agent fails to comply with these Guidelines, the CBN may take any
corrective action against the FI or the agent as appropriate.

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14.0 Sanctions

The CBN shall impose appropriate sanctions for any contravention by Super
Agents. This includes but not limited to:

i. Prohibition from engaging in any further agent banking business;


ii. Prohibition from contracting new agents;
iii. Revocation of agent banking approval;
iv. Termination of agent banking contract;
v. WithholdinG Corporate approvals;
vi. Financial Penalties.

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Appendix I

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274
REGULATORY FRAMEWORK FOR MOBILE MONEY SERVICES IN NIGERIA

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1.0 Introduction
A robust payments system is vital for effective monetary policy
implementation and the promotion of economic efficiency. The
introduction of mobile telephony in Nigeria, its rapid growth and adoption
and the identification of person to person payments as a practical
strategy for financial inclusion, has made it imperative to adopt the
mobile channel as a means of driving financial inclusion of the unbanked.
These factors underscore the decision of the Central Bank of Nigeria to
issue this regulatory framework to create an enabling environment for the
orderly introduction and management of mobile payment services in
Nigeria. The framework defines the regulatory environment as a policy
path towards achieving availability, acceptance and usage of mobile
payment services.
Mobile payment has evolved as a veritable channel for facilitating the
growth of commerce. The use of the mobile phone for the initiation,
authorization and confirmation of the transfer of value out of a current,
savings or stored value account has been recognized as a development
that is expanding the growth of commerce among both the financially
included and nonincluded units in the economy.
This regulatory framework addresses business rules governing the
operation of mobile payment services, and specifies basic functionalities
expected of any mobile payment service and solution in Nigeria. It
identifies the participants and defines their expected roles and
responsibilities in providing mobile payment services in the system. In
addition, it sets the basis for the regulation of services offered at different
levels and by the participants.
The overriding vision of achieving a nationally utilized and internationally
recognized payments system necessitates strategies to bring informal
payment transactions into the formal system.
This framework has identified two models for the implementation of mobile
money services namely;
A. Bank Led – Financial Institution(s) and/or its Consortium as Lead
Initiator
B. Non-Bank Led- A corporate organisation duly licensed by the CBN as
Lead Initiator

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The CBN recognizes the importance of Mobile Network Operator (MNOs) in the
operations of mobile money and appreciates the criticality of the infrastructure
they provide. However, the telco-led model (where the lead initiator is an MNO),
shall not be operational in Nigeria.
Its exclusion will enable the CBN have full control of monetary policy operations,
minimise risks and ensure that the offering of financial services are driven by
organizations that have been licensed by CBN to do so.
2.0 Objectives
The objectives of the regulatory framework are as follows:
A. Provision of an enabling environment for the adoption of mobile payment
services in reducing cash dominance in the Nigeria economy.
B. Ensure a structured and orderly development of mobile payment services in
Nigeria, with clear definition of various participants and their expected roles
and responsibilities.
C. Specification of the minimum technical and business requirements for the
various participants recognized for the mobile money services industry in
Nigeria.
D. Provision of the basis for broad guidelines for the implementation of
processes and flow of mobile payment transactions, from initiation to
completion.
E. Promoting safety and effectiveness of mobile money services and thereby
enhance user confidence in the services.
3.0 Scope
To achieve the above stated objectives, two types of mobile payment services
are identified for operation in Nigeria:
1. The Bank-led Model: This is a model where a bank either alone or a
consortium of banks, whether or not partnering with other approved
organizations seek to deliver banking services leveraging on the
mobile money system. This model shall be applicable in a scenario
where the bank operates on stand-alone basis or in collaboration with
other bank(s) and any other CBN approved organization. The Lead
Initiator must be a bank or consortium of banks, and shall be legally
responsible and accountable to the Central Bank of Nigeria and the
end users.

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2. The Non Bank-led Model: This model allows a corporate organization
that has been duly licensed by the CBN to deliver mobile payment
services to subscribers. The Lead Initiator must be a corporate
organization (other than a deposit money bank or a
telecommunication company) specifically licensed by the Central
Bank of Nigeria to provide mobile payment services in Nigeria.
4.0 Participants in the Mobile Money System
This framework shall guide the activities of Participants in the provision of mobile
money services.
Participants are grouped into six (6) categories:
A. Regulators
B. Mobile Money Operators
C. Infrastructure providers
D. Other Service Providers
E. Consumers
F. Mobile Money Agents

A. Regulators
The Regulators for this purpose are the Central Bank of Nigeria (CBN), Nigerian
Communications Commission (NCC).
B. Mobile Money Operators
These are organizations that are licensed by the Central Bank of Nigeria
to provide the system for the mobile money services. The organizations
approved to perform the role of Mobile Money Operations are Banks and
Corporate Organizations.
All approved Mobile Money Operators are required to provide:
1. The infrastructure (hardware, software, switching and security) for mobile
payment services;
2. Business continuity and disaster recovery plans, to ensure services are
always available at all times.
3. 99.99% system availability and ensure all signed on participating institutions
follow same rule

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Mobile Money Operators are required to connect to the National Central
Switch (NCS) for the purpose of ensuring interoperability of all schemes in
the system. A scheme operator can either be a bank or a licensed
corporate organization.
The Mobile Money Operators are the Lead initiators for the mobile
scheme and shall be responsible for ensuring that the various solutions
and services within an approved mobile payment scheme meets the
entire regulatory requirements as defined in this framework and as may
be specified from time to time.
The Lead initiator (as an entity and as representative of other partners) shall be
legally responsible and accountable to the Central Bank of Nigeria and the end
user. All advertisements and public pronouncements on their scheme shall
emanate and be issued by the Lead Initiator only.
b (i). Bank
The roles of the bank as a MMO include:
a. Provision of all financial services for the operation of the mobile
money service.
b. Verification, approval and accountability for the credibility and
integrity of their partner organizations, and recommending same to
the CBN for approval.
b (ii) Licensed Corporate Organizations
The roles of Licensed Corporate Organizations include:
a. The provision and management of the technology required to deliver
mobile payment services to the subscriber.
b. The provision of the agent network required to extend all the proposed
services to the market place.
C. Infrastructure Providers
These are organizations providing infrastructure that enable switching,
processing and settlement facilities for mobile money services. Settlement
here refers to Inter-Scheme Settlement.
1. Telecommunications: Telecommunication companies play the
important role of providing the infrastructure to drive the exchange of
messages for mobile payments.
2. Inter -Scheme Settlement: The role of Inter-Scheme Settlement Provider
shall be to provide net positions of transactions across schemes to the
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inter-bank settlement system to affect the finality of payment for
services consummated across two different Schemes by various
participants.
D. Other Service Providers:
The CBN recognizes that, with the evolution of the mobile money system
, spin-off services would be identified by MMOs which can be outsourced
to entities with specialized skills and resources to support such services in a
more efficient and effective manner.
The service providers may employ the infrastructures of the MMOs to provide
services to the end users.
E. Consumers
These are end users of mobile money services.
F. Mobile Money Agents
The activities of Mobile Money Agents shall be guided by the provisions of the
Guidelines on Agent Banking and Agent Banking Relationship in Nigeria.
5.0 The Nigerian Mobile Money System
Mobile money system in Nigeria refers to the various components required
to deliver mobile money to the banking and non-banking community. The
providers of these services and solutions shall be required to operate
within the defined regulatory framework specified in this document and
any other regulation/guideline issued by the CBN.
The CBN is responsible for defining and monitoring the mobile money systems in
Nigeria.
6.0 Mobile Money Scenarios
The following scenarios are the methods through which mobile money can be
carried out in Nigeria:
1. Bank Account Based
2. Card Account Based
3. Stored Value (e-Wallet) Account Based
6.1 Bank Account Based
This is a scenario where the mobile money system drives transactions through the
bank accounts of customers. These accounts include current, savings,
domiciliary etc.

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6.1.1 Types of Bank Account Based
The types of Bank Account Based scenario shall include, but not limited to
Pull based account transactions (debits through a mobile payment
solution) and Push based account transactions (credits through a mobile
money solution). A pull based transaction shall be authorized by the
account holder via a verifiable mode before the transaction is
consummated.
6.1.2 Card Account Based
This is a scenario where a payment card is linked to a mobile phone for the
purpose of initiating and concluding payment transactions
6.2.1 Types of Card – Driven Payments
The types of card – driven payments recognized by this framework are:
A. Credit
B. Debit, and
C. Pre-Paid
6.3 Stored Value Account Based
This is a scenario where a mobile money system drives transactions through a
systembased account that shall comply with the standards defined within this
framework.
6.3.1 Types of Stored Value Account
The various options recognized by this framework include Re-loadable Stored
Value Account, Pre-paid Account, etc.
7.0 Mobile Money Processes
The Mobile Money Operators shall provide a detailed payments
management process that covers the entire solution delivery, from user
registration and management, Agent recruitment and management,
Consumer protection/dispute resolution procedures, Risk management
process to transaction settlement. These processes shall cover the scope
of the value chain across all the participants in the mobile money
ecosystem.
8.0 Infrastructure
The core infrastructure for providing a National mobile payment system
comprises of transaction processing, clearing and settlement platforms
and agent network. The responsibility for the provision and management
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of these platforms is shared amongst the various stakeholders/service
providers.
9.0 Settlement
The settlement finality for mobile money shall leverage the NIBSS
Infrastructure and the CBN Inter-Bank Funds Transfer System (CIFTS). The
Infrastructure shall facilitate instant payment to the end users and
settlement of the Scheme providers on a T+1 cycle for the mobile money
system.
10.0 Scheme Dispute Resolution
NIBSS shall provide the dispute resolution platform for the mobile payment
systems for the use of participants in resolving inter scheme transaction
disputes. The dispute resolution process will be aligned with the global
best practices for arbitration.
11.0 Risk Management
In view of the peculiarity of the operations of other licensed providers and
the unique risks associated with their operations, the regulatory framework
hereby specifies the following requirements to mitigate risks arising from
their activities.
The MMOs must ensure that risk mitigation techniques are in place to minimize
operational, liquidity, technical, fraud, financial and money laundering risks. The
mobile payment system should not be susceptible to sustained operational
failures as a result of system outages. A risk compliance officer must be assigned
by the MMOs, who are to provide internal risk management oversight. The CBN
will review the risk management program, including all of the controls that are in
place to manage the risks on a periodic basis
12.0 Technology
The technology implemented for mobile payment services is to comply
with the standards and requirements on international best practice on
mobile payment services. The technology to be deployed is expected to
be reliable, user friendly, safe and secure. All MMO are to interconnect
through NIBSS to ensure interoperability.
13.0 User Interface
13.1 The user interface shall at the minimum, be menu-driven.
13.2 The user interface shall not provide access to confidential information.
13.3 PIN shall be encrypted at the point of entry.
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14.0 Know Your Customer (KYC) and Customer Due Diligence (CDD)
Requirements
All MMOs shall comply with the provisions of the Circular on “Three – Tiered Know
Your Customer Requirements”.
15.0 Anti-Money Laundering Regulation
In addition to the provisions of the requirements prescribed in the KYC
Guidelines, the CBN AML document shall also apply to mobile money service
The regulatory authorities reserve the right to change the criteria for suspicious
transactions reporting in respect of mobile money as it deemed fit. Such
amendments shall be communicated by appropriate channels to the mobile
money operators and other stakeholders.
16.0 Consumer Protection and Dispute Resolution
To build confidence in the mobile money system, a dispute resolution
mechanism needs to be put in place.

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GUIDELINES ON MOBILE MONEY SERVICES IN NIGERIA

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1.0 Preamble
In exercise of the powers conferred on the Central Bank of Nigeria (CBN)
by Section 47(2) of the CBN Act, 2007, to promote and facilitate the
development of efficient and effective system for the settlement of
transactions, including the development of electronic payment systems;
and Pursuant to its mandate of promoting a sound financial system in
Nigeria, the CBN hereby issues the following guidelines for Mobile Money
Services in Nigeria

2.0 Introduction

The introduction of mobile telephony in Nigeria, its rapid growth and


adoption, and the identification of person to person payments as a
practical strategy for financial inclusion, has made it imperative to adopt
the mobile channel as a means of driving financial inclusion of the
unbanked. These factors underscore the decision of the Central Bank of
Nigeria to issue these guidelines, to create an enabling environment for
the orderly introduction and management of mobile money services in
Nigeria.
This guideline addresses business rules governing the operation of mobile
money services, and specifies basic functionalities expected of any
mobile payment service and solution in Nigeria. It identifies the
participants, and defines their expected roles and responsibilities in
providing mobile money services in the system. In addition, it sets the basis
for the regulation of services offered at different levels and by the
participants.
These guidelines have identified two models for the implementation of mobile
money services namely;
A. Bank Led – Bank and/or its Consortium as Lead Initiator
B. Non-Bank Led- A corporate organisation duly licensed by the CBN as
Lead Initiator
3.0 Objectives
The objectives of the guidelines are as follows:
a. To ensure a structured and orderly development of mobile money services in
Nigeria, with clear definition of various participants and their expected roles
and responsibilities.

285
b. Specification of the minimum technical and business requirements for the
various participants recognized for the mobile money services industry in
Nigeria.
c. To promote safety and effectiveness of mobile money services and thereby
enhance user confidence in the services.
4.0 Scope
To achieve the above stated objectives, this Guideline covers models,
agent network, business rules, roles and responsibilities of participants
under mobile money services in Nigeria.
5.0 Models
Two models of mobile money services are identified for operation in Nigeria:
a. The Bank-led Model: This is a model where a bank either alone or a
consortium of banks, whether or not partnering with other approved
organizations, seek to deliver banking services, leveraging on the
mobile payments system. This model shall be applicable in a scenario
where the bank operates on stand-alone basis or in collaboration with
other bank(s) and any other approved organization. The Lead Initiator
shall be a bank or a consortium of banks.
b. The Non-Bank led Model: This model allows a corporate organization
that has been duly licensed by the CBN to deliver mobile money
services to customers. The Lead Initiator shall be a corporate
organization (other than a deposit money bank or a
telecommunication company) specifically licensed by the CBN to
provide mobile money services in Nigeria.
6.0 Agency Network
The provisions of the Guidelines for the Regulation of Agent banking and Agent
banking relationships in Nigeria shall apply to Mobile Money Agent Network.
7.0 Business Rules
7.1 Licensing
All Mobile Money Operators (MMOs) shall:
(a) Be licensed by the CBN on such terms and conditions as contained in
“Appendix I” in this document, and may be reviewed from time to time.
(b) Be issued a unique Scheme Code by the NIBSS for managing
interoperability.

286
(c) Be issued unique short codes by the NCC.
(d) Ensure that all telecommunication equipment are type approved by the
NCC.
(e) Register users of its scheme based on technology standards and the
requirements of these Guidelines.
(f) Ensure that the registration processes within its mobile money scheme shall
fulfil the entire KYC requirements specified in these Guidelines.
7.2 Activation
(a) The Mobile Money System shall require a registered user to activate the
service before the commencement of transactions with a security
code (e.g. PIN/Password etc).
(b) The Mobile Money Operators shall ensure that the activation process is
not compromised or altered within its infrastructure.
7.3 Transactions
(a) All transactions initiated and concluded within the mobile payment system
shall have a unique transaction reference issued by the system
(b) All transactions shall have the following elements: Transaction reference
number, payer and payee phone numbers, transaction amount, transaction
date and time stamps, and other relevant transaction details and unique
identifiers.
(c) Where transaction involves merchants, the following details shall be provided
in addition to (b) above merchant category, merchant addresses and
codes.
(d) Each transaction detail logged within the payment system shall contain a
valid description as in 7.3. (b).
(e) No airtime deductions shall be made in respect of charges on any
transaction.
(f) MMOs shall appoint and notify CBN of their settlement banks.
(g) All obligations arising from mobile payment transactions shall be settled into
settlement accounts held with Deposit Money Banks. MMOs shall maintain
separate accounts for their other business activities.
7.4 Rules of Operations for bank account based Transactions
(a) Transactions shall be originated via a bank’s banking application into
the mobile wallet.
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(b) The bank account based relationships shall comply with the existing
account opening standards and practice in the Nigerian banking
system.
(c) The transaction activities generated shall be traceable, monitored and
logged within the mobile payments system.
(d) Access to the account through the Mobile Payments System shall be
via a secured channel that meets the defined standards, as specified
in these guidelines.
(f) Authorization of transactions originating from or terminating on these
accounts shall be based on standards defined by the ISSUING bank.
7.5 Card Account Based
This is a scenario where a payment card is issued and linked to a mobile phone
account subject to the appropriate KYC and Card Issuance Rules (Please, see
the Guidelines on the Issuance and Usage of Cards in Nigeria)
(a) Types of Card – Driven Payments
The types of card – driven payments recognized by these guidelines
are:
i. Credit
ii. Debit, and
iii. Pre-Paid
(b) Rules of Operations for Card Based Transactions
i. The Card Account based transactions shall be based on an
infrastructure that relies on the global 3DES secure architecture at the
minimum.
ii. The card shall be issued by a CBN approved Card issuing Organization.
iii. The card system shall comply with the existing regulation and standard
for cards.
iv. All Card Account based transactions must be authenticated against
the originating Card Management System.
(c) Types of Stored Value Account
The various options recognized by these guidelines include Re-loadable
Stored Value Account, Pre-paid Account, etc.

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(d) Rules of the Operations for Stored Value Account
a. All system based accounts shall have an identification system that generates
unique identifier per user account within the Mobile Payments System.
b. These accounts shall only be accessible through the Mobile Payments
System.
c. The user may specifically request for other means of access to his/her system
based account other than as specified in 7.5(f)(ii) above. However, the
liability of the user shall be clearly stated before granting such request
d. All accounts and transaction details shall comply with PCI DSS standards.
e. The Mobile Payments System account unit shall comply with all the standards
and requirements defined in these guidelines
f. All system based account shall be tied to a settlement account with a
licensed deposit- taking institution. The settlement account shall be funded to
the tune of the total amount of the system based accounts on the scheme.
7.6 Mobile Payments Processes
The MMOs shall put in place detailed processes that cover the entire
solution delivery, from user registration and management, agent
recruitment and management, Consumer protection, dispute resolution
procedures, Risk management processes, to transaction settlement.
These processes shall cover the scope of the value chain across all the
participants in the mobile payments ecosystem.
8.0 Roles and Responsibilities of Participants Banks
The role/responsibilities of banks as Scheme Operators shall include:
(a) Provision of all financial services for the operation of the mobile payments
service.
(b) Verification, approval and accountability for the credibility and integrity of
their partner organizations.
(c) Seeking and obtaining necessary approvals from relevant regulatory
authorities.
(d) The deployment and delivery of the mobile payment services to the
customer.
(e) Ensuring that the mobile payment service meets all specified mobile
payment standards as provided in this Guidelines.
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(f) Putting in place adequate measures to mitigate all the risks that could arise,
following the deployment and use of its mobile payment service.
(g) Facilitating remittances to both scheme and non–scheme recipients.
(h) Providing financial, clearing and settlement services to the mobile payments
system.
(i) Educating the customers on the appropriate use of the service and ensuring
the deployment of adequate channels for enquiries and complaints.
8.2 Licensed Corporate Organizations
The roles/responsibilities of Licensed Corporate Organizations shall include:
(a) The provision and management of the solution required to deliver mobile
payment services to the subscriber.
(b) Ensuring that the proposed services meet all the regulatory standards and
requirements specified in the mobile payments Guidelines; the
deployment and delivery of the mobile payment solutions to the
customer;
(c) Educating the customers on appropriate use of the solution and ensuring
the deployment of adequate channels for enquiries and
complaints.ensuring that international inflow messages shall at a minimum
be conveyed to the recipients by secure SMS.
(d) Ensuring that the mobile payments system provides transaction monitoring
and reporting in compliance with this Guideline.
(e) Providing access for on-the-spot assessment and verification of its
transactions by the Central Bank of Nigeria on demand basis.
(f) Providing a monthly assessment report on the performance in prescribed
format, and the submission of same to the Banking and Payment Systems
Department of the Central Bank of Nigeria.
(g) Keeping records of transactions emanating from the organization’s
mobile payment system for a minimum of seven (7) years.
(h) Ensuring that the mobile payment services comply with specified
standards as stated in this guidelines.
(i) Putting in place adequate measures to mitigate all the risks that could
arise from the deployment and use of its mobile payment services.

290
8.3 Infrastructure Providers
These are organizations providing infrastructure that enable switching,
processing and settlement facilities for mobile money services. Settlement
here refers to InterScheme Settlement.
8.4 Mobile Network Operators (MNOs):
Their role shall be guided by the following provisions:
(a) Providing telecommunication network infrastructure for the use of Mobile
Money Operators;
(b) Ensuring that a secure communication channel based on the minimum
technology standard stipulated in this Guidelines are implemented;
(c) That MNOs shall not give preferential treatment to any MMO over another in
terms of traffic and price.
(d) Ensuring that its customers are free to use any mobile payments scheme
service of their choice;
(e) Shall not receive deposits from the public, except in respect of the airtime
billing of their customers;
(f) Shall not allow the use of the airtime value loaded by their customers for
purposes of payments or to transfer monetary value;
(g) Shall ensure seamless interconnection between MMOs; and
(h) Shall not engage in any conduct which has a purpose or effect of
anticompetition in any aspect of mobile money services.
8.5 Consumers
They shall have rights/responsibilities as follows:
(a) Ease of enrolment
(b) Ease of use ( SMS, USSD, STK, IVR, etc)
(c) Privacy, Trust and Security of transaction
(d) Convenience
(e) Accessibility to funds on completion of transaction process
(f) Real time transfer of value
(g) Easy and prompt access to dispute resolution process
(h) Ensure the protection of PIN / Password
(i) Ensure prompt reporting of fraud cases, errors and complaints
291
(j) Ensure proper confirmation of transaction details and recipients’ mobile
phone numbers at all times before authorizing transactions.
(k) Comply with all security rules as provided by the scheme operator
(l) Escalate complaints to the Consumer Protection Departments of the Central
Bank of Nigeria, if resolution of complaints is unduly delayed.
Nominee/Settlement Account
(a) MMOs shall appoint and notify CBN of their settlement banks.
(b) All obligations arising from mobile money transactions shall be settled into
settlement accounts held with Deposit Money Banks. MMOs shall maintain
separate accounts for their other business activities.
(c) The settlement accounts with the deposit money banks shall be opened as
Nominee Accounts on behalf of the customers of the Mobile Money
Operators.
The operations of the account shall be guided by the following conditions:
i. the account shall be non-interest bearing,
ii. no right of set-off,
iii. debit transactions into the account shall only be for settlement related
transactions
iv. No charges of any form shall apply to the account
(d) The settlement account shall not be used, under any guise or purpose, as
collateral for negotiation of loans by the organisation.
(e) The balance on the settlement account shall always be equal to the total
outstanding (un-spent) balance of all holders of the e-money.
(f) Mobile Money Operators shall be required to reconcile on a daily basis, the
balances in their pool accounts and make weekly returns to the Director,
Banking & Payments System Department of the CBN.
(g) All customer transactions shall be traceable; auditable and can be
validated.
(h) Remittance inflow messages shall, at a minimum, be conveyed to the
recipient through SMS.

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Settlement
a. The settlement process to be deployed by Mobile Money Operators shall
ensure compliance with the settlement standards and requirements defined
in these Guidelines.
b. The MMO shall ensure that its mobile payment infrastructure fully complies
with the clearing and settlement rules for finality of settlement.
c. The scheme operator shall, on a daily basis request for its settlement positions
from its bankers for reconciliation of transactions.
d. All inter scheme settlements shall be routed through the inter-bank settlement
system.
e. The scheme operator shall ensure that all settlement information details are
preserved for reference for a minimum period of seven (7) years.
f. The Scheme Operator shall maintain a minimum Shareholders’ Fund
unimpaired by losses of N2 billion, with effect from 1st June, 2016.
10.1 Operating Rules for Scheme Settlement Operator
Nigeria Inter-bank Settlement System Plc (NIBSS) shall:
(a) Provide net settlement positions of all Inter-Scheme service providers and
effect final settlement using the CBN Inter-Bank Funds Transfer System
(CIFTS) on (T+1) cycle.
(b) Provide statistical reports to the regulatory bodies and participants as may
be prescribed from time to time
(c) Maintain audit trail and transaction log of all transactions consummated
on the scheme.
(d) Provide the infrastructure (hardware, software, switching and security) to
link all inter scheme providers.
(e) Provide business continuity/disaster recovery plans to ensure services are
available at all times.
(f) Provide 99.99% system availability and ensure that all signed-on
participating institutions follow same rules.
(g) Ensure MMOs are connected to the National Central Switch (NCS) for the
purpose of interoperability
(h) Ensure that the mobile payments system is interoperable with the network
infrastructure of different MNOs, solution providers, MMOs and the NCS

293
10.2 Inter -Scheme Settlement
The role of NIBSS as Inter-Scheme Settlement Provider shall be to provide
net positions of transactions across schemes to the inter-bank settlement
system to affect the finality of payment for services consummated across
two different Schemes by various participants.
10.3 Forms of Settlement
There are two transaction scenarios that come into play. These scenarios On-us
and Not on-us transactions:
(a) On-Us Transactions
i. These are payment transactions in which all parties involved in the
transaction cycle are of the same scheme i.e. Issuer, Acquirer,
Merchant and Consumer.
ii. Transactions are not routed through a switch except where an external
processor is involved e.g. Airtime Recharge Transactions, Bills payment.
iii. These set of transactions do not require settlement.
(b) Not-on-Us/Remote-on-Us Transactions
i. These are payment transactions where an Acquirer Terminal is used by
other Issuers. ii. The role of the Inter-Scheme Settlement Providers shall be
to provide a net position of all participants, the acquirer and the issuer,
which consummate services across schemes to the inter-bank
settlement system to affect the finality of payment.
10.4 Final Settlement
For finality of settlement between participating institutions, settlement
providers shall provide settlement information of their participants to the
final settlement system. Final Settlement shall be done through the CBN
Inter-Bank Funds Transfer System (CIFTS) by effecting the net positions
provided by the national central switch and the inter-bank settlement
system.
11 Transaction Security Standards
11.1 Mobile Payments solutions deployed shall adhere to the following minimum
standards:
(a) The minimum encryption standard is 3DES encryption. Encryption shall be on
an end-to-end basis.
(b) ISO 8583

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(c) EMV standards in the case of Card payment related transactions.
(d) PCIDSS
(e) All subsequent routing of messages to the Mobile Money Operators’ servers
must be with the highest level of security with dedicated connectivity like
leased lines (E1 links) / VPNs;
(f) That any sensitive information stored in third party systems is restricted with
appropriate encryption and hardware security standards as contained in this
guidelines;
(g) All transactions on an account shall be allowed only after authentication of
the mobile number and the PIN associated with it;
(h) That mobile payments application shall not allow the option of saving the PIN
either on the handset or on the application;
(i) All accounts activated by the consumer on the mobile application are linked
to the mobile phone number. This mobile phone number shall be used as the
second factor authentication for mobile transactions;
(j) The PIN shall not travel in plain text during the transaction;
(k) That proper system of verification of the phone number shall be
implemented;
(l) The payment authorisation message from the user’s mobile phone shall, at
the minimum, be 3DES encrypted and checked for tampering by the
scheme operator. It shall not be possible for any interceptor to change the
contents of the message;
(m) There shall exist, a security policy duly approved by the Board of Directors of
the organisation providing the service;
(n) Segregation of duty of Security Officer / Group dealing exclusively with
information systems security and Information Technology Division which
actually implements the computer systems;
(o) The Information Systems Auditor shall conduct periodic audit of the system to
ensure adherence to the specified security standards;
(p) Logical access controls to data, systems, application software, utilities,
telecommunication lines, libraries, system software, etc. exists;
(q) At the minimum, there shall be in place, the use of proxy server type of
firewall so that there is no direct connection between the Internet and the
Mobile Money Operators’ systems. For sensitive systems, an inspection firewall

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shall be implemented to thoroughly inspect all packets of information,
compare past and present transactions and enable a real time security alert;
12. Infrastructure
The core infrastructure for providing a national mobile payment
system comprises of transaction processing, clearing and settlement
platforms. The responsibility for the provision and management of
these platforms shall be that of the Lead Initiator
13. Risk Management
13.1 In view of the peculiarity of the operations of the MMOs and the unique
risks associated with their operations, this guidelines hereby specifies the
following requirements to mitigate risks arising from their activities.
(a) The MMOs shall ensure that risk mitigation techniques are in place to
minimize operational, liquidity, technical, fraud, financial and money
laundering risks.
(b) The mobile payments system shall not be susceptible to sustained
operational failures, as a result of system outages.
(c) A risk management officer shall be assigned by the MMOs, who is to
provide internal risk management oversight.
(d) The CBN will review the risk management program, including all the
controls that are in place to manage the risks from time to time.
13.2 Credit and Settlement Risk
The central role of the settlement infrastructure requires that MMOs
shall:
(a) Ensure that the mobile payment settlement platform automatically
generates transaction settlement information/records.
(b) Adopt standard messaging formats as provided by NIBSS, for all schemes
for settlement purposes.
(c) Maintain audit trail and settlement log for a minimum of seven (7) years.
(d) Fulfill other conditions that may be reviewed by the regulatory authorities
from time to time.
13.3 Business Continuity Risk
MMOs shall:
(a) Maintain proper backup infrastructure.

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(b) Implement a disaster recovery and business continuity plan.
(c) Periodically test the effectiveness of the backup infrastructure and business
continuity plan.
13.4 Business Continuity Plan (BCP)
MMOs shall:
(a) Ensure that BCP is approved by their board.
(b) Comply with laid down minimum technology standards as specified in
this document.
(c) Ensure proper/adequate back up of data as may be required by their
operations.
(d) Ensure that the BCP is tested through a fail-over process, at least twice a
year.
(e) Have, well documented and tested business continuity plans approved
by the board, that address all aspects of the mobile payment business,
to take care of business disruptions and ensure system availability and
recoverability:
i. Both data and software should be backed up periodically
ii. Recovery and business continuity measures, based on the criticality of
the systems, shall be in place and a documented plan with the
organization and assignment of responsibilities of the key decision
making personnel shall exist.
iii. An off-site back up is required for recovery from major failures /
disasters to ensure business continuity. Depending on criticality,
different technologies based on backup, hot sites, warm sites or cold
sites should be available for business continuity.
iv. Develop and implement comprehensive risk management framework
to identify, monitor and control risks. This should provide the strategy to
resolve potential problems that may result from internal and external
interdependencies.
13.5 The BCP shall be:
(a) Based on a comprehensive Business Impact Analysis and Risk Assessment;
(b) Documented in a written program;
(c) Reviewed and approved by the board and senior management, at least
annually;
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(d) Disseminated to employees;
(e) The responsibility of the MMO, where it is outsourced to a third-party;
(f) Flexible to respond to unanticipated threat scenarios and changing internal
conditions;
(g) Focused on the impact of various threats that could potentially disrupt
operations rather than on specific events;
(h) Developed based on valid assumptions and an analysis of
interdependencies; and
(i) Effective in minimizing service disruptions and financial loss through the
implementation of mitigation strategies.
(j) Ensure that processing priorities can be adequately implemented and that
business operations can be resumed in a timely manner.
(k) Monitor closely mobile traffic and system capacity to ensure that any
service degradation due to capacity problems are addressed promptly.
(l) Ensure that the BCP is reviewed by external auditors at least annually, and
forwarded to CBN;
(m) Ensure employees are trained and aware of their roles in the implementation
of the BCP;
(n) Ensure the BCP is tested, at least quarterly, on an enterprise-wide basis;
(o) Review the BCP testing program and test results on a regular basis;
(p) Ensure the BCP is continually updated to reflect the current operating
environment.
14.0 Technology
The technology implemented for mobile money services shall comply with
the following standards and other requirements outlined in the provisions
of these Guidelines.
14.1 Standards
(a) Modularity of Technologies
i. The MMOs shall ensure that the minimum technology standards for
communication are met (Interoperability and Interconnectivity).
ii. Only secure channels shall be used in providing mobile money
services.
iii. The mobile money services shall ensure non-repudiation.
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(b) Reliability
i. Payment instruction shall be consistently executed. In the event of
failure, reversal shall be immediate and automatic.
ii. Consumers shall get immediate value for every successful transaction.
(c) User Interface
i. The user interface shall, at the minimum, adhere to the security requirements
as stated in the guideline.
ii. The user interface shall not provide access to confidential information.
iii. PIN shall be encrypted at the point of entry.
15.0 Know Your Customer (Kyc) and Customer Due Diligence (Cdd)
Requirements
All MMOs shall comply with the provisions of the KYC Guidelines (CBN AML/CFT
Regulation 2009
16.0 Certainty of Mobile Transactions
For the purpose of establishing certainty of transactions through mobile
payments, MMOs shall ensure the following:
a. Summary of transaction requested must be displayed to the user for
confirmation. The transaction summary shall include, the phone numbers of
the paying user and receiving user, transaction description, the transaction
amount, date and time and a unique transaction identifier. By confirming
the summary, the user commits to the transaction.
b. Option for the user to save such transaction summary.
c. Upon completion of the transaction, the user receives an electronic
receipt which shall conform to the transaction summary earlier
displayed and the option for saving the electronic receipt shall be
available to the user.
d. The electronic summary of transaction and the electronic receipt
should be securely logged and the log maintained online for a
minimum period of three (3) months and subsequently archived for a
minimum period of seven (7) years. However, if a complaint arises
before the expiration of the seven (7) years, the log in respect of such
pending complaints shall be maintained until the case is completely
resolved or discharged.

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e. Regulatory authorities, Law Enforcement Agencies or Arbiters are
granted access to the log, when required, for the purpose of certifying
a printed copy for evidential purposes.
17.0 Consumer Protection Measures
MMOs shall comply with the following minimum requirements:
a. Ensure that customers understand the transactions they are entering and
adequate disclosures are made.
b. Ensure that a channel of communication is in place 24/7 to entertain
enquiries and complaints in a language understood by customers.
c. Clearly display charges for services through its agents.
d. Factor in the vulnerability of the lower end of the society in product and
services design. There should be adequate consumer education activities to
ensure that consumers are sensitized on the services.
e. Ensure that appropriate consumer protection mechanisms are put in place
against loss of service, fraud and privacy of customer information to
enhance confidence in the mobile money services.
f. Provide the leading role in dispute resolutions and take necessary steps to
reach other agencies in the ecosystem that are relevant to resolving
disputes.
g. Resolve customer complaints within a reasonable time and not later than 48
hours from the date of reporting or lodging the complaint with the MMO.
h. Be held responsible for the actions and inactions of their agents.
17.1 Dispute Resolution Mechanisms
Disputes arising between parties shall be settled as follows:
a. The parties shall settle disputes within 14 days.
b. Customers may escalate complaints to the Central Bank of Nigeria where
they are dissatisfied with item 1 above.
c. If resolution is not achieved, after 1 & 2 above, parties may thereafter settle
the dispute in accordance with the provisions of the Arbitration and
Conciliation Act, Cap A18, Laws of the Federation of Nigeria, 2004.

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18.0 Cessation of Mobile Payment Service
a. Any MMO wishing to exit from the mobile payments system shall notify the
CBN in writing regarding the intention for the discontinuation, 120 days
before ceasing its operations;
b. The CBN shall have powers to order any MMO exiting from the mobile
payments system to meet its outstanding obligations.
19.0 Statutory Returns
a. MMOs shall, at the end of every month and not later than the 14th day of the
next month, submit to the CBN, data and other information on mobile
money operations including:
b. Nature, value and volume of transactions;
c. Incidents of fraud; and
d. Nature and number of customer complaints and remedial measures taken.
19.1 Annual Reporting
MMOs shall include in their annual reports and accounts, in the prescribed
format all activities of its mobile money operations.
20.0 Remedial Measures
If an MMO or its agent fails to comply with these Guidelines, the CBN may take
any corrective action against the MMO as may be prescribed from time to time.
21.0 Sanctions
In addition to the use of remedial measures in Section 22, the Bank may
impose any or all of the following sanctions against an MMO, its board of
directors, officers or agents:
(a) Withholding Corporate approvals;
(b) Financial Penalties;
(c) Suspension from mobile money operation; and
(d) Revocation of the mobile money operation license.
22.0 Review Of The Guidelines
This Guideline shall be reviewed from time to time by the Central Bank of
Nigeria.

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23.0 Glossary Of Terms
Cifts: The Real Time Gross Settlement (RTGS) System deployed by the
Central Bank of Nigeria which effects settlement of transfer among
banks on real time and gross basis. It is known as the CBN Inter-Bank
Funds Transfer System (CIFTS).
Bank: A deposit taking institution duly licensed by the Central Bank of Nigeria.
Interoperability: a situation in which payment instruments belonging to a
given scheme may be used in systems installed by other schemes.
Inter-Scheme Operation: Inter-Scheme operations are mobile payments
consummated across two different schemes by various participants.
Intra-Scheme Operations: Intra-Scheme operations are mobile payments that
are consummated within a particular service provider’s scheme.
Issuer: the entity which receives payment in exchange for value distributed in
the system and which is obligated to pay or redeem transactions or
balances presented to it.
Mobile Money Operators: provide the infrastructure for the mobile payment
systems for the use of participants that are signed-on to their scheme.
NCC: refers to the Nigeria Communications Commission with Regulatory powers
over the telecommunication companies (Telcos)
Service Providers: employ the infrastructure of the scheme operator to
provide services to end users.
Settlement Infrastructure Providers: Organizations providing infrastructure that
enables message exchange, switching and settlement facilities for mobile
money services.
NIBSS: Nigeria Inter-Bank Settlement System
3DES: Triple(3) Data Encryption Standard
Nominee Account: Account set up by a Nominee (MMO) for settlement of
customer transactions held on behalf of the individual customers
(the 'beneficial owner') under a custodial agreement.
Licensed Corporate Organizations: Companies licensed by the Corporate
Affairs Commission (CAC) under the Companies and Allied Matters
Act 2004 (CAMA), to carry business in Nigeria.

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Infrastructure Providers: These are organizations providing infrastructure
that enable switching, processing and settlement facilities for
mobile money services. Settlement here refers to Inter-Scheme
Settlement.

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APPENDIX I

Requirements for Mobile Money Licence


1. Evidence of the formation of the Consortium that will deploy the project
(Certificate of Incorporation)
2. The Consortium’s profile and functional contact e-mails and telephone
numbers
3. Memorandum & Articles of Association
4. Shareholding structure of the Consortium
5. Forms C02 (Return on Allotment of shares) and C07 (Particulars of Directors)
6. CV’s of Board and Management of the Company
7. 7. Organogram of the company
8. Business Plan, to include:
i Nature of the Business
ii Features of the scheme
iii Securities features that will be put in place
iv 3 years Financial projections for the company
v Transaction and other charges that will be borne by customers
vi Profit sharing agreement among the parties
vii Diagrammatic illustration of transaction flows
9. Information Technology Policy of the Company including:
i Privacy Policy
ii Information Ownership/Disclosure/Loss Policy
iii Backup and Restore Policy
iv Network Security Policy
v Encryption Policy
vi Confidential Data Policy
vii Password Policy
viii Third Party Connection Policy
ix Incidence Response Policy
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x Physical Security Policy
10. Enterprise Risk Management Framework
11. Contingency and Disaster Recovery Plan (Business Continuity Programme)
12. Draft agreements with the following:
i Technical Partners
ii Participating banks
iii Switching company/(s)
iv Merchants
v Telcos
vi Any other party
13. Tax Clearance Certificate for three (3) years of each party in the Consortium
14. Project Deployment Plan (time, location, operation, etc.)
15. Payment of non-refundable Application fee of N100,000.00 (One hundred
thousand naira) made payable to the CBN via the RTGS Third Party
Transfer.
16. Evidence of Shareholders’ Fund of N2 billion before a license is issued

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BPS/DIR/GEN/CIR/06/001 January 19, 2015
TO: ALL DEPOSIT MONEY BANKS (DMBs)
CIRCULAR ON IMPLEMENTATION OF TWO FACTOR AUTHENTICATION FOR INTERNAL
BANKING PROCESSES
A major identified cause of fraud in the banking industry has been traced to
increased insider abuse. This abuse revolves around identity theft and abuse of
authorization. The increased use of automation in most banking payment
processes has further escalated insider abuse in banks with weak authentication
procedures.
It has therefore become necessary for the Central Bank to issue the following
directives to all DMBs;

a) Implement a Maker/Checker control structure for all payment platforms,


including account and Database system maintenances on core banking
systems. The risk appetite/capacity of individual banks will be a key factor in
considering transaction limits for maker/checker roles. DMBs are expected to
comply by December 31, 2015.

b) Implement Two Factor Authentication at login points for applications driving


Transfers, Withdrawal, Deposit, Standing Order, Account Maintenance and
System
Maintenance processes. An implementation plan should be submitted to the
Central Bank by January 30, 2015 and all banks are expected to fully comply
by December 31, 2015, failing which defaulting banks would incur a penalty
of N50,000.00 daily.

c) All payment processing Gateways and Third Party Processors should


implement Fraud-Monitoring Tool to check transfers from an account to
multiple bank accounts by December 31, 2015.
Please be guided and ensure strict compliance with the content of this circular.

‘Dipo Fatokun
Director, Banking and Payment System Department

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Guidelines on International Money Transfer Services in Nigeria

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GUIDELINES ON INTERNATIONAL MONEY TRANSFER SERVICES IN NIGERIA

1.0 Preamble
In exercise of the powers conferred on the Bank by Section 2 (d) of the Central
Bank of Nigeria Act, 2007 and Section 57 (2) of the Banks and Other Financial
Institutions Act (BOFIA), Laws of the Federation of Nigeria, 2004, to issue
guidelines for the maintenance of adequate and reasonable financial services
to the public, the Central Bank of Nigeria (CBN) hereby issues the following
guidelines for the regulation of International money transfer services in Nigeria.
1.1 Objectives
The objectives of the guidelines are to:
i. provide minimum standards and requirements for International money
transfer services operations in Nigeria;
ii. specify delivery channels for offering international money transfer services
(inbound/outbound), in a cost effective manner;
iii. Provide an enabling environment for international money transfer services in
the Nigerian economy;
iv. specify minimum technical and business requirements for various participants
in the international money transfer services industry in Nigeria; and
v. Provide broad guidelines for implementation of processes and flows of
international money transfer services, from initiation to completion.
1.2 Scope
This guidelines address business rules governing the operation of international
money transfer services in Nigeria. In addition, it sets the basis for the regulation
of the services offered at different levels and by diverse participants.
2.0 Licensing Requirements
2.1 No person or institution shall provide international money transfer services
unless such person/institution has been duly licensed by the CBN.
2.2 Application for a licence to carry on the business of International money
transfer services shall be submitted to the office of the Director, Trade &
Exchange Department, Central Bank of Nigeria, Abuja.
2.3 Documentary Requirements
All applications shall be accompanied with the following:

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i. Board of director’s approval to offer International money transfer services.
ii. Copy of the applicant’s certificate of incorporation
iii. Memorandum & Articles of Association (certified copy), of which the primary
object clause shall indicate provision of Money Transfer Services.
iv. Shareholding structure of the Company
v. Forms C02 (Return on Allotment of shares) and C07 (Particulars of Directors)
vi. Profiles of the Board and Management of the Company to include: CVs,
functional contact e-mails and telephone numbers, ownership, governance
and management structure;
vii. Organogram of the company
viii. Business Plan, to include:
a. Nature of the Business
b. Features of the scheme
c. Internal control systems and monitoring procedures
d. Security features that will be put in place
e. 3 years Financial projections/Market analysis for the Company
f. Transaction and other charges that will be borne by customers
g. Profit sharing agreement among the parties
h. Diagrammatic illustration of transaction flows
i. Consumer Protection and Dispute Resolution Mechanism
ix. Information Technology Policy of the Company including:
a. Privacy Policy
b. Information Ownership/Disclosure/Loss Policy
c. Backup and Restore Policy
d. Network Security Policy
e. Encryption Policy
f. Confidential Data Policy
g. Password Policy
h. Third Party Connection Policy
i. Incidence Response Policy

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j. Physical Security Policy
x. Enterprise Risk Management Framework
xi. Contingency and Disaster Recovery Plan(business continuity plan)
xii. Draft agreements with the participating parties
xiii. Tax Clearance Certificate for three (3) years
xiv. Project Deployment Plan (time, location, operation, etc.)
xv. Credit reports from a licensed credit bureau for the shareholders and key
officers of the money transfer services operator;
xvi. Any other information as may be required by the CBN from time to time
xvii. A non-refundable application fee of N500,000 (Five Hundred Thousand
Naira) or such other amount that the Bank may specify from time to time,
payable to the “Central Bank of Nigeria” by electronic transfer.
xviii. Evidence of meeting the minimum paid up share capital of:
a. N2,000,000,000 (Two Billion Naira) for Nigerian companies; and
b. N50,000,000 (Fifty Million Naira) or its equivalent for Foreign companies, plus
the guarantee of the parent company
xix. Presence in at least seven (7) different countries.
2.4 Overseas Partnership Requirements
A money transfer operator, who wishes to engage a foreign technical partner
that will provide global or regional payment or money transfer platform, shall
obtain a letter of no objection from the CBN. The following conditions shall
apply to the technical partner:
a. Be a registered entity, licensed in its home country to carry on money transfer
activities.
b. Have a minimum Net Worth of US$1 million, as per the latest audited financial
statement, or as may be determined by the CBN from time to time.
c. The Overseas technical partner should be well established in the money
transfer business, with a track record of operations.
d. There should be an MOU that clearly delineates liabilities in the event of
disputes and/or process failures.
2.4 The CBN shall conduct appropriate due diligence on the promoters, directors
and key officers of the proposed money transfer operator.

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2.6 Prohibitions
a. Deposit Money Banks are prohibited from operating as Money Transfer
Service Operators (MTSO), but can act as agents.
b. Section 19 (1) (a) of BOFIA 1991 as amended, for persons not qualified to be
on the employment of banks, shall also apply to Money Transfer Service
Operators.
2.7 Disqualification of Shareholders and officers
In line with the BOFI Act No. 25 of 1991 [as amended], all the conditions
stipulating the exclusion of certain individuals from the management of banks,
shall apply to the management of Money Transfer Service Providers, except with
the written permission of the Governor of the CBN.
Shareholders and officers of the company shall be disqualified, based on the
provisions of Section 44 (2) of the BOFIA 1991 as amended. The section provides
that: No person shall be appointed or shall remain a director, secretary or an
officer of a bank who:
(a) is of unsound mind or as a result of ill- health is incapable of carrying out his
duties; or
(b) is declared bankrupt or suspends payments or compounds with his creditors
including his bankers; or
(c) is convicted of any offence involving dishonesty or fraud; or
(d) is guilty of serious misconduct in relation to his duties; or
(e) in the case of a person possessed of professional qualification, is disqualified
or suspended (otherwise than of his own request) from practicing his
profession in Nigeria by the order of any competent authority made in
respect of him personally.
3.0 Operations of International Money Transfer Services
3.1 Permissible Activities
The permissible operations of International money transfer services shall include
allowable inbound and outbound international money transfer transactions. The
transactions shall consist of the following activities:
(a) The acceptance of monies for the purpose of transmitting them to persons
resident in Nigeria or another country.

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(b) Cross-border personal money transfer services, such as, money transfer
services towards family maintenance and money transfer services favoring
foreign tourists visiting Nigeria shall be allowed under this arrangement.
(c) The money transfer services shall target individual customers mainly and the
transactions shall be on “person to person transfer” basis to safeguard
against corporate customers that might structure their transactions into
smaller amounts to circumvent the statutory reporting threshold.
3.2 Non Permissible Activities
A money transfer operator is not authorized to:
a. Act as an authorized dealer in gold or other precious metals;
b. Engage in deposit taking and/or lending money;
c. Maintain current accounts on behalf of customers;
d. Establish letters of credit; or
e. Act as a custodian of funds on behalf of customers.
f. Engage in institutional transfers. A money transfer service operator shall not
engage in any other business other than as authorized by the Bank.
g. Buy foreign exchange from the domestic foreign exchange market for
settlement.
3.3 Business Premises
A money transfer operator shall display prominently at each of its business
premises:
(a) The current licence to engage in money transfer services;
(b) The business hours;
(c) Details of the tariffs to be charged;
(d) A notice informing the customers that they are entitled to be issued with a
receipt for any money transfer service transactions; and
(e) A notice to the effect that the money transfer operator is not allowed to
accept deposits or lend to the public.
3.4 Notification of Business Hours
A money transfer service operator shall notify the Bank and its customers of:
(i) the business hours for each of its outlets;

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(ii) any intended changes in business hours, in any of their places of business,
fifteen days in advance, before the changes are effected
3.5 Temporary closure of business
A money transfer service operator wishing to temporarily close its main offices
shall seek the consent of the CBN. In the event of an emergency, the operator
shall relocate to its established back up site and notify the CBN accordingly.
The temporary closure of an agency or outlet shall be notified to the CBN
immediately.
In either event above, the operator/agent shall display a conspicuous notice to
that effect.
3.6.0 Transfer Limits
3.6.1 Allowable limit of the outbound money transfer shall be US$2,000 or its
equivalent per transaction, subject to periodic review by the CBN.
3.6.2 All in-bound money transfers to Nigeria shall only be disbursed to
beneficiaries through bank accounts or mobile money wallets.
3.6.3 Where the beneficiary does not have a bank account or mobile money
wallet, payments shall only be made upon the provision of a satisfactory
reference from a current account holder in a bank, confirming that the
beneficiary is the bona fide owner of the funds.
3.6.4 The following conditions shall apply in the transaction:
i. The currency to be given to a money transfer agent for an outbound transfer
shall be the Naira;
ii. An outward payment transaction shall be executed in a convertible
currency agreed between the parties; and
iii. Where a currency conversion service is offered before initiation of a payment
transaction or at the point of payment, the money transfer services operator
must disclose all charges, as well as the exchange rate to be used for
converting the payment transaction
3.7 Split Transactions
A money transfer service operator shall not allow or process a transaction
that appears to have been deliberately split into small amounts to avoid the
reporting requirements under the provisions of the AML/CFT Act.

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3.8 Agents
An approved money transfer service operator may conduct its business through
an agent, in line with the provisions of these guidelines.
An agent is a suitable entity engaged by a money transfer service operator to
provide money transfer service on its behalf, using the agent’s premises, staff
and technology.
3.8.1 Suitability for appointment:
An agent shall:
(1) be a corporate body registered with the corporate affairs commission in
Nigeria or with a similar body in other jurisdictions or established by law.
(2) be an existing and well established commercial entity which has been
operational for at least 12 months.
(3) not have been classified as a non performing borrower by any financial
institution in the last 12 months.
(4) possess appropriate physical infrastructure and human resources to provide
money transfer services.
(5) not be an entity listed on any Sanction list.
(6) Be a financial institution under the regulatory purview of the CBN.
3.8.2 Engagement of an Agent
The money transfer operator shall:
(1) execute a contract with each agent that specifies terms and conditions of
their engagements. These terms shall include but are not limited to the
following:
(a) A statement that the money transfer services operator is wholly responsible
and liable for all actions or omissions of the agent.
b) Measures to mitigate risks associated with agent business including limits,
customer transactions, cash management, cash security, security of agent
premises and insurance policies;
(c) Specific services to be rendered by the agent;
(d) The rights, expectations, responsibilities and liabilities of both parties;
(e) A statement that the Bank shall have free, unfettered and timely access to
the internal systems, documents, reports, records, staff and premises of the

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agents, in so far as money transfer business is concerned and shall exercise
such powers as it may considered necessary;
(f) Appropriate policies and procedures to detect, prevent, report or otherwise
deal with incidences of money laundering;
(g) Responsibilities of the agent to deliver supporting transaction documents;
(h) A statement that all information or data that the agent collects in relation to
agency money transfer services, whether from the customers, the money
transfer operator or from other sources, is the property of the money transfer
operator;
(i) Adequate oversight safeguards for the money transfer operator to address
instances of non-compliance by the agent with the stipulated obligations;
(j) Prohibition from charging the beneficiary any fees other than the fees
agreed upon with the sender, at the initiation of the transaction;
(k) Business hours of the agent;
(l) Suitable limits on cash holding by the agent and also limits on individual
customer payments and receipts;
(m) Confidentiality of customer and user information;
(n) Remuneration for the agent;
(o) A transition clause on the rights and obligations of the money transfer
operator and the agent upon termination or cessation of the agency
contract; and
(p) Detailed procedure for disengagement or termination of the agency
contract.
(2) Retain a contract for the life of the agency plus a retention period of 7 years
or as may be determined by the CBN from time to time.
(3) Notify the Bank of the appointment of each agent, providing details of
name, phone number and any additional information as may be required by
the Bank
(4) Conduct the business in compliance with all the applicable laws, regulations
and guidelines.
3.9.0 Bank Accounts
A money transfer operator shall:
3.9.1 Hold all customer funds for transfer in an account designated as
“customers’ account” domiciled with any deposit money bank in Nigeria. This
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account shall be separate from all other accounts maintained by the
operator.
3.9.2 Maintain complete and accurate accounting records.
3.9.3 Produce, upon request by the Bank, all documents pertaining to the
account activity, including, but not limited to, bank statements, cheque
books, deposit slips and reconciliations or other comparable account
records.
3.10 Records.
3.10.1 A money transfer operator shall:
3.10.2 Maintain a management information system that facilitates efficient
collection and processing of data required for audit trails.
3.10.3 Maintain accurate information on each transaction. Transaction
information shall include:
(a) Date of transaction;
(b) Name, address and contact phone number of sender;
(c) Name, address and contact phone number of beneficiary;
(d) Acceptable means of identification;
(i) Amount and currency;
(j) Occupation of the sender;
(k) Type (Sending or Receiving) and Purpose of the transaction; and
(l) Source of funds.
3.10.4 Issue receipt, which shall contain the following information:
(a) Full names of the customer;
(b) The type and amount of currency sent or received;
(c) The transaction reference;
(d) The nature, time and date of the transaction;
(e) Customer signature; and
(g) Commission charged, if any.
3.10.5 All transactions generated by the money transfer operator in the course
of its business activities must be posted in its books of accounts.
3.10.6 A money transfer service operator shall keep accurate and up to date
records and ensure that the records are verified on a daily basis.
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3.11 Returns
A money transfer service operator shall submit its returns to the Director, Trade &
Exchange Department, Central Bank of Nigeria, Abuja.
3.12 Anti-Money Laundering Risk
All money transfer operators in Nigeria shall comply with the provisions of the
Central Bank of Nigeria “Anti-Money Laundering and Combating the
Financing of Terrorism in Banks and Other Financial Institutions Regulations
2013” and all other applicable laws and regulations.
4.0 Disclosure Requirements
4.1 General
A money transfer service operator shall disclose to its customers:
4.1.1 Details of applicable exchange rate, commission, fees and any other
amount that may be charged by banks/agents involved in a transfer.
4.1.2 The meaning of any technical terms and acronyms used.
4.1.3 That it neither accepts deposits nor lends to the public
4.1.4 Prevailing exchange rates at all times and in all locations it conducts
business.
4.2.0 Outward Money Transfer Services
A money transfer operator shall:
4.2.1 advise customers of the time funds sent would be available for collection
by beneficiaries;
4.2.2 Inform the customers within 24 hours where outward transfers could not be
effected within the time frame advised.
4.2.3 Refund to the sender, any amount returned undelivered in the manner it
was paid by the customer:
i. Where the operator is responsible for the returned transfer, the refund to the
sender shall include all the fees and charges paid by the sender; and
ii. Where the sender is responsible for the returned transfer, the operator shall
recover from the sender, only costs associated with the transaction.
4.3.0 INWARD MONEY TRANSFER SERVICES
A money transfer operator shall:
4.3.1 Make payment to customers only in Nigerian currency, in line with CBN
regulation;
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4.3.2 Use the prevailing exchange rate on the day the transfer is received; and
4.3.2 Declare in the receipt/certificate of transfer that the money paid to the
customer is not counterfeited.
4.4.0 Charges
4.4.1 All money transfer operators shall comply with the guide to money transfer
charges, as provided by the CBN from time to time.
4.4.2 The provider must make refund where wrong, inappropriate or
disproportionate charges or fees are identified internally by provider.
5.0 Dispute Resolution
5.1 All complaints to the operator must be acknowledged on receipt.
5.2 Each operator shall provide a Complaints Management Unit to resolve
complaints or disputes submitted by its customers. The unit shall provide its
services free of charge through well publicized and dedicated channels,
including phone numbers and e-mail address(es).
5.3 An operator must fully investigate complaints and make appropriate
decision and communicate same to the complainant within one (1)) week
of the receipt of complaints.
5.4 Each complaint shall be assigned a unique identifier for ease of reference.
Operators shall provide dedicated phone, email or other means by which
complainants may enquire about the progress of their complaints. In
addition, operators shall provide a response to all enquiries within 48 hours of
receipt.
5.5 Where a complainant is dissatisfied with the decision, the operator shall
provide an internal mechanism to review its initial decision.
5.6 The review body must arrive at a decision within one week of receiving letter
of dissatisfaction from a complainant;
5.7 Where a complainant is not satisfied with a decision of a review body, the
complainant may escalate the issue to the Director, Consumer Protection
Department, Central Bank of Nigeria; and
5.8 A provider shall render monthly returns on all complaints to the Director,
Trade & Exchange Department, Central Bank of Nigeria, Abuja, in a format
approved by the Bank.

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6.0 Miscellaneous
6.1 At a minimum, an operator must have a second level authentication before
payment could be made to recipients in the case of inward money transfer
services;
I. An operator owes a customer a duty of confidentiality except where:
a. Disclosure is at the instance of a relevant authority; and
b. The customer expressly consents to disclosure.
II. An operator should not require from the customer, any means of
Identification different from those provided in extant CBN circulars and
guidelines;
III. For the avoidance of doubt, any of the under-listed is an acceptable means
of identification:
a. International Passport;
b. Driver’s License;
c. National Id. Card;
d. INEC Registration Card; or
e. Bank Verification Number (BVN)
7.0 Remedial Measures
If a Money Transfer Service Operator or its agent fails to comply with these
Guidelines, the CBN may take any corrective action against the MTSOs as may
be prescribed from time to time.
8.0 Sanctions
In addition to the use of remedial measures in Section 8, the Bank may take any
or all of the following sanctions against an MTSO, its board of directors, officers or
agents:
(a) Withhold Corporate approvals;
(b) Financial Penalties;
(c) Suspension from Money Transfer operation; and
(d) Revocation of the Money Transfer Service operation licence.

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9.0 Glossary of Terms
Agent: An agent is a suitable entity engaged by a money transfer service
operator to provide money transfer service on its behalf, using the agent’s
premises, staff and/or technology.
Bank: Central Bank of Nigeria
BOFIA: Banks and Other Financial Institution Act
CAC: Corporate Affairs Commission
CBN: Central Bank of Nigeria
Credit Bureau: Credit Reference Company - means an institution that collects
information from creditors and available public sources on borrower’s credit
history. The bureau compiles the credit information on individuals/entities
regarding their credits, credit repayments, court judgements, bankruptcies etc.
and then creates a comprehensive credit record that may be sold to lending
institutions and other authorized users.
MTSO: Money Transfer Service Operator
Transaction: A transfer sent or transfer received as the case may be.
Transfer Amount: the funds collected from the sender for a transfer, excluding
applicable fees

Banking & Payments System Department and Trade & Exchange Department

June, 2014

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Guidelines for Card Issuance and Usage in Nigeria

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1.0 Preamble

In exercise of the powers conferred on the Bank by Section 47 (3) of the Central
Bank of Nigeria Act 2007 (as amended), to issue guidelines for the maintenance
of adequate and reasonable financial services for the public and to ensure high
standards of conduct and management throughout the banking system; and
pursuant to its inherent powers, the Central Bank of Nigeria (CBN) hereby issues
the following Guidelines for the Regulation of Card Issuance and Usage in
Nigeria.
1.1 Objectives
I. These guidelines have been developed to provide minimum standards and
requirements for the issuance and usage of payment cards in Nigeria
II. It will enable issuing banks, other financial institutions, processors and cards
schemes upgrade and maintain their card operations to ensure optimum
security, efficiency, cost effectiveness and customer friendliness
III. Serve as a tool for banks and other financial institutions to assess their card
issuance portfolio
IV. Ensure that consumers that carry Nigerian issued cards operate within
acceptable standards
V. Encourage the use of Nigerian issued cards locally and internationally
1.2 Scope
I. To all licensed banks and other institutions that participate in the issuance and
processing of debit, credit, stored value/prepaid, virtual cards, either directly
or through their subsidiaries, affiliated companies or third party associated
companies.
2.0 Minimum Standards
All industry stakeholders who process, transmit and/or store cardholder
information shall ensure that their terminals, applications and processing
infrastructure comply with the minimum requirements of the following Standards
and Best Practices. In addition, all terminals, applications and processing
infrastructure, should also comply with the standards specified by the various
card schemes. Each vendor must provide valid certificates evidencing
compliance with these standards, and must regularly review status of all its
systems to ensure they are still compliant, as standards change.
There will be a continuous review of compliance with these and other global
industry standards from time to time.

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2.1 PA DSS –Payment Application Data Security Standard.
2.2 PCI PED – Payment Card Industry Pin Entry Device.
2.3 PCI DSS – Payment Card Industry Data Security Standard.
2.4 Triple DES – Data Encryption Standards should be the benchmark for all
data transmitted and authenticated between each party. The triple
DES algorithm is the minimum standard.
2.5 EMV – All cards issued and acquiring devices deployed, must comply
with the minimum EMV requirements.
3.0 General Requirements
3.1 Only banks licensed by the CBN with clearing capacity shall issue payment
cards to consumers and corporations in Nigeria. Banks without clearing
capacity can issue in conjunction with those with clearing capacity.
However, where a partnership exists, the parties shall document service
level agreements, delineating their responsibilities for the issuance of the
cards. A copy of the Service Level Agreement shall be submitted to the
Central Bank of Nigeria.
3.2 All banks shall seek approval from the CBN for each card brand and type
they wish to issue.
3.3 The payment cards to be issued can be a “pay now”, such as debit and
prepaid, or a “pay later”, such as credit and charge card. These can be
operated in different forms, including, but not limited to: plastic cards; virtual
card numbers (VCN), tag, etc.
3.4 The usage channels, limits and frequencies and other control measures shall
be defined by the issuing banks.
3.5 The cardholder shall, in agreement with the issuing bank, have the flexibility
to customize the usage limits, select transaction channels and other
customizable features, to suit their personal risk preferences.
3.6 All payment card transactions shall be subject to current Nigerian Financial
Intelligence Unit (NFIU) reporting requirements.
3.7 A cardholder or his/her estate shall, upon request, be entitled to receive a
cash refund of the available balance (which belongs to the customer) in the
card account from the issuing bank or institution.
3.8 Cards may be issued in Nigerian Naira or in any other convertible currency.
3.9 The international usage limits and frequencies for Naira denominated cards
shall be defined by each participating bank. However these limits shall not
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exceed the total combined amount of Foreign Currency that each individual
can access via BTA and PTA per annum - which is currently $150,000 per
annum
3.10 All card issuers shall render monthly returns to the CBN on the volume of
transactions and gross amount of transactions done internationally using their
cards.
3.11 The issuer, its agent and card association must maintain an AML/CFT
program, reasonably designed within the context of laws and regulations, to
prevent the Card Association system from being used to facilitate money
laundering or the financing of terrorist activities.
3.12 An issuer should have risk-management framework in place that enables it
to identify, measure, monitor, and manage the range of risks that arise in or
are borne by its operations.
3.13 In the application of customer fees for services rendered, Issuers shall be
guided in their operations by the CBN’s “Guide to Bank Charges”. To reduce
the burden of card costs to customers, payment cards must be valid (i.e.
shall not expire) for at least 3 years from when the card is issued to the
customer.
3.14 Issuers are expected to continuously educate cardholders on the following,
amongst other things:
I. Security tips for safeguarding cardholder information
II. Costs and charges associated with owning and using a payment card
III. Contact numbers to the Issuer’s 24/7 contact centre in order to report
cardholder issues or problems
IV. Dispute resolution process across the bank’s products and channels
3.15 Issuers shall not levy any charge that was not explicitly indicated to the
customer or cardholder.
3.16 Unsolicited cards should not be issued. Where an unsolicited card is issued
and activated without the written consent of the recipient and the latter is
billed for the same, or fraudulent activity occurs, the card issuer shall not
only reverse the charges forthwith, but also pay a penalty, without objection
to the recipient, amounting to twice the value of the charges reversed.
3.17 The verifiable consent of a customer shall be required before issuing a
payment card or other products offered along with the card. Information to

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the customer has to be explicit and not implied. The consent may be
received physically or electronically.
3.18 Card issuers shall continue to furnish customers or cardholders with details of
the contractual terms and conditions, prior to activation. Such terms shall
include at a minimum:
i. Fees and charges;
ii. Withdrawal limits;
iii. Billing cycles;
iv. Termination procedures; and
v. Consequences of Default/theft/misuse of cards
3.19 No card issuer or its agent shall deliver any card to a customer in a fully-
activated state.
3.20 A card issuer shall keep internal records over a sufficient period of time, in
line with existing CBN guidelines, to enable easy tracking of card-related
transactions.
3.21 The issuer shall ensure full security of the payment card. The security of the
payment card shall be the responsibility of the issuer and the losses incurred
on account of breach of security or failure of the security mechanism shall
be borne by the issuer, except the issuer establishes security breach on the
part of the card holder.
3.22 Issuers should ensure that the process of card issuance is completely
separated from the process of PIN issuance, and done in accordance with
best practices thus minimizing the risk of compromise.
3.23 All domestic card transactions must be settled within a cycle of T + 1, while
international transactions shall be settled as may be defined and reviewed
by the settlement agent.
3.24 All debit entries arising from failed transactions attributable to system-related
issues must be auto-reversed. Where auto reversal is not feasible, manual
reversal must be carried out within 24 hours.
4.0 Roles and Responsibilities of Card Issuers
4.1 General
4.1.1 In order for a card to be used abroad, the issuing bank must have done full
KYC on the customer, as reflected in the CBN KYC Manual and Money
Laundering (Prohibition) Act.

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4.1.2 Issuers shall implement a risk-based approach to setting volume and
transaction limits. The risk attached to a customer will be based on KYC due
diligence carried out during the customer on-boarding process.
4. 1.3 Issuers shall ensure that they understand the respective rules for the
acceptance of their cards internationally and shall ensure that they make
customers aware of any information that would be necessary in taking a
decision on the card to use, when going overseas.
4. 1.4 Issuers shall give customers the opportunity to request for cards within the
range of the bank’s card products. For instance, if an issuer offers brand of
cards such as Verve, Visa, MasterCard, Union Pay, etc, customers shall be
free to choose any brand of cards issued. The available cards provided by
the issuer must be explicitly stated on the card request form (physical or
electronic) so that the customer can make an informed choice.
4. 1.5 Issuers shall also provide customers with a choice to specify limits for the
volume and value of transactions that they would perform; such limits cannot
be higher than the maximum limits, as specified in this Guideline.
4. 1.6 Issuers shall provide customers with the ability to specify when their cards
should work abroad, and when it should not, as well as which countries they
would like their cards to work in, at any particular time.
4.1.7 It is the responsibility of the issuing bank to work with the card schemes in
providing the settlement and clearing facility for cards used outside Nigeria.
4.2 Transaction Processing
4.2.1 Issuers shall ensure that their card information are hosted and processed
within the PCIDSS certified environment.
4.2.2 Issuers shall implement systems that ensure that Exchange Control and
transaction limits are complied with, and Issuers shall provide monthly reports
that demonstrate that this is being complied with.
4.2.3 Card issuers must provide authorization services for their card transactions.
Where this service is outsourced, the bank shall be responsible for all risk
mitigation service efficiency.
4.2.5 An issuer must process a Chargeback for a transaction in accordance with
the Card Association Operating Regulations. An Issuer sending Chargeback
documentation must do so within the time period specified in the Card
Association Operating Regulations.

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4.3 Settlement
4.3.1 Settlement of domestic transactions shall be done within the standards
defined by the CBN (T+1).
4.3.2 Foreign currency shall be sourced from the autonomous FX market and
Issuers shall leverage their foreign exchange licenses to access, buy or
transfer foreign exchange to remit to international card schemes. Domestic
card schemes shall appoint a domestic Settlement bank whom shall
leverage its license as a regulated authority to buy and transfer the required
volume of foreign exchange to international acquirers.
4.4 Fraud and Risk Management
4.4.1 Issuers shall establish Board or Executive Management approved AML
program/policy that includes:
i. Assessment of money laundering
ii. Appointment of a Compliance Officer;
iii. Annual Internal Audit/Independent testing of the AML program; iv.
Periodic AML training for employees;
v. Investigating and filing any reports of suspicious activity required under the
Nigerian law.
4.4.2 Issuers shall implement processes/reports/alerts to monitor potential
instances of money laundering or terrorist financing.
4.4.3 Issuers shall ensure that they issue cards from only the card schemes that
have demonstrable fraud management systems.
4.4.4 Liability shift rules shall apply when Nigerian issued EMV cards are used
fraudulently on EMV compatible terminals where magnetic stripe fallback is
enabled, or at nonEMV compatible terminals where the transactions is read
as a fully magnetic stripe transaction.
4.4.5 In the event that the acquirer operates in an environment where EMV
compatibility is not enforced, the Nigerian Issuer must set limits, in order to
reduce the issuer and the cardholder’s exposure.
4.4.6 Issuers are required to monitor their card production procedures to
ensure that their EMV cards are properly produced. The issuer shall take full
liability for any fraud from a fall back transaction that occurred as a result of
improperly produced chip cards.

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4.4.7 The Card Issuer should implement system validation to detect potentially
suspicious transactions. The Card Issuer may refuse to authorise a transaction
or allow the Cardholder to make a payment into the card account if:
I. The Cardholder has exceeded an account limit (either aggregate or
daily limit)
II. The transaction seems unusual, compared with the normal Card usage
(such as unusual locations and spending patterns)
III. The Card Issuer reasonably believes that:
A. the Cardholder has used or obtained, or may use or obtain, a service
or money illegally or fraudulently
B. A third party may have rights over money in the Cardholder account
IV. The transaction originates from a blacklisted merchant, in which case,
the Issuer must provide proof of blacklisting to CBN, upon request.
4.4.8 For card not present transactions, the minimum of 2nd level
authentication for internet based transactions is mandatory.
4.4.9 Issuers are expected to deploy robust fraud monitoring tools that have
the capacity to monitor customer transaction trends, real-time operations
and option of blocking suspicious transactions.
4.5.0 Any trapped card in the ATM shall be rendered unusable (by perforation)
by the Acquirer and returned to the Issuer on the next working day.
5.0 Specific Requirements for Stored Value Cards (Individual and Corporate)
5.1 No stored value card shall be issued to a person without obtaining the
minimum KYC.
5.2 The maximum amount that can be loaded on the stored value card shall not
exceed N50,000 per day.
5.3 The fee for loading salary payments unto a payment card shall be paid
separately by the salary payer and not deducted from the balance value of
the stored value card.
5.4 The maximum balance on the stored value card shall not exceed N250,000
at any time.
5.5 The limits specified for stored value cards shall also apply to cards linked to
mobile money wallets, where least KYC (Phone Number and Name) has
been performed on the mobile money customer.

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5.6 Issuers can offer stored value products, but not limited to the following
segments:
i. Consumers: General Purpose Reloadable (GPR), Travel, Student,
loyalty/reward and On-line
ii. Corporations: Payroll, Incentives, Per Diem, Corporate Travel and Healthcare
iii. Public Sector: Social Benefits, Payroll, Procurement, Meal Vouchers, Disaster
Relief
6.0 Specific Requirements for Prepaid Cards (Individual and Corporate)
6.1 Prepaid cards issued will operate at least within the minimum KYC
requirements prescribed by the CBN. However, loadable limits (in Naira and
Foreign currency) and daily balances shall be determined by the issuing
bank or financial institution.
6.2 No prepaid card shall be issued beyond the limits of a stored value card to a
person or a corporate organization. Where a customer desires to do
transactions beyond the limits prescribed above, full KYC would be required.
Please, refer to CBN KYC Manual and Money Laundering (Prohibition) Act.
6.3 The maximum withdrawal and spending limits for the Prepaid Cards will be
determined by the issuing bank.
6.4 The limits specified for Prepaid Cards shall also apply to cards linked to
mobile money wallets, where full KYC has been performed on the mobile
money customer.
7.0 Specific Requirements for Debit Cards
7.1 Debit cards shall be issued to customers having Savings /Current Accounts.
8.0 Specific Requirements for Credit and Charge Cards (Individual and
Corporate)
8.1 An issuer should identify sources of credit risk, routinely measure and monitor
credit exposures, and use appropriate risk-management tools to control
these risks and minimize credit and charge cards defaults.
8.2 Credit and charge cards to be issued in Nigeria include but are not limited to
the following:
I. General purpose cards - Issued under the trademark of credit card
associations, accepted by all merchants
II. Private label cards: accepted by specific retailers (e.g. a
departmental store)

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8.3 Change(s) in charges (other than interest) may be made only with
prospective effect giving notice of at least one month. If a credit cardholder
desires to surrender his credit card on account of any change in credit card
charges to his disadvantage, he may be permitted to do so without the bank
levying any extra charge for such closure. Any request for closure of a credit
card has to be honoured immediately by the credit card issuer, subject to full
settlement of dues by the cardholder.
8.4 Issuers should not unilaterally upgrade credit cards and enhance credit limits.
Prior consent of the borrower should invariably be taken whenever there are
any change(s) in terms and conditions.
8.5 In the matter of recovery of dues, banks should ensure that they or their
appointed agents conduct themselves in a manner that is courteous, ethical
and professional.
9.0 Dispute Resolution
9.1 Domestic Transactions
Where a customer has a dispute to resolve, the customer shall report it to the
Issuer. The Issuer, working with the respective Card Scheme shall ensure that
disputes are resolved within internationally acceptable timeframes for disputed
international transactions. The timeline for the resolution of domestic transaction
disputes shall be T+2, commencing from the date of the transaction. The
Acquirer shall initiate the resolution, even without the prompting of the issuing
bank.
9.2 International Transactions
The timeline for dispute resolution for international transactions shall be as
specified by the card scheme.
10.0 Submission of Statutory Returns
Issuers shall, at the end of every month, and not later than the 10th day of the
next month, submit data and other information on card transactions to the CBN.
The following are the minimum information that must be included in the Returns:
i) Type, value and volume of transactions, on a monthly basis. ii) Separation of
the type, value and volume by transaction type, card type (by card scheme
and by debit, credit, charge, stored value and prepaid card), channel
(internet, POS, ATM), local and foreign transactions.
iii) Incidents of fraud, theft or robbery on cards, card data, etc.

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iv) Reports of foreign exchange remitted to international card schemes and
international acquirers, respectively
iii) Type and number of customers’ complaints and remedial measures taken
This reporting format may be changed from time to time, as specified by the
CBN.
11.0 Annual Reporting
Card Issuers shall include in its annual reports and accounts, all activities of its
card operations.
12.0 Powers of the CBN over Card Issuers and their agents.
In addition to any other power conferred on the CBN, the Bank shall have
power to:
i) Request for any information from any card issuer at any time, as the Bank
may deem necessary;
ii) Carry out spot or scheduled inspection of the books and premises of the
Issuer or its agent;
iii) Direct a Card Issuer or its agent to take such actions or desist from such
conduct as the CBN may find necessary.
13.0 Remedial Measures
If a Card Issuer fails to comply with these Guidelines, the CBN may take any
corrective action against the Card Issuer, as may be considered appropriate.
14.0 Sanctions
In addition to the use of remedial measures, the Bank may take any or all of the
following sanctions against the Card Issuer, its board of directors, officers or
agents:
i. Prohibition from issuing new cards to its customers;
ii. Revocation of approval to issue a specified card brand to its customers;
iii. Monetary Penalties;
iv. Any other regulatory sanction that may be deemed appropriate.
15.0 Amendment to the Guidelines
These guidelines may be amended by the CBN from time to time, in whole or in
part, as it is deemed necessary.

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16.0 Previously released Guidelines
Unless expressly overwritten in this document, these Guidelines supersede all
previously released CBN Guidelines on Card Issuance and Usage in Nigeria.
17.0 Definition of Terms
a) ATM - Automated Teller Machine
b) AML/CFT - Anti-Money Laundering/Combating the Financing of Terrorism
c) CBN - Central Bank of Nigeria (also referred to as the Bank)
d) Banks - Commercial, specialized, merchant and other licensed financial
institutions
d) EMV (Europay, MasterCard, Visa) - The global standard that ensures smart
(Chip-andPIN) cards, terminals and other systems can interoperate.
e) Stored-value cards - Payment cards where money is on deposit with the
issuer, but the card account is not linked to a current or savings account.
Funds and data on a stored value card are metaphorically ‘physically’
stored on the card. Stored value cards are usually anonymous in nature and
issued outside of banking halls.
f) Prepaid cards - Payment cards where money is on deposit with the issuer, but
the card account is not linked to a current or savings account. Funds and
data are maintained on computer systems affiliated with the issuer.
g) Credit card - Refers to a payment card assigned to a cardholder, usually with
a credit limit, that can be used to purchase goods and services on credit or
obtain cash advances. Credit cards allow cardholders to pay for purchases
made over a period of time, and to carry a balance from one billing cycle to
the next.
h) Charge Card – A charge card is a credit card that requires all outstanding to
be settled on due date without the feature to revolve balances (i.e., carry a
balance to the next billing cycle).
i) Payment Cards - are cards issued by a CBN licensed issuer to cardholders
(individuals or corporates) and accepted at terminals (ATMs, POS, Web,
Mobile, Kiosks etc.) to make payments, purchases or withdrawals. Payment
Cards shall be governed by CBN rules and shall comply with the rules of the
applicable domestic or international Card Scheme. Closed Scheme cards
(cards issued by a merchant or institution that can only be used within that
merchant or institution) are not Payment Cards.
j) PIN - Personal Identification Number
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k) VCN - Virtual Card Numbers
l) NFIU - Nigerian Financial Intelligence Unit
m) NDIC - Nigerian Deposit Insurance Corporation
n) BTA - Business Travel Allowance
o) PTA - Personal Travel Allowance
p) KYC - Know Your Customer
q) FX - Foreign Exchange
r) GPR - General Purpose Reloadable
s) PoS - Point-of-Sale

Banking and Payments System Department

May, 2014

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GUIDELINES FOR NIGERIAN BANKING INDUSTRY

ELECTRONIC REFERENCE PORTAL OPERATIONS

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1 Executive Summary

1.1 Introduction

The Financial Services sector in Nigeria has passed through many phases of
development within the last decade, as a result of Central Bank of Nigeria‟s (CBN‟s)
active development and supervisory initiatives to evolve a stronger and more
dynamic banking system. Despite all the efforts, only an insignificant percentage of
the more than 140 million Nigerians are currently banked. This is alarming and
grossly unimpressive, considering the need for effective monitoring and control of,
as well as, planning the economy by both the Government and the Central Bank
of Nigeria (CBN).

Besides high illiteracy level and low confidence in the Financial System, a major
reason for this relatively small number of account holders is the inter-bank reference
bottleneck which makes it difficult for new accounts to be opened speedily. At
times, the prospective bank customers get frustrated and eventually abandon the
process of opening a bank account.

The Nigeria Inter-Bank Settlement System (NIBSS) Plc, in fulfilment of her


sharedservice mandate and in conjunction with the Committee of Heads of
Bank Operations (CHBO) has agreed to develop an electronic reference (e-
Reference) portal, such that account opening processes of Nigerian banks can
be fast-tracked with regards to interbank referencing.
1.2 Objectives
a. To eliminate the manual process of inter-bank reference forms exchange.
b. To enhance the efficiency of reference clearing in Nigeria.
c. To ensure accountability of reference documents.
d. To reduce the turn-around time for confirming references for new accounts.
e. To provide a common secure web-based platform for the exchange of
documents within the Financial Services Industry
f. Reduce the cost of printing of manual reference for the whole industry
1.3 Stakeholders
a. Banks
b. NIBSS
c. Banking Public (Indirect)

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2 Electronic Reference Portal as a Solution for Inter-Bank Referencing &
Document Exchange
2.1 What is e-Reference Portal?
This is a web-based document management system, by which one entity can
send documents electronically (e-documents) to the other, within the Nigeria
Banking System. This system is designed, necessary and important for timely
Inter-Bank reference processing.
2.2 System Features
a. Secure web-based platform, hence there will be no direct interconnection
requirements among banks.
b. Clearing of paper-based not-for-value inter-bank items.
c. Bank user from any branch will be able to upload scanned completed
reference forms as well as any other document for the attention of another
bank.
d. Presenting Bank user will be able to search/view/download e-
documents/forms approved or rejected by the Receiving Bank.
e. Receiving Bank user will be able to search/view/download and treat
incoming edocuments/forms from other banks.
f. On-Line-Real-Time follow-up by Presenting Bank.
g. On-Line-Real-Time approval by Receiving Bank.
h. Regulatory authorities will be able to monitor defaulting Receiving Banks.
2.3 Scalability
a. NIBSS Administrator will be able to create as many bank adminsitrators as
requested by the banks
b. Bank Administrator will be able to create users (Operators and Authorizers).
c. System will be able to accept scanned input from any machine compatible
with the host operating system.
2.4 Security
The confidentiality, integrity and authenticity of data are ensured by the
implementation of the following security measures:
a. Input/uploads will be done directly into the system via secure VPN.
b. All transmitted data will be encrypted and compressed appropriately.
Administrators will use a 2-factor authentication username and password
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2.5 Document Specifications
a) Size : A4 maximum (8.27” x 11.29”)
b) Type: Portable Document Format (PDF)
c) Color: Black & White
d) Dot per inch: 200dpi (maximum)
3 Operations Work Flow
3.1 Creation of Users
a. NIBSS will create Admin users for each Financial Institution (based on formal
application/instruction) who in turn will create all internal users.
b. Bank Admin User will create two users per location:
I. Operator (will upload scanned items and complete other details online)
II. Authorizer (will approve Operator‟s work online before items are registered as
valid Outward/Inward Items)
c. Bank Admin user will be able to block the privileges of any user s/he created
earlier in the system.
d. NIBSS Administrator will be able to block Bank Admin User earlier created or
replace him/her with another user on Bank‟s formal instruction.
e. Bank/NIBSS Admin User will not be able to upload, approve or transmit
references.
3.2 Outward Operation (Presenting Bank)
a. Operator logs into the e-reference portal.
b. User uploads scanned reference document from his/her workstation and
completes online details.
c. E-reference portal marks document as „awaiting approval‟.
d. Authorizer logs into the e-reference portal to view items „awaiting approval‟.
e. Authorizer approves or rejects document.
f. Approved items are immediately transmitted to Receiving Bank.
g. Rejected items are immediately returned to the Operator with a reason.
h. Operator (e-reference portal deletes item permanently and starts afresh
each successfully transmitted item is issued a unique identification number for
auditing and tracing purposes.

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It is important to note that the status of references are color-coded and
transparent across the portal. Each user knows at any point in time the status
of an outward/inward reference.
3.3 e-Reference Clearing Processing
a) e-Reference portal receives approved outward items from Presenting Banks.
b) Items are instantly transmitted to the Receiving Bank.
c) Presenting Bank immediately receives acknowledgement of delivery.
3.4 Inward Operation (Receiving Bank)
a. Both Operators and Authorizers will be able to view detailed and summary
incoming items for confirmation.
b. Operator marks each verified item as „confirmed‟ or „rejected‟.
c. Authorizer will be able to view and mark „confirmed‟ or “rejected‟ items by
the operator as “Approved” or “Not Approved”.
d. “Not Approved”items will be marked in the e-Reference portal with
appropriate reject reason(s) as in Appendix 1. (multiple selection of reject
reasons should be possible and at least one reason MUST be selected)
i. Incorrect Signature
ii. Bad Image
iii. Account Closed
iv. Non-Current Account
v. Account does not exist
vi. Account status not qualified for referencing
vi. Beneficiary not known to referee
vii. Others.
e. All treated items should be immediately available to both Presenting and
Receiving banks
f. Both users will be able to view/download own items “Approved” or “Not
Approved” by other banks
3.5 Reports
Generally, reports will be produced based on „From‟, „To‟ „dates‟, „Status‟
supplied by users. The statuses will be „Due‟, „Past Due‟, „Pending‟, „Approved‟
and „Not Approved for both Outward and Inward items.

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a. Due ref as Pbank will contain detailed presented items bank-wide.
b. Due ref as Summary Pbank will contain summarized presented items bank-
wide.
c. Due ref as RBank will contain detailed received items bank-wide.
d. Due ref as Summary RBank will contain summarized received items bank-
wide.
e. Control report will contain detailed „past due‟ items and for how long they
have been so.
f. System should be able to send Control Report per bank to at least two
designated email addresses in each bank every Monday morning.
g. System should be able to visually advise users of all their inward „past due‟
items daily.
h. Statistics report will provide MIS details of e reference portal clearing
operations per bank and Industry.
3.6 e-Reference Clearing Cycle
The e-Reference Clearing Cycle shall be T+3 .
In the event that a Bank refuses to respond to an inward reference confirmation
request after the T+3 cycle, an escalation mail will be sent by the portal to
the Authorizer, the Head of Domestic Operations and the Head of
Operations of the Bank concerned. Under no circumstance shall Reference
confirmations be deemed okay when there is no response from the receiving
Bank.
4 Responsibilities of Stakeholders
4.1 Presenting Bank
a. Ensure clarity of scanned images as poor quality images will be a valid
ground for rejection.
b. Ensure references are sent timeously to referees‟ Bank.
4.2 Receiving Bank
a. Ensure speedy response to all incoming items.
b. Respond to rejected items with valid reasons.
4.3 NIBSS
a. Ensure maximum system uptime.

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b. Ensure speedy response to banks request for creating/changing/removing
Bank Admin User.
c. Regular maintenance of system application, database and operating
systems.
5 Commercials
The usage of the e-Reference Portal, amongst other financial industry portals
being offered by NIBSS shall subsist on:
1. The Payment of Annual Subscription Fee of One Million Naira Only
(N1,000,000.00) for access to the usage of all NIBSS Portals
2. The payment of e-Reference Processing Fee of Fifty Naira Only (N50.00) by
reference Presenting Bank

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6. APPENDICES
6.1 APPENDIX - REJECT REASONS
1. Incorrect Signature
2. Bad Image
3. Account Closed
4. Non-Current Account
5. Account does not exist
6. Account status not qualified for referencing
7. Beneficiary not known to referee

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361
362
363
364
CENTRAL BANK OF NIGERIA

GUIDELINES FOR THE REGULATION OF AGENT BANKING AND AGENT


BANKING RELATIONSHIPS IN NIGERIA

365
SECTIONS
1. Definition of Agent Banking

2. Application and Approval Requirements

2.1. Documentary requirements

2.2. Agent Structure

2.3. Information requirements for agent structure

2.4. Renewal of engagement

2.5. Monitoring of Agent Banking relationships

3. Minimum Requirements of Agent Banking Contract

4. Establishment of agent Banking relationship

4.1. Agent eligibility 


5. Assessment of Agents

5.1. Suitability assessment of an agent

5.2. Moral and professional suitability of a prospective agent.

5.3. Agent due diligence

6. Key Roles & Responsibilities of the Financial Institution

6.1. Management of agent banking business

6.2. Permissible activities

6.3. Prohibited activities

6.4. Operational and Transactional Limits

7. Rules on exclusivity of agents

8. Supervision of agents

9. Publication of list of agents and locations

10. Relocation, transfer and closure of agent premises

11. Settlement of transactions and the technology requirement

11.1. Real time transactions

11.2. Minimum IT requirements for the operation of agent banking


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11.3. Data and Network Security Requirements

12. Third-Party Service Providers

13. Risk Management

14. Money Laundering


14.1. Customer due diligence

14.2. Anti-Money Laundering and Combating the Financing of Terrorism


(AML/CFT) requirements;

15. Consumer protection measures

15.1. Minimum requirements

16. Disclosures

17. Branding and Advertisement

18. Dispute Resolution

19. Submission of statutory returns

19.1. Annual Reporting

20. Powers of the CBN over agents.

21. Remedial measures

22. Sanctions

23. Amendment to the Guidelines

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Guidelines for the Regulation of Agent Banking and Agent Banking Relationships

A. Preamble
In exercise of the powers conferred on the Bank by Section 2 (d) of the Central
Bank of Nigeria Act, 2007 and Section 57 (2) of the Banks and Other Financial
Institutions Act (BOFIA), Laws of the Federation of Nigeria, 2004 to issue guidelines
for the maintenance of adequate and reasonable financial services to the
public, the Central Bank of Nigeria (CBN) hereby issues the following guidelines
for the regulation of Agent Banking and Agent Banking Relationships in Nigeria.
B. Objectives
The objectives of the guidelines are to:
• provide minimum standards and requirements for agent banking operations;
• enhance financial inclusion; and
• provide for agent banking as a delivery channel for offering banking services in
a cost effective manner.
1. Definitions
Agent Banking
Agent banking is the provision of financial services to customers by a third party
(agent) on behalf of a licensed deposit taking financial institution and/or mobile
money operator (principal).
Principal
For the purposes of this document the principal shall at all times be a deposit taking
Financial Institution and/or Mobile Money Operator (MMO).
Agent
An agent is an entity that is engaged by a financial institution to provide specific
financial services on its behalf using the agent’s premises.
Associate
For the purpose of this guidelines; an associate of an FI may be an employee
(current or former), his/her relations, including spouse, parent, children or any
person with a pecuniary interest with the Financial Institution (FI).
Premises
The physical location or place used by the agent to conduct
business.
Financial Institution (FI)
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For the purposes of this document a financial institution shall be any institution
licensed by the CBN to accept deposits and conduct banking or other financial
services as defined by BOFIA and the licensed Mobile Money Operators
Third Party Service Providers
These shall mean parties other than the principal and agent who are in contract
with either the principal or agent specifically relating to the existing agent banking
relationship.
Agent Banking Database
This shall mean the database of all approved agent banking relationships,
locations, agents and principal that exist in the country.

Super-Agent

A super-agent is an agent that has been contracted by the principal and


thereafter may subcontract other agents in a network while retaining overall
responsibility for the agency relationship.

Sole Agent

A Sole agent is an agent who does not delegate powers to other agents but
assumes agency relationship/responsibility by himself.
Sub-Agent

A sub-agent is a person to whom some or all aspects of the agent banking have
been delegated by a Super-Agent.

Bank-led model

The Bank led model is a general agency arrangement where only a bank may act
as a principal in forming agent banking relationships.

Non-bank led model

The non-bank led model of agent banking is a general agency arrangement


where parties other than banks may act as principal in forming agent banking
relationships.

AML/CFT

This means Anti-Money Laundering and Combating Financing Terrorism

KYC

Know Your Customer

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Proprietor and Partner

A “proprietor” or “partner” under this Guideline shall, in respect of other


unincorporated entities include reference to persons and their titles as they are
known or referred to under those unincorporated entities.

Receipts

For purposes of this document, receipts shall include all forms of durable and
verifiable acknowledgements including, paper, email and SMS.

Real Time Transactions

This means the processing of instructions on an individual basis at the time they are
received rather than at some later time.

2. Application and Approval Requirements

Any financial institution that wishes to engage in agent banking shall submit an
application for approval to the CBN. The application shall clearly state the extent of
agent banking activities and responsibilities of the relevant parties.

The application shall be submitted to the Office of the Director, Banking &
Payments System Department, CBN, Abuja. All applicants shall supply information
to the CBN as may be required from time to time.

Information required by the CBN for agent banking licence shall include:

a. Name of the applicant

b. Postal Address/email

c. Business Address

d. Telephone number

e. Company Registration Number/certificate

f. Feasibility Study for the agent relationship

2.1 Documentary Requirements

All applications for agent banking shall be addressed to the Director, Banking &
Payments System Department, CBN, Abuja and accompanied with the following:

i. Board Approval

ii. A document that shall outline the strategy of the FI including current and
potential engagements, geographical spread and benefits to be derived
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iii. Qualifying criteria for engaging agents e.g.

a. Outreach

b. Competence

c. Integrity

d. Others

iv. Service Level Agreements (SLAs) and Agent Banking Contract

v. Risk management, internal control, operational procedures and any other


policy and procedures relevant to the management of an agent banking
arrangement.

vi. Proposal for KYC and AML/CFT compliance.

2.2 Agent Structure

The responsibility for the selection of agents lies solely with the FI, subject to the
following allowable agent structures:

i) Super-Agents: These are agent networks that shall establish a collection of


outlets or franchise within its wide network of outlets that shall be under its
supervision and control.

ii) Sole-Agent: A sole agent is an agent who does not delegate powers to other
agents but shall assume the agent banking relationship/responsibility by
himself.

iii) Sub-Agents: These are networks of agents that shall be under the direct
control of a superagent as may be provided in the agent banking contract.

2.3 Information Requirements for Agent Structure


Within each agent category, the FIs shall clearly state the agent structure adopted.
In addition, any structure adopted shall contain among others, the following
information:

i. Name(s) of agent(s).

ii. Location(s) of activities.

iii. Terms of engagement, itemizing all commercial activities the agent is


currently engaged in and all proposed responsibilities.

iv. Signed declaration by agents.

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FIs shall require all agents to submit updated information annually or as soon as any
change occurs.

2.4 Renewal of Engagement

Licensed institutions are advised to renew all agent agreements biennially except
otherwise required.

2.5 Monitoring of Agent Banking relationships

The CBN shall, at least on an annual basis, monitor FI/agent relationships;


compliance with laid down guidelines and regulations. Where the need arises or in
response to specific issues, the CBN shall conduct monitoring visits to any agent(s).

The approach for monitoring super-agent would differ from other agent types in
view of the probable higher risk, liquidity management and consequences of
failure. In the case of super agents the CBN shall require full disclosure on persons or
entities that control more than 10% or more of the share capital or has powers to
exercise significant influence over the management.

3. Minimum Requirements of Agent Banking Contract

i. Every agent banking contract shall contain reference to the FIs full liability with
respect to customers, and it shall specify the obligation of both the FI and the
agent.

ii. The principal is allowed to use a third party (e.g. a network manager) to
manage its agent network. However, all agents sign ups must be approved by
the principal.

iii. FIs shall itemize all activities that the agent shall be conducting on its behalf or
limitations on any such activities.

iv. These may include:

a. Account opening, deposits and withdrawals


b. Fund transfer services

c. Bills payments

v. Fees and all charges in respect of the agent banking shall be explicitly stated
in the contract.

vi. Responsibility for payment of expenses (directly or indirectly) relating to the


activities of the agency shall also be explicitly stated.

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vii. Responsibility for provision of infrastructure and procurement of third party
service providers including undertaking for service provision shall be explicitly
stated.

viii. All agent banking contracts shall have a dispute resolution clause.

ix. Agents shall not be permitted to charge any fees directly to customers, and
details of remuneration for the agent shall be specified in the contract
between the agent and the principal.

x. Measures to mitigate risks associated with agent banking services to include;


limits on customer transactions, cash management, cash security, security of
agent premises and insurance policies.

xi. The FI shall be responsible for all actions or omissions of the agent
notwithstanding anything contained in the contract to the contrary; provided
they relate to banking services or matters connected therein.

xii. The CBN shall have free, full, unfettered and timely access to the internal
systems, documents, reports, records, staff and premises of the agent in so far
as the agent banking business is concerned and shall exercise such powers as
it may deem necessary.

xiii. Compliance with AML/CFT and KYC requirements is mandatory.

xiv. The agent shall be under obligation to deliver transaction support documents
to the principal.

xv. A statement that all information or data that the agent collects in relation to
agent banking services, whether from the customers, the FIs or from other
sources, is the property of the FI and such information shall be kept
confidential.

xvi. Remedial action available to the FI in the event of agent failure to discharge
its stipulated obligations.

xvii. Agent’s business hours.

xviii. Suitable limits on cash holding by the agent and also limits on individual
customer withdrawal and lodgement.

xix. Confidentiality of customer and user information.

xx. Technical description of electronic devices.

xxi. Remuneration for the agent.

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xxii. Specify that the agent shall at all times ensure safe-keeping of all relevant
records, 
data, documents or files or alternately, such records, data,
documents or files are moved to the institution at regular pre-agreed intervals.

xxiii. A statement to the effect that employees of an agent shall not be treated as
employees of the institution and the rights and duties of such shall be agreed
upon between the institution and the agent.

xxiv. A provision for changing the terms of the contract and stipulations for default
and 
determination of the contract.

xxv. A transition clause on the rights and obligations of the parties upon termination
or cessation of the agent banking contract.

xxvi. The FI and the agent may provide for other terms and conditions that they
consider necessary for the agent banking business.

4. Establishment of Agent Banking Relationship

i. FIs shall be required to carry out its respective due diligence on prospective
agents.

ii. The CBN shall prescribe the extent of such agent banking relationships and
scope of activities.

iii.All FIs shall have due diligence policies and guidelines that define initial
agent engagement, regular monitoring and supervisory checks, trigger points
and corrective measures.

iv.FIs shall also specify the permissible activities agent may undertake within
each agent category.

v. FIs shall define minimum standards for selection and approval procedure for
each agent category.

vi.Any FI that wishes to vary the terms of its earlier agreement as approved by
the CBN, shall be required to submit a new application.

vii. All agent banking contract between an FI and an agent shall comply with
this Guidelines and any other law in force.

4.1 Agent eligibility

i. The entity must have been in legitimate commercial activity for at least
twelve (12) months immediately preceding the date of the application to
become an agent and the business must be a going concern.

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ii.An entity shall not be eligible for appointment as an agent if the carrying out
of agent banking business by the entity shall contravene any written law,
regulation or the objects of the entity.

iii. The following entities shall be eligible for appointment as agents under this
Guidelines:

i) Limited liability companies.

ii) Sole proprietorships.

iii) Partnerships.

iv) Cooperative Societies.

v) Public entities.

vi) Trusts.

vii) Any other entity, which the CBN may prescribe.

viii. Any entity which is faith-based or not-for-profit, a non-governmental


organization, an educational institution, bureau-de-change or any
other entity which, under any applicable law is not allowed to carry on
profit-making business shall not engage in agent banking business.

ix. Any entity, which is subject to any regulatory authority under any
written law or is a public entity, shall obtain the consent of the
regulatory authority or the appropriate oversight body or authority prior
to being appointed an agent.

5. Assessment of Agents

5.1 Suitability Assessment of an Agent

A. Before the appointment of an agent the FI shall ensure that the entity has:

i. An existing well established commercial activity which has been


operational for at least twelve (12) months immediately preceding the
date of the suitability assessment.
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ii. Not been classified as a non-performing borrower by any FI in the last 12
months preceding the date of signing the contract (such information
having been obtained from licensed Credit Bureaux). The performing
status shall be maintained for the duration of the agency.

iii. Appropriate physical infrastructure and human resources to provide the


services required.

iv. For purposes of carrying out an assessment under this clause, the
proposed agent shall complete an agent assessment form.

B. Prior to the appointment as an agent under the provisions of this Guidelines,


any entity that seeks to be appointed as an agent by an institution shall
furnish the institution with the following information as applicable:

i. Name of the entity proposed to be an agent;

ii. Certificate of incorporation or business registration;

iii.Description of the commercial activity the entity has been carrying on for the
last twelve months immediately preceding the date of the application;

iv. Valid business licence or permit for any regulated commercial activity carried
on by the entity for at least twelve months prior to the date of the
application;

v. Audited financial statements for the last two years where applicable;

vi. Tax clearance certificate;

vii.Physical location, postal address and telephone numbers of the 
entity and
its working hours;

viii. Evidence of availability of funds to cover agent operations including


deposits and withdrawals by customers, and

ix. Any other information the FI may require.

x. Where a prospective agent is unable to meet the requirements in (i-ix)


above, it is not precluded from being a sub-agent, where there is a super-
agent structure.

C. The FI shall keep all information provided by the agent safe and confidential
and shall make this information available to the CBN on request.

D. The FI shall endeavor to obtain accurate information from the entity and its
officers or employees.
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E. Any entity which or whose proprietors, partners, officers or employees furnish
an FI with false or inaccurate information under this Part shall be disqualified
from conducting agent banking business.

F. Every FI shall sensitize its agents on the provisions of this Guidelines and the
obligation to comply with its requirements.

5.2 Moral and Professional Suitability of a Prospective Agent

i. FIs shall assess the moral, business and professional suitability of the sole
proprietor or partners proposed to be appointed as agents.

ii.In the case of a corporate entity, the FI shall assess the moral, business and
professional suitability of the chief executive officer and the officer(s) in
charge of or responsible for agent banking operations of the entity.

iii. The persons mentioned in Clauses i and ii shall, for the purpose of suitability
assessment under this Part, furnish the FI with a duly completed agent
appraisal form for sole proprietor, partner, and corporate entity.

iv. In assessing the suitability of a corporate entity, sole proprietor, partners or


officers of a corporate entity, the FI shall have regard to the following:

a. Negative information obtained from Credit Bureaux or other


credible sources.
b. Any criminal record in matters relating to finance, fraud, honesty or
integrity.
c. Reputation (based on references from at least two people of good
social standing living in the same locality as the person and who
have known the person for at least three years).
d. Business or work experience.
e. Sources of funds.
f. The business track record of the entity in the last three years where
applicable.
g. Any other information that may negatively or positively impact on
the prospective agent.

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5.3 Agent Due Diligence

i. The FI shall establish efficient and thorough Agent Due Diligence procedures
to mitigate risks.

ii.The FI shall institute clear, well documented Agent Due Diligence policies and
procedures. Minimum contents shall include, methods of identifying potential
agents, initial due diligence, and regular due diligence checks to be
performed at specified intervals and check list of early warning signals and
corrective actions to ensure proactive agent management.
iii. Roles/responsibilities of functions/departments within the FI with regards to
agent management shall be clearly specified in the Agent Due Diligence
procedures.
iv. FIs shall ensure that agents are well established, reputable and have the
confidence of the market.
v. FIs shall ensure that proper AML/CFT monitoring processes exist for agent
banking. The necessary actions to be taken by agents in this regard shall be
communicated to the agents and the agents’ compliance monitored. Due
Diligence shall also include:
a. Verification of legal status of the Agent.

b. Verification of address or location of all prospective agents.

c. Establishing that there are no relationships with the FIs that may be
detrimental to the agent banking relationship.

d. Verification of the adequacy of the prospective agents resources


for agent banking.

e. Any other measures deemed necessary by the FI.

6. Key Roles & Responsibilities of the Financial Institution

i. The FI shall make a clear, informed and documented decision on the use of
agents for rendering banking services to its customers.

ii. Development of an appropriate agent banking contract and appointment


of eligible agents based on set out criteria.

iii. The FI shall be wholly responsible and liable for all actions or omissions of its
agent. This responsibility shall extend to actions of the agent even if not
authorized in the contract so long as they relate to agent banking services or
matters connected therewith.

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iv. Maintenance of an effective oversight of the agent’s activities and ensuring
that appropriate controls are incorporated into its system in order to assure
compliance with relevant regulations.

v. Assessing the adequacy of controls of outsourced activities through regular


audits.

vi. Formulation and implementation of policies and procedures to safeguard


the information, communication and technology systems and data from
threats.

vii. Provide agents with such operational guidelines/manuals and risk


management policy documents as shall be needed for rendering services to
customers efficiently.

viii. Inclusion of risk-based review of critical agent banking processes to ensure


that the policies, rules, regulations and operational guidelines are adhered
to.

ix. Selecting credible agents with suitable/convenient outlets.

x. Management and mitigation of risk associated with the engagement of


agents to provide financial services on their behalf.

xi. The provision of basic financial education to customers and agents. The FI
must periodically train its agents.

6.1 Management of Agent Banking Business

i. The FI shall develop and implement an agent banking strategy and establish
an effective oversight over agent banking services.

ii. The FI shall ensure effective management oversight, which shall encompass
the review and approval of key aspects of its security control programs,
processes, policies and infrastructure.

iii. There shall be a comprehensive process/framework for managing risks


associated with reliance on third parties.

iv. The FI shall ensure the expansion of the scope of the bank’s internal audit
function to address the increased complexity and risks inherent in agent
banking activities and ensure appropriate staffing of the audit department
with personnel possessing the right skills.

v. The FI shall take steps to update and modify, where necessary, its existing risk
management policies and practices to cover current or planned agent
banking services.
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vi. The FI shall take steps to ensure the integration of agent banking applications
with the main banking systems so as to achieve an integrated risk
management approach for all banking activities.

vii. The FI shall train agents to enable them adequately perform operations and
provide the services agreed upon, including training relating to the proper
identification of customers, customer service, confidentiality of information,
record keeping and financial education.

6.2 Permissible Activities

i. Cash deposit and withdrawal.

ii. Bills payment (utilities, taxes, tenement rates,


subscription etc.).

iii. Payment of salaries.

iv. Funds transfer services (local money value


transfer).

v. Balance enquiry.

vi. Generation and issuance of mini statement.


vii. Collection and submission of account opening and other related
documentation.

viii. Agent mobile payments/banking services

ix. Cash disbursement and cash repayment of loans.

x. Cash payment of retirement benefits.

xi. Cheque book request and collection

xii. Collection of bank mail/correspondence for customers.

xiii. Any other activity as the CBN may from time to time
prescribe.

xiv. It shall be the responsibility of the FI to determine, based on agent risk


assessment, which services a particular agent may provide.

6.3 Prohibited Activities


An agent shall not:
i. Operate or carry out any transaction when there is communication
failure with the FI.
380
ii. Carry out a transaction where a receipt or acknowledgement cannot
be generated.
iii. Charge the customer any fee.
iv. Give any guarantee.
v. Offer banking services on its own accord.
vi. Continue with the agency business when it has a proven criminal record
involving 
fraud, dishonesty, integrity or any other financial impropriety.
vii. Provide, render or hold itself out to be providing or rendering any banking
service which is not specifically permitted in the contract.
viii. Open accounts, grant loans or carry out any appraisal function for
purposes of opening an account or granting of a loan or any other
facility except as may be permitted by any other written law to which
the agent is subject.
ix. Undertake cheque deposit and encashment of cheques.
x. Transact in foreign currency.
xi. Provide cash advances.
xii. Be run or managed by an FI’s employee or its associate.
xiii. Sub-contract another entity to carry out agent banking on its behalf
except where there is a super-agent structure in place.
xiv. FI may in the contract document specify other activities, which the agent
is prohibited from undertaking.
6.4 Operational and Transactional Limits
i. The FI shall establish limits for services agreed upon with agents.

ii.The limits shall be prudent and bear a relation to the volume of cash moved
by the agent and the risks associated with the agent’s locality for conducting
agent-banking business.
iii. Limits shall be set for each agent and where applicable, for each type of
transaction.
7. Rules on Exclusivity of Agents

i. There shall be no exclusivity of agent banking contracts between FIs and


agents.
ii.An agent may provide agent-banking services to as many FIs as it can
accommodate at any given time.
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iii. The capacity of the agent to accommodate more FIs shall be determined
by the additional/incoming FI.
8. Supervision of Agents
i. FIs shall be responsible for monitoring and supervising the activities of the
agents.
ii.FIs shall have information on the volume and value of transactions carried out
for each type of service by each agent.
iii. FIs shall monitor effective compliance with set limits and establish other
prudential measures in each case.
iv.FIs shall implement measures to control operational risks, including having
clause(s) in the contract establishing the liabilities of the agent.
v. FIs shall take all other measures including onsite visits by the FI’s staff or
authorized persons to ensure that agents operate strictly within the
requirements of the law, guidelines and the contract.
vi. Notwithstanding the responsibility by the FIs to monitor and supervise their
agents, the CBN may at any time request for any information or carry out
inspection as it deems necessary.
9. Publication of List of Agents and Locations

i. FI shall publish an updated list of all their agents on their websites and annual
reports. In addition to this, it may publish a comprehensive list of agents on
flyers, corporate gifts and such other publications, as it deems appropriate.
ii.The publications containing the list of their agents shall be disseminated to all
their branches and may also be disseminated to their agents.
10. Relocation, Transfer and Closure of Agent Premises
It is the responsibility of the FI to ensure the following:
i. No agent shall relocate, transfer or close its agent banking premises without
prior notice to the FI.
ii.Notice of intention to relocate, transfer or close agent banking premises shall
be served on the FI at least thirty days or such other period as may be
agreed upon in the contract, a copy of which shall be posted at the agent’s
premises.
iii. Within thirty days prior to relocation or closure of agent banking premises, the
FI shall notify the CBN and forward the details and reason(s) for relocation,
transfer or closure of premises.

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11. Settlement of Transactions and the Technology Requirements

11.1 Real Time Transactions

To ensure real time transactions, the FI shall:


i. Ensure that all transactions carried out within the agent banking are done on
a real time basis.
ii. Deploy technology that facilitates instant payment to the end users account.

iii. Provide its agents with settlement positions for reconciliation of transactions.

11.2 Minimum IT requirements for the operation of agent banking

The technology implemented by the FI for agent banking shall comply with the
industry standard technology in terms of hardware and software. The FI shall ensure
that:
i. Transaction information is transmitted in a secure manner.
ii. The technology deployed comprises a set of interoperable
infrastructure modules that work seamlessly. There shall be an end-to-
end connection from the FI to the agent.
iii. Customers get immediate value for successful transactions
iv. Payment instructions are instantly executed. In the event of failure of
communication during a transaction, immediate reversal shall be
mandatory.
v. Generation of receipts or durable acknowledgements for successful
transactions.
vi. Automatically deny an agent exceeding the daily limit allowed or
performing unauthorized transactions.
vii. Audit trail is maintained and made available on request.
viii. All settlement information details are preserved for a minimum period
of 5-years.
ix. The FI shall put in place adequate measures to mitigate all the risks that
could arise from the deployment and use of its agency banking IT
architecture.
11.3 Data and Network Security Requirements
FIs shall put in place systems that specifically and at a minimum address the
following issues:
i. Physical and logical security of infrastructure.
383
ii. Availability of services.

iii. Data confidentiality and integrity.

iv. Encryption of PIN and electronic transactions.


v. Customer accountability and non-repudiation of transactions

vi. Error messaging and exception handling.

12. Third-Party Service Providers

i. The FI may enter into a written contract with a third party service provider
for the following:
a. Technology platform

b. Agent selection

c. Agent network management

d. Agent training

e. Equipment provision

f. Equipment maintenance

It must be noted however, that such contracts shall not constitute agent banking.
ii. Any third party service provider, who seeks to render agent banking in
addition to providing the above services, shall be required to follow the
application process for agent banking services as specified in this
Guidelines.
iii. The FI shall be responsible for the agent banking business even where a
third party service provider is contracted to provide the services specified
above.
iv. The FI shall ensure compliance of both the agent and third party service
provider with the standards and requirements of the agent banking
guideline.
13. Risk Management
i. FIs shall be responsible for monitoring and supervising the activities of their
agents.
ii. FIs shall have information on the numbers and volumes of transactions carried
out for each type of service by each agent.
iii.FIs shall monitor effective compliance with set limits and establish other
prudential measures in each case.

384
iv.FIs shall implement measures to control operating risks, including having
clause(s) in the contract establishing the liabilities of the agent.
v. Periodic physical visits by institution’s staff or authorized persons shall be
necessary to ensure that agents operate strictly within the requirements of
the law, guidelines and the contract.
vi.FIs shall pay special attention to credit risk, operational risk, legal risk, liquidity
risk, reputation risk and compliance with rules for combating money
laundering and financing terrorism.
vii. FIs shall conduct due assessment of agent’s credit worthiness and set limit
structures for agent’s various activities commensurate with this assessment.
viii. Product programs, procedure manuals and customer transaction limits shall
be devised keeping in mind implications for operational and liquidity risks for
agents.
ix. Wireless or electronic banking related risks as well as information and data
security risks shall be managed by the FI in a prudent manner.
x. A business continuity management plan of FI shall accommodate Agent
Banking Operations to mitigate any significant disruption, discontinuity or
gaps in agent’s functions.
xi. FIs shall put in place appropriate product and operations manuals,
accounting procedures and systems and design appropriate
forms/stationery to be used by the agent.
xii. Institute systems and personnel to adequately monitor and control agent
banking operations on an ongoing basis.
xiii. Notwithstanding the responsibility on FIs to monitor and supervise their
agents, the CBN may at any time, exercise regulatory and supervisory
powers under BOFIA and CBN Act (as amended) and may request for such
data or information or carry out such inspection as it deems necessary.
14 Money Laundering

14.1 Customer Due Diligence


FIs are required to conduct due diligence on customers to ensure that the
requirements of Anti-Money Laundering/Combating Financing of Terrorism
(AML/CFT) are adhered to.
Factors to consider include:
• Know Your Customer (KYC) requirements.

385
• Daily and transaction limits.
• Minimum IT security requirements.
• Authentication of each customer’s transaction.
14.2 Anti-Money Laundering and Combating the Financing of Terrorism
(AML/CFT) Requirements
FIs shall train their agents on anti-money laundering (AML) and combating of
financing of terrorism (CFT) requirements.
FIs shall ensure:
i. Customers are identified with at least any of the following; IDs, PINs,
passwords, payment card, secret code or secret message while performing
any transaction requiring identification.
ii.Agents report to the FI within twenty four (24) hours, all suspicious activities
that come to the agent’s knowledge.
iii.Agent conducts banking business strictly within the transaction limits
prescribed by the FI.
In the fulfillment of AML/CFT requirements, institutions shall comply with the
requirements of the Money Laundering (Prohibition) Act, 2011 and Financing of
Terrorism (Prohibition) Act 2011.
15. Consumer Protection Measures
Appropriate consumer protection systems against risks of fraud, loss of privacy and
loss of service shall be put in place by FIs for purposes of establishing trust among
consumers of agent banking services.
15.1 Minimum requirements
The following requirements shall be complied with at all times:
i. FIs shall establish mechanisms that will enable their customers or users to
appropriately identify their agents and the services provided through such
agents.
ii. Agents shall issue receipts for all transactions undertaken through them. FIs
shall provide their agents with necessary tools that enable generation of
receipts or acknowledgements for transactions carried out through agents. In
this regard, electronic receipts or acknowledgements are permissible.
iii. Where an agent acts as a receiver and deliverer of documents, an
acknowledgement shall be provided for all documents received or delivered
by the agent to or from the customer.
386
iv. A channel for communication of customer/agent complaints to the FIs shall
be provided. FIs shall provide dedicated customer care telephone numbers
for lodging complaints by their customers. The customers/agents can also use
this telephone numbers to verify with the FI, the authenticity and identity of
the agent, its physical location and the validity of its agent banking business.
v. FIs shall establish complaints redress mechanism and shall ensure proper
communication of this mechanism to their customers.
vi. All customer complaints shall be resolved within a reasonable time and not
later than fourteen (14) days from the date of reporting or lodging the
complaint with the FI. FIs shall keep record of all customer complaints and
how such complaints are redressed.
vii. An agent shall have signs that are clearly visible to the public indicating that
it is a provider of services of the FI with which it has an agency contract. The
agent shall not however represent to the public that it is an FI.
viii. In the provision of agent banking services, FIs shall use secure systems that
ensure customer information confidentiality.
ix. The customer shall be made aware of the fact that he shall not carelessly
store PIN and other critical information or share such information with other
parties including agents.
x. FIs shall establish contact centres to facilitate communication between a
customer and the FI.
16. Disclosures
The agent shall display in a conspicuous place on its premises the following:
i. Name and the logo of the FI.
ii. Banking services offered.
iii. A notice to the effect that services shall be provided subject to
availability of funds.
iv. Charges or fees applicable for each service which are payable to the
FI by the customers.
v. The dedicated telephone number(s) through which customers can
contact the FI.
vi. The name, telephone numbers and location of the institution’s branch
to which the agent reports its agent activities.

387
vii. On request by a customer, an agent shall show a copy of the approval
letter issued by the Central Bank to the FI, a copy of its appointment
letter as agent by the FI and the current license for the commercial
activity being undertaken by the agent. These documents should be
readily available in the agent banking premises.
17. Branding and Advertisement
i. FIs may choose to brand their agent network service under any brand name.
However use of protected words like “bank”, “finance”, “financial institution”,
“financial intermediary” or their derivatives or any other word suggesting that
the agent is itself an FI is prohibited.
ii. In advertising its agent service network, the FI shall not in any form
misrepresent the agent as a financial institution or mislead the public as to
the services available at the agent’s premises.
iii. An agent shall not brand its premises in a manner that may suggest that it is a
financial institution.
iv. An agent shall display its principal’s name and logo in a conspicuous manner
and ensure where there is more than one principal the names and logos shall
be similarly displayed.
18. Dispute Resolution
Where a dispute arises between an FI and an agent, it shall be settled as provided
below:
i. The parties shall agree to attempt to settle the disputes amicably within a
period of 10 business days.
ii. If the parties are unable to settle the dispute in accordance with (i) above,
they may thereafter refer the dispute to an Arbitral panel as provided under
the Arbitration and Conciliation Act, Cap. A18, Laws of the Federation of
Nigeria, 2004.
19. Submission of Statutory Returns
FIs shall, at the end of every month and not later than the 10th day of the following
month, submit to the CBN, data and other information on agent operations
including:
i) Nature, value and volume of transactions;
ii) Incidents of fraud, theft or robbery; and
iii) Nature and number of customer complaints and remedial
measures taken.

388
19.1 Annual Reporting
FIs shall include in its annual reports and accounts in the prescribed form all
activities of its agent banking operations.
20. Powers of the Cbn Over Agents
In addition to any other power conferred on the CBN, it shall have power to:
i) Request for information from agents at any time as the CBN may deem
necessary;
ii) Carry out spot or scheduled inspection of the books and premises of the
agent;
iii) Direct an agent to take such actions or desist from such conduct as the CBN
may find necessary;
iv) Direct the termination of the agency contract as the CBN may find
necessary;
v) Direct the FI to take such actions against or on behalf of the agent as the
CBN may find appropriate;
vi) Direct the FI to take such remedial action arising from the conduct of an
agent as it may deem fit.
21. Remedial Measures
If FI or its agent fails to comply with these Guidelines, the CBN may take any
corrective action against the FI or the agent as appropriate.
22. Sanctions
In addition to the use of remedial measures in section 21, the CBN may take any or
all of the following sanctions against an FI, its board of directors, officers or agents:
iii) Prohibition from engaging in any further agent banking business;
iv) Prohibition from contracting new agents;
v) Revocation of agent banking approval;
vi) Termination of agent banking contract;
vii) Withholding Corporate approvals;
viii) Financial Penalties.

389
23. Amendment To The Guidelines
These guidelines may be amended by the CBN from time to time in whole or in part
as it is deemed necessary.

Banking and Payments System Department


February, 2013

390
391
392
CENTRAL BANK OF NIGERIA

REVISED GUIDELINES ON STORED


VALUE/PREPAID CARD ISSUANCE
AND OPERATIONS

393
GUIDELINES ON STORED VALUE/PREPAID CARD ISSUANCE AND OPERATIONS
1.0 Preamble
In exercise of the powers conferred on the Bank by Section 47 (3) of the Central
Bank of Nigeria Act 2007 (as amended) to issue guidelines for the maintenance
of adequate and reasonable financial services for the public and to ensure high
standards of conduct and management throughout the banking system; and
Pursuant to its inherent powers, the Central Bank of Nigeria (CBN) hereby issues
the following guidelines for Stored Value/Prepaid Card Issuance and Operations
in Nigeria:
2.0 Objectives
These guidelines have been developed to provide minimum standards and
requirements for the operation of stored value/prepaid card issuance and
operations.
3.0 General Requirements
3.1 Only deposit-taking banks or financial institutions licensed by the CBN with
clearing capacity shall issue stored value/prepaid cards. Other deposit
taking institutions without clearing capacity can issue in conjunction with
those with clearing capacity.
3.2 Only one stored value/prepaid card shall be issued per person per currency
per product by an issuer at any anytime
3.3 The usage limits and frequencies shall be defined by each participating
bank
3.4 All stored value/prepaid card transactions shall be subject to current
Nigerian Financial Intelligence Unit (NFIU) reporting requirements
3.5 All card issuers shall render monthly returns to the CBN on the number of
stored value/prepaid cards in issue, volume of transactions and gross
amount of transfers from/to stored value/prepaid cards for inclusion in the
national statistics on payments
3.6 All stored value/prepaid card account Naira balances shall be considered
deposit liabilities by the issuing bank or financial institution and therefore
subject to deposit insurance protection up to the limit provided by the
Nigerian Deposit Insurance Corporation (NDIC) for bank deposits
3.7 A stored value/prepaid card holder or his/her estate shall, upon request, be
entitled to receive a cash refund of the outstanding balance of the card
account from the issuing bank or institution

394
3.8 The fee for loading salary payments unto a stored value/prepaid card shall
be paid separately by the salary payer and not deducted from the balance
value of the stored value/prepaid card.
3.9 Operators, including mobile/telecommunications operators, wishing to
operate money transfer schemes with stored value/prepaid cards shall do
so with requisite approval from the CBN and, at all times, in strict conjunction
with licensed deposit-taking banks or financial institutions
3.10 Stored value/prepaid cards shall be issued without regard to where actual
value resides; value shall be held in either centrally-connected network
databases or in non-network attached electronic devices, including, but
not limited to, smart/chip cards and mobile handsets.
3.11 All Stored value/prepaid cards shall be EMV-compliant (i.e. Chip and PIN
enabled)
3.12 The CBN Guidelines for Transaction Switching and Card Issuance and
Guidelines on POS Card Acceptance Services shall also apply to stored
value/prepaid cards unless where specifically overwritten in these
Guidelines
4.0 Specific Requirements for Stored Value Cards
4.1 No stored value card shall be issued to a person without obtaining minimum
KYC which includes name, phone number, and address of the person. The
issuer shall ensure that at least one of the KYC information is validated
4.2 The maximum amount that can be loaded on the stored value card shall not
exceed N50,000 per day
4.3 The maximum balance on the stored value card shall not exceed N250,000
at any time
4.4 The limits specified for stored value cards shall also apply to cards linked to
mobile money wallets, where least KYC (Phone Number and Name) has
been performed on the mobile money customer.
5.0 Specific Requirements for Prepaid Cards (Individual and Corporate)
5.1 Prepaid cards issued will operate at least within the minimum KYC
requirements prescribed by the CBN. However, loadable limits (in Naira and
Foreign currency) and daily balances will be determined by the issuing bank
5.2 No prepaid card shall be issued beyond the limits of a stored value card to a
person or a corporate organization. Where a customer desires to do

395
transactions beyond the limits prescribed above. Full KYC would be
required. Refer to CBN KYC Manual and Money Laundering (Prohibition) Act
5.3 The maximum withdrawal and spending amount for the Prepaid Cards will
be determined by the issuing bank
5.4 The limits specified for Prepaid Cards shall also apply to cards linked to
mobile money wallets, where Full KYC has been performed on the mobile
money customer.

396
Appendix: Definition of Terms
The terms below shall have the following meaning for the purpose of these
guidelines.
a) CBN is the Central Bank of Nigeria
b) Deposit Taking Banks means banks and other financial institutions
c) Closed Scheme is where a card is issued and used within a limited/closed
group
d) ATM is Automated Teller Machine
d) EMV (Europay, MasterCard, Visa) is the global standard that is helping ensure
smart (Chip-and-PIN) cards, terminals and other systems can interoperate
e) Stored-value cards are payment cards where money is on deposit with the
issuer, but the card account is not linked to a current or savings account. The
individual transactions limits, the daily transactions limits, and the maximum
amount that can be loaded on the card, are as specified in these guidelines.
Stored value cards are usually anonymous in nature and issued outside of
banking hall
f) Prepaid cards are payment cards where money is on deposit with the issuer,
but the card account is not linked to a current or savings account. The
individual transactions limits, the daily transactions limits, and the maximum
amount that can be loaded on the card, would be as specified by the issuer
g) Product is a group of cards that have unique functionality and are defined to
meet specific purposes of the target users
h) PIN means Personal Identification Number

Central Bank of Nigeria


September 12, 2012.

397
REVISED NIGERIA BANKERS’ CLEARING HOUSE RULES

July 16, 2012

398
1. PREAMBLE
WHEREAS the Central Bank of Nigeria by CBN Act No. 7 of 2007 is to promote
monetary stability and sound financial system in Nigeria.
WHEREAS the Central Bank of Nigeria by virtue of S. 47 of the CBN Act No. 7 of
2007 is charged with the duty of facilitating the clearing of cheques, credit
instruments for banks and for this purpose to organize in conjuction with other
Banks, clearing houses in such places as the Bank may consider necessary.
NOW THEREFORE the Central Bank of Nigeria, pursuant to S. 47 of the CBN Act
of 2007 and having had consultations with banks duly established in Nigeria
hereby issues the following rules for the guidance of all Nigeria Banks
Clearing Houses.
a. Objectives
The objectives of the NBCH are:
(i) To provide a forum for the speedy and efficient collection of
cheques, bills and other payment instruments payable or
deliverable at or through offices of member banks of the NBCH by a
system or systems of clearing.
(ii) To draw up and prescribe from time to time standards for the use of
the member banks of the NBCH in connection with clearing.
(iii) To provide a mechanism for the settlement of clearing activities
among member banks.
(iv) To facilitate the implementation of an effective and efficient
payment system in the Nigerian Banking Industry.
(v) To do all such other lawful things as are incidental or conducive to
the attainment of all or any of the aforementioned objectives.
b. Scope
The Clearing House Rules shall be binding on all member banks of the the
NBCH with effect from July 16th 2012.
** These rules supersede any previous NBCH rules
2. Conditions for Membership
Membership of the NBCH shall be restricted to CBN, Deposit Money Banks,
and NIBSS where applicable. The appointment of Money Deposit Banks shall
be based on merit.

399
(i) Any bank wishing to become a member of the NBCH in any part of the
federation shall apply in writing to the Director of Banking Operations
Department on the prescribed form annexed herewith and marked
Appendix I provided by the CBN. Membership shall imply membership
of the appropriate Bankers Clearing House Committee.
(ii) Any licensed bank that is not a member bank of the NBCH may enter
into an agency agreement(s) with any member(s) of any NBCH for the
purpose of accepting cheques drawn on it and for collecting cheques
drawn on other banks
(iii) A list of newly approved members of the NBCH shall be communicated
to all clearing banks by the Clearing Superintendent.
3. Management of Clearing House
a. NBCH wherever located shall be administered by a committee. The
committee shall comprise the representatives of clearing banks, the CBN
and NIBSS where applicable.
b. The CBN shall appoint the chairman of the committee, the Clearing House
Superintendent and the Clearing House Superintendent Assistant(s).
c. Each member bank shall appoint representatives to the committee who
shall be the Head of Clearing or its equivalent in all branches. The name
and status of such a representative shall be communicated, in writing to
the Chairman of the committee. Any representative of lower status shall
not be admitted to committee meetings.
d. Clearing sessions shall be presided over by the clearing superintendent
and the assistant(s).
e. The decision(s) of the clearing superintendent shall be binding on all
clearing representatives at any session. Any party dissatisfied with the
decision(s) of the superintendent may at the end of the day’s session
appeal to the Head, Banking Services of the relevant branch of CBN.
f. A member bank shall be suspended from participating in any clearing
session on the following reasons:
(i) Where the Settlement Account is not adequately funded, an
appropriate amount of the clearing collateral shall be immediately
rediscounted. The amount of clearing collateral that has been utilized
to fund the account shall be replaced within two (2) business days,
failing which the Settlement Bank shall be suspended from further
participation in clearing house activities, nationwide.
400
(ii) Where the collateral so discounted is insufficient the settlement bank
shall be suspended forthwith and further measures shall be taken in
accordance to Section 2.7 of Attachment I;
(iii) When a settlement bank, persistently overdraws its settlement account
maintained with the CBN
(iv) When a non-settlement bank, persistently overdraws its account with
its settlement bank and the settlement bank has communicated its
intention to stop settling for such a non-settlement bank to the CBN
and NIBSS.
(v) Failure to provide acceptable or competent representatives at the
clearing sessions despite a written notice issued by the Clearing
Superintendent.
(vi) Failure to maintain adequate collateral with either the CBN in case of
a settlement bank or its settlement bank in case of a
(vii) Non settlement bank in accordance to the guidelines on the Nigeria
banks clearing and settlement system (Attachment I).
(viii) When any member bank is suspended by the management of the
CBN in the interest of the system for any other reason not hereto afore
mentioned
4. Eligible Financial Instruments
a. Eligible financial instruments for clearing purposes shall include:
i. Paper instruments such as cheques, drafts, dividend/interest warrants,
debit/credit notes, bankers payments, direct debits;
ii. Electronic payment instruments i.e. ACH (NEFT etc.) that are approved
for clearing/settlement in the Automated Clearing House;
iii. Any other instrument that may be approved by the CBN.
b. Each eligible financial instrument to be presented for clearing purposes shall
not exceed the maximum amount as approved by CBN.
5. Duration of Holding Instruments
a. Paper Instruments:
Cheques lodged at the counter of any member bank shall be deemed paid
after two (2) clearing days or 3 working days commencing from the day of
lodgment.
b. Electronic Instruments shall clear as follows:
401
i. Electronic Instruments shall be presented to the clearing house within 24
Hours of receiving same from the originating customer unless the
relevant service agreement dictates otherwise;
ii. Direct Credits shall be applied to the beneficiary’s account on the
receiving date;
iii. Direct Debits shall be deemed paid after two (2) clearing days or three
(3) working days commencing from the day of lodgment.
6. Settlement Rules and Procedures
(i) The CBN shall appoint settlement banks, among member banks, from time
to time for the purpose of settlement finality.
(ii) Every non-settlement bank shall be required to appoint one of the
settlement banks so designated as an agent bank
(iii) Every settlement bank shall have the mandatory responsibility to maintain
in credit its current account with the Central Bank of Nigeria and shall be
required to deposit with the CBN the required clearing collateral and or
any other securities such as NTB, NTC etc. the value of such collateral shall
be determined from time to time by the CBN.
(iv) Every non-settlement bank shall have the mandatory responsibility to
maintain in credit its settlement current account with the settlement bank
and shall be required to deposit with the settlement bank the agreed
clearing collateral.
(v) The clearing net settlement positions of such non-settlement bank shall be
applied to the CBN settlement account of the settlement bank after every
clearing session.
(vi) The settlement activities between banks shall be in accordance with the
guidelines on the Nigeria banks clearing and settlement system as set out
in (Attachment I) hereto attached.
(vii) The settlement and non-settlement banks relationships shall be governed
by a properly executed agency agreement, a proforma of which is
provided in Attachment I (Appendix).

402
SUMMARY OF CLEARING AND SETTLEMENT DAYS

INSTRUMENT TYPE CLEARING PERIOD I.E. SETTLEMENT TIME


DURATION OF HOLDING
INSTRUMENT
1 Cheques (Fresh) 2 Days Next Day
Same Day (Next day for second
2 Cheques (Returned Items) n/a session)

3 ACH Credits (Fresh) 2 Days Same Day

ACH Credits (Return


ned
Same Day
4 Items) n/a

5 ACH Debits (Fresh) 2 Days Next Day

ACH Debits (Returned


6 Items) n/a Same Day

7. Return of Unpaid Instruments

(a) Time Limit


All financial instruments presented on member banks in any clearing area
shall if unpaid be returned through the clearing house by the second (2nd)
clearing day. Any unpaid instrument shall be returned through the
clearing house. For the avoidance of doubt the time limit set for the return
through clearing of any financial instrument drawn on branches in any
clearing Area are:
(i) Cheques and all ACH - Second (2nd) clearing day or Third (3rd)
working day commencing from the day of lodgment.
(ii) Any financial instrument not returned on the last clearing day
as stated in subsection (i) above shall be deemed paid and
the collecting bank shall give value to its customer the next
day except where a prior notice stopping payment had been
sent to the bank within business hours of the last clearing day.
(iii) All unpaid instruments must be returned through the clearing
area where they were originally presented for clearing
(iv) A paper instrument returned unpaid may be represented
subject to a maximum of two (2) representations. After the
third (3rd) time such an instrument shall not be represented.
(v) The clearing cycle for both categories of instruments may be
subject to review by the CBN from time to time in consultation
with clearing banks.

403
CLEARING CYCLE OF PAPER INSTRUMENTS

TRANSACTION DAY CHEQUE CLEARING CYCLE


MONDAY (T) Fresh cheques are deposited
at bank branch
TUESDAY (T+1) Cheques are presented at the
clearing house
WEDNESDAY(T+2) • Beneficiary Bank gets value
• Last/due date for the return
of dishonored cheques
THURSDAY At the beginning of day, bank
customer receives value for
cheques not returned

(b) Reasons for Returning Instruments


(i) All clearing instruments returned unpaid shall bear a written
reason for the cause of non payment. The reason shall be
written on the instrument itself in generally accepted form and
must not be at variance with actual fact.
(ii) Reasons for return shall be as listed in Appendix II annexed
hereto.
(iii) Where an unpaid instrument is subject of any enquiry, the paying
bank shall pass a debit note with a copy of the unpaid instrument
through the clearing house to the collecting bank and shall
indicate why the intrument is not paid. The original instrument
may be returned to the collecting bank under confidential cover.
(iv) Where the unpaid instrument is a fraudulent / spurious
instrument, the Paying bank shall pass a debit note with a copy
of the spurious instrument through the clearing house to the
collecting bank. The paying bank MUST notify the presenting
bank in writing and copy the Clearing House Superintendent.
(v) Where cases of errors in the listing of clearing instrments occur
or a wrong delivery is discovered, an adjustment will be made
at the next clearing session by use of debit notes. Wrongly
delivered clearing instruments shall be returned to the clearing
house the next session following the session the wrong delivery
was made.
(vi) Where a paper item is delivered without a corresponding data
transmission, the paying bank shall treat the instrument as a free
item in line with the provisions of the Automated Clearing
House Rules and Procedures (Attachment II annexed hereto).
Such instruments must be returned to the presenting bank at

404
the next clearing session, except where agreed between the
banks to treat otherwise.
(vii) Where data transmission is effected without the corresponding
paper item or where wrong data is transmitted, such data must
be returned to the presenting bank within the clearing period.

(c) Delayed Application/Return of Direct Credits


Clearing banks are required to apply inward direct credits to beneficiaries’
accounts as prescribed in Section (7); a receiving bank that delays the application
of direct credits or returns such outside the allowed window shall face appropriate
sanction as approved by the CBN.

The aggrieved bank shall advise the erring bank in writing with acknowledgement
copy advised to NIBSS; the erring bank has three working days to dispute the issue
in writing, failing which NIBSS shall execute the sanction through her interchange
fee service. All disputes shall be resolved by the Clearing Superintendent and
his/her decision shall be binding.

8. Hours of Clearing
Clearing sessions shall commence each working day at 8.00 am or at such other
times as the local circumstances and peculiarities may permit. Any other session
shall be as stated in the automated clearing house rules (Attachment II).
9. Clearing Session Quorum
The quorum of a clearing session shall be a simple majority of all settlement banks,
including the CBN.
10. Lateness to the Clearing House
Any member bank which arrives at the clearing house later than 15 minutes
after the time scheduled for the clearing exercise shall not be allowed to take
part in the session without the approval of the clearing house Superintendent.

11. Location of Clearing House


NBCH shall be located in premises as agreed by the CBN and the clearing
banks.

12. Operational Cost of the Clearing House


a. The CBN shall bear the operational cost of the NBCH where such is
operated by it.
b. NBCH members shall bear the operational cost of the NBCH where such is
not operated by CBN.

405
13. Meetings of Clearing House Committee
The committee shall meet at a place to be provided by the CBN on the last
Wednesday of every quarter or any other day approved by the NBCH to
discuss matters relating to the NBCH.
a. Attendance at meetings of the committee shall be mandatory and shall
be a prerequisite for continued membership of NBCH
b. A member bank may be penalized by suspension from participating in
clearing activities for such periods as shall be determined by the CBN for
non attendance at committee meetings without a satisfactory reason
communicated in writing within five (5) working days before any
scheduled meeting.
c. Deliberations of the committee shall be recorded by the clearing house
superintendent and presided over by the chairman. The recorded
minutes shall be circulated to all members for adoption at the next
meeting. A certified copy of the minutes of a meeting at which an
amendment to these rules is proposed shall be forwarded to the Director
of Banking Operations for necessary action.
d. Meetings of the committee shall require a simple majority of the
registered member banks
e. A member bank of the committee shall have one vote. The decisions of
the committee shall be upheld by a simple majority vote count and
where there is a tie, the chairman shall cast a verdict vote to break the
tie and uphold a decision.

14. Responsibilities

(a) Responsibilities of Members


(i) Clearing banks shall ensure that liability clauses are incorporated in all
their account opening documentations and brought to their customers’
notice while the said documents must be properly signed by the
customer.
(ii) At the end of every clearing session and upon the return of its
representatives from the clearing house, a settlement bank must write a
letter, signed in accordance with its mandate with the Central Bank,
stating net figures for or against it as shown on the presentation form and
signed by the clearing superintendent for the day. Such a letter must
reach the Branch Controller before the clearing session following that to
which the letter relates. The letter is not to be sent through the clearing
house representatives.
(iii) Should there be any discrepancy, the Branch Controller must alert the
bank during the next clearing session. Any settlement bank in respect of
whom such a letter is not received within the specified period will be
406
deemed to have accepted as correct the figure shown on the
presentation form, for each clearing session.
(iv) Every member bank shall subject to the agency agreement between
settlement and non-settlement banks be represented at the clearing
house by representatives who shall deliver and receive the documents
to be cleared.
Each representative, in addition to his identity card, which shall be issued
to him by his bank, should always have in his possession, whenever he is
attending the clearing house on behalf of his bank, the clearing house
entry card of member, which shall be issued to his bank by the CBN or
NIBSS (where applicable). Such representatives shall:
-refrain from any activity that may bring discredit to his/her bank or
disrupt the clearing session.
-conduct himself /herself with dignity in the house and respect and
obey the clearing superintendent.
(v) Member banks shall take full responsibility for the action of their own
representatives. Members must send their representatives to the clearing
house during clearing hours whether the member has any documents to
pass through the clearing system or not.
(vi) A presenting/collecting bank may be fully liable to the extent of any act
of omission or commission including contributory negligence, that
cause(s) any loss of funds through presentation of defective clearing
instruments, if it fails to send a presentment caution letter to the paying
bank.
(vii) A collecting bank that pays the proceeds of a defective forged
instrument before maturity shall be fully liable for the loss of fund thereof.
(viii) A presenting/collecting bank shall be deemed negligent if:
(a) A customer’s account is not properly opened and all
documents required by regulation for opening of account are
not obtained, cross-checked and verified according to
established procedures.
(b) It fails to up-date its customer-information to ensure that its
customers and their referees are genuine, with locatable
addresses.
(c) on the face of the presented instrument, irregularities such as
erasures, post/stale date, mutilations, are evident
(d) A notice of caution is not sent to a paying bank branch with a
copy sent to the chief inspector when:
- Instruments are lodged into dormant accounts, new
accounts or salary accounts
- Instruments of unusually large amount(s), relative to the
account’s transaction history, is (are) lodged by a
customer

407
- Suspected spurious instrument
(e) A special caution notice served at its presenting branch
and/or head office/central clearing office within business hours
before the due date is not acted upon. Such a caution notice will not
be binding unless stamped ‘Received and Confirmed’.
(ix) A paying bank shall be absolved from liability if in the ordinary course
of business it pays presented instruments in good faith, and in
accordance with established banking procedures with proper and
valid confirmation of its customers (where applicable)
(x) Without prejudice to (viii) above a Receiving Bank shall be liable if it
applies an inward instrument into an account based on Account
Number only; it is expected that the Receiving bank would employ
appropriate technology to confirm correctness of Account Number
and Account name before applying instruments
(xi) A paying bank that negligently pays a defective/forged instrument
shall be:
(a) Fully liable, up to the limit of available funds with the collecting
bank, for any loss of funds arising from the payment of such
instrument if not discovered within the stipulated clearing
period;
(b) Liable if a caution notice served at its head office and/or the
nearest branch of the paying bank or its central clearing office
before due date is not acted upon.
(xii) Both paying and collecting banks shall be jointly liable for any loss of
funds due to defective instruments if they are both negligent in the
clearing of the instruments.
(xiii) Caution Notices shall be processed in accordance to the provisions
of the Electronic Caution Notice Rules, where applicable.

(b) Responsibilities of members to Other Financial Institutions


(i) Clearing banks shall maintain properly signed and sealed Agency
Agreement with any of their non-clearing financial institution
customers that collect instruments (e.g. Primary Mortgage Institution,
Microfinance Bank, Stock Brokers and Finance houses).
(ii) Settlement banks shall maintain properly executed Agency
Agreement with their non-settlement banks. (Appendix of
Attachment I)
(iii)The agreement shall contain adequate provisions that shall convey
full liability to the institutions for any instrument they collect for
clearing.
(iv) Where a paying bank is unable to return an instrument within the
clearing period and has sent a special caution notice to the
presenting bank the physical instrument must be returned to the

408
presenting bank within 2 extra days failing which the presenting bank
may give value without further recourse to the paying bank.
(v) Paying bank must ensure that all caution notices delivered to their
offices within normal banking hours are accepted. However,
presentment caution notices must be delivered to the paying bank
within the due date of the underlying clearing instrument.

(c) Responsibilities of Members to Bank Customers


Bank customers shall be entitled to receive value for their uncleared
effects/instruments for collection on due date (where due date is a day
after the last clearing day for the return of the instrument) without hindrance
except where their instruments are dishonoured and returned unpaid to
them within the stipulated clearing duration or are the subject of an
inquiry/fraud.
Every Clearing Bank shall indicate the value date of a lodged cheque on
the Cheque Deposit Slip, to properly guide the Bank customer.
15 Rights
a Clearing banks may have recourse to their customer(s) through legal
means as provided for by the laws of the Federation for any loss of
funds attributable to the operation of their customers’ accounts.
b A breach of the NBCH Rules shall be handled as follows:
i. The complaining party shall communicate observed breach in
writing to the offending party.
ii. The complaining party shall notify the Banking Supervision
Department of CBN if after 10 work days there is no
response/satisfactory response.
iii. The parties shall have recourse to the court of law in the event
of unsatisfactory resolution of a breach at the CBN level.

16 Disclaimer
(a) CBN/Settlement banks in the conduct and settlement of clearing
instruments, shall not incur any liability or additional responsibility
other than that falling equally upon all member banks
(b) Members of the NBCH shall not be liable for any errors and/or
omissions relating to clearing settlement of any clearing session if the
error or omission is not identified and reported in writing within
reasonable time. Late reports of errors and/or omissions by member
banks shall be bilaterally resolved between the affected members.

17. Abuses of Clearing Process

(a) Offences
Any of the under listed acts or such other acts that the offending
bank stands to derive undue advantage from shall constitute abuse
409
of the clearing system if it is proven that it is knowingly committed
these offences include:
(i) Drawing or accepting instruments on unfunded accounts by
a bank.
(ii) Persistent presentation of fake/forged instruments on other
banks.
(iii) Willful wrong presentation of instruments of high value on
other banks.
(iv) Banks charging beneficiaries for inward ACH credits.
(v) Delayed presentation of customers’ ACH items in the clearing
house.
(vi) Delayed application of inward ACH items.
(vii) A bank refusing to pay its own instrument drawn on itself
(Manager’s Cheque/Draft).
Any other act that may be determined by the Central Bank of Nigeria and / or
NBCH committee from time to time as constituting an abuse of the clearing system.

(b) Sanctions

Appropriate sanctions shall be imposed by the CBN and / or NBCH committee


on any bank that commits any of the above listed offences.

18. Industrial Action in Member Banks

(a) The affected bank shall write to the CBN immediately the industrial crisis
commences, if the crisis is such as to prevent the officials of the bank from
attending any clearing session. The letter to the CBN shall be addressed
to the Branch Controller with a copy sent to NIBSS (where applicable),
Directors of Banking Operations and Banking Supervision Departments. A
bank that fails to write as indicated above shall be deemed to be absent
from the clearing house and shall be liable to appropriate penalty as may
be determined by the CBN.

(b) The Branch Controller or his agent shall make a formal announcement of
the industrial action at the next clearing session.

(c) Member banks shall reserve the right to reject financial instruments drawn
on a bank that stays away from the clearing session for more that two (2)
consecutive working days due to industrial action until the bank resolves its
industrial crisis and returns to the clearing house.

(d) Any bank returning to the clearing house after an industrial crisis shall give
a day’s notice in writing to the Branch Controller with copies to

410
NIBSS(where applicable), and all member banks of its intention to return to
the clearing house and may return to the house the next day.

(e) In the case of instruments, which had gone through the clearing before
the industrial action started in the member bank, one additional day of
grace shall be counted for the value dates of the instruments above the
normal clearing duration from the date the member bank returned to the
clearing house.

19. Industrial Action Affecting Clearing House Location

In the event of an industrial action affecting the location of the clearing


house (Clause 11), which prevents the clearing house from sitting, clearing
activity may be conducted in a temporary place, which shall be arranged
by the First Bank of Nigeria Plc. in conjunction with any other bank(s).
In this regard, banks shall exchange their clearing instruments bilaterally and
adopt settlement by means of Bankers payments. The normal clearing
duration shall be observed by all banks.

In the case of instruments, which had gone through the clearing before the
industrial action started, one additional day of grace shall be counted for
the value dates of the instruments above the normal clearing duration from
the date they resume clearing operations. Where a temporary place could
not be arranged while the industrial crisis lasts, banks may present their
instruments direct to the Clearing office in that location or the head Offices
of the banks on which the instruments are drawn and they shall observe the
normal clearing duration as applicable.

20. National Emergency

In the event of a National Emergency that prevents the clearing house from
meeting, all working days during the emergency period shall not be
counted as working days for purpose of determining clearing duration. The
CBN shall write to all member banks to inform them of the National
Emergency.

21. Amendments
The rules of the Clearing House may be amended by the CBN, as it may
consider necessary. Member banks wishing to propose amendments to the
Rules shall forward such proposals to the Director of Banking Operations
Department. The amendment(s) shall be widely circulated among member

411
banks and sufficient notice given to all member banks before the effective
date of the amendment(s).

22. Adjudication on Disputes


Any dispute between member banks on clearing activities shall be referred
to the CBN for adjudication. The decision of the CBN shall be binding on the
affected banks.

23. Definitions
(a) ACH: Any form of electronic payment instruments (single or bulk items)
facilitating direct credit or direct debit to target bank accounts, through
the Automated Clearing House infrastructure.
(b) Clearing bank: All banks approved by the CBN to participate in clearing
House activities. These could be settlement or nonsettlement banks
(c) Clearing day: Where there are more than one clearing session within a
day, the sessions will make up one clearing day. Clearing days start to
count from the date the instrument is presented through the Clearing
House.
(d) Clearing session means the period between the commencement and
closing of clearing business on each working day.
(e) Committee refers to NBCH Committee. i.e a committee of all clearing
banks
(f) NBCH: Nigeria Bankers Clearing House
(g) NEFT: NIBSS Electronic Funds Transfer
(h) NIBSS: Nigeria Interbank Settlement System Plc
(i) NTB: Nigeria Treasury Bills
(j) NTC: Nigeria Treasury Certificate
(k) Paying bank: This is the bank that is expected to give value on the
instrument presented for clearing
(l) PBCC: Participating Bank Clearing Center
(m) Presenting bank: The bank that receives value for the proceeds of the
instrument presented for clearing. Otherwise known as the collecting
bank.
(n) Settlement Banks: these are clearing banks that are appointed by the
CBN to clear and settle for themselves and other clearing banks, known as
412
non-settlement banks. Settlement banks hold accounts with the CBN for
the purpose of settling NBCH clearing positions.
(o) Stale Cheque: A check presented in the clearing more than six (6) months
after it is dated. Banks are not required to present or honour a stale-dated
cheque.
(p) Working days start to count from the date of lodgment of the instrument
with the collecting banks. ‘Working day’ includes Mondays through
Fridays excluding public holidays.

Central Bank of Nigeria

413
APPENDIX I - CLEARING HOUSE APPLICATION FOR MEMBERSHIP

WHEREAS BY SECTION 47 of the Central Bank of Nigeria Act the Central


Bank is charged with the duty of organizing in conjunction with other
banks, a clearing house in ____________ and such other places as may
be desirable;
AND WHEREAS THE Central Bank, pursuant to the said Section 47 of the
Central Bank of Nigeria Act and in consultation with the banks duly
established in

___________________ has decided to organize and set-up a Clearing


House which will be operated under Rules and Procedures relating
thereto duly made by the CBN/Clearing House committee amended
from time to time in force.

AND WHEREAS the _____________________________________________ A


BANK DULY LICENCED TO OPERATE in Nigeria is desirous of becoming a
member of the Clearing House upon the conditions
herein after appearing in this application. AND WHEREAS
I__________________________________________________Being a
__________________________________________________________ of the
said________________________________________and duly authorized. In
this behalf in the manner required by law and the memorandum and
Articles of
Association of the said______________________________________________
And with the intent that the obligations hereby undertaken shall be
binding upon the said
_________________________________________________________ I,
____________________________________________________authorized as
aforesaid and with the intent before mentioned, hereby apply for and on
behalf of the ___________________________________________________that
the said __________________________________________________be admitted
into fully and complete membership of the clearing House and that in
consideration of the exercise, enjoyment and use of the facilities, rights
and privileges whatsoever of the clearing House the said

________________________________________________________________

hereby in consideration of the acceptance of the application herein


made, undertakes for itself servants and/or agents to be bound by any
414
Rules, regulations, Conditions and Stipulations whatsoever duly
promulgated and in force from time to time in respect of the Clearing
House and its operations and with the intent that the rights, privileges
and obligations that will arise on the acceptance of this application shall
be mutually enforceable by the due process of law as between the
Clearing House Organisation and the applicant herein-named.

Dated this ___________________day of____________________19__________

(To be executed under seal or signed under power of Attorney where


appropriate)

The Central bank of Nigeria as on and from the day of commencement


of the operation of the Clearing House and in consideration of the
__________________________________________________________ being a
member of the Clearing House, the Central Bank of Nigeria, is hereby
authorized to debit or credit the account of this Bank with them as may
be necessary with the appropriate net balance arrived at in the daily
settlement of the Clearing.

__________________________19______________

(Executed under Seal or signed under Power of Attorney where


appropriate)

415
APPENDIX II - REASONS FOR RETURNING INSTRUMENTS

1 Account Attached
2 Account Closed
3 Account Dormant
4 Account Name and Account number differ
5 Account Non-existent
6 Account not funded
7 Account Not valid for Clearing/Electronic Payment
8 Bank not in Clearing
9 Cheque drawn in foreign currency. Please present specially
10 Cheque incompletely drawn
11 Cheque Mutilated
12 Crossed to two banks
13 Drawer deceased
14 Drawer’s attention required
15 Drawer’s confirmation required
16 Endorsement irregular
17 Incomplete/Irregular Mandate
18 Material alteration, requires drawer’s signature
19 Missing paper item
20 Payment stopped
21 Presentation/Crossing stamp required
22 Represent
23 Represented more than the allowed number of times
24 Spurious/forged cheque
25 Stale/Post-dated
26 Words and figure differ
27 Wrong delivery

416
ATTACHMENT I - GUIDELINES ON THE NIGERIA BANKS CLEARING AND SETTLEMENT
SYSTEM

Introduction
Pursuant to enhancing the efficiency of the payments system, it has become
necessary to provide a viable framework for managing the settlement positions of
banks. This is aimed at ensuring settlement finality at the CBN, given the important
role that a well functioning payments system has on monetary policy, financial
stability and overall economic activity.
All banks will continue to maintain a single account with the CBN. While the single
account to be maintained by a Settlement Bank will be known as a Settlement
Account, the single account to be maintained by a non-settlement bank will be
known as an Operations Account.
The following procedures will guide the operations of the Clearing and Settlement
system:
General

1. The Central Bank of Nigeria (CBN) in pursuance of Section 47 of the CBN


Act, 2007, will ensure that appropriate Rules, Standards and Procedures exist
and are observed for the effective operation of the Clearing and
Settlement System.

2. Settlement Banks must ensure that they and their non-Settlement Banks are
fully conversant with the Nigeria Bankers’ Clearing House (NBCH) Rules,
procedures and standards necessary for the efficient and secure running of
the daily clearing process, nationwide.

3. Members of the Nigeria Bankers’ Clearing House (the House) must report
any problem that may have a detrimental effect on the daily operation of
the House to the Clearing House Superintendent and the Director, Banking
Operations Department of the CBN.

4. Settlement banks must be financially accountable for the settlement of their


financial instruments and those of their non-settlement banks that they settle
for.

5. Settlement banks must maintain a minimum of the prescribed clearing


collateral, at the CBN and to the satisfaction of the Bank so that amounts
for settlement can be applied by the Bank without delay, and to achieve
settlement finality.

417
6. It is the duty of the settlement banks to submit for clearing, technically
accurate data and paper clearing instruments. They must ensure that the
data and paper clearing instruments are processed correctly and adhere
to the relevant standards and Service Level Codes, in accordance with the
Nigeria Bankers’ Clearing House Rules and Procedures.

7. It is the duty of settlement banks to accept all the clearing instruments,


whether paper or electronic, presented to them and their non-settlement
banks. Subsequently, they or acting on behalf of their non-settlement
banks may return or recall such instruments/electronic data, as are allowed
within the Clearing House Rules.

8. (a) The relationship between the settlement banks and any non- settlement
banks shall be governed by an agency agreement entered into between
the two parties.

(b) Pursuant to 8(a) where the non-settlement bank account with a settlement
bank is not adequately funded, an appropriate amount of the clearing
collateral shall be immediately rediscounted. The amount of clearing
collateral that has been utilized to fund the account shall be replaced
within 24 hours, failing which the settlement bank may decline to present or
receive clearing instruments on behalf of the non-settlement bank.

(c) A settlement bank must give the CBN and the non-settlement banks it
represents four (4) weeks notice before terminating its agency agreement
for any other reason apart from 8(b) above. Similarly, a non-settlement
bank must give the CBN and the settlement bank representing it four (4)
weeks notice before terminating the agency agreement.

9. Pursuant to section 8(b) above, the agency agreement shall specify a


clearing collateral to be pledged by the non-settlement bank to the
settlement bank. The minimum clearing collateral to be pledged by a non-
settlement bank shall not be less than N250 million, which shall be reviewed
from time to time.
2.0 Clearing Instruments and Collateral
2.1 It is the duty of the Settlement Banks to be able to send and receive
clearing instruments/data files to and from the Clearing Houses.
2.2 Financial instruments to be exchanged at the clearing house shall be
subject to approval by the CBN which will consider their suitability, with
reference to the national technical standards and to any other
requirements prescribed by the Bank, in conjunction with the Bankers

418
Committee, regarding the size, shape and form of the instruments and
the materials used in their production.
2.3 The Settlement Banks shall provide clearing collateral to the CBN in
Nigerian Treasury Bills.
2.4 The level of collateral shall be determined by CBN on an annual basis;
the collateral amount shall be sum of highest (debit) settlement
position of individual settlement banks for the immediate preceeding
one year, divided equally among the settlement banks.
2.5 All Settlement Banks must ensure that their Settlement Accounts with
the CBN are appropriately funded at given times.
2.6 Where the Settlement Account is not adequately funded, an
appropriate amount of the clearing collateral shall be immediately
rediscounted. The amount of clearing collateral that has been utilized
to fund the account shall be replaced within two (2) business days,
failing which the Settlement Bank shall be suspended from further
participation in clearing house activities, nationwide.
2.7 Where the clearing collateral is insufficient to fund a debit settlement
position, the CBN shall apply its regulatory powers as it deems fit. The
principle of unwind shall not be an option under this rule.
2.8 In the event of any clearing bank being suspended from participation
in clearing house activities, the NBCH shall be given a notice of one
clearing session to allow for return of cheques presented on such a
bank. This is to resolve the settlement problems that may result from
such a suspension.
3.0 Contingency Plans
3.1 Settlement Banks shall provide adequate contingency for both Outward
and Inward clearing, to ensure that they can continue to provide
clearing and settlement services to the non-settlement banks, in the
event of a major disruption to their operation.
3.2 Pursuant to 3.1 all Settlement Banks shall have adequate proxy
agreements with each other for the purpose of providing clearing and
settlement services to the non-Settlement banks.
3.3 In the event of developments that may prevent banking operation,
especially the disruption of outward and inward clearing process or data
transmission, the financial instruments of the non-settlement bank shall be

419
presented/received in the clearing house by its proxy with which it has
agency agreement.
The net Settlement position shall be posted into the Settlement Bank’s
Account with the CBN
4.0 Outward Clearing
It is the duty of all Settlement Banks to ensure that paper items and the
corresponding clearing data files conform to the relevant Standards and are
presented in accordance with these guidelines as well as the National
Clearing House Rules. Consequently, a Settlement Bank must ensure that:
4.1 The crossing stamp of the non-settlement bank is visible on all paper items
passing through the Zonal Clearing House (ZCH).
4.2 Any returned and received unpaid items can be traced to the relevant
office of the non-settlement bank.
4.3 Individual items bear appropriate sort codes and are appropriately
encoded. All clearing items for the clearing house must be posted
encoded with the amount in line with NACS standards.
4.4. The items are presented in accordance with the Agency Agreement
place between the Settlement Bank and its Non-Settlement Bank.
5.0 Outward Exchange Financial /Data Files
5.1 It is the duty of the Settlement Banks to effect the delivery of the various
items for exchange at the clearing house within the limits established in
the exchange time table.
5.2 It is the duty of presenting Settlement Bank to deliver items prepared for
presentation to the correct Receiving Settlement Bank and
send/deliver/transmit clearing data files it has created from the paper
to the ZCH.
5.3 Upon receipt of the items at the ZCH by the receiving Settlement Bank,
it has a duty to ensure that the items are securely delivered to its non-
Settlement Bank.
5.4 Subject to the Agency Agreement, non-Settlement Banks that already
possess PBCC/NACS equipment, may:
5.4.1 Make use of their clearing equipment to process their own cheques and
deliver the data files to the Settlement Bank’s Clearing Centre for
verification. Such a non-Settlement Bank should transmit directly to the

420
accounts of the respective Settlement Banks representing them in the
Clearing House.
6.0 Inward Clearing Data/Files
Subject to the Agency Agreement between the Settlement Bank and the
non-Settlement Bank, the following procedure shall apply:
6.1 A Receiving Settlement Bank must perform a sufficient check of all items
received to ensure that the correct financial instruments have been
received.
6.2 The cheques so received shall be promptly delivered to the Non-
Settlement Bank in accordance with the Agency Agreement.
6.3 A receiving Settlement Bank as well as a paying bank must perform
adequate checks on all items received, to identify instruments with no
corresponding entries on the clearing data files received on the same
day before processing the items. It must also process the papers on the
same day of receipt, to locate individual items that have been wrongly
delivered.
6.4 The final net settlement positions of the Settlement banks shall be made
available after the clearing sessions, to the CBN for settlement finality.
7.0 Obligations
7.1 Obligations of Settlement Banks
7.1.1 Settlement Banks shall clear and settle for all non-Settlement Banks that
have accepted to clear through them.
7.1.2 Settlement Banks shall ensure they post into the account of each of the
non-Settlement banks with them the net settlement position of the non-
Settlement banks from all the CBN clearing zones.
7.1.3 Subject to the Agency Agreement, settlement banks shall ensure that
the net credit settlement position of each of the non-settlement banks
is transferred to their respective Operations Account with the CBN,
within 24 hours.
7.2 Obligations of the Cbn
7.2.1 The CBN shall maintain Settlement Accounts for each of the Appointed
Settlement Banks, into which shall be posted all the net settlement
positions (Debit/Credit), of each of them, including the net settlement
position of their respective non-settlement banks.

421
7.2.2 The CBN shall provide statements of the Settlement accounts in all clearing
centres not later than 9.00 a.m. next business day.
7.2.3 At the end of the clearing session in each of the clearing centres, the
CBN shall transfer the net settlement positions of the appointed
Settlement Banks to their Head Office Settlement Accounts with the
CBN.
7.2.4 The CBN shall provide an information centre that will enable the
Settlement Banks have access to prompt information relating to their
Settlement Accounts as may be required.
7.2.5 In the event of a Settlement Bank being stripped of its settlement status
for reasons other than those stated in para. 2.5 above by the CBN, the
Bank shall grant a maximum of one month notice to that Settlement
Bank and its non-settlement banks.
7.2.6 Any absence from the clearing house should be communicated in
writing to all relevant banks at least 48 hours before such absence will
take effect.
7.2.7 Settlement Banks that were previously absent from the clearing house
should inform the Clearing Superintendent and other banks in writing at
least a session before their resumption.
8.0 Obligations of Non-Settlement Banks
8.1 Obligations of the non-settlement banks are stated in the attached
Appendix.
9.0 Pursuant to the implementation of this Settlement System, the Cash
Drawing Facility hitherto in use at the CBN Branches by deposit banks
shall be abolished.

THIS AGREEMENT is made the day of 20 - - BETWEEN XYZ Bank, a


licensed bank incorporated in Nigeria and having its registered office
at ……………………………………………………………, (hereinafter
referred to as
“Settlement Bank” which expression shall where the context so admit include
its successors-in-title and assigns ) of the one part and, ABC BANK PLC,
a licensed bank incorporated in Nigeria and having its registered
office at ……………………………………………. (hereinafter referred to as
“Non-Settlement Bank” which expression shall where the context so
admit include its successor- intitle and assigns) of the other part.
422
WHEREAS:

 Settlement Bank has been appointed by the Central Bank of Nigeria


(CBN) as one of the Settlement Banks in Nigeria to undertake
Clearing/Settlement obligation for other Banks.

 Non-Settlement Bank has mandated the Settlement Bank to act as its


agent for clearing and settlement of its instruments in all the clearing
houses. Settlement Bank has agreed with non-Settlement Bank to
render this service subject to the following terms and conditions:

Now This Agreement Witnesses as Follows:


1. Resposibilities of the Settlement Bank
That in pursuance of the said agreement and in consideration of the
payment of fees to Settlement Bank by Non-Settlement Bank of the sum
mentioned in clause (7) being processing and settlement fees respectively.
Settlement Bank hereby agrees to process Non-Settlement Bank’s clearing
instruments and represent it at the Clearing House and settle Non-Settlement
Bank’s net settlement position, subject to clause 12, the following conditions:

a) Settlement Bank shall for the duration of this agreement be the sole
representative of Non-Settlement Bank on an exclusive basis at the
Clearing House.

b) Settlement Bank undertakes to accept Non-Settlement Bank’s physical


instruments and process them for payment after which the net
settlement position shall be credited and/or debited (as the case may
be) to the settlement account of Non-Settlement Bank with Settlement
Bank.

c) Settlement Bank will ensure that physical instrument(s) to be presented at


the Clearing Session shall be prepared in the prescribed format for
transmission to the clearing house as prescribed in the Clearing House
rules and procedures

d) Settlement Bank will thereafter exchange the physical instruments of


NonSettlement Bank and its own instruments as may be required at the
Clearing House with representatives of other settlement banks.

e) Settlement Bank will make the inward clearing instruments and reports of
Non-Settlement Bank instruments collected from the Clearing House

423
available for pick up by Non-Settlement Bank’s authorised representative
(as notified to Settlement Bank) immediately after the end of each
clearing session.
f) Settlement Bank will ensure that it is represented at the Clearing House
each working day at all the clearing sessions.

g) Settlement Bank will, to the best of its ability represent the interest of
NonSettlement Bank at the Clearing House.

h) Settlement Bank will inform Non-Settlement Bank of any changes that


occur in the Clearing House immediately the information is received by
Settlement Bank.

i) Delivery of all instruments between Settlement Bank and Non-Settlement


Bank must be duly acknowledged by the authorised representative of
the receiving bank as notified to the other party.

j) Settlement bank will be held responsible for ensuring that the net credit
settlement position is transferred to the non-settlement bank’s Account
with the CBN, in accordance with NACS guidelines.
2. Responsibilities of Non-Settlement Bank

a) Non-Settlement Bank will ensure that its instruments conform to the


required standards as approved for the Nigerian Banks Clearing System.

b) Non-Settlement Bank will ensure that it provides the physical instruments


and other information as required by Settlement Bank in the format
specified for Nigeria Automated Clearing System (NACS).

c) In accordance with the clearing rules and Know Your Customer (KYC)
guidelines of CBN, Non-Settlement Bank shall maintain current and up to
date information on its customers.

d) Non-Settlement Bank shall be responsible for ensuring that all instruments


delivered to Settlement Bank for clearing purposes are prima facie good
instruments and that person or persons presenting any instruments to
NonSettlement Bank are duly authorized and entitled so to do.

e) Non-Settlement Bank agrees to indemnify and hold Settlement Bank


harmless in respect of any liability and/or loss whether direct or indirect
that may arise as a result of this agreement. Accordingly, Non-Settlement
Bank hereby undertakes to be primarily responsible and liable for all
instruments presented for clearing through Settlement Bank and in case of
any diversion, conversion, instrument cloning and/or any other fraudulent

424
dealing in respect of any instrument presented for clearing by Non-
Settlement Bank through Settlement Bank, Settlement Bank is hereby
indemnified and held harmless from any loss arising therefrom and Non-
Settlement Bank shall make good whatever loss and/or liability that may
arise from such dealings without involving Settlement Bank and in case
Settlement Bank is called upon to answer to any of such charges, Non-
Settlement Bank shall take over the charges and make good the loss
without involving Settlement Bank.

f) Non-Settlement Bank shall comply with NACS’ guidelines for cheque


Clearing and Settlement, which guidelines will be made known to Non-
Settlement Bank for purposes of efficient and hitch free operation of these
presents.
3. Operational Modalities

a) The Non-Settlement Bank shall deliver to the Settlement Bank all its clearing
instruments physically with or without electronic data and shall ensure
that the clearing instruments are delivered before __________ a.m./p.m on
the day preceding the 1st clearing session or before _________ a.m for the
second clearing sessions in a secured medium.
b) Where the clearing instruments are to be delivered physically without
electronic data, Settlement Bank undertakes to accept Non-Settlement
Bank’s physical instruments and process them for presentment at the
Clearing Centre.

c) Where the clearing instruments are to be delivered with electronic data


NonSettlement Bank shall ensure that the electronic data of the physical
instruments to be presented at the clearing session is prepared in the
format requested by the Zonal Clearing House (ZCH) as stated in the
Nigerian Automated Clearing House Rules and Procedures.
d) Settlement Bank will thereafter exchange the physical instruments as may
be required at the ZCH with representatives of other settlement banks.
Settlement Bank will ensure that Non-Settlement Bank have access to its
settlement positions as advised by the ZCH.

e) Settlement Bank shall transfer the net credit of the non-settlement bank to
its operations account with the CBN within 24 hours, in line with the
agency agreement.

f) Without prejudice to the provision of the preceding paragraph, the


NonSettlement Bank cannot be allowed to overdraw its non-chequing

425
account. Where the Non-Settlement Bank ends the day with a net debit
clearing position, the Settlement Bank shall have recourse to the Non-
Settlement Bank’s clearing collateral pledged pursuant to the Agreement.
4. Security/Collateral for Clearing and Settlement of Non-Settlement
Bank’s Cheques

a) Non-Settlement Bank shall open a non-chequing account with Settlement


Bank, to be designated “Settlement Account” wherein the net clearing
position of Non-Settlement Bank shall be credited and/or debited as may
be appropriate after each clearing session.

b) Non-Settlement Bank shall also pledge with the Settlement Bank, Treasury
Bills which shall not be less than N__________ million as per the guidelines,
and the Treasury Bills shall constitute collateral security for any debit
balance in the Settlement Account.
c) In the effect of non funding, Settlement Bank is hereby authorized without
further recourse to Non-Settlement Bank to re-discount Non-Settlement
Bank’s Treasury Bill in (b) above for purposes of recovering and netting off
the debit balance in the Settlement Account.

d) In the event of any shortfall in the clearing collateral arising from a


rediscounting, a Non-Settlement Bank shall make up the shortfall in the
clearing collateral (Treasury Bill) before the commencement of the next
clearing session from the date of re-discount in order to bring the
aggregate value of the investment up to the minimum value as specified
in (b) above.

e) Non-Settlement Bank undertakes to bear the cost of re-discounting the


Treasury Bills necessitated by a need to recover the debit balance in the
Settlement Account.
5. Access
In accordance with the Agency Agreement,
a) Settlement Bank will provide Non-Settlement Bank with electronic viewing
access to the Nigeria Automated Clearing System at Non-Settlement
Bank’s premises by allowing it to view its net settlement position in the
Clearing House, or as agreed by the two parties.

b) Settlement Bank will provide Non-Settlement Bank with the infrastructure to


electronically view their net settlement position on the NACS such as
Personal Computers in the Settlement Bank premises.

426
c) The Settlement Bank will provide the Non-Settlement Bank with daily
statement of its Settlement Account showing the net settlement position.

d) The Settlement Bank will ensure that all relevant equipment as approved
for the NACS such as Reader-Sorter and inter-connectivity between NIBSS
and CBN are installed and functional.
6. Returned Items
The Settlement Bank will consider an inward clearing instrument deemed to
have been honoured or paid unless the Non-Settlement Bank delivers the
instruments to be returned unpaid to the clearing house to a Settlement Bank
at the latest by the following cut-off time:
 by …………… a.m./p. m. prior to the last working day before the instrument
is due to clear, where the instrument is to be returned at the 1st clearing
session of the day OR not later than 4 (four) hours before
commencement of the 2nd clearing session of the day.
7. Guidelines to Fees Charges
a. There shall be a processing fee of N per Clearing instrument
payable by the Non-Settlement Bank to the Settlement Bank subject to a
maximum of N………………….. per annum
b. The Non-Settlement Bank shall also pay an annual settlement fee of the
sum of N ……. to the Settlement Bank.
8. Information
a) The information sent between the Settlement Bank and the
nonSettlement Bank will be in the format compatible with
Clearing House requirement.
b) All notices and other communication under the agreement shall
be sent to the following address:
Settlement Bank:
…………………………………………………………..
…………………………………………………………..

Non-Settlement Bank:
………………………………………………………

427
9. Disclaimer (Liability/Indemnity)
a. The Non-Settlement Bank as well as Settlement Bank shall be liable for any
fraud committed or act of negligence by their officers/agents associated
with the operation this Agreement.
10. Compliance with Laws
Each party hereto agrees that it shall comply with all applicable laws,
guidelines, codes, policies and regulations in the performance of its
obligations or receipt of services including the procurement of permits and
certificates where required. If at any time during the term of this Agreement,
a party is informed or information comes to its attention that it is in violation of
any law, guidelines, policy, regulation or code (or if it is so determined by any
court of law, tribunal or other authority), that party shall immediately take all
appropriate steps to remedy such violation and comply with such law,
regulation, ordinance, policy or code in all respects.
Further, each party shall establish and maintain proper records of all
transactions with the other party.
11. Confidentiality
a. Settlement Bank accepts that all the information received by it from the
NonSettlement Bank in the processing of the Non-Settlement Bank’s
transactions are confidential and proprietary and must be held in the
strictest confidence. Any proven cases should be reported to CBN and
could be a case for termination of Agency agreement.
b. Settlement Bank agrees not to use any information provided by Non-
Settlement Bank for any purpose other than as permitted or required of
under this Agreement.
c. Settlement Bank therefore agrees not to disclose or provide any
information so received to a third party except with the express permission
of Non-Settlement Bank or as may be lawfully required.
12. Duration/Termination of Agreement
i. This Agreement shall commence on the date herein above and will
continue to be in full force and effect unless terminated in accordance
with the provision of this Section.
Any amendments to this Agreement shall be made only with the written
consent of both parties to this Agreement.

428
ii. Both parties shall remain responsible for their obligation with respect to
action and events prior to such termination
iii. Each party shall have the right to terminate this Agreement if any of the
following events occur:
a. if the other party is wound up or goes into liquidation, or for any reason
ceases threatens to cease carrying on business or transfers its business or if
a holden action is imposed on it by any supervisory or regulatory authority
or if any licence issued to it is suspended or revoked by the CBN
b. A decree or order by a court or government agency or authority shall be
entered for the appointment of a Manager, Receiver or Liquidator for the
other party in an insolvency, marshalling of assets and liabilities or similar
proceeding, or the other party shall consent to such appointment;
c. The other party shall commit a material breach of the terms of this
Agreement or shall repeat or continue or fail to remedy any material
breach;
d. The obligations of either party becomes prohibited by law or any other
regulatory authority including but without limitation, to the Central Bank of
Nigeria
iv. In the event of either party being desirous of terminating the Agreement,
the party desiring to terminate shall give one month’s notice in writing to
the other party which shall be delivered to and acknowledged at the
other party’s earlier notified address and NIBSS and CBN would be duly
notified.
v. The foregoing notwithstanding, the Settlement Bank shall be entitled to
terminate this Agreement upon all or any of the following conditions:
a. If the Non-Settlement Bank’s Settlement is contrary to 4 (b) above.
b. If the collateral security in 4 ( c) above is insufficient to offset the debit
balance in the Settlement Account
c. If the value of the Treasury Bills is below the minimum as specified in 4 ( c)
above
d. If the Non-Settlement Bank’s performance of its obligation is unsatisfactory
and/or other habitual breach of the provisions of these presents
vi. The Non-Settlement Bank may with the consent of the Settlement Bank,
which consent shall not be withheld provided that the Settlement
Account is at the time and remains in credit; upon giving the Settlement

429
Bank one month’s notice of its intention to do so, close the Settlement
Account and open an account with another authorized Settlement Bank.
13. Governing Law
The Agreement shall be governed by and construed, interpreted and
enforced in accordance with the Laws of the Federal Republic of Nigeria.
IN WITNESS WHEREOF the parties hereto have caused their respective
Common Seals to be affixed hereto the day and year first above written.
THE COMMON SEAL OF THE WITHIN NAMED XYZ
BANK PLC.
WAS HEREUNTO AFFIXED IN THE PRESENCE OF:

____________________ ___________________
DIRECTOR SECRETARY

THE COMMON SEAL OF THE WITHIN NAMED


ABC BANK LIMITED
WAS HEREUNTO AFFIXED IN THE PRESENCE OF:

____________________ ___________________
DIRECTOR SECRETARY

430
ATTACHMENT II: NIGERIA AUTOMATED CLEARING HOUSE RULES AND PROCEDURES

NIGERIA INTER BANK SETTLEMENT SYSTEM PLC

NIGERIA AUTOMATED CLEARING SYSTEM: RULES AND PROCEDURES

1 General Principles
1.1 The Central Bank of Nigeria (CBN) in pursuance of Section 41 of Central
Bank of Nigeria Act of 1991 will guide to ensure that appropriate Rules,
Standards and Procedures exist for the effective operation of the Nigeria
Automated Clearing System (NACS) and will ensure that the appropriate
mechanisms are in place to manage the rules.
1.2 The Central Bank of Nigeria in conjunction with the Bankers Committee
have mandated Nigerian Inter-Bank Settlement System (NIBSS) Plc to
provide for its members clearing and settlement services for financial
instruments and the electronic data relating to the paper instruments in
Nigeria.
1.3 Nigeria Inter Bank Settlement System (NIBSS) Plc will provide for clearings
to be held each business day in Nigeria, as will be defined by the Central
Bank of Nigeria from time to time for the interchange, between the
settlement members of financial instruments drawn on banks in Nigeria
and meeting the Automated Clearing System’s Clearing House Rules.
1.4 The Central Bank of Nigeria will appoint a staff of the Bank, not below the
rank of a manager to superintend the Nigeria Automated Clearing House
especially as pertains to physical exchange of cheques as well as
settlements. Nigeria Inter Bank Settlement System (NIBSS) Plc will appoint a
Clearing House Manager who shall be responsible for the day-to-day
management of the clearing house within guidelines and authorities
delegated to him by the Managing Director.
1.5 Settlement members must ensure that they and their staff are fully
conversant with the Nigeria Automated Clearing Systems’ Rules,
Procedures and Standards necessary for the efficient and secured
running of the daily clearing process.
1.6 Members shall report any problem that may have a detrimental effect on
the daily operations of the system to the Clearing House Manager.

431
1.7 Settlement members shall be financially accountable for the settlement of
financial instruments handled by them or their agents.
1.8 Members, whether direct or Indirect must maintain adequate clearing
collateral with Central Bank of Nigeria to the satisfaction of the Bank so
that amounts for settlement can be applied by the Bank without delay,
and settled in accordance with the timetable.
1.9 It shall be the duty of members to submit for clearing, technically
accurate data and paper clearing instruments. Members shall ensure
that the data and paper clearing instruments, submitted by Direct
Participating Banks, are processed correctly and conform to the relevant
standards as determined by NIBSS Plc from time to time.
1.10 It shall be the duty of members to accept all the clearing instruments,
whether paper or data presented to them or their agents at the Nigeria
Automated Zonal Clearing Center. Subsequently they or their agents may
return or recall such instruments/data, as are allowed within this Rules.
1.11 Clearing banks shall advise NIBSS Plc of changes in their process systems
in accordance with NIBSS Plc change control procedures.
2.0 Clearing Instruments
2.1 Financial instruments to be exchanged at the Zonal Clearing Center shall
be subject to approval by the CBN who shall consider their suitability,
with reference to the national technical standards and to any other
requirements prescribed by the CBN regarding the size, shape and form of
the instrument and the materials used in its production.
2.2 Financial instruments that do not bear a sorting code shall be excluded
from outward exchange files.
3.0 Contingency Plans –Clearing Banks/Nibss Plc
3.1 All members shall provide adequate contingency for outward clearing to
ensure that they can continue to provide automated clearing data and
paper to other members following a major disruption to their out-ward
clearing process or data transmission.

3.2 Nigeria Inter Bank Settlement System (NIBSS) Plc shall provide adequate
contingency for all clearing data files (Outward, Inward and Settlement
files) to ensure that it can continue to provide automated clearing data to
its members following a major disruption to its primary and/secondary
network.
432
Contingency comprises of the following:
i. Physical media contingency for total network failure.
ii. Physical media contingency for total authentication failure.
iii. Physical media contingency for single authentication failure.
iv. Physical media contingency for settlement.
3.3 Physical media contingency for total network failure.
A direct participating bank shall in the event of a total network failure
produce exchange files on physical media, authenticate and submit the files
to the ZCH.
3.4 Physical Media contingency for single member network failure
i. If a single member cannot access the network then, they shall
produce their exchange files in physical media and deliver them to
the ZCH within the time frame.
ii. Once the affected member has opted for physical media, the
clearing house manager, shall also supply the members’ inward
clearing files on physical media.
3.5 File Authentication
3.5.1 Members shall ensure that all outward exchange files for transmission to
the ZCH are authenticated.
3.5.2 Outward files shall have a security trailer generated and incoming files
shall have the security trailer verified.
3.5.3 Members are obliged to conform to the Certification Practice
Statement and Information Security Policy of the Nigeria Automated
Clearing System.
3.6 Certification Management
It shall be the duty of members to abide by the rules and procedures for
generating public/private key pair and obtaining the public key certificates
in order to maintain authentication integrity.
3.7 Key Management
Members shall have in place the necessary controls and associated
procedures for management of authentication key as laid-down in the
automated clearing security standards. The management of keys is the
responsibility of the members.

433
3.8 Generation of the File Security Trailer
Members shall adhere to the procedures for the generation of the file
security trailer as contained in the automated clearing security standards.
3.9 Verification of the File Security Trailer
Members shall abide by the procedures for the verification of incoming files
as laid down by these rules.
3.10 Monitoring of the Authentication Process
Members shall adhere to the procedures for the creation, authentication
and sending of files as contained in the security policy of Nigeria Automated
Clearing System.
3.11 Archiving of Audit Trails and Files Security Trailers
A member is required to retain an audit trail of files and file security trailers
procedures covering a member's internal audit trail from the authentication
server as defined in the Certification Practice Statement.
4.0 Data Communication Management
4.1 It shall be the duty of all members of Nigeria Automated Clearing System
to be able to send and receive clearing data files from the ZCH and to
support NIBSS in the effective management of the network.
4.2 Outward Clearing
It shall be the duty of all members to ensure that paper items and the
corresponding clearing data files conform to the relevant NACS Standards
and presented in accordance with this rules.
i. The crossing stamp of the presenting bank is visible on all paper
items passing through the ZCH.
ii. An audit trail of all items is maintained by allotting an Item
Sequence Number to each item (ISN).
iii. Returned and received unpaid items can be traced to the relevant
office of the presenting bank.
iv. Individual items bear appropriate sort codes and appropriately
encoded. All paper items for clearing shall be amount encoded in
line with NACS standards. All clearing banks are required to validate
the contents of the code line, including transaction/sort codes.

434
v. The items are presented in accordance with bi-lateral agency
agreement between Direct Participating Banks (DPB) and Indirect
Participating Banks (IPB).
vi. The Items Sequence Numbers (ISN) (which is unique within the same
day) is assigned to all financial instruments.
5.0 Outward Exchange Financial/Data Files
5.1 It shall be the duty of PBCCs to effect the deliveries of the various items for
exchange at the zonal clearing house within the limits established in the
clearing schedule, which shall be as follows:-

CLEARING SCHEDULE FOR THE NACS

SESSION I SESSION II

TIME ACTIVITY TIME

Deadline for the transmission


9.00am 2.00pm
clearing files to ZCH of

Physical Instrument Exchange


7.00am – 9.00am 12pm – 2.00pm
ZCH at

9.30am • PBCCs to download clearing 3.30pm


reports and files
• CBN to download N et
Settlement reports and
files

5.2 It shall be the duty of presenting banks to deliver items prepared for
presentation to the correct PBCC; and send clearing data files it has
created from the paper to the ZCH.
5.3 Upon receipt of the items from the ZCH by the PBCC, it shall be the
duty of the PBCC to ensure that the items are securely delivered to the
Indirect Banks whose duty it is to collect at the premises of PBCC.

6.0 Inward Clearing/Data Files


6.1 A PBCC shall perform a sufficient check on all items received to ensure
that the correct financial instruments have been received.

435
6.2 A PBCC shall perform checks on items received, to identify
instrumentswith no corresponding entries on the clearing data files
received on the same day before processing the item. It shall also
process the papers on same day of receipt to locate individual items
that have been wrongly delivered.
6.3 In the event that a PBCC cannot receive clearing data files from the
network in accordance with the exchange time-table it shall
immediately notify the Clearing House Manager, who shall thereafter
copy a physical media containing settlement claim figures of the
PBCC, inward exchange files and clearing reports.
6.4 The final net settlement positions of banks, including those of indirect
banks shall be electronically made available at the scheduled time
to Central Bank of Nigeria to enable it effect the settlement finality.
6.5 The ZCH shall provide remote on-line access that will enable Central
Bank of Nigeria to enquiry and down-load data items, including CBN
(ZCH) Summary Report and MIS.
6.6 NIBSS shall ensure that all PBCC have remote on-line access to the
ZCH for enquiry and downloading of relevant data items, including
reports files as well as aggregate net settlement position of banks, as
may be required from time to time.

436
437
438
Guidelines for Cheque Truncation in Nigeria

439
1 Preamble
WHEREAS the Central Bank of Nigeria by CBN Act No. 7 of 2007 is to promote
monetary stability and sound financial system in Nigeria.
WHEREAS the Central Bank of Nigeria by virtue of S. 47 of the CBN Act No. 7 of 2007
is charged with the duty of facilitating the clearing of cheques, credit instruments
for banks and for this purpose to organize in conjunction with other Banks, clearing
houses in such places as the Bank may consider necessary.
WHEREAS NOW THEREFORE the Central Bank of Nigeria, pursuant to S. 47 of the CBN
Act of 2007 and having had consultations with banks duly established in Nigeria
hereby issues the following Guidelines for Cheque Truncation in Nigeria.
a) Objectives
The objectives of the Cheque Truncation Guidelines are:
(i) To provide for the regulation and management of cheque truncation in
Nigeria with the view to reducing cost and days of clearing instruments;
(ii) To articulate the rights and responsibilities of presenting and paying banks in
the Cheque Truncation System;
(iii) To provide for minimum technical and operational standards for cheque
truncation; and
(iv) To facilitate the implementation of an effective and efficient payment
system in the Nigerian Banking Industry.
b) Scope
These Guidelines shall apply to clearing and settlement activities in the Nigeria
Bankers Clearing Houses which practice cheque truncation system.
Notwithstanding the provisions of this Guidelines, the provisions of the Revised
Nigeria Bankers’ Clearing House Rules shall apply to cheque truncation system in
Nigeria subject to necessary modifications.
Provided that where there is a conflict between the provisions of the Cheque
Truncation Guidelines and Revised Nigeria Bankers’ Clearing House Rules, the
former shall prevail.

440
2 Terminology

CH Clearing House

CHG Clearing House Gateway

IQA Image Quality Assurance

CAR Courtesy Amount Read box

UDK Unique Document Key

PKI Public Key Infrastructure

RRF Return Request File

CTS Cheque Truncation System

Electronic Cheque Presentment with Image


ECPIX
Exchange

NACS Nigeria Automated Clearing System

OACK Outward Acknowledgement File

SACK Settlement Acknowledgement File

3 Definitions
Cheque— an instrument, payable on demand and drawn on or payable
through or at an office of a bank, whether or not negotiable, that is handled
for forward collection or return.
Cheque Truncation— a process that involves stopping the physical movement
of the cheque and replacing the physical instrument with the image of the
instrument and the corresponding data contained in MICR line. The cheque
details are captured, typically by the bank presenting the cheque or its
clearing agent and electronically presented in an agreed format to the
Clearing House for onward delivery to the paying bank for payment. Unlike
the more common form of presentment where a cheque is physically

441
presented to the paying bank, a truncated cheque is typically stored by the
presenting bank.
Ordinary Caution Notice – This is document issued by the presenting bank to
alert other clearing bank (s) about a suspicious instrument.
Special Caution Notice – This is document issued by the paying bank, after the
closure of the return window to alert the presenting bank not to give value to
such clearing instrument.
MICR Line— ‘‘magnetic ink character recognition line’’ mean the numbers,
which may include the bank routing number, account number, cheque
number, cheque amount, and other information, that are printed near the
bottom of a cheque in magnetic ink in accordance with the Nigeria Cheque
Standards.
Paying Bank—(i) the bank by which a cheque is payable, unless the cheque is
payable at or through another bank and is sent to the other bank for payment
or collection; or (ii) the bank at or through which a cheque is payable and to
which the cheque is sent for payment or collection.
Person— means a natural person, corporation, unincorporated company,
partnership, government unit or instrumentality, trust, or any other entity or
organization.
Presenting Bank— the bank that receives the cheque from the customer,
either directly or via a third party, and presents the cheque to the clearing
house for clearing and settlement.
4 The Nigerian Cheque Truncation Model
4.1 Model for Truncation
The overall model for Nigeria shall be:
Generic model – ‘Image and Data’ model:
Cheque Images and MICR data flow from the Presenting Bank through to the
Paying Bank.
Data Capture – ‘Presenting Bank’ model:
The cheque is dematerialised by the bank where the cheque is initially
presented. Cheques shall be truncated at the Presenting Bank and within
prescribed times defined by the Guidelines.

442
Data and Image Exchange - Clearing House Model:
The Clearing House acts as an intermediary for data and image flow between
the presenting and the paying bank.
Data and Image Archive:
NIBSS shall be the Central Image Warehousing Agency (CIWA) for storage
and certification of cheque images. The paying bank may request for any
image from CIWA for the purpose of proof of payment up to a period of 10
years. Such data retrieval shall be provided on online real time basis.
4.2 Data Standards
The prescribed data standards shall be ANSI X9.37.
4.3 Value Limits on cheque truncation
All cheques are eligible for cheque truncation subject to value limits that may
be imposed by the CBN from time to time.
4.4 Retention of original cheque
The minimum retention period of physical cheques by the presenting bank is
five (5) years. The electronic image shall be retained by CIWA for a minimum
period of ten (10) years.
4.5 Data Storage
From the point of view of control, it is recommended that that Presenting Bank,
Paying Bank, and the Automated Clearing House (NIBSS) shall keep copies of
the cheque images.
4.6 Minimum Storage Standards
The Cheque front shall be stored in Grey Scale format, while Black and White
format shall be used for the cheque front and rear.
4.7 Implementation and Deployment
Truncation shall be mandatory for all banks at a particular centre from a cut-
off date as may be determined by the CBN. The cut-over date shall be
announced well in advance and the participating banks are required to
undertake a formal certification test to demonstrate operational readiness for
the conversion to cheque truncation.

443
5 Procedures
5.1 General Procedures
Clearing Period – Under the Cheque Truncation regime, cheques shall clear on
a T+1 basis such that customers receive value in the morning of T+2.

TRANSACTION DAY CHEQUE CLEARING CYCLE

MONDAY (T) Fresh cheques are deposited at bank branch

TUESDAY (T+1) • Cheques are presented at the clearing house


• Paying Bank to return unpaid instruments same
day
• Beneficiary Bank gets value

WEDNESDAY(T+2) At the beginning of day, bank customer receives


value for cheques not returned

5.1.1 Clearing Timings


The CH shall operate 3 sessions as follows:
Session 1 (1am-8am): Permits all clearing instruments (cheque, NEFT–fresh and
returned items)
Session 2 (11am - 2pm): Permits only returned cheques, fresh NEFT and Returned
NEFT. Fresh cheques are not allowed.
Session 3 (4pm - 6pm): Permits only returned cheques and Returned NEFT
Instruments.
NOTES:
1. Settlements for 1st and 2nd clearing sessions shall be same day, while Return
Instruments (3rd session) shall be settled next day.
2. All unpaid clearing cheques shall be returned same day.
3. NIBSS shall ensure that all inward files and reports are available to banks for
download within 1 hour of session closure.
5.1.2 Point of Truncation
The point of truncation is left to the discretion of the Presenting Bank.

444
Provided that banks shall put in place a process of proper authorization and
controls to ensure that all cheques are processed accurately and in
accordance with the service levels concerning timings.
5.1.3 Settlement
Settlement shall be generated on the basis of the existing MICR code line. The
AMOUNT field shall be captured and keyed in separately by the Presenting
Bank.
The specifications of the cheques detailed for MICR clearing shall be followed.
Presenting Banks are encouraged to auto-read CAR field and specify cheque
value. This shall eliminate cheque post-encoding which is time consuming in the
first place. With the commencement of cheque truncation, post-encoding of
the amount field shall no longer be mandatory.
Presenting Banks shall employ appropriate Optical Character Recognition
technologies to auto-read the AMOUNT field such that cheque post-encoding
would be eliminated in the in-clearing process as advised in the Nigeria Cheque
Standards.
5.2 Clearing – Procedure at the Presenting Bank
5.2.1 Preliminary Verification
As the payment processing is done on the basis of images, the onus of due
diligence shifts to the Presenting Bank for validation of the physical instrument.
The Presenting Bank shall observe reasonable precautions such as:
• verifying the tenor of the instrument,
• physical feel of the instrument and
• Identifying evidence of tampering that is visible to the naked eye and UV
light. For enhanced attention, based on exceptions, the banks shall employ
suitable risk management techniques such as enhanced scrutiny of high value
transactions. The Presenting Bank takes full responsibility for collecting a cheque
and exercises due diligence as per the standard banking conditions and the
minimum security standard specified in the Nigeria Cheque Standard. The
presenting bank shall ensure that the cheque they are presenting conforms to
the Nigeria Cheque Standard.
5.2.2 Crossing
All cheques received over the bank’s counters for the purpose of clearing are
required to be branded with the bank’s special crossing and presentation stamp
prior to scanning.

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5.2.3 Return Processing
The Central Clearing Center of the Presenting bank shall receive the return
exchange file/s for each return session containing the returns on the
presentation lodged by them. An item may be returned as long as its clearing
period has not expired, and a session is available for the particular clearing
type. The return file shall contain the item detail and return reason code. It shall
be the responsibility of the presenting bank to generate the return memo to the
customer from the information in the return file.
5.2.4 Capture of Images and Data
The images of all the instruments in a batch / file shall be duly captured along
with MICR data using scanners set up for the purpose. The amount needs to be
captured/ keyed in to complete the data record.
5.2.5 Reject Repair and Balancing
The banks shall have proper systems and procedures in place to ensure that the
rejects of the MICR line are appropriately repaired and the batch file is
balanced before the same is uploaded from the capture system to the Clearing
House. Banks are required to pass on the value in the MICR repair tag for any
correction / changes / rejects on the MICR band of the cheques in the capture
files.
5.3 Processing at Clearing House Gateway (CHG) – Outward Clearing
5.3.1 Receiving Outward Presentment
The CHG shall receive correctly formatted outward MICR Clearing Data files and
Image files from the capture system of the Presenting Bank. The Presenting Bank
shall ensure that the total amount and individual line items in the MICR Data File
are reconciled against the Data Image File.
5.3.2 Image Quality Analysis and Failure Handling
The incoming images are subjected to IQA validations. The images which fail IQA
validations are rejected with an appropriate response file. The bank may rescan
the instrument and present in line with bank’s internal processes/ control
procedures. The member banks have to maintain control over such re-
presentments.
5.3.3 Item Processing
The MICR Data Files and Cheque Image files presented by the capture system
are validated by the CHG against the file and item level validations indicated in
the CHG Specifications, as released by the Clearing House from time to time. The

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CHG after validations generates response files which contain information related
to acceptance or rejection of each file and the items present in each file with
appropriate reason codes.
Sometimes there may be multiple response files for a MICR Data File and Cheque
Image file. It is the responsibility of the capture system to take these response files
and take appropriate actions. The CHG then sorts the MICR data and their
related images into bundles per paying bank and bundle collection type and
creates exchange files internally and validates these bundles against the session
window to which they shall be attached at the Clearing House. The CHG, before
attaching the items to the session, signs MICR data as well as image views. It also
signs and encrypts the exchange files before transmission to CH.
5.3.4 Session Attachment
The items are assigned to an appropriate clearing session that is open based on
parameters fixed for a session by the Clearing House. These parameters are
passed on to the capture system through the CHG. The item inherits ‘session
date’ that is the business date of the session. If there is no appropriate session
that is open, the items/ bundles wait at the CHG until such a session opens.
A validation of the item’s Presentment Date versus the item’s Session Date is
performed and items that exceed as prescribed shall be rejected by the
Clearing House. The Clearing House shall from time to time prescribe this
parameter.
5.3.5 Transmission of Files to Clearing House
CHG shall build exchange files for the MICR data and the cheque images for
onward transmission to Clearing House. Each exchange file is digitally signed and
encrypted before it is transmitted to the CH.
Banks shall plan transmission of their outward presentation by taking into account
presentation volume, the bandwidth of network with the Clearing House, and the
session window. In the event of an exchange file being received at the CHG
within a session time but not passed to the Clearing House (due to unforeseen
circumstances such as network congestion) before close of the session, the CHG
shall unbundle the exchange file, and reattach to a new session.
5.3.6 Reconciliation of Outward Presentation
It shall be the responsibility of the Presenting Bank to verify and ensure that all the
items presented / transmitted by it have been included in the settlement and
reconcile the total credits with the presentation made by it.

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After End of Session at the CH, CHG generates an OACK file containing the
details of Items that have been taken up for settlement at the CH. It shall be the
responsibility of presenting bank to reconcile their entire presentation by collating
the information from OACK file and various response files.
5.4 Processing at Clearing House Gateway - Inward Clearing
5.4.1 Receipt of Inward Data / Images
The Inward processing deals with accepting inward presentment data and
images from the CH and providing data in the form of files for use within the
bank’s inclearing (paying bank) system. The CHG receives digitally signed inward
financial data exchange files and image exchange files from the CH.
5.4.2 Validation
The CHG shall authenticate and load the exchange file data into the system and
send an error exchange file to the CH if the inward financial data exchange file
or image exchange file failed decryption or authentication. The CHG shall send
an acknowledgement exchange file to the CH if the inward financial data
exchange file or image exchange file gets successfully loaded. The CHG shall
also validate the digital signatures on the Exchange MICR and Image Files.
5.4.3 Control Mechanism
The Paying Bank shall verify that all the inward bundles/ items have been
received by it to ensure that there has been no data loss in the transmission from
Clearing House to the CHG. The CHG supervisor may compare the relevant
information available at the ‘Clearing House Processing Monitor’ and ‘Inward
Exchange File Screen’ for the purpose. The paying bank would not be able to
generate posting files unless all the inward bundles/ items have been actually
received at the CHG.
If any files are lost in transmission the bank may request the Clearing House for
retransmission of images and data.
5.4.4 Generation of Posting File
CHG, for each session, shall generate files for interfacing with the bank’s in-
clearing or exception processing system.
CHG is capable of creating posting files (both image and data files) for payment
processing bank wide in one of the following three ways:
i. Bank wise for the entire bank
ii. Branch wise within each bank
iii. Branch and transaction code wise for each branch.
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The type of posting file paying bank requires is configurable at CHG.
5.5 Processing at Branches / Bank’s In-clearing System
5.5.1 Transmission of Posting Files
It shall be the responsibility of the paying bank module to fetch the posting files
from CHG and undertake the payment processing.
5.5.2 Duplication Checking
The CHG detects duplicate items based on MICR code line on the data for the
configured number of days. The duplicate items are indicated in the SACK files
generated by the paying bank’s CHG, and it is the responsibility of paying bank
module to have processes in place to take necessary caution/control while
processing such items. Additionally, CH also generates a report of duplicate
items for each CHG after each session, and is available for CHGs to access the
same and download, if required.
5.5.3 Payment Processing
The banks shall do the payment processing based on images of the instruments
following all the prudent practices. Both the presenting bank and the paying
bank shall be liable for payment of a stale or post dated instrument.
5.5.4 Return Request File
It shall be the responsibility of the paying bank to collate all the return items and
create Return Request File/s (RRF) as per specifications provided in CHG
Specification document. The paying bank in-clearing system shall forward such
Return Request File/s to CHG for onward transmission to the CH.
5.5.5 Return Processing at the CHG
The CHG shall receive RRF/s from paying bank system containing all the
outgoing returns along with return reason codes. The CHG shall validate the file
for file integrity and data integrity, process the data and generates exchange
file for the CH. During return clearing images would not travel. Each exchange
file is digitally signed and encrypted before it is transmitted to CH.
The Clearing House (CH) shall update and analyse the list of all returned
cheques monthly. Customers with cases of high frequencies shall be reported to
the CBN and accredited Consumer Credit Bureaus. Appropriate return reason
code shall be specified in the RRF/s by the Paying Bank.

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5.5.7 Commission on Turnover (COT)
The Presenting and Paying Banks shall not charge COT on Debit entries arising
from Returned Instruments. However the paying bank shall be free to apply
returned cheque charges as provided in the Bankers Tariff.
5.5.8 Transmission Discipline
CHG shall transmit the Outward Return Exchange Files within the given return
window. As there may be a time lag during transmission of a file from CHG to
CH, the paying bank shall ensure that the return exchange files reach the
Clearing House within the timeframe before the closure of the return session.
5.5.9 Internal Control
While handling the inward clearing, the banks shall search for duplicate MICR
cheques and maintain a duplicate MICR cheques list.
In addition to the inward instruments drawn on branches of a bank, the reports
generated by the Clearing House shall contain the summary position of the total
number of instruments and the total value thereof. After the processing of
inward clearing, banks shall verify the inward clearing figures.
5.5.10 Reconciliation of Clearing Differences
In CTS Clearing the images and data shall be received together in the separate
files (images in IMG and data in XML) and hence the possibility of a bank being
debited without receiving an image shall not arise. In the case of a bank being
debited with the cheque image of another bank (caused, for example, of data
entry error) the same shall be returned to the presenting bank with appropriate
return reason code.
5.6 Special Processing at Clearing House
5.6.1 Caution Notice
Ordinary Caution Notice shall cease to exist in the CTS regime.
5.6.2 Different Status of CHG / Bank
Suspended: CH shall change the status of a bank from ‘in clearing’ to
‘suspended’ under exceptional circumstances such as moratorium or
unwinding. In such a scenario, the suspended bank shall not be able to
participate in any clearing. But banks may return items presented by the
suspended bank in the suspended period.
Not in Clearing: CH shall put a bank in ‘not clearing’ mode when a bank does
not participate in clearing. Once set as ‘not clearing’ the bank cannot make or

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receive any presentations during the ‘not clearing’ period. Other banks also
cannot return items presented on/by the bank.
6 Interbank Data Exchange rules
6.1 Use of Dedicated Secure Network
Images accompanied by the MICR line data, duly encrypted & digitally signed,
shall travel over a dedicated network connecting all the CHGs with the Clearing
House.
6.2 Transmission of Image / Data
The capture system shall transmit the MICR data and images of the cheques to
its Clearing House Interface electronically and/or on the media. Banks may
have procedures in place to optimise bandwidth and ensure that the branches
upload their presentation in over a period of time rather than sending all the
images and data relating to the day’s clearing of the branch at the end of the
day or at a given point of time.
6.3 Media Based Transmission of Exchange Files
In the event of a network failure or in case of an offline CHG, the application
allows for data and image files to be exchanged with the CH using different
types of Electronic medium. The same Public Key Infrastructure (PKI)
infrastructure that is used during network transmission is used to create the files
for transfer using physical media options.
7 Technical Specifications
7.1 Scanning Standard
The scanning shall conform to the prescribed standards which are, for front side,
grey scale 100 DPI 8 bit (256 level) in JFIF format with JPEG compression, and
front and back bi-tonal (black and white), 200 DPI TIFF image. Compression
techniques used are JPEG for grey scale image and CCITT G4 standards for the
bi-tonal. The image quality assurance (IQA) is required at the scanning stage so
that the images meet the processing quality standards. The image specifications
are as follows:

Sl. No. Image Type Minimum DPI Format Compressio

1 Front Grey Scale 100 DPI JFIF nJPEG

2 Front Black & White 200 DPI TIFF CCITT G4

3 Reverse Black & White 200 DPI TIFF CCITT G4

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The background of the cheques shall be image-friendly. There shall be no dark
background.
7.2 Image Quality Checking
The banks need to perform IQA validations at the capture system. Each image
shall have an IQA indicator tag indicating the outcome of the IQA test carried
out by the capture system.
The threshold values for different IQA parameters shall be intimated to the banks
by the Clearing House from time to time. The banks shall take care to
synchronize the IQA parameters at the capture system, to avoid excessive
rejection at the CHG.
7.3 Handing IQA Failure
The Clearing House retains the right to define threshold limits on items failing IQA,
and invoke penal provisions for its violations.
7.4 Digital Signatures
The use of the Public Key Infrastructure (PKI) ensures data authenticity, integrity
and non-repudiation, adding strength to the entire system. The Presenting Bank
CHG shall affix digital signature on each Exchange File before transmission to
CH. The digital signatures used for the clearing file exchange between the CH
and CHGs shall have an unexpired life of at least one month. The Exchange
Files are secured using the PKI throughout the entire cycle covering capture
system, the Presenting Bank, the Clearing House and the paying bank.
8 Data Storage
8.1 Storage and Archiving System
A sound storage and archiving system of images is an integral part of CTS which
takes care of disputes, complaints, reconciliation, etc. The physical instruments
and electronic image shall be stored by the presenting bank for a minimum of
five (5) and ten (10) years respectively.
8.2 Clearing House Table
The master table information, such as sort codes, transaction codes, branch
codes, bank codes, clearing zone codes, calendar, and designated branches,
etc., of the capture system shall be synchronised with that of Clearing House
Table. Any changes in the clearing house table shall get automatically updated
on the online CHGs, and it shall be the bank’s responsibility to update its capture
system immediately. CHG supervisors shall monitor whether the CH Table has

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been updated successfully or not. Any error related to CH Table updates is
reflected in the system monitor screen of the CHGs.
It shall be the responsibility of the offline CHGs (CHGs which are not connected
to CH over network) to ascertain any updates to the Master Tables, before the
commencement of any session. Offline CHGs may have to approach the
Clearing House for any updates.
8.3 Storage of Physical Instruments
The presenting banks need to put in place arrangements to physically archive
the cleared instruments for ready retrieval, whenever required at a later date.
The physical instruments shall be stored for the required statutory period, as
mentioned.
9 Risk and Mitigation
9.1 Internal Control
The banks shall document the process flow and ensure that the adequate
control mechanisms are in place. Special care and adequate physical check
shall be taken during re-scanning of instruments and re-presentation of
instruments.
The banks shall have a mechanism to generate internal control reports at the
end of the session / day to effectively reconcile the presentation made by it
and the credit received by it from the CH. Any discrepancy shall be identified
on the same business day and resolved on the following business day at latest.
Banks shall put in place a framework for mitigation of operational, legal and
reputational risks in compliance with the Electronic Banking Guidelines.
10 Roles and Responsibilities

Responsibilities Sanction

1 Persistent transmission of data that are not in


Bank shall be reported to the
agreement with the image
CBN. After 3 warnings the
bank shall be suspended
from clearing until such error
is corrected.

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2 Presentation of cheques with Presenting bank shall be fully
alteration/erasures which are visible under liable
the UV light/naked eye thus leading to
fraud
3 Presenting cheques which are not in
Relevant CBN sanction shall
accordance with the Nigeria Cheque
apply.
Standard
4 Presentation of cheques with irregularity
The presenting and paying
such as stale, post-dated, amount in words
bank shall be jointly
and figures differ
liable(50:50) if there is a loss

5 Paying bank to ensure that their host


application can prevent the payment of
Paying Bank is fully liable.
duplicated cheques
6 Paying bank shall be fully
Failure to return an unpaid instrument within
liable
the clearing period/window without notice
to the presenting bank

7 Presenting bank’s failure to honour Special Presenting bank shall be fully


Caution Notice from the paying bank duly liable
served within the business hour of
presentment day
8 Undue delay in transmission of cheques Applicable CBN sanction
valid for presentment which made a shall be invoked.
customer to suffer a loss as a result of delay
in getting value
The introduction of the truncation process changes the roles and the
responsibilities of the various participants in the clearing system and may lead to
introduction of certain risks which have to be mitigated. These are documented
below.
a. At the presenting bank level, the responsibility to verify the genuineness of the
cheque based on the apparent tenor or the features of the cheque
presented for collection may lead to banks refusing to accept a genuine
cheque or accept a forged cheque based on a manual scrutiny. Images
and MICR data to be sent to the clearing house have to be matched before
they are released to the Clearing House.

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b. The Clearing House shall assume that the data given by the banks is the data
meant for that day’s clearing and shall arrive at the settlement based on this
assumption. If the MICR data given by the bank is not that matching with the
day’s image the bank has sent for collection, it may lead to erroneous
settlement and large returns.
c. Truncating cheques entails additional operational risks. Banks shall take
adequate measures to ensure that all necessary safeguards are provided for
in consonance with legal requirements and banking practice while making
payments, especially for high value instruments.
d. The paying bank shall verify the signature on the image of a cheque. If a
paying bank chooses to verify signatures on the images of cheques above a
cut-off amount only, then it runs the risk of paying some forged instruments.
11 Sanctions

Responsibilities Sanction

1 Persistent transmission of data that are not in


Bank shall be reported to the CBN.
agreement with the image
After 3 warnings the bank shall be
suspended from clearing until such
error is corrected.

2 Presentation of cheques with alteration/erasures which Presenting bank shall be fully liable
are visible under the UV light/naked eye thus leading
to fraud

3 Presenting cheques which are not in accordance with


Relevant CBN sanction shall apply.
the Nigeria Cheque Standard

4 Presentation of cheques with irregularity such as stale, The presenting and paying bank shall
post-dated, amount in words and figures differ be jointly liable(50:50) if there is a
loss

5 Paying bank to ensure that their host application can


prevent the payment of duplicated cheques Paying Bank is fully liable.

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6 Failure to return an unpaid instrument within the Paying bank shall be fully liable
clearing period/window without notice to the presenting
bank

7 Presenting bank’s failure to honour Special Caution Presenting bank shall be fully liable
Notice from the paying bank duly served within the
business hour of presentment day

8 Undue delay in transmission of cheques valid for Applicable CBN sanction shall be
presentment which made a customer to suffer a loss invoked.
as a result of delay in getting value

March 14, 2012

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CENTRAL BANK OF NIGERIA

GUIDELINES ON POINT OF SALE (POS) CARD ACCEPTANCE SERVICES

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1 Preamble

In exercise of the powers conferred on the Bank by Section 47 (3) of the


Central Bank of Nigeria Act 2007 (as amended) to issue guidelines for the
maintenance of adequate and reasonable financial services for the public and
to ensure high standards of conduct and management throughout the banking
system; and

Pursuant to its inherent powers, the Central Bank of Nigeria (CBN) hereby issues
the following guidelines for Point of Sale (POS) Card Acceptance Services in
Nigeria:

Objectives

These guidelines have been developed to provide minimum standards and


requirements for the operation of POS card acceptance services under the
following POS environment:

a) Countertop
b) Wireless/Portable
c) Handover (PIN Entry only/Customer-activated with PIN Entry)
d) Automated Dispenser (e.g. Automated Fuel Dispenser, Token
dispenser, etc)
e) Biometric point of sale
f) Contactless

2 Point of Sale Card Acceptance Services Stakeholders

POS Card Acceptance Services Stakeholders include, but, not limited to:
1. Merchant Acquirers
2. Card Issuers
3. Merchants
4. Cardholders
5. Card Schemes and Card Associations
6. Switches
7. POS Terminal Owners
8. Payments Terminal Service Aggregator (PTSA)
9. Payments Terminal Service Providers (PTSP)
10. Processors
3 Minimum Standards
All industry stakeholders who process and/or store cardholder information shall
ensure that their terminals, applications and processing systems comply with the
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minimum requirements of the following Standards and Best Practices (for PCI,
the minimum requirement will be level 2.1). In addition, all terminals,
applications and processing systems, should also comply with the standards
specified by the various card schemes. Each vendor must provide valid
certificates showing compliance with these standards, and must regularly review
status of all its terminals to ensure they are still compliant as standards change.
There will be a continuous review and recertification on compliance with these
and other global industry standards from time to time.
3.1 PA DSS –Payment Application Data Security Standard.
3.2 PCI PED – Payment Card Industry Pin Entry Device.
3.3 PCI DSS – Payment Card Industry Data Security Standard.
3.4 Triple DES – Data Encryption Standards should be the benchmark for all
data transmitted and authenticated between each party. The triple DES
algorithm is the minimum standard.
3.5 EMV – The deployed infrastructure must comply with the minimum EMV
requirements.
3.6 Each vendor must provide valid certificates showing compliance with
these standards.
The timelines for compliance with the above minimum standards are as follows:
• New terminals and payment applications Immediate
• Existing payment applications December 1, 2011
• Existing terminals December 31, 2012
4.0 Roles and Responsibilities of:
4.1 Merchant Acquirers
4.1.1 Only CBN licensed financial and non- financial institutions shall serve as
Merchant Acquirers.
4.1.2 Merchant Acquirers can own POS Terminals, but shall only deploy and
support POS terminals through a CBN licensed Payment Terminal Services
Provider (PTSP).
4.1.3 Merchant Acquirers shall ensure that POS terminals purchased and
deployed at merchant/retailer locations through CBN licensed Payment
Terminal Services Provider shall accept all cards (card agnostic)
4.1.4 Support for existing POS terminals already deployed shall be handed over
to PTSPs by November 1st, 2011
4.1.5 Merchant Acquirers shall enter into agreements/contracts with merchants
for accepting payment by means of electronic payment instrument. All
agreements/contracts shall clearly spell out the terms and conditions,
including roles, responsibilities and rights of the acquirer and the

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merchant. The contract should also clearly spell out requirements for the
merchant’s responsibilities in ensuring proper upkeep of the POS terminal.
4.1.6 Every Merchant Acquirer shall connect all its PoS terminals or other
acquiring devices directly to the Payments Terminal Service Aggregator.
4.1.7 Merchant Acquirers shall switch all domestic transactions through the
preferred local switch of their choice for purpose of seeking authorisation
from the relevant Issuer.
4.1.8 To achieve interoperability, all POS terminals deployed in Nigeria shall
accept all transactions arising from any card issued by any Nigerian bank.
Accordingly, Acquirers and other service providers shall be card neutral
entities that have no reason to promote or favour any card brand over
the other.
4.1.9 Every acquirer must be able to accept all cards issued by Nigerian Banks,
whether through a direct license or via an arrangement with any other
acquirer that is licensed under the relevant card scheme/association.
4.1.10 Merchant Acquirers, in conjunction with their Payment Terminal Service
Providers, shall be responsible for ensuring that merchants are trained and
made to put in place reasonable processes and systems for confirming
cardholder identity and detecting suspicious or unauthorized usage of
electronic payment instruments where customer/card is physically present
at point of sale.
4.1.11 Merchant Acquirers shall be required to undertake measures to prevent
the use of their networks for purposes associated with money laundering
and other financial crimes.
4.1.12 Merchant Acquirers shall conduct proper KYC on all their merchants with
POS.
4.1.13 Merchant Acquirers shall set merchant limits based on the volume of
business/type of commercial activities. In addition, Merchant Acquirers
shall provide guidelines to merchants on payment procedures for large
ticket transactions (e.g. review of Identification, etc)
4.1.14 All POS Terminals procured should allow for implementation of Biometric
Authentication by December 2015.
4.1.15 Merchant Acquirers shall in conjunction with banks, switches and other
stakeholders ensure resolution of disputed transactions between the
merchant and the cardholder within five (5) working days. All transactions
from POS devices shall be routed through the PTSA to the relevant
acquirer or its appointed third party processor.

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4.1.16 There shall be no exclusivity arrangements that bundle third party
processing with switching activities. Each acquirer shall be free to process
transactions on its own, or leverage the services of a third party processor;
and these services shall be independent of the switch used to facilitate
such exchange.
4.1.17 Merchant Deposit Banks shall maintain and reconcile merchant accounts
on behalf of Merchant Acquirers.
4.2 Payment Terminal Services Provider (PSTP)
4.2.1 To ensure effectiveness of POS operations and a proper
support/maintenance infrastructure, only CBN licensed Payments Terminal
Service Providers shall deploy, maintain and provide support for POS
terminals in Nigeria. PTSPs shall offer services to acquirers covering all
aspects relating to terminal management and support, including but not
limited to purchase and replacement of spare parts, provision of
connectivity, training, repairs, and development of valueadded services,
amongst other things.
4.2.2 PTSPS shall agree their fees directly with the acquirers, but subject to the
following guidelines:
i A flat fee per terminal, irrespective of location deployed and/or
value/volume of transactions
ii An incentive fee based on volume of transactions per terminal
iii Timely settlement of payments

4.2.3 CBN shall license a limited number of Payments Terminal Service Providers,
to enable the PTSPs build scale and maximize efficiency. Criteria for PTSPs
shall be defined by CBN, and the performance of licensed PTSPS shall be
reviewed annually to confirm they meet defined performance targets.
Licenses of PTSPs that fail to meet performance expectations can be
withdrawn and fresh licenses issued to qualifying companies.
4.2.4 PTSPs can identify merchant opportunities and market potential merchants
on behalf of acquirers.
4.2.5 Only PSTPs shall be allowed to deploy POS terminals. Any party, other than
a PTSP that deploys POS terminals, shall be fined 50,000 Naira per day that
terminal remains deployed. PTSPs shall clearly agree SLAs on deployment
timelines with acquirers to ensure efficient deployment of POS terminals.
4.2.6 PSTPs shall ensure that deployed POS terminals are functional at all times.
Appropriate mechanism must be put in place to remotely detect failures
which shall be rectified or replaced within 48 hours.
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4.2.7 All terminals deployed by PTSPs must have stickers with the PTSP’s support
service contact information. In addition PTSPs must have a support
infrastructure that ensures support coverage for merchants 7 days a week.
4.2.8 PTSPs will be required to enter into contracts/SLAs with the acquirers that
will clearly state the terms and conditions of their support services,
including the fee structure and timeline for fee settlement.
4.2.9 PTSPs shall work with the PTSA to ensure all POS terminals deployed by them
meet all required certifications and the minimum POS specifications
defined in these guidelines.
4.2.10 PTSPs shall work with acquirers and the terminal manufacturers to ensure
that terminals are phased out/replaced/upgraded as appropriate, as
their certifications become obsolete.
4.2.11 No Card Scheme shall engage in business as a Payment Terminal Services
Provider; neither shall any entity that has a management contract with a
Card Scheme engage in business as a Payment Terminal Services
Provider. In addition, no entity in which a Card Scheme, its subsidiary, or
the majority shareholder of a card scheme, has 20% shareholding or more
shall engage in business as a Payment Terminal Services Provider. In
addition, no single Bank shall have a controlling share in any Payment
Terminal Services Provider
4.3 PoS Terminal Owner
4.3.1 Banks, Merchants, Acquirers, PTSA, and PTSPs can be PoS Terminal Owners.
4.3.2 PoS Terminal Owners shall ensure all POS terminals procured by them are
compliant with the minimum POS specifications.
4.3.3 PoS Terminal Owners shall cover the costs of repairs and replacements of
parts for their terminals.
4.4 Payments Terminal Service Aggregator
4.4.1 Nigeria Interbank settlement Systems (NIBSS) - owned by all Nigerian banks
and the Central Bank of Nigeria shall act as the Payments Terminal Service
Aggregator for the financial system.
4.4.2 As the Payments Terminal Service Aggregator for the industry, NIBSS shall
establish communication network for reliable POS data traffic that shall
satisfy the service and availability standards and expectations of the
industry on a cost effective basis.

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4.4.3 As the Payments Terminal Service Aggregator for the industry, NIBSS shall on
an annual basis or more frequently as may be required, on behalf of the
industry certify POS Terminals that meet the POS Terminal standards
approved for the industry.
4.4.4 As the Payments Terminal Service Aggregator, NIBSS shall participate on a
joint committee of industry stakeholders, to negotiate a price list with 2 – 3
terminal equipment providers for bulk purchase of POS terminals for the
Nigerian market. It is expected that a bulk purchase agreement will
enable cost reduction on POS terminals, as well as the ability to define
special requirements for the Nigerian market, and ensure a sufficient
support infrastructure from the terminal manufacturers. Any Terminal
Owner may subscribe to the negotiated global price list for the purchase
of POS Terminals to take advantage of these benefits.
4.4.5 As the Payment Terminal Service Aggregator, NIBSS shall be the only entity
permitted to operate a Terminal Management System. All POS terminals
operating in Nigeria must be connected to the Payment Terminal Service
Aggregator. This is to ensure comprehensive oversight,
reporting/performance monitoring, and also in line with our objectives of
shared industry infrastructure and best practice. NIBSS shall provide
Acquirers and Payment Terminal Service Providers and their merchants
(where required) the ability to view transactions and monitor performance
of their devices.
4.4.6 All PoS Terminals deployed shall be technically enabled to accept all cards
issued by Nigerian banks.
4.4.7 The Payments Terminal Service Aggregator shall route all transactions from
PoS terminals to the relevant Acquirer or its designated third party
processor. This enables Acquirers who are Issuers to handle On-Us
transactions appropriately and all Acquirers to manage their risks and
accept responsibility for such transactions in line with Charge-back Rules
of relevant Card Schemes. This does not preclude any Acquirer from using
the services of any Third Party Processor (TPP) or the Acquirer’s in-house
processing services to process its acquired transactions.
4.4.8 All domestic transactions including but not limited to POS and ATM
transactions in Nigeria must be switched using the services of a local
switch and shall not under any circumstance be routed outside Nigeria for
switching between Nigerian Issuers and Acquirers.
4.4.9 The Payments Terminal Service Aggregator shall monitor the availability
and transaction traffic on all POS terminals on a continuous basis and shall
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provide analysis and reporting on POS terminal performance and
transaction trend to the Central Bank and the industry.
4.4.10 The Payments Terminal Service Aggregator shall ensure all merchants and
other relevant parties are settled within the T+1 settlement period, upon
receipt of settlement reports from all card schemes or the switches they
have appointed to provide such reports on their behalf. Failure to
execute the T+1 settlement cycle shall result in a sanction to the PTSA,
including but not limited to them solely refunding the entire Merchant
Service Charge for that day’s transactions.
4.4.11 The Payments Terminal Service Aggregator shall have clear Service Level
Agreements for certifying terminals quickly and efficiently, as well as for
integrating new value-added services on behalf of acquirers, PTSPs, or 3rd
party application developers.
4.5 Card Issuers
4.5.1 Only licensed deposit taking banks shall with the approval of CBN serve as
the issuers of payment cards.
4.5.2 Only EMV-compliant cards shall be issued by Nigerian banks.
4.5.3 Deposit Taking Banks shall act as the issuer of payment cards and by so
doing commit themselves towards the cardholders to settle the
operations performed by means of payment cards, and the cardholder
commits himself/herself to pay the amount of the operations together with
charges due to the issuer from a specified account.
4.5.4 A card issuer shall be held liable (where proven) for card frauds arising from
card skimming or other compromises of the issuer’s security system,
including payment done with hot-listed card.
4.5.5 A card issuer shall put in place adequate controls to prevent, track and
minimize fraud.
4.5.6 A card issuer shall provide means whereby its cardholders may at any time
of the day or night notify the loss, theft or fraudulent use of the card and
the card issuer shall take all necessary steps to stop any further use of the
affected card.
4.5.7 A card issuer shall keep sufficient internal records over a minimum period
of ten (10) years to enable audit trails on card-related transactions.
4.5.8 A card issuer must have a capacity to reflect customer’s preferences on
the usage of his card.

478
4.5.9 A card issuer shall ensure that all hot-listed cards are system driven across
all channels.
4.5.10 A card issuer shall be responsible for any loss arising from any use or
operation of a card after the card has been reported lost or stolen.
4.5.11 Card issuers shall be responsible for setting overall transaction limits on
cards per day, and transaction limits of such cards by channel, according
to their card products and risk guidelines.
4.5.12 Card issuers, who provide offline limits for their card products, shall ensure
the terms for such offline limits are fully understood and agreed with the
customer. Irrespective of the status of the cardholders account as at the
time of the transaction, the card issuer shall be liable to settle the amount
to the merchant, while it takes the appropriate measures to recover the
funds from the cardholder.
4.5.13 No card issuer or its agent shall deliver any card in a fully activated state.
4.5.14 No card issuer or its agent shall bill or charge a customer for an unsolicited
card unless and until after the card is fully activated by cardholder.
4.5.15 No card issuer or its agent shall engage in the use of unethical tactics
when marketing its card products to members of the public.
4.5.16 No card issuer or its agent shall communicate false or misleading
information regarding card terms and conditions, service fees/waivers,
and/or associated promotions/gifts/prizes to members of the public.
4.5.17 Card Issuers shall respond to Card related disputes or complaints from
cardholders within 24 hours and in conjunction with the Acquirer resolve
such disputes or complaints within five (5) working days.
4.5.18 A card issuer must furnish its cardholders with a detailed list of contractual
terms and conditions prior to activation. Such terms shall include at a
minimum:
i Fees and charges
ii Withdrawal limits (including offline transaction limits and terms where
applicable)
iii Billing cycles
iv Termination procedures
v Default/recovery procedures
vi Loss/theft/misuse of card procedures
vii Grievance/Complaints procedures

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4.5 Merchants
4.5.1 A merchant shall enter into agreement with Merchant Acquirer specifying
in clear terms the obligations of each party.
4.5.2 Merchant shall accept cards as a method of payment for goods and
services.
4.5.3 A merchant may refuse to accept payment by means of an electronic
payment instrument, including payment with cards, if:
a) The electronic payment instrument is invalid;
b) Notification of loss, missing, stolen or damaged has been made of the
electronic payment instrument;
c) The cardholder refuses to present a document confirming his/her identity
in the event of suspicious / unauthorized use of electronic payment
instruments.
4.5.4 The merchant shall display the payment device conspicuously enough for
the cardholder to observe the amount entered into the device before the
cardholder enters his/her PIN.
4.5.5 The merchant shall be held liable for frauds with the card arising from its
negligence, connivance etc.
4.5.6 A merchant shall under no circumstance charge a different price,
surcharge a cardholder or otherwise discriminate against any member of
the public who chooses to pay with a card or by other electronic means.
4.6 Cardholders
4.6.1 A cardholder shall:
a) Store the payment card and protect his PIN with due care
b) Not keep his payment card together with the PIN
c) Notify the issuer without delay about missing, stolen, damaged, lost or
destroyed card
d) Not make available the payment card to unauthorized persons.
4.6.2 The cardholder may withdraw from the contract for payment card without
prior notice to the issuer provided he does not owe for any charges or
transactions on the payment card.
4.6.3 The cardholder shall present, when required by a merchant, a document
confirming his identity.

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4.6.4 The cardholder shall receive value for the operations performed by means
of a payment card, and by so doing, the holder commits himself to pay
the amount of the operations together with charges due to the issuer from
a specified account.
4.6.5 The cardholder shall be held liable for fraud committed with his card arising
from the misuse of his PIN or his card.
4.6.6 The cardholder shall be entitled to receive a receipt or any other form of
evidence at the time a transaction is performed with his/her card
4.6.7 The cardholder shall be entitled to receive, within a reasonable period, at
least monthly, a statement of all transactions performed with his/her card
4.6.8 If a cardholder notifies his bank that an error involving his card has
occurred, the institution must investigate and resolve the claim within 3
working days.
4.6.9 The cardholder shall be given reasonable notice before changes are
made to fees levied on his/her card and be given the option to
discontinue usage of card to avoid such changes in fees without penalty
4.6.10 A cardholder shall be given reasonable notice before changes are made
to the terms and conditions of his card contract and shall be given the
option to opt-out of the card contract without penalty
4.6.11 The cardholder shall be entitled to privacy and information on his card
account cannot be shared with third parties unless:
a) With express customer approval or
b) In cases of customer default, where information can be shared with
credit bureaus and collection/recovery agents or
c) In cases where information is requested by valid order of a competent
Nigerian court/authority or
d) In cases where it is necessary to prevent fraud
4.7 Card Associations and Card Schemes
4.7.1 All card associations and card schemes doing business in Nigeria are
bound by these guidelines and other relevant CBN guidelines/circulars.
4.7.2 To ensure fair play and equal opportunity for all players, each Card
Scheme shall make public and transparent, objective rules for
membership of the said scheme and estimated time required for
certification.

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4.7.3 CBN shall reserve the right to assess the rules to confirm objectivity, vis-a-vis
international standards/best practice. Any Card Scheme that wrongfully
denies membership or unnecessarily delays the process of certification to
potential players, would be penalized by CBN – including but not limited
to paying a fine equivalent to the expected revenue of the payment
services provider for that period, suspension and/or revocation of license,
and CBN licensing new schemes.
4.7.4 No Card Scheme shall engage in the business of acquiring; neither shall
any entity that has a management contract with a Card scheme engage
in the business of acquiring. In addition, no entity in which a Card
Scheme, its subsidiary, or the majority shareholder of a card scheme, has
20% shareholding or more shall engage in the business of acquiring.
4.7.5 No Card Association or Card Scheme shall engage in any antitrust activity
or any act that will lead to abuse of dominant position, monopoly or unfair
competition. Accordingly, there shall not be any form of arrangement or
collusion between two or more Card Associations, Card Schemes, or
Payment Schemes in respect of Issuing, Acquiring, Processing or Switching.
4.8 Switching Companies
4.8.1 All local switches in Nigeria shall ensure that transactions relating to all
cards issued by Nigerian banks are successfully switched between
Acquirers and Issuers.
4.8.2 To achieve the interconnectivity of all new and existing switching
companies, all switching companies shall open their networks for
reciprocal exchange of transactions/messages with the Nigeria Central
Switch and Payment Terminal Service Aggregator.
5. Settlement Mechanism
5.1 The settlement for all POS transactions must be done to the merchant
account on T + 1 basis, where T is the date the transaction is performed.
5.2 Card schemes or their appointed switches shall provide their settlement
reports to NIBSS by 10am for the previous day. The settlement information
should contain sufficient detail to enable NIBSS credit merchant accounts
directly, and shall be provided in a format as advised by NIBSS. Failure to
provide this information in the required format or by the required timeline will
result in a sanction, including but not limited to the offending party solely
refunding the entire Merchant Service Charge for that day’s transactions.

482
5.3 NIBSS shall also directly credit the accounts of other parties with their share of
the merchant service charge (MSC).
5.4 NIBSS will be paid by the banks for the settlement done to the merchant
account in line with the NEFT fee transaction charges.
6. Fees and Charges
6.1 Fees and charges for POS Card Acceptance services are to be agreed
between service providers and banks / entities to which the services are
being provided subject to the following limits:
i. The maximum total fee that a merchant shall be charged for any POS
transaction shall be 1.25% of the transaction value subject to a maximum of
N2, 000.00.Exceptions may apply in respect of travel and entertainment
merchants including but not limited to hotels, restaurants, airlines, etc. In
which case shall be at such rate as agreed from time to time between the
Acquirer and the Merchant. Under NO CIRCUMSTANCE shall a merchant
charge a surcharge to customers for using their cards.
ii. The fees and charges stated above are applicable to only POS transactions
performed with naira denominated cards. POS transactions done with cards
issued in foreign currencies will still follow the pricing arrangement put in
place by the relevant international card association/scheme.
6.2 Fees charged on POS Terminal transactions shall be shared as follows:
i. Issuer - 30.0%
ii. Acquirer - 32.5%
iii. Payment Terminal Owner - 25.0%
iv. Local Switch - 5.0%
v. Payment Terminal Service Aggregator - 7.5%
The Fee schedule will be reviewed annually.
7. Transition to Achieve Interoperability
Prior to December 1, 2011 and the effective date for the new arrangements, all
commercial switches, processors or entities driving PoS terminals in Nigeria shall
ensure full and secure connection to the Central Switch and all transactions in
respect of any card that the switch, processor or other entity is not licensed to
process or switch shall be routed through the NCS to a licensed switch or
processor for purpose of processing such transaction on behalf of the relevant
Acquirer for seeking authorisation from the relevant Issuer.
All terminals must be plugged to into NIBSS Plc, the PTSA on or before November
15, 2011.
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8. Exclusivity Agreements
There shall be no form of exclusivity in any area of payment service including but
not limited to Issuing, Acquiring, Processing, and Sale and Maintenance of
hardware and software. It shall be the responsibility of every Card
Association/Payment Scheme and other relevant parties to ensure that all
existing exclusivity contracts are amended not later than September 30, 2011 to
ensure conformity with these guidelines and other regulations.Any payment
scheme, operator, processor, infrastructure provider, switching company,
service provider or bank that contravenes this policy may be suspended for a
minimum of one (1) month by the CBN as a payment service or payment
infrastructure service provider in the first instance, to be followed by stricter
sanctions if the practice persists.
9. Minimum POS Terminal Specifications

Parameters Specifications

Card Readers EMV Chip/Smart cards, Magnetic stripe. Optional:


Contactless reader, 2 SAM Slots

Communications GPRS, Ethernet, Dial-up Modem. Optional: CDMA, Wi-Fi

Certifications EMV levels 1 & 2, PCI DSS, PA-DSS, PCI PED online &
offline (All PCI certifications should be
Level/Version 2.1 minimum)

Biometric Upgradeable to incorporate fingerprint reader/scanner

SIM capacity Must operate either a dual SIM or a roaming SIM

CPU ARM9/11, 32Bits. Optional: Dual processors

Memory 16MB Flash, 32MB SDRAM

Keypad PCI PED Approved, Backlit

Display TFT LCD graphics, 128/64 pixel, Backlit. Optional: Colour


screen

Power 100-240V, 50-60Hz; 24hrs battery power (operating)


Optional: DC support, Car jack charger, Docking
fast charger

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Printer 15 -18 lines per sec Thermal printer

Multi-Application Supports Multiple Applications

Customization / Optional: Coloured or branded housing,


Others Labelling/embossing, RS232 & USB interfaces,
Protocol implementation

Existing POS terminals that do not comply with the standards set in these guidelines
shall be phased out by December 31, 2012.
10. Compliance
All parties shall comply with the provisions of these guidelines and other relevant
guidelines issued by the CBN. This guideline shall prevail in the case of conflict with
any guidelines issued prior.
11. Timelines
The deadlines for complying with the guidelines as stated in this document shall be
on or before the following dates:
Compliance with minimum standards:

• New terminals and payment applications Immediate

• Existing payment applications December 1, 2011

• Existing terminals December 31, 2012

Provision of scheme rules and certification September 1, 2011


timelines

Compliance with new settlement arrangement October 1, 2011

Spin-off/Independence of Card Schemes April 1, 2012

Handover of existing terminals to PTSPs November 1, 2011

Plug-in of existing terminals to NIBSS November 15, 2011

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Appendix 1: Definition of Terms
The terms below shall have the following meaning for the purpose of those
Guidelines.
a) Merchant Acquirer means a CBN licensed financial or non-financial institution
that has agreement with the relevant card scheme to contract with
merchants to accept payment cards as means of payment for goods and
services.
b) Cardholder means any person to whom a payment card is issued and whose
account will eventually be debited for settlement of transactions performed
with the payment card.
c) Deposit Taking Banks means banks and other financial institutions.
d) Merchant means an organization or entity that contracts with a Merchant
Acquirer for accepting payment by means of payment card or any other
electronic payment instrument.
e) Operations include facilitation of funds transfer, effecting payment and such
other transactions that may be determined from time to time by means of an
electronic payment instrument.
f) Interoperability means ability to issue cards and deploy devices in such a
way that all customers (card holders, merchants and issuers) perceive
operations, while obtaining service, as if the interconnected networks were
one.
g) Interconnectivity means ability for reciprocal exchange of
transactions/messages between two or more switching networks.
h) PIN means Personal Identification Number.
i) Competent Authorities include Courts, Economic and Financial Crime
Commission (EFCC), Independent Corrupt Practices Commission (ICPC),
Regulatory Authorities such as the CBN, Nigeria Deposit Insurance
Commission (NDIC) etc.
j) Hot list means list of deactivated cards that were reported missing, stolen, lost
or damaged by the card holders.
k) Switch means a system that switches card payments messages between
acquirer (or acquirer processor) and issuer (or issuer processor)
l) Card Schemes define the rules of the card system (e.g. interchanges,
licenses, fraud responsibilities), and choices of technical functionalities (e.g.
standards, protocols, security requirements)
486
m) Processor processes card transactions.
n) A Card Association is a network of issuing banks and acquiring banks that
process payment cards of a specific brand.
o) EMV (Europay, MasterCard, Visa) is the global standard that is helping ensure
smart (Chip-and-PIN) cards, terminals and other systems can interoperate.
p) PCI DSS stands for Payment Card Industry Data Security Standard. It was
developed by the major credit card companies as a guideline to help
organizations that process card payments prevent credit card fraud and
various other security vulnerabilities and threats.
q) PCI PED security requirements are designed to secure personal identification
number (PIN)-based transactions globally and apply to devices that accept
PIN entry for all PIN based transactions.
r) PA-DSS stands for Payment Application Data Security Standard. PA-DSS
compliant applications help merchants and agents mitigate compromises,
prevent storage of sensitive cardholder data, and support overall
compliance with the PCI DSS.

Central Bank of Nigeria 2011

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489
490
NIGERIA DIRECT DEBIT SCHEME

491
CHAPTER 1

INTRODUCTION
1. Direct Debit has been operated in Nigeria in paper form in the form of “Debit
Notes” originated by payer’s bank using the Nigeria Clearing House
infrastructure. The Automated Clearing House was implemented in 2002 and
the Nigerian version of the Domestic Funds Transfer introduced to the market
as NEFT (NIBSS Electronic Funds Transfer). NIBSS (Nigeria Inter Bank Settlement
System) owns and manages the physical infrastructure for clearing of cheques
and paperless clearing instruments in Nigeria
ACH Direct Debit (DD) as a product was formally introduced to the Nigerian
Clearing System by the Nigeria InterBank Settlement System (NIBSS) in January
2006. It was introduced as a variant of NEFT (NIBSS Electronic Funds Transfer)
and operated by participating banks under the aegis of the Nigeria bankers
clearing house. Also, other market participants in the payments environment
such as Interswitch have also introduced variants of Direct Debit products
which run-off their switching infrastructure but with ultimate settlement
between the banks passing through NIBSS.
There are currently no general rules specific to Direct Debit as a payment
mechanism in the Nigeria market. What exist are corporate rules developed to
guide the participants in the relevant switch on the various products that run
off this switch, and the general rules for the clearing house. This underlies its
relative low acceptability in the market as there are no clearly articulated and
documented rules that guide and bind market participants, and thus grow the
confidence of the user to accept and use the product.
2. The ACH Debit is a cash-less form of financial settlement which facilitates
“regular in nature” payments. It permits an Originator to collect amounts due
from a Payer at the Payer’s Bank by initiating Direct Debit Transfer on a bank
account nominated in a Direct Debit Mandate. Banks are not responsible for
any underlying contract as it is solely a method of collecting payments. It also
provides an efficient platform for Originators to draw funds from their account
across banks in an efficient manner. In an environment where bank customers
have multi-bank relationships, it provides the right platform for optimal
management of liquidity across banking relationships.
3. Organisations or individuals that regularly or periodically receive large volumes
of payments may benefit immensely from the scheme.

492
4. An organisation wishing to join the Scheme will typically contact the
appropriate service division of its Originator’s bank. The organisation is
expected to satisfy the requirements of the bank before admittance.
The development of a Code of Conduct for Bill Payment is one of the initiatives
arising from the CBN Vision 2020 for the Financial System on Payments. The
implementation of this initiative provides the background to development of
these rules, Nigeria Direct Debit Rules.
We have adopted some of the content from the Direct Debit Rules of other
countries such as Kenya, SEPA, UK due to similarity in operating environment
and need to adopt best practices.
CHAPTER 2
DEFINITIONS
1. Direct Debit Transfer
A Direct Debit Transfer is a payment prepared in an Electronic Funds Transfer
format, in this case, the NEFT Data Transfer format or any other format prescribed
by the relevant service provider.
These Rules refer to a Direct Debit Transfer as a Transfer.
2. Direct Debit Mandate
This is a written authority given by a Payer to the Payer’s Bank, to make
payments from an identified bank account at the request of, and to the
account of, an Originator. The authority is given by the Payer to the Payer’s
Bank with a copy to the Originator. However, in the event that the written
authority is given to the Originator, who in turn presents to the Payer’s Bank, it is
required that the Payer’s Bank duly confirm authenticity from the Payer through
its normal process for confirmations.
These Rules refer to a Direct Debit Mandate as an Authority.
3. Variable Direct Debit Mandate
This authority allows variable amounts to be debited from a Payer’s bank
account. It is used for regular payments that cannot be forecast in advance
and for amounts that change periodically (monthly, quarterly, annually, etc.).
An Originator must provide an Advance Notice to a Payer, of the amounts and
dates of payment, in sufficient time for any queries to be raised before
payment. A new Authority must be variable and, in practice, the vast majority of
existing Authorities are in variable format.

493
4. Advance Notice
This is the notice that must be given by an Originator to a Payer who has signed
a Variable Direct Debit Mandate. At least 14 calendar days' notice must be
given, in respect of the date and or amount to be debited.
5. Direct Debit Indemnity
A Direct Debit Indemnity, referred to in these Rules as an Indemnity, protects a
Payer should an incorrect amount be debited, a debit occur earlier than
specified or in error. Should a Payer query a payment as given, the Payer’s
Bank must, on request, make an immediate refund to the Payer’s bank
account. This covers situations where an Originator may not have given the
required Advance Notice regarding a change of amount or date.
6. Debit Order/Debit transaction – means a mandated payment instruction from a
user to a bank to collect money from a client e.g. insurance premium, hire
purchase, rentals. This definition does not exclude a situation where a user
initiates such an instruction for its own account, or for other variable amount
subject to compliance with the conditions stipulated herein.
CHAPTER 3
PARTICIPANTS AND THEIR ROLES
1. Originator or Biller
An originator or Biller is an organisation that is able to make a Direct Debit
Transfer. A Direct Debit Indemnity binds an Originator to collect only amounts
that have been authorised by a payer on or after a specified date, notified in
advance.
2. Originator’s Bank (also known as Creditor Bank)
The Originator maintains a bank account with the bank that presents the debit
instruction to clearing. An Originator must use the services of a bank to
introduce Direct Debit Transfers to the Clearing House. The Originator must satisfy
a bank’s internal requirements to be allowed access to the Direct Debit
Scheme.
3. Payer
A payer is the party whose bank account is to be debited as instructed in a
Direct Debit Mandate, typically a customer of an originator or has an existing
financial relationship with an originator.

494
4. Payer’s Bank (also known as Debtor Bank)
This is the bank where the payer maintains an account.
5. Payment Service Provider (PSP)
A PSP is a payment service company that is able to accept Direct Debit
Transfers from Originators/Billers, for processing through the Automated Clearing
House. The funding aspect of all Direct Debit Transfers must be processed
through Originator’s Bank and the Payer’s Bank.
Criteria for Entry into the Direct Debit Scheme
Originating Bank
• Must be a member of the Automated Clearing House and integrated with a
Payment Service Scheme that accepts direct debit transfers for processing.
The Payment Service Scheme must have been duly licensed by the Central
Bank to carry out payment / switching services.
•It must hold an account for the originator to receive proceeds of the Direct
debit transfer.
•Originating Banks must comply with the file specification and standards
established by NIBSS or the relevant payment service scheme for electronic file
delivery.
•Must have systems in place to automatically trigger issuance of direct debit
instructions on due date. This is to ensure that installed processes are efficient
enough to meet the expectation of users for settling recurring obligations using
this scheme.
Payer’s Bank
•Must be a member of the Automated Clearing House and integrated with a
Payment Service Scheme that accepts direct debit transfers for processing.
The Payment Service Scheme must have been duly licensed by the Central
Bank to carry out payment / switching services.
• It must hold an account for the payer from which payment will be issued in line
with the Direct Debit Authority.
• Must hold a valid Direct Debit Authority executed in line with the payer’s
mandate with the bank.

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Automated Clearing House / Payment Service Providers.
I. The process and participation criteria for the Direct Debit Scheme is
guided by the Nigeria Bankers’ clearing House Rules and the Guidelines
on Transaction Switching Services.
II. Originators/Billers
III. Originators shall execute the Direct Debit Indemnity with any bank that
originates its transaction.
IV. Every originator will be assigned a Unique Identification Number by its
sponsor bank. The identifier shall be unique to each biller or originator and
shall be used irrespective of the bank originating the transactions. The
Unique Identifier facilitates the process for automated mandate
confirmation of Direct Debit Authority. See Chapter 5 Item 8.
CHAPTER 4
RIGHTS AND OBLIGATIONS OF ALL PARTICIPANTS
A Originator
1. It is pertinent that an Originator must first obtain an Authority from a Payer before
initiating a Transfer on the Payer’s bank account.
An Originator must be prepared to accept any Indemnity claim from a Payer,
arising from an amendment and or a limitation clause inserted by the Payer before
lodgement.
2. On receipt of a Payer’s signed Authority, an Originator becomes entirely
responsible for collecting payments due under that Authority, via a Transfer. An
Originator cannot require the Payer’s Bank to settle by any other means.
3. An Originator must:-
a. initiate a Transfer strictly within the terms of the Authority
b. initiate a Transfer within the terms of any Advance Notice given to a Payer
The data on a Transfer must conform to that advised in the Authority.
An Originator’s identity quoted on a Transfer, if any, must be the same as that
quoted in the Authority.
4. Per adventure an Originator decides to vary the terms of a fixed amount
Authority, a Payer must provide a new Authority incorporating a cancellation
clause.
5. It is expected that an Originator should seek the advice of the Originator’s Bank
before making any changes to:-
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a. the name or constitution of the Originator
b. information quoted on an Authority
The Originator’s Bank may require an Originator to give notice of such a
change to a Payer and/or a Payer’s Bank.
6. It is pertinent for the Originator to note that a Payer can cancel an Authority
without reference; for instance, the appointment of a liquidator or receiver may
involve statutory publicity, which by implication infers that a Payer has provided
constructive notice.
7. If a fixed amount Authority exists for a payment that has not yet been settled by
a specified date and payment is outstanding, then an Originator’s Bank is
prohibited from collecting arrears via a Transfer. The prohibition does not extend to
the re-presentation of an individual unpaid Transfer or in situations where the
Originator has adequately notified the Payer.
8. If an Originator is notified that an Authority is cancelled or amended, the
Originator must alter his records immediately, in order to ensure that:-
a. a Transfer is not initiated after receipt of such notice of cancellation
b. all Transfers initiated in the future incorporate the amendment so notified, in
the case of amendment.
Rights and Obligations of all Participants
Note: a. For ease of reference, it is recommended that an Originator retains
documentation received from a Payer’s Bank. This is important as the
absence of evidence could prejudice a successful counter-claim against
a Payer’s Bank.
b. It is recommended that an Originator ensures that payments made under
separate Authorities are not merged as this could lead to difficulties when
a Payer wishes to cancel an Authority (not all authorities).
9. It is the responsibility of an Originator’s Bank to ensure that an Originator strictly
adheres to the requirements of the Scheme.
Only Banks that are members of the Nigeria Clearing House shall act as Originators
Banks. The moment a bank ceases to be a member of the Clearing House, related
Originators shall appoint other Banks in the clearing house with whom they either
have account or choose to open account with.
10. It is the responsibility of the Originator’s Bank to give information, advice and
guidance on all aspects of the Scheme to an Originator.

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B Payer
1. The initiation of a Transfer must be strictly within the terms of the Mandate and
any Advance Notice to which a Payer is entitled.
2. A Payer is at liberty to cancel a Mandate at any time by advising the Payer’s
bank in writing and with a copy to the Originator. The Originator will duly advise his
bank on receipt of the notice of cancellation.. It is not the Originator Bank’s
responsibility for accepting a cancellation of an Authority. Therefore, the Payer
must raise a claim against the Originator through his bank per adventure a
payment gets through after cancellation, and the Originator must pay promptly.
It is possible that a notice of cancellation is received by the Payer’s bank and
Originator, but not be able to act on it before the next due date of payment.
Adequate notice must be given by the payer to avoid such situations. For recurrent
items where collected is made in advance of service provided, this risk is well
mitigated.
C Payer’s Bank
1. A Payer’s Bank shall accept Transfers originated under an Authority on the
understanding that it is not responsible for verifying or checking that:-
a. an Authority exists
b. payments conform to the terms of the Authority
c. any purpose or condition of payment expressed in that Authority is fulfilled
2. Depending on the nature of the account, which could be deposit account or
any other type of account that might be subject to notice of withdrawal, a Payer’s
Bank may decline to accept instructions to charge Transfers to such accounts.
CHAPTER 5
ADMISSION OF ORIGINATORS
1. Originators, while acting as such, must recognise that a trust is being bestowed
on them by banks, with extensive power, which must be exercised in strict
accordance with the requirements stipulated in these Rules.
2. A prospective Originator must be a customer of a bank whose responsibility it
would be to support the application. An Originator may hold accounts with several
banks
3. In making an assessment, an Originator’s Bank shall have regard to an
applicant’s contractual capacity, credit risk, financial standing and quality of
administrative control.

498
4. As a condition of participation in the Scheme, a prospective Originator must
execute an Indemnity, obtained from the Originator’s Bank.
5. A prospective Originator’s application must stand on its own merits. An
Originator's Bank shall not accept any third-party support for the liability assumed
under an Indemnity. In this context, a third-party relationship does not exist
between a parent and an associated or subsidiary company.
6. The decision on sponsorship shall not be influenced by the existence or
availability of any private insurance cover an Originator may choose to obtain to
cover his Indemnity liability. The assignment of such cover in favour of banks is
neither practicable nor acceptable.
7. After execution, an Originator must return the signed Indemnity and other
accompanying documents deemed necessary by the Originator to the Originator’s
Bank.
8. The Originator’s Bank shall use it’s discretion in accepting an Originator to the
scheme. However, the Nigeria Clearing House management shall also act as
arbiter, if warranted, in future. This will provide a forum for banks to share
information. The fate of a prospective Originator shall rest with the Originator’s
Bank. The Originator’s Bank, in communicating a determination to a prospective
Originator, shall not refer to the Nigeria Clearing House.
9. After the approval of an application, an Originator’s Bank shall allocate the
Originator with a unique Originator’s Identification Number for quoting on all
Transfers. The Unique Identifier will be the Originator’s RC Number, to be captured
as Payment Reference. Where the Originator provides more than one service and
seeks to differentiate them, a Service Code will be assigned and associated with
the Identifier in the form – RC Number/--. The Unique Identifier, and where relevant,
the Service Code must be indicated on all mandates and billing instructions
emanating from the Originator.
10. The lodgement of a signed Indemnity with an Originator’s Bank must be notified
to other banks, together with an advice of the Originator’s Identification Number
issued, through the Nigeria Clearing House.
11. The allocation of an Originator’s Identification Number may be made
exceptionally in advance of lodgement of the Indemnity when such a number is
required for testing automated procedures.

499
CHAPTER 6
SCOPE AND BENEFITS OF THE SCHEME
A. Originator
1. The scheme ensures that the Originator shall no longer have to employ a
comprehensive reconciliation process to check the receipt of expected payments.
It is recommended that, an Originator maintains a separate bank account in which
Transfers are collected. This will effectively ease reconciliation.
2. The Scheme provides the only means recognised by banks where, at the
discretion of an Originator, a Payer could authorise payments from a bank account
of amounts which are variable by time and or amount, until further notice.
3. For an Originator whose payments are subject to changes in amount, a variable
Authority is available, thereby avoiding the need to issue new instructions whenever
amounts change.
4. It also ensures that the Originator is able to manage and control cash flow by
exception and with greater certainty, by attending to unpaid Transfers. The
information on unpaid transfers will also be readily available.
5. An Originator shall be able to take advantage of electronic file formats to
update internal systems and records.
B. Payer
1. Provided by the Scheme is a simple, safe and convenient banking service that
enables a Payer to settle accounts as and when they fall due.
2. Further provisions by the Scheme are:-
a. the elimination of cheques
b. the discontinuation of visits and queues to cash offices or banks
c. the relief from worries about overlooking payment dates
d. a quick and easy resolution to queries at the Payer’s Bank, including an
immediate refund for payments made, if transactions are in dispute
e. an Originator, the ability to merge several payments into one transaction, by
using a variable Authority, provided a Payer consents
f. a Payer, through a variable Authority, the avoidance of the need to issue a
fresh Authority each time a payment amount changes.

500
CHAPTER 7
BUSINESS AND OPERATIONAL RULES
1. Direct Debit as a form of financial settlement facilitates settlement of "regular in
nature" payments. It is an instruction from a customer to their bank authorising an
organisation to collect funds from their account".
2. The process typically involves four parties - A service provider (Originator), service
provider's bank (Originator’s bank), a subscriber (Payer) to the service provider and
the subscriber's bank (Payer’s bank). Direct Debit also provides a viable option for
bank customers who intend to pull funds from their account with one bank to
another.
3. Direct Debit transactions are of 2 types:
-Fixed Direct Debit: allows fixed amounts to be debited from a payer's bank
account.
-Variable Direct Debit: allows variable amounts to be debited from a Payer's
bank account. Typically used for payments where amounts cannot be
predetermined in advance. In this instance, there is need for the service
provider to intimate the subscriber (payer) of the invoice amount well before
the debit is sent to his/her bank.
4. The Direct Debit mandate will clearly state whether it is fixed or variable
5. Every Originator must be assigned with a unique identification number by the
Originator’s bank. This number will be unique to the originator and will be used for
all direct debit transaction originated as a result of mandates executed in favour of
the originator, irrespective of the bank transacting. The unique Originator’s
Identification Number must be recorded in electronic funds transfer file and must
be quoted on all transfers.
6. A direct debit instruction is issued subject to the rules of the clearing house on
returned items. An item that is dishonoured must be returned within the local
clearing cycle in operation. Currently, local cheques clear in T+3. The clearing
house shall not accept paper vouchers under these rules
7. However, irrespective of (6), a payer shall obtain immediate reimbursement for
instructions that are issued in error or not in conformity with the terms of the
mandate or fraudulently issued and identified after the instruction has been
honoured.
8. The Originator’s bank shall submit transfer details to the clearing house at least 3
working days before payment due date.

501
9. An originator shall submit transfer details to the Originator’s Bank in accordance
with the electronic file format defined in the Nigeria Clearing House Rules.
10. If the Payer’s Bank cannot pay a Transfer for any reason, the Payer’s Bank shall
return that debit to the Originator’s Bank within the clearing period allowed under
the Clearing House Rules. The Originator’s Bank shall advise the Originator of the
unpaid item.
11. These Rules are subject to the settlement finality rules applicable to the Nigeria
Banker’s Clearing House.
Unpaid Direct Debit Transfers
1. As noted above, a Payer’s Bank may return a Transfer unpaid
2. A Transfer must be paid or returned unpaid within the same clearing
cycle applicable to local cheques subject to the Nigeria Banker’s
Clearing House rules
3. Representation should only occur when an Originator reasonably assumes
that a Payer shall meet the conditions necessary for payment.
4. The authority of an Originator to effect re-presentation does not arise from
the existence of a debt owed by a Payer to the Originator. An Originator’s
Bank may represent an unpaid item only once and for the same amount
that was originally dishonoured.
5. If a re-presented Transfer is dishonoured an Originator must make other
arrangements directly with a Payer to collect the amount due.
Advance Notice
1. An Originator must give an Advance Notice to a Payer on a variable
Authority, before:-
a. the first payment
b. changes to :-
i. the amount on the Transfer
ii. the due date of the Transfer
An Advance Notice is also required for the payment of :-
c. an initial un-stated amount
d. an amount subject to a limitation clause
An Originator may advise changes known in advance in a schedule.
An Advance Notice must be in writing.
Where appropriate, an Advance Notice should indicate:-
502
e. that an Originator shall not send a subsequent Advance Notice if the
amount on the Transfer changes solely because of an alteration in the
applicable statutory rate
f. the amount initially advised shall be subject to a subsequent discount,
mutually negotiated and agreed
For example: An invoice used as an Advance Notice may indicate:-
The total shown will be charged to your bank account by direct debit on or just
after __________.
2. Where the Originator is a national official body, for example a Government
department that is collecting variable statutory amounts payable, the Originator
must consult the Originator’s Bank on the form of Advance Notice required. Such
an Originator is exempted from issuing individual Advance Notices for changes in
the amount payable, after a Payer receives an Advance Notice of the first
payment, provided that :-
a. the amount payable is specifically identifiable in statute or subordinate
legislation duly passed by the National Assembly
b. the Payer is required to pay the statutory amount, if not by Transfer, then by
some other means
c. the variable Authority signed by the Payer states that if the statutory amount
payable changes, then the Originator shall provide full publicity without
individual Advance Notices
d. the Originator’s Bank is satisfied that the Originator shall provide full publicity
on changes in the statutory amount payable, in sufficient time before
Transfers are initiated, in case a Payer wishes to cancel an Authority.
e. the Originator shall not issue individual Advance Notices and all literature
shall clearly state this
3. In all cases, an Advance Notice, or the publicity referred to here-before, must
allow sufficient time for a Payer to raise a query, countermand a single
payment or, cancel the Transfer. Where the amount or due date is certain,
an Originator shall issue an Advance Notice not less than 14 days from the
due date. In the absence of any specific agreement between an Originator
and a Payer, this period shall be the minimum requirement. The Advance
Notice could be in writing or electronic as agreed between the Originator
and Payer.
Note; Should a club or professional institution make a change to the rate of
subscription or the date of payment, then each member must receive a
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separate notice of the change. An announcement of the change in a
professional journal or other publication is not adequate, although a separate
letter, giving advice of the change, may accompany an individually addressed
journal or publication.
Exceptionally, a written Advance Notice may not be required when a direct
action by a Payer requires an Originator to initiate a specific Transfer on Payer’s
bank account. This action must provide sufficient information to determine the
amount and date of Transfer. An Originator must obtain authority from the
Originator’s Bank before establishing an arrangement dispensing with an
Advance Notice. There are a number of possibilities giving rise to this:-
a. when an Originator is required to debit a Payer’s bank account following a
withdrawal of cash from an automated teller machine under the control of the
Originator
b. when there is a written request by a Payer to an Originator
c. when there is a request by a Payer to an Originator by means other than in
writing but providing an audit trail.
The Direct Debit Mandate
A. General
1. A Direct Debit Mandate is not and should not be misconstrued as
evidence of any contract between an Originator and a Payer’s Bank.
2. When requiring a Payer to complete a Mandate, the Originator should
provide a separate letter and/or leaflet, showing the essential features of
the Scheme. The letter and/or leaflet should provide in concise manner
the essential features of the scheme and highlight the key aspect and
mechanism that guarantees protection for the Payer. A sample format is
included in the Appendix.
3. Before publishing such information to a Payer, an Originator must obtain
the approval of the Originator’s Bank.
In all cases an Originator must:-
a. confirm that a Payer shall obtain immediate reimbursement from the
Originator, in case of an erroneous initiation of a Transfer
b. give a categorical assurance that Transfers shall conform strictly to the
terms of the Mandate and the conditions governing payments between
the parties concerned
c. explain the reasons for the use of a variable Mandate, and give details of
the Advance Notice a Payer will receive
504
d. include any additional information appropriate to the individual
circumstances of the Originator
e. advise a Payer that an Mandate may be cancelled at any time by
notifying the Originator accordingly
B Types of Direct Debit Mandate
1. There are two distinct types of Authorities:-
a. Variable Direct Debit Mandate
i. suitable for all payments, particularly if amounts are liable to change,
and must be used when it is intended to merge payments
ii. the Originator must give an Advance Notice to the Payer of amounts
and dates of debiting
b. Fixed Amount Direct Debit Mandate
This is suitable when amounts remain constant for the life of the Mandate.
2. If a Payer has a query regarding the authenticity of a Transfer applied to the
Payer’s account, the Payer’s Bank must return the transfer to the Originator’s
bank within the clearing period, and shall refer the Payer immediately to the
Originator.
3. The Payer’s Bank may decline to accept Mandate instructions to charge
Transfers to certain types of accounts, such as deposit and savings accounts,
which are subject generally to notice of withdrawal.
Amendment to a Direct Debit Mandate
1. A Payer’s Bank shall advise an Originator promptly of all technical changes
concerning:-
a. the Payer’s Bank
b. a Payer’s bank account
It is recognised that cases can arise where an Originator shall receive a notice
advising of an amendment or cancellation but will be unable to act on it before
the next due date of payment.
2. Amendments may arise:-
a. because a Payer’s bank account is transferred to another branch of the
same bank
b. because a Payer’s bank account is transferred to another bank

505
In this case, a Payer shall be required to obtain a new Mandate. A Payer’s
previous bank should return as unpaid transfers, Transfers received after a
change has occurred.
c. because a Payer authorises, in writing, material alterations to an Mandate,
such as :-
i. the account name
ii. the account number
iii. the due date of payment
iv. the frequency of payment
v. the amount
Note Whilst not a permanent amendment to an Mandate, a Payer may dispute
an Advance Notice and countermand the single payment advised.
3. A Payer’s Bank shall use a Mandate Amendment Advice form to notify an
Originator of the changes.
When produced by automated means the form may display the relevant
information only. An Originator may also receive Advice of new sorting codes
and or account details from banks. If one Originator is required to make
numerous amendments, for example arising out of a closure or merger of
branches, then a list giving details of all amendments to be made may be
provided, provided the Originator does not object.
4. On receipt of an Advice, an Originator must amend records accordingly.
5. The transfer of a Payer from one Originator to another can only be authorised
by the Payer concerned. The authorisation must be in the form of a new
Mandate.
6. A Payer should advise an Originator directly of any amendments made to a
Mandate.
The recommended formats and text for Direct Debit Mandates are included in
the Appendix.
CHAPTER 8
CONTROL MECHANISMS AND CONSUMER PROTECTION
General
These rules are developed with the key objective of ensuring that all participants
in the scheme are protected and that their roles and processes are clearly
articulated and understood by all stakeholders. To further ensure that users are

506
confident that their interest is protected, further control mechanisms are
recommended as best practices to achieve this objective. These
recommendations leverage on existing technology already in deployment in
the industry and should drive competition and product differentiation among
players:
1 All Payers’ Banks are required to have the facility for transaction notification
via sms and/or email. The Payer must be duly notified via either of these media
of the debit passed into their accounts within the clearing cycle. Payers should
encourage their banks to provide this service as a matter of course to meet
the need for prompt and adequate transaction information. However, the
inability of the Payer’s Bank to meet this requirement will not invalidate the
Transfer instructions that comply with the Mandate of the Payer.
2 Controlled Direct Debit is a feature of mobile banking that has been
implemented in other climes to provide the payer with more control over
debits to their accounts that are subject of Direct Debit Mandates. The Transfer
instruction is transmitted and can only become effective subject to the
authorisation of the Payer on his mobile phone.
3 A major challenge with the Direct Debit process is the ability to keep a track of
valid Direct Debit mandates on record. It is critical that Debit Mandates are
held as electronic records for ease of updates, tracking, monitoring, and direct
debit auto-verification. This should be implemented by Payer Bank’s to
improve the efficiency and effectiveness of the Direct Debit process.
4 A Payer must give the Payer’s bank adequate notice of cancellation of a
Direct Debit Mandate. A minimum period of 14 days is recommended to
enable all parties to the scheme to be adequately notified and records
updated.
5 Disputes arising from Direct Debit transaction will be resolved under the aegis
of the Clearing House in line with these rules.
6 A Unique Identifier will be assigned to Originators by their sponsoring banks
which certifies that the market participant is subject to these rules. The Unique
Identifier to be derived from Originators RC Number and relevant Product
Service Code e.g. 12346/01.
Control Requirements for Participation in the Scheme
I.All banks participating in this scheme shall have facilities for transaction
notification via sms and/or email. The Payer must be duly notified via either of
these media of the debit/credit passed into their account within the
subsisting clearing cycle.
507
II.In order to ensure ease of access to mandate instructions, banks are required
to have facilities for holding Direct Debit Authority in electronic form. This is to
ensure efficiency in the processing of debit request received from clearing.
III.A minimum of 14 days notice of cancellation must be given by the Payer to
his bank. This is to enable all parties to the scheme to be adequately notified
and records updated.
IV.Each originator will be sponsored by a bank. The Sponsor bank will assign a
Unique Identifier to the originator for use irrespective of the bank originating
the transaction. The clearing house will be duly notified of all registrations
within 48hrs.
V.It is expected that the Payers’ Bank would go through its normal confirmation
process (as in Cheque Confirmation) upon receipt of a Direct Debit Authority
to verify its authenticity.
VI.A “Kite Mark” or logo will be implemented for the scheme to be displayed on
the Debit mandates form accompanying invoices and subscription forms
issued by certified originators to subscribers for their products/services. This
mark represents a mark of “service quality” and “process integrity” for the
scheme.
VII.The Nigeria Bankers Clearing House shall monitor the operation of the
Scheme to ensure that all participants achieve and maintain the required
standards of documentation and procedure.
VIII.•AUDIT TRAILS: The following records must be maintained and accorded the
same retention period as for Cheques by the participating Banks:
-The executed Direct Debit mandate
-The executed Direct Debit Indemnity
-Full transaction history records of instructions transmitted to clearing.
-Full transaction history records of all returned items.
CHAPTER 9
THE DIRECT DEBIT INDEMNITY
1. Every Originator must execute the prescribed form of Indemnity provided by
an Originator’s Bank.
2. An Originator shall not be permitted to, single-handedly, make amendments
to the standard text. An Originator’s Bank may, with discretion, and the
agreement of other participating banks, require certain additions or deletions

508
to be made to text when particular circumstances or the status of an
Originator indicate that certain contingencies are not covered.
3. An Originator shall undertake to effect settlement of Indemnity claims with
Payers’ Banks immediately and in any case within 5 working days of the date
of the claim.
4. An Originator’s Bank, after having accepted its cover, shall give written notice
of the termination of an Indemnity.
5. An Originator should note that liability is unlimited on:-
a. time there is a continuing liability in respect of Transfers initiated before
receipt of a written notice of termination by a Payer’s Bank
b. amount the liability of an Originator arises not only in respect of Transfers
initiated in error or not at all, but also in respect of any consequential loss
attributable to such errors
Claims under the Indemnity
1. An Originator shall undertake to indemnify banks against any loss arising from
Transfers.
2. The liability under this Indemnity shall be limited to a period of one year.
3. There is no limit on the amount on an Indemnity liability. This is because of
consequential loss as well as errors of commission and omission.
4. An Originator must honour an Indemnity claim immediately and in any case
within 14 days.
5. An Originator wishing to make a counter-claim on a Payer’s Bank should seek
guidance from the Originator’s Bank. The Originator’s Bank should assist an
Originator in lodging the counter-claim with the Payer’s Bank concerned.
6. A Payer’s Bank shall not claim on an Indemnity to recover funds paid in error.
The Payer’s Bank may request an Originator for a full or partial refund of
funds, in writing. This should not include a request for consequential loss. Any
recovery shall be at the discretion of an Originator. An Originator doubting
the validity of a claim should seek the advice of the Originator’s Bank.
Note The essential principle of the Scheme is the right of a Payer to seek and
obtain an immediate refund of payments made in error from and by an
Originator.
On establishing that an Originator was at fault, a Payer’s Bank shall assist a
Payer in lodging an Indemnity claim with the Origin.

509
CHAPTER 10
COMPLIANCE WITH RULES, PENALTIES AND ARBITRATION
1. Each of the participants in this scheme shall conform to the requirements for
admission into the scheme and all the criteria laid down for participation in
the Nigeria Clearing House and the provisions of these rules.
2. Each Originator is required to have executed the Direct Debit Indemnity with
an Originating Bank as sponsor. The relevant Originating Bank shall duly
advise all banks after the execution of the agreement.
3. Each participant shall comply with the specification and standards
established by the relevant payment service provider for electronic files
delivered to the ACH.
Penalties
1. The Nigeria Banker’s Clearing House may require an Originator to withdraw
from the scheme if in their opinion their activities constitute an abuse of the
scheme.
2. All participants in the scheme shall be subject to the rules of the Nigeria
Banker’s Clearing House and penalties imposed in line with its rule for breach
of the rules.
Resolution and Arbitration Mechanisms
• Any dispute between participating Banks in the Direct Debit scheme shall be
referred to the CBN for adjudication. The decision of the CBN shall be binding
on all parties.
• Refer to Chapter 9 – Direct Debit Indemnity
CHAPTER 11
WITHDRAWAL OF AN ORIGINATOR
1. An Originator may withdraw from the Scheme either voluntarily or
compulsorily.
2. Voluntary Withdrawal
An Originator must plan very carefully, in close consultation with the Originator’s
Bank, the following actions:-
a. the cancellation of existing Instructions
b. the progressive replacement of the direct debiting method of payment by
some other method

510
Note Should an Originator wish to revert to payment by standing order, Payer’s
must submit new standing order mandates.
An Originator withdrawing voluntarily from the Scheme should prudently
consider establishing a contingency reserve for meeting:-
• any claims which may arise in respect of unpaid Transfers
•any Indemnity liability which may arise subsequent to withdrawal or termination
of liability respect of Transfers initiated prior to either of these events
3. Compulsory Withdrawal
An Originator’s Bank may require the withdrawal of an Originator from the
Scheme if:-
a. in their opinion, Transfers are carried out either in a manner which constitutes
an abuse of the Scheme or is without due regard to the interests of Payers
b. there is evidence that an Originator is deliberately ignoring standards and
procedures detailed in these Rules
c. the contractual capacity of the Originator is terminated by legal process, for
example, by bankruptcy, liquidation or the appointment of a receiver
Note In extreme cases it may be necessary for an Originator’s Bank to insist on
the withdrawal of an Originator at short notice, notwithstanding the disruption
which may occur. However, an Originator’s Bank shall make every effort to give
sufficient notice to enable an Originator make alternative arrangements. In this
context, an Originator’s Bank shall not assume an obligation in giving notice.
More particularly, an Originator’s Bank shall not accept liability under any
circumstances for any loss that an Originator may suffer as a result of withdrawal
from the Scheme.
CHAPTER 12
MONITORING BY BANKS
1. The Nigeria Banker’s Clearing House shall monitor operations of the Scheme to
ensure that all Originators achieve and maintain the required standards of
documentation and procedure.
2. An essential feature of the monitoring process shall be a selective random
audit, from time to time, of Transfers received by banks and the respective
Instructions held by Originators.
3. The audit shall take place after a day’s clearing session and, in the next day’s
clearing session, Transfers that had earlier failed to conform to significant terms
of the respective Instructions shall be unpaid.
511
4. In this context, significant terms of an Instruction shall include :-
a. the amount
b. the due date
c. the Payer’s identity; that is, the name, number of the account and Sort Code
to be debited
d. The Originator’s Unique Identifier under Payment Reference.
5. An Originator’s Bank shall advise an Originator accordingly, should an audit
reveal that there is an unacceptable level of error or substantial deviation from
standard procedure. Further, should there be no subsequent improvement that
Originator may be required to withdraw from the Scheme.
6. The monitoring of Transfers shall assist customers using the Scheme. Failure by
the Nigeria Clearing House to carry out random audits shall not affect the
validity of any claim under the Indemnity.

512
APPENDIX 1
FORM OF DIRECT DEBIT MANDATE (FIXED AMOUNTS)
Date [•]
FROM [Insert Name of Payer] Creditor’s RC Number/Service
Code Identifier:
[Insert Address of Payer]
TO: [Insert Name of Bank]
[Insert Address of Bank]
CC: [Insert Name of Creditor]
[Insert Address of Creditor]
Dear Sirs,
MY AGREEMENT [insert details of the underlying commercial transaction
between the Creditor and the Payer] dated [•]
The details of my/our bank account are as follows:-
Bank:
Address of Bank Branch:
Account Number:
Sort Code:

I/We hereby request, instruct and authorise you to debit my/our account in
accordance with any Direct Debit Instruction issued and delivered to you by the
Creditor the sum of __________ (amount in words), necessary for payment of the
monthly instalment due in respect of the above-mentioned agreement) on the
__________ day of each and every month commencing on __________ and
continuing (state the period for which the underlying contractual arrangement
exists for). All such debits from my/our account by you in accordance with any
Direct Debit Instruction issued and delivered to you by the Creditor shall be
treated as though they have been signed by me/us personally.
The amounts are FIXED and may be debited on ______of each month. I/We
understand that the Creditor may change the amount and dates only after
giving me/us prior notice and subject execution of this mandate in its variable
form.

513
I/We understand that the withdrawals hereby authorised will be processed by
electronic funds transfer, and I/we also understand that details of each
withdrawal will be printed on my bank statement and/or an accompanying
voucher.
I/We agree to pay any bank charges relating to this Mandate.
This Mandate may be cancelled by me/us by giving both you and the Creditor
twenty (20) Business Days notice in writing, sent by prepaid registered post, or
delivered to the addresses stated above, but I/we understand that I/we shall not
be entitled to any refund of amounts which may have already been withdrawn
while this Mandate was in force if such amounts were legally owing to the
Creditor.
I/We understand that if any Direct Debit Instruction is paid which breaches the
terms of this Mandate, you shall not be liable to us in any way or manner
whatsoever, whether under contract, tort or negligence and that our recourse
shall be limited to the Creditor..

Signed at __________ on this __________ day of __________ 20 __________


________________________________________
[SIGNATURE AS PER ACCOUNT MANDATE] for and on behalf of: [Insert name of
Payer]

In the presence of:


Name:_________________________________________
Address:_______________________________________
Occupation:____________________________________
Signature:_____________________________________

514
APPENDIX 2

FORM OF DIRECT DEBIT MANDATE (VARIABLE AMOUNTS)

Date [•]

FROM [Insert Name of Payer] Creditor’s RC Number/Service Code Identifier:


[Insert Address of Payer]

TO: [Insert Name of Bank]

[Insert Address of Bank]

CC: [Insert Name of Creditor]

[Insert Address of Creditor]

Dear Sirs,

MY AGREEMENT [insert details of the underlying commercial transaction between


the Creditor and the Payer] dated [•]

The details of my/our bank account are as follows:-

Bank:

Address of Bank Branch:

Account Number:

Sort Code:

I/We hereby request, instruct and authorise you to debit my/our account in
accordance with any Direct Debit Instruction issued and delivered to you by the
Creditor for such amounts necessary for monthly/quarterly/semi-annual payments
due in respect of the above-mentioned agreement on the __________ day of each
and every month/quarter/half-year commencing on __________ and continuing
(state the period for which the underlying contractual arrangement exists for). All
such debits from my/our account by you in accordance with any Direct Debit
Instruction issued and delivered to you by the Creditor shall be treated as though
they have been signed by me/us personally.

The amounts are variable and may be debited on various dates. I/We understand
that the Creditor may change the amount and dates only after giving me/us prior
notice.
515
I/We understand that the withdrawals hereby authorised will be processed by
electronic funds transfer, and I/we also understand that details of each withdrawal
will be printed on my bank statement and/or an accompanying voucher.

I/We agree to pay any bank charges relating to this Mandate.

This Mandate may be cancelled by me/us by giving both you and the Creditor
twenty (20) Business Days notice in writing, sent by prepaid registered post, or
delivered to the addresses stated above, but I/we understand that I/we shall not
be entitled to any refund of amounts which may have already been withdrawn
while this Mandate was in force if such amounts were legally owing to the Creditor.

I/We understand that if any Direct Debit Instruction is paid which breaches the
terms of this Mandate, you shall not be liable to us in any way or manner
whatsoever, whether under contract, tort or negligence and that our recourse shall
be limited to the Creditor..

Signed at __________ on this __________ day of __________ 20 __________

_______________________________________

[SIGNATURE AS PER ACCOUNT MANDATE] for and on behalf of: [Insert name of
Payer]

In the presence of:

Name:_________________________________________

Address:_______________________________________

Occupation:____________________________________

Signature:_____________________________________

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APPENDIX 3

FORM OF INDEMNITY

To: [Originator’s Bank]

[Originator’s Address]

Dear Sirs,

1. IN CONSIDERATION of you severally accepting instructions


from time to time from _______________________________________ (hereinafter called
the “Creditor”) or from an agent of the Creditor to debit the account of the Payer
with the amounts specified on instruments drawn in paper form or in automated
input form written in accordance with the Direct Debit Agreement dated [•]
between _______________________, we hereby warrant that the Payer on whose
account a debit is drawn will have signed a Direct Debit Mandate, and we shall
keep you indemnified upon your first demand against all actions, losses, damages,
claims, demands costs and expenses (including legal costs, fees and expenses on
a full indemnity basis) howsoever arising, which you may incur or sustain directly or
indirectly from such debiting or failure to debit and without our requiring proof of
our agreement to the validity of such demand we shall forthwith pay the amount.

2. We authorise you to admit compromise or reject any claims made upon you
without reference to or authority from the Creditor. Furthermore, with respect to any
claims or demand for the refund of any money received by you on our behalf
pursuant to any debit and transfer made on our behalf in accordance with the
[Direct Debit Agreement] [direct debit arrangements between ourselves and the
Payer], you are hereby authorised and are at liberty to comply with such demands
and claims and without any further reference or authorisation from us, you may
debit our account and transfer such funds to the account of the Payer.

3. You are not required to verify or check that instructions given to you have been
given and remain in force in respect of any debit and transfer made at the request
of the Creditor.

4. You are not required to verify or check that any purpose of payment stated in
the Direct Debit Mandate signed by the Payer is fulfilled or is observed.

5. This Direct Debit Indemnity is to be in addition to and is not to prejudice or be


prejudiced by any other Direct Debit Indemnity which has been or may now or
hereafter be executed by us in connection with the Direct Debit Agreement, and
517
shall be binding on us as continuing security notwithstanding any payments from
time to time made to you or any settlement of account or disability, incapacity,
insolvency that may affect us or any other thing whatsoever.

6. You are to be at liberty without thereby affecting your rights hereunder at any
time and from time to time at your absolute discretion to release, discharge,
compound with or otherwise vary or agree the liability under this Direct Debit
Indemnity or make any other arrangements with us.

7. This Direct Debit Indemnity shall be enforceable notwithstanding any change in


your name or any change in the constitution of the bank, its successors or assigns or
by its amalgamation with any other bank or banks.

8. This Direct Debit Indemnity shall be governed by and construed in accordance


with the laws of the Federal Republic of Nigeria.

Signed By: ______________________________________

for and on behalf of: [Insert name of Creditor] pursuant to a resolution of the Board
of Directors of the Creditor a certified copy of which is annexed hereto

In the presence of:

Name:_________________________________________

Address:_______________________________________

Occupation:____________________________________

Signature:_____________________________________

518
APPENDIX 4

LETTER TO PAYER

DIRECT DEBIT

Your rights

Direct Debit is one of the safest ways of paying your bills. Organisations using the
Direct Debit Scheme go through a careful vetting process before they are
authorised to participate in the scheme, and are closely monitored by the banking
industry.

The Direct Debit Scheme protects you and your money by means of the rules that
drive the Direct Debit Scheme.

This protection provided under the scheme is offered by all banks that take part in
the Direct Debit Scheme. The efficiency and security of the Scheme is monitored
and protected by your own bank.

Your Protection under the Scheme

• If the amounts to be paid (in the case of a Fixed Mandate) or the payment dates
change, the organisation collecting the payment will notify you normally 14
working days in advance of your account being debited or as otherwise agreed

• If an error is made by the organisation or your bank, you are guaranteed a full
and immediate refund from your bank of the amount paid

• You can cancel a Direct Debit at any time by contacting your bank. You are
also required to notify the organisation concerned.

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520
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522
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525
526
527
CENTRAL BANK OF NIGERIA

NIGERIAN UNIFORM BANK ACCOUNT NUMBER


STANDARDS

(N.U.B.A.N)

APPROVED

Release Date: August 19th 2010


Version number: 1

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1. Introduction

The Bankers Clearing House has witnessed an upsurge in the volume of ACH
(automated direct credits) cleared through the system since February, 2009. This
resulted from the directive of the Federal Government to the effect that all
Ministries, Departments and Agencies of the Federal Government should replace
all forms of cheque payments with electronic payments as from January 01, 2009.
As the ACH volume increased, so have complaints of banks and bank customers
resulting from the incidents of abuse of the clearing system. Such of the complaints
include:
a) Delayed presentment of customers instructions in the clearing house
b) Delayed application of inward ACH items by some banks
c) Late Return of unapplied inward ACH items
d) Application of inward ACH items to wrong accounts
e) Bank customers quote account numbers wrongly
It was observed that many of these complaints are traceable to the non-uniform
structure of bank account numbers among Nigerian banks. For instance most ACH
beneficiaries quote their bank account numbers wrongly while providing such
account numbers to their employers, in preparation for electronic means of salary
payment. When this happens, both the employer and the presenting bank would
not be able to validate such accounts before presenting such payment
instructions through the Automated Clearing House.
A uniform account number structure scheme would enable both the employer
and the presenting bank to validate account numbers and this would greatly
reduce:
a) The volume of items returned unapplied due to wrong account numbers;
b) The incidence of posting to wrong account numbers, by the receiving bank;
c) The incidence of delayed presentment of outward ACH items. Presently,
most banks use days to cross-check, validate and correct account numbers
before presenting ACH items through the Automated Clearing House;
d) The incidence of delayed application of inward ACH items. Most banks
expend a lot of energy and time to correct account numbers before
uploading inward items just because their core banking applications work
with too long bank account numbers.
It is hoped that the implementation of a Uniform Bank Account Number scheme,
then many of the electronic payment problems we currently experience would be
resolved and banks would experience reduced cost of operations and increased
efficiency of ACH processing.

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2. Best Practice
Uniform account numbering system is in line with global best practice. For instance,
the UK Payments Council published ‘Industry Best Practice for Financial Institutions:
Account Number Formats’ on June 20, 2009. UK banks are required to implement
the scheme. An extract from the document follows:
Account Number Formats
Also, we noted the ISO 13616-1 (Financial Services – International Bank Account
Number IBAN) published by the International Organization for Standardisation (ISO)
on 01/03/2007 was also to give effect to the adoption of uniform account
numbering structure.
The adoption of a 10-digit NUBAN will make Nigeria fully comply with the 10-digit
Account Number structure required by the West Africa Monetary Institute towards
the economic integration of ECOWAS countries.
3. Nuban Account Format
The NUBAN is a 10-digit Bank Account Number format, with the following structure:
999999999 - Account Serial Number
9 - A Check Digit constructed to support a modulus check, which
enables the presenting bank to perform checks. The Check Digit is derived from an
algorithm that operates on a combination of the 3-digit CBN-assigned Bank Code
and the 9-digit Account Serial Number.
Every bank is required to create and maintain a NUBAN code for every customer
account (current, savings, etc) in its customer records database, and the NUBAN
code should be the only Account Number to be used at all interfaces with a bank
customer. We expect every bank to maintain their present Account Numbers and
use them for their internal operations only as from the effective date of NUBAN, but
every such account number would have to be mapped to a NUBAN code as an
Alternate Account Number.
The bank customer should be provided with only the NUBAN code which he/she
would use as a means of account identity at every interaction with the bank. The
onus lies on the bank to map such NUBAN code supplied by the customer to the
relevant internal account number within the bank’s technology system.
A 10-digit account number is simple and can easily be managed by bank
customers. NUBAN frees bank customers from the risk of quoting account numbers
wrongly – a risk that is higher with account numbers of longer digits.
Impact of Nuban on MICR Cheques
The Nigeria Cheque Standards already prescribes a 10-digit account number in
the MICR codeline of all cheques. This shows clearly that NUBAN is compliant with
the Nigeria Cheque Cheque Standard, so banks will not have to change the
physical features of the cheque, now or in the future. However banks would have
to change the structure of the 10-digit account number in the codeline. NUBAN
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actually helps to streamline the account number of all other account types
(Savings Account, etc.) to the 10-digit format which Current Accounts have
enjoyed over the years.
4. Usage of Nuban in ACH Operations
The NUBAN shall be used in ACH operations as follows:
a) Every payer shall obtain the 3-digit Bank Code and a 10-digit NUBAN code
from the payee whenever ACH payments are to be set up;
b) The Payer’s bank shall ensure that all payee accounts supplied by the payer
conform to NUBAN standards. The Payer shall validate the check digit (10th
digit) of the NUBAN code of every electronic payment instruction, and only
instructions with valid NUBAN codes shall be presented in the Automated
Clearing House;
c) The Receiving (Payee) Bank shall upload inward ACH payments based only
on the NUBAN codes of each payment instruction; such upload
program/software shall validate the check digit (10th digit) of the NUBAN
code in the upload process. All inward items with invalid NUBAN codes shall
be returned unapplied, and the receiving bank shall not make any manual
effort to correct such records.
d) The Account Number field in the MICR codeline of cheques shall contain
only the NUBAN code.
5. Implementation Strategy
Sequel to consultations with relevant stakeholders including 3 major providers of
core banking applications to the Nigerian banking system, we hereby mandate a
period of nine (9) months for full compliance by the Deposit Money Banks.
Compliance monitoring by the Payments System Policy and Oversight Office will
commence six (6) months from the release date of this document. All DMBs are
expected to submit their comprehensive migration plans to the Central Bank of
Nigeria one (1) month from the release date herein.
6. Sanctions
Any infractions to the dictates and stringent timelines provided in this document
shall attract severe sanctions as may be determined by the Central Bank of Nigeria
from time to time.

Signed

MANAGEMENT

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NIGERIA DIRECT DEBIT SCHEME

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CHAPTER 1

INTRODUCTION
1. Direct Debit has been operated in Nigeria in paper form in the form of “Debit
Notes” originated by payer’s bank using the Nigeria Clearing House
infrastructure. The Automated Clearing House was implemented in 2002 and the
Nigerian version of the Domestic Funds Transfer introduced to the market as NEFT
(NIBSS Electronic Funds Transfer). NIBSS (Nigeria Inter Bank Settlement System)
owns and manages the physical infrastructure for clearing of cheques and
paperless clearing instruments in Nigeria
ACH Direct Debit (DD) as a product was formally introduced to the Nigerian
Clearing System by the Nigeria InterBank Settlement System (NIBSS) in January
2006. It was introduced as a variant of NEFT (NIBSS Electronic Funds Transfer) and
operated by participating banks under the aegis of the Nigeria bankers clearing
house. Also, other market participants in the payments environment such as
Interswitch have also introduced variants of Direct Debit products which run-off
their switching infrastructure but with ultimate settlement between the banks
passing through NIBSS.

There are currently no general rules specific to Direct Debit as a payment


mechanism in the Nigeria market. What exist are corporate rules developed to
guide the participants in the relevant switch on the various products that run off
this switch, and the general rules for the clearing house. This underlies its relative
low acceptability in the market as there are no clearly articulated and
documented rules that guide and bind market participants, and thus grow the
confidence of the user to accept and use the product.

2. The ACH Debit is a cash-less form of financial settlement which facilitates


“regular in nature” payments. It permits an Originator to collect amounts due
from a Payer at the Payer’s Bank by initiating Direct Debit Transfer on a bank
account nominated in a Direct Debit Mandate. Banks are not responsible for
any underlying contract as it is solely a method of collecting payments. It also
provides an efficient platform for Originators to draw funds from their account
across banks in an efficient manner. In an environment where bank customers
have multi-bank relationships, it provides the right platform for optimal
management of liquidity across banking relationships.
3. Organisations or individuals that regularly or periodically receive large volumes
of payments may benefit immensely from the scheme.

533
4. An organisation wishing to join the Scheme will typically contact the appropriate
service division of its Originator’s bank. The organisation is expected to satisfy the
requirements of the bank before admittance.
The development of a Code of Conduct for Bill Payment is one of the initiatives
arising from the CBN Vision 2020 for the Financial System on Payments. The
implementation of this initiative provides the background to development of these
rules, Nigeria Direct Debit Rules.
We have adopted some of the content from the Direct Debit Rules of other
countries such as Kenya, SEPA, UK due to similarity in operating environment and
need to adopt best practices.

CHAPTER 2

DEFINITIONS

1. Direct Debit Transfer


A Direct Debit Transfer is a payment prepared in an Electronic Funds Transfer
format, in this case, the NEFT Data Transfer format or any other format prescribed by
the relevant service provider.

These Rules refer to a Direct Debit Transfer as a Transfer.


2. Direct Debit Mandate

This is a written authority given by a Payer to the Payer’s Bank, to make payments
from an identified bank account at the request of, and to the account of, an
Originator. The authority is given by the Payer to the Payer’s Bank with a copy to
the Originator. However, in the event that the written authority is given to the
Originator, who in turn presents to the Payer’s Bank, it is required that the Payer’s
Bank duly confirm authenticity from the Payer through its normal process for
confirmations.

These Rules refer to a Direct Debit Mandate as an Authority.

3. Variable Direct Debit Mandate


This authority allows variable amounts to be debited from a Payer’s bank account.
It is used for regular payments that cannot be forecast in advance and for amounts
that change periodically (monthly, quarterly, annually, etc.). An Originator must
provide an Advance Notice to a Payer, of the amounts and dates of payment, in
sufficient time for any queries to be raised before payment. A new Authority must
be variable and, in practice, the vast majority of existing Authorities are in variable
format.

534
4. Advance Notice
This is the notice that must be given by an Originator to a Payer who has signed a
Variable Direct Debit Mandate. At least 14 calendar days' notice must be given, in
respect of the date and or amount to be debited.

5. Direct Debit Indemnity


A Direct Debit Indemnity, referred to in these Rules as an Indemnity, protects a
Payer should an incorrect amount be debited, a debit occur earlier than specified
or in error. Should a Payer query a payment as given, the Payer’s Bank must, on
request, make an immediate refund to the Payer’s bank account. This covers
situations where an Originator may not have given the required Advance Notice
regarding a change of amount or date.

6. Debit Order/Debit transaction – means a mandated payment instruction from a


user to a bank to collect money from a client e.g. insurance premium, hire
purchase, rentals. This definition does not exclude a situation where a user initiates
such an instruction for its own account, or for other variable amount subject to
compliance with the conditions stipulated herein.

CHAPTER 3

PARTICIPANTS AND THEIR ROLES


1. Originator or Biller
An originator or Biller is an organisation that is able to make a Direct Debit
Transfer. A Direct Debit Indemnity binds an Originator to collect only amounts
that have been authorised by a payer on or after a specified date, notified in
advance.

2. Originator’s Bank (also known as Creditor Bank)


The Originator maintains a bank account with the bank that presents the
debit instruction to clearing. An Originator must use the services of a bank to
introduce Direct Debit Transfers to the Clearing House. The Originator must
satisfy a bank’s internal requirements to be allowed access to the Direct
Debit Scheme.

3. Payer
A payer is the party whose bank account is to be debited as instructed in a
Direct Debit Mandate, typically a customer of an originator or has an existing
financial relationship with an originator.

4. Payer’s Bank (also known as Debtor Bank)


This is the bank where the payer maintains an account.
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5 Payment Service Provider (PSP)
A PSP is a payment service company that is able to accept Direct Debit
Transfers from Originators/Billers, for processing through the Automated
Clearing House. The funding aspect of all Direct Debit Transfers must be
processed through Originator’s Bank and the Payer’s Bank.

Criteria for Entry into the Direct Debit Scheme


Originating Bank
I. Must be a member of the Automated Clearing House and integrated with a
Payment Service Scheme that accepts direct debit transfers for processing.
The Payment Service Scheme must have been duly licensed by the Central
Bank to carry out payment / switching services.
II. It must hold an account for the originator to receive proceeds of the Direct
debit transfer.
III. Originating Banks must comply with the file specification and standards
established by NIBSS or the relevant payment service scheme for electronic
file delivery.
IV. Must have systems in place to automatically trigger issuance of direct debit
instructions on due date. This is to ensure that installed processes are efficient
enough to meet the expectation of users for settling recurring obligations
using this scheme.
Payer’s Bank
I. Must be a member of the Automated Clearing House and integrated with a
Payment Service Scheme that accepts direct debit transfers for processing.
The Payment Service Scheme must have been duly licensed by the Central
Bank to carry out payment / switching services.
II. It must hold an account for the payer from which payment will be issued in
line with the Direct Debit Authority.
III. Must hold a valid Direct Debit Authority executed in line with the payer’s
mandate with the bank.
Automated Clearing House / Payment Service Providers.
I. The process and participation criteria for the Direct Debit Scheme is guided
by the Nigeria Bankers’ clearing House Rules and the Guidelines on
Transaction Switching Services.
Originators/Billers
I. Originators shall execute the Direct Debit Indemnity with any bank that
originates its transaction.

536
II. Every originator will be assigned a Unique Identification Number by its sponsor
bank. The identifier shall be unique to each biller or originator and shall be
used irrespective of the bank originating the transactions. The Unique
Identifier facilitates the process for automated mandate confirmation of
Direct Debit Authority. See Chapter 5 Item 8.

CHAPTER 4
RIGHTS AND OBLIGATIONS OF ALL PARTICIPANTS

A Originator
1. It is pertinent that an Originator must first obtain an Authority from a Payer
before initiating a Transfer on the Payer’s bank account.
An Originator must be prepared to accept any Indemnity claim from a
Payer, arising from an amendment and or a limitation clause inserted by the
Payer before lodgement.

2. On receipt of a Payer’s signed Authority, an Originator becomes entirely


responsible for collecting payments due under that Authority, via a Transfer.
An Originator cannot require the Payer’s Bank to settle by any other means.
3. An Originator must:-
a. initiate a Transfer strictly within the terms of the Authority
b. initiate a Transfer within the terms of any Advance Notice given to a
Payer
The data on a Transfer must conform to that advised in the Authority.

An Originator’s identity quoted on a Transfer, if any, must be the same as


that quoted in the Authority.

4. Per adventure an Originator decides to vary the terms of a fixed amount


Authority, a Payer must provide a new Authority incorporating a
cancellation clause.
5. It is expected that an Originator should seek the advice of the Originator’s
Bank before making any changes to:-
a. the name or constitution of the Originator
b. information quoted on an Authority
The Originator’s Bank may require an Originator to give notice of such a change to
a Payer and/or a Payer’s Bank.

6. It is pertinent for the Originator to note that a Payer can cancel an Authority
without reference; for instance, the appointment of a liquidator or receiver

537
may involve statutory publicity, which by implication infers that a Payer has
provided constructive notice.
7. If a fixed amount Authority exists for a payment that has not yet been settled
by a specified date and payment is outstanding, then an Originator’s Bank is
prohibited from collecting arrears via a Transfer. The prohibition does not
extend to the re-presentation of an individual unpaid Transfer or in situations
where the Originator has adequately notified the Payer.
8. If an Originator is notified that an Authority is cancelled or amended, the
Originator must alter his records immediately, in order to ensure that:-
a. a Transfer is not initiated after receipt of such notice of cancellation
b. all Transfers initiated in the future incorporate the amendment so
notified, in the case of amendment.
Rights and Obligations of all Participants
Note:
a. For ease of reference, it is recommended that an Originator retains
documentation received from a Payer’s Bank. This is important as the
absence of evidence could prejudice a successful counter-claim
against a Payer’s Bank.
b. It is recommended that an Originator ensures that payments made
under separate Authorities are not merged as this could lead to
difficulties when a Payer wishes to cancel an Authority (not all
authorities).

9. It is the responsibility of an Originator’s Bank to ensure that an Originator


strictly adheres to the requirements of the Scheme.
Only Banks that are members of the Nigeria Clearing House shall act as
Originators Banks. The moment a bank ceases to be a member of the
Clearing House, related Originators shall appoint other Banks in the clearing
house with whom they either have account or choose to open account
with.

10. It is the responsibility of the Originator’s Bank to give information, advice and
guidance on all aspects of the Scheme to an Originator.

B Payer
1. The initiation of a Transfer must be strictly within the terms of the Mandate
and any Advance Notice to which a Payer is entitled.
2. A Payer is at liberty to cancel a Mandate at any time by advising the Payer’s
bank in writing and with a copy to the Originator. The Originator will duly
advise his bank on receipt of the notice of cancellation.. It is not the
538
Originator Bank’s responsibility for accepting a cancellation of an Authority.
Therefore, the Payer must raise a claim against the Originator through his
bank per adventure a payment gets through after cancellation, and the
Originator must pay promptly.
It is possible that a notice of cancellation is received by the Payer’s bank and
Originator, but not be able to act on it before the next due date of payment.
Adequate notice must be given by the payer to avoid such situations. For recurrent
items where collected is made in advance of service provided, this risk is well
mitigated.

C Payer’s Bank
1. A Payer’s Bank shall accept Transfers originated under an Authority on the
understanding that it is not responsible for verifying or checking that:-
a. an Authority exists
b. payments conform to the terms of the Authority
c. any purpose or condition of payment expressed in that Authority is
fulfilled
2. Depending on the nature of the account, which could be deposit account
or any other type of account that might be subject to notice of withdrawal,
a Payer’s Bank may decline to accept instructions to charge Transfers to
such accounts.

CHAPTER 5

ADMISSION OF ORIGINATORS

1. Originators, while acting as such, must recognise that a trust is being


bestowed on them by banks, with extensive power, which must be exercised
in strict accordance with the requirements stipulated in these Rules.
2. A prospective Originator must be a customer of a bank whose responsibility it
would be to support the application. An Originator may hold accounts with
several banks
3. In making an assessment, an Originator’s Bank shall have regard to an
applicant’s contractual capacity, credit risk, financial standing and quality
of administrative control.
4. As a condition of participation in the Scheme, a prospective Originator must
execute an Indemnity, obtained from the Originator’s Bank.
5. A prospective Originator’s application must stand on its own merits. An
Originator's Bank shall not accept any third-party support for the liability

539
assumed under an Indemnity. In this context, a third-party relationship does
not exist between a parent and an associated or subsidiary company.
6. The decision on sponsorship shall not be influenced by the existence or
availability of any private insurance cover an Originator may choose to
obtain to cover his Indemnity liability. The assignment of such cover in favour
of banks is neither practicable nor acceptable.
7. After execution, an Originator must return the signed Indemnity and other
accompanying documents deemed necessary by the Originator to the
Originator’s Bank.
8. The Originator’s Bank shall use it’s discretion in accepting an Originator to the
scheme. However, the Nigeria Clearing House management shall also act
as arbiter, if warranted, in future. This will provide a forum for banks to share
information. The fate of a prospective Originator shall rest with the
Originator’s Bank. The Originator’s Bank, in communicating a determination
to a prospective Originator, shall not refer to the Nigeria Clearing House.
9. After the approval of an application, an Originator’s Bank shall allocate the
Originator with a unique Originator’s Identification Number for quoting on all
Transfers. The Unique Identifier will be the Originator’s RC Number, to be
captured as Payment Reference. Where the Originator provides more than
one service and seeks to differentiate them, a Service Code will be assigned
and associated with the Identifier in the form – RC Number/--. The Unique
Identifier, and where relevant, the Service Code must be indicated on all
mandates and billing instructions emanating from the Originator.
10. The lodgement of a signed Indemnity with an Originator’s Bank must be
notified to other banks, together with an advice of the Originator’s
Identification Number issued, through the Nigeria Clearing House.
11. The allocation of an Originator’s Identification Number may be made
exceptionally in advance of lodgement of the Indemnity when such a
number is required for testing automated procedures.

CHAPTER 6

SCOPE AND BENEFITS OF THE SCHEME

A Originator
1. The scheme ensures that the Originator shall no longer have to employ a
comprehensive reconciliation process to check the receipt of expected
payments. It is recommended that, an Originator maintains a separate bank

540
account in which Transfers are collected. This will effectively ease
reconciliation.
2. The Scheme provides the only means recognised by banks where, at the
discretion of an Originator, a Payer could authorise payments from a bank
account of amounts which are variable by time and or amount, until further
notice.
3. For an Originator whose payments are subject to changes in amount, a
variable Authority is available, thereby avoiding the need to issue new
instructions whenever amounts change.
4. It also ensures that the Originator is able to manage and control cash flow by
exception and with greater certainty, by attending to unpaid Transfers. The
information on unpaid transfers will also be readily available.
5. An Originator shall be able to take advantage of electronic file formats to
update internal systems and records.

B Payer
1. Provided by the Scheme is a simple, safe and convenient banking service
that enables a Payer to settle accounts as and when they fall due.
2. Further provisions by the Scheme are:-
a. the elimination of cheques
b. the discontinuation of visits and queues to cash offices or banks
c. the relief from worries about overlooking payment dates
d. a quick and easy resolution to queries at the Payer’s Bank, including an
immediate refund for payments made, if transactions are in dispute
e. an Originator, the ability to merge several payments into one
transaction, by using a variable Authority, provided a Payer consents
f. a Payer, through a variable Authority, the avoidance of the need to
issue a fresh Authority each time a payment amount changes

CHAPTER 7
BUSINESS AND OPERATIONAL RULES
1 Direct Debit as a form of financial settlement facilitates settlement of "regular
in nature" payments. It is an instruction from a customer to their bank
authorising an organisation to collect funds from their account".
2 The process typically involves four parties - A service provider (Originator),
service provider's bank (Originator’s bank), a subscriber (Payer) to the service
provider and the subscriber's bank (Payer’s bank). Direct Debit also provides
a viable option for bank customers who intend to pull funds from their
account with one bank to another.
541
3 Direct Debit transactions are of 2 types:
-Fixed Direct Debit: allows fixed amounts to be debited from a payer's bank
account.
-Variable Direct Debit: allows variable amounts to be debited from a Payer's
bank account. Typically used for payments where amounts cannot be
predetermined in advance. In this instance, there is need for the service
provider to intimate the subscriber (payer) of the invoice amount well before
the debit is sent to his/her bank.
4 The Direct Debit mandate will clearly state whether it is fixed or variable
5 Every Originator must be assigned with a unique identification number by the
Originator’s bank. This number will be unique to the originator and will be
used for all direct debit transaction originated as a result of mandates
executed in favour of the originator, irrespective of the bank transacting. The
unique Originator’s Identification Number must be recorded in electronic
funds transfer file and must be quoted on all transfers.
6 A direct debit instruction is issued subject to the rules of the clearing house on
returned items. An item that is dishonoured must be returned within the local
clearing cycle in operation. Currently, local cheques clear in T+3. The clearing
house shall not accept paper vouchers under these rules
7 However, irrespective of (6), a payer shall obtain immediate reimbursement
for instructions that are issued in error or not in conformity with the terms of the
mandate or fraudulently issued and identified after the instruction has been
honoured.
8 The Originator’s bank shall submit transfer details to the clearing house at
least 3 working days before payment due date.
9 An originator shall submit transfer details to the Originator’s Bank in
accordance with the electronic file format defined in the Nigeria Clearing
House Rules.
10 If the Payer’s Bank cannot pay a Transfer for any reason, the Payer’s Bank
shall return that debit to the Originator’s Bank within the clearing period
allowed under the Clearing House Rules. The Originator’s Bank shall advise
the Originator of the unpaid item.
11 These Rules are subject to the settlement finality rules applicable to the
Nigeria Banker’s Clearing House.

542
Unpaid Direct Debit Transfers
1. As noted above, a Payer’s Bank may return a Transfer unpaid
2. A Transfer must be paid or returned unpaid within the same clearing cycle
applicable to local cheques subject to the Nigeria Banker’s Clearing House
rules
3. Representation should only occur when an Originator reasonably assumes
that a Payer shall meet the conditions necessary for payment.
4. The authority of an Originator to effect re-presentation does not arise from the
existence of a debt owed by a Payer to the Originator. An Originator’s Bank
may represent an unpaid item only once and for the same amount that was
originally dishonoured.
5. If a re-presented Transfer is dishonoured an Originator must make other
arrangements directly with a Payer to collect the amount due.
Advance Notice
1. An Originator must give an Advance Notice to a Payer on a variable
Authority, before :-

a. the first payment


b. changes to :-
i. the amount on the Transfer
ii. the due date of the Transfer
An Advance Notice is also required for the payment of :-

c. an initial un-stated amount


d. an amount subject to a limitation clause
An Originator may advise changes known in advance in a schedule.

An Advance Notice must be in writing.

Where appropriate, an Advance Notice should indicate :-

e. that an Originator shall not send a subsequent Advance Notice if the amount
on the Transfer changes solely because of an alteration in the applicable
statutory rate
f. the amount initially advised shall be subject to a subsequent discount,
mutually negotiated and agreed
For example An invoice used as an Advance Notice may indicate :-

The total shown will be charged to your bank account by direct debit on or just
after __________ .
543
2. Where the Originator is a national official body, for example a Government
department that is collecting variable statutory amounts payable, the
Originator must consult the Originator’s Bank on the form of Advance Notice
required. Such an Originator is exempted from issuing individual Advance
Notices for changes in the amount payable, after a Payer receives an
Advance Notice of the first payment, provided that :-
a. the amount payable is specifically identifiable in statute or subordinate
legislation duly passed by the National Assembly
b. the Payer is required to pay the statutory amount, if not by Transfer, then
by some other means
c. the variable Authority signed by the Payer states that if the statutory
amount payable changes, then the Originator shall provide full publicity
without individual Advance Notices
d. the Originator’s Bank is satisfied that the Originator shall provide full
publicity on changes in the statutory amount payable, in sufficient time
before Transfers are initiated, in case a Payer wishes to cancel an
Authority.
e. the Originator shall not issue individual Advance Notices and all literature
shall clearly state this
3. In all cases, an Advance Notice, or the publicity referred to here-before, must
allow sufficient time for a Payer to raise a query, countermand a single
payment or, cancel the Transfer. Where the amount or due date is certain,
an Originator shall issue an Advance Notice not less than 14 days from the
due date. In the absence of any specific agreement between an Originator
and a Payer, this period shall be the minimum requirement. The Advance
Notice could be in writing or electronic as agreed between the Originator
and Payer.
Note Should a club or professional institution make a change to the rate of
subscription or the date of payment, then each member must receive a separate
notice of the change. An announcement of the change in a professional journal
or other publication is not adequate, although a separate letter, giving advice of
the change, may accompany an individually addressed journal or publication.

Exceptionally, a written Advance Notice may not be required when a direct action
by a Payer requires an Originator to initiate a specific Transfer on Payer’s bank
account. This action must provide sufficient information to determine the amount
and date of Transfer. An Originator must obtain authority from the Originator’s Bank
before establishing an arrangement dispensing with an Advance Notice. There are
a number of possibilities giving rise to this:-

544
a. when an Originator is required to debit a Payer’s bank account following
a withdrawal of cash from an automated teller machine under the
control of the Originator
b. when there is a written request by a Payer to an Originator
c. when there is a request by a Payer to an Originator by means other than
in writing but providing an audit trail.
The Direct Debit Mandate

A General
1. A Direct Debit Mandate is not and should not be misconstrued as evidence
of any contract between an Originator and a Payer’s Bank.
2. When requiring a Payer to complete a Mandate, the Originator should
provide a separate letter and/or leaflet, showing the essential features of the
Scheme. The letter and/or leaflet should provide in concise manner the
essential features of the scheme and highlight the key aspect and
mechanism that guarantees protection for the Payer. A sample format is
included in the Appendix.
3. Before publishing such information to a Payer, an Originator must obtain the
approval of the Originator’s Bank.
In all cases an Originator must:-

a. confirm that a Payer shall obtain immediate reimbursement from the


Originator, in case of an erroneous initiation of a Transfer
b. give a categorical assurance that Transfers shall conform strictly to the
terms of the Mandate and the conditions governing payments between
the parties concerned
c. explain the reasons for the use of a variable Mandate, and give details
of the Advance Notice a Payer will receive
d. include any additional information appropriate to the individual
circumstances of the Originator
e. advise a Payer that an Mandate may be cancelled at any time by
notifying the Originator accordingly

B Types of Direct Debit Mandate


1. There are two distinct types of Authorities:-
a. Variable Direct Debit Mandate
i. suitable for all payments, particularly if amounts are liable to
change, and must be used when it is intended to merge
payments

545
ii. the Originator must give an Advance Notice to the Payer of
amounts and dates of debiting
b. Fixed Amount Direct Debit Mandate
This is suitable when amounts remain constant for the life of the Mandate.

2. If a Payer has a query regarding the authenticity of a Transfer applied to the


Payer’s account, the Payer’s Bank must return the transfer to the Originator’s
bank within the clearing period, and shall refer the Payer immediately to the
Originator.
3. The Payer’s Bank may decline to accept Mandate instructions to charge
Transfers to certain types of accounts, such as deposit and savings accounts,
which are subject generally to notice of withdrawal.
Amendment to a Direct Debit Mandate
1. A Payer’s Bank shall advise an Originator promptly of all technical changes
concerning:-
a. the Payer’s Bank
b. a Payer’s bank account
It is recognised that cases can arise where an Originator shall receive a notice
advising of an amendment or cancellation but will be unable to act on it before
the next due date of payment.
2. Amendments may arise:-
a. because a Payer’s bank account is transferred to another branch of the
same bank
b. because a Payer’s bank account is transferred to another bank
In this case, a Payer shall be required to obtain a new Mandate. A Payer’s
previous bank should return as unpaid transfers, Transfers received after a change
has occurred.

c. because a Payer authorises, in writing, material alterations to an


Mandate, such as :-
i. the account name
ii. the account number
iii. the due date of payment
iv. the frequency of payment
v. the amount
Note Whilst not a permanent amendment to an Mandate, a Payer may dispute an
Advance Notice and countermand the single payment advised.

546
3. A Payer’s Bank shall use a Mandate Amendment Advice form to notify an
Originator of the changes.
When produced by automated means the form may display the relevant
information only. An Originator may also receive Advice of new sorting codes
and or account details from banks. If one Originator is required to make
numerous amendments, for example arising out of a closure or merger of
branches, then a list giving details of all amendments to be made may be
provided, provided the Originator does not object.

4. On receipt of an Advice, an Originator must amend records accordingly.


5. The transfer of a Payer from one Originator to another can only be authorised
by the Payer concerned. The authorisation must be in the form of a new
Mandate.
6. A Payer should advise an Originator directly of any amendments made to a
Mandate.
The recommended formats and text for Direct Debit Mandates are included in the
Appendix.

CHAPTER 8
CONTROL MECHANISMS AND CONSUMER PROTECTION

General

These rules are developed with the key objective of ensuring that all participants in
the scheme are protected and that their roles and processes are clearly
articulated and understood by all stakeholders. To further ensure that users are
confident that their interest is protected, further control mechanisms are
recommended as best practices to achieve this objective. These
recommendations leverage on existing technology already in deployment in the
industry and should drive competition and product differentiation among players:

1 All Payers’ Banks are required to have the facility for transaction notification
via sms and/or email. The Payer must be duly notified via either of these
media of the debit passed into their accounts within the clearing cycle.
Payers should encourage their banks to provide this service as a matter of
course to meet the need for prompt and adequate transaction information.
However, the inability of the Payer’s Bank to meet this requirement will not
invalidate the Transfer instructions that comply with the Mandate of the
Payer.

547
2 Controlled Direct Debit is a feature of mobile banking that has been
implemented in other climes to provide the payer with more control over
debits to their accounts that are subject of Direct Debit Mandates. The
Transfer instruction is transmitted and can only become effective subject to
the authorisation of the Payer on his mobile phone.
3 A major challenge with the Direct Debit process is the ability to keep a track
of valid Direct Debit mandates on record. It is critical that Debit Mandates
are held as electronic records for ease of updates, tracking, monitoring, and
direct debit auto-verification. This should be implemented by Payer Bank’s to
improve the efficiency and effectiveness of the Direct Debit process.
4 A Payer must give the Payer’s bank adequate notice of cancellation of a
Direct Debit Mandate. A minimum period of 14 days is recommended to
enable all parties to the scheme to be adequately notified and records
updated.
5 Disputes arising from Direct Debit transaction will be resolved under the aegis
of the Clearing House in line with these rules.
6 A Unique Identifier will be assigned to Originators by their sponsoring banks
which certifies that the market participant is subject to these rules. The Unique
Identifier to be derived from Originators RC Number and relevant Product
Service Code e.g. 12346/01.

/ Control Requirements for Participation in the Scheme.


I. All banks participating in this scheme shall have facilities for transaction
notification via sms and/or email. The Payer must be duly notified via either of
these media of the debit/credit passed into their account within the subsisting
clearing cycle.
II. In order to ensure ease of access to mandate instructions, banks are required
to have facilities for holding Direct Debit Authority in electronic form. This is to
ensure efficiency in the processing of debit request received from clearing.
III. A minimum of 14 days notice of cancellation must be given by the Payer to
his bank. This is to enable all parties to the scheme to be adequately notified
and records updated.
IV. Each originator will be sponsored by a bank. The Sponsor bank will assign a
Unique Identifier to the originator for use irrespective of the bank originating
the transaction. The clearing house will be duly notified of all registrations
within 48hrs.
V. It is expected that the Payers’ Bank would go through its normal confirmation
process (as in Cheque Confirmation) upon receipt of a Direct Debit Authority
to verify its authenticity.
548
VI. A “Kite Mark” or logo will be implemented for the scheme to be displayed on
the Debit mandates form accompanying invoices and subscription forms
issued by Certified originators to subscribers for their products/services. This
mark represents a mark of “service quality” and “process integrity” for the
scheme.
VII. The Nigeria Bankers Clearing House shall monitor the operation of the Scheme
to ensure that all participants achieve and maintain the required standards of
documentation and procedure.
Audit Trails: The following records must be maintained and accorded the same
retention period as for Cheques by the participating Banks:
-The executed Direct Debit mandate
-The executed Direct Debit Indemnity
-Full transaction history records of instructions transmitted to clearing.
-Full transaction history records of all returned items.

CHAPTER 9
THE DIRECT DEBIT INDEMNITY

1. Every Originator must execute the prescribed form of Indemnity provided by


an Originator’s Bank.
2. An Originator shall not be permitted to, single-handedly, make amendments
to the standard text. An Originator’s Bank may, with discretion, and the
agreement of other participating banks, require certain additions or
deletions to be made to text when particular circumstances or the status of
an Originator indicate that certain contingencies are not covered.
3. An Originator shall undertake to effect settlement of Indemnity claims with
Payers’ Banks immediately and in any case within 5 working days of the
date of the claim.
4. An Originator’s Bank, after having accepted its cover, shall give written
notice of the termination of an Indemnity.
5. An Originator should note that liability is unlimited on:-
a. time there is a continuing liability in respect of Transfers initiated before
receipt of a written notice of termination by a Payer’s Bank
b. amount the liability of an Originator arises not only in respect of Transfers
initiated in error or not at all, but also in respect of any consequential loss
attributable to such errors

549
Claims Under The Indemnity
1. An Originator shall undertake to indemnify banks against any loss arising from
Transfers.
2. The liability under this Indemnity shall be limited to a period of one year.
3. There is no limit on the amount on an Indemnity liability. This is because of
consequential loss as well as errors of commission and omission.
4. An Originator must honour an Indemnity claim immediately and in any case
within 14 days.
5. An Originator wishing to make a counter-claim on a Payer’s Bank should seek
guidance from the Originator’s Bank. The Originator’s Bank should assist an
Originator in lodging the counter-claim with the Payer’s Bank concerned.
6. A Payer’s Bank shall not claim on an Indemnity to recover funds paid in error.
The Payer’s Bank may request an Originator for a full or partial refund of
funds, in writing. This should not include a request for consequential loss.
Any recovery shall be at the discretion of an Originator. An Originator
doubting the validity of a claim should seek the advice of the Originator’s
Bank.
Note The essential principle of the Scheme is the right of a Payer to seek and
obtain an immediate refund of payments made in error from and by an Originator.

On establishing that an Originator was at fault, a Payer’s Bank shall assist a Payer in
lodging an Indemnity claim with the Origin.

Chapter 10
COMPLIANCE WITH RULES, PENALTIES, AND ARBITRATION
1. Each of the participants in this scheme shall conform to the requirements for
admission into the scheme and all the criteria laid down for participation in
the Nigeria Clearing House and the provisions of these rules.
2. Each Originator is required to have executed the Direct Debit Indemnity with
an Originating Bank as sponsor. The relevant Originating Bank shall duly
advise all banks after the execution of the agreement.
3. Each participant shall comply with the specification and standards
established by the relevant payment service provider for electronic files
delivered to the ACH.
Penalties
1. The Nigeria Banker’s Clearing House may require an Originator to withdraw
from the scheme if in their opinion their activities constitute an abuse of the
scheme.

550
2. All participants in the scheme shall be subject to the rules of the Nigeria
Banker’s Clearing House and penalties imposed in line with its rule for breach
of the rules.
Resolution and Arbitration Mechanisms.
I. Any dispute between participating Banks in the Direct Debit scheme shall be
referred to the CBN for adjudication. The decision of the CBN shall be binding
on all parties.
II. Refer to Chapter 9 – Direct Debit Indemnity

CHAPTER 11
WITHDRAWAL OF AN ORIGINATOR
1. An Originator may withdraw from the Scheme either voluntarily or
compulsorily.
2. Voluntary Withdrawal
An Originator must plan very carefully, in close consultation with the Originator’s
Bank, the following actions:-

a. the cancellation of existing Instructions


b. the progressive replacement of the direct debiting method of payment
by some other method
Note: Should an Originator wish to revert to payment by standing order, Payer’s
must submit new standing order mandates.

An Originator withdrawing voluntarily from the Scheme should prudently consider


establishing a contingency reserve for meeting:-

• any claims which may arise in respect of unpaid Transfers


• any Indemnity liability which may arise subsequent to withdrawal or
termination of liability respect of Transfers initiated prior to either of
these events
3. Compulsory Withdrawal
An Originator’s Bank may require the withdrawal of an Originator from the
Scheme if :-

a. in their opinion, Transfers are carried out either in a manner which


constitutes an abuse of the Scheme or is without due regard to the
interests of Payers
b. there is evidence that an Originator is deliberately ignoring standards
and procedures detailed in these Rules

551
c. the contractual capacity of the Originator is terminated by legal
process, for example, by bankruptcy, liquidation or the appointment of
a receiver
Note: In extreme cases it may be necessary for an Originator’s Bank to insist on the
withdrawal of an Originator at short notice, notwithstanding the disruption which
may occur. However, an Originator’s Bank shall make every effort to give sufficient
notice to enable an Originator make alternative arrangements. In this context, an
Originator’s Bank shall not assume an obligation in giving notice. More particularly,
an Originator’s Bank shall not accept liability under any circumstances for any loss
that an Originator may suffer as a result of withdrawal from the Scheme.

CHAPTER 12
MONITORING BY BANKS
1. The Nigeria Banker’s Clearing House shall monitor operations of the Scheme
to ensure that all Originators achieve and maintain the required standards
of documentation and procedure.
2. An essential feature of the monitoring process shall be a selective random
audit, from time to time, of Transfers received by banks and the respective
Instructions held by Originators.
3. The audit shall take place after a day’s clearing session and, in the next day’s
clearing session, Transfers that had earlier failed to conform to significant
terms of the respective Instructions shall be unpaid.
4. In this context, significant terms of an Instruction shall include :-
a. the amount
b. the due date
c. the Payer’s identity; that is, the name, number of the account and Sort
Code to be debited
d. The Originator’s Unique Identifier under Payment Reference.
5. An Originator’s Bank shall advise an Originator accordingly, should an audit
reveal that there is an unacceptable level of error or substantial deviation
from standard procedure. Further, should there be no subsequent
improvement that Originator may be required to withdraw from the
Scheme.
6. The monitoring of Transfers shall assist customers using the Scheme. Failure by
the Nigeria Clearing House to carry out random audits shall not affect the
validity of any claim under the Indemnity.

552
APPENDIX 1

FORM OF DIRECT DEBIT MANDATE (FIXED AMOUNTS)

Date [•]
FROM [Insert Name of Payer]
Creditor’s RC Number/Service Code Identifier:
[Insert Address of Payer]

TO: [Insert Name of Bank]


[Insert Address of Bank]

CC: [Insert Name of Creditor]


[Insert Address of Creditor]

Dear Sirs,

MY AGREEMENT [insert details of the underlying commercial transaction between


the Creditor and the Payer] dated [•]

The details of my/our bank account are as follows:-


Bank:

Address of Bank Branch:

Account Number:

Sort Code:

I/We hereby request, instruct and authorise you to debit my/our account in
accordance with any Direct Debit Instruction issued and delivered to you by the
Creditor the sum of __________ (amount in words), necessary for payment of the
monthly instalment due in respect of the above-mentioned agreement) on the
__________ day of each and every month commencing on __________ and
continuing (state the period for which the underlying contractual arrangement
exists for). All such debits from my/our account by you in accordance with any
553
Direct Debit Instruction issued and delivered to you by the Creditor shall be treated
as though they have been signed by me/us personally.
The amounts are FIXED and may be debited on ______of each month. I/We
understand that the Creditor may change the amount and dates only after giving
me/us prior notice and subject execution of this mandate in its variable form.
I/We understand that the withdrawals hereby authorised will be processed by
electronic funds transfer, and I/we also understand that details of each withdrawal
will be printed on my bank statement and/or an accompanying voucher.
I/We agree to pay any bank charges relating to this Mandate.
This Mandate may be cancelled by me/us by giving both you and the Creditor
twenty (20) Business Days notice in writing, sent by prepaid registered post, or
delivered to the addresses stated above, but I/we understand that I/we shall not
be entitled to any refund of amounts which may have already been withdrawn
while this Mandate was in force if such amounts were legally owing to the Creditor.
I/We understand that if any Direct Debit Instruction is paid which breaches the
terms of this Mandate, you shall not be liable to us in any way or manner
whatsoever, whether under contract, tort or negligence and that our recourse shall
be limited to the Creditor..

Signed at __________ on this __________ day of __________ 20 __________

________________________________________
[SIGNATURE AS PER ACCOUNT MANDATE]
for and on behalf of: [Insert name of Payer]

In the presence of:

Name: _________________________________________

Address: _______________________________________

Occupation: ____________________________________

Signature: _____________________________________

554
APPENDIX 2

FORM OF DIRECT DEBIT MANDATE (VARIABLE AMOUNTS)


Date [•]
FROM [Insert Name of Payer] Creditor’s RC Number/Service Code Identifier:
[Insert Address of Payer]

TO: [Insert Name of Bank]


[Insert Address of Bank]

CC: [Insert Name of Creditor]


[Insert Address of Creditor]

Dear Sirs,

MY AGREEMENT [insert details of the underlying commercial transaction between


the Creditor and the Payer] dated [•]

The details of my/our bank account are as follows:-


Bank:

Address of Bank Branch:

Account Number:

Sort Code:

I/We hereby request, instruct and authorise you to debit my/our account in
accordance with any Direct Debit Instruction issued and delivered to you by the
Creditor for such amounts necessary for monthly/quarterly/semi-annual payments
due in respect of the above-mentioned agreement on the __________ day of each
and every month/quarter/half-year commencing on __________ and continuing
(state the period for which the underlying contractual arrangement exists for). All
such debits from my/our account by you in accordance with any Direct Debit
Instruction issued and delivered to you by the Creditor shall be treated as though
they have been signed by me/us personally.
555
The amounts are variable and may be debited on various dates. I/We understand
that the Creditor may change the amount and dates only after giving me/us prior
notice.
I/We understand that the withdrawals hereby authorised will be processed by
electronic funds transfer, and I/we also understand that details of each withdrawal
will be printed on my bank statement and/or an accompanying voucher.
I/We agree to pay any bank charges relating to this Mandate.
This Mandate may be cancelled by me/us by giving both you and the Creditor
twenty (20) Business Days notice in writing, sent by prepaid registered post, or
delivered to the addresses stated above, but I/we understand that I/we shall not
be entitled to any refund of amounts which may have already been withdrawn
while this Mandate was in force if such amounts were legally owing to the Creditor.
I/We understand that if any Direct Debit Instruction is paid which breaches the
terms of this Mandate, you shall not be liable to us in any way or manner
whatsoever, whether under contract, tort or negligence and that our recourse shall
be limited to the Creditor..

Signed at __________ on this __________ day of __________ 20 __________

________________________________________
[SIGNATURE AS PER ACCOUNT MANDATE]
for and on behalf of: [Insert name of Payer]

In the presence of:

Name:_________________________________________

Address:_______________________________________

Occupation:____________________________________

Signature:_____________________________________

556
APPENDIX 3

FORM OF INDEMNITY

To: [Originator’s Bank]


[Originator’s Address]

Dear Sirs,

1. IN CONSIDERATION of you severally accepting instructions from time to time


from _______________________________________ (hereinafter called the
“Creditor”) or from an agent of the Creditor to debit the account of the
Payer with the amounts specified on instruments drawn in paper form or in
automated input form written in accordance with the Direct Debit
Agreement dated [•] between _______________________, we hereby warrant
that the Payer on whose account a debit is drawn will have signed a Direct
Debit Mandate, and we shall keep you indemnified upon your first demand
against all actions, losses, damages, claims, demands costs and expenses
(including legal costs, fees and expenses on a full indemnity basis)
howsoever arising, which you may incur or sustain directly or indirectly from
such debiting or failure to debit and without our requiring proof of our
agreement to the validity of such demand we shall forthwith pay the
amount.
2. We authorise you to admit compromise or reject any claims made upon you
without reference to or authority from the Creditor. Furthermore, with respect
to any claims or demand for the refund of any money received by you on
our behalf pursuant to any debit and transfer made on our behalf in
accordance with the [Direct Debit Agreement] [direct debit arrangements
between ourselves and the Payer], you are hereby authorised and are at
liberty to comply with such demands and claims and without any further
reference or authorisation from us, you may debit our account and transfer
such funds to the account of the Payer.
3. You are not required to verify or check that instructions given to you have
been given and remain in force in respect of any debit and transfer made
at the request of the Creditor.
4. You are not required to verify or check that any purpose of payment stated
in the Direct Debit Mandate signed by the Payer is fulfilled or is observed.

557
5. This Direct Debit Indemnity is to be in addition to and is not to prejudice or be
prejudiced by any other Direct Debit Indemnity which has been or may now
or hereafter be executed by us in connection with the Direct Debit
Agreement, and shall be binding on us as continuing security
notwithstanding any payments from time to time made to you or any
settlement of account or disability, incapacity, insolvency that may affect us
or any other thing whatsoever.
6. You are to be at liberty without thereby affecting your rights hereunder at
any time and from time to time at your absolute discretion to release,
discharge, compound with or otherwise vary or agree the liability under this
Direct Debit Indemnity or make any other arrangements with us.
7. This Direct Debit Indemnity shall be enforceable notwithstanding any change
in your name or any change in the constitution of the bank, its successors or
assigns or by its amalgamation with any other bank or banks.
8. This Direct Debit Indemnity shall be governed by and construed in
accordance with the laws of the Federal Republic of Nigeria.

Signed By: ______________________________________

for and on behalf of: [Insert name of Creditor] pursuant to a resolution of the Board
of Directors of the Creditor a certified copy of which is annexed hereto

In the presence of:

Name:_________________________________________

Address:_______________________________________

Occupation:____________________________________

Signature:_____________________________________

558
APPENDIX 4

LETTER TO PAYER

DIRECT DEBIT

Your rights

Direct Debit is one of the safest ways of paying your bills. Organisations using the
Direct Debit Scheme go through a careful vetting process before they are
authorised to participate in the scheme, and are closely monitored by the banking
industry.

The Direct Debit Scheme protects you and your money by means of the rules that
drive the Direct Debit Scheme.

This protection provided under the scheme is offered by all banks that take part in
the Direct Debit Scheme. The efficiency and security of the Scheme is monitored
and protected by your own bank.

Your Protection under the Scheme

• If the amounts to be paid (in the case of a Fixed Mandate) or the payment
dates change, the organisation collecting the payment will notify you
normally 14 working days in advance of your account being debited or as
otherwise agreed

• If an error is made by the organisation or your bank , you are guaranteed a


full and immediate refund from your bank of the amount paid

• You can cancel a Direct Debit at any time by contacting your bank. You are
also required to notify the organisation concerned.

Central Bank of Nigeria

559
STANDARDS AND GUIDELINES

ON

AUTOMATED TELLER MACHINE (ATM)

OPERATIONS IN NIGERIA

560
1. Preamble
In exercise of the powers conferred on the Bank by Section 28 (1) (b) of the
Central Bank of Nigeria Act 2007 (as amended) to issue guidelines, rules and
standards for the maintenance of adequate and reasonable financial services
for the public and to ensure good conduct and management of the financial
system; and Pursuant to its inherent powers, the Central Bank of Nigeria (CBN)
hereby issues the following standards and guidelines for the operations of the
ATM services in Nigeria.
The primary purpose is to ensure the efficiency of ATM services and
convenience as well as protection of customers. The standards and guidelines
are expected to inform the conduct of ATM operations in Nigeria.
Every institution (banks, non-banks or acquirer) that deploys ATMs or any issuer
that issues card or token to be used at ATM shall comply with the following
standards and guidelines with respect to each of the ATM facilities within its
dominion and control:
2. The Standards
2.1 Standards on ATM Technology and Specification:
a. All ATM deployers/acquirers shall comply with Payment Card Industry Data
Security Standards (PCIDSS).
b. All ATMs shall be able to dispense all denominations of Naira.
c. All terminals shall be levels 1 & 2 EMV compliant and shall be upgraded from
time to time to comply with the latest version within six months of release of
the version.
d. All ATMs shall have audit trail and logs capabilities, comprehensive enough to
facilitate investigations, reconciliation and dispute resolution.
e. Card readers shall be identified by a symbol that:
i. represents the card;
ii. Identifies the direction for which the card should be inserted into the
reader
f. 2% of ATMs deployed shall have tactile graphic symbol for the use of visually
impaired customers. This should be complied with within five years from the
release of these standards.
g. All new ATMs shall accept card horizontally with the chip upwards and to the
right.

561
3. The Guidelines
ATM deployment
a. All ATM consortia may own ATMs; however such institutions must enter into an
agreement with a card scheme or a scheme operator or their designated
settlement agent for acceptance and settlement of all the transactions at
the ATM.
b. Banks shall only deploy ATMs within their premises while the deployment of
ATMs outside banks’ premises should be left to CBN approved consortia
provided that no card scheme or any company that a card scheme has
share holding or ownership of more than 20% will be licensed as ATM owner
or acquirer.
c. All ATM transactions in Nigeria shall be processed by a Nigerian company
operating in Nigeria as acquirer-processor.
d. No card or payment scheme or Card Association shall compel any issuer or
acquirer to send any transaction outside Nigeria for purpose of processing,
authorization or switching if the transaction is at an ATM or at any
acceptance device in Nigeria and the issuer is a Nigerian bank or any other
issuer licensed by the CBN.
e. All transactions at an ATM in Nigeria shall, where the issuer is a Nigerian bank
or any other issuer licensed by the CBN be settled under a domestic
settlement arrangement operated by a Nigerian Company. All collaterals for
such transactions shall be in Nigerian National Currency and deposited in
Nigeria.
f. No card scheme shall discriminate against any ATM owner or acquirer. Every
card-scheme must publish for the benefit of every ATM owner or acquirer
and the Central Bank of Nigeria the requirements for acquiring ATM
transactions under the card scheme.
g. No ATM owner or acquirer shall discriminate against any card scheme or
issuer.
h. Stand-alone or closed ATMs are not allowed.
i. ATMs should be situated in such a manner as to permit access at reasonable
times. Access to these ATMs should be controlled and secured so that
customers can safely use them.
j. Lighting should be adequate for safe access and good visibility. It should
provide a consistent distribution and level of illumination, particularly in the
absence of natural light.
562
k. ATMs should be sited in such a way that direct or reflected sunlight or other
bright lighting is prevented from striking the ATM display, for example, through
the use of overhead sun shelter
l. Privacy shall be provided by the design and installation features of the ATM
so that in normal use the cardholder does not have to conspicuously take
any protective action.
3.2 ATM Operations:
A bank or independent organization that deploys an ATM for the use of the
public shall ensure that:
a. The ATM downtime (due to technical fault) is not more than seventy-two (72)
hours consecutively;
b. The helpdesk contacts are adequately displayed at the ATM terminals. At the
minimum, a telephone line should be dedicated for fault reporting and such
telephone facility shall be functional and manned at all times that the ATM is
operational.
c. All ATM surcharges are fully disclosed to customers;
d. The ATMs issue receipts, where requested by a customer, for all transactions,
except for balance enquiry, stating at a minimum the amount withdrawn,
the surcharges, date and time of the transaction;
e. Receipt prints and screen display are legible.
f. The dispensing deposit and recycling component of the machine is in proper
working condition;
g. The dispensing component holds out the notes for the collection of the user
for a minimum of twenty (20) seconds;
h. There is appropriate monitoring mechanism to determine failure to dispense
cash;
i. There is online monitoring mechanism to determine ATM vault cash levels
j. ATM vault replenishment is carried out as often as possible to avoid cash-out.
k. ATMs are not stocked with unfit notes;
l. Availability of cash in the ATMs at all time. The funding and operation of the
ATM deployed by non-bank institutions should be the sole responsibility of the
bank or institutions that entered into agreement with them for cash
provisioning. In this regard, the Service Level Agreement (SLA) should specify
the responsibilities of each of the parties.
563
m. Change of PIN is provided to customers free of charge throughout the entire
value chain.
n. Acquirers monitor suspicious transactions and report statistics to CBN based
on the agreed format and timeframe
o. Back-up power (inverter) is made available at all ATM locations in such a way
that the machine would not cease operation while in the middle of a
transaction.
p. Waste disposal basket is provided at all ATM locations
q. A register of all their ATMs in Nigeria with location, identification, serial number
of the machines, etc is maintained.
r. Provision is made for extending the time needed to perform a specific step
by presenting a question, such as, "Do you need more time?"
s. Information sufficient to construct a usable card is not displayed on the
screen or printed on a transaction record. This will guard against the
possibility that such information may become accessible to another person
should the cardholder leave the ATM while a transaction is displayed, or
abandon a printed transaction record. Precautions are taken to minimise the
possibility of a card being left by a message or voice alerting the customer to
take his card.
t. Cash out first before card is out of the ATM is adopted to minimise the
possibility of customers leaving cash uncollected at ATM.
u. ATM acquirers that disable cash-retract shall display such notice at the ATM
or on the screen.
v. Every ATM Consortium or acquirer of ATM or POS shall drive its ATMs or POS
directly and shall not outsource the driving of its ATMs or POS to any Card
Scheme or Switch and all transactions from the ATM or POS shall first go to the
ATM Consortium or acquirer.
3.3 ATM Maintenance
A bank or independent organization that deploys an ATM for the use of the
public shall ensure that:
a. Notice is displayed at the ATM for planned maintenance period and
disruption to service due to maintenance for public;
b. An ATM maintenance register or log is kept properly
c. All ATMs and cash in the machines are insured.

564
d. They physically inspect their ATMs at least fortnightly.
3.4 ATM Security
a. Every ATM shall have cameras which shall view and record all persons using
the machines and every activity at the ATM including but not limited to: card
insertion, PIN entry, transaction selection, cash withdrawal, card taking, etc.
However, such cameras should not be able to record the key strokes of
customers using the ATM.
b. Where a surveillance camera is used, it should be kept secretly to avoid
thieves removing or damaging or compromising it.
c. Networks used for transmission of ATM transactions must be demonstrated to
have data confidentiality and integrity
d. All ATMs must be located in such a manner that guarantees safety and
security of users and confidentiality of their transactions.
e. ATMs should not be placed outside buildings unless such ATM is bolted to the
floor and surrounded by structures to prevent removal.
f. Additional precaution must be taken to ensure that any network connectivity
from the ATM to the bank or switch is protected to prevent the connection of
other devices to the network point.
g. Where the user of an ATM blocks his image for camera capture, the ATM shall
be capable of aborting the transaction.
3.5 Dispute Resolution
In the event of irregularities in the account of an ATM customer arising from the
use of card on ATM, the following shall apply:
a. All cardholders’ complaints should be treated within a maximum of 72 hours
from the date of receipt the complaints.
3.6 Liability Shift
a. Where a non EMV card is used on a non EMV Terminal and a fraud occurs,
liability is on either the Card Issuer or the Card Holder. Proof has to be
established on which party compromised card details.
b. Where a non EMV card is used on an EMV Terminal and fraud occurs, liability
is on the Card Issuer
c. Where an EMV card is used on a non EMV Terminal and fraud occurs, liability
is on the Acquirer

565
d. Where an EMV card is used on an EMV Terminal and fraud occurs, liability is
on the Card Holder or the Issuer. However, the onus is on the cardholder to
prove that their PIN had not been disclosed to a third party willingly or
negligently.
e. Where a hybrid card is used on a non EMV Terminal and fraud occurs, liability
is on the Acquirer
f. Where a hybrid card is used on an EMV Terminal and card treated as
magnetic stripe for authorization and fraud occurs, liability is on the Card
Issuer
g. Where a hybrid card is used on an EMV Terminal and card treated as EMV for
authorization and fraud occurs, liability is on the Card Holder or the Issuer.
However, the onus is on the cardholder to prove that his/her PIN had not
been disclosed to a third party willingly or negligently.
4.0 Regulatory Monitoring
a. Any institution which operates an automated teller machine shall file an
updated list of such ATMs, including the detail location of their addresses with
Banking & Payments System Department of the Central Bank of Nigeria for
compliance monitoring.
b. The CBN shall conduct onsite snap checking of ATMs with a view to ensuring
compliance with cash and service availability at the ATMs.
c. Acquirers shall report volume and value of transactions on monthly basis to
the Director, Banking & Payments System Department, CBN.
5.0 Penalties
Sanctions, in the form of monetary penalties / or suspension of the
acquiring/processing service (s) or both, would be imposed on erring institutions
for failure to comply with any of the provisions of the ATM standards and
guidelines or any other relevant guidelines issued by the CBN from time to time.

Central Bank of Nigeria


April, 2010.

566
Appendix 1: Definition of Terms
The terms below shall have the following meaning for the purpose of the ATM
Standards and Guidelines.

a) Issuer: Financial institution that issues plastic cards to customers


b) Acquirer means bank or any other legal person concluding contracts with
merchants concerning acceptance of payment by means of electronic
payment instrument.
c) Cardholder means any person who holds a payment card for the purpose of
effecting payment in respect of good services.
d) Settlement Agent: Institution that generates financial data and compute net
settlement position for each financial institution in a payment scheme(s).
e) PIN means Personal Identification Number
f) Payment tokens: Any authorized payment instruments (physical or electronic)
used to initiate a transaction.
g) Switch means a system that captures electronic financial transactions from
touchpoints, applies rules, determines destinations, delivers the transactions
and gives appropriate feedback;
h) EMV (Europay, MasterCard, Visa) is the global standard that is helping ensure
smart (Chip-and-PIN) cards, terminals and other systems can interoperate.
i) PCI DSS stands for Payment Card Industry Data Security Standard. It was
developed by the major credit card companies as a guideline to help
organizations that process card payments prevent credit card fraud and
various other security vulnerabilities and threats

567
GUIDELINES ON STORED VALUE/PREPAID CARD ISSUANCE AND
OPERATIONS

568
GUIDELINES ON STORED VALUE/PREPAID CARD ISSUANCE AND
OPERATIONS
1. Only deposit-taking banks or financial institutions licensed by the CBN with
clearing capacity shall issue stored value/prepaid cards. Other deposit
taking institutions without clearing capacity can issue in conjunction with
those with clearing capacity.
2. No stored value/prepaid card shall be issued to a person without obtaining
basic identification which includes name, phone number, and address of the
person along with any of the following: any photo identification, passport
photograph, or uniquely verified biometric identification
3. Only one stored value/prepaid card shall be issued per person per currency
by an issuer at any anytime
4. The maximum amount that can be loaded on the stored value/prepaid card
shall not exceed N20,000 per day
5. The maximum balance on the stored value/prepaid card shall not exceed
N250,000 at any time
6. The maximum amount on the stored value/prepaid card shall not exceed
$5,000 per quarter
7. The usage limits and frequencies shall be defined by each participating bank
8. No third party transfer to or from a stored value/prepaid card is allowed
unless the transfer is from one stored value/prepaid card to another.
9. All stored value/prepaid card transactions shall be subject to current
Nigerian Financial Intelligence Unit (NFIU) reporting requirements
10. All card issuers shall render quarterly returns to the CBN on the gross amount
of transfers from/to stored value/prepaid cards for inclusion in the national
statistics on payments
11. All stored value/prepaid card account Naira balances shall be considered
deposit liabilities by the issuing bank or financial institution and therefore
subject to deposit insurance protection up to the limit provided by the
Nigerian Deposit Insurance Corporation (NDIC) for bank deposits
12. A stored value/prepaid card holder or his/her estate shall, upon request, be
entitled to receive a cash refund of the outstanding balance of the card
account from the issuing bank or institution

569
13. The fee for loading salary payments unto a stored value/prepaid card shall
be paid separately by the salary payer and not deducted from the balance
value of the stored value/prepaid card.
14. Operators, including mobile/telecommunications operators, wishing to
operate money transfer schemes with stored value/prepaid cards shall do so
with requisite approval from the CBN and, at all times, in strict conjunction
with licensed deposit-taking banks or financial institutions
15. Stored value/prepaid card issuers and/or acquirers that wish to operate
closed schemes shall obtain requisite approval from the CBN
16. Stored value/prepaid cards shall be issued without regard to where actual
value resides; value shall be held in either centrally-connected network
databases or in non-network attached electronic devices, including, but not
limited to, smart/chip cards and mobile handsets.
17. All Stored value/prepaid cards shall be EMV-compliant (i.e. Chip and PIN
enabled)
18. Each participating bank shall have a Card Management System to
effectively manage the issuance and operation of stored value/prepaid
cards
19. The CBN Guidelines for Transaction Switching and Card Issuance shall also
apply to stored value/prepaid cards unless where specifically overwritten in
these guideline.

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578
CENTRAL BANK OF NIGERIA
Business Central Area District
P.M.B. 0187
Garki, Abuja

09-61638445
09-61638455 (Fax)

June 11, 2009

BOD/RTP/GEN/RVP/01/001

To: All Switches, Banks and Payments Service Providers

GUIDELINE ON TRANSACTION SWITCHING SERVICES AND THE OPERATIONAL RULES


OF THE NIGERIA CENTRAL SWITCH

The Central Bank of Nigeria, in furtherance of its mandate for the


development of the electronic payments system in Nigeria hereby
releases the following regulations for the operation of switching services
in Nigeria:

• Guideline on Transaction Switching Services


• Operational Rules of the Nigeria Central Switch

The above Guidelines and Rules are designed to guide the licensing
and operations of switching companies in Nigeria. Furthermore, in order
to ensure interoperability among electronic funds switches and in line
with section 2.11 of the guidelines, all licensed switching companies are
required to connect to the Nigeria Central Switch on or before July 30,
2009.

E.C. Obaigbona

For: Director, Banking Operations Department

579
GUIDELINES ON TRANSACTIONS SWITCHING SERVICES

580
Guidelines on Transactions Switching Services
1.1 In exercise of the powers conferred on the Bank by Section 28 (1) (b) of
the Central Bank of Nigeria Act 10991 (as amended) to issue guidelines for
the maintenance of adequate and reasonable financial services for the
public and to ensure high standards of conduct and management
throughout the banking system; and
Pursuant to its inherent powers, the Central Bank of Nigeria (CBN) hereby
issues the following guidelines for the operations of the switching services in
Nigeria:
1.2 Scope of the Guidelines
The guidelines set out the procedures for the operation of switching services
in Nigeria, including the rights and obligations of the parties to the switching
contract. It also compels the switching companies to meet with minimum
standards for switching as approved by the CBN.
1.3 License of Switching Companies
For a switching company to operate in Nigeria, it shall obtain a license from
the CBN.
1.3.1 Eligibility
The following are eligible for license to operate as a switching company:
1. Deposit Money Banks
2. Consortium of Banks
3. Agent of a bank or banking consortium, subject to the provisions in section 1.4
4. Any other company approved by the CBN
1.3.2 Parties to Switching Services
Parties to Switching Services include but not limited to:
1. Central Switch
2. Switching Companies
3. Deposit Money Banks
4. Other Financial Institutions
5. Independent Service Operators (ISO)
6. NIBSS
7. Merchants

581
8. Cardholders
9. Card Issuers
10. Merchant Acquirers
1.4 Rights and Responsibilities of a Switching Company
A switching company shall:
1.4.1 Operate its switch in accordance with the license issued to it
1.4.2 Ensure compliance with minimum standards on switches issued by the CBN
and as amended from time to time
1.4.3 Open its network for reciprocal exchange of transactions/messages
between it and the Central Switch
1.4.4 Shall enter into agreement with member institutions, specifying in clear
terms the responsibilities of each party, operational rules and procedures
and liabilities of parties in the event of loss of funds arising from negligence
of any of the parties and a copy shall be submitted to the CBN for record
1.4.5 Ensure that all notifications and information that its employees have
obtained in the course of discharging their responsibilities are treated as
confidential
1.4.6 Establish adequate security procedures to ensure the safety and security of
its information and those of its clients, which shall include physical,
transactions, logical, network and enterprise security
1.4.7 Submit to the CBN its security plans and periodic updates. Any security
breach shall have a record and such instances shall be reported to the
CBN for record purpose
1.4.8 Charge fees for the services provided in relations to its respective switching
network
1.4.9 Have a robust Business Continuity Plan approved by the CBN
1.4.10 Ensure full compliance with relevant provisions of the electronic banking
and other guidelines issued by the CBN in relation to its operations
1.4.11 Not be an issuer of payment cards
1.4.12 Supply to the CBN, information on usage, volume and value of
transactions and other relevant information, as and when due, and in the
format required by the CBN

582
1.4.13 Maintain database on information relating to cardholders, merchants and
their transactions for a minimum period of ten (10) years and in
compliance with section 2.2.4
1.4.14 Report all instances of fraud/attempted fraud on the switch to the CBN
1.4.15 Have a primary site, hot backup site and contingency site as minimum
requirement
1.4.16 Maintain a hot list of cards reported by member banks as lost, missing,
stolen or damaged for the period of validity of the card.
1.5 Rights and Responsibilities of Member Institutions
1.5.1 Member Institutions/Acquirers shall enter into contract with merchants for
accepting payment by means of electronic payment instrument
1.5.2 Upon receipt of settlement from the acquirers, banks shall be responsible to
the merchants for crediting their accounts with the amounts resulting from
the operations on the principles and within the periods as specified in the
contract referred to in 1.5.1
1.5.3 Member Institutions shall act as the issuer of payment cards and by so
doing commit themselves towards the cardholders to settle the
operations performed by means of payment cards, and the cardholder
commits himself to pay the amount of the operations together with
charges due to the issuer from a specified account.
1.5.4 The card shall be issued after signing the contract for payment card. Up to
the moment of issuance, the issuer bears the responsibility for any fraud
resulting from using the card by any unauthorized user
1.5.5 Upon receipt of payment card or card details and PIN by the holder, the
holder bears the responsibility for any fraud resulting from using the card.
1.5.5 Acquirers whose transactions are switched shall maintain databases that
can handle information relating to cardholders, merchants and their
transactions for a minimum period of ten (10) years
1.5.6 Information on usage, volume and value of transactions and other relevant
information shall be forwarded to the CBN as and when due and in the
format required by the CBN
1.5.7 Each member institution shall settle fees charged for the services provided
by the switching company in relation to the operation of the switching
network, in accordance with the agreed tariff

583
1.5.8 Member Institutions shall enter into agreement with cardholders specifying
in clear terms their responsibilities in terms of PIN protection and other
security measures
1.5.9 Only licensed deposit taking institutions shall with the approval of CBN
serve as the issuers of multi purpose payment card
1.5.10 The issuer shall be held liable (where proven) for frauds with the card
arising from card skimming or other compromises of the issuer’s security
system.
1.5.11 Each member institution shall notify the switching company of card
reported lost, stolen, damaged etc for the purpose of placing it on hot list
1.5.12 No card issuer or its agent shall deliver any card in a fully activated state
1.5.13 A card issuer shall put in place adequate credit controls to track and
minimize credit fraud
1.5.14 No card issuer or its agent shall bill or charge a customer for an unsolicited
card unless and until after the card is fully activated by cardholder.
1.5.15 No card issuer or its agent shall engage in the use of unethical tactics
when marketing its card products to members of the public
1.5.16 No card issuer or its agent shall communicate false or misleading
information regarding card terms and conditions, service fees/waivers,
and/or associated promotions/gifts/prizes to members of the public
1.5.17 A card issuer must furnish its cardholders with a detailed list of contractual
terms and conditions prior to activation. Such terms shall include at a
minimum:
I. Fees and charges
II. Withdrawal limits
III. Billing cycles
IV. Termination procedures
V. Default/recovery procedures
VI. Loss/theft/misuse of card procedures
VII. Grievance/Complaints procedures
1.5.18 A card issuer shall provide means whereby its cardholders may at any
time of the day or night notify the loss, theft or fraudulent use of the card
and the card issuer shall take all necessary steps to stop any further use of
the affected card.
584
1.5.19 A card issuer shall keep sufficient internal records over a minimum ten (10)
year period, and in line with existing CBN guidelines on Electronic Banking,
to enable the tracing of errors on card-related transactions
1.5.20 An acquirer shall be responsible for ensuring that merchants put in place
reasonable processes and systems for confirming payee identity and
detecting suspicious or unauthorized usage of electronic payment
instruments both where customer/card is physically present at point of
sale or in cases where customer/card is not physically present like in
Internet/web and telephone payment systems/portals.
1.5.21 No member institution shall issue or support the issuance of a card or
access device that is restricted to only certain terminals/payment devices
that have distinctive hardware and/or software features unless such
terminals/payment devices are for use only in closed systems that are not
normally made available to members of the general public.
1.6 Rights and Responsibilities of the Merchant
1.6.1 A merchant shall enter into agreement with an acquirer specifying in clear
terms the obligations of each party.
1.6.2 An acquirer shall be responsible for crediting the account of the merchant
with the amount resulting from operations, within periods as specified in
the agreement, but not exceeding 3 days for online transactions and 5
days for offline transactions.
1.6.3 A merchant may refuse to accept payment by means of an electronic
payment instrument, including payment with cards, if:
I. The electronic payment instrument is invalid;
II. Obtaining acceptance for execution of operations is not possible;
III. Notification of loss, missing, stolen or damaged has been made of the
electronic payment instrument;
IV. The cardholder refuses to present a document confirming his/her
identity in the event of suspicious / unauthorized use of electronic
payment instruments;
1.6.4 Each merchant shall be entitled to promptly receive from the issuer an
updated list of cards that have been placed on the hot list.
1.6.5 The merchant shall display the payment device conspicuously enough for
the cardholder to observe the amount entered into the device before the
cardholder enters his/her PIN

585
1.6.6 The merchant shall be held liable for frauds with the card arising from its
negligence, connivance etc
1.6.7 A merchant shall neither practice differential pricing based on payment
mode nor discriminate against any member of the public who chooses to
pay with a card or by other electronic means. The prices of goods and
services payable by any customer shall not be different regardless of the
mode of payment.
1.7 Rights and Responsibilities of the Cardholder
1.7.1 Cardholder shall:
• Store the payment card and protect his PIN with due care
• Not keep his payment card together with the PIN
• Notify the issuer without delay about missing, stolen, damaged, lost or
destroyed card
• Not make available the payment card to unauthorized persons.
1.7.2 The cardholder may withdraw from the contract for payment card without
prior notice to the issuer provided he surrenders the payment card and
does not owe for any charges or transactions on the payment card.
1.7.3 The cardholder shall present, when required by a merchant, a document
confirming his identity.
1.7.4 The cardholder shall receive value for the operations performed by means
of a payment card, and by so doing, the holder commits himself to pay
the amount of the operations together with charges due to the issuer from
a specified account.
1.7.5 The cardholder shall be held liable for fraud committed with his card arising
from the misuse of his PIN or his card.
1.7.6 The cardholder shall be entitled to receive a receipt or any other form of
evidence at the time a transaction is performed with his/her card
1.7.7 The cardholder shall be entitled to receive, within a reasonable period or
at an agreed intervals, a statement of all transactions is performed with
his/her card
1.7.8 The cardholder shall be given reasonable notice before changes are
made to fees levied on his/her card and be given the option to
discontinue usage of card to avoid such changes in fees without penalty

586
1.7.9 A cardholder shall be given reasonable notice before changes are made
to the terms and conditions of his card contract and shall be given the
option to opt-out of the card contract without penalty
1.7.10 The cardholder shall be entitled to privacy and information on his card
account cannot be shared with third parties unless
I. with express customer approval or
II. in cases of customer default, where information can be shared with
credit bureaus and collection/recovery agents or
III. in cases where information is requested by valid order of a competent
Nigerian court/authority or
IV. in cases where it is necessary to prevent fraud
1.8 Rights and Responsibilities of the Central Switch
The Central Switch shall:
1.8.1 be licensed by the CBN
1.8.2 be independent of other switching companies
1.8.3 not own or promote any card business or retails products and shall be run
in accordance with international best practice
1.8.4 connect with all new and existing switching companies that meet its
requirements for participation and have obtained the necessary license
from the CBN
1.8.5 Enter into a written agreement with switching companies, specifying in
clear terms the responsibilities of each party, and operational rules and
procedures and copy shall be submitted to the CBN.
1.8.6 Ensure that all notification and information that its employees have
obtained in the course of discharging their responsibilities shall be treated
confidentially
1.8.7 Establish adequate security procedures to ensure the safety and security
of its information and those of its clients, which shall include physical,
transaction, logical, network and enterprise security
1.8.8 Charge fees for the services provided in accordance with agreement
reached under sub-guideline 1.8.5
1.8.9 Have a robust Business Continuity Plan approved by the CBN

587
1.8.10 Ensure full compliance with all the relevant provisions of electronic
banking guidelines and other guidelines issued by the CBN, from time to
time
1.8.11 Supply information on usage, volume and value of transactions and other
relevant information to the CBN as and when due and in the format
required by the CBN
1.8.12 Maintain database on information relating to cardholders, merchants and
their transactions for a minimum period of ten (10) years.
1.8.13 Report all instances of fraud / attempted fraud to the CBN
1.8.14 Have primary site, hot backup site and contingency site as minimum
requirement
2.0 Technical Requirements/Standards
2.1 The central switch/switching companies and their member institutions shall
ensure compliance with the following minimum standards:
I. Minimum Standards for Messaging/Communication
II. Minimum Standards for interoperability
III. Minimum Security Standards
IV. Minimum Standards for Devices
V. EMV Compliance Certification
VI. Minimum Standards for Card Design
2.2 The Central Switch and Switching Companies shall:
2.2.1 Conduct half-yearly planned system tests to ensure ability to seamlessly
switch from primary to back-up systems. Such tests shall be
communicated in advance to all member institutions and the CBN. These
tests shall take place at times during the week and day when the least
amount of network traffic occurs in order to minimize impact on customer
service. The results of the tests shall be shared with all member institutions
and the CBN within 3 business days.
2.2.2 Publish a weekly report of all downtimes experienced to all member
institutions and the CBN. Such reports shall include the duration of the
downtime, the cause(s) of the downtime, and the remedial actions taken
to prevent recurrence
2.2.3 ensure that all devices/software used for transmitting financial data within
their switching networks are EMV 4.0 - Levels 1 & 2 compliant (or any
588
newer EMV version as periodically advised by the CBN) by September 30,
2009
2.2.4 Be in regular compliance with PCI Data Security Standards (DSS) by
September 30, 2009
2.3 The central switch shall, subject to CBN approval and in consultation with
member institutions, maintain minimum technical standards on
interoperability, messaging, network connectivity, network monitoring,
security, disaster recovery, fraud management, and programming
interfaces
2.4 An acquirer/member institution shall be responsible for deploying
terminals/payment devices that are EMV 4.0 - Levels 1 & 2 compliant (or
any newer EMV version as periodically advised by the CBN). This guideline
only affects new equipment purchases made after September 30, 2009
2.5 An acquirer/ member institution shall be responsible for deploying
terminals/payment devices with PIN Entry Devices (PED) that are PCI
Security Standards Council (SSC) PED complaint. This guideline only affects
new equipment purchases made after September 30, 2009
2.6 The central switch shall maintain a list of approved network/link service
providers. All connecting switches are required to maintain a minimum of
two (2) network/link service providers as the primary and secondary link.
2.7 The central switch shall stipulate the minimum network/link bandwidth that
must be provided by each network/link provider
2.8 The central switch shall stipulate the network/link standards and
specifications for all equipment provided by each network/link provider at
all terminating points
2.9 All switches have the duty to transmit all messages or financial transactions
emanating from the Central Switch to their expected destinations without
regard to the originating switch of such message or financial transaction.
2.10 No switch shall reject, degrade, give lower priority or service, or in any way
negatively affect any message or financial transaction originating from the
Central Switch
2.11 All switches shall connect to the Central Switch by July 30, 2009

589
3.0 Operational Rules and Procedures
3.1 Types of Transactions
The central switch/switching companies shall only handle switching services in
accordance with the license issued to them.
3.2 Operating Hours
3.2.1 The central switch/switching companies shall operate 24 hours a day and 7
days a week
3.2.2 In case of system failure, the central switch / switching companies shall
automatically switch to its / their back-up site (s)
3.3 Settlement Mechanism
3.3.1 The Central Switch shall work out the daily net settlement positions of
member institutions and forward same through NIBSS to the CBN for
settlement
3.3.2 Member Institutions shall provide adequate collaterals, as deemed
sufficient by the CBN, in form of Federal Government Securities in line with
their contract agreements with Switching Companies.
3.3.3 Alternatively, member institutions may utilize existing cheque clearing
collaterals held with the CBN to meet the collateral requirement for
transaction switching mentioned in 3.3.2 above.
3.3.4 The CBN shall effect the posting of the net settlement positions of member
institutions into their accounts.
3.4 Incomplete/Irregular Transactions
In the event of irregularities in the account of card holder arising from the
operations of electronic payment instrument, the following procedures
shall apply:
3.4.1 The cardholder or any other party to the transaction shall immediately
notify the issuer on irregularities in his account concerning:
I. Contested transactions
II. Understatement or overstatement of his account
III. Debit in his account without obtaining the value for the transactions •
Other irregularities
3.4.2 The cardholder’s notification shall be considered and verified without
delay

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3.4.3 Upon confirmation of the irregularities, the anomaly shall be corrected
within a maximum period of 14 days from the date of settlement.
3.4.4 Failure to regularize the anomaly within 14 days shall attract penalty on the
defaulting party at the prevailing MPR
3.4.5 All related costs arising from the transaction shall be borne by the
defaulting party.
3.5 Fraudulent Transactions
In the event of fraudulent transactions, the following procedures shall apply:
I. The cardholder shall bear the cost of operations performed by persons, to
whom he made available the payment card or disclose his PIN
II. The cardholder shall bear the cost of operations performed by means of a
lost payment card up till the time of notifying the issuer about the loss
III. The cardholder shall not bear the cost of operations performed by means of
his lost card, if this performance took place in consequence of defective
execution of obligations by the issuer or merchant
3.6 Fees and Charges
3.6.1 Fees and charges for transactions switching, processing, etc are to be
agreed between service providers and banks / entities to which the
services are being provided.
3.6.2 Fees and charges for transaction switching shall not exceed predefined
ceiling specified in 3.6.1 as may be reviewed from time to time.
3.7 Termination.
3.7.1 Member Institutions may terminate participation in the switching network
by notifying the switching company at least one month prior to the
intended termination date.
3.7.2 The switching company may suspend or terminate the participation of any
member institution from the system by giving at least one month notice to
the participating member, if the member institution is in breach of
member institutions rules and responsibilities.
3.8 Special Provision
3.8.1 The central switch/switching companies and their members shall be
required to undertake measures to prevent the use of their networks for
purposes associated with money laundering and other financial crimes.

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3.9 Penalties
A) Sanctions, in the form of monetary penalties of not less than N5 million and /
or suspension of the specific switching service (s) or both, would be imposed
on erring switching companies and / or their member institutions for failure to
comply with any of the provisions of these guidelines and other relevant
guidelines issued by the CBN from time to time.

592
Appendix 1: Definition of Terms
The terms below shall have the following meaning for the purpose of those
Guidelines.
a) Acquirer means bank or any other legal person concluding contracts with
merchants concerning acceptance of payment by means of electronic
payment instrument.
b) Cardholder means any person who holds a payment card for the purpose of
effecting payment in respect of good services.
c) Competent Authorities include Courts, EFCC, ICPC, Regulatory Authorities
such as the CBN, NDIC etc
d) Hot list means list of deactivated cards that were reported missing, stolen, lost
or damaged by the card holders.
e) Interconnectivity means ability for reciprocal exchange of
transactions/messages between two or more switching networks.
f) Interoperability means ability to issue cards and deploy devices in such a
way that all customers (card holders, merchants and issuers) perceive
operations, while obtaining service, as if the interconnected networks were
one.
g) Member Institutions means banks and other financial institutions that are on
the network of a particular switching company;
h) Merchant means an organization or entity that undertakes to conclude a
contract with an acquirer and / or issuer concerning accepting payment by
means of an electronic payment instrument;
i) MPR means Minimum Policy Rate
j) Offline transaction means a transaction in which no direct connection is
made between the device(s) involved in the transaction and a centralized
computer system for the purpose of effecting settlement, or authenticating
the transaction before it is executed.
k) Online transaction means a transaction in which there is a direct connection
between the device(s) and a centralized computer system for effecting
settlement or authorization or validation before a transaction can be
executed.
l) Operations include facilitation of cash withdrawal, funds transfer, effecting
payment and such other transactions that may be determined from time to
time by means of an electronic payment instrument.;
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m) PIN means Personal Identification Number
n) Switch means a system that captures electronic financial transactions from
touch-points, applies rules, determines destinations, delivers the transactions
and gives appropriate feedback;
o) EMV (Europay, MasterCard, Visa) is the global standard that is helping ensure
smart (Chip-and-PIN) cards, terminals and other systems can interoperate.
p) PCI DSS stands for Payment Card Industry Data Security Standard. It was
developed by the major credit card companies as a guideline to help
organizations that process card payments prevent credit card fraud and
various other security vulnerabilities and threats
q) PCI PED security requirements are designed to secure personal identification
number (PIN)-based transactions globally and apply to devices that accept
PIN entry for all PIN based transactions

Central Bank of Nigeria

594
Operational Rules and Regulations for the
Nigeria Central Switch (NCS)

595
COPYRIGHT

Copyright Nigeria Inter-Bank Settlement System (NIBSS) Plc, 2008, all rights reserved.

No part of this publication may be copied or reproduced by or for third parties, sold
or transferred to any person in any manner or from or on any media, without the
prior written permission of Nigeria Inter-Bank Settlement System Plc.

This publication contains proprietary information from Nigeria Inter-Bank Settlement


System Plc. The recipients should not disclose this information to third parties
without the written permission of Nigeria Inter-Bank Settlement System Plc.

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1.0 Terms & Definitions

ACQUIRER Financial Institution or any other person authorized by the


Central Bank of Nigeria; that enables merchants or retailers to
accept payment cards as a means of payment for goods and
services and is responsible for merchant settlement or enables
cardholders to withdraw cash at acceptance devices including
but not limited to ATMs and PoS terminals.
ACQUIRER Financial Institution or any other person authorized by the
Central
PROCESSOR Bank of Nigeria, and licensed by a Card or Payment scheme to
provide the services of and enabling data traffic between the
network or Switch of the Card or Payment Scheme and an
acquiring device including but not limited to ATM, PoS Terminal
– Internet or Hardware, etc.

ADVERSE EFFECT Activities limiting and affecting: the growth in the industry; the
ON COMPETITION choice of users/cardholders; the choice of
financial institutions; the growth of the payments system;
monetary policy implementation; free competition such as
restricting new entry to the system and innovations in the industry
ATMs Automated Teller Machines

CARD SCHEME An entity, company, association or consortium that owns a


trademark, sign, name, logo or other signage which is displayed
on payment cards or tokens and at/on merchant locations,
Points of Sale, Automatic Teller Machines (ATM) or any
acceptance device or location indicating usage or
acceptance of cards bearing the trademark, sign, name, logo,
or other signage.
CBN Central Bank of Nigeria

DOMINANT A position of strength, enjoyed by a switching company, in the

597
POSITION relevant market, in Nigeria, which enables it to:
Operate independently of competitive forces prevailing in the
market in its favour
Affect its competitors or consumers or the relevant market in its
favour
Control more than 35% of such other percentage of the volume
and value of transactions switched in Nigeria as may be
determined from time to time
EFT Electronic Funds Transfer

EXCLUSIVE Any agreement restricting the user in the course of business


SWITCHING from acquiring or otherwise dealing in any services other
SERVICE than those of the provider or any other provider
AGREEMENT

FEP Front End Processors are connecting switches’ software


deployed to enable connection to the NCS

HSM Hardware Security Module

ISO International Standards Organization

ISSUER Financial Institution or any other person authorized by the


Central Bank of Nigeria to issue plastic cards to customers

ISSUER – Financial Institution or any other person authorized by the


PROCESSOR Central Bank of Nigeria; and licensed by a Card or Payment
scheme to provide the services of and enabling data traffic
between the network or Switch of the Card or Payment Scheme
and the Issuing Institution or Issuer.
MERCHANT Party accepting the card and presenting transaction data to an
acquirer

NCS Nigeria Central Switch

NOT-ON-US Transactions acquired by a financial institution on behalf of


another and to whom the transaction is referred for
authorization.

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OFF-LINE This describes a state when the authorizing institution’s network is
unavailable to accept, authorize and process EFT transactions
ON-LINE This describes the availability of authorizing institution’s network
to accept, authorize and process EFT transactions

PAYMENT Any authorized payment instrument (physical


TOKENS or electronic) used to initiate a transaction e.g. Payment Cards,
Mobile, etc

PIN Personal Identification Number

POS Point of Sale

PREDATORY FEE The provision of services at a fee which is below the cost, as may
be determined by regulations, or provision of services, with a
view to reduce competition or eliminate the competitors

REFUSAL TO Any agreement which restricts, or is likely to restrict by any


method
DEAL the user/provider or classes of users/providers to whom services
are rendered or from whom services are procured

TCP/IP Transmission Control Protocol/Internet Protocol

THE BANKERS A Committee of all Chief Executives of Banks and


COMMITTEE Discount Houses under the Chairmanship of the Governor of
Central Bank of Nigeria.
TIES-IN Any agreement requiring a user of switching service to use
ARRANGEMENT some other service(s) of the provider as a condition to using the
switching service

UNCITRAL United Nations Commission on International Trade Law

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2.0 Background
Nigeria Inter-Bank Settlement System (NIBSS) Plc was incorporated in April 1993
on the mandate of The Bankers Committee, to facilitate transfer of funds
between the banks and discount houses. NIBSS is owned by all Licensed Banks
(in equal proportion) and Discount Houses in Nigeria, including the Central Bank
of Nigeria (CBN). It commenced operation in June 1994. The operations of
NIBSS takes the form of banks transmitting financial transaction data on-line and
retrieving reports and statements of accounts on-line via secure technology
networks.
Highlight of the mandate of NIBSS as entrenched in her memorandum and
article of association is to:
I. Carry on business as a service oriented institution that provide the
mechanism for same day clearing and settlement of inter-bank transfers and
payments
II. Provide the infrastructure for the automated processing and settlement of
transactions between banks
III. Provide framework for elevating the level of efficiency in funds transfer
services generally
IV. Initiate and develop an integrated nationwide network for the electronic or
paperless funds transfer and settlement of transactions.
The mandate to develop and operate a national switch for Nigeria was formally
issued by The Bankers Committee to NIBSS Plc in May 2006.
2.1 The Objectives of the Nigeria Central Switch (NCS)
The Nigeria Central Switch is designed to:
Provide interconnectivity and interoperability amongst approved EFT switch
initiatives in Nigeria;
Specify the Nigeria EFT interface standards
Provide vital retail payment statistics for tactical & strategic planning purposes;
Provide a mechanism for proactive detection of card frauds;
Provide a central switch which integrates modules for accessing external
content, transaction service networks, internal billing applications and related
packages;
Provide seamless integration of the Nigeria retail payment system with the West
African Monetary Zone retail payment plan and beyond.

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Deploy a central switch network which complies with all relevant international
standards
Operationally, the NCS:
Provides a single point of access.
Enables sharing of common technology infrastructure
Enables new entrants to effectively build only one interface to the system.
Conforms to International Switch and Messaging standards ISO 8583.
3.0 Scope
This document (Operational Rules and Regulations for the Nigeria Central
Switch) specifies the rules and general guidelines for the operation of the NCS. Its
provisions shall be binding on all partner institutions.
4.0 Partner Institutions
4.1 Switching Companies
These are electronic funds transfer and transaction switching and processing
service providers that operates within Nigeria. It also includes future service
providers. The switching companies facilitate the exchange of value between
financial service providers, merchants, their customers and other stakeholders.
4.2 Deposit Money Banks
These are financial institutions operating in the country and are otherwise called
issuers of payment tokens (cards, vouchers, etc), which are used on the network
of switches. They may equally assume the title of Acquirers if they own
Automated Teller Machines (ATMs), Point of Sale (POS) terminals, and / or other
payment service channels.
4.3 Others
These are other financial institutions such as Independent Service Operators,
payments processing institutions and solution providers.
5.0 Responsibilities
5.1 Partner Institutions
Each Partner Institution shall undertake to satisfy and ensure continued
compliance with the eligibility criteria and conditions for admission as outlined in
the operational rules and regulations of the Nigeria Central Switch (NCS) and
should:

601
1. Implement the interface connectivity to the NCS
2. Ensure availability of secure connectivity to the NCS and duly notify of any
service failure.
3. Maintain a record of all service failure times in a log report, which shall
include date, time and period of service failure.
4. Ensure message format conform to the ISO 8583 standard.
5. Ensure that their banks pledge securities that provide 110% protection for
their operations
6. Maintain and provide audit trails of transactions flowing through its systems
and the NCS for a minimum period of seven years.
7. Adhere to confidentiality and privacy rules.
8. Ensure that all it’s transaction acquiring channels (ATM, POS, Web, etc)
accept payment tokens of all NCS partner switches, in compliance with the
NCS minimum transaction set, subject to the user of the channel or device
paying such fees as the owner of the acquiring channel or device will
stipulate including but not limited to transaction fees pursuant to Rule 8.3.
9. Shall provide transaction logs and traces when requested, to aid resolution of
disputes arising from financial transactions.
10. Shall provide a transaction log promptly to any requesting partner institution
concerning any NCS-routed transaction, to aid resolution of card transaction
complaints and disputes.
5.2 The Nigeria Central Switch (NCS)
The NCS shall after certification of the partner Institutions ensure:
1. A secure connectivity to the central switch based on the specifications in the
NCS Secure Interconnectivity Requirements document (September, 2007).
2. Routing and switching of transactions amongst Partner Institutions.
3. Switching of transactions between all transacting parties
4. Maintenance and distribution of statistics relating to availability and service
performance of the NCS and Partner Institutions.
5. The enforcement of all agreements reached with the participant institutions
and communications providers.
6. To apply the appropriate fees and charges to all transactions passing
through the NCS.

602
7. Generation and secure distribution of reports as illustrated in the Service
Level.
8. The maintenance of transaction integrity and security for all transactions
passing through the NCS.
9. Notification of Partner Institutions on status of Settlement Transactions.
10. Notify all existing partner and institutions of the joining of a new partner
institution to enable them configure their systems to accept payment tokens
of the new institution
6.0 Technical Requirements
6.1 Interface Specification
The interface specifications will be provided to all Parties to Switching Services as
part of the NCS Interconnectivity requirements.
All interface specifications will conform to the international ISO8583; 1993
standards.
All NCS Partner Institutions will have to develop both Issuer and Acquirer
Interfaces that comply with the NCS Interface Specification as described in the
following documents:

A BASE24- Dec
es_ISO_8583_1993_Host_External_Message_Manual.p
df

BASE24_es_ISO_8583_1993_Host_Ext_Msg_Manual_Future_Up Feb
date_Feb-2007.pdf

6.2 Communication and Message Protocol


The NCS ISO 8583; 1993 Host External Message is based on the standard external
message developed by the International Standards Organization (ISO). It is a
variable-length and variable-content message that can be configured
differently, based on the type of message being sent.

603
The NCS ISO Host Interface component creates and interprets external
messages according to the specifications in the NCS Interface specification
document.
The NCS ISO 8583; 1993 host external message allows incoming and outgoing
messages to be configured individually by a host, depending on the information
the host chooses to send and receive.
1. The message format will be ISO 8583. Details are provided in the NCS
Interface Specification document.
2. All Partner Institutions would maintain secure dedicated Virtual Private
Network TCP/IP data communication to the NCS.
3. The communication protocol will be TCP/IP.
4. The Hardware Security Module (HSM) Connectivity - TCP/IP
6.3 Connection to NCS by Institutions
The Nigerian Central Switch project requires a secure connectivity to all existing
Switches in Nigeria and future new entrants. A secure interconnectivity has to be
established with the NCS, as specified in the NCS Secure Interconnectivity
Requirements (Sept. 2007).
6.4 Security
Parties to Switching Services involved in card-operated devices, must be
capable of providing secure hardware encryption/decryption of customer PINs
and messages for onward transmission to the NCS network.
PIN numbers will be 4 digits.
PINs and messages of transactions must be hardware encrypted using keys
provided by NIBSS.
7.0 Nigeria Central Switch (NCS) Operations
7.1 The NCS Minimum Transactions Standard
The following minimum transaction set must be supported by all switches in order
to achieve interoperability:
7.1.1 POS Transaction Types
I. Purchase
II. Purchase Reversal
7.1.2 ATM Transaction Types
I. Withdrawal
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II. Balance Enquiry
Reversal Transaction will be available for each
7.1.3 Transactions from Other Devices/Channels
Because the source of all transactions will be the Custom NCS Interface, the
NCS will process all transactions which are presented in a format recognized by
that interface, regardless of which type of device or channel was used to
initiate the transaction at the acquiring switch.
This will allow the system to process transactions from, for example, the internet,
mobile phones, and IVR (interactive voice response) systems.
7.2 Modus Operandi
Transactions that route to or through the NCS for authorization do so in a series of
transaction messages.
Transaction processing through the NCS includes the following components,
depending on the source of the transaction and the routing configuration:
Message Delivery (foundation)
Acquirer Interface or Channel Manager (business)
Prefix (business)
Router (business)
Issuer Authorization and/or Issuer Interface (business)
Journal (business)
There are many different components involved in any one transaction. Those
listed above provide a basic list of components for the NCS payment engine
processing.
7.3 Off-line Services
The NCS will not provide off line authentication or authorization of transactions.
All authorizations shall come from the issuer.
7.4 Reports
The following reports are to be generated and circulated via secured online
mode.

605
S/N Description

1 Daily Activity Report By Source Switch; By Bank

2 Daily Activity Report By Destination Switch; By Bank

3 Interchange Fees By Switch; By Bank

4 Net Settlement Report By Switch; By Bank

5 Detailed transaction report

6 Audit trail / History report

7 Transaction volume and value by terminal type and


location

8.0 Fees and Charges


The NCS shall be kept operational at all times and as a result; all participants in
the network shall bear the joint responsibility of supporting its operations. NIBSS
considers the opportunity of participants to share ATM/POS networks that do not
belong to them and thereby reducing investments in building infrastructures as a
huge cost saving benefit.
The associated cost for the discharge of the functions of the NCS is as follows:
8.1 Joining Fees
All parties to the Switching Services joining the NCS will be required to pay a one
off fee. It is expected that these joining fees will cater for the efforts in
infrastructure installation and systems delivery as well as contributory license for
the development of payment system in Nigeria.
8.2 Transaction Charges
The Transaction Charges are of two types;
1. Switching Charge – NIBSS will charge for every financial transaction that hits
the NCS; as shown in the table below.

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Device Payer Recovery Of Fee

ATM Issuer NCS to recover fee from Issuer,


through NIBSS, monthly.

POS Acquirer NCS to compute fee monthly


OR and recover such fee on
Ac 15th of following month
qui from bank account
rer nominated by paying
net acquirer processor, who
wo would have recovered the
rk fee upfront from acquirer.
pro
ce
sso
r

2. Settlement Charge – NIBSS will charge for every settlement transaction which
normally is received on net basis.
Charges will be reviewed at regular interval by the Management of NIBSS and
approved by the Board of Directors, to ensure continuous operations of The NCS
for the benefit of all stakeholders.
8.3 Transaction Fees Payable to Device Owners
Fees payable to device owners shall be as agreed by individual card schemes.
With respect to transactions at POS terminals, Acquirers/Users should agree with
Device Owners, the amount payable to Device Owners while amount payable
to ATM owners/acquirers shall be agreed between the Owners/Acquirers and
the Users/Issuers.
ATM Acquirer/Device owners are required to display applicable Transaction
Fees clearly on their devices, and obtain cardholder’s consent during
transaction processing.
9.0 Service Level
The four basic design goals that govern the development of the NCS are:
I. Availability
II. Data Integrity
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III. Performance and Scalability
IV. Open Interfaces
It is therefore expected that all other connecting Partner Institutions must have
similar architecture, as transactions are mission critical and pivotal to EFT
processing.
As a result, the following draft service levels are expected as a minimum
requirement.
The NCS would be available for transactions 24 hours and 7 days a week.
The NCS system’s performance will be measured in terms of:
a) Up-Time
b) Response Time
The performance of the Partner Institutions systems will be measured by:
a) Success Rates – successful transactions as a percentage of all transactions
switched to Partner Institutions for authorization.
b) Response Times
The NCS would maintain an uptime of at least 99% during any 24 hour period, to
all Partner Institutions.
Partner Institutions connected to the NCS as Issuers must achieve transaction
success rates of at least 97% any 24-hour period.
For all transaction requests routed to authorizing institutions a timeout period will
be set after which the institution node will be deemed to be down and the
transaction will be classified as a failed transaction and declined. This period will
be agreed with the authorizing institution but will be no longer than 90 seconds.
The NCS will be responsible for maintaining and distributing all statistics relevant
to the above.
All NCS Partner Institutions will conform to these and other performance
standards, which may be agreed from time to time.
All NCS Partner Institutions will maintain and provide audit trails for all
transactions which pass between their systems and the NCS for a minimum of 7
years.
The timeout parameters on every terminal that allows access to the NCS must
be no less than 40 seconds and not more than 90 seconds.

608
10.0 Settlement
10.1 Business Day
A Business Day for the NCS will be a 24-hour period. A typical business day will
start from 12.00.00am to 11.59.59 pm.
10.2 Transaction Settlement Procedure
1. Settlement among the NCS Partner Institutions will be processed through the
NIBSS Inter Bank Engine.
2. The NCS end-of-day processing cycle will commence 12.00am, at the close
of each Business Day.
3. A Settlement report file consisting of the net position of each Partner Institution
will be generated.
4. The Settlement report file will be sent to Partner Institutions in a secure
electronic format.
5. Postings to the CBN accounts will take place once a day at the close of
business.
10.2.1 Settlement during Weekends/Non Working Days
1. Transaction settlement will be done every day except on weekends and/or
public holidays or non working days. However, Settlement Report Files will be
generated every day including weekends and on non working days
2. Settlement Report Files generated for each non working day will be
processed on the next working day.
3. NIBSS will send settlement confirmation reports to Partner Institutions,
confirming the settlement (or non settlement) of daily transactions
10.3 Settlement of Transactions
10.3.1 Settlement Risk Mitigation
• Settlement risk shall be mitigated by the Proactive Risk Management (PRM)
functionality of the NCS.
• The switches shall ensure that member banks in their scheme pledge
securities that provide for 110% protection for their operations.
• Partner Institutions may be required to increase their value of securities
pledged as and when required as approved by the CBN from time to time.
• The NCS shall settle all transactions that pass through into bank accounts.

609
10.4 Notifications on Settlement
• NIBSS will notify Partner Institutions of the success or failure of each settlement
transaction.
11.0 Governing Law
This agreement shall be governed and construed in accordance with the laws
of the Federal Republic of Nigeria and be subject to the jurisdiction of the
Nigerian Courts. All disputes shall be settled under the law of the Federal
Republic of Nigeria.
12.0 Penalties and Dispute Resolution
12.1 Penalties
Failure to comply with the provisions of these guidelines shall be referred to the
CBN for the appropriate regulatory sanctions.
12.2 Dispute Resolution
Should any dispute arise from the operation and performance of the NCS, it shall
be settled first by a meeting of at least one senior executive officer of each
Party. If upon exercise of due diligence, the latter does not resolve a dispute
within 15 days of the notifying Party’s calling of the meeting, either Party may
refer the matter to binding arbitration. Parties shall agree to abide by the
decision of the arbitration panel. Dispute resolution shall be conducted under
the rules of UNCITRAL, in Nigeria unless the Parties mutually agree upon another
jurisdiction. A panel of three (3) arbitrators shall conduct the dispute resolution;
one each appointed by each Party and the third appointed by the other two.
The arbitrators appointed shall be English speaking and the arbitral proceedings
shall be conducted in English. The arbitrators’ award shall be binding on the
Parties, without recourse to court. The Parties to a dispute shall evenly bear the
cost of the arbitration except for their own respective individual costs, which
they shall bear individually.
13.0 Confidentiality Rule and Prohibitions
The rule governing the NCS is such that each of the Parties and their Advisors will
disclose and provide to each other such Confidential Information as the
Disclosing Party deems necessary for the relevant business purpose under the
NCS.
13.0.1 Confidential Information” shall for the purposes of these Rules mean any
and all information that a Party discloses to the other in connection with the
relevant business purpose, which includes, but is not limited to the following:

610
Any customer information, technical, commercial, financial, marketing or
business information and know-how, including without limitation, all
correspondence, notes, computer disks and tapes, documents, records, data,
services, financial information, marketing brochures or other information in
whatever form relating to the parties, their operating documents, standard
forms which information has been communicated to the other, or otherwise
acquired by the other during the course of these services, whether such
information is formally designated as confidential or not.
13.0.2 The Receiving Party will not disclose Confidential Information to any
person, firm, corporation, association or any other entity for any reason or
purpose whatsoever, provided however, that the Receiving Party may disclose
the Confidential Information on a need-toknow basis to its internal management
who are directly involved in the development and operation of the NCS, legal
and financial advisors retained specifically to provide advisory services and
provided that the Receiving Party ensures that such persons are bound by an
equivalent duty of confidentiality.
13.0.3 The Disclosing Party may give notice in writing at any time requiring that
any part of the Confidential Information disclosed be either returned or
destroyed, such return or destruction to be combined with a notice to the
Disclosing Party to the effect that upon such return or destruction the Receiving
Party has not knowingly retained in its possession or under its control, either
directly or indirectly, any Confidential Information or copies thereof. In any case,
the Receiving Party must comply with any such request within thirty (30) days of
receipt of such request.
13.0.4 All parties to Switching Services shall ensure that all notifications and
information that its employees have obtained in the course of discharging their
responsibilities are treated as confidential.
13.1 Prohibition of Anti-competition Agreements
No parties to Switching Services in Nigeria shall enter into any agreement in
respect of any switching service that shall cause or is likely to cause adverse
effect on competition. Any agreement entered into in contravention of this
provision shall be null and void and of no effect.
13.1.1 Any agreement entered into between parties to Switching Services or
decision taken by any association of switching companies or association of
persons, including cartels engaged in identical or similar provision of switching
services, which:
a. Limits or controls markets, technical development, investment or provision of

611
Switching Services
b. Shares the market or provision of services by way of allocation of
geographical area of market, or number of customers in the market or any
other similar way; shall be considered an anti-competition agreement.
13.1.2 Any agreement amongst parties to Switching Services, in respect of
switching services, including:
a. Tie-In Agreement;
b. Exclusive Service Agreement
c. refusal to deal;
shall be considered an agreement in contravention of anti-competition
agreement if such agreement causes or is likely to cause adverse effect on
competition in Nigeria.
13.2 Prohibition of Abuse of Dominant Position
13.2.1 No parties to Switching Services shall abuse its dominant position by
directly or indirectly imposing unfair or discriminatory condition and fees in
the provision of its services.
13.2.2 Equally, no parties to Switching Services shall limit or restrict the provision of
switching services or market thereof or technical or scientific development
relating to switching services to the prejudice of consumers.
13.2.3 No parties shall indulge in practice or practices resulting in denial of
market access.
13.3 Prohibition of Competition by NIBSS/NCS Nigeria Inter-Bank Settlement
System Plc (NIBSS), the Nigeria Central Switch (NCS) and any company,
person or group of persons performing the roles, duties or functions of the
Nigeria Central Switch SHALL NOT under any circumstance whatsoever or
howsoever engage in competition with any Payment Card Industry
Scheme, Operator or Service Provider. Accordingly, Nigeria Inter-Bank
Settlement System Plc (NIBSS), the Nigeria Central Switch (NCS) and any
company, person or group of persons performing the roles, duties or
functions of the Nigeria Central Switch shall not:
13.3.1 Be or engage in any business as:
a. A Card Scheme
b. Issuer of Payment Cards
c. Issuer-Processor

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d. Acquirer
e. Acquirer-Processor
13.3.2 Support or promote any Card scheme
13.3.3 Own, deploy, maintain or install acceptance and acquiring devices such
as Point of Sale terminals and Automatic teller Machine.
14.0 Amendments
Any NCS stakeholder wishing to propose amendments to the NCS rules shall
forward such proposals to the MD/CEO of NIBSS. The amendments shall be
widely circulated among stakeholders and sufficient notice given to all before
the effective date of the amendment, if approved.

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CENTRAL BANK OF NIGERIA
Business Central Area District
P.M.B. 0187
Garki, Abuja

09-61638445
09-61638455 (Fax)

June 11, 2009

BOD/RTP/GEN/RVP/01/002

To: The General Public

REGULATORY FRAMEWORK FOR MOBILE PAYMENTS SERVICES IN NIGERIA

The Central Bank of Nigeria, in its desire to extend banking services to a


wider segment of the Nigerian public, has identified mobile telephony
as a veritable avenue for advancing financial inclusion. In view of the
penetration and wide acceptance of the mobile phone services in
Nigeria, the Bank is encouraging the introduction of payments services
through the mobile phone.

The Central Bank of Nigeria hereby issues the following regulatory


framework for the operations of mobile payments services in Nigeria.

Thank you

E.C. Obaigbona

For: Director, Banking Operations Department


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REGULATORY FRAMEWORK

FOR MOBILE PAYMENTS SERVICES IN NIGERIA

615
1.0 Introduction

This regulatory framework is developed to conform to international best


practice and standards. It is also a product of vigorous engagement and
consultations with stakeholders.

After identifying person to person payments (over the mobile phone


infrastructure) as a practical strategy for financial inclusion of the un-banked,
the Central Bank of Nigeria opted for the creation of an enabling regulatory
environment as a policy path towards achieving availability, acceptance and
usage of mobile payments services in Nigeria.

The overriding vision is to achieve a nationally utilised and internationally


recognised payments system.

1.1 Objectives
The objectives of the regulatory framework are as follows:
I. Provision of an enabling environment for mobile payments services in
reducing cash dominance in the Nigerian economy.
II. Specification of minimum technical and business requirements for various
participants in the mobile payments services industry in Nigeria.
III. Stipulation of roles and responsibilities of participants in the provision and
usage of mobile payments services in Nigeria.
IV. Provision of broad guidelines for implementation of processes and flows of
mobile payments transactions from initiation to completion.
1.2 Scope
This regulatory framework addresses business rules governing the operation of
mobile payment services in Nigeria. It specifies basic functionalities expected
of any mobile payment service and solution in Nigeria. In addition, it sets the
basis for regulation of mobile payments services offered at different levels and
by diverse participants. This framework does not cover the use of mobile
phone as an access to the internet for the purpose of using internet banking
services. In that regard, the provisions of the Electronic Banking Guidelines
should apply.
1.3 Participants
The framework shall guide the activities of participants in the provision of
mobile payments services. Participants include service providers, infrastructure
providers, solution providers, scheme operators and the consumers.
1.3.1 Scheme Operators
Organizations that provide the infrastructure for the mobile payment systems for
the use of participants that are signed-on to their scheme.
1.3.2 Settlement Infrastructure Providers
Organizations providing infrastructure that enables message exchange, switching
and settlement facilities for mobile payments services.
1.3.3 Service Providers
Organizations that employ the infrastructure of scheme operators to provide mobile
payments services to end users.
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1.3.4 Consumers
These are end users of mobile payments services.
1.3.5 Solution Provider
These are information technology software developers that develops mobile
payments software, application and other ancillary hardware.
2.0 Mobile Payment System
Mobile Payment System in Nigeria refers to the various components required to
deliver mobile payment to the banking and non-banking community. The
providers of these services and solutions shall be required to operate within the
defined regulatory framework specified in this document.
The Central Bank of Nigeria shall be responsible for defining, monitoring and
regulating the mobile payment systems in Nigeria.
2.1 Mobile Payment Models
This framework has identified three major models for the implementation of mobile
payments services namely;
I. Bank –Focused- Financial Institutions as Lead Initiator
II. Bank Led – Financial Institution(s) and/or its Consortium as Lead Initiator
III. Non-Bank Led- A corporate organisation as Lead Initiator
The Lead initiator shall be responsible for ensuring that the various solutions and
services within a mobile payment system meet the entire regulatory
requirement as defined by the Central Bank of Nigeria. The Lead initiator (as an
entity and as representative of other partners) shall be legally responsible and
accountable to the Central Bank of Nigeria and the end user.
The Central Bank of Nigeria appreciates the critical role of telecommunication
companies in any of the models for the implementation of mobile payments
services in Nigeria. The role of the telecommunication companies shall be
guided by the following provisions;
Telecommunication companies shall
I. provide telecommunication network infrastructure for the use of
scheme operators;
II. ensure that a secure communication path based on the technology
standard stipulated in this regulatory framework is implemented;
III. make available its network to scheme operators based on criteria
which are transparent and generally applicable to all scheme
operators without discriminatory practices against any scheme;
IV. ensure that its subscribers are free to use any mobile payments system
service of their choice;
I. not receive deposit from the public except in respect of the prepaid
airtime billing of their subscribers
II. not allow the use of the prepaid airtime value loaded by their
subscribers for purposes of payment or to transfer monetary value.
2.1.1 Bank-Focused Model
This is a model where a bank delivers banking services to existing and
prospective bank customers using the mobile phone as a delivery channel. This
model can only be deployed by a licensed deposit-taking financial institution.

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Licensed deposit-taking financial institutions, under this model shall include,
deposit money banks, microfinance banks and discount houses.
2.1.1.1 The Participants
The participants in this model shall include the initiating bank, its Information and
Communication Technology (ICT) partners and the customers.
2.1.1.2 Responsibilities of the Financial Institutions
Financial Institutions shall be responsible for;
2.1.1.2.1 Seeking and obtaining necessary approvals from the regulatory authorities.
2.1.1.2.2 The deployment and delivery of the mobile payment solutions to the
customer
2.1.1.2.3 Ensuring that the mobile payment solution meets all specified mobile
payment standards as stated in the mobile payment services regulatory
framework
2.1.1.2.4 Putting in place adequate measures to mitigate all the risks that could
arise from the deployment and use of its mobile payment solution.
2.1.1.2.5 Facilitating international remittances to both scheme and non–scheme
recipients.
2.1.1.3 Rules
The financial institutions shall ensure that
2.1.1.3.1 The mobile payment system meets all regulatory requirements and
standards
2.1.1.3.2 it adheres to the requirements of the mobile payment KYC guidelines.
2.1.1.3.3 It makes adequate provision for monitoring and reporting as defined in the
mobile payment monitoring and compliance guidelines.
2.1.1.3.4 Remittance messages shall, at a minimum, be conveyed to the recipient
through secured SMS.
2.1.2 Bank Led Model
This is a model where a bank, or a consortium of banks, partnering with other
organizations, jointly seeks to deliver banking services leveraging on the mobile
banking system.
This model shall be applicable only in a scenario where there exists
collaboration between a licensed deposit-taking financial institution(s) and an
organization duly verified by the partner bank(s). Licensed deposit-taking
financial institutions, under this model shall include, deposit money banks,
microfinance banks and discount houses.
2.1.2.1 The Participants
The participants in this model are the initiating bank(s), the partner organizations
(e.g scheme operator, infrastructure providers telecommunications companies,
independent operators etc) and the customers.
2.1.2.2 Roles of the Financial Institutions
The Financial Institutions shall:
2.1.2.2.1 Provide all financial services for the operation of the mobile payments
service.
2.1.2.2.2 Verify, approve and guarantee the creditability and integrity of the
partner organization.

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2.1.2.3 Roles of the Partner Organizations
Among other roles as may be defined in the agreement with the financial
institution(s), the partner organizations shall:
2.1.2.3.1 Provide and manage the technology required to deliver mobile payment
services to the customer
2.1.2.3.2 Provide the agent network required to extend all the proposed services to
the market place.
2.1.2.3.3 Facilitate international remittances to both scheme and non –scheme
recipients
2.1.2.4 Responsibilities of the Financial Institutions
The Financial Institutions shall be responsible for:
2.1.2.4.1 Seeking and obtaining approval from the CBN;
2.1.2.4.2 Providing financial, clearing and settlement services to the mobile
payment system;
2.1.2.4.3 Ensuring that the mobile payment solution complies with specified mobile
payment standards as stated in the mobile payment services regulatory
framework;
2.1.2.4.4 Putting in place adequate measures to mitigate all the risks that could
arise from the deployment and use of its mobile payment solution and;
2.1.2.4.5 Educating the customers on the appropriate use of the solution;
2.1.2.4.6 Recruiting, training, and managing the agents
2.1.2.5 Responsibilities of the Partner Organizations
The Partner organisations shall be responsible for:
2.1.2.5.1 ensuring that the proposed solution meets all the regulatory standards and
requirements specified in the mobile payment services regulatory
framework;
2.1.2.5.2 The deployment and delivery of the mobile payment solutions to the
customer;
2.1.2.5.3 providing the agent network required to support the delivery of services to
the customer;
2.1.2.5.4 Collaborate with the financial institutions in recruiting, managing and
training the agents on the network;
2.1.2.5.5 Educating the customers on appropriate use of the solution;
2.1.2.5.6 Ensuring that international remittance messages shall, at a minimum, be
conveyed to the recipient through secured SMS.
2.1.2.6 Rules
2.1.2.6.1 The mobile payment system must meet all regulatory requirements and
standards
The financial institution shall ensure that
2.1.2.6.2 It adheres to the requirements of the mobile payments KYC guidelines.
2.1.2.6.3 It makes adequate provision for monitoring and reporting as defined in the
mobile payment monitoring and compliance guidelines.
2.1.2.6.4 International remittance messages shall, at a minimum, be conveyed to
the recipient through secured SMS.

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2.1.3 Non-Bank Led Model
This model allows a corporate organisation that has been duly approved by
CBN to deliver mobile payments services to consumers. This model shall be
applicable to any organization other than a licensed deposit money bank and
telecommunication companies. Corporate organisation, under this model,
include switching companies and payments system service providers.
2.1.3.1 The Participants
The participants in this model are the corporate organization, its partners and the
consumers.
2.1.3.2 Roles of the Organization
2.1.3.2.1 The corporate organization would provide and manage the technology
required to deliver mobile payment services to the customer.
2.1.3.2.2 The corporate organization would provide the agent network required to
extend all the proposed services to the market place.
2.1.3.3 Responsibilities of the Organization
The organisation shall be responsible for:
2.1.3.3.1 ensuring that the proposed solution meets all the regulatory standards and
requirements specified in the mobile payment services regulatory
framework.
2.1.3.3.2 the deployment and delivery of the mobile payment solutions to the
customer.
2.1.3.3.3 developing the agent network required to support the delivery of services
to the customer.
2.1.3.3.4 recruiting, managing and training the agents on their network.
2.1.3.3.5 educating the customers on appropriate use of the solution
2.1.3.3.6 ensuring that its mobile payment system provides transactions monitoring
and reporting system in compliance with regulatory requirements.
2.1.3.3.7 providing access for on-the-spot assessment and verification of its
transaction details by the Central Bank of Nigeria on an on-demand basis.
2.1.3.3.8 providing a quarterly assessment report on the performance of the
organization and the submission of same at the Banking Operations
Department of the Central Bank of Nigeria.
2.1.3.3.9 keeping records of transaction details emanating from the organization’s
mobile payment system.
2.1.3.3.10 ensuring that the mobile payment solution complies with specified
standards as stated in the regulatory framework.
2.1.3.3.11 putting in place adequate measure to mitigate all the risk that could arise
from the deployment and use of its mobile payment solution.
2.1.3.3.12 shall appoint and notify CBN of its settlement bank among the CBN
approved settlement banks.
2.1.3.3.13 facilitate international remittances to both scheme and non –scheme
recipients.
2.1.3.4 Rules
The organisation shall ensure that:

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2.1.3.4.1 monetary values in respect of its mobile payments services are reflected in
the settlement bank financial system by maintaining a settlement account
with a deposit money bank.
2.1.3.4.2 The settlement account with the deposit money bank shall be opened as
a nominee account with users of the e-money issued on it as beneficiaries.
2.1.3.4.3 The settlement account is not interest bearing to both the users and the
Organization.
2.1.3.4.4 The settlement account is not used, under any guise or purpose, as
collateral for negotiation of loans by the organisation.
2.1.3.4.5 The balance on the settlement account shall always be equal to the total
outstanding (un-spent) balance of all holders of the e-money.
2.1.3.4.6 the mobile payment system meets all regulatory requirements and
standards 2.1.3.4.7 it adheres to the requirements of the mobile
payments Know Your Customer (KYC) guidelines.
2.1.3.4.8 all customer transactions are traceable; auditable and can be validated.
2.1.3.4.9 international remittance messages shall, at a minimum, be conveyed to
the recipient through secured SMS.
2.2 Types of Mobile Payments Scenarios
Mobile payment scenarios are methods through which mobile payments can be
carried out. These scenarios could be;
I. Card Account Based
II. Bank Account Based
III. Stored Value (e-Money) Account Based
2.2.1 Card Account Based
This is a scenario where a payment card is linked to a mobile phone for the purpose
of initiating and concluding payment transactions.
2.2.1.1 Types of Card-Driven Payments
The types of card-driven payments recognized by the CBN are:
I. Credit,
II. Debit and
III. Pre-Paid
2.2.1.2 Rules of Operations
2.2.1.2.1 The Card Account Based payment shall be based on an infrastructure that
relies on the global 3-DES secure architecture.
2.2.1.2.2 The card shall be issued by a CBN approved card issuing organization
2.2.1.2.3 The card shall be recognized within the existing financial system
2.2.1.2.4 The card system shall comply with the existing regulation and standards for
cards.
2.2.1.2.5 All Card Account based transactions must be authenticated against the
originating Card Management System.
2.2.2 Bank Account-Based
This is a scenario where a mobile payment system drives transactions through
bank accounts of customers. These accounts are based on the existing
accountgenerating system in the banking system.
Some of the account type include: current account, saving account, domiciliary
accounts etc.
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2.2.2.1 Types of Bank Account Based
The types of Bank Account based scenarios shall include but not limited to Pull
Based account transactions and Push Based account transactions.
The Pull-based transactions are transactions that generate a debit on the
account through a mobile payment solution, whilst a Push-based generates a
credit transaction through a mobile payment solution on the account. A Pull-
based transaction shall be authorised by the account holder via a verifiable
mode before the transaction is consummated and debited to his or her
account.
2.2.2.2 Rules of Operations
2.2.2.2.1 The Bank Account Based payment shall be originated via a financial
institution’s banking application.
2.2.2.2.2 The Bank Account Based shall comply with the existing account opening
standards and practice in the Nigerian banking system.
2.2.2.2.3 The transaction activities generated within/by the account shall be
traceable, monitored and logged within the mobile payment system
2.2.2.2.4 Access to the account through the mobile payment system shall be via a
secured mobile payment system that meets the defined standards
specified in the mobile payment services regulatory framework.
2.2.2.2.5 Authorization of transactions originating from or terminating on these
accounts shall be based on standards defined by the host financial
institution.
2.2.3 Stored Value Account Based
This is a scenario where a mobile payment system drives transactions through a
system-based account. These system-based accounts shall comply with the
standards defined within the regulatory framework.
2.2.3.1 Type of Stored Value Account
The various stored value options recognized by the CBN include Re-loadable stored
value accounts, prepaid account etc.
2.2.3.2 Rules of Operations
2.2.3.2.1All system-based accounts shall have an identification system that
generates unique identifier per user account within the mobile payment
system.
2.2.3.2.2 All system-based accounts shall only be accessible through the mobile
payment system.
2.2.3.2.3 The user may however specially request other means of access to his/her
system-based account other than specified in 2.2.3.2.2 above. The liability
of the user shall be clearly stated before granting request.
2.2.3.2.4 All accounts and transaction details shall be stored in an encrypted format
within the mobile payment system.
2.2.3.2.5 The mobile payment system account management unit shall comply with
all the standards and requirements defined in the mobile payment
regulatory framework.
2.2.3.2.6 All system based stored value account shall be tied to a settlement
account with a licensed deposit taking institution. The settlement

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account shall be funded to the tune of the total outstanding balance
amount of all the systembased accounts on the scheme
2.3 Mobile Payment Processes
The mobile payment solution providers shall provide a detailed payment
management process that covers the entire solution delivery process from
customer registration and management, customer service and dispute
resolution procedures to transaction settlement finality.
These processes shall cover the scope of the value chain across all the participants
in the mobile payment system.
2.3.1 Operational Modalities
The Mobile Payment system shall support the following key processes for delivering
payments to the customers through their handsets.
2.3.1.1 Registration
2.3.1.1.1 All scheme operators shall be registered with the Central Bank of Nigeria
and shall be issued a unique scheme code by the national switch for
managing interoperability within the national mobile payment system.
2.3.1.1.2 The mobile payment system deployed by a service provider shall have the
capabilities to register all users within the payment system.
2.3.1.1.3 The service provider shall register users of its solution based on technology
standards and requirement in this regulatory framework
2.3.1.1.4 The solution provider shall ensure that the registration processes within its
mobile payment system shall fulfil the entire KYC requirement specified
within the regulatory framework.
2.3.1.1.5 All mobile payment system users shall retain and maintain evidence of the
successful completion of the registration process with a solution provider.
2.3.1.2 Activation
2.3.1.2.1 The mobile payment system shall require a registered user to activate the
service before commencement of transactions with his PIN/Password.
2.3.1.2.2 The activation of service shall ensure that user identity is not compromised
within or without the mobile payment system.
2.3.1.2.3 The activation of users shall be securely managed within the solution
provider mobile payment system.
2.3.1.2.4 The scheme operators shall ensure that the activation process is not
compromised or altered within its infrastructure.
2.3.1.3 Transactions
2.3.1.3.1 All transactions initiated and concluded within the mobile payment system
shall have a unique transaction reference issued by the system
2.3.1.3.2 All transactions shall have the following elements: Transaction number,
transaction amount, transaction date and time stamps, merchant
categories, merchant addresses and codes
2.3.1.3.3 Each transaction detail logged within the payment system shall contain a
valid description, payer and payee phone numbers.
2.3.1.3.4 Mobile payment solution providers shall provide notifications for all
transactions concluded on their mobile payment systems.
2.3.1.3.5 Scheme Operators shall ensure that all transactions processed within its
infrastructure are not compromised.
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2.3.1.4 Settlement
2.3.1.4.1 The settlement process to be deployed by scheme operators shall ensure
compliance with the settlement standards and requirements defined in the
mobile payment regulatory framework.
2.3.1.4.2 The scheme operator shall ensure that its mobile payment infrastructure
fully complies with the mobile payment services regulatory framework
requirement for finality of settlement.
2.3.1.4.3 The scheme operator shall provide all solution providers with settlement
positions for reconciliation of transactions.
2.3.1.4.4 All final settlement processes shall be routed through the inter-bank
settlement system.
2.3.1.4.5 The scheme operator shall ensure that all settlement information details are
preserved for reference over a 5 year period.
3.0 Infrastructure
The core infrastructure in providing a national mobile payment system comprises
transaction, clearing and settlement arrangements. These infrastructures consist of
service providers, network facilities, information and computer technologies,
operating procedures and rules. To achieve finality of payments to all parties, the
settlement process for all models need to be defined as well as the rules guiding
the various services.
Infrastructure already exists at the national switch and inter-bank settlement system,
to facilitate the settlement finality of payment through the CBN InterBank Funds
Transfer System (CIFTS) infrastructure. Infrastructure shall facilitate instant payment
to the end users and settlement of the Scheme providers in a T+1 cycle for the
mobile payment system. The rules and regulation to provide such an operation are
detailed below.
3.1 Settlement
There are various settlements processes which will come into place depending on
how the mobile services were consummated. The services include IntraScheme (On
us; Not on us) and Inter-Scheme (On Us; Not On Us).
3.1.1 Intra Scheme
Intra-Scheme Services are services that are consummated within a particular
service provider’s scheme. However, as there are various participants in each
scheme, a service initiated by a particular participant on itself is referred to as a On
Us service while a service initiated from one participant to another within the same
scheme is referred as a Not On Us.
The role of Intra-Scheme Settlement Providers shall be to provide a net position of
all their participants to the inter-bank settlement system to effect finality of
payment.
3.1.2 Inter Scheme
Inter-Scheme Services are services consummated across two different schemes by
various participants. When a service is consummated by the same participant that
belongs to two different schemes, this service is referred to as On Us service. Not On
Us service are services consummated by two different participants that belong to
two different schemes.

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The role of Inter-Scheme Settlement Providers shall be to provide a net position of
all participants which consummate services across schemes to the inter-bank
settlement system to effect the finality of payment.
3.1.3 Final Settlement
For finality of Settlement between participating institutions, settlement providers
shall provide settlement information of their participants to the final settlement
system. Final Settlement shall be done through the CBN Inter-Bank Funds Transfer
System (CIFTS) by effecting the net positions of both the inter scheme and the intra
schemes (Not on Us) provided by the national central switch and the inter-bank
settlement system.
3.1.4 Operating Rules
3.1.4.1 Intra-Scheme (Not on Us) Settlement
Any organization providing intra-scheme settlement shall:
3.1.4.1.1 obtain CBN approval for the operation of the scheme.
3.1.4.1.2 maintain a settlement account with a bank that is a participant on CIFTS.
3.1.4.1.3 provide net settlement positions of all their participants to the participating
banks for final settlement on a T+1 cycle.
3.1.4.1.4 provide statistical reports to the Regulators and participants as required.
3.1.4.1.5 maintain audit trail and transaction log of all transactions consummated
on the scheme.
3.1.4.2 Inter Scheme Settlement
Any organization providing inter-scheme settlement shall:
3.1.4.2.1 provide net settlement positions of all Inter-Scheme service providers and
effect final settlement using the CBN Inter-Bank Funds Transfer System
(CIFTS) on (T+1) cycle.
3.1.4.2.2 provide statistical reports to the regulatory bodies and participants as
required
3.1.4.2.3 maintain audit trail and transaction log of all transactions consummated
on the scheme.
3.1.5 Roles and Responsibilities
3.1.5.1 Intra Scheme Settlement
Any organization providing intra-scheme settlement shall:
3.1.5.1.1 provide the infrastructure (hardware, software, switching and security) to
participating service providers on mobile payments schemes.
3.1.5.1.2 provide business continuity and disaster recovery plans to ensure services
are always available at all times.
3.1.5.1.3 provide 99.99% system availability and ensure all signed on participating
institutions follows same rule.
3.1.5.1.4 ensure all infrastructures are interoperable across all providers.
3.1.5.2 Inter Scheme Settlement
Any organization providing inter-scheme settlement shall:
3.1.5.2.1 provide the infrastructure (hardware, software, switching and security) to
link all inter scheme providers.
3.1.5.2.2 provide business continuity and disaster recovery plans to ensure services
are always available at all times.

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3.1.5.2.3 provide 99.99% system availability and ensure that all signed-on
participating institutions follow same rules.
3.1.5.2.4 ensure that all infrastructures are interoperable across all providers.
3.2 Scheme Operators
Scheme Operators provide the infrastructure for the mobile payment systems for
the use of participants that are signed-on to their scheme.
3.2.1 Participants
The participants in this industry are Banks, Payments Switches and Independent
Scheme Operators.
3.2.2 Operating Rules
For any of the following interested parties to operate as scheme operator they shall
adhere to the following rules:
3.2.2.1 Banks
Banks shall:
3.2.2.1.1 obtain CBN approval before operating the scheme
3.2.2.1.2 have systems to provide KYC information to all regulatory bodies
3.2.2.1.3 ensure that independent service providers pledge adequate collateral
where it provides settlement banking relationship.
3.2.2.1.4 ensure that the settlement accounts of the independent service providers
to which it provides banking services is drawn down by only the net
settlement position of the provider.
3.2.2.2 Payment Switches
Payments switches shall:
3.2.2.2.1 obtain CBN approval to operate the scheme
3.2.2.2.2 maintain systems to provide KYC information to all regulatory bodies
3.2.2.2.3 ensure that service providers utilizing their infrastructure provides adequate
collateral to mitigate settlement risk.
3.2.2.3 Independent Scheme Operators
Independent scheme operators shall:
3.2.2.3.1 obtain CBN approval to operate the scheme
3.2.2.3.2 maintain systems to provide KYC information to all regulating bodies
3.2.2.3.3 ensure that service providers utilizing their infrastructure provide adequate
collateral to mitigate settlement risk.
3.2.3 Roles and Responsibilities
Scheme operators shall:
3.2.3.1 provide the infrastructure (hardware, software, switching and security) to
participating service providers on mobile payments.
3.2.3.2 provide business continuity and disaster recovery plans to ensure services
are always available at all times.
3.2.3.3 provide 99.99% system availability and ensure all signed on participating
institutions follow same rule.
3.2.3.4 ensure all infrastructure are interoperable across all providers
3.3 Service Providers
The service providers employ the infrastructures of the Scheme Operators to
provide services to the end users.

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3.3.1 Participants
The participants in this industry are Banks, Telecommunication Companies, and
Independent Service Providers.
3.3.2 Operating Rules
For any of the following interested parties to operate as service providers they shall
abide by the following rules:
3.3.2.1 Banks
The banks shall:
3.3.2.1.1 obtain CBN approval to provide the service
3.3.2.1.2 provide KYC information to all regulatory bodies
3.3.2.1.3 provide adequate collateral to mitigate settlement risk
3.3.2.2 Independent Service Providers
The independent service providers shall:
3.3.2.2.1 obtain CBN approval to provide the service
3.3.2.2.2 provide KYC information to all regulatory bodies
3.3.2.2.3 provide adequate collateral to mitigate settlement risk
3.3.2.2.4 maintain a settlement account with a settlement bank
3.3.2.2.5 ensure that all payments for purchases of issued stored value are made
into designated settlement account.
3.3.3 Roles and Responsibilities
Service providers shall:
3.3.3.1 provide customer support service
3.3.3.2 provide users with user manuals and training in using the scheme.
3.3.3.3 have procedures for efficient dispute resolution.
3.3.3.4 guarantee that the mobile payment system will be available 99.99%
3.3.3.5 maintain details of transaction records consummated within their mobile
payment system for 5 years
3.3.3.6 ensure that the customer gets the notification for every transaction on its
mobile and an alternative medium e.g e-mail.
3.3.3.7 ensure compliance with the standards and requirements of the mobile
payment system guideline.
3.3.4 Risk Management for Independent Service Providers
In view of the peculiarity of the operations of the independent service providers
and the unique risks associated with their operations, the regulatory framework
hereby specifies the following requirements to mitigate risks arising from the
activities of the independent service providers.
3.3.4.1 Credit and Settlement Risk
Independent service providers shall:
3.3.4.1.1ensure that the mobile payment system automatically generates
settlement information.
3.3.4.1.2 ride on the capabilities of the scheme operators for settlement purposes.
3.3.4.1.3 maintain audit trail and settlement log for 5 years.
3.3.4.1.4 maintain a minimum paid-up capital of N20million unimpaired by losses
3.3.4.1.5 fulfill other conditions that may be specified by the regulatory authorities
from time to time.

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3.3.4.2 Business Continuity Risk
Independent service providers shall:
3.3.4.2.1 maintain proper backup infrastructure
3.3.4.2.2 implement a disaster recovery and business continuity plan
3.3.4.2.3 periodically test the effectiveness of the backup infrastructure and
business continuity plan.
3.3.4.3 Other Risks
Independent service providers shall:
3.3.4.3.1 implement a robust risk management framework to identify, monitor and
control all other risks that may arise out of the operation.
3.3.4.3.2 ensure that ownership is credible and the top management is
experienced.
3.3.4.3.3 be registered with CAC as Limited Liability Company.
4.0 Technology
The technology implemented for mobile payment services shall comply with
the following technology standards and other requirements outlined in the
provisions of this regulatory framework.
4.1 Standards
4.1.1 Modularity of Technologies
4.1.1.1 The technology deployed in the delivery of mobile payment services
shall comprise a set of interoperable infrastructure modules that work
seamlessly. There shall be an end-to-end connection from user-device
through transport network to the service site.
4.1.1.2 Provided the security requirements of this regulatory framework are met,
the mobile payment service shall use any mode of communication
including, but not restricted to, the following:
I. Secure SMS,
II. WAP/GPRS and
III. USSD1
IV. EDGE
4.1.1.3 Provided the security requirements of this framework are met, the mobile
payments service shall use any mode of user interface, including, but not
restricted to, the following :
I. Secure SMS
II. Menu driven USSD1 application
III. WAP/GPRS
4.1.1.4 The mobile payments services shall not use plain SMS.
4.1.1.5 Only secure channels shall be used in providing mobile payments services
4.1.1.6 The mobile payments services shall ensure non-repudiation
4.1.1.7 The mobile payment solution may be embedded into SIM toolkit. The
NCC shall stipulate standards for all telecommunication network service
providers to facilitate embedding of mobile payment solutions.
4.1.2 Solution Initialisation
The mobile payments solution shall ensure simple initialization of the payment
application.

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4.1.3 Compatibility
4.1.3.1 The mobile payment solution shall be compatible and interoperable
with the network infrastructure of different telecommunication
companies, solution providers, and scheme providers and the Nigeria
Central Switch.
4.1.4 Interoperability
All schemes shall be able to interoperate:
4.1.4.1 with other scheme or solution providers
4.1.4.2 with other payment channels like cards, ATM, POS, etc.
4.1.4.3 with the National Central Switch
4.1.4.4 The National Central Switch shall provide scheme codes for the various
operators of mobile payments services for the purpose of seamless
operations and settlements, with the ultimate aim of giving immediate
value to all user transactions.
4.1.5 Message Format
Mobile Payments solutions deployed shall adhere to the following message format:
4.1.5.1 encrypted end-to-end
4.1.5.2 ISO 8583 compliant.
4.1.6. Reliability
4.1.6.1.Payment instruction shall be consistently executed. In the event of failure,
immediate reversal shall be automatic.
4.1.6.2 Users shall get immediate value for every successful transaction.
4.1.7 Flexibility
Users shall be able to switch between service providers without any
bottlenecks.
Switching from one solution to another shall be as easy as possible.
4.1.8 User Interface
4.1.8.1 The user interface shall, at the minimum, be menu-driven.
4.1.8.2 If private or personal data in the application are directly accessible
through this menu (for example, memorizing the PAN-Primary Account
Number), the access to this menu shall be protected.
4.1.8.3 Administrative functions - for example, tracing, certification/confirmation of
transaction shall be provided.
4.1.8.4 PIN shall be encrypted at the point of entry.
4.1.9 Security
The overall security framework shall ensure:
4.1.9.1 encrypted messaging / session between consumer’s phone and third
party service provider / Telecom Company. The minimum encryption
standard to be specified is Triple Data Encryption Standard (3-DES)
encryption;
4.1.9.2 all subsequent routing of messages to the scheme providers’ servers
must be with the highest level of security with dedicated connectivity
like leased lines (E1 links) / VPNs;
4.1.9.3 that Hardware Security Module (HSM) exists between Nigeria Central
Switch, service providers and all financial or third party institutions that
participate in the scheme;
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4.1.9.4 that any sensitive information stored in third party systems is restricted with
appropriate encryption and hardware security standards;
4.1.9.5 all transactions on an account shall be allowed only after authentication of
the mobile number and the PIN associated with it;
4.1.9.6 that mobile payments application shall not allow the option of saving the
PIN either on the handset or on the application;
4.1.9.7 all accounts activated by the consumer on the mobile application is
linked to the mobile phone number. This mobile number shall be used as
the second factor authentication for mobile transactions;
4.1.9.8 the PIN does not travel in plain text during the transaction;
4.1.9.9 that proper system of verification of the phone number shall be
implemented;
4.1.9.10 the payment authorisation message from the user’s mobile phone shall,
at the minimum, be triple DES encrypted and checked for tampering by
the service or scheme provider. It shall not be possible for any
interceptor to change the contents of the message;
4.1.9.11 existence of a security policy duly approved by the Board of Directors of
the organisation providing the service.
4.1.9.12 segregation of duty of Security Officer / Group dealing exclusively with
information systems security and Information Technology Division which
actually implements the computer systems;
4.1.9.13 that Information Systems Auditor audits the information systems;
4.1.9.14 logical access controls to data, systems, application software, utilities,
telecommunication lines, libraries, system software, etc. exists;
4.1.9.15 at the minimum, the use of proxy server type of firewall so that there is
no direct connection between the Internet and the scheme providers’
systems. For sensitive systems, a stateful inspection firewall shall be
implemented to thoroughly inspects all packets of information,
compare past and present transactions and enable a real time security
alert;
4.1.9.16 the information security officer and the information system auditor
undertake periodic penetration tests of the system, which shall include;
I. Attempting to guess passwords using password-cracking tools;
II. Search for back door traps in the programs;
III. Attempt to overload the system using DDoS (Distributed Denial of
IV. Service) & DoS (Denial of Service) attacks;
V. Check if commonly known holes in the software, especially the browser
and the e-mail software exist;
VI. regular penetration testing on the mobile payment system;
4.1.9.17 physical access controls is strictly enforced. Physical security shall cover all
the information systems and sites where they are housed, both against
internal and external threats.
4.1.9.18 proper infrastructure and schedules for backing up data. The backed-up
data shall be periodically tested to ensure recovery without loss of
transactions in a time frame as given out in the security policy.

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4.1.9.19 the existence of disaster recovery sites and regular testing of its facilities for
the purpose of business continuity.
5.0 Business Rules
5.1 E-Money
E-Money is monetary value stored electronically in a centrally held electronic
device. It shall possess the following characteristics to be classified as e-money:
I. issued on receipt of funds
II. accepted as a means of payment by parties other than the
issuer
III. its value shall be transferable
IV. shall have defined cash out capabilities
V. e-money is not entitled to any interest payments
VI. charges are not allowed on e-money floats
5.1.1 Issuers
The issuer is the entity which receives payment in exchange for value
distributed in the system and which is obligated to pay or redeem transactions
or balances presented to it. The issuer of e-money can either be a bank or a
third party with the necessary authorization/license from the regulatory
authorities.
5.1.1.1 Bank Issuer
This is the institution that pledges the float. They are responsible for
5.1.1.1.1 settlement of all transactions against (all) their e-money schemes
5.1.1.1.2 appointment of Agents and subagents
5.1.1.1.3 monitoring the exit of agents and sub-agents
5.1.1.1.4 ensuring compliance to KYC/AML limits as set
5.1.1.1.5 enrolment of customers
5.1.1.1.6 sale of e-money
5.1.1.1.7 cash out/withdrawal
5.1.1.1.8 complying with the minimum technical specification for the operation of
this scheme as specified in this framework.
5.1.1.1.9 interoperability with other scheme operators
5.1.1.1.10 maintaining and providing the regulator with data on transactions on the
mobile payments scheme detailing transaction volume and value on a
weekly basis.
5.1.1.1.11 the provision of adequate collateral securities with the regulatory
authority for the purpose of mitigating settlement risks. The amount shall be
stipulated and reviewed by the regulatory authority as may be deemed
necessary from time to time.
5.1.1.1.12 the replenishment of the pledge within 24 hours of depletion, failing which
the issuer shall be sanctioned.
5.1.1.1.13 complying with all the provisions of this regulatory framework, failing
which the regulator may mete out appropriate sanctions as may be
deemed fit.
5.1.1.2 Non-Bank Issuer
The Non-bank issuers of e-money for the purpose of mobile payments are
institutions, other than deposit money banks, who are responsible for:
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5.1.1.2.1 the appointment of Agents and subagents
5.1.1.2.2 monitoring the exit of agents and subagents
5.1.1.2.3 ensuring compliance to KYC/AML limits as set
5.1.1.2.4 obtaining license from the regulatory authority for the operation of the
scheme.
5.1.1.2.5 complying with the minimum technical specification for the operation of
this scheme as specified in this framework.
5.1.1.2.6 interoperability with other scheme operators
5.1.1.2.7 maintaining and providing the regulatory authority with data on
transactions on the mobile payments scheme detailing transaction volume
and value on a weekly basis.
5.1.1.2.8 providing adequate collateral securities with the regulatory authority for
the purpose of mitigating settlement risks. The amount shall be stipulated
and reviewed by the regulatory authority as may be deemed necessary
from time to time
5.1.1.2.9 replenishment of the pledge within 24 hours of depletion, else the issuer
shall be sanctioned
5.1.1.2.10 maintaining a settlement account with one of the designated settlement
banks for the purpose of settling inter-scheme settlement positions. The
non-bank issuer shall notify the regulator of the settlement bank of its
choice. The settlement account shall warehouse the total outstanding
balance of e-money issued at any given time.
5.1.1.2.11 complying with all the provisions of this regulatory framework, failing
which the regulator may mete out appropriate sanctions as may be
deemed fit.
5.1.1.2.12 collaborating with other financial institutions to offer services to the tune
of the limits specified for semi-banked in the KYC/AML section of this
framework.
5.2 Agents Network
A contractual relationship in which one party, the agent, acts on behalf of another
party, the principal. The agent may execute trades for the principal but is not
responsible for performance by the principal.
5.2.1 Roles and Responsibilities of the banks and scheme operators to their agents
are as follows:
Banks and scheme operators:
5.2.1.1 may appoint agents to facilitate the following activities in connection to
their mobile payments services:
I. Enrolment of customers
II. Deposit
III. Withdrawal /Cash-out
5.2.1.2 shall carry out the following due diligence before appointing an agent;
5.2.1.3 Where agent is an individual, the name, address, signature and/or finger
prints of the agent shall be obtained and verified appropriately;
5.2.1.4 Where the agent is a corporate body or a registered business, the bank shall
verify its registration and obtain the following documents:
I. Copies of Certificate of Incorporation/Registration of Business
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II. Memorandum and Article of Association
III. Board Resolution authorizing the organization to offer mobile payments
agency services
IV. Any other relevant document for KYC/CDD purposes.
V. List of Head Office and Operational offices/kiosks.
5.2.1.5 the agent shall be a customer of the bank and/or scheme operator and
shall maintain a bank account with a bank in Nigeria.
5.2.1.6 shall be able to monitor the agent’s cash-in-hand at all reasonable periods
and evacuate same based on pre-agreed limits.
5.2.1.7 shall give an operational brochure detailing the expected process for each
activity of the agents.
5.2.1.8 shall establish reasonable control procedures around the activities of the
agent.
5.2.1.9 shall purchase a fidelity insurance cover for the activities of its agents.
5.2.1.10 shall maintain customer complaint/help line which shall be conspicuously
displayed at the offices/kiosks of the agent.
5.2.1.11 shall ensure that all transactions consummated under its payment scheme
has an industry standard audit trail.
5.2.1.12 shall maintain an online link to the agent.
5.2.1.13 shall ensure that its agents are well trained to deliver the services they offer
5.2.1.14 shall ensure that the agent displays its brand visuals conspicuously at all
times
5.2.1.15 shall ensure that the relationship between it and its agents as well as the
income derivable by the agents are documented and agreed.
5.2.2 Roles and Responsibilities of Agent
The agent shall:
5.2.2.1 Maintain an account with the bank or scheme operators.
5.2.2.2 maintain a till not exceeding N100,000.00 at any time.
5.2.2.3 report any transaction he deems suspicious.
5.2.2.4 shall conspicuously display the complaint/help line maintained by the bank.
5.2.2.5 Effectively use the online link provided by the bank/e-money issuer in the
conduct of his/her business
5.2.2.6 the agents are not restricted to any one scheme operator (They can serve
as agents to multiple operators).
5.2.3 Know Your Customer (KYC) and Customer Due Diligence (CDD) Requirements
A hierarchical approach towards the implementation of KYC/CDD is required
to make a success of financial inclusion strategy of mobile banking. A
threetiered KYC/CDD requirement matrix for mobile payments scheme
provider is therefore stipulated as follows:

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BANKING KYC/CDD VERIFICATION MOBILE PAYMENT
STATUS LEVEL REQUIREMENT TRANSACTION

LIMIT

Un-banked Least KYC Name and Phone Maximum


transaction limit of
Number N3,000 and
Daily limit of N30,000

Semi-banked Partial KYC Refer to CBN KYC Maximum


Manual and Money transaction limit of
N10,000 and
Laundering
(Prohibition) Act. Daily limit of
N100,000

Fully-banked Full KYC Refer to CBN KYC Maximum


Manual and Money transaction limit of
N100,000 and
Laundering
(Prohibition) Act. Daily limit of
N1,000,000.

The above matrix shall apply to individuals while merchants as account holders
shall be subjected to the full KYC requirements for corporates. Schemes operated
by independent organisation shall not allow mobile payments transaction beyond
the limit stipulated above for the un-banked.

5.2.4 Anti-Money Laundering Regulation


The mobile payments scheme operator shall notify the Nigeria Financial
Intelligence (NFIU) of suspicious transactions. Suspicious mobile payments
transaction shall be identified based on the following criteria:
5.2.4.1 Any single mobile payment (individual) account (including virtual and
stored value account) which receives a total volume of payments of
more than 100 in a day.
5.2.4.2 Any single mobile payment (merchant) account (including virtual and
stored value account) which receives a total volume of payments of
more than 1000 in a day.
5.2.4.3 Any single mobile payment (individual) account (including virtual and
stored value account) which receives a total value of payments of N1m
and above in a day.

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5.2.4.4 Any single mobile payment (merchant) account (including virtual and
stored value account) which receives a total value of payments of N10m
above in a day.
The regulatory authorities reserve the right to change the criteria for suspicious
transactions reporting in respect of mobile payments as it deemed fit. Such
amendments shall be communicated by appropriate channel to the mobile
payments scheme operators and other stakeholders.
5.3 Certainty of Mobile Transactions
For the purpose of establishing certainty of transactions through mobile payments,
mobile payments scheme operators shall ensure the following:
5.3.1 Summary of transaction requested must be displayed to the user for
confirmation. The transaction summary shall include, the phone numbers
of the paying user and receiving user, transaction description, the
transaction amount, date and time and a unique transaction identifier. By
confirming the summary, the user commits to the transaction.
5.3.2 Option for the user to save such transaction summary.
5.3.3 Upon completion of the transaction, the user receives an electronic
receipt which shall conform to the transaction summary earlier received
and the option for saving the electronic receipt shall be available to the
user.
5.3.4 The electronic summary of transaction and the electronic receipt should
be securely logged and the log maintained online for a minimum period
of three (3) months and subsequently archived for a minimum period of
seven (7) years. However, if a complaint arises before the expiration of
seven (7) years, the log in respect of such pending complaints shall be
maintained until the case is completely resolved or discharged.
5.3.5 The regulatory authority (or its agent) is granted access to the log when
required for the purpose of certifying a printed copy for evidential purposes.
6.0 User Protection
6.1 Responsibilities of Mobile Payments Scheme
Operators
6.1.1 Operators shall maintain a functional dispute and complaints resolution desk
which shall be equipped to receive complaints through phone calls, e-mails
and personal visit/contact from the user.
6.1.2 The addresses, telephone lines and e-mail of the complaint resolution desk
must be well advertised through various media and at their agents’ locations.
6.1.3 Operators and/or their agents shall be the first point of call for any subscriber
of mobile payments scheme to register any complaint.
6.1.4 Mobile payments scheme operators shall ensure that complaints are
acknowledged with a case identifier issued to the complainant within 24
hours and resolved within 3 working days of registering such complaints.
6.1.5 Operator shall ensure that all calls to the telephone lines of the
dispute/complaint resolution desk should be recorded and maintained till the
dispute is resolved.
6.1.6 Complaints by personal visits must be adequately logged with the name and

635
signature (or thumbprint) of the complainant documented against the
complaint.
6.1.7 Operators must ensure adequate due diligence in appointing agents as they
shall be held accountable for the activity of their agents, if lapses are
established against them in respect of their due diligence responsibilities.
6.1.8 Ensure consumer education and awareness to promote ease of use, security
and adoption.
6.2 Rights of Users
6.2.1 Ease of enrolment
6.2.2 Easy to use (Menu Driven, SMS, USSD, etc)-maximum of 25 key strokes
6.2.3 Privacy, Trust and Security of transaction
6.2.4 Convenience: anywhere, anytime.
6.2.5 Accessibility to funds on completion of transaction process
6.2.6 Immediacy of transfer and value
6.2.7 Assurance of value to the recipients
6.2.8 Easy and prompt access to dispute resolution process
6.3 Responsibilities of Users
6.3.1 Ensure the protection of PIN / Password
6.3.2 Ensure prompt reporting of fraud cases / attempts, errors and complaints
6.3.3 Ensure proper confirmation of transaction details and recipients’ mobile
phone numbers at all times before authorizing transaction.
6.3.4 Comply with all security rules as provided by the scheme operator
6.3.5 Escalate complaints to the ombudsman through the offices of the Central
Bank of Nigeria if resolution to complaints is unduly delayed.
6.4 Composition and Role of Ombudsman in Dispute Resolution
The Central Bank of Nigeria shall establish the Office of the Ombudsman.
The Office of the Ombudsman shall comprise:
6.4.1 A representative of the Nigeria Communication Commission.
6.4.2 A representative of the Consumer Protection Council
6.4.3 A representative of scheme operators
6.4.4 A representative of financial institutions
6.4.5 An eminent professional or a respectable Nigeria
6.4.6 A member of the National Payments System Committee
6.4.7 The Central Bank of Nigeria
The roles of the Office of the Ombudsman shall be as follows:
6.4.8 Receive, investigate and resolve complaints involving all participants.
6.4.9 Sustenance of confidence in the mobile payments schemes.
6.4.10 Creation of an environment that encourages expeditious resolution of
complaints.
6.4.11 Monitor and ensure instant compensation or otherwise notification to the
complainant for decided cases.
6.4.12 Recommend improvement to mobile payments services.
6.4.13 Promote consumer education and awareness.

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7.0 Compliance Monitoring
The Central Bank of Nigeria shall ensure the establishment of appropriate
processes and procedures for the purpose of monitoring compliance to the
regulatory framework.
Non-compliance with the provisions of this regulatory framework shall attract
appropriate sanctions as may be determined by the Central Bank of Nigeria.

Glossary of Terms
1. CIFTS: The Real Time Gross Settlement (RTGS) System deployed by the
Central Bank of Nigeria which effects settlement of transfer among
banks on real time and gross basis. It is known as the CBN Inter-Bank
Funds Transfer System (CIFTS).
2. Financial Institution: A deposit taking institution duly licensed by the
Central Bank of Nigeria.
3. Interoperability: a situation in which payment instruments belonging to a
given scheme may be used in systems installed by other schemes.
4. Inter-Scheme Operation: Inter-Scheme operations are mobile payments
consummated across two different schemes by various participants.
5. Intra-Scheme Operations: Intra-Scheme operations are mobile payments
that are consummated within a particular service provider’s scheme.
6. Issuer: the entity which receives payment in exchange for value distributed in
the system and which is obligated to pay or redeem transactions or balances
presented to it.
7. Scheme Operators provide the infrastructure for the mobile payment systems
for the use of participants that are signed-on to their scheme.
8. Service Providers employ the infrastructure of the scheme operator to
provide services to end users.
9. Settlement Infrastructure Providers Organizations providing infrastructure that
enables message exchange, switching and settlement facilities for mobile
payments services.

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CENTRAL BANK OF NIGERIA

GUIDELINES FOR CUSTODIANSHIP IN MONEY MARKET AND OTHER


FIXED INCOME INSTRUMENTS

638
GUIDELINES FOR CUSTODIANSHIP IN MONEY MARKET AND OTHER FIXED INCOME
INSTRUMENTS
In furtherance of the primary objectives of the Bank to promote price stability,
enhance inter-bank activities and pursuant to the provisions of Sections 27 and 28
of the Central Bank of Nigeria Act, 1991, as amended, section 55 of the Banks and
Other Financial Institutions Act, 1991, as amended, and section 4.3 of the Central
Bank of Nigeria Operational Procedures on Money Market Dealership System in
Nigeria, the Central Bank of Nigeria (CBN) hereby issues the following Guidelines for
the operation of Custodianship in money market and fixed income instruments in
Nigeria.
1.0 Introduction
Custodianship is an arrangement whereby some financial institutions undertake to
provide safekeeping and administration of financial assets on behalf of their clients
who may or may not be the actual investors in those assets. A custodian holds
financial assets in trust for its client, and acts in accordance with the client’s
instructions and service level agreement between them. The custodian provides
custodial services at a fee and/or charges.
The purpose for the introduction of custodianship in money market and fixed
income securities in Nigeria is to further align the Nigerian money market with the
rest of the world and to adopt international best practices which will further
enhance investors’ confidence in the Nigerian money market. It will also enhance
the growth as well as transparency in the market.
The Guidelines provide the basic procedure and rules that shall be adhered to by
Custodians in money market and fixed income instruments. They are to be read
along with other existing guidelines issued to regulate the operations and conducts
of the operators in the Nigerian money market.
2.0 Qualifications for Custodianship
2.1 The following shall be eligible to be appointed a Custodian in money market
instruments:
2.2 A bank or discount house that has completed and submitted a prescribed
application form to the CBN on behalf of its subsidiary to be appointed a
custodian.
2.3 A subsidiary of a bank or of a discount house set up with the sole purpose of
carrying out custodial business, and has a minimum of N2.0 billion paid-up
capital.

639
2.4 A duly licensed custodian by the National Pension Commission (Pencom) who
may wish to carry out custodial business in money market and fixed income
instruments.
2.5 All duly licensed Pension Funds Custodians shall continue to hold money market
instruments of pension fund as provided for by the Pension Reform Act of 2004
and as may be amended from time to time.
2.6 Appointment fee of N2.0 million shall be paid to the CBN within two weeks by
an applicant whose application was successful and approval-in-principle has
been granted.
2.7 Any other criteria as the CBN may specify from time to time.
3.0 Eligible Instruments
3.1 All government securities shall be eligible for Custodianship including but not
limited to, NTB, FGN Bonds, FRN Bonds, Treasury Certificates, etc.
3.2 All securities issued by the Central Bank of Nigeria for its monetary operation
including OMO Bills, CBN Certificates, etc.
3.3 All securities approved by appropriate authorities issued by government at all
levels, corporate organizations, government agencies and parastatals.
4.0 Functions and Scope of Operations
4.1. Functions
The functions of a Custodian shall include but not limited to the following:
i. Safekeeping of instruments.
ii. Transaction settlement.
iii. Transaction statement.
iv. Position statement.
v. Reporting (compliance, valuation, performance, etc)
vi. Income and proceeds collection
vii. Securities lending.
viii.Remittances.
ix. Tax services.
x. Other services.
4.1.1 Safekeeping of securities on behalf of its clients. The securities can be held in
physical or electronic forms in the name of a nominee or in the beneficial
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name. The clients or investors can be individuals, corporate bodies,
government, other institutional investors and the general public who do not
maintain security portfolio with the CBN.
4.1.2 Transaction settlement shall include collection of cash and securities on behalf
of buyers and receiving payments on behalf of the sellers. Settlement shall be
on the basis of delivery versus payment.
4.1.3 Custodians shall furnish their clients with daily transaction statement and
where there is no transaction a nil statement shall be sent. The transaction
statement shall include but not limited to trade date, settlement date, price,
volume, types of securities, and counterparties.
4.1.4 Custodians shall provide daily statement of cash and securities balances to
their clients.
4.1.5 Custodians shall provide reports to their clients, which shall include inquiry
tracking, records of clients’ cash and securities positions; settlement activity,
performance measurement of the securities in the clients’ portfolio, valuation,
etc.
4.1.6 Custodians shall act an agent for the clients in corporate actions to collect on
their behalf, interest, coupons, proceeds and any accrued benefits during the
tenors of the securities, and at redemption.
4.1.7 Custodians may deploy the instruments in their custody for securities
lending with express permission of their clients.
4.1.8 Custodians shall effect requisite remittances of settlement proceeds, interest,
coupons and any accrued benefits in line with the clients’ mandates.
4.1.9Custodians may provide tax services to clients in accordance with the
provisions of the tax laws pertaining to the investment. Tax services shall
include among others, filing requirements; accurate definition of the clients’
tax situation; arranging tax relief at source before interests or coupons are
paid; preparation of tax documents for filing or submission to tax authorities for
processing; and, monitoring of outstanding payments or claims relating to the
securities in their custody.
4.1.10 Custodians may offer other services to their clients including cash
management services for clients’ cash balances for which the client can earn
a return on the funds, foreign exchange, etc.

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4.2 Scope of Operations
4.2.1A Custodian without Money Market Dealership status shall settle custodian
trade in money market and fixed income instruments only through authorized
MMD.
4.2.2 The scope of custodianship shall cover the instruments as contained in section
3.0 of the Guidelines.
5.0 Operational Modalities
5.1 All instruments in custody shall be held in book form. However, existing
instruments in physical form shall be dematerialized within six months from the
inception of the operation of the Guidelines.
5.2 The instruments so held in custody may be in the name of a nominee or the
beneficial name.
5.3 The instruments shall be kept separate and distinct from those of the bank or
discount house custodian and must not appear on their balance sheets. A
separate account (nominee clients) shall be maintained with the CBN
exclusively for custodial (non-proprietary) assets. In the case of a pension
custodian, the instruments must be separated and distinct from personal assets.
5.4 Such instruments shall be electronically administered and maintained and shall
be protected adequately. Physical instruments shall be kept in secured and
fire-proof vault, registered and maintained in a separate book.
5.5 Where a Custodian is asking the CBN to move assets from its clients’ account
(nominee account)) to the propriety account or to the account of an MMD,
the client’s letter of instruction authorizing such movement shall be attached.
5.6 Custodians shall accept additional instruments for safekeeping on behalf of
their clients if new issues are acquired. A client shall be expected to keep the
entire holdings of a particular type instrument with a single Custodian at any
point in time.
5.7 The money market instruments in custody may, with the express permission of
the client, be used for security lending and the income there-from shall be
shared as agreed by both parties.
5.8 There shall be ‘securities lending agreement’ between the Custodian and the
borrower requiring the borrower of securities to provide the Custodian with
collateral. Such collateral shall be in form of cash or government securities
equal to or greater than the loaned securities.

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5.9 The borrower of securities shall pay the Custodian a fee which shall be
negotiated between them. The fee shall be quoted as an annualized
percentage of the value of the loaned securities.
5.10 Where the same custodian is acting on behalf of the buyer and the seller, it
shall on the agreed value date, make the proceeds/securities available to the
seller/buyer in accordance with the specified instructions.
5.11 In all other transactions except as it is described in sub-section 5.10, the seller’s
Custodian shall have received instructions from the seller to move the asset to
the buyer. The Custodians shall settle the transaction. The seller’s Custodian
shall release cash proceeds to the client on receipt of value while the buyer’s
custodian shall receive the securities and credit the client’s account
accordingly. Where the custodian fails to or unduly delays in remitting funds in
contravention of the client’s instructions and/or service level agreement (SLA)
it shall pay with interest at the CBN monetary policy rate during the lag period.
5.12 In the event of loss of instruments resulting directly or indirectly from fraud,
negligence, willful default, misconduct or error by the Custodian or its
employees or agents, the Custodian shall bear the full replacement cost,
including any incidental costs in addition to the value of the instrument at the
time the loss was identified.
5.13 The custodian shall ensure it maintains adequate fidelity insurance to cover its
custodial operations and obligations. It shall also put in place and maintain a
robust business continuity plan/disaster recovery arrangements and facilities
6.0 Remuneration
The Custodian shall be entitled to charge:
a. custody fee of not more than 0.35 per cent per annum charged monthly;
b. transaction cost of N500.00 per transaction;

c. In addition, a custodian may share revenue with a non-custodian bank that


appointed it as a custodian up to 20 per cent of the revenue earned on the
business.
7.0 Activity Report
7.1 The financial statements of the Custodian shall disclose the money market
instruments held under custody.
7.2 The Custodian shall render monthly statements to the investor.
7.3 A Custodian shall submit details of transactions to the CBN daily in specified
format.
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7.4 A Custodian shall provide the holdings of offshore investors, in prescribed
formats, to the CBN on a daily basis.
8.0 Code of Conduct
8.1 On appointment, a Custodian shall sign an undertaking to abide by the
Guidelines on Custodianship, and other rules and regulations and meet
requirements that may be stipulated by the CBN from time to time.
8.2 A custodian shall and administer clients’ assets with utmost caution and duty of
care.
8.3 A Custodian shall not refuse to receive instruments or settle transactions on
behalf of its clients. It shall also not refuse to transfer assets to another
custodian on the instructions of its clients.
8.4 A Custodian shall not divulge any information relating to a client except as
required by law, regulatory reports or as specified by the Guidelines, CBN, and
by any Court of Law.
8.5 A custodian shall put in place procedure and mechanism for tracking and
reporting suspicious transactions.
8.6 In line with ownership segregation requirement, custodians shall keep custody
assets in such a way as to protect them from foreclosure,
appropriation/attachment by creditors or liquidators of custodial assets.
9 Sanctions
a. From the commencement of this Guidelines, no person or entity shall engage
in the business of custody of money market instruments except in line with the
provisions contain therein.
b. The CBN shall review the performances of individual Custodians with respect to
their compliance with the requirements. Appropriate sanctions shall be
applied for all infractions. Sanctions shall include, but not limited to the
suspension or revocation of custodianship certificate.
10 Review of the Guidelines
The Guidelines shall be reviewed from time to time.

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Glossary of Terms
1. Instrument
Instrument in this Guidelines refers to money market (securities whose tenors
do not exceed one year) and fixed income (securities that pay fixed periodic
income including but not limited to eligible instruments in clauses 3.1 – 3.3 of
this Guidelines.
2. Custodian
An institution/corporate body licensed by the CBN for safekeeping and
administration of money market and fixed income instruments on its own
behalf and/or on behalf of its clients.
3. FGN Bonds
Bonds issued by the Federal Government of Nigeria to the investing public
through the Domestic Debt Office.
4. Money Market Dealer
An institution licensed by the CBN for the purpose of dealing in money
market instruments for its own account or on behalf of individuals and
institutional investors.
5. FRN Bonds.
Bonds issued by the authority to replace the Ways and Means Advances
granted the Federal Government of Nigeria for fiscal operations. The bonds
are exclusively held by the CBN.
6. Primary Market
This is a market of new issues of money market instruments.
7. OMO Bills
These are bills issued by the CBN for liquidity management purposes.
8. CBN Certificates.
These are money market instruments issued by the CBN for its monetary
operations.
9. Secondary Market
This is a market where previously issued money market instruments are traded.
10. Dematerialization
The elimination of physical certificates that represent ownership of securities,
so that securities exist as book entry records only.
645
CONSENT TO PARTICIPATE AS A CUSTODIAN IN MONEY MARKET INSTRUMENTS

We hereby accept and consent to the terms and conditions, rights and
obligations as contained in the guidelines for Custodianship in money market
instruments.

………………………………………………………………………………
Managing Director’s/ CEO’s Signature and Date

………………………………………………………………………………...
Company Secretary’s/ Director’s Signature and Date

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649
650
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654
CENTRAL BANK OF NIGERIA
Central Business Area District
P.M.B. 0187
Garki, Abuja

09-61638445
09-61638455 (Fax)

October 28, 2008

BOD/DIR/CIR/2008/GEN/3/17

TO: ALL DEPOSIT MONEY BANKS AND DISCOUNT HOUSES

EXPANDED DISCOUNT WINDOW OPERATIONS

In order to ensure a robust operation of the discount window and in the


process provide effective and efficient guidance for the conduct of
monetary operations, the Central Bank of Nigeria hereby expands its
discount window operations.

The key elements of the Expanded Discount Window operations include:

The provision of two categories of facilities, namely; the overnight


standing facility and the fixed tenor repo;

The increase in the tenor of borrowing from the window from


overnight to 360 days;

The increase in the number of financial instruments acceptable


as collateral in the Window to include non-federal government
securities.

The widening of the base of the financial markets from which the
instruments are drawn; and

655
The broadening of financial innovations to support the operations of
the Discount Window.

Details of the Guidelines on the Expanded Discount Window Operations are as


contained in the attached document

All operators in the money market are to be guided by the provisions in


the Guidelines, and may wish to contact the undersigned if further
clarifications are needed.

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CENTRAL BANK OF NIGERIA

GUIDELINES ON THE EXPANDED WINDOW OPERATIONS

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FOREWORD

This Guideline is issued by the Central Bank of Nigeria (CBN) in exercise of its
statutory powers under section 30 of the CBN Act 2007.

Under the Guidelines, the Bank hereby expands its discount window
operations in order to allow more robust processes of injection and
absorption of excess liquidity in the money market.

The expanded discount window is introduced to admit non-federal


government instruments as eligible securities. It is also to ensure that the
tenor of liquidity provided under the discount window operations is
extended from overnight to maturities of up to 360 days.

For any further clarification on the Guidelines, enquiries can be directed to:

The Director,
Banking Operations Department
Central Bank of Nigeria
Abuja

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Introduction

1.Following the liberalization of the financial markets and the need to deepen
the securities market, the Central Bank of Nigeria in exercise of its statutory
powers hereby expands the Bank’s Discount Window operations. This is through
the admittance of non- federal government instruments. It also involves
extending the tenor of liquidity provided through the discount window from
overnight to maturities of up to 360 days. These additional initiatives are
expected to engender a more efficient and effective financial resource flows
and intermediation. However, the basic policy thrust in the administration of
the Discount Window (DW) would remain that of the Central Bank of Nigeria
acting as a lender of last resort in relieving liquidity shortages and absorbing
excess liquidity in the banking system.
2.The Central Bank of Nigeria (the Bank) recognizes that open market
operations are the primary means of effecting changes in the overall level of
bank reserves and the interest rates in the inter-bank market. It will, therefore,
continue to employ open market operations in the adjustment of reserves.
Nevertheless, the DW is expected to serve as a supplementary adjustment
mechanism, especially for the institutions which may be facing liquidity
imbalances. It must be realized that access to the DW has the implication of
creating reserves, and reserves should be created circumspectly if monetary
control objectives are to be constantly placed in adequate perspective.

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General Conditions Governing the Discount Window (DW) Operations

3. DEFINITION OF TERMS

Institutions: Banks and Discount Houses only.


Bank: Central Bank of Nigeria (CBN)
DMB: Deposit Money Banks
DH: Discount Houses
MPR: Monetary Policy Rate
DW (Discount Window): The window through which the CBN grants standing
lending facilities and outright advances to the DMBs and DHs.
NDIC (Nigeria Deposit Insurance Corporation): A body established to
provide insurance for private sector deposits in the DMBs.
SLF (Standing Lending Facility): An overnight advance available to DMs and DHs.
SDF (Standing Deposit Facility): The deposit facility for institutions to place
overnight excess funds with the CBN.
Repo (Repurchase Agreement): The sale of securities for immediate
payment and the commitment by seller to buy back the securities at a later
date under an agreed term.
Bankers Acceptance (BA): A bill of exchange which is drawn on, and accepted
by, a DMB.
Guaranteed Commercial Paper (GCP): An unconditional promise by the
issuer to pay to the order of a person, a certain sum at a future date.
Guidelines: The Guidelines for the expansion of CBN’s Discount Window
Promissory Note: A contract where one party (the maker or issuer) makes
an unconditional promise in writing to pay a sum of money to the other (the
payee), either at a fixed or determinable future time or on demand of the
payee, under specific terms.
4. The operation and functions of the DW will continue to be based on the
following broad conditions:
(i) Lender of Last Resort Facility - Institutions seeking to utilize the DW must
first fully exhaust all alternative market sources. The DW is to be
approached on a Last resort basis only.
(ii) Deposit Money Banks and Discount Houses shall access the DW only on
secured basis. Any credit must therefore be fully and adequately
660
collateralized by eligible securities listed in paragraph 6 of this
Guideline.
(iii) Deposit Money Banks and Discount Houses may use the DW to obtain
liquidity from the Bank via repo or collateralized loans against eligible
instruments.
(iv) Repo credit from the DW shall be for a period not exceeding one year.
(v) Collateralized loans shall be on an overnight basis through standing
lending facilities.
(vi) Credits at the DW must be with eligible instruments whose tenor shall
not exceed one year. In other words, such instruments shall be those
qualifying for secondary market operations with the Bank.
(vii) Credits by way of an advance or outright borrowing must be fully
secured by eligible instruments.
(viii) The eligible instruments at the DW will be rated appropriately and in
line with the prevailing economic conditions and the financial well
being of the issuer of the security.
(ix) Advances or outright borrowing at the DW whilst adequately secured
shall be priced appropriately and the applicable rate of interest will be
governed by the prevailing economic and market conditions. In any
event, such advances shall attract a rate of interest at the Bank’s MPR
plus a margin determined at the discretion of the Bank.
Access to the Discount Window
5. All DMBs and DHs shall have direct access to the DW. The Bank through its
Banking Operations Department shall exercise good judgment and
discretion in the administration of the DW in order to ensure that the DW
objectives are met. In particular, institutions may be denied access to the
DW in the following circumstances:
(i) if the Bank observes an act of undue rate arbitrage in the operations
of the institution’s dealings;
(ii) if an institution is found to have contravened the provisions of the
Bank’s monetary and credit policy guidelines;
(iii) if the Bank discovers that the institution is be over-trading or engaged
in undue mismatch of its assets and liabilities;
(iv) if there is contravention of the clearing houses rules;
(v) if there is any contravention or non-observance of provisions of the
prudential guidelines;

661
(vi) If a DMB/DH under a holding action fails to comply with the provisions
of the holding action.
Eligible Instruments
6. The following instruments shall qualify for eligibility at the DW:
i. Nigerian Treasury Bills
ii. Nigerian Treasury Certificates
iii. FGN Bonds
iv. NDIC Accommodation Bills
v. States Government Bonds
vi. Banker’s Acceptances/Guaranteed Commercial Papers/Promissory
Notes.
vii. Any other instrument that may be approved by the Bank from time to
time.
7. The first three instruments are securities issued by the Federal Government
of Nigeria, while the others are the non-federal government securities. It
must be noted that not all nonfederal government instruments will have
automatic eligibility at the DW. The Bank will maintain a list of the eligible
instruments for DW operations. DMBs/DHs will be required to satisfy
certain prescribed conditions as contained in the Annexure to this paper,
in order to have eligibility conferred on their instruments. Consideration
for applications from prospective eligible authorized dealers will be
open-ended. Such applications should be addressed to the Director of
Banking Operations, Central Bank of Nigeria, Abuja or Tinubu Square,
Lagos.
Nigeria Treasury Bills (NTBs)
8. NTBs are the obligations of the Nigerian Government. They are short-term
securities issued for various tenors up to one year. NTBs are issued by
auction in various denominations. Interested investors usually make
application for purchase of the bills through any authorized dealer. The
bills are issued in bearer form and in book entry, and are therefore
negotiable. Because of the zero issuer risk, they are the most liquid and
marketable money market instrument in the Nigerian money market
today.
9. An active secondary market is conducted daily at the Bank where two-
way quotes in the respective bill bands are made. However, unlike the
primary market, the Bills are sold to buyers in book-entry form in order to
facilitate the transactions which are enormous in value and volume. A
secondary market amongst money market counter-parties also exists
662
where bills could be traded. NTBs have automatic eligibility at the DW.
Holders wishing to repo physical bills at the DW must specially endorse
those bills to the Bank. In the case of book-entry holdings, an application
duly signed by two authorized signatories is required. All transactions are
usually for same-day value and proceeds of discounted bills are credited
into the current account of the DMB/DH held at the Bank.
Nigerian Treasury Certificates (NTCs)
10. Like treasury bills, NTCs are also obligations of the Nigerian Federal
Government. NTCs are medium-term money market instruments of one
year and two-year maturities. NTCs possess all the attributes of NTBs in the
market, in terms of risk and dealings, as well as transferability and
negotiability. Therefore, much of the provisions contained in the
foregoing paragraphs 9 and 10 relating to NTBs apply to NTCs.
FGN Bonds
11. FGN Bonds are sovereign obligations backed by the “full faith and
credit” of the Nigerian Federal Government. They are long-term debt
instruments with maturity greater than one year issued on behalf of the
Federal Government by the Bank on the authority of the Debt
Management Office (DMO). They are issued at par and at a coupon
rate, as interest is paid periodically.
12. Interested applicants and investors usually make application for
purchase of the instruments through DMBs/DHs. The instruments are
issued in physical certificates or book entry form.
13. The secondary market activities are at present conducted on the floor of
the Nigerian Stock Exchange with the expectation of over the counter
trading in the Bank. DMBs and DHs wishing to rediscount physical
instruments at the DW must specially endorse those instruments to the
Bank. In the case of book-entry holdings, an application duly signed by
two authorized signatories is required. All transactions are usually for
same-day value and proceeds of discounted instruments are credited
into the current account of the DMB or DH held at the Bank.
NDIC Accomodation Bills
14. An Accommodation Bill is a bill to which a person called an
accommodation party puts his name to oblige or accommodate
another person without receiving any consideration for so doing. The
position of such a party is, in fact, that of a surety or guarantor. When a

663
banker discounts an accommodation bill he becomes a holder for value
and an accommodation party is liable to a holder for value.
15. In exercise of its statutory obligations to insured banks, the Nigerian
Deposit Insurance Corporation (NDIC) is empowered by section 37 (2) (c)
of the NDIC Act 2006 to accept an accommodation bill with interest for
a period not exceeding 90 days maturity exclusive of days of grace and
subject to renewal of not more than four times. An NDIC
accommodation bill is an eligible instrument at the DW and such a bill
must meet the following requirements:
(i) be drawn by an insured DMB;
(ii) be drawn for a period not exceeding 90 days;
(iii) be signed by two authorized signatories of the bank;
(iv) bear on the face of the bill the acceptance of the NDIC with the
authorized signatories of the Corporation;
(v) be endorsed specially to the Bank by the DMB;
(vi) the rate of commission (which should be expressed as a percentage
on the face value) payable on the bill should be agreed between the DMB and
NDIC while the Bank shall be advised accordingly.
16. Provided the foregoing conditions are fully satisfied, the Bank will proceed
to discount the bill at the DW subject to the following:
i) the applicable discount rate, which in any event will not be lower
than the MPR will be at the discretion of the Bank;
ii) the proceeds of the bill, net of NDIC commission, will be credited to
the current account of the bank at the Bank, under advice;
iii) at the maturity of the bill, the face value shall be debited to the
account of the DMB;
iv) in the event that the funds in the current account of the DMB are
insufficient to cover the face value of the bill at maturity, the entire
amount shall be debited into the account of the NDIC, under
advice, but without formal notice; and
v) all parties shall ensure that an accommodation bill once issued is
not renewed for more than a four-cycle period.
State Government Bonds
17. State Government Bonds are obligations of State Governments or their
agencies. Like FGN Bonds, they are long-term debt instruments with
maturity greater than one year. They are also backed by full faith, credit
and taxing power of the State Governments issuing them.

664
18. The instruments will be accorded eligibility at the DW subject to the
following:
(i) Must be rated by a recognized rating agency.
(ii) Must have a minimum of “BBB” rating.
(iii) Must be secured by an Irrevocable Standing Payment Order (“ISPO”)
of the issuer as a first charge upon, and payable out of the Statutory
Allocation of the State Government and must be deductible at source.
(iv) Must provide a Sinking Fund Account to be managed by a registered
Trustee.
(v) Must be guaranteed by a DMB/DH.
Bankers’ Acceptance (BAs)
19. A Bankers Acceptance is a bill of exchange which is drawn on, and
accepted by, a DMB. It usually arises from documentary or acceptance
credits which have been opened by a DMB in favour of a customer who
is the drawer of the Bill. The customer may require shortterm finance from
a DMB to cover the movement of goods in home and overseas trade, or
to finance existing stock pending sale or processing. By placing its
acceptance on the bill, a DMB is accepting a contingent liability as well
as giving an indication that it will honour the draft upon presentation at
maturity. Being a three-ways-out paper, BAs may command a low credit
risk in the money market.
20. To qualify for eligibility at the DW, an acceptance must be made by a
DMB accorded eligibility status by the Bank. The Bank will maintain a list
of those institutions whose acceptances are eligible for discount at the
DW (the criteria for determining eligibility is contained in the annexure
to this Guidelines.) On the other hand, those accepted by a DMB
whose acceptances are not accorded eligibility at the DW will be
classified as ineligible acceptances. A BA must satisfy the following
conditions:
(i) the BA must identify the underlying transaction for which the bill was
drawn.
(ii) shall be self-liquidating and must not be for capital purposes;
(iii) shall be drawn for an original tenor not exceeding 180 days
(iv) the bill shall not be payable outside Nigeria
(v) the bill shall not be drawn on, or accepted by connected parties or by
a DMB with a share holding link with the drawer. Connected parties will

665
be informed where there exists direct or indirect shareholding
relationship as well as common or inter-locking directorship; and
(vi) the bill must have been purchased by DMBs/DHs thus making the bill a
two-name paper, namely those of the drawer, the accepting
bank/discount house.
21. The tenor of borrowing shall not exceed that of the underlying BA.
22. The features of an eligible BA at the DW are contained in the provisions outlined
in paragraphs 8 and 9 of the Annexure to this Guideline.
Guaranteed Commercial Paper (GCP)/Promissory Notes
23. A Guaranteed Commercial Paper is an unconditional promise by the
issuer to pay to the order of a person, a certain sum at a future date. The
instrument is issued in form of a Note with a maturity of less than one year
at a discount from face value and must carry a bank’s guarantee with
the bank incurring a contingent liability.
24. A Promissory Note is a contract where one party (the maker or issuer)
makes an unconditional promise in writing to pay a sum of money to the
other (the payee), either at a fixed or determinable future time or on
demand of the payee, under specific terms.
25. To qualify for eligibility at the DW, a GCP must satisfy the provisions
contained in the foregoing paragraphs 20 and 21 relating to BAs.
Types of Facility
26. There are basically two types of credit which are available to eligible
borrowers at the DW. These are:
- Overnight Advance/Standing Lending Facility (SLF) or Outright
Borrowing - Fixed Tenor Repo.
Eligible instruments may be repurchased by the Bank at the DW. Such instruments
shall not exceed a maturity period of one year.
While Outright Advances shall be on overnight basis, Repurchase Agreements
shall be for such periods as shall be stipulated by the Bank from time to time.
27. Standing Lending Facility:
The CBN Standing Lending Facility (SLF) is an overnight advance available to
deposit money banks / discount houses. The facility is fully collateralized with a
margin of 10 per cent (for only FGN securities backed facilities) above the face
value of the amount applied for. For non-federal government securities, the Bank

666
reserves the right to determine the collateral margin after accessing the dating of
the instrument.
The following procedure shall apply in the granting of an overnight advance/SLF to
a DMB/DH:
i) submission of an application for an overnight advance, addressed to
the Director, Banking Operations Department, CBN;
ii) the application shall state:
- the amount required, which shall not exceed 10% of the applicant’s
total assets at the time of application;
- the purpose for which the advance is required;
- the date it is required;
iii) the application shall be accompanied by :
- a statement of the applicant’s assets as at the close of business the
previous day;
- collateral in form of treasury bills, or other eligible collateral whose face
value should not be lower than 110% of the advance;
iv) the interest on overnight advance shall be deducted from the
advance and the balance credited to the borrower’s current
account with the Bank;
v) the applicable interest rate which will be at the discretion of the Bank
shall not be lower than the Monetary Policy Rate (MPR).
vi) the over-riding consideration shall be that the window should be
accessed only on a last resort basis.
27. Each DMB/DH shall be eligible for an advance only once in any day and
at the close of business. Any DMB/DH that accesses the CBN DW too
frequently shall be subjected to greater scrutiny by the Bank. The Bank shall
not hesitate to impose penalty on any DMB/DH should there be
inappropriate utilization of the SLF window. The CBN may suspend or revise
the conditions of any one or both of the SLF if it does not meet the overall
objectives of the Bank’s monetary policy stance.

Repurchase Agreement (Repo)

29. A Repurchase Agreement is a contract involving two simultaneous


transactions in a single contract. It is the sale of securities for immediate
payment and the commitment by the seller to buy back the securities at
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a later date, under an agreed term. The Repo could be viewed as a
money market instrument in its own right to the extent that it allows an
investor the opportunity of suitable asset/liability structuring.
30. Transactions on a Repurchase Agreement could be either a Repo (buy-
back) or a reverse (sell-back) depending on whether the transaction is
viewed from the standpoint of the lender or the borrower of the funds.
For purposes of the DW facility the CBN will view a transaction as a Repo,
which is a creation of reserves while a Reverse Repo is withdrawal of
reserves.
31. In the conduct of open market operations, the Bank uses outright
sales/purchases of securities as well as repurchases transactions to effect
either a permanent or temporary action on bank reserves. Generally,
central banks use repos at their own initiative for monetary policy
purposes and not a means of making a secondary market in an asset.
This basic concept will guide discount officers in the administration of the
Repo facility at the DW. In other words, a perceived liquidity surplus in the
system on any one day or over a period could engender a reverse
action. Conversely, a shortage could evoke a repo action. Outside these
two scenarios, a repurchase transaction will be viewed strictly as means
of making a secondary market trading.
32. Whenever a repo transaction is undertaken as a secondary market
trading, the Bank will view such transaction purely as a loan and the
following conditions will apply:
(i) The term of a repo shall be as prescribed by the Bank from time
to time. The tenor shall not exceed 360 days
(ii) A repo is viewed as a loan, albeit collateralized. The applicable
rate shall therefore be market-driven. In any event, such rate
shall not be lower than the CBN MPR. All eligible securities at
the DW will be allowed for repo transactions.
(iii) Repo shall not be granted alongside an overnight advance.
(iv) The maximum allowable borrowing under a repo transaction in
DW shall not exceed 70% of the face value of the eligible
security. This clause is applicable to only the nontreasury
securities i.e. commercial bills and state government bonds.
33. Deposit money banks and discount house will be eligible for repo only
once in any one day at the close of business. The reason for the facility
shall be explicitly stated. Therefore, at 3:30 p.m. every day each deposit
668
money bank /discount house shall inform the Director, Banking
Operations Department of the Bank of its position in the money market,
that is, whether it is short of funds or has surplus funds.
34. The Bank reserves the right to disallow access to the expanded
discount window if:
(i) There is a perceived excess in the general level of bank reserves in the
system.
(ii) A DMB/DH is suspected to be involved in rate arbitraging
(iii) The supporting collateral is inadequate in terms of value and quality.
(iv) The DMB/DH’s access to the DW, on cumulative basis, at any time is
more than 50% of the DMB/DH’s shareholders’ funds unimpaired by
losses.
Pricing at the Discount Window
35. The pricing of instruments at the DW will be fully market-based in order
to disallow any incidence of undue arbitraging.
36. In determining the applicable rate, due cognizance will be given to
prevailing market rates such as the inter-bank market rates. As had
been stated, DMBs/DHs seeking to utilize the DW are expected to have
fully exhausted all available alternative market sources of funds.
Conclusion:
37. This guideline has been issued to assist money market participants in
understanding the facilities which are available at the Central Bank of
Nigeria Discount Window and shall be reviewed from time to time as the
need arises.

Banking Operations Department


Central Bank of Nigeria Abuja.

October, 2008

669
ANNEXURE

CRITERIA FOR DETERMINING ELIGIBILITY OF BANKS WHOSE ACCEPTANCES QUALIFY


FOR DISCOUNT WINDOW (DW) SUPPORT

This paper describes in general terms the conditions that must be satisfied by an
authorized dealer in order to become an eligible institution.

1. The Bank shall maintain a list of those authorized dealers whose


acceptances are eligible for discounting at its DW. Any institution may
therefore apply at any time to the Bank for inclusion in this list.
2. To acquire an eligible status, an applicant must satisfy the following
performance criteria consistently during the six months immediately
preceding the receipt of its application:
(i) Statutory minimum capital requirement;
(ii) Capital adequacy ratio;
(iii) Specified liquidity ratio;
(iv) Specified cash reserve;
(v) Prudential Guidelines; and
(vi) Sound management.
3. An assessment of each application will also take cognizance of the
following:
(i) Track record-whether the applicant already has a demonstrated
capacity as well as a substantial existing acceptance business in the
Nigeria money market;
(ii) Whether the extent to which an applicant has been operating as a
market maker or trading in eligible DW instruments is considered
adequate; and
(iii) Views expressed by other market participants on the usefulness of the
role undertaken by the applicant, especially with regard to inter-bank
transactions.
4. An important performance criterion on the assessment of an application is
that an applicant must have demonstrated active participation in the
Nigerian money market. This is meant to encompass an applicant’s volume
of trading in eligible DW instruments.
5. Institutions are expected to operate their current accounts at the Bank in a
consistently regular manner. The overdrawing of its CBN account (without
any supportable collateral under the mandate facility) by an institution is an
indication of its current or future inability to promptly and fully satisfy its
financial obligations. In this regard, applicants for eligibility would be
670
required to have conducted their CBN accounts in a most desirable manner
over the prescribed period.
6. The Bank in its dealings in the money market recognizes the need to control
the composition and size of its own debt portfolio. The Bank will not impose
any direct limit on the volume of acceptance business written by eligible
institutions. However, for reasons of prudence, it will exercise internal controls
on the proportion of its own portfolio for which a individual acceptor’s paper
may account. The Bank would therefore ensure that the volume of each
institution’s acceptances is not disproportionately out of line with its capital
resources. Furthermore, the Bank may limit the volume of acceptances,
which it may acquire at any time, for purposes of monetary controls.
7. A DMB may apply for eligibility at any time. The eligibility list will be revised
from time to time with a view to adding to, or deleting from, the list. An
eligible bank, which wishes to renounce its eligibility, is free to do by giving
notice to the Bank.
8. For a BA, GCP and Promissory Note to qualify for eligibility at the DW, it must
conform to the following:
(i) its size should be 24cm by 13cm.
(ii) the name and logo of its accepting bank should be clearly stamped and
endorsed on the face of the instrument.
(iii) “Acceptance” by DMB should be clearly stamped and endorsed on the
face of the instrument.
(iv) Other endorsements should be clearly indicated on the reverse side of
the instrument.
v) Instruments traded in the market should be in the minimum denomination
of N5million.
9. The following documents should accompany any DW dealings in Bankers
Acceptance (BAs); Guaranteed Commercial Papers (GCPs) and Promissory
Notes:
i) Details of contract letters.
ii) Original instruments.
10. Standing Lending Facility:
The CBN Standing Lending Facility (SLF) is an overnight advance available to
deposit money banks / discount houses. The facility is fully collateralized with a
margin of 10 per cent (minimum) above the face value of the amount applied for.
Banking Operations Department
Central Bank of Nigeria
October, 2008
671
672
673
CENTRAL BANK OF NIGERIA
Business Central Area District
P.M.B. 0187
09-61638445 Garki, Abuja.
09-61638455 (Fax)

April 1, 2008

REF: BOD/DIR/CIR/08/03/09

CIRCULAR TO ALL BANKS

CLEARING AT THE NEW CBN CURRENCY CENTRES

As you are aware, the Central Bank of Nigeria had recently opened four new
branches at Awka, Lokoja, Umuahia and Asaba. Two others are scheduled to be
opened soon at Osogbo and Gombe. Enhancing the efficiency of the payments
system is a key consideration in the drive to embark on the expansion of the branch
network of the Bank.

To this end, all clearing banks are reminded of the need to apply for membership of
the new clearing houses at these new currency centres forthwith. Please note that
clearing by banks’ branches located in the new clearing zones at their former
clearing centres shall cease, with effect from Monday, April 21, 2008, except
Gombe which shall be with effect from April 27, 2008.

Thank you.

James K.A Olekah


Director, Banking Operations Department
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CENTRAL BANK OF NIGERIA
Business Central Area District
P.M.B. 0187
Garki, Abuja
09-61638445
09-61638455 (Fax)

January 2, 2008

BOD/DIR/CIR/2008/GEN/03/003

CIRCULAR TO ALL DEPOSIT MONEY BANKS (DMBs)/DISCOUNT HOUSES

HARMONISATION OF PARTICIPANTS’ CODES ON THE CIFTS DATABASE AT CBN


AND PARTICIPANTS’ TAD

It has been observed that the codes on the cheque books of some
CIFTS participants are different from that on the CBN Inter-bank Funds
Transfer System (CIFTS). In view of this, the Central Bank of Nigeria is in
the process of harmonizing the codes for all the CIFTS participants.

All the CIFTS participants are therefore required to collect the ‘sql’ script
and the procedure from the CBN Lagos, Information Technology
Department on January 4, 2008, for effective harmonisation of the
codes thereafter.

Please note that it is mandatory that all the participants implement the ‘sql’
script on Saturday January 5, 2008.

Thank you.

James K.A. Olekah

Director, Banking Operations Dept

675
676
CENTRAL BANK OF NIGERIA
Business Central Area District
P.M.B. 0187
Garki, Abuja

09-61638445
09-61638455 (Fax)

November 27, 2007

BOD/DIR/CIR/2007/GEN/03/001

CIRCULAR TO GOVERNMENT REVENUE COLLECTING BANKS

ENSURING TIMELY REMITTANCE OF GOVERNMENT REVENUE BY DEPOSIT MONEY

BANKS

It would be recalled that the Central Bank of Nigeria (CBN), in 1999 delegated
its retail banking role with government to the deposit money banks. Since then
banks have been the main revenue collecting agents for government and its
agencies. Under this arrangement all appointed banks are required to remit all
revenue collections into the pool accounts at the CBN, within an agreed
timeline.

The CBN is however worried that notwithstanding the appeals to the revenue
collecting banks, some do not remit their collections as and at when due
especially the collection on behalf of the Nigeria National Petroleum
Corporation (NNPC) from its depots all over the country. This has led to the
postponement of the Federation Accounts Allocation Committee (FAAC)
meeting dates in some instances; thus disrupting the distribution of revenue to
the federating units. In addition, this unethical practice undermines the effective
conduct of monetary policy given the size of the NNPC account.

The CBN warns that it would no longer tolerate this attitude. Thus, all revenue
deposits collected on behalf of NNPC from all its depots should be paid into the
CBN within twenty-four (24) hours of the exact value date indicated on the NNPC
payment instruction to banks, failing which the CBN shall debit the accounts of
the affected banks in the CBN. Banks, whose accounts get overdrawn because
of the direct debit, shall pay double the penalty for overdrawn accounts. In
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addition, defaulting banks risk being stopped from collecting revenue for NNPC
and other parastatals.

We will continue to count on your support and cooperation.

J.K.A. Olekah

Director, Banking Operations Department

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PART B
BANKING SUPERVISION CIRCULARS, POLICIES AND GUIDELINES

679
BSD/DIR/GEN/LAB/11/25

October 10, 2018

LETTER TO ALL BANKS AND PAYMENT SERVICE PROVIDERS

ISSUANCE OF RISK-BASED CYBERSECURITY FRAMEWORK AND GUIDELINES FOR


DEPOSIT MONEY BANKS AND PAYMENT SERVICE PROVIDERS

The CBN hereby issues the attached Risk-Based Cybersecurity Framework and
Guidelines for Deposit Money Banks (DMBs) and Payment Service Providers (PSPs),
which represents the minimum requirements to be put in place by all DMBs in their
respective cybersecurity programmes.

The effective date for full compliance with the provisions of the guidelines is
January 1, 2019 and all DMBs and PSPs are expected to do so, on or before that
date.

Please, be guided accordingly.

Yours faithfully,

AHMAD ABDULLAHI

DIRECTOR, BANKING SUPERVISION

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RISK-BASED CYBERSECURITY FRAMEWORK AND GUIDELINES

FOR

DEPOSIT MONEY BANKS AND PAYMENT SERVICE PROVIDERS

OCTOBER 2018

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Introduction

The safety and soundness of Deposit Money Banks (DMBs) and Payment Service
Providers (PSPs) require that they operate in a safe and secure environment.
Hence, the platform on which information is processed and transmitted should be
managed in a way that ensures the confidentiality, integrity and availability of
information as well as the avoidance of financial loss and reputation risk, amongst
others.

In recent times, cybersecurity threats have increased in number and sophistication


as DMBs and PSPs, use information technology to expedite the flow of funds among
entities. In this regard, threats such as ransomware, targeted phishing attacks and
Advanced Persistent Threats (APT), have become prevalent; demanding that DMBs
and PSPs remain resilient and take proactive steps to secure their critical
information assets including customer information that are accessible from the
cyberspace.

It is in this regard that this framework, which outlines the minimum cybersecurity
baseline to be put in place by DMBs and PSPs, is being issued. The framework is
designed to provide guidance for DMBs and PSPs in the implementation of their
cybersecurity programmes towards enhancing their resilience.

Cybersecurity resilience is considered as an organisation‟s ability to maintain


normal operations despite all cyber threats and potential risks in its environment.
Resilience provides an assurance of sustainability for the organisation using its
governance, interconnected networks and culture.

DMBs/PSPs should note that for a cybersecurity programme to be successful, it must


be fully integrated into their business goals and objectives, and must be an integral
part of the overall risk management processes.

The framework provides a risk-based approach to managing cybersecurity risk. The


document comprises five parts: Cybersecurity Governance and Oversight,
Cybersecurity Risk Management System, Cybersecurity Operational Resilience,
Metrics, Monitoring & Reporting and Compliance with Statutory and Regulatory
Requirements.

Cybersecurity Governance and Oversight

2.1. Cybersecurity governance sets the agenda and boundaries for cybersecurity
management and controls through defining, directing and supporting the security
efforts of the DMBs and PSPs. It spells out the responsibilities of the Board of
Directors, Senior Management and Chief Information Security Officer (CISO). This
entails the development and enforcement of policies, procedures and other forms
of guidance that the DMBs/PSPs and their stakeholders are required to follow.

2.2. The responsibility for the provision of oversight, leadership and resources to
ensure that cybersecurity governance becomes an integral part of corporate

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governance rests with the Board of Directors of the DMB/PSP. In this regard, the
Board shall ensure that cybersecurity is completely integrated with business
functions and well managed across the DMB/PSP.

2.3. Furthermore, the Board shall ensure that cybersecurity governance not only
aligns with corporate and Information Technology (IT) governance, but is cyber-
threat intelligence driven, proactive, resilient and communicated to all internal and
external stakeholders.

2.4. The responsibilities of the Board of Directors are detailed below:

2.4.1. The Board of Directors through its Committees shall have oversight and overall
responsibility for the DMB/PSP‟s cybersecurity programme. It shall provide leadership
and direction for effective conduct of the processes. The Board shall ensure that
cybersecurity governance is integrated into the organisational structure and
relevant processes.

2.4.2. The Board shall ensure that cybersecurity processes are conducted in line
with business requirements, applicable laws and regulations while ensuring security
expectations are defined and met across the DMB/PSP. Furthermore, the Board
shall hold Senior Management responsible for central oversight, assignment of
responsibility, effectiveness of the cybersecurity processes and shall ensure that the
audit function is independent, effective and comprehensive.

2.4.3. The Board shall be responsible for all cybersecurity governance documents
such as cybersecurity strategy, framework and policies and ensure alignment with
the overall business goals and objectives.

2.4.4. The Board shall, on a quarterly basis receive and review reports submitted by
Senior Management. The report shall detail the overall status of the cybersecurity
programme to ensure that Board approved risk thresholds relating to cybersecurity
are being adhered to.

2.4.5. The Board of every DMB/PSP shall appoint or designate a qualified individual
as the “Chief Information Security Officer” (CISO) who shall be responsible for
overseeing and implementing its cybersecurity programme. In the case of banking
groups, such institution may leverage on its group CISO where the bank is part of a
group that has a CISO.

2.4.6. The board shall ensure that the cybersecurity budget is approved.

2.5. The responsibilities of Senior Management are detailed below:

2.5.1. Senior Management shall be responsible for the implementation of the


Boardapproved cybersecurity policies, standards and the delineation of
cybersecurity responsibilities.

2.5.2. Senior Management shall provide periodic reports (at a minimum quarterly);
to the Board on the overall status of the cybersecurity programme of the DMB/PSP.
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2.6. The responsibilities of the Chief Information Security Officer (CISO) are detailed
below:

2.6.1. The CISO shall be responsible for the day-to-day cybersecurity activities and
the mitigation of cybersecurity risks in the DMB/PSP.

2.6.2. The CISO shall focus on the DMB/PSP-wide cybersecurity risk rather than IT
security risk only, and shall also be responsible for the development and
implementation of the cybersecurity programme and strategy as approved by the
Board.

2.6.3. A group CISO shall be responsible for establishing and maintaining an


enterprise vision, strategy and program in the case of banking group where critical
information security expertise and tools are maintained and controlled centrally.

2.7. The requirements of the Chief Information Security Officer (CISO) are detailed
below:

2.7.1. The CISO shall be of senior management grade and shall possess adequate
authority; experience; independence and status within the DMB/PSP to enable
him/her function properly.

2.7.2. The CISO shall not report to the Head of Information Technology (IT)
operations to avoid conflict of interest while ensuring segregation of duty. He/She
shall report to the Managing Director/Chief Executive Officer.

2.7.3. The CISO shall meet educational and experience requirements as provided in
the Fit and Proper (Approved Persons) Framework required for Assistant General
Managers and above for DMBs and shall be at least senior manager for PSPs. Given
the requirements of this job role, experience gained solely in the field of IT shall be
deemed to be adequate.

2.7.4. In addition, the CISO shall possess relevant qualifications and in-depth
experience in Information Technology with any, or combination of, Information
Security Certifications such as Certified Information Systems Security Professional
(CISSP), Certified Information Security Manager (CISM) and Certified Chief
Information Security Officer (CCISO).

2.8. The Information Security Steering Committee (ISSC):

2.8.1. Every DMB/PSP shall establish an information security steering committee that
shall be responsible for the governance of the cybersecurity programme.

2.8.2. The steering committee shall consist of senior representatives of relevant


departments within the DMB/PSP and shall be headed by the CISO.

2.8.3. The roles, responsibilities, scope and activities of the information security
steering committee shall be clearly defined.

2.8.4. The objectives of the Committee shall include:


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2.8.4.1.Ensuring that DMB/PSP‟s security policies and processes align with the
business objectives;

2.8.4.2.Evaluating, approving, and sponsoring institution-wide security investment;

2.8.4.3.Enforcing the implementation of policies for investment prioritization and


security risk management; and

2.8.4.4.Providing strategic direction and cybersecurity governance for the


DMB/PSP.

2.9. Risk Management Control Functions

To ensure the effectiveness of a DMB/PSP‟s cybersecurity governance, its processes


and controls shall be reviewed at least annually. In this regard, the risk
management control functions; handled by relevant department of the
organization shall have their responsibility as follows:

2.9.1. Risk Management

Risk Management shall independently evaluate all the risks relating to cybersecurity
in a proactive way. This should include the use of appropriate tools and
methodologies for risk identification, analysis and control. Appropriate reports shall
be provided to Senior Management and the Board Risk Management Committee,
quarterly.

2.9.2. Compliance

The Compliance Department of DMBs and PSPs shall review their cybersecurity
programmes and processes to ensure adherence to relevant CBN directives and
other extant regulations.

2.9.3. Internal Audit

A DMB/PSP‟s cybersecurity programme shall be audited by the Internal Audit unit to


determine the effectiveness of the controls put in place and ascertain if they are
adequate for the DMB/PSP‟s risk exposure. Internal audit shall be independent with
the scope of cybersecurity audits clearly defined. Audit programmes shall be risk-
based and provide assurance to the Board and Senior Management on the
effectiveness of the cybersecurity programme.

2.10. Cybersecurity Strategy and Framework

2.10.1.The Board of Directors shall approve the DMB/PSP‟s information/cybersecurity


strategy, which shall provide direction on how to achieve its cybersecurity goals.
The strategy shall address and mitigate cyber-risk while providing compliance with
the legal, contractual, statutory and regulatory requirements. The strategy shall
align with the DMB/PSP‟s Information Security Management System (ISMS),
information technology and the overall corporate strategy.

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2.10.2. A DMB/PSP shall also put in place an information/cybersecurity framework in
support of its strategy which aligns policies, business and technological approaches
to address cyber risks and clearly defines all cybersecurity roles and responsibilities.

2.10.3. In addition, a DMB/PSP shall develop an information/cybersecurity policy


either as a separate document or as part of its cybersecurity framework or its
Information Security Management System (ISMS). The policy shall clearly convey
management intent and the DMB/PSP‟s approach to achieving its cybersecurity
objectives.

2.10.4. The policy document(s) approved by the Board shall be continuously


reviewed and updated annually at a minimum or when there are significant
changes to the DMB/PSP‟s cyber-risk exposure and in the light of emerging
technologies. The annual review shall ensure its suitability, adequacy and
effectiveness to mitigate cyber-risk.

Cybersecurity Risk Management System

3.1. Effective Risk Management serves to reduce the incidence of significant


adverse impact on an organization by addressing threats, mitigating exposure, and
reducing vulnerability. DMBs and PSPs shall incorporate cyber-risk management
with their institution-wide risk management framework and governance
requirements to ensure consistent management of risk across the institution.

3.2. The Risk Management programme shall be based on an understanding of


threats, vulnerabilities, risk profile and level of risk tolerance of the organisation. The
process shall also be dynamic in view of the constantly changing risk landscape.
The Board and Senior Management shall support and be involved in the cyber-risk
management process by ensuring that resources and capabilities are available
and roles of staff properly defined in management of risks.

3.3. The Risk Management System shall cover the four basic activities below:

3.3.1. Risk assessment

3.3.2. Risk measurement

3.3.3. Risk mitigation/Risk treatment

3.3.4. Risk monitoring and reporting

3.4. Cyber risk assessments should be updated regularly to address changes or


introduction of new technologies, products etc. before deployment to ensure
accurate risk measurement.

3.5. Risk treatment options such as risk reduction, risk retention, risk avoidance, risk
transfer and how residual risk is addressed should be selected based on the
outcome of the risk assessment.

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3.6. Information obtained from risk management activities shall be reported to the
Senior Management and the Board of Directors to support informed decision
making.

3.7. A DMB/PSP shall ensure consistent conduct of risk assessments, vulnerability


assessments and threat analysis to detect and evaluate risk to the DMB/PSP‟s
information assets and determine the appropriateness of security controls in
managing risk.

3.8. IT risk shall be responsible for assessment, measurement and


monitoring/reporting of risks associated with critical IT infrastructure while
information/cybersecurity team shall be responsible for risk mitigation/treatment.

3.9. Cybersecurity Resilience Assessment

Cybersecurity Resilience Assessment is useful in evaluating an organization‟s


defense posture and readiness to cybersecurity risks. In view of rapid advancement
in IT, interconnection between networks (internet) and multiple threats in the
cyberspace, a DMB/PSP shall carry out cyber risk resilience assessment to
determine its current and target cybersecurity profile.

3.9.1. Determining the Current Cybersecurity Profile (“present state”)

3.9.1.1. DMBs and PSPs shall determine their “current” cybersecurity position at
regular intervals by evaluating all identifiable cybersecurity vulnerabilities; threats
and likelihood of successful exploit; potential impact (reputational, financial,
regulatory, etc.); and the associated risks in order to estimate the amount of assets
and efforts required to recover from losses/damage attributable to potential cyber
incidents.

3.9.1.2. The assessment should include but not limited to adequacy of cybersecurity
governance; policies, procedures and standards; inherent risks in business
operations; visibility to emerging threats to information assets; capability to swiftly
respond and recover from cyber-incidents; vendor risk, and efficacy of existing
controls to mitigate the identified risks.

3.9.1.3. In addition to various cybersecurity assessments conducted to identify


vulnerabilities, other frameworks/tools available to assist in achieving this objective
at no cost are contained in Appendix II. All gaps identified shall be documented
and communicated to the Executive Management and Board of Directors.

3.9.2. Establishing a Target Cybersecurity Profile (“desired state”)

A DMB/PSP shall develop a detailed roadmap to timely address the gaps identified.
This document shall state the vulnerability/risk treatment plan with stipulated time
frame. The plan may include updating the cybersecurity policy; establishing a
security operation center and cyber forensic laboratory; signing-up with external
cyber threat intelligence agencies, etc.

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3.9.3. Reporting Cybersecurity Self-Assessment

A report of the self-assessment which shall depict the procedure/tools/framework


used to conduct the cybersecurity self-assessment; identified gaps, threats, and
risks; potential value at risk/impact; prioritized action plan to mitigate risks
identified; and timeline for remediation; remediation status with possible residual
vulnerabilities/risks shall be submitted by DMBs and PSPs to the Director, Banking
Supervision Department of the Central Bank of Nigeria annually not later than
March 31st . The report shall be signed and submitted by the Chief Information
Security Officer after its endorsement by the Executive Management. See the
reporting template in Appendix VII.

Cybersecurity Operational Resilience

DMBs and PSPs are required to build, enhance, and maintain their cybersecurity
operational resilience which will ultimately contribute to reducing cybercrime in
Nigeria and strengthen the banking sector cyber defense.

The following are the minimum controls that a DMB/PSP shall put in place on their
critical IT infrastructure to ensure the Confidentiality, Integrity and Availability (CIA)
of information assets among others.

4.1. Know Your Environment

A DMB/PSP shall endeavor to be acquainted with its business environment and


critical assets. It shall devise mechanisms to maintain an up-to-date inventory of
authorized software, hardware (workstation, servers, network devices etc.), other
network devices, and internal and external network connections. All unauthorized
software and hardware device on its network shall also be identified, documented,
removed and reported appropriately.

Employees and contractors providing information technology and cybersecurity


functions/services shall also be identified. Details on how to improve DMB/PSP‟s IT
infrastructure awareness is contained in Appendix III.

4.2. Enhancing Cybersecurity Resilience

A DMB/PSP shall continuously improve on its cybersecurity resilience. This is crucial


for the prompt identification of system vulnerabilities; emerging threats and their
associated risks; rapid cyber-incident response; increasing cybersecurity maturity
level; ensuring the confidentiality, integrity and availability of information assets
whilst promoting a safe and sound banking system in Nigeria.

Leveraging on the DMB/PSPs‟ resilient cybersecurity governance, risk management


and compliance, a DMB/PSP shall adopt the measures in Appendix IV and V as the
minimum cybersecurity baselines to enhance its cybersecurity resilience.

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4.3. Cyber-Threat Intelligence

A DMB/PSP is required to possess an objective knowledge – based on fact – of all


emerging threats, cyber-attacks, attack vector, mechanisms and indicators of
attack/compromise to its information assets which shall be used to make informed
decisions.

To this end, DMBs and PSPs are required to:

4.3.1. Establish a Cyber-Threat Intelligence (CTI) programme which shall proactively


identify, detect and mitigate potential cyber-threats and risks.

4.3.2. Establish a CTI policy (as part of the cybersecurity policy) approved by the
Board of Directors to aid proactive identification of emerging cyber threat, trends,
patterns, risks, and possible impact.

4.3.3. Identify and document various CTI Sources. See Appendix VI for details.

4.3.4. Take informed decisions based on the CTI programme as it provides valuable
information on areas susceptible to cyber-attacks, latest threats, attack vector, etc.
Decisions may include: reviewing the Bring Your Own Device (BYOD) policy;
conducting emergency awareness training, vulnerability assessment, and
penetration testing; review of vendor source codes, cyber-incident response plan,
BCP/DR plans, vendor SLA; and increased system logging, etc.

4.3.5. Promptly report all impending and challenging cyber-threats to their


information assets to the Director of Banking Supervision of Central Bank of Nigeria
using the Cyber-threat Intelligence Reporting template in Appendix VII after its
endorsement by appropriate authorities.

Metrics, Monitoring & Reporting

5.1. A DMB/PSP shall put in place metrics and monitoring processes to ensure
compliance, provide feedback on the effectiveness of control and provide the
basis for appropriate management decisions. The metrics should be properly
aligned with strategic objectives and provide the information needed for effective
decisions at the strategic, management and operational levels.

5.2. The metrics should assess the effectiveness of the DMB/PSP‟s overall
cybersecurity programme and measure its performance and efficiency. Tools may
be employed to achieve this include key risk indicators, key goal indicators, etc.

5.3. The Board and Senior Management of DMB/PSP shall establish an effective and
reliable reporting and communication channels throughout the institution to ensure
the effectiveness and efficiency of the cybersecurity programme. The
cybersecurity programme reporting process shall be consistent, timely,
comprehensive, transparent and reliable. The measurement process should help to
identify shortcomings and failures of security activities and provide feedback on
progress made in resolving issues.
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5.4. A reporting process that defines reporting and communication channels shall
be established for the dissemination of security-related material such as changes in
policies, standards, procedures, new or emerging threats and vulnerabilities.

5.5. The Board of Directors and Senior Management shall be provided with
quarterly reports to keep them abreast of the state of the cyber/information
security programme and governance issues in the DMB/PSP.

5.6. A DMB/PSP is required to report all cyber-incidents (as defined in Appendix I)


whether successful or unsuccessful not later than 24 hours after such incident is
detected to the Director of Banking Supervision, Central Bank of Nigeria using the
report format in Appendix VII. Where necessary and applicable, additional
information should be provided afterwards.

Compliance with Statutory and Regulatory Requirements

6.1. The Board and Senior Management of DMBs and PSPs shall ensure compliance
with all relevant statutes and regulations such as the Nigerian Cybercrimes
(Prohibition, Prevention etc.) Act, 2015 and all CBN directives to avoid breaches of
legal, statutory, regulatory obligations related to cybersecurity and of any security
requirements.

6.2. The Central Bank of Nigeria shall ensure the establishment of appropriate
processes and procedures for the purpose of monitoring compliance with this
framework and other extant laws and regulations.

6.3. Non-compliance with the provisions of this framework shall attract appropriate
sanctions as may be determined by the Central Bank of Nigeria in accordance
with the provisions of the CBN Act and BOFIA.

7. Compliance

The CBN shall monitor and enforce compliance with the provisions of the
Guidelines.

8. Effective Date

This Guideline shall take effect from January 1, 2019

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Appendix I: Critical Systems and Cyber-Incidents

For the purpose of this framework, “critical system” shall mean any IT infrastructure
(servers, applications, databases, network, ATM, POS, etc.) whose unavailability
(such as failure, unplanned downtime, etc.), corruption, unauthorized access
and/or interception of the information it stores, processes or transmit will results in a
significant financial loss and negatively impact business operation and service to
customers.

A Cyber-Incident is referred to as any incident which may result in a significant


financial loss as a result of:

I. Unplanned outage of IT system(s) such as Core Banking Application,


Treasury Systems, Trade finance systems, core network devices, Internet
banking systems, electronic channels (e.g. ATMs, POS, USSD, Mobile
banking, etc.) and connected payment systems e.g. SWIFT, RTGS, NEFT,
etc.)

II. Cyber security incident such Distributed Denial of Service (DDOS),


Ransomware/cryptoware, data breach, data destruction, web
defacement, etc.

III. Unauthorised access, disclosure, tampering or theft of banks and


customers‟ information (personal Identifiable Information and financial
data).

A significant financial loss is a loss that exceeds 0.01% of shareholders‟ funds


unimpaired by losses.

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Appendix II: Cybersecurity Self-Assessment Tools

Below are few risk assessment tools that can guide DMBs/PSPs in achieving cyber
resilience. Other suitable resources may also be adopted.

1. The FFIEC Cybersecurity Assessment Tool


https://www.ffiec.gov/cyberassessmenttool.htm

2. US-CERT Cyber Resilience Review (CRR) https://www.us-


cert.gov/ccubedvp/assessments

3. ICS-CERT‟s Cybersecurity Evaluation Tool (CSET) https://ics-


cert.uscert.gov/sites/default/files/FactSheets/ICS-
CERT_FactSheet_CSET_S508C.pdf

4. Payment Card Industry (PCI) Data Security Standard Self-Assessment


Questionnaire https://www.pcisecuritystandards.org/

5. ISO 27001 https://www.iso.org

6. The CBN circulars relating to cybersecurity


https://www.cbn.gov.ng/documents/

7. Nigerian Cybercrimes (Prohibition, Prevention etc.) Act, 2015

8. NgCERT website https://www.cert.gov.ng/

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Appendix III: Know Your Environment:

1. Asset Management

Hardware: A DMB/PSP shall:


1.1 Maintain an up-to-date inventory of all authorized devices used to process,
store or transmit data/information in the institution such as workstations,
laptops, switches, routers, firewall, printers, scanner, photocopiers, IP Phones,
surveillance cameras, etc. connected to its network. Unauthorized devices
shall not be granted access to the network.
1.2 Ensure that all identified devices are categorized not only by the criticality
and sensitivity of the data/information they store, process or transmit but also
on their mobility.
1.3 Assess and review the profile(s) of personnel(s) and/or third parties who have
unrestricted/restricted access to devices identified in “1.1” above.
1.4 Automate the detection of unauthorized devices as they connect to the
DMB/PSP‟s network and ensure that only authorized devices are granted
access to the network.
Software: A DMB/PSP shall:
1.5 Devise a mechanism to maintain an up-to-date inventory of all
applications/software installed and/or running on all its systems. Unauthorized
software/applications identified shall be removed.
1.6 Ensure that the installation of applications/software including patches and
hotfixes to authorized workstations/laptops, servers (including those on the
demilitarized zone or DMZ), and mobile devices are centrally coordinated
and managed.
1.7 Ensure that all legacy but still-in-use software and applications are
catalogued. Vulnerabilities associated with them shall be promptly identified
and remediated with adequate controls and must be considered for
upgrade.
1.8 Establish controls to prevent unauthorized modification or removal of its
authorized software/applications while preventing the installation of
unauthorized software/applications on its network.
ATM and POSs: A DMB/PSP shall:
1.9 Devise a mechanism to maintain an up-to-date inventory of all ATM and POS
machines connected to its network.
1.10 Establish controls to protect all ATM and POS devices against malware,
tampering, memory scrapping, and spoofing.
1.11 All POS merchants must be appropriately risk profiled at least annually.
1.12 Ensure that risks associated with these devices are regularly assessed,
documented and mitigated promptly.
Network: A DMBs and PSPs shall:
1.13 Maintain an approved up-to-date network topology of their wired and
wireless networks irrespective of their location;
1.14 Maintain a catalog of all dedicated/frequently-used network
connection(s) to regulatory authorities, switches, vendors/contractors,
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and wholesale customers with details of the objectives of such
connections;
1.15 Implement Authentication, Authorization and Accounting (AAA) policies
on network devices;
1.16 Implement secure network management and prompt reporting;
1.17 Devise mechanism to mitigate layer 2 and 3 attacks using Firewall,
Access Control Lists (ACLs), etc. and
1.18 Ensure that the Internal Operating System (IOS) software of network
devices such as routers are up-to-date.
Protocols: A DMB/PSP shall ensure that
1.19 Protocols used by programmers during application development and
those used by endpoint and network devices for data transfer and
topology advertisement are secure while meeting functional
requirements.
1.20 Vulnerabilities associated with these protocols are regularly assessed and
mitigated appropriately. This include but not limited to those used by
cellular phones (via mobile network) to communicate with DMB/PSP‟s IT
infrastructure e.g. USSD, SMS, etc.
2. Staff/Employee:
The Management of a DMB/PSP shall:
2.1 Identify all employees whose job description is to implement, enforce, and
review its physical and technical security controls; this includes but not
limited to IT system, IT security administrators, security guards, etc.
2.2 Conduct background check on employees who implement policies,
procedures used to protect sensitive information, and plausibly know ways
of circumventing those control e.g. IT system administrators and security
guards.
2.3 Ensure that risks associated with this category of employee are regularly
assessed as part of the enterprise risk assessment framework. Background
check shall be periodically conducted to gather reliable information about
such employees.
2.4 Ensure that mandatory vacation/leave is adopted to thwart opportunities for
fraudulent activities, and key-man risk.
2.5 Ensure that access rights assigned to all users is based on the principles of
separation of duties and least privilege.
3. Vendor/Contractors/Third-parties: A DMB/PSP shall:
3.1 Maintain an up-to-date inventory of services rendered by
vendor/contractor/third-parties with valid Service Level Agreement (SLA).
3.2 Ensure that each SLA contains at minimum: details of service rendered, Non-
Disclosure Agreement (NDA), Roles and Responsibilities of each party,
Duration, Vendor Service Level Manager, Service Quality metric/evaluation
criteria, and the Right to Audit clause.
3.3 Audit their vendors/contractors/third-parties in order to ensure/enforce
compliance with the SLA; and promptly identify risky parties; if possible, visit
their office/ IT processing facility

694
3.4 Assess the qualification, skills and/or experience of vendor staff assigned to
them by their vendors/contractors/third-parties.
4. External Connection: A DMB/PSP shall:
4.1 Identify and document all connections to third-parties - wholesale
customers, vendors and switches that provide Value Added Service (VAS) - ;
the objective of each connection shall be documented and reviewed
regularly.
4.2 Assess, document, and mitigate all risks associated with the identified
external connections appropriately.
4.3 Where applicable, visit the data center and network infrastructure facilities
of third-parties; access their approved cybersecurity policies and ensure it
addresses all cybersecurity concerns.
4.4 Ensure that third-party accesses are restricted to only authorized segment of
the network; only specific IP addresses from the third-party shall be allowed,
and restrict connection(s) to a period of time (where applicable).
4.5 Always log, monitor, and review all third-party connections to their network.
5 Payment Service Providers: Where a DMB/PSP (in a nested PSP relationship)
engage a Payment Service Providers (entity); third-party for the storage,
transmission, processing and security of cardholder data, the DMB/PSP shall:
5.1 Identify, review and document the services provided by the entity.
5.2 Determine and document the scope of the entities involvement in
storing, processing, or transmission of cardholder data and the effect on
the security of the Cardholder Data Environment.
5.3 Identify and document the technology used by the entity for the
services provided.
5.4 Identify and document whether an additional third-party is used by the
entity to deliver the services rendered.
5.5 Identify the facilities of the entity where cardholder data/information is
located.
5.6 Obtain the following documentation from the entity to validate PCI DSS
compliance for the service rendered: Report on Compliance (ROC);
Attestation of Compliance (AOC); SelfAssessment Questionnaire (SAQ);
and ASV Scan Report Attestation of Scan Compliance (AOSC).

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Appendix IV: Enhancing Cybersecurity Resilience

This section provides the minimum controls required for a DMB/PSP to continue to
support and provide business services even in the event of cyber –attacks. It
provides controls on access right management, secure system configuration,
cybersecurity awareness , data loss prevention, system life cycle management,
vulnerability management, continuous security monitoring, and enhancing incident
response capabilities.
1. Access Control:
A DMB/PSP shall establish an access control policy which ensures that:
a. There exists mechanism, standards and procedures that govern users, systems
and service accounts access provisioning, identification, and authorization to
all systems, network, and applications.
b. All workstations/laptops, end-users, service accounts, network devices
(internal and external), and administrators have identities and credentials to
access the bank‟s resources.
c. Access to its information assets (including customer information), resources
and connected services/facilities at any time are limited to only authorize
users, services, processes or devices (including wireless network) based on the
principle of least privilege and guided by an access control matrix.
d. Authorizations given to users, service and system accounts are limited to the
functions/ services they provide; where necessary implement logon time and
days restriction.
e. Physical access to assets is controlled based on the criticality and sensitivity of
the information processed, stored and transmitted by them.
f. The repositories of all users, administrator, and system identities and
credentials are protected.
2. Secure System Configuration Management: To enhance resilience through
system configuration, a DMB/PSP shall:
a. Acquire and deploy systems/applications with in-built resilience
configuration.
b. Develop minimum security baseline configuration such as anti-
malware; data loss prevention solutions; and systems security settings
for workstations/laptops, servers, applications/software including
network devices governed by vendor recommendations, informative
references in Appendix V and the CBN guidelines.
c. Devise mechanisms to logically apply and maintain their cybersecurity
policies and security baseline configuration on systems, applications
and network devices.
d. Establish a Standard Operating Procedures (SOP) for all IT processes
and activities.
e. Audit the security configurations items on system and network devices
to ensure compliance with preconfigured security settings.
f. Devise a mechanism to monitor, detect, log and report all
unauthorized system configuration changes; where possible, the
mechanism shall re-apply the security configuration seamlessly.
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3. Cybersecurity Awareness Training:
Educating employees, contractors and customers on cybersecurity is imperative for
a secure cyberspace. To this end, a DMB/PSP shall:
a. Develop cybersecurity awareness training contents, taking cognizance of the
prevailing cyber threats, cyber risk, and various attack-vectors.
b. Ensure that the content of the cybersecurity awareness training include
information contained in the DMBs and PSPs‟ cyber security policy, roles and
responsibilities of all parties, and emerging cyber –threats.
c. Mandate all Board members and employees to participate the training
programme.
d. Ensure that third-party/vendor also undergo the bank‟s security awareness
programme as well.
e. Devise mechanisms to communicate cybersecurity awareness messages to all
their customers in the language they understand irrespective of their location.
To thwart social engineering attack among others, the messages shall be
communicated in English and customers‟ understandable Nigerian local
languages at least monthly or when there is an identified cyber-threat/attack
vector via SMS, emails, radio, newspapers, etc.
4. Data Loss Prevention:
Protecting and controlling the accessibility and usage of customers Personal
Identifiable
Information (PII) and bank‟s sensitive and critical information within and outside the
corporate network is a major goal of cybersecurity resilience. Hence,
a. A DMB/PSP shall develop a data loss/leakage prevention strategy to
discover, monitor, and protect sensitive and confidential business and
customer data/information at endpoints, storage, network, and other digital
stores, whether online or offline.
b. The strategy should provide but not limited to a mechanism that:
i. classifies both structured and unstructured data/information;
ii. discovers where sensitive/confidential data/information are stored;
iii. iii. monitors how sensitive/confidential data/information are being
used;
iv. continuously protects data whether the endpoint is on/off the
corporate network;
v. addresses notable data loss concerns through USB, e-mail, mobile
phones and web;
vi. takes prompt actions when a potential data breach is suspected or
detected: e.g. blocking an employee‟s attempt to save a sensitive
information to an external storage or network share drive; and
vii. establishes to management a reduction in data loss risk in institution.
c. Critical and sensitive information on assets shall be formally managed
throughout removal, transfers, and disposition. All assets identified for disposal
shall undergo degaussing, and/or total destruction; in accordance with its
approved policy.

697
d. A DMB/PSP shall validate that similar control exist at vendor managed
facilities such as co-location data centers, and cloud service providers.
5. System Life Cycle Management:
In managing the life cycle of systems, a DMB/PSP shall:
a. Establish policies and procedures that consistently oversee the lifecycle
(identification, acquisition/development, maintenance/update, and
disposal) of applications, components, and systems.
b. Ensure that cybersecurity control are considered and incorporated in all
stages of the system/application lifecycle. The business requirement for the
acquisition/development of systems/applications shall also identify and
document the security requirements. This includes but not limited to access
control, access right management, authentication, event logging, audit
trail, user session management, separation of duties, and least privilege, etc.
c. Validate that the systems/applications meet all other requirements
(functional, performance, reliability, etc.) and any applicable CBN
regulations before they are deployed.
d. Ensure that all in-house applications are developed in-line with secure
coding practices such as threat modeling, input validation, least privilege,
defense in-depth, and fail secure whilst mitigating against OWASP
vulnerabilities. These applications shall also be thoroughly tested by a team
of qualified software testers and business/application owners.
e. Separate the production/live environment from the development and
testing environment(s).
f. Sanitize sensitive data in the development and testing environments by
implementing a Data Masking solution to mask/fabricate bank‟s and
customers‟ sensitive information for the purpose of development, System
and User Acceptance Tests.
g. Establish a procedure for the maintenance of on-site and remote
organizational assets to prevent unauthorized access.
h. Adopt cryptographic controls such as public key infrastructure, hashing and
encryption to guard confidential and sensitive information against
unauthorized access.
i. Comply with the extant rules and regulations of your card schemes and
associated stakeholder rules.
6. Vulnerability Management:
IT vulnerability management is an integral part risk management. To this end, a
DMB/PSP shall promptly identify weaknesses in their IT infrastructure (database,
applications, network etc.), account profiles (system administrators and privileged
users), vendors, etc.
a. Information Assets:
To promptly identify all system vulnerabilities and cybersecurity risks to
operations and IT assets, a DMB/PSP shall:
i. Implement a vulnerability management policy; approved by Executive
Management
ii. Establish an automated mechanism to detect all vulnerabilities in its assets.
This includes but not limited to workstations, network devices, servers
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(production, test and development), etc. The vulnerabilities and threats
shall be documented; potential business impact and likelihood shall also
be identified.
iii. Conduct vulnerability assessment at least quarterly or when there is a
significant change (such as installation of new systems, devices,
applications, etc.) to the bank’s information processing infrastructure or
when vulnerabilities are made known.
iv. Further identify vulnerabilities in their assets by engaging professionals in this
field to conduct Penetration Tests (PT) annually. However, PT shall be
conducted frequently on internet-facing systems/applications.
v. Continuously identify the inherent risks and vulnerabilities associated with IT
platform/protocols used for business services e.g. USSD and SMS mobile
Banking protocols.
vi. Promptly categorize and resolve issues identified during vulnerability
assessment based on their criticality, likelihood and impact. Subsequent
validation to assess closure of such vulnerabilities shall also be done. The
root cause of the identified vulnerabilities such as a flaw in security policy,
system misconfiguration, inconsistent Standard Operating Procedure
(SOP), noncompliance to change management processes, and superficial
risk assessment shall also be addressed to thwart future occurrence.
vii. Have a dedicated team that monitors the release of security
patches/updates by their vendors / OEMs. Security updates are
mandatory, and shall be deployed quickly in accordance with DMBs and
PSPs‟ patch management policy. Patches for well-known or zero day
vulnerabilities shall also be applied swiftly in accordance with its
emergency patch management process.
viii. Establish an efficient mechanism and processes to identify assets patch
compliance status - on operating system and application software on
users‟ laptops and desktop, servers (including those on the DMZ), virtual
machines, etc. - and remedy patch deficiencies.

b. System Administrators And Privileged Accounts:


To limit exposure to insider threat, a DMB/PSP shall:
i. Identify all employees and system/service accounts with super-privileges on
each system, application, database, and device; and enforce segregation of
duties and principle of least privilege for these accounts.
ii. Where applicable, enforce password and account-management policies and
practices to these accounts as-well. Use of shared default/anonymous
privileged account by multiple users is highly prohibited.
iii.Ensure that no single administrator have unfettered access to its critical systems.
Logon credentials to critical systems, applications, and network shall be created
and separately documented by at least 2 different employees.
iv. iv. Change the logon credentials of default system accounts on assets before
they are connected to the network. This shall apply to test and development
servers as well.

699
v. Establish a strategy, mechanism and an intelligent procedure to log, monitor,
and audit actions performed by these accounts. All logs/audit trails shall be
preserved and regularly reviewed in accordance with each institution‟s
account management policy.
c. Vendors:
A DMB/PSP shall ensure that:
i. No vendor has unfettered access to its systems, database, network and
applications (especially the core application).
ii. If a vendor needs to access its information asset, management approval shall
be sought only for the duration the access is required. Such access shall be
administered by an authorized administrator.
iii.No vendor given logged-on to its information assets shall be left unattended to.
Their actions shall be logged and closely monitored at all time. If possible,
conduct a background check on all vendor staff before they are granted
access.
7. Continuous Security Monitoring:
There shall be an ongoing awareness of information security vulnerabilities and
threats to support s DMB/PSPs risk management decisions. To improve surveillance,
it shall:
a. Determine what needs to be monitored by: gathering information about all
systems, databases, and network that support business activities; analyze
reports about cyber-incidents that have occurred in the past; evaluate the
recommendations from both recent internal and third-party audits/ risk
assessment of the network; and report of its cybersecurity self-evaluation.
b. Identify the key dependent variables – people, system, database, network
and services – that the technical components of the continuous monitoring
strategy will depend on.
c. Determine appropriate performance metrics for those variables; this includes
but not limited to skills, system availability, event logging capability of systems
to be monitored etc.
d. Establish how the log data collected from various sources will be stored and
secured.
e. Define a continuous security monitoring policy/strategy; it shall include but not
limited to the identified systems and processes, key dependent variables and
their performance metrics, roles and responsibilities, duration to retain log
data, events that would trigger these systems to send alerts, monitoring
intervals/frequency, and how identified cyber-incidents / breaches will be
contained, treated, documented, and reported.
f. Determine a baseline of operations and expected data flows for users,
systems, and network of the identified systems. This includes but not limited to
logon hours, network traffic threshold, level of processor utilization, etc.
g. Implement across all-delivery channels a risk-based transaction monitoring
mechanism which shall securely notify customers of all payment or fund
transfer transactions above a specified value defined by customers.
h. Establish a non-intrusive real-time monitoring mechanism to collect, correlate,
and detect anomalous user, administrator, system, and process/service
700
activities on critical system, database, and network in a timely manner while
verifying the effectiveness of protective measures in place.
i. Ensure that the mechanism provides Value Added Services (VAS) such as
separating real events from nonimpact events (false positive), locating and
containing events, sending alerts to appropriate staff for investigation,
remediation, reporting, keeping historical data for the purpose of forensics,
and managing operational risks.
j. Monitor the physical environment of assets – server room, network devices,
data center, disaster recovery site, and off-site storage location –to detect
potential threats in a timely manner.
k. Establish an effective and efficient non-intrusive mechanism to detect and
perform remediation actions on malicious codes and unauthorized mobile
codes on all systems (including those on the DMZ). For signature based
solutions, frequency of update shall be at least daily.
l. DMBs and PSPs that intends to or have cloud service providers shall be guided
by the continuous security monitoring recommendation of Cloud Security
Alliance (CSA).
8. Incident Response:
This is an organized approach to addressing and managing the aftermath of a
security breach or attack (also known as an „incident‟) with an objective of
reducing damage, recovery time and incident costs. For an effective and efficient
Incident Response (IR), a DMB/PSP shall:
a. Review its Disaster Recovery and Business Continuity plan documents
(DR/BCP) with the business (stakeholders) to ensure they are adequate and
effective to support cybersecurity resilience.
b. Create a DR/BCP test calendar to ascertain the effectiveness and efficiency
of the Disaster Recovery and Business Continuity plans.
c. Test the DR/BCP. Lessons learned shall be incorporated into the DR/BCP
documents as an improvement.
d. Develop an IR policy with stakeholders. The IR policy shall stipulate:
i. the creation of a cyber-incident response plan; approved by the Board of
Directors;
ii. Senior management and business process owners definition of an Acceptable
Interruption Window (AIW) for all categories of cyber-incidents and
performance metric at each stage of the IR process;
iii. the establishment of a dedicated team whose focus shall be on detecting
and responding to cyber-incident;
iv. adequate and continuous training of the IR team on how to respond, report
cyber-incidents, and conduct trend analysis to thwart future occurrence;
v. conducting cybersecurity drills based on the approved cyber-incident
response plan and test schedule to ascertain its viability, effectiveness and
efficiency;
vi. the adoption of automated detection tool such as network and system
(endpoint) scanners; and alerts from Log Management solutions, Firewall,
Intrusion Detection/Intrusion Prevention systems (ID/IPS), etc. for effective
early detection of cyber-incidents;
701
vii. appropriate chain of custody when collecting, analyzing and reporting
cyberincident in a manner that is legally admissible; and
viii. how crisis information shall be communicated and shared with stakeholders
including the CBN and the public.
9. Payment Service Provider Security Assurance Programme:
To ensure that systems and data entrusted by a DMB/PSP (in a nested PSP
relationship) to PSPs (entity) are maintained in a secure and compliant manner, the
institution shall establish an assurance programme which shall include but not
limited to:
i. Launching a due diligence programme on proposed or existing PSP
companies thorough vetting prior to establishing a relationship and after
engagement to ensure that the entity holds skills and experience appropriate
for the service provided.
ii. Establishing written agreements and policies between it and the entity for
consistency and mutual understanding of service provided on their
respective responsibilities and obligations.
iii. Continuous monitoring of the PSP‟s PCI DSS compliance status to provide an
assurance of the PSP‟s compliance with the applicable requirements for the
services provided.
iv. Obtaining and reviewing the appropriateness of the entity‟s incident
response, business continuity plan, and cyber-insurance coverage.
v. Reviewing PSP compliance with your third-party security policies

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Appendix V: Informative References

ISO Information https://www.iso.org/isoiec-27001-


Security informationsecurity.html
Management
Systems
Cybersecurity https://www.iso.org/standard/44375.html
guideline
NIST Special https://www.nist.gov/publications/
Publications
Resource https://beta.csrc.nist.gov/
Center
PCI Document https://www.pcisecuritystandards.org/document_l
Security Library ibrary
Standard
Council
COBIT 5 COBIT 5 for https://isaca.org
Information
Security

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Appendix VI: Cyber-Threat Intelligent Sources

Internal Threat Intelligence (TI) sources


Internal intelligent data sources are those security events generated by the IT
infrastructures of DMBs/PSPs. This includes systems and security logs, database
activity logs, malware detection report, analysis of network traffic, etc.
1. A DMB/PSP shall have an approved Security Operations Center ("SOC")
strategy as sub-set of the Cybersecurity framework (with clear mission, vision
and objective) to support its overall business objectives, minimize cybersecurity
risk, while meeting regulatory requirements.
2. The strategy shall explicitly state the model of SOC to be adopted (On-premise,
In-house, Outsourced or Hybrid).
3. A DMB/PSP‟s approved organizational chart shall also depict the SOC structure
and its team.
4. There shall be a dedicated and secure physical space for the SOC to
engender teamwork, brain-storming, knowledge-sharing among members and
quick response time.
5. Its ambience shall also be protected with both technical and physical controls
and equipped with a TV to keep the SOC staff abreast of imminent cyber
events which may affect the DMB/PSP information assets.
6. The SOC shall not just house sophisticated tools but equipped with a Security
Information and Event Management (SIEM) solution that aggregates data from
various security feeds to provide real-time analysis of security alert. Where
applicable, the SOC shall be able to perform prompt remediation service.
7. For intuitive correlations and prompt visibility of the bank‟ security posture,
feeds to the SIEM shall also include logs from network devices, vulnerability
assessment systems; application and database scanners; penetration testing
tools; IDS/IPS; and enterprise antivirus system.
8. It shall be up and manned continuously (24x7), managed and administered by
skilled IT professionals with technical knowledge, experiences and suitable
credentials in areas such as operating systems, networking, cryptography,
database administrator, digital forensic, etc. For effective monitoring, shifts
work schedule shall be adopted. At least two (2) members of the team shall
manage the SOC at all time; responsibilities should be clearly defined.
9. The SOC team shall have adequate knowledge of the business, its environment
and infrastructure in order to prioritize the most appropriate response when
cyber-incidents occur.
10. The SOC shall have well documented processes to:
• triage various types of cyber-incidents with appropriate response
approved by the business process owners for operational consistency;
• identify, analyze and report emerging threats; and
• gather and preserve evidence for Forensic Investigation.
11. There shall be a capacity planning tool/process that communicates SOC
infrastructure (SIEM) storage to enable the SOC team balance task workload
with available resources.

704
12. At a minimum, the team shall comprise of a SOC Manager, Analysts and
Intelligence Architects.
13. Risk and vulnerability assessment shall be conducted on the SOC infrastructure.
The SOC infrastructure and processes shall be continually audited either as
standalone or part of the cybersecurity process.
14. The SOC shall be able to provide input to the institution‟s Cybersecurity
Awareness Training program based on the identified security incidents.
15. The SOC shall periodically provide cyber-incident reports to Board and Senior
Management.
16. Although internal Threat Intelligence (TI) sources provide information that is
peculiar to a DMB/PSP‟s environment, each institution is advised to subscribe to
external TI sources for threats notification and possible mitigants.

External TI sources:
These are sources external to a DMB/PSP environment. They combine various
sources of TI into a single source which is easy to understand.
1. A DMB/PSP shall subscribe to external TI providers such as data feeds from IT
vendors; intelligence sharing group such as the NgCERT, FS-ISAC, ICS-CERT;
other DMBs/PSPs; and relevant agencies to keep them informed of emerging
cyber-threats and vulnerabilities.
2. Caution shall be exercised on open-source cyber-threat intelligence feeds due
to high rate of false positive and/or false negative alerts.

705
Risk-based Cybersecurity Self-Assessment Reporting for Deposit Money Banks
(DMBs) and Payment Service Providers (PSPs)

Introduction
In accordance with Section 3 of the Central Bank of Nigerian Risk-based
Cybersecurity Security Framework, Deposit Money Banks (DMBs) and Payment
Service Providers (PSPs) are expected to conduct a cybersecurity self-assessment.
This assessment shall identify all cybersecurity vulnerabilities, threats, likelihood of
successful exploit, potential impact (reputational, financial, and regulatory) to
information assets; and the associated risks. The self-assessment shall include but
not limited to identifying the adequacy of cybersecurity governance, policies,
procedures and standards; inherent risks in the bank‟s business operations; visibility
to all emerging threats to information assets; capability to swiftly respond and
recover from cyber-incidents; and determining the potency of existing controls to
mitigate the identified risks.
In-view of this extant regulation, DMBs and PSPs shall conduct and report their Risk-
based Cybersecurity Self-Assessment using this template annually but not later than
March 31st by the Chief Information Security Officer after its endorsement by the
Executive Management. The report shall be submitted to the Director, Banking
Supervision Department, Central Bank of Nigeria.
Purpose
The objective is to determine the Cybersecurity resiliency of Nigerian DMBs and
PSPs; the ability of DMBs and PSPs to maintain normal operations in spite of all
threats and potential risks in the cyberspace.

Likelihood Impact Definition


of
occurrence

The identified threat is active and prevalent; the DMB/PSP has


High little/ineffective/no controls in place to prevent the vulnerability
from being exploited by the threat.

The identified threat is active and prevalent; but the DMB/PSP


Moderate has some controls in place which may be capable to prevent
the vulnerability from being exploited by the threat.

Identified threat does not apply to the DMB/PSP or the DMB/PSP


Low has sophisticated and efficient controls in place which provides
assurance that the risk may not crystallized.

706
Definition of Terms:

Likelihood of occurrence: This is the probability that an event will take place.
Adopt the legend below to specify the likelihood of occurrence.

Impact: This is the potential damage caused by a cyber-attack (threat agent).


Adopt the legend below to specify the magnitude of potential impact.

Magnitude
Impact Definition
of Impact

Reputational damage; System down time > 6 hours for mission


High critical systems, loss of major tangible assets or resources; high
monetary loss, violation of the CBN regulations on cybersecurity.

Reputational damage; System down time > 1 hour but < 6 hours for
Moderate mission critical systems, loss of minor tangible assets or resources;
moderate monetary loss, or loss of tangible assets or resources.

System down time < 1 hour for mission critical systems, insignificant
Low
monetary loss, loss of tangible assets or resources.

Risk level: To determine the risk level, DMBs/PSPs should consider the likelihood of a
threat exploiting a vulnerability; the impact of a successful attack and the
existence of security controls to mitigate the risk. Adopt the legend below to state
the residual risk level.

Risk Level Risk Level Definition

High Corrective action(s) must be put in place immediately.

Moderate Corrective action(s) must be put in place within a stipulated time

Low The board shall accept the risk / determine if corrective actions are
needed.

707
Name of Institution

Month, Year

CYBERSECURITY SELF-ASSESSMENT REPORT

Approved By: ___________________________________Approval Date: __________

Approved By: __________________________________ Approval Date: __________

708
CYBERSECURITY SELF-ASSESSMENT OF NAME OF YOUR INSTITUTION

Scope

State/ Describe the coverage of this Cybersecurity Self-Assessment

Cybersecurity Assessment Methodology

State the tools/documents/guidelines/framework used to conduct this self-assessment

Identified Threats

Description of Mitigating Residual


Threat No 1 Likelihood Impact
threat Control(s) Risk

Likelihood Level
of of
occurrence. impact Risk level.

Comments to
Control(s):

Description of Mitigating Residual


Threats No 2 Likelihood Impact
threat Control(s) Risk

Likelihood Level
of of
occurrence. impact Risk level.

709
Comments to
Control(s):

Description of Mitigating Residual


Threats No 3 Likelihood Impact
threat Control(s) Risk

Likelihood Level
of of
occurrence. impact Risk level.

Comments to
Control(s):

Description of Mitigating Residual


Threats No 4 Likelihood Impact
threat Control(s) Risk

Likelihood Level
of of Risk level.
occurrence. impact

Comments on
Control(s):

Description of Mitigating Residual


Threat No 5 Likelihood Impact
threat Control(s) Risk

Likelihood Level
of of Risk level.
occurrence. impact

Comments on
Control(s):

Threat No 6 Description of Likelihood Impact Mitigating Residual

710
threat Control(s) Risk

Likelihood Level
of of Risk level.
occurrence. impact

Comments on
Control(s):

Description of Mitigating Residual


Threat No 7 Likelihood Impact
threat Control(s) Risk

Likelihood Level
of of Risk level.
occurrence. impact

Comments on
Control(s):

Description of Mitigating Residual


Threat No 8 Likelihood Impact
threat Control(s) Risk

Likelihood Level
of of Risk level.
occurrence. impact

Comments on
Control(s):

Description of Mitigating Residual


Threat No 9 Likelihood Impact
threat Control(s) Risk

Likelihood Level
of of Risk level.
occurrence. impact

711
Comments on
Control(s):

Mitigating Residual
Threat No 10 Description of threat Likelihood Impact
Control(s) Risk

Likelihood of Level
occurrence. of Risk level.
impact

Comments on
Control(s):

Vulnerability Assessment

Asset No 1 Description
Mitigating Residual
of Threat Likelihood Impact
Control(s) Risk
Vulnerability

Likelihood Level of
of impact Risk level.
occurrence.

Time Frame
to
Comments
on Time Frame Close

Control(s): Vulnerability

Asset No 2 Description
Mitigating Residual
of Threat Likelihood Impact
Control(s) Risk
Vulnerability

712
Likelihood Level of
of impact Risk level.
occurrence.

Time Frame
Comments to
on Time Frame
Close
Control(s):
Vulnerability

Asset No 3 Description
Mitigating Residual
of Threat Likelihood Impact
Control(s) Risk
Vulnerability

Likelihood Level of
of impact Risk level.
occurrence.

Time Frame
to
Comments
on Time Frame Close

Control(s): Vulnerability

Asset No 4 Description of Mitigating Residual


Vulnerability Threat Likelihood Impact
Control(s) Risk

Likelihood Level of
Risk level.
of impact
occurrence.

713
Time Frame
to
Comments
on Time Frame Close

Control(s): Vulnerability

Asset No 5 Description of Mitigating Residual


Vulnerability Threat Likelihood Impact
Control(s) Risk

Likelihood Level of
of impact Risk level.
occurrence.

Time Frame
to
Comments
on Time Frame Close

Control(s): Vulnerability

Asset No 6 Description of Mitigating Residual


Vulnerability Threat Likelihood Impact
Control(s) Risk

Likelihood Level of
of impact Risk level.
occurrence.

Time Frame
Comments to
on Duration
Close
Control(s):
Vulnerability

714
Asset No 7 Description of Mitigating Residual
Vulnerability Threat Likelihood Impact
Control(s) Risk

Likelihood Level of
of impact Risk level.
occurrence.

Time Frame
to
Comments
on Duration Close

Control(s): Vulnerability

Asset No 8 Description of Mitigating Residual


Vulnerability Threat Likelihood Impact
Control(s) Risk

Likelihood Level of
of impact Risk level.
occurrence.

Time Frame
to
Comments
on Duration Close

Control(s): Vulnerability

Asset No 9 Description of Mitigating Residual


Threat Likelihood Impact
Vulnerability Control(s) Risk

715
Likelihood
Level of
of Risk level.
impact
occurrence.

Time Frame
to
Comments on
Duration Close
Control(s):
Vulnerability

Asset No 10 Description of Mitigating Residual


Threat Likelihood Impact
Vulnerability Control(s) Risk

Likelihood Level of
of impact Risk level.
occurrence.

Time Frame
to
Comments on
Duration Close
Control(s):
Vulnerability

Justification

Based on the Threat Sources, Events and System Vulnerabilities Assessment completed
above, the system’s overall risk is Pick a Risk Level.

Reason

716
________________________________________________________________________________________

Conducted by Name & Signature Title


Date

717
Central Bank of Nigeria

Cyber-Threat Intelligence Report Template for Deposit Money Banks (DMBs) and
Payment Service Providers (PSPs)

Purpose

The purpose of the cyber-threat intelligence reporting is to provide a risk-based


approach to promptly identify emerging cyber threat, trends, patterns, risks, and
their potential impact. It is not the aftermath of an incident but a proactive
measure to mitigate against emerging cyber-risk.

Definition of Terms:

Likelihood of Occurrence: This is the probability that an event will take place.
Adopt the legend below to specify the likelihood of occurrence.

Likelihood of Impact Definition


occurrence

High The identified threat is active and prevalent; the


DMB/PSP has little/ineffective/no controls in place to
prevent the vulnerability from being exploited by the
threat.

Moderate The identified threat is active and prevalent; but the


DMB/PSP has some controls in place which may be
capable of preventing the vulnerability from being
exploited by the threat.

Low Identified threat does not apply to the DMB/PSP or it


has sophisticated and efficient controls in place which
provides assurance that the risk may not crystalize.

718
Impact: This is the potential damage caused by a cyber-attack (threat agent).
Adopt the legend below to specify the magnitude of potential impact.

Magnitude of

Impact Impact Definition

High Reputational damage; System down time > 6 hours for


mission critical systems, loss of major tangible assets or
resources; high monetary loss or violation of the CBN
regulations on cybersecurity.

Moderate Reputational damage; System down time > 1 hour but < 6
hours for mission critical systems, moderate monetary
loss, loss of tangible assets or resources.

Low System down time < 1 hour for mission critical systems,
insignificant monetary loss, loss of tangible assets or
resources.

Risk level: To determine the risk level, DMB/PSP should consider the likelihood of a
threat exploiting a vulnerability; the impact of a successful attack and the
existence of security controls to mitigate the risk. Adopt the legend below to state
the residual risk level.

Risk Level Risk Level Definition

High Corrective action(s) must be put in place immediately.

Moderate Corrective action(s) must be put in place within a


stipulated time

Low The board shall accept the risk / determine if corrective


actions are needed.

719
CYBER-THREAT INTELLIGENCE REPORT OF ………….. NAME OF INSTITUTION

Name of Institution

Month, Year

CYBER-THREAT INTELLIGENCE REPORT

Approved By: ________________________________________Approval Date: __________

Approved By: _________________________________________Approval Date: __________

720
Identified Cyber-Threats

Threat(s) How was the threat Potential Security


Level of
Date identified Victim(s)/
S/No Name and Likelihood Impact Controls Residual
detected (Internal/External Targeted
Descripti In Place Risk
on Source) Asset

Level of Risk level


Likelihood impact with the
of if controls
Select successful in place.
Date successf
attack.
ul

Comm ents

Threat(s) How was the threat Potential Security


Date
S/No Name and identified Likelihood Impact Controls In Risk level
detected Victim(s)/
Description (Internal/External Place

721
Source) Targeted
Asset

Likelihood Risk level


of Level of with the
successful impact if controls
Select Date attack. successful in place.

Comm ents

Potential
How was the threat
Threat(s) Security Level of
Date identified Victim(s)/
S/No Name and Likelihood Impact Controls In Residual
detected (Internal/External
Description Targeted Place Risk
Source)
Asset

Likelihood Level of Risk level


Select Date of impact if with the
successful successful controls

722
attack. in place.

Comments

Potential
How was the threat
Threat(s) Security Level of
Date identified Victim(s)/
S/No Name and Likelihood Impact Controls In Residual
detected (Internal/External
Description Targeted Place Risk
Source)
Asset

Likelihood Risk level


of Level of with the
successful impact if controls
Select Date attack. successful in place.

Comm ents

723
Potential
How was the threat
Threat(s) Security Level of
Date identified Victim(s)/
S/No Name and Likelihood Impact Controls In Residual
detected (Internal/External
Description Targeted Place Risk
Source)
Asset

Likelihood Risk level


of Level of with the
successful impact if controls
Select Date attack. successful in place.

Comm ents

How was the threat Potential


Threat(s) Security Level of
Date identified
S/No Name and Victim(s)/ Likelihood Impact Controls In Residual
detected (Internal/External
Description Place Risk
Source) Targeted

724
Asset

Likelihood Risk level


of Level of with the
successful impact if controls
Select Date attack. successful in place.

Comm ents

Threat(s) How was the threat Potential Security Level of


Name and Date identified Victim(s)/ Controls In Residual
S/No Likelihood Impact
Description detected (Internal/External Place Risk
Source)

Targeted
Asset

Likelihood Risk level


Select Date Level of
of with the
impact if
successful controls
725
attack. successful in place.

Comments

_________________________________ _________________________
_____________________________

Prepared by Name & Signature Title


Date

726
Central Bank of Nigeria Security Incident Reporting Template For Deposit Money
Banks (DMBs) and Payment Service Providers (PSPs)

Security incidents must be reported by DMBs to the Director, Banking


Supervision, Central Bank of Nigeria within the first six hours of the incident
happening. Additional updates must be provided if the earlier reporting was
incomplete, (i.e. new information due to investigation). Also, where necessary,
additional document should be provided and appended to this form.

727
CONTACT INFORMATION

DMB’s/PSP’s Name:

Staff Name:

Designation: Department:

Phone No: Email:

Additional Contact Details:

____________________________________________________________________________________________

____________________________________________________________________________________________

____________________________________________________________________________________________

728
INCIDENT DETAILS

Date & Time Incident was Discovered:

New Incident Update to Incident

Please provide reference to previous incident:

Date & time Incident was detected:

Type of Incident Detected:

729
Unauthorised Access Advanced Persistent Threat Phishing

Denial of Service Inappropriate/Misuse of Unplanned Downtime


system
Unauthorised Use Malicious Code
Access or Credential Abuse Website Defacement
Others
f other, please state:
Sustained Probe/Scan

730
Description of Incident:

_ ___________________________________________________________________________________________

_ ___________________________________________________________________________________________

_ ___________________________________________________________________________________________

_ ___________________________________________________________________________________________

I ncident Impact :

Outage of Critical IT System Theft or Loss of Customer Information

Loss of sensitive Information Outage of Infrastructure

731
Financial Loss Cybersecurity Incident (DOS, Ransomware etc.)
Others.
Regulatory & Legal
f other, please state:

I mpact Impact Definition

High Critical system(s), customer facing applications/systems, internal network or a


combination is impacted. System downtime is experienced.

Moderate Systems or network that can put the DMB‟s/PSP‟s network, critical system(s) or a
combination at risk is impacted. May lead to system downtime.

Low Non-critical system(s) was impacted.

732
P lease select impact:

High

Moderate

Low

Description of Impact:

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

733
___________________________________________________________________________________________

___________________________________________________________________________________________

Impact Category Low Medium High

Financial

Reputation

Functional/Operational

Legal & Regulatory

734
Description of Impact Category:

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

735
Does the affected critical system(s)/ network(s) have potential impact on another critical
system/critical asset(s) of the DMB/PSP? If “Yes”, please provide more details:

Incident Notification

Internal Management Affected Customer

CBN Law enforcement (Police, EFCC, etc.) Others

If other, please state:

INCIDENT ACTIONS

Incident Detection: (Date, Time and Details):

___________________________________________________________________________________________

736
___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

Affected System or Network: (Date, Time and Details):

Please provide details on location, purpose of this system/ network, affected applications
(including hardware, manufacturer, software developer, make/ model, operating system,
database version etc.) running on the systems/networks, etc., If known, any TCP or UDP ports
involved in the incident; If known, provide the affected system’s IP address If known, provide the
attacker’s IP address:

___________________________________________________________________________________________

737
___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

Containment Measures:

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

738
Evidence Collected (Systems Logs, etc.):

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

Eradication Measures:

___________________________________________________________________________________________

___________________________________________________________________________________________

739
___________________________________________________________________________________________

Recovery Measures:

___________________________________________________________________________________________

___________________________________________________________________________________________

___________________________________________________________________________________________

740
Other Mitigation Actions:

_____________________________________________________________________________

____________________________________________________________________________

_____________________________________________________________________________

Acronyms

AIW Acceptable Interruption Window

APT Advanced Persistent Threat

ATM Automated Teller Machine

AOC Attestation of Compliance

ASV Scan Report Attestation of


Scan

AOSC Compliance

BCP/DR Business Continuity/ Disaster Recovery


Plan

BYOD Bring Your Own Device

CSA Cloud Security Alliance

Control Objectives for Information and


COBIT related Technology

DMB Deposit Money Bank

DMZ Demilitarized Zone

Federal Financial Institutions


FFIEC Examination Council

Financial Services Information Sharing


FS-ISAC and Analysis Center

741
Industrial Control Systems Cyber
ICS-CERT Emergency Response Team

IDS Intrusion Detection System

IP Phones Internet Protocol Phones

IPS Intrusion Prevention System

ISO International Organization for


Standardization

LAN Local Area Network

NIST National Institute of Standards and


Technology

NgCERT Nigeria Computer Emergency Response


Team

OEMs Original Equipment Manufacturer

OWASP Open Web Application Security Project

PCI DSS Payment Card Industry Data Security


Standard

POS Point of Sale

PSP Payment Service Provider

ROC Report on Compliance

SAQ Self-Assessment Questionnaire

SMS Short Message Service

TV Television Set

USSD Unstructured Supplementary Service


Data

742
Glossary

2-Factor This is a process in which a user provides two different


Authentication authentication factors to verify his identity.

Access Control Matrix is a security model in computing that


Access Control
defines the access rights or authorization of each subject
Matrix
with respect to objects in the system.

Acceptable This is the maximum allowable time of interrupting mission


Interruption critical systems or applications before restoration.

Window

APT is a targeted network attack in which an unauthorized


Advanced
malicious entity gains access to a network and remains
Persistent Threat
undetected for a long period of time.

Anti-Skimming This is a device that prevents fraudulent capture of


Device personal data from the magnetic stripes cards when they
are used on devices such as an ATM.

Automated Teller This is an intelligent electronic banking channel, which


Machine allows banks‟ customers have access to basic banking
services without the aid of any bank representative.

Business Continuity/ These are planned processes that help DMB/PSP prepare
for disruptive events and recover within a short period.
Disaster Recovery
Plan

Bring Your Own BYOD is a privilege given to employees to use their


Device personally owned devices (laptops, smart phones, etc.) to
access information and resources of their work place.

Cloud Security A non-profit organization with a mission to “promote the


Alliance use of best practices for providing security assurance
within Cloud Computing, and to provide education on the
uses of Cloud Computing to help secure all other forms of
computing”

Cyberspace This is an imaginary environment where communication

743
over computer networks occurs

Demilitarized Zone A demilitarized zone or DMZ in computing is a physical or


logical sub-network that separates the trusted (internal
local area network) from other untrusted networks
(Internet). It houses external-facing servers, resources and
services meant to be accessed from the internet.

False Positive A false positive is a false alarm generated by a device,


process or entity; usually based on preconfigured rules or
logic.

False Negative False negative occurs when a security device omits a


vulnerability

Firewall This is a network security system or software that has the


capability to monitor and control incoming and outgoing
network traffic based on preconfigured rules.

Financial Services This is a global financial industry's information sharing


Information Sharing organization that provides timely authoritative information
and Analysis Center on physical and cyber security threats to help protect the
critical systems and assets of its members.

Intrusion Detection A device or software/application that monitors a


System DMB/PSP‟s network or systems for policy violations and/or
malicious activities.

Internet Protocol A phone built on Voice over IP technologies (VoIP) for


Phone transmitting

telephone calls over an IP network, such as the Internet.

This is a network threat prevention technology that


Intrusion Prevention examines network traffic to identify possible threats while
System preventing potential exploits of system vulnerabilities.

Internet An internet is an interconnected computer networks linked


by the internet protocol suite.

744
International ISO is a non-governmental organization with a mission to
“promote the development of standardization and related
Organization for
activities in the world with a view to facilitating the
Standardization international exchange of goods and services, and
developing cooperation in the spheres of intellectual,
scientific, technological and economic activity.”

Local Area Network A computer networking technology that links devices


within a specific range.

Log Management This is an automatic way of dealing with large volumes of


systemgenerated logs. It usually comprises of Log
collection, correlation, analysis, search, reporting and
retention.

Malicious code Any code or script developed with an intention to cause


undesired effects, security breaches or damage to a
system.

Mobile code Any malicious programme, application, or script capable


of moving when implanted in an email, document or
website.

Nested Payment Any entity that is contracted for its services by another
Service Provider payment service provider for the purposes of providing a
service.

Non-Disclosure A legal contract or agreement between two or more


Agreement parties that outlines a degree of confidentiality.

Nigeria Computer A team of experts in the Office of the Nigerian National


Security Adviser with a mission to “manage the risks of
Emergency
cyber threats in the Nigeria‟s cyberspace and effectively
Response
coordinate incident response and mitigation strategies to
Team proactively prevent cyber-attacks against Nigeria”.

Nigeria Cybercrime This is the first cybercrime bill enacted by the National
Act, 2015 Assembly of the Federal Republic of Nigeria in 2015.

Open-source A platform, blog, database that collects, stores and share


cyberthreat information on emerging cyber threats, indicators and

745
intelligence trends to its subscribers.

This is a non-profit organization that provides journals,


Open Web methodologies, documentation, and development of best
Application Security practices, in the field of web application security at no
Project cost.

Payment Card This is an information security standard for DMB/PSPs that


Industry Data collect, process, store and transmit cardholder data.
Security Standard

Payment Service These are third-party service providers who use their
Providers infrastructure to store, process, or transmit DMB‟s customer
information including cardholders‟ data.

Point of Sale This is a device that accepts payment cards for electronic
terminal funds transfers.

Privileged user Any user who by virtue of function has super system-rights
in any computer, application, database, device, etc.

Patches These are software designed to improve the features,


security, etc. of a system, device, and
application/software.

Service Level This is a contract between a service provider and a


Agreement subscriber; who defines the level of service expected from
such service provider.

Standard Operating This is a step-by-step instruction on carrying out routine


Procedure operations/tasks. Its purpose it to achieve uniformity of
performance, efficiency and quality output at all time.

Threat Anything that has the potential to cause damage or loss to


an information asset.

Unstructured This is a communication technology used to send message


between a mobile phone and an application on a
Supplementary
network.
Service Data

Value Added A term used to describe non-core services of a service

746
Service provider but offered to its customers.

Vendors Provider of goods or services to DMB/PSP

Vulnerability This is a weakness or gap in a system, application, process,


device, etc.

747
Central Bank of Nigeria
Banking Supervision Department
Central Business District
P.M.B. 0187
Garki. Abuja.
E-mail: bsd@cbn.gov.ng

09-462-3640 I

BSD/DIR/GEN/LAB/11 /006
March 1, 2018

LETTER TO ALL BANKS

COMPLIANCE WITH THE CYBERCRIME (PROHIBITION, PREVENTION, ETC.), ACT


2015: COLLECTION AND REMITTANCE OF LEVY FOR THE NATIONAL
CYBERSECURITY FUND

Pursuant to the provisions of Section 44 (S.1 and 2) of the Cybercrime


[Prohibition. Prevention. etc.]. Act 2015. which established the National Cyber
Security Fund and mandated the payment of a levy of 0.005% into the
Fund Account in the Central Bank of Nigeria. A National Cyber Security
Fund account has been opened and domiciled in the Central Bank of Nigeria.

Consequently, all banks are hereby directed to comply with the statutory
provision for the collection and remittance of the 0.005% levy on all
electronic transactions by the businesses specified in the second schedule
of the Cybercrime (Prohibition, Prevention, etc.) Act, as follows:
1. GSM Service Providers and all telecommunication companies;
2. Internet Service Providers;
3. Sanks and Other Financial Institutions;
4. Insurance Companies; and
5. Nigerian Stock Exchange.
All levies imposed under the Act should be remitted to the CBN within a period
of 30 days after collection.
This directive takes immediate effect.
Yours faithfully,

-
THOMPSON 0. SUNDAY

FOR: DIRECTOR OF BANKING SUPERVISION


748
Central Bank of Nigeria
Banking Supervision Department
Central Business District
P.M.B. 0187
Garki. Abuja.
E-mail: bsd@cbn.gov.ng

09-462-3640 I

REF: BSD/DIR/GEN/LAB/11/002

January 31, 2018

LETTER TO ALL BANKS

RE: INTERNAL CAPITAL GENERATION AND DIVIDEND PAYOUT RATIO

Please recall that the Central Bank of Nigeria issued a Circular dated
October 8. 2014 referenced BSD/DIR/GEN/1.AB/07/033 on the above
subject. Kindly note an addition/amendment for the Circular as in item
4.0(4). All other provisions remain unchanged.

1.0 Globally, retained earnings have been identified as an important source of


growing an institutions capital. Advantages of retained earnings include:
being a source of long term finance; being easier and cheaper to raise
than external finance; curtailment of financial risk; and improving liquidity
and profitability.

2.0 However, it has been observed that rather than take advantage of this
beneficial means of capital generation, some institutions pay out a greater
proportion of their profits, irrespective of their risk profile and the need to
build resilience through adequate capital buffers.

3.0 Prior to now, dividend payout policy for banks has been as stipulated in
Section 16(1) of BOFIA 2004 (as amended) and Prudential Guidelines for DMBs
of 2010 which state that “Every Bank shall maintain a reserve fund and shall, out
its net profits for each year (after due provision for taxation) and before any
dividend is declared, where the amount of the reserve fund is:

749
a. Less than the paid-up share capital. transfer to the reserve fund a sum
equal to but not less than thirty per cent of net profits: or

b. Equal to or in excess of the paid-up share capital, transfer to the reserve


fund a sum equal to but not less than fifteen per cent of the net profit:
provided that no transfer under this subsection shall be mad" until all
identifiable losses have been made good.

3.1 Section 16 (3) also states that: Notwithstanding (a) and (b) of' subsection (I),
the Bank may. from time to time specify a different proportion of the net
profits of each year, being lesser or greater than the proportion specified in
paragraph (a) and (b) to be transferred to the reserve fund of a bank for the
purpose of ensuring that the amount of the reserve fund of such bank is
sufficient for the purpose of its business and adequate in relation to its
liabilities.

3.2 Subsequently, Section (17) (!) Stipulates that no bank shall pay dividend
on its shares untit-

AII its preliminary expenses organisational expenses share selling commission,


brokerage, amount of losses incurred and other capitalised expenses not
represented by tangible assets have been completely written off; and
adequate provisions have been made to the satisfaction of the bank
for actual and contingency losses on the risk assets, liabilities, off balance
sheet commitments and such unearned incomes as are derivable
therefrom.

3.3 While these regulations are aimed at building the statutory reserves of
supervised banks, in view of the dynamism, rapid changes and emerging risks
on the horizon, there is a need to proactively address these risks.

4.0 In order to facilitate sufficient and adequate capital build up for


banks in tandem with their risk appetite, the following directives will now
apply:

I. Any Deposit Money Bank (DMB) or Discount House (DH) that does not meet
the minimum capital adequacy ratio shall not be allowed to pay dividend.

2. DMBs and DHs that have a Composite Risk Rating (CRR) of High” or a Non­
Performing Loan (NPL) ratio of above 10% shall not be allowed to pay dividend.

750
3. DMBs and DH that meet the minimum capital adequacy ratio but have
a CRR of "Above Average" or an NPL ratio of more than 5% but less than
10% shall have dividend payout ratio of not more than 30%.

4. DMBs and DHs that have capital adequacy ratios of at least


3% above the minimum requirement, CRR of "Low" and NPL ratio of more
than 5% but less than I 0%. Shall have dividend pay-out ratio of not more
than 75% of profit after tax.

5. There shall be no regulatory restriction on dividend pay-out for DMBs


and DH that meet the minimum capital adequacy ratio, have a
CRR of "low” or "moderate" and an NPL ratio of not more than 5%.
However, it is expected that the Board of such institutions will recommend
payouts based on effective risk assessment and economic realities.

6. No DMB or DH shall be allowed to pay dividend out of reserves.

7. Banks shall submit their Board approved dividend payout policy to the
CBN before the payment of dividend shall be permitted.

All ratios shall be based on financial year averages.

This circular takes immediate effect.

AHMAD ABDULLAHI

Director, Banking Supervision

751
BSD/DIR/GEN/LAB/10/045
December 11, 2017

LETTER TO ALL BANKS

RE: REGULATORY REPORTING OF FGN-ISSUED TREASURY BILLS AND CBN-ISSUED


OMO BILLS

Further to our earlier circular ref: BSD/DIR/GEN/RRTB/06/027 and dated 12thJune


2017 on the above subject, the CBN has noted that banks’ still lump FG-issued
Treasury Bills and CBN-issued OMO Bills in the daily and monthly returns through
FinA as “Treasury Bills”.

This practice has grave implications on the compilation and interpretation of


monetary aggregates, and may lead to the adoption of time inconsistent
monetary policy decisions.

Consequently, all banks are hereby reminded of the requirement to report


CBN-issued OMO Bills in the DBR/ MBR 300 under Items Code 11450 to 11550;
whereas FGN-issued Treasury Bills should be reported separately under Items
Code10490 to 10590.

Banks are to ensure that these reporting formats are strictly adhered to; failing
which appropriate sanctions shall be appropriately meted out.

Yours faithfully,

AHMED ABDULLAHI
DIRECTOR OF BANKING SUPERVISION

752
09-462-36401

BSD/DIR/GEN/LAB/10/032

September 6, 2017

Letter to All Banks

FURTHER GUIDANCE TO BANKS AND DISCOUNT HOUSES ON THE IMPLEMENTATION


OF IFRS 9 (FINANCIAL INSTRUMENTS) IN NIGERIA

Further to the Guidance Notes on the Implementation of IFRS 9 (Financial


Instruments) in the Nigerian banking sector issued by the Central Bank of Nigeria
on December 20, 2016, banks are required to note that the commencement
date for the parallel run of IAS 39 and IFRS 9 system requirements has been
shifted to October 1, 2017. This is to enable banks conclude the deployment of
their newly developed ECL Models and implementation of IFRS 9 accounting
policies for classification and measurement as well as impairment calculations.

Also, banks are required to assess the financial impact of the implementation of
IFRS 9 on their operations. The assessment reports which should detail
comprehensively the expected impact on total provisions, capital and reserves
as well as capital adequacy as at June 30, 2017, should reach the undersigned
on or before October 31, 2017.

Yours faithfully,

THOMPSON O. SUNDAY
FOR: DIRECTOR OF BANKING SUPERVISION

753
09-462-364-15
09-462-364-18

BSD/GDB/CON/NIB/01/03

August 1, 2017.

LETTER TO ALL NON-INTEREST FINANCIAL INSTITUTIONS


MONITORING THE DISBURSEMENT OF NON-PERMISSIBLE INCOME (NPI)

The Financial Regulation Advisory Council of Experts (FRACE) at its 15th meeting
held between 3rd and 4th May, 2017 resolved that the Advisory Committee of
Experts (ACE) of all Non-interest Financial Institutions (NIFIs) are required to
monitor the disposal of Non-Permissible Income generated in the course of the
NIFIs operations. Specifically, FRACE had directed that it is not permissible for a
NIFI, its shareholders and management staff, to benefit in any way from the NPI
that is given to charity, even if that benefit is the goodwill that the NIFI will
achieve as a result of publicizing the payment (Section 1a of the 10th FRACE
Resolutions, February, 2015).

To this end, the ACE of all NIFIs are required to send a report of the disposal of
Non-Permissible Income to the Director of Banking Supervision on a quarterly
basis.

Please, be guided accordingly.

Yours Faithfully,

K. O. BALOGUN
FOR: DIRECTOR OF BANKING SUPERVISION

754
09-462-36401

March 31, 2017

BSD/DIR/GEN/LAB/10/016

LETTER TO ALL BANKS


REVISED GUIDELINES ON BANCASSURANCE REFERRAL MODEL

In furtherance of our efforts to ensure that banks comply with the Regulation on
the Scope of Banking Activities & Ancillary Matters, No. 3, 2010, the CBN hereby
issues the Revised Guidelines on Bancassurance Referral Model to address
developments both in the banking and insurance sectors. These Guidelines are
a replacement to the one issued in March 2015.

Banks are therefore required to ensure that their offering of Bancassurance


referral services is in line with the provisions of the Guidelines effective April 1,
2017.
Please be guided accordingly.

Yours faithfully,

AHMAD ABDULLAHI
DIRECTOR OF BANKING SUPERVISION

755
REVISED GUIDELINES ON
BANCASSURANCE REFERRAL MODEL

Banking Supervision Department


Central Bank of Nigeria
March, 2017

756
1.0 Introduction
In 2010, the CBN Regulation on the Scope of Banking Activities and Ancillary
Matters No. 3, 2010 was issued to repeal the Universal Banking Model, which
hitherto permitted banks to engage in non-core banking financial activities
either directly or indirectly through designated subsidiaries.
In the light of developments and the need to ensure synergy in the financial
system, the Central Bank of Nigeria (CBN) in exercise of its power under Section
33(1) (b) of the CBN Act 2007 and the provision of Part 2, Section 3, Item (l) of
the CBN Scope, Conditions & Minimum Standards for Commercial Banks
Regulations No. 01, 2010 has considered it necessary to issue these guidelines
on Bancassurance.
The guidelines set out the regulatory framework for the offering of
bancassurance products through the non-integrated referral model. The
choice of this model is premised on the fact that it does not preclude banks
from focusing on their core banking businesses and does not undermine the
essence of the CBN’s New Banking Model.
2.0 Definitions
Bancassurance - An arrangement in which insurance companies leverage on
the customer base of banks to sell insurance products to banks’ customers.
Referral Model - In this model, a bank refers its customers to its partner insurance
companies. In return, the bank receives a commission on each lead closed by
the insurance company. The bank is not involved in marketing the products.
Bancassurance Agreement – A contract duly executed between a bank and
an insurance company to engage in the referral model of bancassurance.
Bancassurance Products – Insurance products which fall under the General
and Life insurance business that would be sold to banks’ customers by the
insurance company under a bancassurance referral model agreement. The
product is distinct from insurance covers that serve as mitigants for losses
against credit and other risks.
Commission – Referral fee payable to the bank by the insurance company in
line with the provisions of the Bancassurance Agreement.
3.0 Prohibited Business
1. Banks shall not engage in any other model of bancassurance other than that
permitted under these guidelines and for which approval has been obtained
from the CBN.
2. Banks shall not offer banking products that incorporate insurance features.
3. Banks shall not offer free premium payments as a feature of any of their
products.

757
4. Banks shall not provide the bancassurance referral service in a manner that
contravenes this guidelines.
4.0 Bancassurance Arrangement between Banks and Insurance Companies
1. The referral model of bancassurance arrangement between a bank and an
insurance company shall not be valid without an executed Bancassurance
Agreement.
2. Banks shall not undertake any insurance marketing, underwriting or claim
settlement. This must be clearly stated in the Bancassurance Agreement.
3. Banks shall ensure that no risks are transferred to it and shall not assume any
fiduciary responsibility or liability for any consequences, financial or
otherwise, arising from the subscription to insurance policies by their
customers under the Bancassurance Referral Model.
4. Banks shall conduct a thorough due diligence/periodic assessment for the
selection of partner insurance companies, which would be restricted to two
insurance companies.
5. Banks shall ensure that only insurance products approved by NAICOM are
offered by their partner insurance companies to their customers.
6 Banks shall not enter into bancassurance agreement with insurance
companies who do not hold a valid operational license from National
Insurance Commission (NAICOM).
5.0 Approval
The offering of bancassurance referral services by a bank is subject to the
CBN’s approval. A bank that intends to offer bancassurance referral services is
required to submit the following alongside its application:
1. Extract of Board resolution approving the service.
2. The Bancassurance Agreement between the bank and the insurance
company, which should at the minimum set out:
a. The bancassurance products to be offered by the insurance company;
b. The duties and responsibilities of each of the parties under the
arrangement during and upon termination of the contract;
c. The conditions for the termination of the agreement;
d. The commission to be charged for the referral services should be as
approved by NAICOM;
e. The duration of the contract and whether it is renewable;
f. Dispute resolution mechanism and measures to safeguard confidential
information;
g. Disclaimer that the products shall be underwritten by the insurance
company with no recourse to the bank in terms of claims or any legal

758
proceedings between the insurance company and the bank’s customer;
and
h. Other relevant information.
3. The bank’s assessment of risks and mitigants put in place.
Upon approval, the bank shall forward the signed copy of the bancassurance
agreement to the CBN. Upon expiration, banks shall notify the CBN of the
renewal of the bancassurance agreement.
Any amendment to the bancassurance agreement shall be subject to the
approval of the CBN. Upon the termination of the agreement, the bank shall
notify the CBN stating the reason(s) for the termination.
6.0 Marketing of Bancassurance Products and Policy Documents
1. Banks shall only refer their customers to insurance companies. Thus, marketing
of the insurance products shall be done by the staff of the insurance
companies.
2. The referral document shall contain a disclaimer that the products shall be
underwritten by the insurance company with no recourse to the bank in
terms of claims or any legal proceedings between the insurance company
and the bank’s customer.
3. The insurance products to be sold shall be strictly the products of the
insurance company.
4. The bank’s name or logo shall not appear in any of the policy documents.
5. The insurance marketers may be allowed to occupy a space in the banking
hall of the bank.
6. Banks shall maintain adequate records of all transactions which will be
reviewed during supervisory activities.
7.0 Premium Collection
1. The premium paid by the customer may be paid into the insurance
company’s account in the bank; if the bank is a banker to the insurance
company under a customer/banker relationship and with a valid instruction
from the customer.
8.0 Referral Commission
1. Insurance companies shall pay to the banks all agreed commission(s) on
consummated transactions as approved by NAICOM.
2. The applicable commission(s) shall be clearly stated in the Bancassurance
Agreement.
9.0 Claims Handling and Settlement
1. Banks shall not be responsible for claims handling and settlement as these
are the responsibilities of the insurance companies.

759
2. The insurance companies shall be solely responsible for the collection of
necessary documents and information related to claims.
10.0 Consumer Protection Safeguards
1. The referral shall be based on the need of the customers as assessed by the
banks and would be advisory in nature. This shall be made known to the
customer.
2. Banks are prohibited from influencing or compelling customers in any way to
take up insurance products from insurance companies they have
bancassurance referral agreement with.
3. Banks shall not charge their customers service fee, processing fee,
administration charge or any other fee for the referral.
4. Banks shall ensure the confidentiality of consumer data and information.
5. Banks shall ensure that the insurance company has in place an appropriate
complaints redress mechanism.
11.0 Annual disclosure
Banks shall disclose in the notes to the annual financial statements referral
commission earned from bancassurance services.
12.0 Sanction for Non-Compliance
Banks should ensure compliance with these guidelines as any breach of the
Guidelines shall attract sanctions in accordance with Section 64(1) of the BOFIA
2004. In addition, the bank may be prohibited from offering bancassurance
referral services.

Banking Supervision Department


Central Bank of Nigeria
March, 2017

760
09-462-36401 February 13, 2017

BSD/DIR/GEN/LAB/10/009

LETTER TO ALL BANKS

REVIEW OF THE LIMIT ON FOREIGN BORROWING BY BANKS

The recent depreciation in the value of the currency has led to an increase in
the Naira equivalent of foreign currency denominated borrowings by banks. A
major consequence of this development was the inadvertent breach of the
regulatory limit for foreign currency borrowings (75% of shareholders’ funds
unimpaired by losses) by some banks. To address this development, banks are
advised to be guided by the following requirements regarding their foreign
currency exposures:
1. The aggregate foreign currency borrowing of a bank excluding inter-group
and inter-bank (Nigerian banks) borrowing should not exceed 125% of
shareholders’ funds unimpaired by losses.

2. The Net Open Position (Long or short) of the overall foreign currency assets
and liabilities taking into cognizance both on and off-balance sheet items
should not exceed 10% of shareholders’ funds unimpaired by losses using the
Gross Aggregate Method.

In addition, banks are required to institute the following risk mitigation strategies,
among others, around their foreign currency borrowings:

 All borrowings should be hedged using financial market tools acceptable


to the CBN;

761
 Borrowings must be subordinated debts with prepayments allowable only
at the instance of the bank and subject to the prior approval of the CBN;
and

 All debts, with the exception of trade lines, should have a minimum fixed
tenor of 5 years.

Banks are also directed to report their utilisation of all FCY borrowings to the
CBN on a monthly basis.

Please note that these Guidelines take immediate effect.

Thank you.

AHMAD ABDULLAHI
DIRECTOR, BANKING SUPERVISION DEPARTMENT

762
09-462-36401
BSD/DIR/GEN/LAB/10/006

February 6, 2017

LETTER TO ALL BANKS AND THEIR EXTERNAL AUDITORS

APPLICATION OF INTERNATIONAL STANDARD ON AUDITING (ISA) 701


(COMMUNICATING KEY AUDIT MATTERS IN THE INDEPENDENT AUDITOR’S REPORT)
IN THE BANKING SECTOR

The attention of all banks and their external auditors is hereby drawn to the Rule
9 (Application of International Standard on Auditing (ISA) 701 - Communicating
Key Audit Matters in the Independent Auditor’s Report) of the Financial
Reporting Council of Nigeria (FRCN) which requires independent auditors of
listed and unlisted entities to comply with the requirements of ISA 701 for audit
of financial statements for periods ending on or after December 15, 2016 and
June 30, 2017, respectively.
In order to create a level playing field for the implementation of ISA 701 in the
Nigerian banking industry, the CBN has obtained the concurrence of the FRCN
for external auditors of all banks (both listed and unlisted) to comply with the
requirements of the new standard for audits of financial statements for periods
ending on or after December 15, 2016.
Accordingly, the auditors’ reports accompanying audited financial statements
of all banks for the applicable periods should be compliant with ISA 701.
Please be guided accordingly.

Yours faithfully,

K. O. BALOGUN
FOR: DIRECTOR OF BANKING SUPERVISION

763
09-462-36401

BSD/DIR/GEN/IFR/09/130
December 20, 2016

Letter to All Banks and Discount Houses

GUIDANCE NOTE TO BANKS AND DISCOUNT HOUSES ON THE IMPLEMENTATION


OF IFRS 9 (FINANCIAL INSTRUMENTS) IN NIGERIA

We hereby forward the Central Bank of Nigeria’s initial Guidance Note on the
implementation of IFRS 9 (Financial Instruments) in the Nigerian banking sector.

The Guidance Note communicates supervisory expectations for the


implementation of the new standard, especially in areas where banks are
expected to exercise considerable judgment and/or elect to use simplifications
and other practical expedients permitted under the standard. The Note also
specifies information to be submitted to CBN not later than April 30, 2017 on IFRS
9 Implementation Projects while requiring banks to submit monthly status
updates on the implementation projects starting May 2017.

To ensure a seamless implementation, the CBN has established a Project Team


and banks are encouraged to seek clarifications, if any, on the Guidance
Notes by contacting the Project Manager, Mr. C. D. Nwaegerue, via email on
cdnwaegerue@cbn.gov.ng.

Yours faithfully,

‘TOKUNBO MARTINS (MRS)


DIRECTOR OF BANKING SUPERVISION

764
09-462-36401

BSD/DIR/GEN/LAB/09/044

December 20, 2016

UNITED NATIONS SECURITY COUNCIL RESOLUTION 2270 (2016)

You may recall the previous relevant UNSCR , including resolution 825 (1993),
resolution 1540 (2004) resolution 1695 (2006), resolution 1718 (2006), resolution
1874 (2009), resolution 1887 (2009) , resolution 2087 (2013) and resolution 2094
(2013), as well as the statements of its President of October 6, 2006, April 13,
2009 and April 16, 2012 reaffirming that the proliferation of nuclear, chemical &
biological weapons, as well as their means of delivery, constitute a threat to
international peace and security.

The Council recently expressed its gravest concern at the nuclear test
conducted by the Democratic People’s Republic of Korea (DPRK) on January
6, 2016 in violation of resolution 1718 (2006), 1874 (2009), 2087 (2013) and 2094
(2013), and the challenge such a test constitutes to the international efforts
aimed at strengthening the global regime of non-proliferation of nuclear
weapons, and the danger it poses to peace and stability in the region and
beyond.

Consequently, the specific sanctions relating to banking in the UNSCR 2270


(2016) are enumerated in Article 32 to 38 of the Resolution. These Articles
expanded the scope of persons, entities and activities covered by the latest
sanctions such as:

• That the asset freeze imposed by paragraph 8 (d) of the resolution 1718
(2006) shall apply to all the funds, other financial assets and economic
resources outside of the DPRK that are owned or controlled, directly or
indirectly, by entities of the Government of the DPRK or the Worker’s Party
of Korea, or by individuals or entities acting on their behalf or at their
direction, or by entities owned or controlled by them;
765
• That States shall prohibit in their territories the opening and operation of
new branches, subsidiaries, and representatives offices of DPRK banks,
prohibit financial institutions within their territories or subject to their
jurisdiction from establishing new joint ventures and from taking an
ownership interest in, or establishing or maintaining correspondent
relationship with DPRK banks;

• That States shall take the necessary measures to close existing


representative offices, subsidiaries or banking accounts in the DPRK within
ninety days, if the State concerned has credible information that
provides reasonable grounds to believe that such financial services could
contribute to the DPRK’s nuclear or ballistic missile programs, or other
activities prohibited by resolutions; and

• That all States shall prohibit public and private financial support from
within their territories or by persons or entities subject to their jurisdiction
for trade with the DPRK (including the granting of export credits,
guarantees or insurance to their nationals or entities involved in such
trade) where such financial support could contribute to the DPRK’s
nuclear or ballistic missile programs or activities prohibited by resolutions.

In view of the above, you are required to put measures in place to ensure
compliance with the provisions of the UNSCR 2270 (2016).

766
09-462-36401

BSD/DIR/GEN/LAB/09/043

September 5, 2016

LETTER TO ALL BANKS


DISCONTINUATION OF PRUDENTIAL RETURNS RENDITION THROUGH THE
ELECTRONIC FINANCIAL ANALYSIS AND SURVEILLANCE SYSTEM (e-FASS)

You may recall the successful deployment of the FinA application in 2013 and
the various correspondence on how to improve the returns rendition process.

Following the sustained stability of the FinA application, all banks are hereby
advised to discontinue the rendition of prudential returns through the e-FASS
application with effect from October 3, 2016.

However, the rendition of Trade and Exchange-related returns will continue on


the e-FASS application platform until further notice.

Thank you.

Yours faithfully,

A. O. IDRIS
FOR: DIRECTOR OF BANKING SUPERVISION

767
09-46236403/09-46236418

July 28, 2016

REF: BSD/DIR/GEN/LAB/09/038

LETTER TO ALL BANKS

WRITE-OFF OF FULLY PROVIDED NON-PERFORMING LOANS

The CBN acknowledges the request by banks to amend the requirements of


S.3.21 (a) of the prudential Guidelines, which mandates banks to retain in their
records, fully provided Non-performing Loans (NPLs) for a period of one year
before write-off.

The CBN has no intention to repeal the provision of the above mentioned
section of the guidelines. In view of the current macro-economic challenges
however, the CBN hereby grant a one-off forbearance, this year 2016, to banks,
to write-off fully provided NPLs without waiting for the mandatory one year.

TOKUNBO MARTINS (MRS.)


DIRECTOR OF BANKING SUPERVISION DEPARTMENT

768
09-462-36401
BSD/DIR/GEN/LAB/09/037
July 27, 2016

LETTER TO ALL BANKS

PROVISIONING FOR FOREIGN CURRENCY LOANS

In continuation of the efforts to enhance efficiency, facilitate liquidity and


transparency in the foreign exchange market, the CBN issued the Revised
Guidelines for the Operations of the Nigerian Inter-bank Foreign Exchange
Market on June 15, 2016.
One of the effects of the Guidelines, which liberalized the foreign exchange
market, is the increase in balances on foreign currency-denominated loans
and advances in the books of banks, especially facilities that had been fully
provided for under the previous exchange rate regime, but were yet to be
written off, per our extant regulation under Section 3.21(a) of the Prudential
Guidelines for Deposit Money Banks in Nigeria of July 1, 2010.
Consequently, to ensure adequate and proper provisioning, banks are by this
circular, required to ensure that the unprovisioned portion on all such facilities
are fully provided for immediately in the income statements and evidence of
the additional provisions forwarded to the Director of Banking Supervision within
one week of the date of this circular.
Additionally, all foreign currency-denominated loans should be reviewed and
adequate provisioning made on all delinquent ones in line with the Prudential
Guidelines for Deposit Money Banks in Nigeria of July 1, 2010.

Please be guided accordingly.

TOKUNBO MARTINS (MRS.)


DIRECTOR OF BANKING SUPERVISION

769
09-462-36401

BSD/DIR/GEN/LAB/09/035

July 12, 2016

LETTER TO ALL DEPOSIT MONEY BANKS AND DISCOUNT HOUSES

MANDATORY REGISTRATION AND LISTING OF COMMERCIAL PAPERS


Further to the Guidelines on the Issuance and Treatment of Bankers
Acceptances (BAs) and Commercial Papers (CPs) issued by the Central Bank
of Nigeria (CBN) on November 18, 2009, banks are hereby informed that they
are only permitted to deal in CPs that are registered on Authorised Securities
Exchanges with effect from July 11, 2016.
Accordingly, banks are prohibited from transacting in CPs (that are not quoted
or intended for quotation on an Authorised Securities Exchange), in any
capacity whatsoever, including but not limited to as Issuer; Guarantor; Issuing,
Placing, Paying and Collecting Agent (“IPPCA”), Collecting and Paying Agent
(“CPA”); etc., from the effective date.

The CBN having approved the quotation rules of FMDQ OTC Securities
Exchange, has cleared it for the quotation of CPs in Nigeria. Deposit Money
Banks and Discount Houses would be updated on subsequent clearance of
additional Securities Exchanges from time to time.
Please note that this letter supersedes our letter dated July 11, 2016 on the
same subject.

Yours faithfully,

A. O. IDRIS
FOR: DIRECTOR OF BANKING SUPERVISION

770
09-462-36401
09-462-36418

June 28, 2016

BSD/DIR/GEN/LAB/09/033

LETTER TO ALL BANKS

REVIEW OF OPERATIONAL GUIDELINES FOR BLACKLISTING

Following the spate of petitions for the reversal of blacklisted staff by banks due
to failure to comply with the process of investigation and granting of fair
hearing to erring staff before forwarding their names for blacklisting, the Central
Bank of Nigeria (CBN) has considered it imperative to issue the “Review of
Operational Guidelines for Blacklisting” to the industry.

The Guidelines provide the procedures for forwarding names to the CBN for
inclusion in the Register of terminated, dismissed or convicted staff of banks and
other financial institutions on the grounds of fraud, forgery and dishonesty.
The Guidelines takes immediate effect.

Please be guided accordingly.

Yours faithfully,

TOKUNBO MARTINS (MRS)


DIRECTOR OF BANKING SUPERVISION

771
REVIEW OF OPERATIONAL GUIDELINES FOR BLACKLISTING

1.0 Preamble
Pursuant to the powers granted under “Banks and Other Financial Institutions
and Central Bank of Nigeria Acts,” these guidelines are issued to provide a
guide to the procedure for forwarding names to the Secretary of the Bankers’
Committee for inclusion in the Register of Terminated, Dismissed or Convicted
staff of Banks and Other Financial Institutions on the grounds of fraud and
dishonesty. It had been observed that details of cases rendered in the related
returns were no longer limited to cases of fraud and forgeries as originally
intended, but had been erroneously extended to include cases such as
lateness to work, abandonment of duty, etc.
The inclusion of these other cases negates the intent and basis for blacklisting.
“Blacklisting” is in furtherance to the requirements and provisions of Section 48,
sub-section 4 of BOFIA CAP B3, LFN 2004 which states: “Any person whose
appointment with a bank has been terminated or who has been dismissed for
reasons of fraud, dishonesty or convicted for an offence involving dishonesty or
fraud shall not be employed by any bank in Nigeria”.
The Central Bank of Nigeria (CBN) in recent times has been inundated with
petitions for the reversal of names from the “blackbook”. This emanates from
failure by the Deposit Money Banks (DMBs) to comply with the process of
thorough investigation and granting of fair hearing to erring staff before a final
decision is taken to either dismiss or terminate the employment of such staff.
These guidelines are therefore issued in order to give clarity to the process of
rendering the above returns.
2.0 Introduction
Trust is the cornerstone upon which banking business is conducted. Any act of
malfeasance taken by a bank or its staff that would erode the trust of the
public is therefore of prime concern to the regulators and other stakeholders.
Due to the nature of banking operations, banks are frequent targets for frauds
from within and outside the system. Despite the various Risk Management
policies and internal control processes/procedures that have been put in place
to mitigate against such incidents, the occurrence and attempts of fraud have
not been abated in the banking system as evidenced by the monthly returns
on fraud and forgeries submitted by the banks to the CBN.
Risk management systems and processes are only as good as the people that
operate them, it is therefore imperative that only persons of integrity and
proven character are employed and retained in the financial industry.

772
It was on this premise that the Bankers’ Committee at its meeting of December
14, 1982 decided that a register be kept of staff dismissed on grounds of fraud
and acts of dishonesty.
Thus the CBN maintains a register called the “blackbook” containing names
and details of such staff that were dismissed or terminated, in line with Section
48 (4) of BOFIA 2004.
Every individual whose name is listed in the “blackbook” is barred from holding
any employment within the financial system in Nigeria.
3.0 Objective of the Blackbook
The process of blacklisting is intended to achieve the following objectives:
• To prevent discredited and fraudulent staff from being recycled within
the financial system.

• That only staff with credible references are employed within the financial
system.

• To serve as deterrent to other staff from committing frauds/dishonest acts.

• To hold accountable individuals that fail to meet the expected standards


of integrity and professionalism required of bankers.

• To ensure operational compliance by banks and other financial


institutions with Section 48 (4) of BOFIA LFN CAP B3 2004.
4.0 Conditions for Blacklisting
The blacklisted person is anyone who has been terminated or dismissed strictly
as a result of:
• Fraud

• Act of dishonesty

• Conviction
5.0 Initiation of Blacklisting Action
• A disciplinary committee must have conducted a thorough
investigation.

• The Disciplinary committee must have established that the staff


involved had committed an act of fraud and dishonesty.

The staff must have been granted Fair hearing through the Disciplinary
committee.
The decision of the committee must be communicated to the staff involved.

773
6.0 The Fair Hearing Process
Upon verification of the existence of grounds for blacklisting, the financial
institution shall notify the staff in writing, informing him that:
a) A complaint for blacklisting has been filed against him, stating the grounds
for such and the consequences of being blacklisted;

b) The staff must be given the opportunity to present documentary or verbal


testimony that may affect the decision;

c) The final decision of the Disciplinary Committee must be communicated to


the staff.
7.0 Returns to the Cbn
The financial institution shall forward the returns on dismissed or terminated staff
(including temporary and contract) on grounds of frauds and forgeries to the
CBN along with a declaration from the bank that:
It followed due process before arriving at the decision
And signed by the Managing Director.
8.0 Contents of the Returns
The return shall clearly state:
i. The names of the person(s) involved (which should be written in full without
any abbreviation),
ii. Date of birth
iii. Local Government of Origin
iv. State of Origin
v. Gender
vi. Offense committed.
vii. Designation/ Status
viii. Unique identification details i.e. international passport, national identity, BVN
etc.
Along with the monthly returns, documents of the investigation, disciplinary
committee’s final decision must be submitted.
9.0 Blacklisting Action by the Cbn
Upon receipt of the returns, the CBN would:
Review the documents and establish that due process was actually
followed.
The Head, Bankers’ Committee upon confirmation shall subsequently
blacklist the persons.
10.0 Delisting
10.1 A blacklisted person CAN ONLY be delisted upon:
774
CBN’s issuance of a Delisting Order consequent upon a Court’s Order or

A request from the financial institution following CBN’s concurrence to the
motion for reconsideration.
10.2 If the CBN determines that due process was not followed or the offence
listed is not a blacklistable offence, the CBN will sanction the erring
financial institution for not adhering to the provision of this guideline as
empowered by Section 60 of BOFIA.
10.3 Banks and other financial institutions should note that it is their responsibility
to report names of staff terminated/dismissed on grounds of Fraud and
Forgeries to the CBN and are cautioned against the dangerous practice
of advising such staff to “simply resign”. If discovered, the CBN will regard
this with even higher severity and the financial institution be sanctioned
accordingly.
11.0 Terminations and Dismissals for Other Offences
Banks and Other Financial Institutions are required to continue reporting
terminations and dismissals for miscellaneous offences other than fraud and
dishonesty. Staff in this category are not barred from future employment in the
financial services industry, but full disclosure will be made to prospective
employers.
12.0 Motion for Reconsideration
12.1 A motion for reconsideration may be filed with the CBN, when:
a) There is new evidence or facts which were not made available during the
investigation and may probably alter the result of the investigation;

b) Based on the above, the Disciplinary Committee of the affected institution


may be asked to review the case;

c) After the review, if it is established that the staff was not guilty of fraud or acts
of dishonesty, the institution would initiate the delisting process by writing to
the CBN to delist such a person from its blackbook; and

d) The Institution is therefore expected to forward the full report of its


investigation to the CBN for review after initiating the delisting process.
12.2 Without prejudice to the above, the Governor of CBN shall decide after
the review of the request if the individual should be delisted or not and the
decision shall become final.
12.3 After the delisting has taken place, the CBN would then communicate its
action to both the financial institution and the delisted person.

775
13.0 COMMENCEMENT OF GUIDELINES
These guidelines or any amendments made thereto shall take immediate
effect.

GLOSSARY

1. FRAUD:

The Black’s Law Dictionary, 13th Edition defined fraud to mean “a knowing
misrepresentation of the truth or concealment of a material fact to induce
another to act to his or her detriment”.

2. DISHONESTY:

Oxford Online British and world English Dictionary defines dishonesty as


“behaving or being prone to behaving in an untrustworthy, deceitful, insincere
way or intending to mislead or cheat”.

776
09-462-36401

BSD/DIR/GEN/LAB/08/052

November 11, 2015

LETTER TO ALL BANKS

THE NEED FOR BANKS TO BUILD ADEQUATE LOAN LOSS RESERVE

In recent times, the adverse macro-economic environment has been a source


of concern in the financial sector. It is however comforting to know that the
fiscal and monetary authorities are deploying remedial policy measures to
ameliorate these challenges.

Accordingly, in line with the provision of section 12.14 of the Prudential


Guidelines for Deposit Money Banks 2010 (Regulators Power over Adequacy of
Provisioning), banks are required to immediately increase the general provision
on performing loans to 2% in the prudential review of their credit portfolios. This is
an attempt to ensure that adequate buffers against unexpected loan losses
are built up.

This directive is without prejudice to the relevant provisions of the International


Financial Reporting Standards.

Yours faithfully,

TOKUNBO MARTINS (MRS.)


DIRECTOR OF BANKING SUPERVISION

777
09-462-36418

BSD/DIR/GEN/LAB/08/048

September 7, 2015

LETTER TO ALL BANKS

DEADLINE FOR TRANSFER OF FEDERAL GOVERNMENT FUNDS TO TREASURY SINGLE


ACCOUNT

The Federal Government of Nigeria recently gave a deadline of September


15th 2015 for all balances/receipts due to the Government or its agencies to be
paid into the Treasury Single Account (TSA) maintained with the Central Bank of
Nigeria.
Banks are therefore directed to ensure that all such funds are remitted in line
with the directive on or before the given deadline.

Please note that the Central Bank of Nigeria will impose severe sanctions on
any bank that fails to comply on or before the deadline of 15th September,
2015.

Yours faithfully,

‘Tokunbo Martins (Mrs.)


Director of Banking Supervision

778
09-46236403

June 30, 2015

BSD/DIR/GEN/LAB/08/032

LETTER TO ALL BANKS

RE: PUBLIC SECTOR REVENUE ACCOUNTS WITH DEPOSIT MONEY BANKS

Our circular referenced BSD/DIR/GEN/LAB/08/003 dated January 14, 2015,


refers.
We have observed with dismay that most banks are yet to comply fully with the
provisions of the circular directing banks to transfer ALL revenue accounts
collected on behalf of the Federal Government and its Agencies to CBN
account within 24 hours of the value date of such collections with effect from
February 28, 2015.

Banks are therefore, by this circular, directed to ensure strict compliance with
effect from the date of this circular, failing which severe financial and
administrative sanctions will be imposed. For emphasis, June 30, 2015 shall be
the FINAL deadline.
Please be guided accordingly.

A.O. IDRIS
For: DIRECTOR OF BANKING SUPERVISION

779
09-46236403

BSD/DIR/GEN/BAS/08/031

June 24, 2015

LETTER TO ALL BANKS AND DISCOUNT HOUSES

REVISED GUIDANCE NOTES ON BASEL II IMPLEMENTATION AND THE REPORTING


TEMPLATE FOR CAPITAL ADEQUACY RATIO

Following the review of comments from the industry on the existing Guidance
Notes and the Reporting Template on the implementation of Basel II in Nigerian
Banking Industry, the CBN hereby issues Revised Guidance Notes on Regulatory
Capital, Credit Risk, Market Risk, Operational Risk, Pillar 3 Disclosure Requirement
and a new Reporting Template for the monthly submission of Capital
Adequacy Ratio. These Revised Documents are now available on the CBN’s
website.

Accordingly, all banks are required to adopt the revised documents and re-
submit their Capital Adequacy Ratio for three months from April to June 2015 to
bsdreturns@cbn.gove.ng on or before July 31, 2015.

In addition, all banks are required to note the amendment in Section 2.5 of the
Revised Guidance Notes on Pillar 3 Disclosure Requirement which specifies the
medium and frequency of disclosure for compliance.

Thank you

Yours faithfully,

‘TOKUNBO MARTINS (MRS.)


DIRECTOR OF BANKING SUPERVISION

780
CENTRAL BANK OF NIGERIA

Guidance Notes on Pillar III

Market Discipline

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1.0 Introduction

The aim of Pillar III is to promote market discipline by allowing market


participants to access information on risk exposure and risk management
policies and procedures through disclosures. This document sets out the
disclosure requirements with respect to procedure, frequency and content of
information to be disclosed.
1.1 General Disclosure Principle

Banks should have a formal disclosure policy approved by the board of


directors that addresses the bank’s approach for determining what disclosures
it will make and the internal controls over the disclosure process. In addition,
banks should implement a process for assessing the appropriateness of their
disclosures, including validation and frequency of them. (BCBS June 2006, Par
821)

2.0 Disclosure Requirements

2.1 Organization of Information and Limitation of Obligations

The information whose disclosure is governed by these regulations is listed in


Annex A.

2.2 Content and Procedures for Disclosing Information

• Banks shall disclose information relating to their core activities, risks profiles
and methodologies used.
• In order to ensure the comprehensiveness of disclosures, references to other
sources is not allowed.
• Banks are expected to make adequate disclosure consistent with their
organizational complexity and the type of business they engage in, taking
into account their internal reporting systems to the board and
management.

2.3 Disclosure Eligibility Requirements

 For banks that adopt internal systems to calculate capital requirements for
credit or operational risks and for those using credit risk mitigation
techniques, compliance with specific disclosure requirements (Disclosure
Eligibility Requirements) shall be a necessary condition for the recognition of

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such approach and the effects of such techniques for regulatory capital
purposes. These disclosure requirements are marked by an asterisk in the
annexed tables.
2.4 Derogations from Disclosure Requirements

• Banks may omit the disclosure of information that is not considered material,
with the exception of information that represents a disclosure eligibility
requirement.
• In exceptional cases, banks may omit the disclosure of proprietary or
confidential information (including information that represents a disclosure
eligibility requirement), provided that they specify the information that is not
disclosed and the reasons for nondisclosure, and publish more general
information on the matter in question.
2.5 Medium and Frequency of Disclosure
Information on qualitative and quantitative disclosures shall be made through
banks’ website and in printed form to the CBN.

• Banks shall make adequate pronouncement on the means of disclosure in


their financial statements.
• Disclosures shall be published on a bi-annual basis and within thirty days of
publishing the financial statements. However, for banks with stable
Composite Risk Rating (CRR) of
“Low” and “Moderate” other than domestic systemically important banks,
annual reporting will be acceptable.
• Domestic systemically important banks may be required to publish
information on a more frequent basis in recognition of their level of business,
international affiliations and financial sectors dynamics.

2.6 Organization and Controls

• Banks shall adopt suitable organizational arrangements to ensure the


compliance with disclosure requirement under these regulations. Board and
management shall independently assess and verify the quality of
information. The solutions adopted shall form part of the bank’s system of
internal controls.
• Within this framework, banks shall establish appropriate specific procedures
for verifying disclosures that are yet to be subjected to verification by
external auditors or the CBN.
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Definitions of Terms

For the purposes of these regulations:

Confidential information shall mean information in respect of which the bank


has obligations to customers or other counterparty relationships binding it to
confidentiality.
Material information shall mean information which if omitted or misstated could
change or influence the assessment or decision of a user relying on such
information for the purpose of making economic decisions;
Proprietary information shall mean information which, if shared with the public,
would undermine the bank’s competitive position. It may include information
regarding products or systems which, if shared with competitors, would render
the bank’s investment therein less valuable;

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ANNEX A

Table 1: General Requirements

Description of disclosure

Qualitative For each risk category (including those considered in the


disclosure following tables), banks shall disclose risk management
objectives and policies, including:
• The strategies and processes for managing such
risks;
• The structure and organization of the relevant risk
management function;
• The scope and nature of risk measurement and
reporting systems;
• The policies for hedging and mitigating risk as well
as strategies and processes for monitoring their
continuing effectiveness.

Table 2: Scope of Application


Description of disclosure

Qualitative (a) The name of the bank to which the disclosure


disclosure requirement applies.
(b) An outline of differences on the basis of consolidation for
accounting and prudential purposes, with a brief
description of the entities within the group which:
i) Are fully consolidated; ii) Are
proportionally consolidated; iii) Are
deducted from the regulatory
capital; iv) Are neither consolidated
nor deducted.
(c) Any current or potential legal or substantive impediment
to the prompt rapid transfer of regulatory capital or funds
within the group.
(d) For groups, any reduction in individual capital
requirements applied to the parent entity and the
Nigerian subsidiaries.
785
Quantitative (e) The names of all subsidiaries excluded from consolidation
and aggregate amount of their capital deficiencies with
respect to any
disclosure mandatory capital requirements.

Table 3: Regulatory Capital Structure


Description of disclosure

Qualitative (a) Summary information on the main terms and conditions


disclosure of the features of capital items, especially hybrid capital
instrument and subordinated debt capital instruments.
(b) The total amount of Tier 1 capital, with separate
disclosure of individual positive and negative items
especially hybrid capital instruments.
(c) The total amount of Tier 2 capital

(d) Other deductions from regulatory capital, with separate


disclosure – for banks using one of the IRB systems – of
any negative differences between total value
adjustments and expected loss.
Quantitative (e) Total regulatory capital.
disclosure

Table 4: Capital Adequacy


Description of disclosure

Qualitative (a) Summary description of the bank’s approach to assessing


disclosure the adequacy of its internal capital to support current
and future activities.
Quantitative (b) For banks calculating credit risk-weighted exposure
disclosure amounts using the standardized approach, the capital
requirement for each of the exposure classes.

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(c) For banks calculating credit risk-weighted exposure
amounts using the IRB approach, the capital requirement
for each of the exposure classes envisaged in these
regulations.
For retail exposures, separate disclosure shall be made
for each of the following categories: “exposures secured
by residential property”, “qualifying revolving retail
exposures” and “other retail exposures”.
For equity exposures, disclosure shall be made for:
i) Each of the methods envisaged (simple risk weight
approach, PD/LGD approach, internal models
approach); in the case of the simple risk weight
approach, separate disclosure shall be made for the
capital requirement for:
a) exchange-traded exposures;
b) private equity exposures in sufficiently diversified
portfolios; c) other exposures;
ii) Exposures subject to supervisory transition
regarding capital requirements; iii) Exposures subject to
grandfathering provisions regarding capital
requirements.
(d) Capital requirements for market risks, with separate
disclosure for:
- Assets included in the supervisory trading portfolio:
i) Position risk with specific evidence towards
securitization; ii) Settlement risk - Entire balance
sheet: iii) Foreign exchange risk; iv) Commodity
risk;
(e) Capital requirement for counterparty risks.

(f) Total and Tier 1 capital ratios.


Table 5: Credit risk: general disclosures for all banks
Description of disclosure

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Qualitative (a) In addition to the general disclosure indicated in Table 1,
disclosure the following information shall be disclosed for the
exposure to credit risk and dilution risk: 1

i) The definitions of “past due” and “impaired” loans used


for accounting purposes;2

ii) A description of methods adopted for determining


value 2adjustments 3.
Quantitative (b) Total and average gross credit risk exposures 4 over the
disclosure period, 5 with separate disclosure by major types of
exposure and counterparty. 6 The amount shall be net of
permitted accounting offsets, regardless of the effects of
credit risk mitigation techniques.
(c) Distribution of exposures by significant geographical
areas, broken down by material exposure classes and
further detailed if appropriate.
(d) Distribution of exposures by industry or counterparty type,
broken down by type of exposure and further detailed if
appropriate.
(e) Distribution by residual contractual maturity 7 of the entire
portfolio, broken down by type of exposure and further
detailed if appropriate.

1 Dilution risk shall mean the possibility that the amount owed by the assigned obligor in respect of purchased receivables is reduced through

credits or allowances arising from returns, disputes regarding product quality, promotional or other discounts.
2 Banks shall indicate that the definition used is the same as the supervisory definition.
3 Value adjustments include specific and portfolio allowances as well as provisions to cover guarantees
issued or commitments undertaken with third parties.
4 Where the period-end position is representative of the bank’s risk exposure during the period, the

average gross exposures need not be provided.


5 Where average amounts are disclosed in accordance with an accounting regulations or other

requirement which specifies the calculation method to be used, that method shall be followed.
Otherwise, the average exposures shall be calculated using the most frequent interval that the bank’s
systems generate for management, prudential or other reasons, provided that the resulting averages are
representative of the bank’s operations. The basis used for calculating averages shall be specified only if
not on a daily average basis.
6 This breakdown could be that applied under accounting rules.

7 It is possible to use the same maturity groupings envisaged by accounting regulations.


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(f) By significant industry or counterparty type, the
amount of: i) Impaired and past due exposures,
shown separately; ii) Total value adjustments; iii)
Value adjustments during the period.

(g) By significant geographical areas, the amount of:

1) impaired and past due exposures, shown


separately;

2) value adjustments for each geographical


area, where possible.
8

(h) Reconciliation of changes in value adjustments for


impaired exposures, show separately for specific and
portfolio value

adjustments. The information shall include:


i) A description of the methods used to calculate the
value adjustments; ii) The opening balance of total value
adjustments; iii) Charge-offs taken during the period; iv)
Value adjustments made during the period; v) Amounts
reversed during the period; vi) Any other adjustment, for
example exchange rate differences, business
combinations, acquisitions and disposals of subsidiaries,
including transfers between value adjustments; vii) The
closing balance of total value adjustments.
Charge-offs and recoveries recorded directly to the
income statement should be shown separately.

8 The portion of portfolio value adjustments that is not allocated to a specific geographical area shall be

disclosed separately.
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Table 6: Credit risk: disclosures for portfolios treated under the standardized
approach, specialized lending and equity exposures treated under IRB
approaches
Description of disclosure

Qualitative (a) Banks calculating credit risk-weighted exposures using


disclosure the standardized approach shall provide the following
information for each exposure class:
i) Names of the nominated external credit
assessment institutions (ECAIs), and the reasons for any
changes;
ii) The exposure classes for which each ECAI is used;
iii) A description of the process used to transfer the
issuer or issue credit ratings to comparable assets not
included in the supervisory trading book.
Quantitative (b) Banks calculating credit risk-weighted exposures using
disclosure the standardized approach shall provide, for each
exposure class, the exposure values, with and without
credit risk mitigation, associated with each credit quality
step as well as the exposure values deducted from the
regulatory capital.
(c) For exposures subject to the supervisory risk weights in IRB

approaches (specialized lending – equity exposures


under the simple risk weight method), the exposures
assigned to each credit risk class shall be provided.

Table 7: Credit risk: disclosures for portfolios treated under IRB approaches (*)
Description of disclosure
Qualitative (a) Authorization from the CBN to use the approach selected
disclosure and/or to use phased roll-out.

790
(b) Explanation of:
i) The structure of internal rating systems and relation
between internal and external ratings; ii) The use of
internal estimates for purposes other than the calculation
of risk-weighted exposure amounts in accordance with
IRB approaches; iii) The process for managing and
recognizing credit risk mitigation techniques; iv) The
control and review mechanisms for the rating systems,
including discussion of independence and
accountability.
(c) Description of the internal ratings process, provided
separately for the following exposure classes:
i) Central governments and central
banks; ii) Banks and other financial
institutions;
iii) Non-financial institutions, including SMEs, specialized
lending and purchased receivables; iv) Retail exposures,
for each of the categories envisaged (exposures secured
by residential property; qualifying revolving retail
exposures; other retail exposures); v) Equities. 9
The description shall include:

• The types of exposure included in the exposure


classes;
• The definitions, methods and data for estimation
and validation of PD and, where applicable, LGD
and the credit conversion factors, including
assumptions employed in the derivation of these
variables; 10
• The description of deviations from the definition of
default as permitted by prudential regulations,

9 Equities shall only be disclosed here as a separate class where the bank uses the PD/LGD approach
for equities held in the banking book.
10 Banks shall provide a general overview of the system approach, describing definitions of the variables,

and methods for estimating and validating those variables set out in the quantitative risk disclosures.
This should be done for each of the classes indicated in the text. Banks should draw out any significant
differences in the approaches used to estimate these variables within each class.
791
where these are determined to be material, also
indicating for each class the main categories of
exposure affected by such deviations. 11

Quantitative (d) Exposure values for each exposure class.


disclosure: Exposures towards central governments and central
risk banks, banks and other financial institutions, and
assessment corporates, where the banks use the IRB advanced
approach, must be shown separately from exposures for
which the banks do not utilise this approach.
(e) For each exposure class – central governments and
central banks; banks and other financial institutions;
corporates; equities – provide the following information,
with a sufficient breakdown between PD categories
(including default) to allow a significant differentiation of
credit risk: 12

i) Total exposures (for exposures towards central


governments and central banks, banks and other
financial institutions, and corporates, the sum of
outstanding loans plus unutilised margins; for equities,
outstanding amount); ii) For banks on the IRB advanced
approach, exposure-weighted average LGD
(percentage);

11 Banks shall only describe the main areas where there has been material divergence from the
reference definition of default such that it would affect the reader’s ability to compare and understand the
disclosure of exposures by PD grade.
12 The PD, LGD and EAD disclosures below shall reflect the effects of collateral, netting and

guarantees/credit derivatives, where recognized. Disclosure of each PD grade should include the
exposure-weighted average PD for each grade. Where banks are aggregating PD grades for the
purposes of disclosure, this shall be a representative breakdown of the distribution of PD grades used in
the IRB approach.
792
iii) Exposure-weighted average risk-weight; iv) For banks
on the IRB advanced approach, the amount of unutilised
margins and relative exposure-weighted average EAD. 13

(f) For retail exposures, provide for each category


envisaged:
i) The information referred to in point e) (if applicable, on
a pool basis) or ii) Analysis of exposures (if applicable, on
a pool basis) against a sufficient number of expected loss
(EL) grades to allow for a meaningful differentiation of
credit risk.
Quantitative (g) Actual value adjustments (for example, charge-offs and
disclosure: specific write-downs) in the preceding period for each
historical exposure class (showing each retail exposure category
results separately) and how this differs from previous years.
(h) Discussion of the factors that impacted on the loss
experience in the preceding period (for example, has
the bank experienced higher than average default rates,
or higher than average LGDs and credit conversion
factors).
(i) Banks’ estimates against actual outcomes over a longer
period. This should at least include information on
estimates of losses against actual losses in each exposure
class, over a period sufficient to allow for a meaningful
assessment of the performance of the internal rating
processes for each exposure class (for retail exposures,
the information must be given for each of the categories
provided). Where necessary, banks should further
decompose this to provide analysis of PD and, for banks
on the advanced IRB approach, LGD and credit
conversion factor outcomes against estimates provided.
(*) Eligibility requirements for the use of particular instruments or methodologies

13 Banks shall only provide one estimate of EAD for each exposure class. However, where banks believe it is
helpful, in order to give a more meaningful assessment of risk, they may also disclose EAD estimates across a
number of EAD categories, against the undrawn exposures to which these relate.
793
Table 8: Risk Mitigation Techniques 14(*)
Description of disclosure
Qualitative (a) Policies and processes for, and an indication of the extent
disclosure to which the bank makes use of, on- and off-balance
sheet netting.
(b) Policies and processes for collateral evaluation and
management.
(c) A description of the main types of collateral taken by the
bank.
(d) The main types of guarantor and credit derivative
counterparty and their creditworthiness.
(e) Information about market or credit risk concentrations
under the credit risk mitigation instruments used.
Quantitative (f) For banks calculating credit risk-weighted exposures in
disclosure accordance with the standardized or foundation IRB
approaches, separately for each exposure class, the
total exposure value (if applicable, net of onbalance
sheet netting and off-balance sheet netting agreements)
that is covered by financial collateral and other eligible
collateral, after application of haircuts.15
(g) For banks calculating credit risk-weighted exposures
according to the standardized or foundation IRB
approaches, separately for each exposure class, the
total exposure (if applicable, net of on-balance sheet
offsets and off-balance sheet offsetting agreements)
covered by guarantees or credit derivatives. For equities
such disclosure requirement applies to each method
(simple risk weight method, PD/LGD approach, internal
models method).
(*) Disclosure requirements for banks using credit risk mitigation techniques.

14Credit derivatives treated as part of synthetic securitization transactions should


be excluded from CRM disclosures and included within those relating to
securitizations.
15If the comprehensive approach is applied, where applicable, the total

exposure covered by collateral after haircuts should be reduced further to


remove any positive adjustments that were applied to the exposure.

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1.1 Table 9: Counterparty Risk16
Description of disclosure
Qualitative (a) Description of:
disclosure i) The method used to assign the operating limits defined
in terms of internal capital and credit for counterparty
credit exposures; ii) Policies relating to guarantees and
assessments concerning counterparty risk; iii) Policies with
respect to wrong-way risk exposures; iv) The impact in
terms of the amount of collateral that the bank would be
required to provide given a credit rating downgrade.

Quantitative (b) i) Gross positive fair value of contracts; ii)


disclosure Reduction in gross positive fair value due to
netting; iii) Positive fair value net of netting
agreements; iv) Collateral held;
v) Positive fair value of derivative contracts net of netting
and collateral agreements; vi) Measures of EAD, or value
of the exposure to counterparty risk, calculated in
accordance with the methods used (internal,
standardized, mark-to-market models) vii) Notional
amount of credit derivative hedges for counterparty risk;
viii) Distribution of positive fair value of contracts by type
of underlying;17 ix) Notional amount of credit derivatives
in the banking book and the supervisory trading book,
divided by product type,18 further broken down
according to the role played by the bank (buyer or seller
of protection) within each product group;
x) Estimated alpha if the bank has received authorization
from the CBN to estimate alpha.

16Applicable to OTC derivatives (including credit derivatives) as well as


securities financing transactions(repurchase agreements, securities or
commodities lending and borrowing transactions, re-margining transactions
based on securities or commodities, long settlement transactions).

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17For example: interest rate contracts, FX contracts, equity contracts, credit
derivatives, commodity/other contracts. 18For example: credit default swap,
total rate of return swap.

Table 10: Securitization Transactions 14


Description of disclosure
Qualitative (a) i) Description of the bank’s objectives with regard to
disclosure securitization activity; ii) For positions towards re-
securitizations and third parties, the type of risks in terms
of:
• level of subordination of position towards the
underlying securitization, or underlying assets
• these positions towards the securitization
iii)Description of procedures implemented to
monitor changes in credit and market risks positions
towards the securitization (e.g. the way in which
the performance of the underlying asset affects
those positions) and towards the re-securitization;
iv) Description of the cover policies of the risks
associated with securitization and re-securitization
positions, including an indication of the main
guarantee of security for each type of risk;

14 Except where otherwise specified, this information must be provided separately for positions in the
trading book for supervisory purposes and for those in the banking book. The reference to securitization
must be understood as including resecuritizations. Where the distinction is specified, the information
must be provided separately for securitizations and for resecuritizations. Credit derivatives that are
treated, for the purposes of these regulations, as part of synthetic securitization structures shall be
excluded from the credit risk mitigation disclosures and included within those relating to securitization.

796
(b) Summary of bank’s accounting policies for securitization
activities, specifying:
i) Whether the transactions are treated as sales or
financings; ii) Recognition of gain on sale; iii) Key
assumptions for valuing securitization exposures;
iv) Treatment of synthetic securitizations, if this is not
covered by other accounting policies (for example, on
derivatives).
v) The valuation criteria of awaiting securitization
assets and if they are allocated or not in the trading book
for supervisory purposes; vi) the accounting policies
relating to arrangements that could require the bank to
provide financial support for securitised assets (eg.
liabilities in the financial statements).

(c) Names of ECAIs used for securitizations and the types of


exposure for which each agency is used.
(d) The description of the ‘Internal Assessment Approach’,
including:
• The internal assessment process;
• The relation between internal assessment and
external ratings;
• The use of the internal evaluation for purposes other
than the calculation of capital requirements;
• The control mechanisms of the internal assessment
process including an independence,
accountability, and internal assessment process
review;
• The exposure types to which is applied the internal
assessment process;
• The stress factors used to determine the levels of
credit enhancement, by type of exposure.
(e) The explanation of significant changes to any of the
quantitative information referred to in points f) to h) since
the last reporting period.

797
Quantitative (f) state the following information broken down by exposure
disclosure type:
i) Total amount of securitization transactions to be carried
out by the bank as originator, divided into traditional and
synthetic, and those for which the bank acts only as a
promoter; ii) Total amount of securitization positions in
both balance sheet and off-balance sheet;
iii) Total amount of awaiting securitization assets; iv) The
amount of securitization positions deducted from
regulatory capital or subject to risk weight of 1250%;
v) Summary of the securitization activity in the period as
originator, including the amount of the underlying assets,
as well as the profits or losses from the sale.
(g) i) Total amount of own securitization positions or of third
party and associated capital requirements, broken down
between securitization positions and positions towards re-
securitizations, and further broken down into a
meaningful number of risk weight bands or capital
requirements for each of the used approaches
(standardized approach,
Supervisory Formula, etc.).
ii) Total amount of own re-securitization positions or of
third party, divided as follows:
• By positions covered by credit risk mitigation (CRM)
and positions not covered;
• By creditworthiness or by name of any guarantor.
(h) Only for positions allocated in the banking portfolio and
securitized assets by the bank, the underlying assets
impaired and the losses recognized by the bank during
the reporting period, both broken down by exposure
type.

798
Table 11: Market risks: disclosures for banks using the internal models approach
(IMA) for position risk, foreign exchange risk and commodity risk
Description of disclosure
Qualitative (a) For each portfolio covered by the IMA: i) Characteristics
disclosure of the models used; ii) A description of stress testing
applied to the portfolio; iii) A description of the approach
used for backtesting and/or validating the accuracy and
consistency of the internal models and modeling
processes.

(b) The scope of acceptance by the CBN regarding the use


of the internal models approach.
(c) Description of the level of conformity with the rules
governing the systems and controls used to ensure
prudent and reliable assessments of the positions
included in the supervisory trading portfolio, as well as the
methods used to ensure compliance with such rules.
Quantitative (d) The maximum, minimum and average value in the
disclosure reference period and the value at end of the period: i)
Daily VaR data; ii) Stressed VaR data; iii) The capital
requirements referred to in point (a). ii).

(e) For each sub-portfolio the capital requirements referred


to in point
(a).ii), together with the weighted average liquidity
horizon for the nominal value of the exposure.
(f) The comparison of the daily closing VaR with the daily
changes in the actual value of the portfolio, it must show
the reasons behind the changes which have occurred
during the reporting period.

1.2 Table 12: Operational risk

Description of disclosure
Qualitative (a) A description of the approach used for operational risk
disclosure capital assessment.
799
(b) A description of the advanced measurement
approaches (AMA), if used by the bank, including a
discussion of relevant internal and external factors
considered in the approach adopted.
In case of partial use of the AMA, the scope and
coverage of the different approaches used should be
indicated.
(c)* For banks using the AMA, a description of the use of
insurance for the purpose of mitigating operational risk.
(*) Eligibility requirements for the use of particular instruments or methodologies.

1.3 Table 13: Equity exposures: disclosures for banking book positions
Description of disclosure
Qualitative (a) i) Differentiation between exposures according to the
disclosure objectives pursued (for example, capital gains,
relationships with counterparties, strategic reasons); ii)
Description of accounting techniques and valuation
methodologies used, including key assumptions and
practices affecting valuation, as well as significant
changes in these practices.
Quantitative (b) Value disclosed in the balance sheet and fair value; in
disclosure addition, for listed securities, a comparison with market
quotation where it is materially different from fair value.
(c) Type, nature and amounts of exposures, distinguishing
between: i) Exposures traded in the market; ii) Exposures
in private equity instruments held in sufficiently diversified
portfolios; iii) Other exposures.

(d) Total cumulative realised gains and losses arising from


sales and liquidations in the reporting period.

800
(e) i) Unrealised gains/losses (recognised in the balance
sheet but not taken to the income statement); ii) Amount
of the above gains/losses included in Tier 1 or Tier 2
capital.

1.4 Table 14: Interest rate risk on positions in the banking book
Description of disclosure
Qualitative (a) i) Nature of the interest rate risk;
disclosure ii) Key assumptions used in measuring and managing
risk, particularly as regards loans with prepayment option
and the behaviour of non-maturity deposits; iii)
Frequency of measurement of this type of risk.
Quantitative (b) Consistently with the method used by management to
disclosure measure interest rate risk, the increase/decline in
earnings or economic capital (or other relevant
indicators) – broken down by main currencies 15 – in case
of upward or downward rate shocks.

15 Non-material currencies shall be treated as a single currency.


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CENTRAL BANK OF NIGERIA

Guidance Notes on Supervisory Review Process

SUPERVISORY REVIEW PROCESS

802
1.0 Introduction

The Supervisory Review Process is structured along two separate but


complementary stages.

a. The Internal Capital Adequacy Assessment Process (ICAAP)1, and


b. The Supervisory Review and Evaluation process (SREP)2
2.0 Internal Capital Adequacy Assessment Process (ICAAP)

• The ICAAP is based on appropriate risk management systems that require


adequate corporate governance mechanisms, an organisational
framework with clear lines of responsibility, and effective internal control
systems because capital cannot be regarded as a substitute for
addressing inadequate risk management processes.
• The ICAAP shall be documented, understood and shared by all bank
structures and shall be subject to independent internal review.
• The respective banks’ boards are entirely responsible for the ICAAP. They
are expected to independently establish the design and organisation in
accordance with the risk appetite of the bank. They are also responsible
for the implementation and the annual update of the ICAAP and the
resulting of internal capital in order to ensure it is still in conformity with the
banks’ operations and environment.
• On an annual basis, banks shall render returns to the Central Bank
of Nigeria (CBN) on the key features of the ICAAP, their risk exposure and
the level of capital deemed adequate to support those risk. The report
shall also contain a self-­‐assessment of the ICAAP, areas for
improvement, any deficiencies in the process and the corrective
measures to be taken.
General Rules for the ICAAP

• Banks shall have a process for determining the total capital, currently
and prospectively necessary to support all material risks. This process shall
be;
= formalized and documented,
= subject to internal review and approval by board and management.
= proportionate to the nature, scale and complexity of the business
conducted.
• The calculation of total capital requires an assessment of all the risks to
which a bank is or may be exposed, including those not considered in
calculating the capital requirement under Pillar 1.
803
• Banks shall determine the risks, other than credit, counterparty, market
and operational risks, for which the adoption of quantitative
methodologies that can be used in determining internal capital would
be appropriate3, and those for which control and mitigation measures, in
combination or alternatively, would be more suitable.
2.2 Proportionality in the ICAAP

The principle of proportionality shall apply to the following aspects:

•The methodologies used in measuring/assessing risks and in


determining the related internal capital;
• The type and nature of the stress tests adopted;
• The treatment of correlation among risks and the determination of
total internal capital;
• The organisational structure of the risk control systems;
• The scope and detail of ICAAP reporting to the CBN.

2.3 Features of the ICAAP

In developing an Internal Capital Adequacy Process, banks shall take


cognizance of the key supervisory principles as enunciated by the Basel
Committee on Banking Supervision (BCBS July 2006 paragraphs 725-­‐760).
The main features are summarized below:

2.3.1 Comprehensive Identification of Risks

a) Banks shall independently identify the risks to which they are exposed, taking
into consideration their operations and the markets in which they operate.
b) This analysis shall consider at a minimum, the risks listed in Annex A. This list is
not exhaustive: the identification of any further risk factors connected with its
specific operations is left to the prudent assessment of each bank.
c) Banks and banking groups shall clearly identify the sources of the various
forms of risks and where these are to be found at the level of operating units,
enterprise-­‐ wide, within the group or from external counterparties. This
makes it possible to ascertain whether the regulatory capital requirements
calculated at the individual level for the most significant legal entities
adequately cover the risks effectively faced by these entities.

804
2.3.2 Sound Capital Assessment

• In order to calculate internal capital banks should have:


a) Designed policies and procedures that clearly identify, measure and
report all material risks;
b) A process that relates capital adequacy to the level of risks assumed;
c) A process that relates capital adequacy goal with the banks’ strategic
focus and business plan;
d) A process of internal controls that reviews and audits continuously the
activities of the banks to ensure robustness and integrity of the overall risk
management process;
• In addition, banks are required to quantify all material risks they are exposed
to using methodologies they deem appropriate in relation to their
organisational and operational features.
• For credit, counterparty, market and operational risks, a methodological
starting point is provided by the regulatory systems for calculating capital
requirements for such forms of risk;
• With regard to interest rate risk, all banks shall assess the impact of
hypothetical shocks on the interest rate exposure of the banking book.
Where this should cause a significant reduction of a bank’s regulatory
capital, the CBN shall examine the results with the bank and may adopt
appropriate actions; and,
• The ICAAP of banks must be able to show how total capital reconciles with
the definition of regulatory capital. Specifically, they shall explain the use of
capital instruments that may not be included in regulatory capital but are
included in the calculation of internal capital

2.3.3 Stress Testing

• Banks shall conduct stress testing of their risk mitigation and control systems
and, where necessary, the adequacy of their internal capital, in order to
enhance the assessment of their exposure to risks.
• Stress tests are quantitative and qualitative techniques used by banks to
assess their vulnerability to exceptional, but plausible, events. They involve
assessing the impact on banks’ exposures of specific events (sensitivity
analysis) or joint movements of a set of economic and financial variables
under adverse scenarios (scenario analysis).

805
2.3.4 Corporate Governance in the ICAAP

• The board and management of banks shall be responsible for the ICAAP.
• They shall establish a framework for assessing the various risks, develop a
system to relate risk to banks’ capital level, and establish a method for
monitoring compliance with internal policies. It is likewise important that the
board of directors adopts and supports strong internal controls and written
policies and procedures and ensures that management effectively
communicates these throughout the organization. (BCBS July 2006, Par 730)
2.3.5 Monitoring and Reporting
Banks should have a system for monitoring and reporting risk exposures and
assessing how their changing business risk profiles affect their capital needs.
They are therefore required to:
a) Evaluate the level and trend of material risks and their effects on capital
levels;
b) Evaluate the sensitivity and reasonableness of the key assumptions used
in capital assessment;
c) Determine that they hold sufficient capital against the various risks and
ensure compliance with established capital adequacy goals; and,
d) Assess future capital requirements based on reported risk profiles and
indicate any necessary adjustments to be made to the banks’ strategic
plan based on that assessment.
2.3.6 Internal Control Review

• An effective ICAAP requires that the relationship between risks and capital
levels is monitored
• The board should ensure that its system of internal control can monitor its
business environment
• The bank should ensure conduct of periodic review to ensure integrity,
accuracy and reasonableness of its risk management process. Such reviews
should cover:
a) Appropriateness of the ICAAP
b) Large exposures and risk concentration
c) Accuracy and completeness of data input
d) Reasonableness and validity of scenarios used in the assessment
e) Stress testing and analysis of assumptions / inputs

806
2.4 Regulatory Reporting of the ICAAP

2.4.1 Content and Structure

a) The ICAAP report will enable the CBN to conduct a complete, documented
assessment of the key qualitative features of the capital planning process,
the overall exposure to risks and the consequent calculation of total internal
capital.
b) The report is transmitted to the CBN along with the relevant board resolutions
and senior management reports containing their comments on the ICAAP,
in accordance with their respective responsibilities and functions.
c) The report shall be organised, at a minimum, into the areas specified in
Annex B.
2.4.2 Frequency of ICAAP Reporting

• On an annual basis, banks shall, not later than the end of April, submit to the
CBN the ICAAP report as at 31 December of the previous year.
• Based on the capital reported at the close of the previous year, the ICAAP
document shall provide the bank’s strategies for taking on risk and ensuring
that the related capital needs through the end of the current year are met.

3.0 Supervisory Review and Evaluation Process (SREP)

3.1 General Rules for the SREP

The SREP shall be conducted for banks and banking groups on an annual
basis in order to verify that they have established capital and organisational
arrangements that are appropriate for the risks they face and ensures
overall operational equilibrium.

3.2 Stages of the SREP

The SREP is organised into the following main stages:

a) Analysis of exposure to all material risks and the relative control systems;
b) Verification of compliance with capital requirements and other
supervisory rules;
c) Assessment of the procedure for calculating total internal capital and of
the adequacy of total capital in relation to the bank’s risk profile;
d) Issuance of specific opinions for each form of risk and of an overall
opinion on the situation of the bank;
e) Determination of any supervisory response
807
3.3 Proportionality in the SREP

The supervisory review and evaluation process is also informed by the


principle of proportionality, under which:

a) Corporate governance systems, risk management processes, internal


control mechanisms and the determination of capital deemed
adequate to cover risks shall be proportionate to the nature, scale and
complexity of the business conducted by the banks;
b) The frequency and the comprehensiveness of the SREP shall have regard
to the systemic importance, nature, size and complexity of banks.
The CBN, as part of its Risk-­‐Based Supervisory process, will review and
evaluate the soundness of banks’ ICAAP against the expectations set out
under the features of ICAAP in this guideline. This review will also consider the
comprehensiveness of the ICAAP and the quality of risk management to
form a view on the appropriateness of the banks’ internal capital targets
and its capacity for meeting the targets. Based on these reviews, the CBN
may require any bank to, among other things, take action to improve its
capital and risk management processes if it is not satisfied with the bank’s
ICAAP.

While the board and senior management of banks maintains primary


responsibility for their institution’s capital adequacy, the CBN reserves the
power to intervene at an early stage to prevent a bank’s capital from falling
below the level that it deems adequate to support its risks. The CBN may
require rapid remedial action if adequate capital is not maintained or
restored. This may include the following:

a) Altering the risk profile of the bank through business or operational


restrictions;
b) Directing banks to raise additional capital;
c) Strengthening of the systems, procedures and processes concerning
risk management, control mechanisms and internal assessment of
capital adequacy;
d) Prohibition of distribution of profits or other elements of capital;
e) Directing the bank to hold an amount of regulatory capital greater
than the legal minimum for credit risk, counterparty risk, market risk
and operational risk;
f) Using other measures as contained in the CBN Supervisory Intervention
Framework (SIF) and the BOFIA
808
ANNEX A: Risks Subject To the Internal Capital Adequacy Assessment
Process (ICAAP)

1. Pillar 1 Risks

a) Credit risk (including counterparty risk,);


b) Market risks;
c) Operational risk.
2. Other Risks

a) Concentration risk: the risk arising from exposures to counterparties,


groups of connected counterparties, and counterparties in the same
economic sector or which engage in the same activity or are from the
same geographic region;
b) Interest rate risk in the banking book: the risk arising from potential
changes in interest rates;
c) Residual risk: the risk that recognized credit risk mitigation techniques
used by the bank may be less effective than planned;
d) Securitization risk: the risk that the economic substance of a securitization
operation is not fully reflected in risk assessment and management
decisions;
e) Business and Strategic risk: the current or prospective risk of a decline in
profits or capital caused by changes in the business environment or
erroneous decisions, the inadequate implementation of decisions or poor
responsiveness to competitive developments;
f) Reputational risk: the current or prospective risk of a decline in profits or
capital should customers, counterparties, shareholders, investors or
supervisors take a negative view of the bank;
g) Liquidity risks; Banks’ liquidity profile and the liquidity of the markets in
which they operate.
h) Compliance with minimum standards and disclosure requirements;
i) Factors external to the bank, e.g., business cycle effects

809
ANNEX B: Guide FOR ICAAP Reporting

1. Strategies and Forecasting Horizon Adopted


a) Business plan and annual budgets; schedule of reviews of business plan
and its components; extraordinary events necessitating review;
b) Reconciliation between time horizon of business plan and capital plan;
c) Ordinary and extraordinary sources of capital.
2. Corporate Governance, Organizational Arrangements and Internal
Control Systems Connected with the ICAAP
a) Description of the process for the preparation and updating of the
ICAAP;
b) Description of the process for reviewing the ICAAP;
c) Definition of the role and functions assigned to the board and senior
management bodies for the purposes of the ICAAP;
d) Definition of the role and functions assigned to various corporate
functions for the purposes of the ICAAP (for example, internal auditing,
compliance, planning, risk management, and other units such as head
office and branch network commercial units, accounting and audit);
e) Description of organizational and contractual safeguards relating to any
elements of the ICAAP that is outsourced;
f) Indication of internal regulations relevant to the ICAAP.
3. Risk Exposures, Risk Measurement and Aggregation Methodologies,
Stress Testing
a) Risk mapping: illustration of the position of the bank in respect of Pillar 1
and Pillar 2 risks;
b) Risk mapping in relation to bank’s operating units and/or legal entities of
the group;
c) Techniques for risk measurement, internal capital determination and
stress testing;
d) Description, for every category of measurable risk, of the main
characteristics of the main risk control and mitigation instruments;
e) General description of systems for control and mitigation of non
measurable risks.
4. Components, Estimation and Allocation of Internal Capital
a) Quantification of internal capital for each risk and total internal capital;
b) Any methods for allocating internal capital (by operating unit and/or
legal entity).

810
5. Reconciliation of Internal Capital, Regulatory Requirements and
Regulatory Capital
a) Reconciliation of total internal capital and regulatory requirements;
b) Listing and definition of capital components covering internal capital;
c) Eligibility of components covering internal capital to be calculated for
supervisory purposes; explanation of inclusion of ineligible components;
d) Estimate of cost of using other capital sources in addition to those used.
6. Self-Assessment of ICAAP
a) Identification of the areas of the process amenable to improvement;
b) Planning of capital or organisational actions.
7. Organization of the ICAAP Report
i. Executive Summary
ii. Structure and Operations
iii. Governance Structure
iv. Risk Assessment and Capital Adequacy
v. Stress Testing
ii. Capital Planning
iii. Design, Approval, Review, and Use of ICAAP
iv. Challenges and Further Steps
v. Summary of Internal Capital Adequacy Assessment Process
vi. Risk Appetite Statement
vii. Use of Internal Models for Capital Assessment
viii. Review of ICAAP

811
CENTRAL BANK OF NIGERIA

Guidance Notes on the Calculation of Capital Requirement for


Operational Risk

Basic Indicator Approach (BIA) and the Standardized Approach


(TSA)

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1. Operational Risk Capital Requirement

1.1 Introduction
In calculating the capital requirements to cover operational risk, banks are
required to assess the correlations among the various types of risk and identify
their possible impact in terms of operational risk. Ensuring full compliance with
the regulations would also play an important role in mitigating operational risk.
1.2 Calculation Approaches
This guidance notes make provision for two methods of calculating operational
risk capital charge; the Basic Indicator Approach (BIA) and the Standardized
Approach (TSA).
• Banks using the BIA are required to calculate their capital requirement by
multiplying an indicator of a bank's volume of business, gross income, by a
specified regulatory percentage. Banks using the BIA must hold capital for
operational risk equal to the average over the previous three years of a
fixed percentage of positive annual gross income.
• Banks using TSA are required to calculate their capital requirement by
multiplying gross income by separate regulatory percentages for each of
the eight business lines into which banks’ activities are divided (corporate
finance, trading and sales, retail banking, commercial banking, payment
and settlement, agency services, asset management and retail brokerage)
TSA uses the gross income from the above business lines as a proxy for the
scale of business operations and thus the likely scale of operational risk
exposure within each of these business lines. The capital charge for each
business line is then calculated by multiplying gross income by the factor
assigned to that business line.

1.3 Adoption of Approaches


Banks and banking groups are expected to adopt the BIA at the
commencement date of this regulation and may seek approval to move to
TSA which requires more stringent operational risk management processes.

2. Governance and Management of Operational Risks


2.1 Board and Management
The board of directors plays a key role in establishing an effective and
efficient operational risk management and control system and to this end
the board and senior management shall;
a) Establish the general framework of the system
813
b) be responsible for its implementation,
c) supervise its operation and
d) Verify its overall functionality and compliance with regulatory
requirements.
2.2 Processes and Procedure
Specific attention shall be paid to the processes, functions and other
aspects involved in the calculation of the capital requirement. Accordingly,
banks’ board and management shall have the specific responsibility for:
a) Identifying and measuring infrequent, yet severe loss events,
b) Identifying the various forms and manner in which operational risks may
materialize,
c) Assessing the operational risks associated with the introduction of new
products, activities, processes and systems.
d) Adopting contingency and business continuity plans that ensure their
operational resilience and limit losses in the event of severe business
disruptions.
2.3 Reversion of Approaches
Banks that have adopted TSA are not allowed to revert to the BIA without
the approval of the CBN. However, if the CBN discovers that a bank using
TSA no longer meets the qualifying criteria for the approach, it may require
the bank to revert to the BIA until it meets the conditions specified by the
supervisor before returning to TSA.
2.4 Sound Practices for Operational Risk Management
Regardless of the operational risk capital computation approach adopted,
banks are required to comply with principles in “Sound Practices for the
Management and Supervision of Operational Risk” (BCBS, February 2003).

3. Basic Indicator Approach (BIA)


3.1 Calculation Method

a) The capital requirement using the BIA shall be equal to 15% of the average
of the last three years positive observations of the relevant indicator (i.e.
gross income). The formula for the calculation is given below:

KBIA = [𝑮𝑮𝑮𝑮𝒊𝒊….𝜼𝜼 ∗ 𝜶𝜶] ∕ 𝜼𝜼


Where:
KBIA = the capital charge under the Basic Indicator Approach

814
Gl = positive annual gross income for the previous three years

= number of the previous three years for which gross


𝜂𝜂
income is positive

 =15%,
b) Gross income under this guideline includes the sum of a bank’s
• Net interest income, and
• Net non-interest income;
All of which shall be gross of:
• Any provisions (example unpaid interest); and write-offs made during the
year
• Any operating expenses, including fees paid to outsourcing service
providers; in addition to fees paid for services that are outsourced, fees
received by banks that provide outsourcing services shall be included in
the definition of gross income
But shall exclude:
• Realized or unrealized profits/losses from the sale or impairment of
securities in the banking book;
• Extraordinary or irregular items;
• Income derived from insurance recoveries.
• exclude reversal during the year in respect of provisions and write-offs
made during the previous year(s);
• exclude income from legal settlements in favour of the bank;

c) However, if, for any given observation, the value of the relevant indicator is
negative or equal to zero, this figure shall not be taken into account in
calculating the total capital requirement. The requirement shall be
calculated as the average for the positive observations only.
d) Where data on the relevant indicator is not available for certain
observations during the applicable three-year period, the calculation of the
requirement shall be based on the average of the available observations
only.
e) If the relevant indicator or its components are related to a period less than
12 months (e.g. in the case of newly formed banks, mergers and
acquisitions), this value must be annualized linearly.
f) Banks shall be required to reconcile the gross income used in capital
computation and the gross income reported in returns made to CBN.
815
4. The Standardized Approach (TSA)
4.1 Approval Process

• Banks seeking the approval of CBN for the use of TSA must show that their
boards are actively involved in the oversight of operational risk
management system; the system is conceptually sound and implemented
with integrity and must have sufficient resources to support the use of the
approach. They would therefore be required to submit the following in
support of their application:
a) Organization charts that specify the tasks and responsibilities of the
operational risk management and control functions;
b) A board certification of compliance with qualifying criteria;
c) A document describing the self-assessment process and the related
findings; and
d) The internal audit report on the adequacy of the operational risk
management system.
• Banks authorized to use TSA shall send to the CBN annually, a formal
certification of compliance with the qualifying criteria and the internal audit
report on the adequacy of the operational risk management system.
4.2 Qualifying Criteria for the Standardized Approach
In order to obtain authorization to use the Standardized Approach, banks
shall have adequate internal control procedures and an effective
operational risk management system (specified below) in addition to
adequate corporate governance mechanisms.

4.2.1 Internal Controls

a) The Self-Assessment Process


• The self-assessment process shall consist of a formalized set of procedures
and activities to;
a) assess the quality of the operational risk management system, as well as
b) its continuing compliance with regulatory requirements, and;
c) appropriateness to operational needs and market developments.
• The procedures for conducting the self-assessment and the related findings
shall be adequately documented and reported to senior management
and board. The report shall place specific emphasis on any aspect of the
operational risk management system that requires improvement, including

816
changes in bank structure and operations, and on the assessment of
compliance with the qualifying criteria.

b) The Internal Audit Function


• The internal audit unit shall carry out periodic reviews of the operational risk
management system and the self-assessment process at least once every
year with a view to evaluating their effectiveness and compliance with the
qualifying criteria.
• The unit shall forward its reports on the review of operational risk to the
board of directors for necessary corrective actions.

4.2.2 Operational Risk Management System


The key features of the operational risk management system are:

a) The Mapping of Activities into Regulatory Business Lines 16


 For the purpose of calculating the capital requirement, the bank shall map its
activities into eight regulatory business lines, listed in the table below, in
accordance with the following principles:
i) All activities shall be mapped into the business lines in a mutually
exclusive and jointly exhaustive manner;
ii) Any activity that forms an integral or ancillary part of another shall be
allocated in accordance with the mapping criteria for the main activity;
iii) An activity belonging to more than one business line shall be mapped to
the dominant business line;
iv) Where an activity cannot be mapped on the basis of a dominant
business line, it shall be mapped to the business line yielding the highest
percentage. The same rule shall apply to any associated ancillary
activity;
v) A compound activity shall be divided into its significant components,
which shall be mapped to the most appropriate business lines on the
basis of their nature and characteristics;
vi) Banks may use internal transfer pricing methods to allocate the relevant
indicator to the various business lines; 17
vii) The mapping of activities into business lines shall be consistent with the
categories adopted for credit and market risks.

16 Business lines shall be in line with the permissible activities prescribed in the CBN banking model.
17 For example, the retail business line may carry out lending transactions making use of funds raised
with activities typical of other business lines such as interbank funding, which is included in the trading
and sales line. In this case, internal transfer prices can be used to reallocate the cost components from
trading and sales to retail.
817
viii) The mapping criteria shall be reviewed and adjusted in line with current
business activities and the bank’s risk profiles.
ix) The process of mapping activities into business lines shall be subject to
internal review and documented.
x) In mapping activities into business lines, banks shall take account of the
table contained in Annex A.

b) Supplementary Business Line Mapping Guidelines


i) There are a variety of valid approaches that banks can use to map their
activities to the eight business lines, provided the approach used meets
the business line mapping principles. The following is an example of one
possible approach that could be used by a bank to map its gross
income:
ii) Gross income for retail banking consists of net interest income on loans
and advances to retail customers and SMEs treated as retail, plus fees
related to traditional retail activities, net income from swaps and
derivatives held to hedge the retail banking book, and income on
purchased retail receivables. To calculate net interest income for retail
banking, a bank takes the interest earned on its loans and advances to
retail customers less the weighted average cost of funding of the loans
(from whatever source).
iii) Similarly, gross income for commercial banking consists of the net interest
income on loans and advances to corporate (plus SMEs treated as
corporate), interbank and sovereign customers and income on
purchased corporate receivables, plus fees related to traditional
commercial banking activities including commitments, guarantees, bills
of exchange, net income (e.g. from coupons and dividends) on securities
held in the banking book, and profits/losses on swaps and derivatives
held to hedge the commercial banking book. Again, the calculation of
net interest income is based on interest earned on loans and advances
to corporate, interbank and sovereign customers less the weighted
average cost of funding for these loans (from whatever source).
iv) For trading and sales, gross income consists of profits/losses on instruments
held for trading purposes (i.e. in the mark-to-market book), net of funding
cost, plus fees from wholesale broking.
v) For the other five business lines, gross income consists primarily of the net
fees/commissions earned in each of these businesses. Payment and

818
settlement consists of fees to cover provision of payment/settlement
facilities for wholesale counterparties.

Asset management is management of assets on behalf of others.

c) The Operational Risk Data Collection and Storage System

• Banks are required to establish an operational risk data collection and


storage system, which at a minimum shall include material losses and any
related recoveries, which are capable of ensuring the effectiveness of the
risk management system.
• The system shall ensure on a continuing basis that the data are relevant,
reliable and up to date. For this purpose, banks shall:
i) Develop information systems capable of ensuring the integrity,
confidentiality and availability of the data over time;
ii) Carry out periodic reviews of the operational risk data collection and
storage system.

d) Assessment of Exposure to Operational Risks


• At least once a year, banks shall conduct an assessment of their exposure
to operational risks for the entire bank and significant operating segments.
• The results of the assessment shall form an integral part of the process of
controlling the bank’s operational risk profile and shall be reported to the
board and management, and within the scope of their duties, to the
managers of the operating segments involved.
• The results of the assessment shall be used for management purposes to
mitigate operational risks.

e) The Reporting System

Banks shall establish a reporting system which ensures that the board,
management and all the functions involved have access to appropriate
information on operational risk. At a minimum, the information shall include:

i) Results of the assessment of operational risk exposure; ii) Material losses


and related recoveries; iii) Description of actions taken to prevent and
mitigate operational risks, with information on their effectiveness.

819
4.3 Calculation of the Capital Requirement Using TSA

• Under the Standardized Approach, the capital requirement for operational


risk shall be equal to the average of the last three years observations of the
Standardized Approach amount.
• The Standardized Approach amount shall be calculated for each year as
the sum of the relevant indicators (gross income as defined under BIA) for
the business lines weighted on the basis of the percentages indicated
below.
Business line Percentage (β)
Corporate finance 18%
Trading and sales 18%
Retail banking 12%
Commercial banking 15%
Payment and settlement 18%
Agency services 15%
Asset management 12%
Retail brokerage 12%

• The total capital charge under TSA may be expressed as follows:


KTSA = {∑𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚 𝟏𝟏−𝟑𝟑 𝒎𝒎𝒎𝒎𝒎𝒎[∑(𝑮𝑮𝑮𝑮𝑮𝑮−𝟖𝟖 ∗ 𝜷𝜷𝜷𝜷−𝟖𝟖), 𝟎𝟎]} ∕ 𝟑𝟑

Where:

KTSA = Capital charge under TSA


GI1-8
Annual gross income in a given year for the eight business
=
lines in the table above.

β1-8 The fixed percentages for the business lines indicated in the
= table above.
• Where the weighted relevant indicator of a business line is negative, it shall
be included in calculating the Standardized Approach amount. Where the
Standardized Approach amount for a given year is negative, then the result
for that year shall be zero and shall be included in the calculation of the
three-year average.

820
• In any given year, negative capital charges (resulting from negative gross
income) in any business line may offset positive capital charges in other
business lines without limit.
• Where data on the relevant indicator is not available for certain
observations during the applicable three-year period, the calculation of the
requirement shall be based on the average of the available observations
only. 18
• If the relevant indicator or its components are related to a period less than
12 months (e.g. in the case of newly formed banks, mergers and
acquisitions), this value must be annualized linearly.
• In the event that a bank or banking group migrates from the basic indicator
approach to the standardized approach during the year, the capital
requirement is calculated by using the new method from the first reporting
date.
Annex B shows an example of using standardized approach for calculating
capital requirement for operational risk.

5. Definition of Terms
Relevant indicator shall mean gross income

Business lines shall mean the lines of business into which a bank’s activities shall
be classified in accordance with the criteria set out in the Standardized
Approach for computation of capital charge for operational risk.
Operational loss shall mean the adverse financial effects generated by
operational events that have been recognized in the bank’s accounts and that
have or may have an impact on the bank’s income statement.
Legal risk shall mean the risk of losses resulting from violations of law or
regulations, from contractual or constructive liability or from other disputes.
Operational risk shall mean the risk of losses resulting from inadequate or failed
internal processes, people and systems or from external events, including legal
risk.
Operating segment shall mean any area of activity such as a business line, an
organizational unit, a legal entity or a geographical area.

18 Only values for the relevant indicator determined on the basis of the International Accounting
Standards shall be used in calculating the capital requirement.
821
Standardized approach amount shall mean the algebraic sum of each of the
eight business lines divided by 3 years. Where the weighted relevant indicator
of a business line is negative, it shall be included in calculating the
Standardized Approach amount. Where the Standardized Approach amount
for a given year is negative, then the result for that year shall be zero and shall
be included in the calculation of the three-year average

6. ANNEX A: Standardized Approach – Mapping of Business Lines to Bank


Activities

Business lines List of activities

Corporate finance Mergers, acquisitions, placements (public tenders and


offerings, private placements, bond issues). Investment
banking activities involving equity and debt capital (IPOs,
privatizations, syndications, secondary private placements,
underwriting, etc.). Business appraisals. Securitizations on
behalf of third parties. Corporate financial management.
Capital increases (lead manager only). Advisory and
research services (capital structure, industrial strategy,
undertakings, reorganizations, etc.). Investment advice as a
specific business.
Trading and sales Dealing on own account. Treasury management and
funding on own account (asset & liability management,
etc.). Securitization on own account. Reception,
transmission and execution of orders for corporate and
professional clients. Advice, underwriting, placement of
financial instruments (investment funds, securities and fund
portfolio products, equities, bonds, derivatives, etc.) with
corporate and professional clients.

822
Retail banking Acceptance of deposits and lending. Guarantees and
commitments. Consumer credit for retail customers. Leasing
and factoring. Other transactions with retail counterparties
not allocated to other business lines. Ancillary services such
as collection and payment (issuing debit and credit cards,
funds transfer and other payments on behalf of customers,
exchanging foreign currency, etc.) and custodianship and
administration of financial instruments.

Commercial Acceptance of deposits and lending. Guarantees and


banking commitments.
Leasing and factoring. Export and trade credit. Other
transactions with
corporate counterparties not allocated to other business
lines. Ancillary services such as collection and payment
(issuing debit and credit cards, funds transfer and other
payments on behalf of customers, foreign exchange, etc.)
and custodianship and administration of financial
instruments. Net income (for example, coupons and
dividends) on nontrading books.

Payment and Payment, settlement and clearing services and systems


settlement (RTGS, NIBSS,
SWIFT, MASTERCARD, VISA, CSCS etc.). Issuing and
administering means of payment and funds transfer as a
specific business. Correspondent banking.
Agency Depository bank. Custodianship and related services
services (cash/collateral management, deposits with third parties,
etc.) as a specific business. Tax collection services. Treasury
services for government entities.
Trust services.

823
Asset Portfolio management and other forms of asset
management management (investment funds, pension funds, securities
and fund portfolio products, hedge funds, etc.). This refers
only to the production, and not the distribution, of asset
management products, except for placement with
professional clients by specialized companies.

Retail Reception, transmission and execution of orders for retail


brokerage customers. Advice, underwriting, placing of financial
instruments and insurance products (bank insurance,
investment funds, securities and fund portfolio products,
equities, bonds, derivatives, etc.) with retail customers.

ANNEX B: STANDARDIZED APPROACH – Example of the Calculation of the


Capital Requirement

Business line Step 1 Beta Step 2


Annual Gross Income Factor Calculation of the
by weighted relevant indicator
Business Lines by business
Yr 1 Yr 2 Yr 3 Yr 1 Yr 2 Yr 3
Corporate 10 10 10 18% 1.80 1.80 1.80
finance
20 -60 30 18% 3.60 -10.80 5.40
Trading &
sales 20 20 30 12% 2.40 2.40 3.60
Retail
banking 20 15 10 15% 3.00 2.25 1.50
Commercial
banking 10 -40 10 18% 1.80 -7.20 1.80
Payment and
Settlement 20 15 0 15% 3.00 2.25 0.00
Agency
services

824
Asset 0 20 30 12% 0.00 2.40 3.60
Management
Retail -10 10 20 12% -1.20 1.20 2.40
brokerage

Step
3

Algebraic sum for the year


14.40 -5.70 20.10
Step 4
Calculation of the
Standardized
Approach amount
14.40 0.00 20.10
Step 5
Standardized Approach
capital requirement

11.50

1. Calculate the relevant indicator on an annual basis for each business line
(the result may be either positive or negative).
2. Multiply the relevant indicator of each business line by the corresponding
percentage (the result may be either positive or negative).
3. Sum the weighted relevant indicators of the eight business lines, offsetting
the positive amounts against the negative amounts. If the total result for
the year is negative, set it equal to zero.
4. Calculate the Standardized Approach amount for each of the three
years (the result may be either positive or equal to zero).
5. Calculate the total capital requirement as the simple average of the
Standardized Approach amounts for the three years.

825
CENTRAL BANK OF NIGERIA

Guidance Notes on the Calculation of Capital Requirement


for Credit Risk

STANDARDIZED APPROACH

826
CHAPTER ONE: CREDIT RISK – STANDARDIZED APPROACH

1.0 Introduction
The application of the standardized approach for calculating the capital
requirement for credit risk is supported by external credit assessments and it
entails:
a) the classification of exposures to different classes based on the nature of
the counterparty or the technical characteristics of the transaction or the
manner in which it is carried out, and
b) the assignment of diversified risk weights to each portfolio, based on the
ratings provided by the External Credit Assessment Institutions (ECAI) or
the risk weights specified for certain exposure categories under this
framework.
All unrated exposures shall be assigned a risk weight of 100% where any of the
under listed two conditions holds
c) The bank does not intend to use a rating assigned by an ECAI; and
d) Where ECAI selected by the bank has not issued a rating for the
exposure.
2.0 External Credit Assessments
External credit assessments (or external ratings) on the borrowers or specific
exposures are the basis for the determination of risk weights under the
standardized approach for exposures to sovereigns, central banks, public
sector entities, banks, corporates as well as certain specific exposures1. The
risk weights for other categories of exposures that are not subject to external
ratings are specified in this framework.
2.1 Rules on the use of external ratings
The rules for the use of external ratings are as follows;
a) Banks that intend to use credit assessments from ECAIs shall furnish the
CBN with a list of such ECAIs.
b) Banks are not allowed to use credit assessments issued by connected
ECAIs.
c) Credit assessments shall be used consistently; therefore, banks that
decide to use credit quality assessments from an ECAI for a certain class
of exposures shall use them for all the exposures belonging to that class.
d) Banks shall use only credit quality assessments of ECAIs that take account
of total exposure i.e. principal and interest.
e) External ratings for an entity within a group cannot be used to risk weight
other entities within the same group.

827
2.2 Single and Multiple assessments
• Where there is only one assessment by an ECAI chosen by a bank for a
particular exposure, that assessment should be used to determine the risk
weight of the exposure.
• Where separate assessments by two different ECAIs result in different risk
weights, the higher risk weight will be applied.
• Where there are three or more assessments with different risk weights, the
assessments with the two lowest risk weights should be selected and the
higher of those two risk weights will be applied.
2.3 Unsolicited Ratings
As a general rule, banks should only use solicited ratings from recognized
ECAIs for the purposes of calculating capital requirement under the
standardized approach. Where it is expedient for any bank to use
unsolicited ratings, such bank shall obtain the CBN approval and the quality
of the unsolicited ratings must not fall below that of solicited ratings.
2.4 Revocation of ECAI’s recognition
Where the recognition of an ECAI is revoked, banks that use the ratings
provided by such ECAI shall adjust their exposure risk weights within 30 days.
2.5 Issuer and Issues Assessment
Where a bank invests in a particular security, which has an issue-­‐specific
rating, the risk weight for this exposure will be based on this rating. Where the
bank has an investment which does not have an issue-­‐specific rating, the
following principles shall apply:
a) Where the bank’s exposure is to a borrower which does not have its own
issuer rating, but the same borrower has a rating on other obligations
(such as a debt security) to which the bank is not exposed, the bank
shall use that debt security rating in determining the appropriate risk
weight for the exposure to the borrower. However, this is subject to the
condition that the bank’s exposure ranks pari passu or senior in all
respects to the debt security which has a rating, otherwise, the claim will
receive the risk weight for unrated exposures;
b) Where a borrower has its own issuer rating, this rating typically applies to
senior unsecured exposures on that borrower. Thus, only senior exposures
on that borrower will be able to utilise this rating. Other exposures will be
treated as unrated; and
c) Where either the issuer or a single security has a low quality rating which
maps into a risk weight equal to or higher than that which applies to
unrated exposures, an unrated exposure on the same borrower or issuer

828
will be assigned the same risk weight as is applicable to the low quality
rating (instead of the risk weight for unrated exposures).
2.6 Domestic and Foreign Currency Exposures

• A credit assessment that refers to an item denominated in the borrower’s


domestic currency cannot be used to derive a risk weight for another
exposure to that same borrower that is denominated in a foreign currency.
• Where unrated exposures are risk weighted based on the rating of an
equivalent exposure to that borrower, the general rule is that foreign
currency ratings would be used for exposures in foreign currency. Domestic
currency ratings, if separate, would only be used to risk weight claims
denominated in the domestic currency2.
2.7 Short-­‐Term and Long-­‐Term Credit Assessments

• Where a short-­‐term exposure is assigned a 150% risk weight, all unrated


exposures to the counterparty whether short-­‐term or long-­‐term shall
receive a 150% risk weight;
• Where a short-­‐term exposure is assigned a 50% risk weight, no unrated
short-­‐term exposure shall receive a risk weight of less than 100%.
• When a specific short-­‐term assessment for a short-­‐term exposure on a
bank maps into a less favourable (higher) risk weight than the general
preferential treatment for short-­‐term exposures, the general short-­‐term
preferential treatment for interbank exposures cannot be used. All unrated
short-­‐term exposures should receive the same risk weighting as that implied
by the specific short-­‐term assessment.
3.0 Exposures and Risk Weights Categories

The following part defines the various categories of exposures and their
corresponding risk weights under the standardized approach. On-­‐balance
sheet exposures shall be multiplied by the appropriate risk weight to determine
the risk-­‐ weighted asset amount, while off-­‐balance sheet exposures shall be
multiplied by the appropriate credit conversion factor (CCF) before applying
the respective risk weights. Specifically, all exposures subject to the
standardized approach should be risk-­‐weighted net of specific provisions3

3.1 Exposures to Central Governments and Central Banks

• Exposures to Central Governments and Central Banks shall be assigned risk


weights based on the rating assigned by an ECAI/Export Credit Agency
(ECA) as follows;

829
Credit Assessment AAA to A+ to A – BBB+ BB+ to Below Unrated

(ECAI) AA-­‐ to BBB-­‐ B-­‐ B-­‐

Risk Scores (ECA) 1 2 3 4-­‐5 6 Unrated

Risk Weight 0% 20% 50% 100% 150% 100%

• Notwithstanding the provisions of this paragraph, a risk weight of 0% shall


be assigned to the following:
a. Exposures to Federal Government of Nigeria (FGN) and Central Bank of
Nigeria (CBN) denominated in Naira (NGN) and funded in that
currency.
b. Exposures, including inter-­‐bank transactions guaranteed by the FGN or
CBN.
c. Inter-­‐bank transactions among supervised institutions collateralized by
FGN Bonds or Treasury Bills.
3.2 Exposures to non-­‐Central Government Public Sector Entities

• Exposures to Public Sector Entities (PSEs4) shall be assigned a risk weight of


100% regardless of the length of the residual maturities of the exposures.
• Where a PSE is located in other jurisdiction, the risk weight of the sovereign
rating of that jurisdiction shall be applied.
3.3 Exposures to State Governments and Local Authorities

• Exposures to State and Local Governments in Nigeria shall receive the


following risk weights:
a) 20% risk weight for State Government bonds that meet the eligibility
criteria for classification as liquid assets by the CBN
b) 100% risk weight for other State and Local Government bonds and
exposures
• State and Local Governments of other jurisdictions shall be assigned the
sovereign risk weight of those jurisdictions.

830
3.4 Exposures to Multilateral Development Banks (MDBs)

• Exposures to multilateral development banks shall be risk weighted on the


basis of the rating assigned by an ECAI, as set out in the table below;

Credit Assessment for AAA A+ to BBB+ BB+ to Below unrated

to AA-
MDBs ­‐ A– to BBB-­‐ B-­‐ B-­‐

Credit quality steps 1 2 3 4 and 5 6 Unrated

Risk Weight 20% 50% 50% 100% 150% 50%

• However, a risk weight of 0% shall apply to exposures to the following


MDBs, regardless of any external credit rating assigned:
a) International Bank for Reconstruction and Development (IBRD);
b) International Finance Corporation (IFC);
c) African Development Bank (ADB);
d) Asian Development Bank (ADB)
e) European Bank for Reconstruction and Development (EBRD)
f) Inter-­‐American Development Bank (IADB)
g) European Investment Bank (EIB)
h) European Investment Fund (EIF)
i) Nordic Investment Bank (NIB)
j) Caribbean Development Bank (CDB)
k) Islamic Development Bank (IDB)
l) Council of Europe Development Bank (CEDB)
m) International Islamic Liquidity Management Corporation (IILMC)
n) Any other MDBs that may be specified from time to time by the CBN.

3.5 Exposures to Supervised Institutions

• Exposures to banks incorporated in a given country will be assigned a risk


weight one category less favourable than that assigned to exposures on
the sovereign of that country as shown in the following table.

831
AAA to A+ to BBB+ BB+ to Below unrated

Credit Assessment AA-­‐ A– to BBB-­‐ B-­‐ B-­‐

Credit quality steps 1 2 3 4 and 5 6 unrated

Risk Weight 20% 50% 100% 100% 150% 100%

• Short-­‐term exposures to supervised institutions in Nigeria with an original


maturity of three months or less shall be assigned a risk weight of 20% while a
risk weight of 100% shall be assigned to long-­‐term exposures.
• Shareholdings, hybrid and subordinated capital instruments issued by
supervised institutions shall be assigned a risk weight of 100% where they are
not deducted from regulatory capital.5
3.6 Exposures to Corporates and Other Persons

• This class includes exposures to entities other than those referred to in the
above subsections as well as exposures to natural persons and small and
medium-­‐sized enterprises that cannot be classified under retail exposures
as provided below.
• Exposures to corporates other than small and medium-­‐sized enterprises
shall be risk weighted on the basis of a credit assessment assigned by an
ECAI as follows;

AAA to A+ to BBB+ to Below B-­‐ unrated

Credit Assessment AA-­‐ A– BBB-­‐

Credit quality step 1 2 3 and 4 5 and 6 unrated

Risk Weight 20% 50% 100% 150% 100%

832
• Exposures to insurance companies, securities firms, and collective
investment schemes shall be treated as exposures to corporates.
3.7 Regulatory Retail Portfolio

Exposures included in the regulatory retail portfolio shall be risk-­‐weighted at


75%. To qualify to be included in the regulatory retail portfolio, such
exposures must meet the following criteria:

i) Orientation criterion – the exposure is to an individual person or persons


or to a small business. (small businesses may include sole proprietorships,
partnerships or small and medium-­‐scale enterprises (SMEs6))
ii) Product criterion -­‐ the exposure takes the form of any of the following:
revolving credits and lines of credit (including credit cards and
overdrafts), personal term loans and other term loans (for example
installment loans, auto financing loans, student and educational loans,
personal finance) and small business facilities. Investment in debt and
equity securities, whether listed or not, are excluded from this portfolio.
Mortgage loans are excluded to the extent that they qualify for
treatment as exposures secured by residential property.
iii) Granularity criterion7 -­‐ the aggregate exposure8 to one counterpart
cannot exceed 0.2% of the overall regulatory retail portfolio;
iv) Low value of individual exposures -­‐ the aggregate retail exposure to
one counterpart cannot exceed an absolute threshold of N100 million.
3.8 Exposures secured by Mortgages on Residential Property
• A risk weight of 100% shall be applied to exposures secured by mortgages
on residential property provided that:
a) The residential property will be occupied or rented out. The borrower’s
capacity to repay does not materially depend on cash flows generated
by the property serving as collateral, but rather on the capacity of the
borrower to repay the debt from other sources9;
b) The amount of the exposure does not exceed 80% of the value of the
property10. The loan to value ratio may be raised to 100% if supplemental
guarantees are provided. In order to enable lending banks to obtain an
effective benefit from the reduction in credit risk, the supplemental
guarantees shall meet the general requirements specified under the rules
governing credit risk mitigation.

833
3.9 Exposures Secured by Mortgages on Commercial Real Estate
Exposures secured by mortgages on commercial real estate (property for
use as office space, distribution or other economic activities) located in
Nigeria are risk-­‐ weighted at 100%.
Other Conditions for Exposures Secured by Real Estate Property
Exposures secured by real estate property shall include exposures secured by a
mortgage on real estate or connected with real estate leasing contracts, in
accordance with the procedures set out in this section, provided that the
following conditions, in addition to those under subsection 3.8 and 3.9 above:
a) The value of the property does not materially depend upon the credit
quality of the debtor;11
b) The property is appraised by an independent valuer12 at a value that does
not exceed the market value;13
c) The claim on the collateral is legally enforceable in all relevant jurisdictions
and may be realized in a reasonable period of time.
d) The property value shall be adequately monitored. Thus;
i. the value of the property shall be verified at least once every three
years for residential property and once every year for commercial real
estate, or more frequently where the market is subject to significant
changes in conditions;
where the verifications under point i) reveal a material decline in the
value of the property, a valuation shall be made by an independent
valuer, based on a value that shall not exceed the market value;14
the property valuation shall be reviewed by an independent valuer at
least once every three years for exposures exceeding 5% of the
bank’s regulatory capital15;

e) The types of property accepted as collateral and the related lending


policies shall be clearly documented;
f) The property serving as collateral shall be adequately insured against
damage.
3.10 Past Due Exposures16

The treatment of exposures classified as past due (defaulted) is provided


below.

• The risk weights for the unsecured portion of past due exposures (other than
qualifying residential mortgage loans and higher risk assets, net of specific
provisions17 (including partial write-­‐offs) are as follows:

834
i) 150% risk weight when specific provisions are less than 20% of the
outstanding amount of the exposure;
ii) 100% risk weight when specific provisions are no less than 20% of the
outstanding amount of the exposure.
For the purpose of defining the secured portion of past due exposures,
eligible collateral and guarantees will be the same as for credit risk
purposes.Qualifying residential mortgage loans that are past due shall be
risk weighted, net of specific provisions (including partial write-­‐offs) as
follows:

i) 100% when specific provisions are less than 20% of the outstanding
amount of the exposure; and
ii) 50% when specific provisions are 20% or more of the outstanding amount
of the exposure.
3.11 Higher Risk Exposures
The following exposures are regarded as higher risk exposures and are
assigned specific risk weights18 as follows:
a) Unrated securitization shall be risk weighted 1000%
b) Unrated securitization for internationally active banks (to which capital
adequacy ratio of 15% applies) shall be risk weighted 667%
c) Securitization tranches that are rated between BB+ and BB-­‐ will be risk
weighted at 350%
d) Investment in non-­‐financial firms with negative financial results over the
past two years; will be weighted at 200%.
e) Investments in venture capital firms will be risk weighted 150%
f) Non-­‐publicly traded equity investments will be risk-­‐weighted at 150%
g) Residential mortgage loans for abandoned housing development
project or construction will be risk-­‐weighted at 150%; and
h) Exposures to sovereigns, PSEs, banks, and securities firms rated below B-­‐
as well as exposures to corporates rated below BB-­‐will be risk weighted
at 150%
i) Where exposure to a particular industry within a sector (as defined by the
International Standard Industrial Classification of Economic Sectors as
issued by the CBN) is in excess of 20% of total credit facilities of a bank,
the risk weight of the entire portfolio in that industry shall be 150%. If for
instance the total exposure of a bank to the food manufacturing industry
within the Manufacturing sector is in excess of 20% of total credit facilities,
the entire portfolio of exposure to the food manufacturing industry would
be risk weighted 150%.
835
j) The treatment of both defaulted and non-­‐defaulted exposures of these
higher risk items shall be the same.
3.12 Other Assets

• 0% Risk Weight
i) Cash in hand and equivalent cash items shall be assigned a 0% risk
weight.
ii) Gold bullion held in own vaults or on an allocated basis to the extent
backed by bullion liabilities shall be assigned a 0% risk weight.
iii) All exposures deducted from capital
• 20% Risk Weight
i) Cheques and Cash items in transit shall be assigned a 20% risk weight.
• 100% Risk Weight
i) Property, plant and equipment and other fixed assets
ii) Prepayments
iii) Investments in equity or regulatory capital instruments issued by banks,
other financial institutions and other entities unless deducted from
capital base.
iv) Investments in collective investment schemes.
v) Real estate and other investments (including non-­‐consolidated
investment participation in other companies)
vi) Bank lending to subsidiaries in the same group: -­‐ where the loan is fully
secured, it would be assigned a risk weight of 100%, otherwise it would
be deducted from the capital when computing capital adequacy.
vii) Any other assets not specified above.
3.13 Off-­‐Balance-­‐Sheet Exposures:

Guarantees and Commitments

• In order to calculate the credit risk associated with guarantees and


commitments issued, banks shall first convert the exposures to credit
equivalent amount by multiplying the exposures by the related credit
conversion factors (CCF). Then, capital requirement is derived by multiplying
the credit equivalent amount by the specific risk weight of the counterparty.
Specifically, the credit conversion factors as provided in Annex B shall be
applied to the exposures.
• In the case of asset sale and repurchase agreements and outright forward
purchases, the risk weights shall be that of the assets in question and not that
of the counterparties to the transactions.

836
3.1.4 Securitization Positions
The risk-­‐weights for securitized exposures are set out in chapter two of this
framework.

CHAPTER TWO: SECURITIZATION POSITIONS

1.0 Introduction
• This section describes the various approaches in determining regulatory
capital requirements on exposures arising from securitization (traditional and
synthetic) held in the banking book and the operational requirements for
allowing regulatory capital reduction for banks.
• All banks, whether acting as originators or as third-­‐party investors, must hold
regulatory capital against all securitization exposures (on-­‐ or off-­‐balance
sheet) in the banking book arising from traditional and synthetic
securitizations or structures that contain features similar to both. Such
securitization exposures may arise from the following activities of the banks
among others:
i) investments in any securitization issue, including retention or repurchase
of one or more securitization positions;
ii) provision of credit risk mitigants or credit enhancement to parties to
securitization transactions;
iii) provision of liquidity facilities or other similar facilities;
iv) obligations due to early amortization features in a securitization; or
v) entitlements to future income, generated by a securitization through
various forms of arrangements such as deferred purchase price, excess
servicing income, gain-­‐on-­‐sale, future margin income, cash collateral
accounts or other similar arrangements.
• The framework specifies a number of methods for calculating the risk-
­‐weighted value of securitization positions. For banks that adopt the
standardized approach in calculating the capital requirement for credit risk,
the risk-­‐weighted amount of the securitized assets underlying the
securitization position shall be calculated using risk weights assigned by an
ECAI to securitization exposures.
• For regulatory capital purposes, banks may use credit risk mitigation
techniques to reduce the capital requirement for securitization positions. The
methods for using these techniques are described in the section on credit
risk mitigation.

837
2.0 Operational Requirements for the Recognition of Credit Risk Transfer
• This section establishes the minimum requirements for the recognition of the
transfer of credit risk and the regulatory capital treatment that the
originating bank shall apply to securitize assets. Where the requirements set
out in this section are not met, the securitization shall not be recognized for
regulatory capital purposes.
• Banks should understand the inherent risks of the activity and be competent
in structuring and managing such transactions. The terms and conditions of
all transactions between the originating banks and the Special Purpose
Vehicle (SPV) should be at market terms and conditions (all fees payable,
should be in a timely manner) and meet the institution’s normal credit
standards.
• An institution’s capital and liquidity plans should take into account the
potential need to finance an increase in assets on its balance sheet as a
result of early amortization or maturity events. The CBN may, if deemed
necessary, increase the institution's capital requirement.
2.1 Operational Requirements for Traditional Securitizations
Under a traditional securitization, an originating bank may exclude the
securitized exposures from the calculation of the credit risk-­‐weighted assets
only if all the following requirements are met on an ongoing basis:
a) Significant credit risks associated with the securitized exposures has been
transferred to third parties.
b) The securitized exposures are not subject to claims by the originating
bank and its creditors, even in the event of bankruptcy proceedings or
receivership against the originating bank. Compliance with this condition
shall be supported by an opinion provided by a qualified legal counsel
with relevant experience in the sector;
c) The transferee is a special-­‐purpose vehicle (SPV) and the holders of the
beneficial interests in that entity have the right to pledge or exchange
the interests without restriction;
d) The securities issued on the securitized exposures are not obligations of
the originating bank. Thus, investors who purchase the securities have
recourse only to the underlying pool of exposures.
e) The originating bank does not maintain effective or indirect control over
the transferred exposures. The originating bank is deemed to have
maintained effective or indirect control over the transferred credit risk
exposures if it;

838
• has right to repurchase from the transferee (i.e. SPV) the previously
transferred exposures in order to realize their benefits; or
• is obligated to re-­‐assume the risk of the transferred exposures. The
originating bank’s retention of servicing rights to the exposures will not
necessarily constitute indirect control of the exposures.
f) Clean-­‐up call options shall be permitted, provided they satisfy the
conditions set out in sub-­‐section 2.3.
g) The contracts that govern the securitization do not contain clauses that;
• require the originating bank to improve the credit quality of
securitization positions by altering the securitized assets
• allow for increases in a retained first loss position or credit
enhancement provided by the originating banking institution after the
inception of the transaction; or
• increase the yield payable to parties other than the originating bank,
such as investors and third-­‐party providers of credit enhancements,
in response to a deterioration in the credit quality of the securitized
assets.
Where the traditional securitization complies with the significant credit risk
transfer requirement for regulatory capital purposes, but does not pass the
de-­‐recognition test under IAS 39, the value of any securitization positions
held by the originating bank shall be determined as if the transferred assets
had been derecognized and the securitization positions recognized.
2.2 Operational Requirements for Synthetic Securitizations
Under a synthetic securitization, an originating bank may recognize the use
of Credit Risk Mitigation (CRM) techniques such as collateral, guarantees or
credit derivatives for capital relief purpose, if all the following requirements in
addition to the conditions set out under traditional securitization are met on
an ongoing basis:

a) The credit protection by which the credit risk is transferred complies with
conditions under credit risk mitigation. For this purpose, special-­‐purpose
vehicles shall not be recognized as eligible unfunded credit protection
providers19;
b) The instruments used to transfer credit risk do not contain terms or
conditions that:
• impose significant materiality thresholds below which credit protection
is deemed not to be triggered if a credit event occurs;
• allow for the termination of protection due to deterioration of the
credit quality of the underlying exposures;
839
• require positions in the securitization to be improved by the bank;
• increase the bank’s cost of credit protection or the yield payable to
holders of positions in the securitization in response to a deterioration
in the credit quality of the underlying pool;
c) Securitization structures that include a clean-­‐up call feature must satisfy
the conditions set out in sub-­‐section 2.3.
d) A written opinion is obtained from qualified legal counsel that confirms
the enforceability of the credit protection in all relevant jurisdictions.
2.3 Operational Requirements and Treatment of Clean‐Up Calls
• For securitization transactions that include a clean-­‐up call, no capital
will be required due to the presence of a clean-­‐up call if the following
conditions are met:
a) the exercise of the clean-­‐up call must not be mandatory, in form or in
substance, but rather must be at the discretion of the originating bank;
b) the clean-­‐up call must not be structured to avoid allocating losses to
credit enhancements or positions held by investors or otherwise
structured to provide credit enhancement; and
c) the clean-­‐up call must only be exercisable when 10% or less of the
original underlying portfolio, or securities issued remain, or, for synthetic
securitizations, when 10% or less of the original reference portfolio value
remains.
• Securitization transactions that include a clean-­‐up call that does not meet
all of the requirements above, shall be subject to the following treatment:
a) For a traditional securitization, the underlying exposures must be treated
as if the exposures were not securitized. Banks must not recognize in
regulatory capital any income in equity capital resulting from a
securitization transaction, such as that associated with expected future
margin income resulting in a gain-­‐ on-­‐sale; and
b) For synthetic securitizations, the purchaser of protection must hold capital
against the entire amount of the synthetically securitized exposures as if it
had not benefited from any credit protection.
• If a clean-­‐up call, when exercised, is found to serve as a credit
enhancement, the exercise of the clean-­‐up call must be considered a
form of implicit support provided by the bank and must be treated in
accordance with the supervisory guidance pertaining to securitization
transactions.

840
2.4 Treatment of Implicit Support

Where the originating bank provides implicit support20 to a securitization, it


shall;

a) Calculate capital requirement for all of the exposures associated with the
securitization transaction as if the exposures had not been securitized or
as if the transaction did not benefit from any credit protection (in the
case of synthetic securitization);
b) Deduct from Tier 1 Capital any income in equity capital resulting from a
securitization transaction, such as that associated with expected future
margin income resulting in a gain-­‐on-­‐sale; and
c) Disclose the details of the implicit support and the impact of such support
on its regulatory capital in accordance with the disclosure requirements
under Pillar III.

3.0 Standardized Approach for Securitization Exposures

• Banks are required to hold regulatory capital against all of their securitized
exposures using the guidelines contained in this section.
• Banks that apply the standardized approach for calculating credit risk
capital requirements for the type of the underlying exposure(s), securitized
are also required to use the same approach for calculating the capital
requirements for the securitization exposures.
3.1 Risk Weights for Securitization Exposures

• The risk-­‐weighted asset amount of an on-­‐balance sheet securitization


exposure is computed by multiplying the amount of the securitization
exposure by the appropriate risk weight as provided in the table below:

Risk Weights for Securitizations and Re-securitization Positions

External Credit AAA to A+ to BBB+ to BB+ to B+ and

Assessment AA-­‐ A-­‐ BBB-­‐ BB-­‐ below or

841
unrated

Securitization 20% 50% 100% 350% 1250%

Exposures

Re-­‐securitization 40% 100% 225% 650% 1250%

Exposures

• For off-­‐balance sheet exposures, unless otherwise specified, the credit


exposure equivalent of the off-­‐balance-­‐sheet securitization positions
(such as guarantees issued and loan commitments) shall be equal to the
nominal value multiplied by a credit conversion factor of 100%.
3.2 Use of Assessments
• Where the credit assessment made by an ECAI takes account of a credit risk
mitigation instrument provided for the entire securitization that is recognized
for regulatory capital purposes, the assessment may be used to determine
the position’s risk weight; otherwise, the assessment may not be taken into
consideration.
• Where credit risk protection is provided directly to an individual securitization
position, a credit assessment made by an ECAI that reflects such protection
shall not be considered. In this case, the general rules on the recognition of
credit risk mitigation instruments shall apply.
• The bank that holds the position cannot use the ECAI evaluations based on
the credit enhancement provided by the bank itself or by another member
of the banking group through guarantees, credit derivatives, credit lines,
etc. In this case, the bank shall consider the position as unrated and apply
the treatment provided for these positions.
• The use of assessments by different ECAIs for positions in different tranches of
the same securitization is not permitted.
3.3 Exceptions to Risk Weight for Unrated Securitization Exposures

A 1250% risk weight is required for unrated positions with the exception of the
circumstances described under:

a) Look-­‐through approach
b) Positions connected with Asset-­‐Backed Commercial Paper (ABCP)
programmes
c) Eligible Liquidity Facilities
842
3.4 Treatment of Unrated Most Senior Securitization Exposures (Look-­‐Through
Approach)

• Where a bank holds or guarantees the most senior exposure in a


traditional or synthetic securitization that is unrated, it may apply the “look-
­‐through” approach to determine the risk weight of the underlying
exposures provided the composition of the underlying pool is known at all
times. Under this approach, the unratedmost senior position receives the
average risk weight21 of the underlying exposures subject to supervisory
review.
• If the resulting weighted average risk weight is higher than the risk weight of
the securitization exposure below it, then the risk weight of the latter shall
apply. However, where the bank is unable to determine the risk weights
assigned to the underlying credit risk exposures, the unrated position must
be risk weighted at 1250%.
3.5 Treatment of Exposures in a Second Loss or Better Position In an Asset-
­‐Backed Commercial Paper (ABCP) Programmes
Where a bank holds unrated securitization exposures that is connected with
an ABCP programme, such exposure will be subject to a risk weight which is
the higher of 100% or the highest risk weight assigned to any of the
underlying individual exposures covered by the facility provided that the
following requirements are satisfied:
a) The exposure is economically in a second loss or better position and the
first loss position provides significant credit protection to the second loss
position;
b) The associated credit risk is the equivalent of investment grade or better;
and
c) The bank that holds such unrated securitization exposure does not also
hold or retain the first loss position in the same ABCP programme.
3.6 Risk Weights for Eligible Liquidity Facilities
• Liquidity facilities shall be deemed eligible where the following conditions
are satisfied:
a) The contractual clauses relating to the liquidity facility clearly identify
and limit the circumstances under which the facility may be drawn;
b) It is not possible for the liquidity facility to be drawn so as to provide credit
enhancement by covering losses already incurred at the time of draw-
­‐down (for example, by providing liquidity in respect of assets in default
at the time of draw-­‐ down or by acquiring assets at more than fair
value);
843
c) The liquidity facility is not used to provide permanent or regular funding
for the securitization;
d) Repayment of utilized liquidity facilities are not subordinated to the claims
of other creditors of the securitization, except for payments arising in
respect of interest rate or currency derivative contracts, fees or other
such payments that are subject to waiver or deferral;
e) It is not possible for the liquidity facility to be drawn after all applicable
credit enhancements from which the facility would benefit (specific or
general) are exhausted;
f) The facility includes a specific provision that:
i) Provides for an automatic reduction in the amount that can be drawn
equal to the amount of the assets in default; or,
ii) Where the securitized portfolio consists of rated assets, terminates the
facility if the average quality of the securitized assets falls below the
equivalent of investment grade.
• Where the above conditions are met, the bank may apply a 50% CCF to
the eligible liquidity facility regardless of the maturity of the facility.
However, if an external rating of the facility itself is used for risk-­‐weighting
the facility, a 100% CCF must be applied.
• A conversion factor of 0% shall apply to liquidity facilities that are
unconditionally revocable without advance notice, provided that the
conditions set out above are satisfied and the repayment of utilized
facility are senior to any claims on the cash flows arising from the
securitized assets.
3.7 Treatment of Overlapping Exposures

Where a bank has two or more overlapping positions in a securitization that


may be drawn under various conditions (e.g. provision of a liquidity facility
and a credit enhancement in a securitization transaction), they shall be
treated as a single position to the extent they overlap22. Where the
overlapping facilities are subject to different capital treatments, the
treatment that results in the highest capital charge should be applied on the
overlapping portion.
• However, if overlapping facilities are provided by different banks, each
bank must hold capital for the maximum amount of the facility.
3.8 Treatment of Securitizations of Revolving Underlying Exposures with Early
Amortization Provisions
• In the case of the sale of revolving assets through a securitization transaction
that contains an early amortization provision, the originating bank shall
calculate a capital requirement to cover the risk underlying the repurchase

844
of the securitized assets in addition to the capital requirement for the
securitization positions.
• Where the securitized assets include both revolving and non-­‐revolving
items, the originating banks shall apply the additional capital requirement to
that portion of the securitized pool that contains the revolving assets. In
calculating the additional capital requirement, a distinction shall be made
between the originator’s interest and the investors’ interest. The originator’s
interest shall not be subordinate to the investors’ interest.
• The exposure of the originating bank associated with its rights in respect of
originator’s interest shall not be considered a securitization position but as a
proportionate exposure to the securitized assets as if they had not been
securitized and included in the calculation of the capital requirement for
credit risk.
• In determining the additional capital requirement, the risk-­‐weighted
amount shall be obtained by multiplying the amount of the investors’
interest by the product of the appropriate conversion factor and the
average risk weight for the securitized assets, calculated under the
standardized approach as if the assets had not been securitized.
Capital requirement for originating banks = (Investors’ interest) x CCF x (Risk
weight of underlying exposures)

• The appropriate conversion factors (CCF) to be applied shall be


based on the following factors:
i) The speed of the repayment mechanism, i.e. whether the early
amortization repays investors through a controlled or non-
­‐controlled mechanism;
ii) The type of revolving assets securitized, i.e. whether or not they
are unconditionally cancellable without notice by the
originating bank.
• An early amortization provision shall be considered to be “controlled”
where the following conditions are met:
a) The originating bank has an appropriate capital and liquidity
management plan in place to ensure that it has sufficient capital and
liquidity available in the event of an early amortization;

b) Throughout the duration of the transaction there is a pro-­‐rata sharing


between the originator’s interest and the investors’ interest of payments
of interest and principal, expenses, losses and recoveries based on the

845
value of the assets securitized at one or more reference points during the
month;

c) The amortization period is sufficient to repay or recognize as in default at


least 90% of the total debt (the sum of the originator’s interest and the
investors’ interest) outstanding at the beginning of the early amortization
period;
d) During the amortization period, the speed of repayment shall be no more
rapid than would have been achieved using straight-­‐line amortization.
• Securitization transactions with early amortization clauses that do not
satisfy the conditions above will be treated as a non-­‐controlled early
amortization
3.8.1 Determination of CCFS for Controlled and Non-­‐Controlled Early
Amortization Features
• In the case of securitizations involving retail revolving assets that are
unconditionally cancellable without notice and are subject to an early
amortization provision that is triggered when the excess spread falls to a
certain level, the appropriate conversion factor shall be based on a
comparison between the three-­‐month average excess spread and the
contractually established excess spread level at which excess spread is
required to be trapped.
• Where the securitization does not contractually provide for excess
spread to be trapped, the trapping point shall be deemed to be
4.5% points greater than the excess spread level that triggers early
amortization.
• The appropriate conversion factor shall be determined separately for
each retail securitization transaction with controlled and non-
­‐controlled early amortization provisions (see table below),
expressed as the ratio between the three-­‐month average excess
spread and trapping level excess spread.

846
Conversion Factor for Calculating the Additional Requirement

betwee
Ratio n the average Securitizations Securitizations with

exces
s spread and trapping with “uncontrolled” early

level excess spread “controlled “early amortization provisions

amortization

provisions

Greater than
133.33% 0% 0%

From less than 133.33% to 1% 5%

100%

From less than 100% to 75% 2% 15%

From less than 75% to 50% 10% 50%

From less than 50% down to 20% 100%

25%

Less than 25% 40% 100%

847
• All other securitized revolving exposures (i.e. those that are committed
and all non-­‐ retail exposures) with controlled early amortization
features will be subject to a CCF of 90% against the off-­‐balance sheet
exposures.
• All other securitized revolving exposures (i.e. those that are committed
and all non-­‐ retail exposures) with non-­‐controlled early amortization
features will be subject to a CCF of 100% against the off-­‐balance sheet
exposures.
• The total capital requirement for all the originating bank’s positions
involving early amortization will be subject to a maximum capital
requirement equal to the greater of:
i) the capital required for retained securitization exposures; or
ii) the capital requirement that would apply had the exposures 23 not
been securitized24
• Originating banks shall not be required to calculate any additional
capital requirement for:
i) Securitizations of revolving assets whereby investors remain fully
exposed to the credit risk of future draws, so that the risk on the
securitized assets does not return to the originating bank even after
an early amortization event has occurred; this occurs even where
the early amortization provisions mirror the time structure of the
revolving assets transferred;
ii) Securitizations where any early amortization provision is triggered
solely by events not related to the financial performance of the
securitized assets or of the originating bank, such as, material
changes in tax laws or other regulations.

CHAPTER THREE: CREDIT RISK MITIGATION

1.0 Introduction

• Credit Risk Mitigation (CRM) techniques consist of the use of relevant


financial collateral, guarantees, derivatives, estate mortgages and lease
transactions or other instruments in relation to all banking book exposures
and asset classes, that, would reduce the risk recognised in calculating the
bank’s capital requirements.

848
• Where a rating has already taken into account a particular guarantee
which has been pledged by a borrower, then such guarantee cannot be
considered any longer for purposes of credit risk mitigation.
• Banks must demonstrate to the CBN that they have adequate risk
management policies and procedures to control risk arising from the use of
CRM techniques

2.0 Credit Risk Mitigation Categories


• Unless otherwise specified, two categories of credit risk mitigation are
recognised for standardized credit risk capital requirement calculation
methods: funded and unfunded credit risk mitigation.
2.1 Funded Credit Risk Mitigation:
a) Financial collateral;
b) Master netting agreements;
c) On-­‐balance-­‐sheet netting;
d) Other funded credit protection
2.2 Unfunded Credit Risk Mitigation:
a) Guarantees and counter guarantees;
b) Credit derivatives25.
3.0 General Requirements for Accepting Instruments as Credit Risk Mitigants for
Capital Calculation26

The requirements for any of the credit risk mitigants to be used must have been
met at the time the credit protection is established and compliance shall
continue over its duration.

• The general requirements27 seek to ensure the legal certainty and


effectiveness of credit protection, including:
i) The binding nature of the legal commitment between the parties,
ii) Its enforceability and validity in the local jurisdiction
iii) Completeness of documentation,
iv) Enforceability of the protection in all relevant jurisdictions against third
parties and
v) The timeliness of liquidation in the event of breach.
3.1 Legal Certainty

• Credit protection acquired by a bank shall be legally valid, effective,


binding on the protection provider and enforceable in all relevant

849
jurisdictions, including in the event of the insolvency or bankruptcy of
the underlying borrower and/or protection provider28.
• In particular, the bank shall:
a) Ensure in advance that the instrument used confers a full and freely
enforceable right to activate the protection.
b) Fulfil any requirements to ensure that the credit protection is valid,
effective, binding and enforceable under the applicable law. These
shall include, but not limited to:
i) registration and perfection of deeds of mortgage,
ii) establishing proper liens on property and other collateral or
instruments acquired or created for credit protection, and
iii) obtaining and conserving appropriate documentation explicitly
establishing the existence of the credit protection;
c) Ensuring compliance with all relevant laws and regulations that may void
the validity, effectiveness, binding and enforceability of the protection.
3.2 Organisational Requirements

• Banks shall establish appropriate policies and processes taking account of


the complexity of its organisational structure.
• Credit Protection must be managed by a system, which governs the entire
process of obtaining, valuing, controlling and realising the CRM instruments
used. Credit protection buyers must have in place documented policies and
procedures that will:
i) Specify the types of CRM instruments eligible for regulatory capital
purposes.
ii) Value and assess the impact of instrument on the overall risk profile of the
exposure.
iii) Ensure that banks continue to perform a complete assessment of the
credit risk of the protected exposure, even when the CRM has been
recognised for regulatory capital purposes.
iv) Establish the appropriate means of measuring, managing and controlling
concentration risk and residual risks arising from the CRM instruments e.g.
failure, reduction or termination of protection.
v) Provide appropriate operational structures for ensuring compliance with
the requirements for the recognition of CRM techniques for regulatory
capital purposes.
vi) Ensure periodic reviews of the status of the legal documentation, the
impact of any changes in the law and any consequent actions to be
taken.
850
vii)Adopt specific measures to ensure the uniformity of local structure’s
assessments and operational procedures.
3.3 Timely Liquidation

Credit Protection acquired by banks must be easily liquidated or realizable


in a timely manner. To this end, each bank should have in place appropriate
policies and procedures for the disposal and realisation of any acquired
credit protection should the need arise.

3.4 Disclosure

The recognition of CRM techniques for regulatory capital purposes shall be


subject to the relevant disclosure requirements prescribed for financial
institutions under Pillar III disclosure requirements.

4.0 Standardized Approach for Funded Credit Protection

4.1 Financial Collateral

4.1.1 Specific Requirements

For regulatory capital purposes, financial collateral shall have the


characteristics described below:

1. Correlation

• There shall be no positive material correlation between the value of the


financial collateral and the credit quality of the borrower.
• In all cases, securities issued by the borrower, or any related group entity,
shall not be eligible to be financial collateral.
2. Fair Value

• Banks should calculate the fair value of the collateral and revalue it at
least once every six months or whenever they have reason to believe
that a significant decrease in its fair value has occurred.
3. Segregation

• Where the financial collateral is held by a third party, banks shall ensure
segregation of the assets of the third party from the collateral (external
segregation) and the segregation of assets belonging to other parties
held by the same custodian (internal segregation)29.

851
4.1.2 Methods of Calculating Capital Requirement

In calculating the capital requirement for credit exposures secured by


eligible financial collateral, banks may use;

a) The Simple Method

The risk weight associated with the instrument provided as credit protection
shall be applied to the collateralised portion of the exposure. Maturity
mismatching is not permitted under this method. The collateral must be
pledged for at least the entire life of the exposure, it must be marked to
market and re-­‐valued at a minimum frequency of six months. The portion
of the exposure collateralised by the market value of the recognised
collateral will receive a risk weight applicable to the collateral instrument.
b) The Comprehensive Method

Under this method, the amount of the exposure shall be reduced by the
value of the collateral. In calculating the capital requirement, the value of
the exposure and that of the collateral shall be adjusted to take account of
market price volatility by applying appropriate haircuts to both amounts
(collateral value and exposure value)30.

852
See Annex D on the application of the calculation methods.

4.2 Master Netting Agreements

4.2.1 Specific Requirements

The effects of the reduction of credit risk due to bilateral netting contracts
between the bank and a single counterparty relating to securities financing
transactions shall be recognised, provided that in addition to the general
requirements relating to legal certainty set out above, the contracts:

• Give the non-­‐defaulting party the right to terminate and close-­‐out in a


timely manner all transactions under the agreement in the event of
default, including in the event of the bankruptcy or insolvency of the
counterparty;
• Provide for the netting, or other equivalent effect, of reciprocal debtor
and creditor positions on transactions closed out under a master
agreement so that a single net amount is owed by one party to the
other.

853
The specific requirements for financial collateral where applicable must also be
met.

The netting of banking book and trading book positions shall be permitted only
where the transactions covered by the agreement satisfy the following
conditions:

a) All the transactions are re-­‐valued daily at current market prices;

b) The instruments used as collateral for the transaction are among those
eligible as financial collateral (see Annex C).

These regulations shall apply to master netting agreements involving similar


transactions (single-­‐product netting) and master netting agreements involving
different products (cross-­‐product netting).

4.2.2 Methods of Calculating Capital Requirement

In calculating the capital requirement for credit exposures secured by


master netting agreements under the standardized approach, banks are
expected to use the comprehensive method only.

4.3 On-Balance Sheet Netting

4.3.1 Specific Requirements

The recognition of the effects of on-­‐balance-­‐sheet netting shall be


subject to the following specific requirements:

i) The netting agreement shall be in writing, which shall specifically identify


the assets (loans) and liabilities (deposits) subject to netting.
ii) The bank shall be able to identify at any time, all the loans (assets) and
deposits (liabilities) in respect of the same counterparty that are subject
to the netting agreement;
iii) In adopting precautions to preserve the effective availability of the
liabilities (deposits) to be offset against the assets (loans), restrictions on
the disposal of the liabilities shall be established.
iv) The bank shall monitor and control relevant exposures on a net basis.

854
4.3.2 Methods of Calculating Capital Requirement

In calculating the capital requirement for credit exposures secured by on-


­‐balance netting agreements, banks may:

i) In respect of liabilities (deposits) of the lending bank, apply the same


treatment provided for cash collateral.
ii) Where the liabilities subject to the netting agreement mature sooner than
the asset, apply the provisions regarding maturity mismatch.
4.4 Other Funded Credit Protection

The instruments described below may be recognised for credit risk mitigation
purposes. In calculating the credit risk mitigation, the unfunded credit
protection calculation method shall be applied.

4.4.1 Deposits with Third Party Institutions

The cash in the supervised institutions or similar instruments held by those


outside of a custodial service and pledged in favour of the bank that
calculates the requirement may be considered as a guarantee issued by
the institution itself provided that:

i) The borrower’s claim against the third party institution is openly pledged
or assigned to the bank and the pledge is legally effective and
enforceable in all relevant jurisdictions;
ii) The third party institution is notified of the pledge or assignment; and is
able to make payment solely to the bank or to other parties with the
bank’s consent;
iii) The pledge is unconditional and irrevocable.
4.4.2 Life Insurance

Insurance policies pledged to the bank may be treated as protection given


by the company issuing the policy, provided that:

a) The company providing the life insurance can be recognised as an


eligible guarantor.
b) The life insurance policy is openly pledged or assigned to the bank.
c) The company providing the insurance is notified of the pledge or
assignment and as a result may not pay the amount payable under the
contract without the bank’s consent.
d) The declared surrender value of the policy is non-­‐reducible;

855
e) The bank has the right to cancel the policy and receive the surrender
value in a timely fashion in the event of borrower default;
f) The bank is informed of any non-­‐payments under the policy by the
policyholder;
g) The credit protection is provided for the maturity of the loan. Where the
insurance relationship ends before the loan relationship expires, the bank
shall ensure that the amount deriving from the insurance contract serves
as security until the end of the duration of the credit agreement;
h) The pledge or assignment shall be legally effective and enforceable in all
jurisdictions, which are relevant at the time of the conclusion of the
credit agreement.
The value of the credit protection shall be the surrender value of the policy.

4.2.3 Financial Instruments Issued by Third Parties

• Financial instruments issued by supervised institutions that the issuer has


undertaken to repurchase at the request of the bearer may be treated as a
guarantee of the issuer.
• The value of the credit protection recognised shall be as follows:
a) Where the instrument will be repurchased at face value, the value of the
protection shall be that amount.
b) Where the instrument will be repurchased at market price, the value of
the protection shall be the value of the instrument calculated in
accordance with the rules applicable to unrated debt securities.

5.0 Standardized Approach for Unfunded Credit Protection

5.1 Guarantees31 and Counter-Guarantees

5.1.1 Specific Requirements

Without prejudice to the general requirements set out for the recognition of
the credit risk mitigation, the following additional conditions will apply for the
recognition of the effects of guarantees for regulatory capital purposes:

a) The credit protection shall be direct;


b) The extent of the credit protection shall be clearly defined and
incontrovertible;
c) The credit protection contract shall not contain any clause that could
allow the protection provider to unilaterally cancel the protection. If the
contract allows the protection provider to withdraw, the agreement

856
between the parties shall safeguard the coverage and all obligations
arising, prior to the exercise of the withdrawal;
d) The credit protection contract shall not contain any clause, the fulfilment
of which is outside the direct control of the lending bank, which could
have one of the following effects:
i) To increase the effective cost of the protection as a result of
deteriorating credit quality of the protected exposure;
ii) To prevent the protection seller from being obliged to pay out in a
timely manner in the event the original borrower fails to make any
payments due;
iii) To allow the protection seller to reduce the maturity of the credit
protection;
e) In the event of default of the counterparty, the bank shall have the right
to recoup, in a timely manner, any claim due under the guarantee32 . In
particular, payment shall not be subject to the lending bank having to
pursue the borrower.
f) The guarantee shall cover all payments the borrower is required to make
in respect of the claim. Where certain types of payments are excluded
from the guarantee, the recognised value of the guarantee shall be
adjusted to reflect the limited coverage;
g) The guarantee shall be an explicitly documented obligation assumed by
the guarantor.

In the event of an asset mismatch, guarantee contracts shall contain a


cross default clause under which default in respect of a specific credit
exposure of a given borrower shall extend to all exposures to the same
person.

5.1.2 Eligible Guarantors

Guarantees issued by parties falling within the categories listed below shall
be recognised:

a) Central governments and central banks;


b) Public sector entities and regional and local authorities;
c) Multilateral development banks;
d) Supervised institutions;
e) Corporates that have a credit assessment by an ECAI associated with
credit quality step 2 or above.
857
5.1.3 Methods of Calculating Capital Requirement

In calculating the capital requirement:

a) Banks may substitute the risk weight of the borrower with that of the
guarantor.
b) The value of the credit protection provided by a guarantee shall be
the amount that the protection provider has undertaken to pay in the
event of the default of the borrower.
c) Where the guarantee is denominated in a currency different from that
in which the exposure is denominated (currency mismatch) the value
of the credit protection shall be reduced as provided for in Annex F.
d) In calculating the capital requirements, a guaranteed exposure with
respect to borrowers assigned to the retail exposure portfolio may be
valued as if it were assigned to the portfolio in which the guarantor is
classified.
e) The regulations set out in this section shall apply in the event of
maturity mismatch.
f) Where the protected amount is less than the exposure value and the
secured and unsecured portions are of equal seniority (i.e. the bank
and the protection provider share the losses on a pro-­‐rata basis), the
capital requirements shall be reduced proportionately.
g) Where the protected amount is less than the exposure value and the
secured and unsecured portions are of unequal seniority (i.e. the bank
and the protection seller are liable for losses with different levels of
seniority), with the risk being segmented (tranched transactions), the
regulations governing securitisation operations shall apply.
5.1.4 Counter-Guarantees and Indirect Guarantees

• Where an exposure is covered by a guarantee that is counter-


­‐guaranteed by one of the entities in categories a) through c) listed
above, the exposure may be treated as covered by a guarantee
provided by the counter-­‐guarantor, provided that the following
conditions are met:
a) The counter-­‐guarantee covers all the credit risk elements of
the protected exposure;
b) Both the original guarantee and the counter-­‐guarantee meet
the requirements for guarantees, except that the counter-
­‐guarantee need not be direct;

858
c) The bank is able to demonstrate that the cover is robust and
that nothing in the historical evidence suggests that the
coverage of the counter-­‐guarantee is less than effectively
equivalent to that of a direct guarantee by the counter
guarantor.
• A counter-­‐guarantee provided by one of the protection providers
listed above shall be recognised even where it does not guarantee
the direct guarantee of the exposure but rather a counter-
­‐guarantee of the direct guarantee provided by a protection seller
that is not an eligible counter-­‐guarantor.
5.2 Credit Derivatives

5.2.1 Eligible Instruments

For the purposes of these regulations, the following types of credit


derivatives and instruments that may be recognised:

a) Credit default swaps;


b) Total return swaps;
c) Credit linked notes.
In order to be recognised for regulatory capital purposes, the protection
shall be provided by a protection provider belonging to one of the
categories listed in the section on eligible guarantors.

Where a bank uses a credit derivative in the supervisory trading book to


hedge exposures in the banking book (internal hedges), the protection shall
be recognised only if the credit risk transferred to the trading book is, in turn,
transferred to one or more third parties through credit derivatives that satisfy
the eligibility requirements provided for in these regulations.

5.2.2 Specific Requirements

Without prejudice to the general requirements set out on CRM, recognition


of credit derivatives shall be subject to the specific requirements applicable
to guarantees and the following conditions:

a) Subject to point b) below, the credit events specified under the credit
derivative shall at a minimum include all the cases listed below, under
the conditions specified:
i) The failure to pay the amounts due under the terms of the underlying
obligation that are in effect at the time of such failure (with a grace
859
period that is closely in line with or shorter than the grace period in the
underlying obligation);
ii) The bankruptcy, insolvency or inability of the borrower to pay its debts,
or its failure or admission in writing of its inability generally to pay its
debts as they become due, and analogous events;
iii) The restructuring of the underlying obligation involving forgiveness or
postponement of principal, interest or fees that results in a credit loss
event (i.e. value adjustment or other similar debit to the income
statement);
b) Where the credit events specified under the credit derivative do not
include restructuring of the underlying obligation as described in point
(a)(iii) above, the credit protection may nonetheless be allowed subject
to a reduction in the recognised value;
c) In the case of credit derivatives providing for cash settlement, a robust
valuation process shall be in place in order to estimate loss reliably. There
shall be a clearly specified period for obtaining post-­‐credit-­‐event
valuations of the underlying obligations;
d) If the protection buyer’s right and ability to transfer the underlying
obligation to the protection provider is required for settlement, the terms
of the underlying obligation shall provide that any required consent to
such transfer may not be unreasonably withheld;
e) The identity of the parties responsible for determining whether a credit
event has occurred shall be clearly defined. This determination shall not
be the sole responsibility of the protection seller. The protection buyer
shall have the right or ability to inform the protection provider of the
occurrence of a credit event.
An asset mismatch under a credit derivative shall only be allowed if:

a) The reference obligation or the obligation used for purposes of


determining whether a credit event has occurred, as the case may be,
ranks paripassu with or is junior to the underlying obligation;
b) The underlying obligation and the reference obligation or the obligation
used for purposes of determining whether a credit event has occurred,
as the case may be, share the same borrower (i.e. the same legal entity)
and there are in place legally enforceable cross-­‐default or cross-
­‐acceleration clauses.

860
5.3.3 Method of Calculating Capital Requirement

Without prejudice to the provisions of the following sub-­‐section, treatment


of credit default swaps and total rate of return swaps for regulatory capital
purposes shall be the same as that for guarantees.

In the case of credit derivatives that do not include as a credit event


restructuring of the underlying obligation involving forgiveness or
postponement of principal, interest or fees that result in a credit loss event
(e.g. the making of a value adjustment or other similar debits to the income
statement), the value of the credit position:

a) Shall be reduced by 40% where the amount that the protection seller has
undertaken to pay is not higher than the exposure value;
b) Shall be no higher than 60% of the exposure value where the amount
that the protection provider has undertaken to pay is higher than the
exposure value.
Credit linked notes issued by the lending bank shall be treated as cash
collateral up to the amount collected.

5.3.4 Unfunded Mutual Guarantees

Where mutual guarantee systems provide unfunded credit protection, the


specific requirement for guarantees shall be deemed satisfied where either
of the following conditions are met:

a) The bank has the right to obtain in a timely manner a provisional


payment by the guarantor calculated to represent a robust estimate
of the amount of the economic loss, including losses resulting from the
non-­‐payment of interest and other types of payment which the
borrower is obliged to make, likely to be incurred by the bank
proportional to the coverage of the guarantee. The bank shall
establish the appropriateness of the payment with respect to the
losses incurred.
b) The loss-­‐protecting effects of the guarantee, including losses resulting
from the non-­‐payment of interest and other types of payments
which the borrower is obliged to make, justify treatment as a
guarantee.

861
6.0 Maturity Mismatches

6.1 Rules for recognition of maturity

a) Subject to a maximum of 5 years, the effective maturity of the


protected asset shall be the longest possible remaining time before
the borrower is scheduled to fulfil its obligations.
b) Subject to the following paragraph, the maturity of the credit
protection shall be the time to the earliest date at which the credit
protection may terminate or be terminated.
c) Where there is an option to terminate the protection that may be
exercised at the discretion of the protection provider, the maturity of
the protection shall be taken to be the time to the earliest date at
which that option may be exercised.
d) Where there is an option to terminate the protection that may be
exercised at the discretion of the protection buyer and the terms of
the arrangement at origination of the protection contain a positive
incentive for the bank to call the transaction before contractual
maturity, the maturity of the protection shall be taken to be the time
to the earliest date at which that option may be exercised; otherwise
such an option may be considered not to affect the maturity of the
protection.
e) Where a credit derivative is not prevented from terminating prior to
expiration of any grace period required for a default on the
underlying obligation to occur, the maturity of the protection shall be
reduced by the amount of the grace period.
6.2 Effects on the Valuation of Credit Protection

a) Protection of less than three months residual maturity, the maturity of


which is less than that of the underlying exposure, shall not be
recognised.
b) Where there is a maturity mismatch, the credit protection shall not be
recognised where the original maturity of the protection is less than
one year.
c) Unfunded credit protection shall be recognised in the amount
adjusted in accordance with Annex G for all banks.
d) Where the bank uses the simple method in the prudential treatment of
financial collateral, the residual maturity of the guarantee shall not be
less than that of the exposure.

862
Definition of Terms

• Asset mismatch shall mean a situation in which the underlying asset


differs from the reference obligation due to liquidity or changes in interest
or exchange rates;
• Asset-­‐backed commercial paper (ABCP) is a process by which an SPV
(conduit) issues a commercial paper and uses the proceeds of such
issuance primarily to obtain interests in various types of assets either
through asset purchase or secured lending transactions. An ABCP
programme includes several parties that provide services for the SPV;
credit enhancement that provides loss protection and liquidity facilities
that assist in the timely repayment of the commercial paper;
• Asset-­‐backed securities (ABS) shall mean securities issued by
securitization vehicles as part of securitization transactions having
different levels of subordination in supporting losses;
• Capital market-driven transaction shall mean transactions giving rise to
an exposure secured by collateral, which include a provision conferring
upon the bank the right to receive margin frequently. These include
margin lending and over-the-counter (OTC) derivatives with the
exchange of margins between counterparties;
• Cash assimilated instrument shall mean certificates of deposit or other
similar instruments issued by the bank that acquires protection;
• Central government shall mean the central government of a sovereign
state;
• Clean-up call option shall mean a contractual option that permits the
originating bank to repurchase or extinguish the securitization positions
before all of the securitized assets have been repaid, when the amount
of outstanding exposures falls below a certain threshold. In a traditional
securitization, this is usually achieved through the repurchase of the
remaining securitization positions. In a synthetic securitization, the option
usually takes the form of a clause that extinguishes the credit risk
protection of the securitized asset;
• Collective Investment Schemes shall mean a scheme in whatever form,
including an open-­‐ended investment company, in pursuance of which
members of the public are invited to invest money or other assets in a
portfolio, and in terms of which:
i) two or more investors contribute money or other assets and hold a
participatory interest;

863
ii) The investors share the risk and benefit of investment in proportion to
their participatory interest in a portfolio of a scheme or any other
basis determined in the deed, but not a collective investment
scheme authorized by another act.
The types of collective investment schemes applicable in Nigeria are;

i) Unit Trust (open-­‐ended or closed ended)


ii) Venture capital funds
iii) Open-­‐ended Investment Companies
iv) Real Estate Investment Schemes
v) Specialized funds
• Credit derivatives shall mean contracts in which the protection provider is
required to perform a contractually-­‐agreed obligation triggered by a
specified credit event; such obligation consists of paying an amount
equal to: i) the decline in the value of the reference obligation with
respect to the initial value (“cash settlement variable”); ii) the entire
notional value of the reference obligation in exchange for physical
delivery of the reference obligation or another equivalent financial
instrument (“deliverable obligation”) specified in the contract; iii) a
specified fixed amount (“binary payout”);
• Credit enhancement shall mean a contractual arrangement whereby
the credit quality of a securitization position is better than what it would
have been in the absence of this enhancement. Credit enhancement
may be provided by more junior tranches in the securitization and other
types of credit protection;
• Credit event shall mean an event agreed by the parties that triggers the
protection provider’s obligation to fulfil the undertaking established in the
contract;
• Early amortization provision in securitized positions shall mean a
contractual provision that, upon the occurrence of specified events,
triggers repayment of investors’ securitization positions prior to the
originally stated maturity of the securities issued;
• Excess spread shall mean the difference between the revenue flows from
the securitized assets and the costs and expenses connected with the
securitization (for example, interest paid to holders of the ABS securities
and servicing commissions);
• Exposures shall mean on-­‐balance sheet assets (for example, loans,
shares, bonds, subordinated loans) and off-­‐balance-­‐sheet assets (for
example, guarantees issued). Exposures shall not include assets
864
deducted from regulatory capital and those allocated to the supervisory
trading book subject to capital requirements for market risk;
• External Credit Assessment Institution (ECAI) shall mean a credit
assessment agency recognized by the Central Bank of Nigeria;
• Fair value shall mean the amount at which an asset may be exchanged,
or a liability settled, in a free transaction between knowledgeable,
independent parties.
• Federal government shall mean the government of the Federal Republic
of Nigeria;
• First losses in securitized positions shall mean losses on securitized
portfolios, the amount of which reduces the right of securitization
positions to receive payments, starting with that with the highest degree
of subordination;
• First-­‐to-­‐default derivatives shall mean contracts referring to a number
(basket) of borrowers under the terms of which the protection provider’s
payment obligation is triggered by the first default in the basket and that
this credit event terminates the protection afforded by the derivative
contract;
• Funded credit protection shall mean the credit risk mitigation techniques
that give the protection buyer the right to satisfy its claim with specified
assets or cash amounts. These include financial collateral, real estate
collateral and movable property collateral (other physical collateral),
credit linked notes, trade receivables, on-­‐ and off-­‐balance sheet
netting; other types of protection are listed in sub-­‐section 4.4 of this
chapter. Funded credit protection shall also include guarantees given
through securities repurchase and lending/borrowing transactions and
the related master netting agreements, as well as leasing transactions;
• Future margin income (FMI) shall mean the amount of income
anticipated to be generated by the relevant exposures over a certain
period of time that can reasonably be assumed to be available to cover
potential credit losses on the exposures (i.e. after covering normal
business expenses). FMI usually does not include income anticipated from
new accounts.
• Gain-­‐on-­‐sale shall mean any residual interest retained by the
originating bank that is, an on-­‐balance sheet asset that represents a
retained beneficial interest in a securitization accounted for as a sale,
and that exposes the originating bank to any credit risk directly or

865
indirectly associated with the transferred asset, that exceeds a pro rata
share of that originating bank's claim on the asset.
• Implicit support securitized positions shall mean credit enhancement
provided by the originator or by the sponsor in excess of its contractual
obligations to reduce actual or potential losses by holders of
securitization positions.
• Investment grade: A securitization exposure is deemed to be of
investment grade if an ECAI recognized by the bank has assigned it a
rating within credit quality steps 1 to 3.
• Investor shall mean the person that holds a risk position in a securitization;
• Investors’ interest shall mean the portion of the pool of revolving assets
that forms the complement to the originators’ interest.
• Loan to value ratio shall mean a ratio used by lenders to express the ratio
of loan to the value of an asset purchased. The higher the ratio, the more
riskier the loan will be considered to the lender.
• Liquidity facility shall mean a securitization position arising from a
contractual agreement to provide funding to ensure the timeliness of
cash flows to investors;
• Margin lending shall mean credit extended by an intermediary in
connection with the purchase, sale, carrying or trading of securities by
the counterparty for which an exchange of margins is required. Margin
lending shall not include traditional financing collateralised by securities;
• Master netting agreements are legal agreements between two parties
that have multiple derivatives contracts with each other that provide for
the net settlement of all contracts through a single payment, in a single
currency, in the event of default or termination of any one contract.
• Maturity mismatch shall mean a situation where the residual maturity of
the credit protection is less than that of the protected exposure;
• Nth-­‐to-­‐default derivatives shall mean contracts referring to a number
(basket) of borrowers under the terms of which the protection provider’s
payment obligation is triggered by the nth default in the basket;
borrowers may be assigned different settlement amounts;
• Originating bank: A bank shall be considered an originating bank in a
securitization transaction if it meets either of the following conditions:
i) The bank originates directly or indirectly (e.g. a bank purchases a
third party financial instrument via its balance sheet or acquires
credit risk through credit derivatives and subsequently sells or

866
transfers to an SPV) the underlying exposures included in the
securitization; or
ii) The bank serves as a sponsor of an ABCP conduit or similar
programme that acquires exposures from third-­‐party entities. In the
context of such a program, a bank would generally be considered a
sponsor and, in turn, an originator if it, in fact or in substance,
manages or advises the programme, places securities into the market,
or provides liquidity and/or credit enhancements.
• Originator’s interest shall mean the value of the portion held by the
originating bank in a portfolio of revolving exposures, the drawn amounts
of which have been securitized. This portion shall be equal to the ratio
between the amount of the securitized drawn amounts whose cash flows
are not available to repay investors in the securitization and total
securitized drawn amounts. The undrawn amounts shall also be multiplied
by this ratio to determine the portion of the available margin attributable
to the originator and the portion attributable to the investors.
• Protection buyer shall mean the party that purchases protection against
credit risk (or sells the credit risk);
• Protection provider shall mean the party that sells the credit risk
protection (or purchases the credit risk);
• Rating shall mean the credit assessment assigned by an ECAI;
• Reference entity shall mean the party/parties or country (in the case of
sovereign risk) to which the reference obligation refers;
• Reference obligation shall mean the obligation used to determine the
cash settlement value or the deliverable obligation;
• Reference rate shall mean the market interest rate increased or
decreased by a specified spread;
• Revolving underlying exposures involve exposures where the borrower is
permitted to vary the drawn amount and repayments within an agreed
limit under a line of credit (e.g. credit card receivables and corporate
loan commitments)
• Securities financing transactions shall mean securities or commodities
repurchase/reverse repurchase transactions, securities or commodities
lending/borrowing transactions and margin lending transactions;
• Securitization position shall mean any type of exposure to a securitization,
such as securities issued by special-­‐purpose vehicles, liquidity facilities,
subordinated loans, interest rate or currency derivative transactions
performed as part of a re-­‐ securitization;

867
• Securitization shall mean a transaction that divides the credit risk of an
asset or portfolio of assets into two or more tranches and in which:
i) Payments in the transaction are dependent on the performance of
the asset or portfolio of assets in question;
ii) Tranches have different degrees of subordination in supporting the
losses of the securitized assets or portfolio;
• Securitized assets shall mean individual assets or groups of assets that
have been securitized. These include loans, debt securities, equity
securities, ABS securities and loan commitments.
• Solicited rating shall mean a rating assigned for a fee following a request
from the entity evaluated. Ratings assigned without such a request shall
be treated as equivalent to solicited ratings if the entity had previously
obtained a solicited rating from the same ECAI;
• Special-­‐purpose vehicle (SPV) shall mean the company or other legal
entity other than the bank, organized for the purpose to carrying out one
or more securitizations which possess the following characteristics:
i) its activities are limited solely to those appropriate to accomplishing
that objective;
ii) the structure of the vehicle is designed to isolate the obligations of the
vehicle from that of the originating bank, and;
iii) the holders of the beneficial interests in it may pledge or exchange
those interests without restriction.
• Supervised institutions shall mean deposit money banks, discount houses
and other financial institutions under the supervisory purview of the CBN.
• Synthetic securitization shall mean a securitization transaction in which
the transfer of credit risk in two or more tranches is achieved through the
use of credit derivatives or guarantees with no transfer of the asset or
portfolio of assets. Synthetic securitizations shall include transactions in
which it is possible, using credit protection, to isolate within a portfolio
composed of one or more assets a risk component that supports the first-
­‐loss portion of the portfolio (tranched transactions);
• Total rate of return swaps (“TRORs”) shall mean contracts under which the
protection buyer (also called the “total return payer”) agrees to transfer
all the cash flows generated by the reference obligation to the
protection provider (also called the “total return receiver”), who agrees
to transfer the cash flows associated with changes in a reference rate to
the protection buyer. On the payment dates (or the termination date of
the contract), the total return payer pays the total return receiver any

868
increase in the value of the reference obligation (i.e. the positive
difference between the market value and the initial value of the
reference obligation). In the case of a decline in the value of the
reference obligation, the total return receiver pays the equivalent
amount to the total return payer33;
• Traditional securitization shall mean a securitization through which credit
risk is transferred by selling the securitized assets to a special-­‐purpose
vehicle that issues securities (ABS) that do not represent payment
obligations of the originating bank. Traditional securitizations shall include
the transfer of credit risk by means of loans granted by the vehicle to the
originating bank (sub-­‐ participation);
• Tranches shall mean contractually established segments of credit risk
associated with an exposure or a number of exposures, in which each
segment is associated with a greater or lesser degree of subordination in
supporting losses than another segment, without taking account of any
credit protection provided by third parties directly to holders of positions
in the tranches. Securitization exposures that cover the “first loss” incurred
by the securitized portfolio represent the junior risk (for example, junior
securities, subordinated loans);
• Underlying asset shall mean the on-­‐balance-­‐sheet asset for which
protection has been acquired;
• Unfunded credit protection shall mean the credit risk mitigation
techniques based on the undertaking of a third party to pay a specified
amount in the event of the default of the borrower or on the occurrence
of other specified credit events. These include guarantees and credit
derivatives, with the exception of credit linked notes;
• Unsolicited rating shall mean a rating assigned without a request from the
entity evaluated and without payment of a fee.
Definition of Past Due or Defaulted Exposures
Past due or defaulted exposures shall include; bad debts, substandard loans,
and restructured exposures. Specifically, a default is considered to have
occurred with regard to a particular obligor when either or both of the two
following events have taken place:-­‐
i) The bank considers that the obligor is unlikely to pay its credit obligations
to the banking group in full, without recourse by the bank to actions such
as realizing security (if held).
ii) The obligor is past due more than 90 days on any material credit
obligation to the banking group.

869
The elements to be taken as indications of unlikeliness to pay include but are
not limited to the following:

• The bank puts the credit obligation on non-­‐accrued status (e.g.


suspended interest).
• The bank makes a charge off or an account-­‐specific provision or
impairment resulting from a significant decline in credit quality
subsequent to taking on the exposure (impairment provisions on equity
exposures set aside for price risk do not signal default).
• The bank sells the credit obligation at a material credit related economic
loss. (For securities financing, the facility should not be recorded as a
default if the collateral is liquidated not due to the deterioration of an
obligor’s creditworthiness but to restore an agreed collateral coverage
ratio given a fall in the value of collateral and this has been disclosed to
the customer in writing at the granting of this facility).
• The bank consents to a restructuring of the credit obligation where this is
likely to result in a diminished financial obligation caused by the material
forgiveness, or postponement of principal, interest or (where relevant)
fees. This constitutes a granting of a concession that the bank would not
otherwise consider.
• Default of a related obligor. Banks must review all related obligors in the
same group to determine if that default is an indication of unlikeliness to
pay by anyother related obligor. Banks must judge the degree of
economic interdependence between the obligor and its related entities.
• An obligor is in significant financial difficulty. An indication could be a
significant downgrade of a borrower’s credit rating.
• Default by the obligor on credit obligations to other financial creditors,
e.g. other banks or other financial institutions.
• The bank has filed for the obligor’s bankruptcy or a similar order in
respect of the obligor’s credit obligation to the banking group.
• The obligor has sought or has been placed in bankruptcy or similar
protection where this would avoid or delay repayment of the credit
obligation to the banking group.
Default at Facility Level
For retail exposures, banks are allowed to apply the definition of default at
facility level, rather than at borrower level. For example, a borrower might
default on a credit card obligation and not on other retail obligations. As such,
default by a borrower on one obligation does not require a bank to treat all
other obligations to the banking group as defaulted. However, banks should be
870
vigilant and consider a borrower’s cross-­‐default of facilities if a default on one
facility is representative of his incapacity to fulfill other obligations.
Re-ageing
The bank must have clearly articulated and documented policies in respect of
the counting of days past due, in particular in respect of the re-ageing of the
facilities and the granting of extensions, deferrals, renewals and rewrites to
existing accounts. At a minimum, the re-ageing policy must include:
• approval authorities and reporting requirements;
• minimum age of a facility before it is eligible for re-­‐ageing;
• delinquency levels of facilities that are eligible for re-­‐ageing;
• maximum number of re-­‐ageings per facility; and
• a reassessment of the borrower’s capacity to repay.
These policies must be applied consistently over time, and must support the
‘use test’ (i.e. if a bank treats a re-­‐aged exposure in a similar fashion to other
delinquent exposures more than the past-­‐due cut off point, this exposure must
be recorded as in default for IRB purposes). Some supervisors may choose to
establish more specific requirements on re-­‐ageing for banks in their jurisdiction.
Treatment of Overdrafts
Overdrafts must be subject to a credit limit and brought to the knowledge of
the borrower. Breaches of the limit must be monitored. If the account was not
brought under the limit after 90 days (subject to the applicable past-­‐due
trigger), it would be considered as defaulted. Banks must have in place rigorous
internal policies for assessing the creditworthiness of customers who are offered
overdraft accounts.

871
ANNEX A: EXTERNAL CREDIT ASSESSMENT INSTITUTIONS

Introduction
For the purposes of determining risk weights under the standardized approach,
the Central Bank of Nigeria shall recognize ECAIs to formulate opinions and
make credible and transparent credit assessments.
The verification of compliance with the requirements and mapping of ratings to
risk weight classes shall be performed by the CBN on the basis of the criteria
specified in this section.
Recognition may be requested for in any one of the following categories:
a) Solicited ratings;
b) Unsolicited ratings provided that the ECAI only issues credit assessments of
this kind.
1. Requirements for Recognizing External Credit Assessment Institutions
• The Central Bank of Nigeria will only recognize legal persons as ECAIs.
• An ECAI may also request recognition for its subsidiaries in a single
application, provided that the latter adopts analogous methodologies
such that the assessments they issue can be considered equivalent to
those of the applicant.
• ECAIs shall satisfy the following requirements for the purposes of receiving
recognition:
a) Objectivity
i. The methodology adopted shall take into account the factors material
to differentiating the specific characteristics of the different positions
assessed and is supported by statistical evidence from its use in the past
ii. The robustness of the methodology shall be adequately supported by
the available data concerning the default rates recorded for individual
rating grades and the migration rates between different rating grades.
iii. The methodology must have been applied in a consistent manner to all
exposures in a given class and adequately discriminate between
exposures in different classes;
iv. The methodology must have been validated internally on the basis of
historical experience;
v. The methodology is usually calibrated in the light of systematic errors
highlighted by the backtesting of outputs.
b) Independence
The formulation of ratings shall be free from external interference, and
conflicts of interest with regard to ownership, customers and other
872
activities performed by the ECAI and its analysis shall be managed
appropriately. For this purpose, ECAIs applying for recognition shall certify
and demonstrate that:

i. Measures have been taken to ensure independence from


ownership and to prevent external political or economic pressures
or constraints from jeopardizing the objectivity of credit
assessments;
ii. The organizational structure provides for the operational, human
resource and, possibly, legal separation of rating activity from other
activities, such as consulting and marketing, that could affect the
objectivity of the assessments;
iii. Internal rules are in place to prevent conflicts of interest
concerning persons involved in assigning ratings;
iv. Rating activities are profitable and adequate financial resources
are available;
v. The structure of fees charged the rated entities and the
compensation of staff responsible for assigning ratings is not a
function of the outcome of the assessment;
vi. Measures have been taken to ensure the independence of the
ratings concerning major customers that generate a significant
share of revenues (greater than 5%);
vii. They have sufficient staff with an appropriate level of professional
expertise and experience in performing credit assessments (for
example, at least one of the persons participating in the rating
decision process should have at least three years of experience).
viii. Internal corporate governance rules are clearly formalized;
ix. They make adequate disclosure of any conflicts of interest;
x. They have an internal audit function (or other similar function) that
is hierarchically independent of the persons responsible for
assigning ratings and is charged with verifying the effective
application of the independence conditions.
c) Regular Review
i) ECAIs shall have procedures to monitor any changes in the
assessed entity’s position that could lead to significant change in
the rating and, if necessary, to amend the rating promptly;
ii) ECAIs shall have a proven back-­‐testing procedure;
iii) Credit assessments shall be reviewed at least once a year.

873
d) Market Credibility
i) The degree to which an ECAI’s ratings are accepted at the
international level;
ii) Where an ECAI operates exclusively or primarily in its domestic
market, it should provide evidence of reliance of its ratings by
banks not belonging to the same banking group.
e) Transparency of Methodologies and Ratings.
i) ECAIs shall disclose the principles underlying their rating
methodology and any changes in the methodology in a manner
that is understandable to users of the credit assessments
ii) Credit assessments shall be accessible in a timely manner to all
banks and, where banks are required to pay a commission, such
commission shall be set in a transparent manner. The effective
default rates and, where available, the theoretical probabilities of
default associated with the individual rating grades shall also be
accessible.
In assessing compliance with these requirements, the CBN shall consider the
adoption of a code of conduct based on international best practices.

Recognition Process

The application for recognition may be submitted by the ECAI or the bank that
intends to use such ECAI. For ECAIs already recognized in other jurisdictions,
such evidence shall be submitted to the CBN by the ECAI or the bank.

The application for recognition shall specify:

For which of the following sectors recognition is requested:34

a) Public finance;
b) Commercial entities;
c) Structured finance (including securitization positions)
Whether recognition is requested for solicited or unsolicited ratings

The application shall provide the information requested in sufficient detail,


compliance with all the requirements for recognition indicated above. If the
application is submitted by an ECAI, it shall be accompanied by:

a) Certification by an independent external entity with proven professional


expertise and high standing affirming the compliance of an ECAI with all
the requirements for recognition. The entity shall also certify that, where
874
the ratings are not accessible to the public, they correspond to those for
the period in which they were produced;
b) Certification of the banks that plan to use the ratings.
c) Evidence that such ECAI is registered by the appropriate regulatory
agencies as an eligible rating agency.
Where the application for recognition is submitted by a bank, the CBN may
request the cooperation of the ECAI for the purposes of recognition as well as
the certification referred to in point a) above.

The CBN may also consider other information in addition to that submitted in
the application for recognition if it is deemed material and significant in
evaluating the application.

The CBN shall publish the list of recognized ECAIs and the related mapping
through the appropriate channels.

4. Mapping
The credit assessments issued by ECAIs shall be associated with the risk weight
classes established in these regulations (mapping).

Mapping shall be carried out by the Central Bank of Nigeria, taking account
of quantitative and qualitative factors, with the latter including the definition
of default used.

5. Ongoing Review
The CBN shall ascertain ongoing compliance with the recognition
requirements. For this purpose, ECAIs shall provide the CBN with:

i) Notice of any material change in their rating systems that would


produce a change in the ratings of a significant portion of the
entities rated in a given segment;
ii) Mapping data updated on an annual basis
iii) Update responses to the questionnaire set out below at least every
four years (including certification by an expert as provided for in sub-
­‐section 2 – Recognition Process).
iv) Any other material information which may assist the CBN in its
continuous review.

875
INFORMATION THAT EXTERNAL CREDIT ASSESSMENT INSTITUTIONS SHALL PROVIDE
IN THE APPLICATION FOR RECOGNITION (QUESTIONNAIRE)

General Information
• Type of application:
a) for use in the standardized approach;
b) for risk weighting securitizations;
• Market segments for which recognition is requested:
a) Public finance;
b) Commercial entities;
c) Structured finance;
• Types of credit assessments to be issued (solicited or unsolicited), where
both solicited and unsolicited ratings are issued, a brief description of the
rationale behind the policy shall be provided;
• Countries where the applicant is active.
Presentation of the Applicant
• Legal form and structure of the group to which the applicant belongs, if
any;
• Ownership structure, list of shareholders that hold 10% or more of the share
capital and/or exercise significant influence;
• Total number of employees specifying qualification and experience
• Total number of major customers35 and the percentage of total revenues
from services rendered to them;
• Financial information: financial statements for the past three years and
forecasts for the next three years, where available.
Requirements
Objectivity
• A high-­‐level description of the credit assessment methodology and the
procedures through which it is applied (in a consistent manner) and
reviewed.
• An explanation shall also be provided of the role and operation of any
committees that approve the assessments and the significance of non-
­‐public information obtained from rated entities;
• For each of the borrower or exposure group for which a core
methodology is applied,36 a high-­‐level description of the quantitative and
qualitative inputs;
• A brief explanation by geographical area of the differences in the
methodologies;
876
• A description of the procedures used to verify the consistency and
discriminatory power of the methodologies, with details on the results
generated by such analysis;
• A Comparison of theoretical default probabilities – where available – and
effective default rates;37
• The results of internal validation.
Independence
• Identification and detailed description of all factors demonstrating
compliance with the independence requirements for which specific
certification is required. Evidence demonstrating that the requirements have
been met shall also be attached.
Regular Review
• General information on the frequency and scope of regular reviews, people
involved, means used to ensure timely updating of data and assessments,
automatic warning systems, mechanisms to enable systematic errors to
feedback into changes in the methodology;
• A summary of the reviews carried out;
• An explanation of the methods for performing back-­‐testing and
certification that have been in use for at least one year.
Transparency
• Explanation and demonstration of the way in which the principles of the
methodologies employed and changes made to them are disclosed to the
banks involved.
Reputation
• Information demonstrating widespread reliance by the international market
on the ratings issued. For example, the following factors may be considered:
• Market share, revenues generated by rating activities, and, more generally,
financial resources available, any pricing based on the rating, the use of the
ratings by banks for bond issues or assessing credit risk;
• Where an ECAI operates exclusively or primarily in its domestic market, it
should provide evidence of reliance on its ratings by banks not belonging to
the same banking group.
Disclosure of Credit Assessments
• Accessibility to the ratings on the part of banks;
• Where both solicited and unsolicited ratings are issued, the methods
employed to enable banks to distinguish between the two shall be
disclosed;

877
• Where access to ratings or other information needed for their use is granted
in exchange for payment, the criteria used to determine the price and
certification that pricing is transparent shall be described.
Mapping of Ratings for Commercial Entities and Public Finance
This shall specify the following:
• The definition of default used and the time horizon;
• Most recent two three-­‐year cumulative default rates (CDR);
• Average three-­‐year CDR based on a five-­‐year time series;
• Description of the methodology for calculating CDRs: method of
aggregating defaults (weighting mechanism), selection of pool (static or
dynamic, adjusted), etc.;
• For each rating grade, the number of defaults actually registered each year
and the annual default rates based on a five-­‐year data time series;
• Comparison between the actual and theoretical (where available) annual
default rates;
• Transition matrices with the size of the cohorts or pool of issuers and the
number of ratings withdrawn for each rating grade;
• Dynamic characteristics of the rating methodology (point-­‐in-­‐time or
through-­‐the-­‐ cycle);
• The rating scale adopted and the meaning of the rating categories;
• The geographic coverage of the rating system;
Mapping of Securitization Ratings
• Definition of default/impairment on which the default/impairment rates are
calculated and the time horizon;
• Analysis of the performance of the rating system and description of its main
features (choice of the time horizon, impact of withdrawn and cured ratings
on default rates, how economic cycles are taken into account);
• Data on the default and/or loss/recovery rates based on a time series of at
least ten years;
• Transition matrices with the size of the cohorts and the number of ratings
withdrawn for each rating grade;
• The rating scale adopted and the meaning of the rating categories;
• The geographic coverage of the rating system.

878
ANNEX B: CLASSIFICATION OF GUARANTEES AND COMMITMENTS

HIGH RISK: CCF: 100%

i. Guarantees having the character of credit substitutes;


ii. Credit derivatives: commitments in respect of the trading of credit
derivatives as a protection seller;
iii. Acceptances;
iv. Endorsements on bills not bearing the name of another bank;
v. Irrevocable standby letters of credit having the character of credit
substitutes;
vi. Spot and forward purchase commitments for securities and other
financial instruments other than foreign exchange, except for those
allocated to the supervisory trading book and subject to the capital
requirements for market risk as well as those with own equity instruments
as the underlying;38
vii. Spot and forward deposits and loans to be made;
viii. The unpaid portion of partly paid-­‐up shares and securities, except for
those allocated to the supervisory trading book and subject to the
capital requirements for market risk;
ix. Assets transferred with option for repurchase upon demand by
transferee;39
x. Written put options on securities and financial instruments other than
foreign exchange, except for written put options allocated to the
supervisory trading book and subject to the capital requirements for
market risk, as well as those with own equity instruments as the
underlying;40
xi. Other lending commitments of certain utilization.
ABOVE AVERAGE RISK: CCF -­‐ 50%
i. Irrevocable or confirmed documentary credits except for those in which
the shipment of the goods serves as collateral or other self-­‐liquidating
transactions;
ii. Guarantees not having the character of credit substitutes;
iii. Warranties and indemnities (including tender, performance, customs and
tax bonds) and other guarantees;
iv. Irrevocable standby letters of credit not having the character of credit
substitutes;
v. Facilities supporting securities issues (Notes Issuance Facility (NIF); and
Revolving Underwriting Facility (RUF));
879
vi. Undrawn credit facilities (lending commitments of uncertain utilization, 41
commitments to provide guarantees or acceptance facilities) with an
original maturity of more than one year.
Moderate Risk: CCF: 20%
i. Irrevocable or confirmed documentary credits in which the shipment of
the goods serves as collateral or other self-­‐liquidating transactions;
ii. Undrawn credit facilities (lending commitments of uncertain utilization, 42
commitments to provide guarantees or acceptance facilities) with an
original maturity of up to one year, which may not be revoked
unconditionally at any time without notice or that do not provide for
automatic revocation due to deterioration in a borrower’s
creditworthiness;
iii. Other medium/low risk assets.
Low Risk: CCF is 0%
i. Undrawn credit facilities (agreements to lend, purchase securities,
provide guarantees or acceptance facilities) which may be revoked
unconditionally at any time without notice, or that provide for automatic
cancellation due to deterioration in a borrower’s creditworthiness.
ii. Retail credit lines may be considered as unconditionally revocable where
the terms permit the bank to cancel them to the full extent allowable
under consumer lending laws;
iii. Other low-­‐risk items
For banks to apply low risk CCF for guarantees and other commitments, the
following conditions must be satisfied;

• The bank has legal ability to cancel the exposure without prior notice
• The internal controls and monitoring mechanism can immediately detect
any deterioration in the borrowers’ credit worthiness
• No legal actions are instituted against the bank in respect of the
exposures.

880
ANNEX C: FINANCIAL COLLATERAL

Eligible Instruments

The following instruments may be recognised as eligible financial collateral:

a) Gold;
b) Cash on deposit and cash equivalent instruments held by the bank
purchasing protection; these include credit-­‐linked notes issued by the
bank purchasing protection.
c) Debt securities issued by:
i. Central governments and their central banks, which securities
have a specific rating from an ECAI of a credit quality step of
between 1 and 4;
ii. International organisations and multilateral development banks
to which a 0% risk weight is assigned;
iii. Public sector entities and state or local governments whose
exposures meet the eligibility criteria for classification as liquid
assets by the CBN;
iv. Multilateral development banks other than those under point ii),
public sector entities and regional or local governments other
than those under point iii) whose securities have a specific
rating from an ECAI of a credit quality step of between 1 and 3;
v. Other entities whose securities have a specific rating from an
ECAI of a credit quality step of between 1 and 3;
d) Debt securities issued by supervised institutions and corporates, with a
specific rating from an ECAI of a credit quality step of between 1 and 3
applicable to short term exposures;
e) Unrated debt securities issued by entities whose exposures are treated as
exposures to supervised institutions, provided that:
i. They are listed on a recognised exchange;
ii. They qualify as senior debt;
iii. All other issues of the same seniority by the issuing institution
have a rating associated with credit quality steps 1 through 3;
iv. The bank has no information to suggest that the issue would
justify a rating, if applicable, below that indicated in the
preceding indent;
v. The bank can demonstrate that the instrument has sufficient
market liquidity;

881
f) Equities and convertible bonds included in All Share Index (ALSI);
g) Units in Collective Investment Schemes which have a daily public price
quote and the Collective Investment Scheme’s assets are invested in the
instruments listed above.
h) If the comprehensive method is used for the prudential treatment of
financial collateral, the latter may also include:
i. Equities and convertible bonds not included in the All Share
Index (ALSI) but traded on a recognised exchange;
ii. Units in Collective Investment Schemes if they have a daily
public price quote and the unit trust’s assets are invested in
instruments listed above.

882
ANNEX D: COLLATERAL UNDER THE STANDARDISED APPROACH

Calculation Methods

1. Simple Method
1. The risk weight envisaged for instruments provided as collateral shall
apply, entirely or proportionately, to exposures secured, respectively, in
whole or in part by financial collateral. The unsecured portion of the
exposure shall receive the counterparty’s (borrower’s) risk weight.
2. The risk weight applied to the collateralised portion of the exposure shall
be at least 20%, except in the cases expressly provided below.
3. The collateral shall be assigned a value equal to the fair value of the
underlying instrument.
1.1. Risk Weights: Exceptions to the 20% Minimum Threshold

The secured portion of the following transactions may receive a risk weight of
0% provided that the conditions listed below are met.

1. Repurchase transactions and securities lending and borrowing


transactions, where:
a) Both the exposure and the collateral are cash or debt securities issued by
the persons listed in Annex A, letter c), points i) through iii) and receive a
risk weight of 0% for the purposes of calculating the capital requirement;
b) Both the exposure and the collateral are denominated in the same
currency;
c) Either the maturity of the transactions does not exceed one day or both
the exposure and the collateral are subject to daily marking-­‐to-­‐market
or daily re-­‐ margining;
d) The time between the last marking-­‐to-­‐market before a failure to re-
­‐margin by the counterparty and the liquidation of the collateral does
not exceed four business days;
e) The settlement of the transactions occurs within a settlement system
proven for that type of transaction;
f) The documentation covering the agreement is standard market
documentation for these types of transactions;
g) The documentation governing the transaction provides for immediate
termination in the event the counterparty fails to physically deliver cash,
securities or margins or otherwise defaults;

883
h) Upon any default event, regardless of whether the counterparty is
insolvent or bankrupt, the bank has the unfettered, legally enforceable
right to immediately seize and liquidate the collateral for its benefit.
i) The counterparty is a core market participant.
For the purposes of the application of these rules, the category of core market
participants shall include:

a. The Federal Government of Nigeria;


b. Central Bank of Nigeria, and
c. Licensed banks and discount houses in Nigeria
2. Over-the-counter derivatives transactions listed in the regulations
governing counterparty risk whose exposure is calculated in accordance
with such regulations, subject to daily marking-­‐to-­‐market,
collateralised by cash or cash-­‐ equivalent instruments where there is no
currency mismatch.
3. Transactions in which the exposure and the collateral are denominated
in the same currency and the collateral is either:
i. Cash on deposit or a cash equivalent instrument;
ii. Debt securities issued by one of the entities eligible to issue
financial collateral, excluding public sector entities, if such
securities have a 0% risk weight for the purpose of calculating the
capital requirement43 and their fair value has been discounted by
20%.
Banks shall apply a 10% risk weight to the secured portion of exposures
connected with the transactions specified in point i) where the counterparty is
not a core market participant (see box). The transactions specified in point ii)
shall also be subject to the same risk weight if they are secured by debt
securities issued by one of the entities eligible to issue financial collateral,
excluding public sector entities, if such securities have a 0% risk weight for the
purpose of calculating the capital requirement.

2. Comprehensive Method
The exposure value under the comprehensive method shall be calculated as
follows:

Formula 1

E* = max {0, [E x (1 + He) – C x (1 – Hc – Hfx)]}44

884
Where:

E* = The exposure value after risk mitigation

E = Current value of the exposure


He = Haircut appropriate to the exposure

C = The current value of the collateral received

Hc = Haircut appropriate to the collateral

Haircut for currency mismatch between the collateral and


Hfx = exposure

In the case of exposures represented by loans and derivatives, “He” shall be


equal to zero. Banks may apply a haircut of zero to repurchase transactions
and securities lending and borrowing transactions only where they possess the
characteristics set out in sub-­‐section 1.1 of this Annex45.

Where the collateral consists of a number of eligible instruments (basket of


assets), the haircut on the basket shall be H = Σiai Hi, where ai is the weight of
the asset (as measured by units of currency) in the basket and Hi, the haircut
applicable to that asset.

When the frequency of re-­‐margining or revaluation is longer than the


minimum, the minimum haircut numbers will be scaled up depending on the
actual number of business days between re-­‐margining or revaluation using
the square root of time formula below:

Formula 2

H = HM ( + ( – ))/

Where:

H = haircut
HM = haircut under the minimum holding period

TM = minimum holding period for the type of transaction

NR = actual number of business days between re-­‐margining for capital


market transactions or revaluation for secured transactions.

885
2.1 Standard supervisory haircut approach

In the case of daily revaluation, the haircuts to be applied to exposures and


collateral consisting of debt securities, equity securities, cash and gold are
those specified in Tables 1 through 4 below. Such haircuts are broken down by:

a) The type of instrument


b) The liquidation period of the transaction
c) The credit quality step,
d) The residual maturity
e) The issuer category for debt securities.

In the case of less-­‐than-­‐daily revaluation, the haircut shall be scaled up using


formula (2) under the comprehensive calculation method above.

The minimum holding period for various products is summarised in the following
table.

Transaction Type Minimum Holding Period Condition

Repo Style Transactions Five Business Days Daily Re margining

Other Capital Market Ten Business Days Daily Re margining

Transactions

Secured Lending Twenty Business Days Daily Revaluation

For the purposes of determining credit quality steps, the provisions of Annex C
concerning the identification of the various categories of eligible securities shall
apply.

With regard to the other types of instruments:

886
• For non-­‐eligible securities or commodities repurchase transactions and
lending and borrowing transactions, the haircut applicable to non-­‐main
index equities listed on a recognised exchange shall apply;
• The haircuts applicable to eligible units in collective investment schemes
shall be the weighted average haircuts that would apply to the assets, in
which the fund has invested, having regard to the liquidation period for
capital market-­‐driven transactions. If the bank does not know the
instruments in which the fund has invested, it shall use the highest haircut
that would apply to any of the assets in which the fund may invest on the
basis of its rules;
• Unrated debt securities issued by entities whose exposures are treated as
exposures to supervised institutions that satisfy the eligibility criteria under
point e of this Annex), shall receive a haircut that is the same as that for
securities issued by such entities or by corporate with a rating associated
with credit quality steps 2 or 3 as provided for under the standardized
approach to credit risk.
Debt securities other than those with short-­‐term
Table 1: ratings

Credit Residual Debt securities issued by Debt securities issued by

an
quality maturity Sovereigns, PSE d others

step Multilateral Development

agencies to which risk

weight of zero per cent is

assigned

Liquidation period (%) Liquidation period (%)

20 10
20 days 10 days 5 days days days 5 days

887
0.
1 ≤ 1 year 0.707 5 0.354 1.414 1 0.707

> 1 and ≤
5 2.828 2 1.414 5.657 4 2.828

years

> 5 years 5.657 4 2.828 11.314 8 5.657

2–3 ≤ 1 year 1.414 1 0.707 2.828 2 1.414

> 1 and ≤
5 4.243 3 2.121 8.485 6 4.243

years

> 5 years 8.485 6 4.243 16.971 12 8.485

4 ≤ 1 year 21.213 15 10.607 NA NA NA

> 1 and ≤
5 21.213 15 10.607 NA NA NA

years

> 5 years 21.213 15 10.607 NA NA NA

Debt securities with short-­‐term


Table 2: ratings.

888
Credit Debt securities described in Debt securities described in

quality Annex A, letter c), points I Annex A, letter c), points iv and v

step through iii

Liquidation period (%) Liquidation period (%)

20
days 10 days 5 days 20 days 10 days 5 days

78

1 0.707 0.5 0.354 1.414 1 0.707

2–3 1.414 1 0.707 2.828 2 1.414

Table 3: Equity instruments, cash and gold

Type of instruments or exposures Liquidation period (%)

20 days 10 days 5 days

Main index equities and main index 21.213 15 10.607

convertible bonds

889
Other equities and convertible
bonds 35.355 25 17.678

listed on a recognised
exchange

Cash 0 0 0

Gold 21.213 15 10.607

Table 4: Haircuts for currency mismatches

Liquidation period (%)

20 days 10 days 5 days

11.314 8 5.657

890
ANNEX E: MASTER NETTING AGREEMENTS

Calculation Methods

1. Comprehensive Method
The exposure value fully adjusted for the volatility (E*) of exposures subject to a
master netting agreement recognised for regulatory capital purposes with
respect to securities financing transactions shall be calculated using the
supervisory haircut approach, as contained in the description of the treatment
of financial collateral under the comprehensive method.
The fully adjusted exposure value E* is obtained by netting the exposures under
the agreement and the collateral as well as an increase that reflects the
possible changes in the price of underlying securities and any foreign
exchange risk.
This can be computed using the following formula:
E* = max {0, [(∑ (E) – ∑ (C)) + ∑ (Es x Hs) +∑ (Efx x Hfx)]}

Where:
E* = the exposure value after risk mitigation
E =current value of the exposure
C =the value of the collateral received

Es = absolute value of the net position in a given security

Hs = haircut appropriate to Es

absolute value of the net position in a currency different


Efx = from the

settlement currency

Hfx = haircut appropriate for currency mismatch

Σ(E) is the sum of all the exposures (E) under the agreement;

Σ(C) is the sum of all forms of collateral (C) under the agreement;

The net position in each type of security46 or commodity (Es) shall be


calculated by subtracting from the total value of the securities or commodities
of that type lent, sold or provided under the master netting agreement, the
total value of securities or commodities of that type borrowed, purchased or
received under the agreement.

891
The net position in each currency, other than the settlement currency of the
master netting agreement (Efx), shall be calculated by subtracting from the
total value of securities denominated in that currency lent, sold or provided
under the master netting agreement added to the amount of cash in that
currency lent or transferred under the agreement, the total value of securities
denominated in that currency borrowed, purchased or received under the
agreement added to the amount of cash in that currency borrowed or
received under the agreement.
The haircut appropriate to a given type of security or cash position (Hs) shall be
applied to the absolute value of the positive or negative net position in the
securities of that type.
The foreign exchange risk haircut (Hfx) shall be applied to the net positive or
negative position in each currency other than the settlement currency of the
master netting agreement.

ANNEX F: UNFUNDED CREDIT PROTECTION

Treatment of Currency Mismatches

Where unfunded credit protection is denominated in a currency different from


that in which the exposure is denominated (a currency mismatch) the value of
the credit protection shall be reduced by the application of a haircut (HFX) as
follows:

G* = G x (1-­‐HFX)

Where;

• G is the nominal amount of the credit protection;


• G* is G adjusted for any foreign exchange risk;
• HFX is the haircut for any currency mismatch between the credit
protection and the underlying obligation.

892
ANNEX G: MATURITY MISMATCHES

Valuation of Credit Protection

1. Funded Credit Protection for Banks that apply the Comprehensive


Method to Financial Collateral

The maturity of the credit protection and that of the exposure shall be reflected
in the adjusted value of the collateral using the following formula:

CVAM = CVA x (t-­‐ 0.25)/(T-­‐ 0.25*)

Where:

• CVA is the volatility adjusted value of the collateral as specified in the


comprehensive method for calculating exposure value ([C (1 – HC –
HFX)]) or the amount of the exposures, whichever is lower;
• t is the number of years remaining to the maturity date of the credit
protection calculated in accordance with the rules contained under the
definition of maturity, or the value of T, whichever is lower;
• T is the number of years remaining to the maturity date of the exposure
calculated in accordance with the rules contained under the definition
of maturity, or 5 years, whichever is lower;
• t* is 0.25.
• CVAM shall be taken as CVA further adjusted for maturity mismatch to
be included in the formula for the calculation of the fully adjusted value
of the exposure (E*) as set out under the comprehensive method.

2. Unfunded Credit Protection for all Banks


When there is a maturity mismatch with recognised credit risk mitigants
(collateral, on-­‐balance sheet netting, guarantees and credit derivatives) the
following adjustment will be applied to derive the adjusted value of the credit
protection:

PA = P* x (t-­‐ 0.25)/(T-­‐ 0.25)

Where:

• P* is the amount of the protection adjusted for any currency mismatch;


• PA is P* adjusted for any maturity mismatch;

893
• t is the number of years remaining to the maturity date of the credit
protection calculated in accordance with the rules contained under the
definition of maturity, or the value of T, whichever is lower;
• T is the number of years remaining to the maturity date of the exposure
calculated in accordance with the rules contained under the definition
of maturity, or 5 years, where the former is higher;
• PA is then taken as the value of the protection for the purposes of
calculating the value of the protection.

894
CENTRAL BANK OF NIGERIA

Guidance Notes on Regulatory Capital

895
Introduction
This document lays down the new supervisory regulations for assessing the
capital adequacy levels of all banks in Nigeria. The Rules governing regulatory
capital, its components and required deductions to the capital levels, shall be
applied by banks for assessment of qualifying capital.

Banks are required to maintain a minimum regulatory capital adequacy ratio


(CAR) of 10%/15% 19 on an on-going basis. The Central Bank of Nigeria (CBN) will
take into account the relevant risk factors and the internal capital adequacy
assessments of each bank to ensure that the capital held by a bank is
commensurate with the bank’s overall risk profile. This would include, among
others, the effectiveness of the bank’s risk management systems in identifying,
assessing / measuring, monitoring and managing various risks including interest
rate risk in the banking book, liquidity risk, concentration risk and residual risk.
Accordingly, CBN will consider prescribing a higher level of minimum capital
ratio for each bank under the Pillar 2 framework on the basis of their respective
risk profiles and their risk management systems. Furthermore, in terms of the Pillar
2 requirements of the capital adequacy framework, banks are expected to
operate at a level well above the minimum requirement.

A bank shall compute its regulatory capital adequacy ratio in the following
manner:

Where total risk-weighted assets are calculated as the sum of:

1) risk-weighted on-balance sheet and off-balance sheet assets computed


according to Standardised Approach for credit risk
2) 12.5 times the sum of the capital charges determined for market risk and
operational risk; and
Qualifying capital is broadly classified as Tier 1 and Tier 2 capital. Elements of
Tier 2 capital will be limited to a maximum of one-third (i.e. 33.33%) of Tier 1
capital, after making deductions for goodwill, deferred tax asset (DTA) and
other intangible assets but before deductions of investments.

19 A minimum regulatory capital adequacy ratio (CAR) of 15% will be applicable to banks with
international authorisation and Systemically Important Banks (SIBs) while a CAR of 10% will be
applicable to other banks.
896
Banks are to note that Regulatory Risk reserve is not recognized as a
component of qualifying capital. However, any balance, should be netted off
against the Total RWA and such balance must be based on the last audited
financial statement.
Tier 1 Capital
This includes only permanent shareholders' equity (issued and fully paid ordinary
shares/common stock and perpetual non-cumulative preference shares) and
disclosed reserves (created or increased by appropriations of retained earnings
or other surpluses).
Tier 1 capital would include the following elements:
1) Paid-up share capital;
2) Irredeemable preference shares;
3) Share premiums;
4) General reserve (retained profit),
5) SMEEIS reserves,
6) Statutory reserve;
7) Other reserves as may be determined by the CBN.
For an instrument to be treated as paid-up share capital, it must satisfy following
criteria:
1) Represents the most subordinated claim in liquidation of the bank;
2) The investor is entitled to a claim on the residual assets that is proportional
with its share of issued capital, after all senior claims have been paid in
liquidation (i.e. has an unlimited and variable claim, not a fixed or capped
claim);
3) The principal is perpetual and never repaid outside of liquidation;
4) Distributions are paid out of distributable profit or retained earnings;
5) There are no circumstances under which the distributions are obligatory;
6) Distributions are paid only after all legal and contractual obligations have
been met and payments on more senior capital instruments have been
made. This means that there are no preferential distributions, including in
respect of other elements classified as the highest quality issued capital;
7) It is in the form of issued capital that takes the first and proportionately
greatest share of any losses as they occur. Within the highest quality of
capital, each instrument absorbs losses on a going concern basis
proportionately and pari passu with all the others;
8) It should be classified as equity instruments in accordance with IFRS.

897
There is no limit on the inclusion of Tier 1 capital for the purpose of calculating
regulatory capital.
Tier 2 Capital
Hybrid Capital Instruments
Hybrid debt capital instruments, in this category combine certain
characteristics of equity and debt. Each has a particular feature, which can be
considered to affect its quality as capital. Where these instruments have close
similarities to equity, in particular when they are able to support losses on an on-
going basis without triggering liquidation, they may be included in Tier 2 capital.
Essentially, hybrid capital instruments should meet the following
requirements: a) they are unsecured, subordinated and fully paid up;
b) they are not redeemable at the initiative of the holder or without the prior
consent of the
CBN;
c) they are available to participate in losses without the bank being obliged to
cease trading (unlike conventional subordinated debt);
d) although the capital instrument may carry an obligation to pay interest that
cannot permanently be reduced or waived (unlike dividends on ordinary
shareholders' equity), it should allow service obligations to be deferred (as
with cumulative preference shares) where the profitability of the bank would
not support payment;
e) Hybrid capital instruments that are redeemable must have an original
maturity of at least 10 years. The contract must clearly specify that
repayment is subject to authorization by the Central Bank of Nigeria.
Cumulative preference shares, having these characteristics, would be eligible
for inclusion in this category.
Subordinated Debt
A capital instrument of the bank shall qualify as subordinated debt for inclusion
as Tier 2
Capital when it satisfies the following conditions -
a) the capital instrument is issued and fully paid-up in cash;
b) the capital instrument is subordinated to depositors and general creditors of
the bank;
c) the paid-up amount is not secured or covered by a guarantee of the bank
or any of its subsidiaries, or any other arrangement, that legally or
economically enhances the seniority of the claim vis-a-vis the bank’s
creditors and depositors;
d) with regard to the maturity of the capital instrument:
i. the capital instrument has a minimum original maturity of at least 5 years;
898
ii. recognition of capital instrument in Tier 2 capital in its final five years to
maturity is amortised on a straight-line basis by 20% per annum in
accordance with table 1 below;
Table 1: Progressing discounting of debt capital instrument

Remaining Maturity of Instruments Rate of Discount


(%)
Less than one year 100
One year and more but less than two 80
years
Two years and more but less than 60
three years
Three years and more but less than 40
four years
Four years and more but less than five 20
years

iii. there are no step-ups or other provisions that mandate or create an


incentive for the bank to redeem the capital instrument;
e) the capital instrument is callable at the option of the bank only after a
minimum of five years from the issue date, subject to the following
requirements:
i. a call option may be exercised only with the prior approval of the
CBN;
ii. the bank shall not exercise a call option unless the bank
demonstrates that its capital position is well above the minimum
capital requirements after the call option is exercised;
f) the holder of the capital instrument has no rights to accelerate the
repayment of future scheduled payments (either coupon or principal),
except in a bankruptcy or liquidation of the bank;
g) The capital instrument does not have a credit sensitive dividend feature. In
this regard, the capital instrument shall not have a dividend or coupon that
is reset periodically, based in whole or in part on the credit standing of the
bank or any banking group entity;
h) the main features of the capital instrument are disclosed clearly and
accurately; the agreement governing the issuance of the capital instrument
shall not be changed without the prior approval of the CBN where such
proposed changes could impact its eligibility as Tier 2 Capital;

899
i) Where a bank issues the capital instrument in a foreign currency, the capital
instrument shall be re-valued periodically (at least monthly) in terms of Naira
at the prevailing exchange rates. Where the bank intends to use a swap to
hedge the foreign exchange exposure arising from the foreign currency
capital instrument, it shall consult the CBN on the capital treatment
applicable to the hedge prior to such use.

Other Comprehensive Income Items


Other comprehensive income items other than fixed asset revaluation reserves
that are created by the adoption of the International Financial Reporting
Standards (IFRS) may be accepted as part of the Tier 2 capital subject to the
limitations that will be specified by the CBN from time to time.

Deductions from Capital


All items that are deducted from capital are excluded from total assets in
calculating the capital adequacy ratio.

If a bank is required to make a deduction from Tier 2 capital and it does not
have sufficient capital to make that deduction, the shortfall will be deducted
from Tier 1 capital.
Goodwill, other Intangibles and Deferred Tax Assets (DTA)
a. Intangible assets and losses in the current period and those brought
forward from previous periods should be deducted from Tier 1 capital.
b. DTA associated with accumulated losses should be deducted from Tier 1
capital.
Under Impairment
Any shortfall in specific and collective impairment is to be deducted from Tier 1
capital.
Treasury Shares
It represents own shares purchased and held by the bank and shall be
deducted from Tier 1 capital.
Securitization Transactions
a. Increases in equity capital resulting from securitization transactions (e.g.
capitalized future margin income, gains on sale) shall be deducted from
Tier 1 capital.
b. Securitisation exposures, eligible for deduction from capital, shall be
deducted 50 per cent from Tier 1 and 50 per cent from Tier 2, except
where expressly provided otherwise. Deductions from capital may be
calculated net of any specific provisions maintained against the relevant
securitisation exposures.

900
Reciprocal Cross Holdings in the Common Shares of Banking, Financial and
Insurance Entities
Reciprocal cross holdings in common shares (e.g. Bank A holds shares of Bank B
and Bank B in return holds shares of Bank A) will be fully deducted from Tier 1
capital.
Investments in the Capital of Banking and Financial Institutions
A bank's aggregate investment in all types of capital eligible instruments, issued
by banks and financial institutions (except its financial subsidiaries) should not
exceed 10 per cent (prudential limit) of the investing bank's capital funds (Tier 1
plus Tier 2 before deductions for investments). Any investment in excess of this
limit shall be deducted at 50 per cent from Tier 1 and 50 per cent from Tier 2
capital.

A banks' investment in the following instruments issued by financial institutions


will be included in the prudential limit of 10 per cent, referred to above.
 Equity shares;
 Hybrid debt capital instruments
 Subordinated debt instruments; and
 Any other instrument approved by the CBN having the nature of capital.
Financial institutions whose instruments shall qualify for capital purposes shall be
as defined in the Regulation on the Scope of Banking Activities and Ancillary
Matters No. 3 and any other extant regulations issued by the CBN.
Investment in Capital of Financial Subsidiaries
In the case of investment in financial subsidiaries, the treatment will be as stated
below for the purpose of capital adequacy:
i. A bank's aggregate investment in capital eligible instruments, issued by its
financial subsidiaries that are outside the scope of regulatory
consolidation, shall be deducted at 50 per cent from Tier 1 and 50 per
cent from Tier 2 capital.
ii. Banks should ensure that majority owned financial entities that are not
consolidated for capital purposes and for which the investment in equity
and other instruments eligible for regulatory capital status is deducted,
meet their respective regulatory capital requirements.

901
Annexure I: Illustration of Capital Adequacy Computation

A. Particulars

The table below represents an illustrative balance sheet of the Bank A.

(Naira million)

Statement of financial position


Cash 2,300 Deposits 14,030
FGN bonds 3,500 Call borrowing 130
Loans secured by mortgage of 4,250 Other liabilities 520
residential properties
Loans to individuals under 650 Share holders’ equity 2,300
Regulatory retail portfolio (credit
risk mitigation in the form of
deposits provided – N 130
million)
Loans to corporate entities 6,050
(The amount of undrawn credit
limits in overdraft accounts
(revolving credits), all maturing
within a year, totals N 1850
million)
Properties, plants and 230
equipment
Total Assets 16,980 Total liabilities and Equity 16,980
Performance bonds 8,400
Documentary credit 6,500

B. Other Data:

1. Capital for market risk – N 45 million


2. Average annual gross income – N 320 million
3. All loans are unrated
4. Risk weight for all residential exposure – 75%
5. Performance bonds and LCs are extended to unrated corporate
902
C. Solution

1. Credit Equivalent Amount of Off-Balance Sheet Exposures

Credit
Serial
Exposure particulars Amount CCF (%) equivalent
no
amount
Revolving credits (Undrawn
1 1,850 20 370
credit limits)
2 Performance bonds 8,400 50 4,200
3 Documentary credit 6,500 20 1,300
Total 5,870

2. Risk Weighted Assets of On-Balance Sheet Exposure:

Exposures details Gross Credit risk Net Risk RWA


exposure mitigation exposure weight
before CRM (CRM) after CRM (%)
Cash 2,300 2,300 0 0
FGN bonds 3,500 3,500 0 0
Loans secured by
mortgage of 4,250 4,250 75 3,187
residential properties
Regulatory retail
650 130 520 75 390
portfolio
Corporate exposure 6,050 6,050 100 6,050
Corporate exposure
370 370 100 370
(Revolving credits)
Properties, plants and
230 230 100 230
equipment
Performance bonds 4,200 4,200 100 4,200
Documentary credit 1,300 1,300 100 1,300
Total risk weighted
15,727
assets

903
3. Calculate Operational Risk Capital Charge:

= Relevant Indicator (gross income) x  (15%)

= N 320 million x 15%


= N 48 million

4. Calculate the Total Eligible Capital (i.e., Tier 1 + Tier 2)

= Shareholders’ Equity

= N 2300 million

5. Calculate the Capital Adequacy Ratio (CAR)

= 13.62%

904
CENTRAL BANK OF NIGERIA

Guidance Notes on the Calculation of Capital Requirement for


Credit Risk

STANDARDIZED APPROACH

905
Chapter 1 Overview

This guideline establishes methodologies for the calculation of capital


requirement for credit risk exposures under “Pillar 1” using the Standardised
Approach.
Under this approach, a bank shall apply risk-weights to its on-balance sheet
and off-balance sheet exposures in accordance with the risk classes set out in
this guideline for regulatory capital purposes. Risk-weights are based on credit
rating grades or fixed risk-weights as provided in this guideline and are broadly
aligned with the supervisory view of the likelihood of counterparty default. A
bank shall, where appropriate, use the ratings of External Credit Assessment
Institutions (ECAIs) recognized 20 by the Central Bank of Nigeria (CBN) or as
otherwise specified to determine the credit rating grades of an exposure.
A bank may use eligible credit risk mitigation (CRM) techniques in determining
the capital requirement for an exposure as specified in Chapter 4 of this
guideline.

Chapter 2 Standardized Approach for Credit Risk

1. Introduction
For the purpose of capital computation for credit risk under Standardized
Approach, a bank shall take into account all on-balance sheet and off-
balance sheet exposures in the banking book except where such exposures;
a. are required to be deducted from bank’s capital; or
b. are treated as “securitization exposure”
A bank’s exposure to counterparties under OTC derivative contracts, credit
derivative contracts or repo-style transactions booked in its trading book are
also subjected to credit risk capital charge under standardised approach.
2. External Credit Assessment
2.1 Scope of application of external credit assessments institutions
A bank shall use its chosen ECAIs and their external credit assessments
consistently for each type of exposure, for both risk weighting and risk
management purposes. A Bank shall not
“cherry-pick” the assessments provided by different ECAIs.
A bank shall not recognise the effects of CRM if such CRM is already reflected
in the issuespecific external credit assessment of the exposure.

20 CBN will publish the names of approved ECAI from time to time.

906
2.2 Use of Single and Multiple Assessment
Where a bank has two external credit assessments which map into different
credit quality grades, it shall assign the exposure to the credit rating associated
with the higher risk weight. Where a bank has three or more external credit
assessments which map into two or more different credit grades, it shall assign
the exposure to the credit grade associated with the higher of the two lowest
risk weights. For illustration, if there are three external credit assessments
mapping into credit grades with risk weights of 0%, 20% and 50%, and then the
applicable risk weight is 20%.
2.3 Use of Unsolicited Rating
A rating would be treated as solicited only if the issuer of the instrument has
requested the ECAI for the rating and has accepted the rating assigned by the
agency. As a general rule, banks should use only solicited rating from the
chosen ECAI. No ratings issued by the ECAI on an unsolicited basis should be
considered for risk weight calculation as per the Standardized Approach
without the approval of the CBN.
2.4 Issuer and Issue Rating
Where an exposure has an issue-specific external credit assessment, a bank
shall use such assessment. Where an exposure does not have an issue-
specific external credit assessment the following principles shall apply:
a) if there is an issue-specific external credit assessment for another exposure
to the same obligor which maps to a risk weight that is lower than that
applicable to an unrated exposure, a bank may use the issue-specific
assessment for the other exposure only if the exposure without an issue-
specific assessment ranks pari-passu with or is senior to the exposure with
the issue-specific assessment in all respects;
b) if the obligor has an issuer external credit assessment which maps to a risk
weight that is lower than that applicable to an unrated exposure, a bank
may use the issuer assessment of the obligor only if the exposure is a senior
claim;

Where either the issuer or a single security has a low quality rating which maps
into a risk weight equal to or higher than that which applies to unrated
exposures, an unrated exposure on the same borrower or issuer will be assigned
the same risk weight as is applicable to the low quality rating (instead of the risk
weight for unrated exposures).

907
2.5 Domestic and Foreign Currency Exposures
A credit assessment that refers to an item denominated in the borrower’s
domestic currency cannot be used to derive a risk weight for another exposure
to that same borrower that is denominated in a foreign currency.
Where unrated exposures are risk weighted based on the rating of an
equivalent exposure to that borrower, the general rule is that foreign currency
ratings would be used for exposures in foreign currency. Domestic currency
ratings, if separate, would only be used to risk weight claims denominated in
the domestic currency 21.
2.6 Short Term and Long Term Credit Assessment
Where a short-term exposure is assigned a 150% risk weight, all unrated
exposures to the counterparty whether short-term or long-term shall receive a
150% risk weight. Where a shortterm exposure is assigned a 50% risk weight, no
unrated short-term exposure shall receive a risk weight of less than 100%.
When a specific short term assessment for a short-term exposure on a bank
maps into a less favourable (higher) risk weight than the general preferential
treatment for short- term exposures, the general short term preferential
treatment for interbank exposures cannot be used. All unrated short term
exposures should receive the same risk weighting as that implied by the specific
short term assessment.
3. Classification of Exposure and Risk Weight Determination
A bank shall classify each of its exposures, according to obligor or nature of the
exposure, into one of the following classes:
1) Exposures to central governments or central banks;
2) Exposures to public sector entities;
3) Exposures to state governments and local authorities;
4) Exposures to multilateral development banks;
5) Exposures to supervised institutions;
6) Exposures to corporate and other persons
7) Regulatory retail portfolio
8) Exposures secured by mortgages on residential properties
9) Exposures secured by mortgages on commercial real estates

21Notwithstanding the above, where an exposure arises through a bank’s participation in a loan
extended, or has been guaranteed against convertibility and transfer risk, by a multilateral
development bank whose preferred creditor status, is recognized in the market, the credit
assessment on the borrower’s domestic currency item may be used for risk weight purposes, to the
extent guaranteed by the MDB.

908
10) Past Due exposures
11) High risk exposures
12) Unsettled and failed transactions
13) Other exposures
3.1 Exposures to Central Governments or Central Banks
Exposures to central governments and central banks will be risk weighted
in accordance with the table 1 below:
Table 1: Risk Weights for Central Governments & Central Banks

Credit rating AAA A+ to BBB+ BB+ to Below Unrated


to A- to B- B-
AA- BBB-
ECA risk score 1 2 3 4-5 6 Unrated
Risk weight 0% 20% 50% 100% 150% 100%

Notwithstanding the provisions of this paragraph, a risk weight of 0% shall be


assigned to the following:
a. Exposures to Federal Government of Nigeria (FGN) and Central Bank of
Nigeria (CBN);
b. Instruments issued by other entities backed by express guarantee of the
FGN;
c. Inter-bank transactions guaranteed by the FGN or CBN; and
d. Inter-bank transactions among supervised institutions collateralized by
FGN Bonds, Treasury Bills or other similar sovereign bills.
3.2 Exposures to Public Sector Entities
Exposures to domestic Public Sector Entities (PSEs 22) shall be assigned a risk
weight of 100% regardless of the length of the residual maturities of the
exposures. Public sector entities include both commercial and non commercial
entities owned by federal government, state government or a local
government.
The exposure on a foreign PSE shall be risk weighted according to the credit
rating grade applicable to the jurisdiction where the PSE is located.
3.3 Exposures to state governments and local authorities
Exposures to State and Local Governments in Nigeria shall receive the
following risk weights:

22 The CBN may adjust the risk weights applicable to these entities when deemed necessary.

909
a) 20% risk weight for State Government bonds that meet the eligibility
criteria for classification as liquid assets by the CBN;
b) 100% risk weight for other State and Local Government bonds and
exposures.
Exposures to foreign state governments and local governments will be
assigned sovereign risk weight of their jurisdictions.
3.4 Exposures to Multilateral Development Banks
Exposures to Multilateral Development Banks (MDBs) will be assigned risk
weights according to the credit ratings as set out in table 2below.

Table 2: Risk weights for exposures on multilateral development banks

Credit rating AAA A+ to BBB+ BB+ to Below Unrated


to A- to B- B-
AA- BBB-
Credit quality 1 2 3 4-5 6 Unrated
grade
Risk weight 20% 50% 50% 100% 150% 100%

However, a risk weight of 0% shall apply to exposures to the following MDBs,


regardless of any external credit rating assigned:
a) International Bank for Reconstruction and Development (IBRD);
b) International Finance Corporation (IFC);
c) African Development Bank (ADB);
d) Asian Development Bank (ADB)
e) European Bank for Reconstruction and Development (EBRD)
f) Inter-American Development Bank (IADB)
g) European Investment Bank (EIB)
h) European Investment Fund (EIF)
i) Nordic Investment Bank (NIB)
j) Caribbean Development Bank (CDB)
k) Islamic Development Bank (IDB)
l) Council of Europe Development Bank (CEDB)
m) International Islamic Liquidity Management Corporation (IILMC)
n) Any other MDBs that may be specified from time to time by the CBN.

910
3.5 Exposures to Supervised Institutions
Exposures to banks incorporated in a given country, other than Nigeria, will be
assigned a risk weight one category less favourable than that assigned to
exposures on the sovereign of that country as set out in table 3 below.

Table 3: Risk weights for exposures on supervised institutions

Credit AAA A+ to BBB+ BB+ to Below Unrated


rating to A- to B- B-
AA- BBB-
Credit 1 2 3 4- 6 Unrated
quality 5
grade
Risk 20% 50% 100% 100% 150% 100%
weight

Short-term exposures to supervised institutions in Nigeria with an original


maturity of three months or less shall be assigned a risk weight of 20%while a risk
weight of 100% shall be assigned to long-term exposures.

For capital adequacy purpose, a bank’s aggregate exposure in eligible


capital instruments of other banks and financial institutions (other than
subsidiaries 23) shall not exceed 10% of its own capital (i.e. Tier 1 capital after
regulatory adjustment). The amount in excess of 10% of capital will be
deducted from investor bank’s capital (50% from T 1capital and 50% from T 2
capital). Investments in capital eligible instruments to the extent of permissible
limit, issued by supervised institutions, will be assigned risk weight of 100% where
they are not deducted from regulatory capital.
3.6 Exposures to Corporate and Other Persons
This class includes exposures to corporate, insurance companies and collective
investment schemes. Exposures to natural persons and small and medium sized
entities (SMEs), which cannot be classified under “regulatory retail”, shall also
be treated as exposure to corporate.
The table 4 below specifies the credit ratings with the risk weights for corporate
exposures.

23For exposure on capital eligible instruments of subsidiary, please refer to Para 4.7 of “Guidance Note
on Regulatory Capital”

911
However, all corporate exposures will, in the interim, be treated as unrated.

Table 4: Risk weights for corporate exposures

Credit AAA A+ to BBB+ Below Unrated


rating to A- to BB- BB-
AA-
Credit 1 2 3-4 5-6 Unrated
quality
grade
Risk 20% 50% 100% 150% 100%
weight

3.7 Regulatory Retail Portfolio


Claims included in the regulatory retail portfolio shall be assigned a risk weight
of 75% provided they meet the following criteria:

a) Orientation Criterion – The exposure is to an individual person or a group


of persons or to a small business. Small business will include sole
proprietorship, partnership or small and medium-size enterprises (SMEs).

b) Product Criterion - the exposure takes the form of any of the following:
i. A revolving credit exposure or line of credit including exposure
relating to overdraft facilities;
ii. A personal term loan or lease, including instalment loan, vehicle
finance or lease, student and educational loans and personal
finance; or
iii. Small business facilities or commitments.
The following exposures will not be included as part of regulatory retail
portfolio:
1. securities such as bond and equities, listed or not;
2. mortgage loan that qualify for inclusion in “exposures secured by
mortgage on residential property”;
3. past due exposures;

c) Granularity Criterion
In order to ensure that the regulatory retail portfolio of a bank is sufficiently
diversified, no aggregate amount of all form of exposures to counterparty

912
(even those that individually satisfy other conditions above) shall exceed
0.20% of the aggregate amount of the bank’s regulatory retail portfolio.
In relation to granularity criterion, aggregate exposure (gross exposure
without taking any form of credit risk mitigation into account) to
counterparty will be computed on the assumption that:
i. In the case of on-balance sheet exposure, the amount of the
exposure is the outstanding balance and for revolving credit,
outstanding balance or the limit whichever is higher;
ii. In the case of off-balance sheet exposure, other than OTC
derivative transaction and credit derivative contract, the amount
of exposure is the credit equivalent amount (notional amount, net
of specific provision, multiplied by the CCF);
iii. In the case of OTC derivative transactions and credit derivative
contracts, the amount of exposure is the credit equivalent
amount of the exposure.
All past due exposures will be excluded while computing the amount of
aggregate exposure in relation to granularity criterion.

d) Low Value of Individual Exposures


The maximum aggregate retail exposure (before the effect of credit risk
mitigation) to one counterparty and its related counterparties must not
exceed an absolute threshold of 100 million naira.
3.8 Exposures Secured by Mortgages on Residential Properties
Exposures secured by residential property for purchase/construction in Nigeria,
except past due exposures, shall be risk-weighted 75% subject to the under-
listed conditions;
i. The loan to value ratio (LTV) is less than or equal to 80%;
ii. Lending must be fully secured by first legal mortgages on residential
property;
iii. The residential property must be occupied or intended to be occupied
by the borrower or rented/to be rented by the borrower to a third party;
iv. the residential property must be valued according to prudent valuation
rules prescribed by the CBN;
v. the bank must be satisfied that the risk of the borrower is not dependent
solely on the performance of the underlying property serving as
collateral but rather on the capacity of the borrower to repay the debt
from other sources;

913
vi. the value of the property must be monitored on a frequent basis and at
a minimum once every three years and more frequently where there
are indications that there are significant changes in market conditions;
and
vii. the property must be adequately insured;
Where these conditions are not satisfied, the exposure shall attract a risk weight
of 100%.
LTV ratio should be computed as a percentage of the total outstanding in the
account (without any netting) as the numerator and the realisable value of the
residential property mortgaged to the bank as the denominator.
Bank’s exposure to one counterparty up to two properties will be categorised
under “exposures secured by mortgage on residential property” whereas
exposure for the third property and above will be treated as commercial real
estate.
3.9 Exposures Secured by Mortgages on Commercial Real Estates
Exposures secured by mortgages on commercial real estate located in Nigeria
will be riskweighted at 100%.
3.10 Past Due Exposures
The unsecured portion of past due exposures (other than a qualifying
residential mortgage loan), net of specific provisions (including partial write-
offs), will be risk-weighted as follows:
a) 150% weight when specific provisions are less than 20% of the outstanding
amount of the past due exposure ;
b) 100% weight when specific provisions are at least 20%of the outstanding
amount of the past due exposure.
Qualifying residential mortgage loan that are past due, will be risk-
weighted net of specific provisions (including partial write-offs), as follows:
a) 100% risk weight when specific provisions are less than 20% of the
outstanding amount of the exposure;
b) 50% risk weight when specific provisions are at least 20% of the
outstanding amount of the exposure.
For the purpose of computing the level of specific provisions in past due
exposures for deciding the risk-weighting, all past due exposures of a single
counterparty (without netting the value of the eligible collateral) should be
considered in the denominator.
Past due or defaulted exposures shall include; bad debts, substandard loans,
and restructured exposures. Specifically, a default is considered to have

914
occurred with regard to a particular obligor when either or both of the two
following events have taken place.
i. The bank considers that the obligor is unlikely to pay its credit obligations
to the banking group in full, without recourse by the bank to actions
such as realizing security (if held).
ii. The obligor is past due more than 90 days on any material credit
obligation to the banking group. Overdrafts will be considered as being
past due once the customer has breached an advised limit or been
advised of a limit smaller than current outstanding.
For the purpose of defining the secured portion of the past due exposures,
eligible collateral will be the same as recognised for credit risk mitigation
purposes.
3.11 High Risk Exposures
The following exposures are regarded as high risk exposures and are assigned
specific risk weights as follows:
a) Investments in venture capital firms will be risk weighted 150%;
b) Non-publicly traded equity investments will be risk-weighted at 150%;
c) Investment in non-financial firms with negative financial results over the
past two years, will be risk-weighted at 200%.
d) Where exposure to a particular industry within a sector (as defined by the
International Standard Industrial Classification of Economic Sectors as
adopted by CBN) is in excess of 20% of total credit facilities of the bank,
the risk weights of the entire exposures to that industry will be 150%. If, for
instance, the total exposure of a bank to food manufacturing industry
within the manufacturing sector is in excess of 20% of the total credit
facilities, the entire exposure to food manufacturing industry will be risk
weighted at 150%.
3.12 Unsettled and Failed Transactions
A bank shall comply with the requirements, described below, to calculate the
credit-risk weighted exposure amount for any unsettled transaction on
securities, foreign exchange instruments and commodities.

3.12.1 Delivery vs. Payment (DVP) Transactions


A bank shall apply a risk weight to any exposure arising from receivables that
remains unpaid or undelivered in respect of an unsettled DVP transaction in
accordance with Table 5 below.

915
Table 5: Risk weight to exposure on failed transactions

Number of Business Days after Risk weight


Agreed Settlement Date
From 0 to 4 0%
From 5 to 15 100%
From 16 to 30 625%
From 31 to 45 937.50%
46 day or more 1250%

3.12.2 Non-DVP Transactions


A bank, which has fulfilled its obligations under the first contractual payment or
delivery leg of a non-DVP transaction, shall regard as a loan exposure to its
counterparty any outstanding receivables after the end of the first contractual
payment or delivery date. If the receivables remain unpaid or undelivered after
the second contractual payment or delivery date, the bank shall risk weight the
exposure arising from receivable in the following manner:

a) according to the risk weight of the counterparty under the credit risk
framework if the exposures remain unpaid or undelivered up to and
including the fourth business day after the second contractual payment or
delivery date;
b) 1250% risk weight to such receivables and replacement cost if the
receivable remain unpaid or undelivered on or after the fifth business day
after the second contractual payment or delivery date.

3.13 Other Exposures

0% risk weight

i. Cash and gold bullion held in bank’s own vault;


20% risk weight
i. Cheques and other items in transit.

100% risk weight

916
i. Investment in premises, plant and equipment and other fixed
assets;
ii. Prepayments;
iii. Any other assets not specified above.
4. Measurement of Off-Balance Sheet Exposures

4.1 Off-Balance Sheet Exposures Other than OTC Derivative Transactions

The notional amount of an off-balance sheet instrument does not always


reflect the amount of the credit risk. The notional amount of the instrument must
be multiplied by a credit conversion factor to derive a credit equivalent
amount. Broad types of credit conversion factors are detailed in the table
6below.

Table 6: Credit conversion factors for non-market-related off-balance


sheet transactions

Nature of transaction Credit


conversion
factor (%)
Direct credit substitutes 100
Performance-related contingencies such as bid bonds, 50
performance bonds, etc.

short-term, self-liquidating trade-related contingencies; 20


unutilised portions of commitments with an original 0
maturity of one year or less, or that are unconditionally
cancellable at any time

The resulting credit equivalent amount is then treated as an on-balance sheet


instrument and is assigned the weight appropriate to the counterparty or, if
relevant, the weight assigned to the guarantor or the collateral security.
The categories of credit conversion factors are outlined below.

High Risk: CCF – 100%


i. Guarantees having the character of credit substitutes;
ii. Acceptances;
iii. Endorsements on bills not bearing the name of another bank;

917
iv. Irrevocable standby letters of credit having the character of credit
substitutes;
v. Spot and forward purchase commitments for securities and other
financial instruments other than foreign exchange;
vi. Spot and forward deposits and loans to be made;
vii. The unpaid portion of partly paid-up shares and securities,
viii. Assets transferred with option for repurchase upon demand by
transferee; ix. Other lending commitments of certain utilization.

Above Average Risk: CCF- 50%


i. Transaction-related contingencies (for example, bid bonds, performance
bonds, warranties, and standby letters of credit related to a particular
transaction);
ii. Commitments with an original maturity exceeding one year, including
underwriting commitments and commercial credit lines;
iii. Revolving underwriting facilities (RUFs), note issuance facilities (NIFs) and
other similar arrangements;
iv. Undrawn credit facilities (lending commitments of uncertain utilization,
commitments to provide guarantees or acceptance facilities) with an
original maturity of more than one year.

Moderate Risk: CCF- 20%


i. Short-term, self-liquidating trade-related contingencies, including
commercial/ documentary letters of credit;
ii. Undrawn credit facilities with original maturity up to 1 year

Low Risk: CCF- 0%


i. Undrawn credit facilities that provide for automatic cancellation due to
deterioration in a borrower’s creditworthiness;
ii. Commitments with an original maturity of one year or less or that are
unconditionally cancellable at any time without prior notice.
4.2 OTC Derivative Transactions
A bank is not exposed to credit risk for the full notional amount of their contracts
(notional principal amount), but only to the potential cost of replacing the cash
flow (on contracts showing a positive value) if the counterparty defaults. In
calculating a bank’s pre-settlement counterparty credit risk exposures arising
from interest rate and foreign exchange rate related OTC derivative
transactions for capital adequacy purposes, the bank shall include all its OTC

918
derivative transactions held in the banking and trading books which give rise to
pre-settlement counterparty credit risk.
The credit equivalent amounts are calculated using either the Original Exposure
Method or the Current Exposure Method and are assigned the risk weight
appropriate to the counterparty.

4.2.1 Original Exposure Method


The credit equivalent amount of an interest rate and foreign exchange rate
related OTC derivative transaction shall be determined by multiplying the
notional principal amount of the transaction by the appropriate CCF
according to the nature of the derivative transaction and its maturity, as
specified in table 7 below.

Table 7: Conversion factors for Original Exposure Method

Original maturity
OTC Derivative Transaction One From one to For each
year or two years additional
less year
a 288 Interest Rates 0.50% 1.00% 1.00%
b Foreign Exchange Rate and 2.00% 5.00% 3.30%
Gold (i.e. 2% + 3%)

4.2.2 Current Exposure Method


A bank using the current exposure method shall calculate exposure, for the
pre-settlement counterparty exposure arising from an OTC derivative
transaction that is not covered by a qualifying bilateral netting agreement, by
adding –
a) the replacement cost (obtained by marking-to-market) of the OTC
derivative transaction or in the case of a transaction with negative
replacement cost, a value of zero; and
b) the amount for potential future exposure obtained by applying the
appropriate add-on factor set out in Table 8 to the notional amount of
the OTC derivative transaction;
E = Max (RC or 0) + NA * Add-on factor
Where E = exposure,
RC = replacement cost and
919
NA = notional amount
Table 8:Add-on Factors for computation of Potential Future Exposure
(Add-on)

Remaining
OTC Derivative Transaction maturity
One year Over one Over
or less year to five five
years years

a 288 Interest Rates 0.00% 0.50% 1.50%


b Foreign Exchange Rate and 1.00% 5.00% 7.50%
Gold

For an OTC derivative transaction to a single counterparty that is covered by a


qualifying bilateral netting agreement, a bank, using the current exposure
method, shall calculate exposure for the pre-settlement counterparty exposure
arising from that netting by adding –
a) the net replacement cost (obtained by marking-to-market) of all OTC
derivative transactions with that counterparty or in the case where
there is a negative replacement cost, a value of zero; and
b) an add-on, ANET for potential future exposure (Add-on) which is
calculated as follows:

ANET = 0.4 x AGROSS + 0.6 x NGR x AGROSS


Where -
i. “AGROSS” refers to the sum of individual add-on amounts
(calculated by multiplying the notional amount of each OTC
derivative transaction by the appropriate add-on factor set out in
Table 8 of all OTC derivative transactions with that counterparty;
and
ii. “NGR” refers to the ratio of the net current replacement cost to
the gross current replacement cost for all OTC derivative
transactions subject to qualifying bilateral netting agreements
with that counterparty.

No potential future exposure would be calculated for single currency


floating/floating interest rate swaps. The exposure on these contracts would be

920
evaluated solely on the basis of their current exposure, i.e. the replacement
cost.

Chapter 3 Standardised Approach for Securitization Exposures

1. Operational Requirements for Recognition of Risk Transfer


1.1 Operational Requirements for Traditional Securitizations
An originating bank may exclude securitised exposures from the calculation of
risk-weighted assets only if all of the following conditions have been met. Banks
meeting these conditions must still hold regulatory capital against any
securitization exposures they retain.
a) Significant credit risk associated with the securitised exposures has been
transferred to third parties;
b) The transferor does not maintain effective or indirect control over the
transferred exposures. The assets are legally isolated from the transferor in
such a way that the exposures are put beyond the reach of the transferor
and its creditors, even in bankruptcy or receivership. These conditions
must be supported by an opinion provided by a qualified legal counsel.
The transferor is deemed to have maintained effective control over the
transferred credit risk exposures if it: (i) is able to repurchase from the
transferee the previously transferred exposures in order to realize their
benefits; or (ii) is obligated to retain the risk of the transferred exposures.
The transferor’s retention of servicing rights to the exposures will not
necessarily constitute indirect control of the exposures;
c) The securities issued are not obligations of the transferor. Thus, investors
who purchase the securities only have claim to the underlying pool of
exposures.
d) The transferee is an SPE and the holders of the beneficial interests in that
entity have the right to pledge or exchange them without restriction.
e) Clean-up calls must satisfy the conditions set out in paragraph 1.2
f) The securitization does not contain clauses that –
i. require the originating bank to alter systematically the underlying
exposures such that the pool’s weighted average credit quality is
improved unless this is achieved by selling assets to independent
and unaffiliated third parties at market prices;
ii. allow for increases in a retained first loss position or credit
enhancement provided by the originating bank after the
transaction’s inception; or

921
iii. increase the yield payable to parties other than the originating
bank, such as investors and third-party providers of credit
enhancements, in response to a deterioration in the credit quality of
the underlying pool;

1.2 Operational Requirements and Treatment of Clean-Up Calls


If a securitization includes a clean-up call, the bank which has the ability to
exercise the clean-up call shall ensure that:
a) the exercise of the clean-up call is at its discretion;
b) the clean-up call is not structured to avoid allocating losses to credit
enhancements or positions held by investors or in any way structured to
provide credit enhancement; and
c) the clean-up call is exercisable by the bank only when 10% or less of the
original underlying exposures or securities issued remain or, for synthetic
securitization, the bank purchasing protection must hold capital against
the entire amount of the securitized exposures as if they did not benefit
from any credit protection.
Securitization transactions, that include a clean-up call that does not meet all
of the criteria stated above, result in a capital requirement for the originating
bank. For a traditional securitization, the underlying exposures must be treated
as if they were not securitised. Additionally, banks must not recognise any gain-
on-sale in regulatory capital. For synthetic securitizations, the bank purchasing
protection must hold capital against the entire amount of the securitised
exposures as if they did not benefit from any credit protection.
If a clean-up call, when exercised, is found to serve as a credit enhancement,
the exercise of the clean-up call must be considered a form of implicit support
provided by the bank and capital will be maintained for the implicit support
along with adequate disclosure as required by supervisory guidelines.
2. Deductions from Capital
A bank shall deduct from its capital (Tier 1 and Tier 2 capital) -
a) Any gain-on-sale in a securitization transaction where the bank is an
originating bank;
b) Any credit enhancing interest-only strip recorded by the bank as
originating bank in a securitization transaction;
c) Any rated securitization exposure of the bank with –
i. long term credit quality grade of 4 or 5 where the bank is the
originator;
ii. long term credit quality grade of 5 where the bank is the investor;
922
d) Any unrated securitization of the bank except where the securitization
exposure is-
i. the most senior tranche in the securitization transaction;
ii. To a second loss tranche or better in an ABCP programme. iii. In
respect of a liquidity facility which is not an eligible liquidity facility.
Any of the above deductions shall be:
a) based on outstanding book value in case of an on-balance sheet
securitization exposure and credit equivalent amount in case of an off-
balance sheet exposure;
b) 100% from Tier 1 if the deductible item is gain-on-sale in a securitization
transaction;
c) 50% from Tier 1and 50% from Tier 2 for all other exposures.
3. Risk Weights
The risk-weighted asset amount of a securitization exposure is computed by
multiplying the amount of the position by the appropriate risk weight
determined in accordance with the following tables. For off-balance sheet
exposures, banks must apply a CCF and then risk weight the resultant credit
equivalent amount. If such an exposure is rated, a CCF of 100% must be
applied. Risk weights for long term and short term securitization exposures are
set out in the tables 9 and 10 below.

Table 9: Risk weight - long term securitization exposure


External AAA to A+ to A- BBB+ to BB+ to BB- B+ and
Credit AA- BBB- below or
Assessment unrated

Securitization 20% 50% 100% 350% 1250%


Exposures
Re- 40% 100% 225% 650% 1250%
Securitization
Exposures

923
Table 10: Risk Weights - Short-term securitization exposure
External Credit A-1/P-1 A-2/P-2 A-3/P-3 All other ratings or
Assessment unrated
Securitization Exposures 20% 50% 100% 1250%
Re-securitization 40% 100% 225% 1250%
Exposures

4. Exceptions to General Treatment of Unrated Securitization Exposures

The unrated securitization exposures must be risk weighted at 1250% with the
following exceptions:
i. the most senior exposure in an unrated securitization,
ii. exposures that are in a second loss position or better in ABCP programs;
and
iii. eligible liquidity facilities;
4.1 Treatment of Unrated Most Senior Securitization Exposures
If the most senior exposure in a securitization of a traditional or synthetic
securitization is unrated, a bank that holds or guarantees such an exposure
shall determine the risk weight by applying the “look-through” treatment,
provided the composition of the underlying pool is known at all times. A bank is
not required to consider interest rate or currency swaps when determining
whether an exposure is the most senior in a securitization for the purpose of
applying the “look-through” approach.

In the look-through treatment, the unrated most senior position receives the
average risk weight of the underlying exposures subject to supervisory review.
Where the bank is unable to determine the risk weights assigned to the
underlying credit risk exposures, the unrated position must be risk weighted at
1250%.

4.2 Treatment of Exposures in a Second Loss Position or Better in ABCP


Programmes

A risk weight of 1250% is not required for those unrated securitization exposures
provided by a sponsoring bank to ABCP programs, that satisfy the following
requirements:
a) The exposure is economically in a second loss position or better and the
first loss position provides significant credit protection to the second loss
position;
924
b) The associated credit risk is the equivalent of investment grade or better;
and
c) The bank holding the unrated securitization exposure does not retain or
provide the first loss position.
Where these conditions are satisfied, the risk weight is greater of (i) 100% or (ii)
the highest risk weight assigned to any of the underlying individual exposures
covered by the facility.
4.3 Credit Conversion Factors for Off-Balance Sheet Exposures
A bank must determine whether, according to the criteria outlined below, an
off-balance sheet securitization exposure qualifies as an ‘eligible liquidity
facility’. All other off-balance sheet securitization exposures will receive a 100%
CCF.

4.3.1 Eligible Liquidity Facilities


A liquidity facility, provided by a bank as part of a securitization transaction, is
an eligible liquidity facility where:
a) Facility documentation clearly identifies and limits the circumstance under
which the facility may be drawn;
b) Drawings under the facility are limited to the amount which is likely to be
paid from the liquidation of the underlying exposures of the securitization
transaction and any credit enhancement provided by the originating
bank. In addition, the facility must not cover any losses incurred in the
underlying pool of exposures prior to a draw, or be structured such that
draw-down is certain (as indicated by regular or continuous draws);
c) The facility is subject to an asset quality test which precludes it from being
drawn to cover credit risk exposures that are already in default. In
addition, if the exposures that a liquidity facility is required to fund are
externally rated securities, the facility can only be used to fund securities
that are externally rated investment grade at the time of funding;
d) The facility cannot be drawn after all applicable (e.g. transaction-specific
and programmewide) credit enhancements from which the liquidity would
benefit have been exhausted;
e) The facility is not capable of being drawn after all credit enhancements of
the securitization exposure, have been exhausted; and
f) Repayment of drawing on the facility is not subordinated to the claims of
investors in the securitization issues.
Where these conditions are met, a bank shall apply-
a) a 20% CCF to the undrawn portion of the eligible liquidity facility if the
facility has original maturity of one year or less; and
925
b) a 50% CCF to undrawn portion of the eligible liquidity facility if the facility
has original maturity of more than one year;

However, if an external rating of the facility itself is used for risk-weighting the
facility, a 100% CCF must be applied.
The bank shall apply a CCF of 0% to the undrawn portion of the eligible liquidity
facility, if the facility is available:
a) in the event of general market disruption;
b) to advance funds to pay investors in the securitization issue (in the event of
general market disruption) and which, once drawn, is secured by
underlying assets, and must rank at least pari-passu with the claims of
holders of the capital market instruments.

A bank shall deduct the undrawn portion of a liquidity facility, which is not an
eligible liquidity facility and is unrated, from its capital.

4.3.2 Overlapping Exposures


A bank may provide two or more facilities which may be drawn in respect of
the same securitization transaction leading to duplicate coverage provided by
the bank to the underlying exposures. In other words, the facilities provided by a
bank may overlap since a draw on one facility may preclude (in part) a draw
under the other facility. In the case of overlapping facilities provided by the
same bank, it is only required to hold capital once for the position covered by
the overlapping facilities (whether they are liquidity facilities or credit
enhancements).
Where the overlapping facilities are subject to different conversion factors, the
bank must attribute the overlapping part to the facility with the highest
conversion factor. However, if overlapping facilities are provided by different
banks, each bank must hold capital for the maximum amount of the facility.
4.4 Capital Requirement for Early Amortisation Provisions
Early amortisation provisions are mechanisms that, once triggered, allow
investors to be paid out prior to the originally stated maturity of the securities
issued.
An originating bank is required to hold capital against all or a portion of the
investors‟ interest (i.e. against both the drawn and undrawn balances related to
the securitised exposures) when:
a) it sells exposures into a structure that contains an early amortisation
feature; and

926
b) The exposures sold are of a revolving nature. These involve exposures where
the borrower is permitted to vary the drawn amount and repayments within
an agreed limit under a line of credit (e.g. credit card receivables and
corporate loan commitments);
For a bank subject to the early amortisation treatment, the total capital charge
for all of its positions will be subject to a maximum capital requirement (i.e. a
“cap”) equal to the greater of
(i) that required for retained securitization exposures, or
(ii) The capital requirement that would apply had the exposures not been
securitised;
In addition, banks must deduct the entire amount of any gain-on-sale and risk
weight the credit enhancing interest-only strip (I/Os) arising from the
securitization transaction.
A bank is not required to calculate a capital requirement for early amortisations
in the following situations:
a) Replenishment structures where the underlying exposures do not
revolve and the early amortisation ends the ability of the bank to add
new exposures;
b) Transactions of revolving assets containing early amortisation features
that mimic term structures (i.e. where the risk on the underlying
facilities does not return to the originating bank);
c) Structures where a bank securitises one or more credit line(s) and
where investors remain fully exposed to future draws by borrowers
even after an early amortisation event has occurred;
d) The early amortisation clause is solely triggered by events not related
to the performance of the securitised assets or the selling bank, such
as material changes in tax laws or regulations.
The capital requirement for securitization exposures shall reflect the type of
mechanism through which an early amortization is triggered. For risk-based
capital purposes, an early amortization provision will be considered either
controlled or non-controlled.

4.4.1 Determination of CCFs for Controlled and Non-Controlled Early


Amortisation Features
A controlled early amortisation provision must meet all of the following
conditions.
a) The bank must have an appropriate capital/liquidity plan in place to
ensure that it has sufficient capital and liquidity available in the event of
an early amortisation;
927
b) Throughout the duration of the transaction, including the amortisation
period, there is the same pro rata sharing of interest, principal, expenses,
losses and recoveries based on the bank’s and investors’ relative shares
of the receivables outstanding at the beginning of each month;
c) The bank must set a period for amortisation that would be sufficient for at
least 90% of the total debt outstanding at the beginning of the early
amortisation period to have been repaid or recognised as in default; and
d) The pace of repayment should not be any more rapid than would be
allowed by straightline amortisation over the period set out in criterion (c).
An early amortisation provision that does not satisfy the conditions for a
controlled early amortisation provision will be treated as a non-controlled early
amortisation provision.
In the case of securitizations involving retail revolving assets that are
unconditionally cancellable without notice and are subject to an early
amortization provision that is triggered when the excess spread falls to a certain
level, the appropriate conversion factor shall be based on a comparison
between the three-month average excess spread and the contractually
established excess spread level at which excess spread is required to be
trapped.
In cases where such a transaction does not require excess spread to be
trapped, the trapping point is deemed to be 4.5 percentage points.
The bank must divide the excess spread level by the transaction’s excess
spread trapping point to determine the appropriate segments and apply the
corresponding conversion factors, as outlined in table 11.
The appropriate conversion factor shall be determined separately for each
retail securitization transaction with controlled and non-controlled early
amortization provisions, expressed as the ratio between the three-month
average excess spread and trapping level excess spread. Table 11 below sets
out the CCF for securitization exposures;
Table 11: Credit Conversion Factor (CCF) for Securitization Exposure

3-month average excess spread Credit Conversion


Factor (CCF)
Ratio between the average Securitizations with Securitizations with
excess spread and trapping “controlled “early “non-controlled”
level excess spread amortization provisions early amortization
provisions

928
133.33% of trapping point or 0% 0%
more
less than 133.33% to 100% of 1% 5%
trapping point
less than 100% to 75% of 2% 15%
trapping point

less than 75% to 50% of trapping 10% 50%


point

less than 50% to 25% of trapping 20% 100%


point

less than 25% 40% 100%

All other securitized revolving exposures (i.e. those that are committed and all
non-retail exposures) with controlled early amortization features will be subject
to a CCF of 90%against the off-balance sheet exposures.
All other securitized revolving exposures (i.e. those that are committed and all
non- retail exposures) with non-controlled early amortization features will be
subject to a CCF of 100%against the off-balance sheet exposures.

Chapter 4 Credit rRsk Mitigation

1. Introduction
This section of the guideline sets out the principles for the recognition of credit
risk mitigation (CRM) techniques that a bank may use under the Standardised
Approach to Credit Risk for the purpose of calculating its capital requirements.
Banks use a number of techniques to mitigate the credit risks to which they are
exposed. The framework set out in this chapter is applicable to the banking
book exposures in the standardised approach. The use of CRM techniques
reduces or transfers credit risks but it may simultaneously increase other risks
(residual risks). Banks should employ robust procedures and processes to control
these risks. If there are significant residual risks including concentration risk,
arising from use of CRM techniques, banks are required to maintain additional
capital under pillar
2. CRM Approaches
The types of CRM techniques described in the guidelines are listed below:
a) Financial collaterals
929
b) Netting
c) Guarantee and credit derivatives
2.1 Treatment of Pools of CRM Techniques
In the case where a bank has multiple CRM techniques covering a single
exposure (e.g. a bank has both collateral and guarantee partially covering an
exposure), the bank will be required to subdivide the exposure into portions
covered by each type of CRM technique (e.g. portion covered by collateral,
portion covered by guarantee) and the risk-weighted assets of each portion
must be calculated separately. When credit protection provided by a single
protection provider has differing maturities, they must be subdivided into
separate protection as well.
2.2 Minimum Requirements for Recognition of CRM Techniques
In order for a bank to obtain capital relief from the use of any CRM technique,
the following conditions shall be met under the comprehensive approach:
a) All documentation used in collateralised transactions and for
documenting on-balance sheet netting and guarantees must be binding
on all parties and legally enforceable in all relevant jurisdictions. A bank
must have undertaken sufficient legal review to be satisfied with the legal
enforceability of the documentation and shall be expected to undertake
periodic reviews to ensure on-going enforceability.
b) Where a bank, acting as an agent, arranges a repo-style transaction (i.e.
repurchase/reverse repurchase and securities lending/borrowing
transactions) between a customer and a third party and provides a
guarantee to the customer that the third party will perform on its
obligations, then the risk to the bank is the same as if the bank had
entered into the transaction as a principal. In such circumstances, a bank
shall be required to calculate capital requirements as if it were itself the
principal.
3. Financial Collaterals in CRM
A bank shall apply Comprehensive Approach to all its on- and off-balance
sheet banking book exposures that are subject to credit risk mitigation using
eligible financial collaterals.
Comprehensive Approach allows offset of collateral against exposures, by
effectively reducing the exposure amount by the value ascribed to the
collateral. Mismatches in the maturity of the underlying exposure and the
collateral shall be allowed under the comprehensive approach. A capital
requirement shall be applied to a bank on both sides of a collateralised

930
transaction, e.g. both repo and reverse repo agreements shall be subject to
capital requirements.
3.1 Minimum Conditions for Use of Financial Collaterals
a) There must be a formal written contractual agreement between the
lender and the party lodging the collateral which establishes the lender’s
direct, explicit, irrevocable and unconditional recourse to the collateral.
In the case of cash collateral, this may include a contractual right of set-
off on credit balances, but a common law right of set-off is insufficient on
its own to satisfy this condition.
b) The legal mechanism by which collateral is pledged or transferred must
allow the bank the right to liquidate or take legal possession of the
collateral in a timely manner. The bank must take all steps necessary to
satisfy the legal requirements applicable to its interest in the collateral.
This would include clear and robust procedures for the timely liquidation
of collateral to ensure that any legal conditions required for declaring the
default of the counterparty and liquidating the collateral are observed
and that the collateral can be liquidated promptly.
c) In the event of default, any requirement on the lender to serve notice on
the party lodging the collateral must not unnecessarily impede the
lender’s recourse to the collateral.
d) A bank must have clear and robust procedures for the timely liquidation
of collateral to ensure that any legal conditions required for declaring the
default of the counterparty and liquidating the collateral are observed
and that the collateral can be liquidated promptly.
e) Where the collateral is held by an independent custodian or an equally
independent third party, the bank must take reasonable steps to ensure
that the custodian segregates the collateral from its own assets. Deposits
held with banks other than the lending bank shall be recognised as
eligible collateral if they are openly pledged or assigned to the lending
bank and such pledge or assignment is legally effective and enforceable
in all relevant jurisdictions.
f) Collateral in the form of securities issued by the counterparty to the credit
exposure (or by any person or entity related or associated with the
counterparty) is considered to have a material positive correlation with
the credit quality of the original counterparty and is therefore not eligible
collateral.

931
3.2 Eligibility of Financial Collateral
The following collateral instruments, mentioned in table 12 below, are eligible
for recognition in the comprehensive approach:
Table 12: Eligible collateral for comprehensive approach.

Collateral instruments that are eligible under the Comprehensive Approach


1 Deposits with the bank (as well as certificates of deposit or comparable
instruments issued by the lending bank) which is incurring the
counterparty exposure
2 Gold
3 Debt securities issued by FGN, State Governments and Supervised
Institutions;
4 Debt securities rated by an ECAI where these are either:

i. at least BBB- and above when issued by entities other


than FGN and Supervised Institutions ; or ii. at least A-3/P-3
for short-term debt instruments
In all other cases, banks will seek the approval of CBN before
recognising such instruments as eligible collateral.

5 Equities (including convertible bonds) that are listed in exchanges in


Nigeria.
Banks will seek the approval of CBN for using equity shares, as CRM,
traded in exchanges in other countries.

3.3 Comprehensive Approach


In the comprehensive approach, a bank shall calculate its adjusted exposure
to a counterparty for capital adequacy purposes in order to take account of
the effects of collaterals. Using haircuts, a bank is required to adjust both the
amount of the exposure to the counterparty and the value of any collateral
received in support of that counterparty to take account of possible future
fluctuations in the value of either, due to movement in risk factors in the
market. This will produce volatility adjusted amounts for both exposure and
collateral. Unless either side of the transaction is cash, the volatility adjusted
amount for the exposure will be higher than the exposure and for the collateral
it will be lower.

932
3.3.1 Calculation of Net Credit Exposure
On-balance sheet exposure - A bank shall calculate net credit exposure of on-
balance sheet exposure using credit risk mitigation by applying the following
formula:

E* = max {0, [E x (1 + He) – C x (1 – Hc – Hfx)]}


Where:
E* = the net exposure value after risk mitigation
E = the current value of the exposure
He = haircut appropriate to the exposure
C = the current value of the collateral received
Hc = haircut appropriate to the collateral
Hfx = haircut appropriate for currency mismatch between the
collateral and exposure
Off-balance sheet exposure (other than OTC derivative transaction)–A bank
shall calculate net credit exposure of off-balance sheet exposure using credit
risk mitigation by applying the following formula:

E* = max {0, [E x (1 + He) – C x (1 – Hc – Hfx)]} x CCF


Where:
E* = the net exposure value after risk mitigation
E = the current value of the exposure
He = haircut appropriate to the exposure
C = the current value of the collateral received
Hc = haircut appropriate to the collateral
Hfx = haircut appropriate for currency mismatch between the collateral
and exposure CCF = CCF applicable to the off-balance sheet exposure
OTC derivative transaction - A bank shall calculate net credit exposure to an
obligor in respect of an OTC derivative transaction using credit risk mitigation
by applying the following formula:

E* = max {0, [E – C x (1 – Hc – Hfx)]}


Where:
E* = the net exposure value after risk mitigation
E = credit equivalent amount of the OTC derivative transaction
(aggregating current market value and the potential future exposure
(add-on))
He = haircut appropriate to the exposure
C = the current value of the collateral received

933
Hc = haircut appropriate to the collateral
Hfx = haircut appropriate for currency mismatch between the collateral and
exposure
Where the collateral is a basket of assets, the haircut on the basket shall be

H = Σ ai Hi
Where ai is the weight of the asset in the basket (as measured by units of
currency) and Hi is the haircut applicable to that asset.

3.3.2 Standard Supervisory Haircuts


The standard supervisory haircuts are applied to the security (Hc) with
reference to the rating of the issuer and to the exposure (He) with reference to
the rating of the counterparty.
The standard supervisory haircuts (assuming daily mark-to-market, daily re-
margining and a 10business day holding period) are expressed as percentages
in table 13 below:
Table 13: Standard Supervisory Haircuts
Issue rating by ECAI for debt securities Residual Sovereigns Other
Maturity (%) issuers (%)

AAA to AA-/A-1 (long and short positions), FGN =< 1 year 0.50 1.00
bonds & T-bills and State Government bonds >1 year, < 5 2.00 4.00
years

> 5 Years 4.00 8.00


A+ to BBB-/ =< 1 year 1.00 2.00
A-2/A-3/P-3 and unrated bank securities >1 year, < 5 3.00 6.00
years
> 5 Years 6.00 12.00
BB+ to BB- 15 NA
Main index equities (including convertible bonds) and Gold 15
Other equities (including convertible bonds) listed on a 25
recognized exchange.

Cash in the same currency 0

934
The standard supervisory haircut for currency risk where exposure and
collateral are denominated in different currencies is 8% (also based on a 10-
business day holding period and daily mark-to-market).
For transactions in which the bank lends non-eligible instruments (e.g. non-
investment grade corporate debt securities), the haircut to be applied on the
exposure should be the same as the one for equity traded on a recognised
exchange that is not part of a main index.

Adjustment for different holding periods and non-daily mark-to-market or re-


margining.
For some transactions, depending on the nature and frequency of the
revaluation and remargining provisions, different holding periods are
appropriate. The framework for collateral haircuts distinguishes between repo-
style transactions (i.e. repo/reverse repos and securities lending/borrowing),
other capital-market-driven transactions (i.e. OTC derivatives transactions and
margin lending) and secured lending. In capital-market-driven transactions
and repo-style transactions, the documentation contains re-margining clauses;
in secured lending transactions, it generally does not.
The minimum holding period for various products is summarised in the following
table 14:

Table 14: Transaction Type and Minimum Holding Period

Transaction type Minimum holding Condition


period

Repo-style five business days daily re-margining


transaction

Other capital market ten business days daily re-margining


transactions

Secured lending twenty business days daily revaluation

935
When the frequency of re-margining or revaluation is longer than the minimum,
the minimum haircut numbers will be scaled up depending on the actual
number of business days between remargining or revaluation using the square
root of time formula below:

H=

√ TM
Where:
H = haircut
HM= haircut under the minimum holding period
TM= minimum holding period for the type of transaction
NR = actual number of business days between re-margining for capital
market transactions or revaluation for secured transactions.
When a bank calculates the volatility on a TN day holding period which is
different from the specified minimum holding period TM, the HM will be
calculated using the square root of time formula:
HM

√ TN
Where:
TN= holding period used by the bank for deriving HN
HN= haircut based on the holding period TN
For example, for banks using the standard supervisory haircuts, the 10-business
day haircuts provided in Table 13, will be the basis and this haircut will be
scaled up or down depending on the type of transaction and the frequency
of re-margining or revaluation using the formula below:
H = H10√ {NR + (TM – 1)}

√10
Where:
H = haircut
H10= 10-business day standard supervisory haircut for instrument
NR = actual number of business days between re-margining for capital
market transactions or revaluation for secured transactions.
TM= minimum holding period for the type of transaction
Conditions for Zero Haircut
For repo-style transactions where the following conditions are satisfied, and the
counterparty is a core market participant (i.e. FGN, CBN, or licensed banks in

936
Nigeria), a bank may choose not to apply the haircuts specified in the
comprehensive approach and may instead apply a haircut of zero:
a) Both the exposure and the collateral are cash or a sovereign security
qualifying for a 0% risk weight in the standardised approach;
b) Both the exposure and the collateral are denominated in the same
currency;
c) Either the transaction is overnight or both the exposure and the collateral
are marked-tomarket daily and are subject to daily re-margining;
d) Following a counterparty‘s failure to re-margin, the time that is required
between the last mark-to-market before the failure to re-margin and the
liquidation of the collateral is considered to be no more than four business
days;
e) The transaction is settled across a settlement system proven for that type
of transaction;
f) The documentation covering the agreement is standard market
documentation for repostyle transactions in the securities concerned;
g) The transaction is governed by documentation specifying that if the
counterparty fails to satisfy an obligation to deliver cash or securities or to
deliver margin or otherwise defaults, then the transaction is immediately
terminable; and
h) Upon any default event, regardless of whether the counterparty is
insolvent or bankrupt, the bank has the unfettered, legally enforceable
right to immediately seize and liquidate the collateral for its benefit.
3.3.3 Collateralised OTC derivatives transactions
Under the Current Exposure Method, the calculation of the counterparty credit
risk capital charge for an OTC derivative transaction will be as follows:

Capital charge = [(RC + add-on) - CA] x r x 10% or 15%


Where:
RC = the replacement cost,
Add-on = the amount for potential future exposure,
CA = the volatility adjusted collateral amount under the comprehensive
approach or zero if no eligible collateral is applied to the transaction,
and r = the risk weight of the counterparty.

3.3.4 Maturity Mismatch


A maturity mismatch exists where the residual maturity of the term of
lodgement of the collateral is less than the maturity of the exposure covered
by the collateral. Where there is a maturity mismatch, the collateral may only
937
be recognised for capital adequacy purposes where the original maturity of
the term of lodgement of the collateral is greater than or equal to 12 months. If
the original maturity of the term of lodgement of the collateral is less than 12
months, the collateral will not be eligible unless the term of lodgement
matches the maturity of the underlying exposure. In all cases where there is a
maturity mismatch, the collateral will not be eligible where it has a residual
maturity of three months or less.
Where there is a maturity mismatch between collateral and the underlying
exposure, for capital adequacy purposes a bank must apply the following
adjustment:

Pa = P x {(t-0.25)/(T-0.25)}
Where:
Pa = value of the collateral adjusted for maturity mismatch P = collateral
amount adjusted for any haircuts
t = min (T, residual maturity of the term of lodgement of the collateral)
expressed in years T = min (5, residual maturity of the exposure)
expressed in years.
4. Netting
4.1 On-balance Sheet Netting
For capital adequacy purpose, a bank may compute net exposure of loans
and deposit of a specific obligor using the comprehensive approach for on-
balance sheet exposure. Assets (loans) are treated as exposure and liabilities
(deposits) as collateral. The haircuts will be zero except when a currency
mismatch exists.
A bank shall ensure that the following conditions are met for eligibility for using
on-balance sheet netting as a CRM metric:
a) The bank has a well-founded legal basis for concluding that the netting
or offsetting agreement is enforceable in each relevant jurisdiction
regardless of whether the counterparty is insolvent or bankrupt;
b) The bank is able at any time to determine those assets and liabilities with
the same counterparty that are subject to the netting agreement;
c) The bank monitors and controls its roll-off risks; and
d) The bank monitors and controls the relevant exposures on a net basis,
4.2 Netting of Repo-style and OTC Derivative Transactions
A bank shall recognise the effects of bilateral netting agreements covering
repo-style transactions on a counterparty-by-counterparty basis if the
agreements are legally enforceable in each relevant jurisdiction upon the

938
occurrence of an event of default and regardless of whether the counterparty
is insolvent or bankrupt.
In addition, netting agreements must:
a) provide the non-defaulting party the right to terminate and close-out in a
timely manner all transactions under the agreement upon an event of
default, including in the event of insolvency or bankruptcy of the
counterparty;
b) provide for the netting of gains and losses on transactions (including the
value of any collateral) terminated and closed out under it so that a
single net amount is owed by one party to the other;
c) allow for the prompt liquidation or set-off of collateral upon the event of
default; and
d) In addition to the provisions required in (a) to (c) above, be legally
enforceable in each relevant jurisdiction upon the occurrence of an
event of default and regardless of the counterparty's insolvency or
bankruptcy.
The master netting agreement, for OTC derivatives and repo-style transactions,
is an agreement, in writing, between two parties, that sets out standard terms
that apply to all the transactions entered into between those parties. Each
time that a transaction is entered into, the terms of the master agreement do
not need to be re-negotiated and apply automatically. Under the master
netting arrangement, a bank can net its positive and negative exposures with
the counterparty to a single netted exposure for capital adequacy purpose.
For a bank using the standard supervisory haircuts or own-estimate haircuts,
the framework below shall apply to take into account the impact of master
netting agreements:

E* = max {0, [(Σ (E) – Σ(C)) + Σ (Es x Hs) +Σ (Efx x Hfx)]}


Where:
E* = the exposure value after risk mitigation
E = current value of the exposure
C = the value of the collateral received
Es = absolute value of the net position in a given security
Hs = haircut appropriate to Es
Efx = absolute value of the net position in a currency different from the
settlement currency Hfx = haircut appropriate for currency mismatch
For OTC derivative transactions, a bank shall calculate the credit equivalent
amount of its net credit exposure to counterparty by adding together the net

939
current exposure and the net potential exposure as described under
comprehensive approach for treatment of CRM.
5. Guarantee and Credit Derivative Contracts
5.1 Operational Requirements for Guarantee
The following conditions must be met for the credit protection deriving from a
guarantee (counter-guarantee) or credit derivative to be recognised:
a. the credit protection must be direct;
b. the extent of the credit protection must be clearly defined and
incontrovertible;
c. the credit protection contract must not contain any clause, the fulfilment
of which is outside the direct control of the lender, that
i. would allow the protection provider to unilaterally cancel the
protection;
ii. would increase the effective cost of protection as a result of
deteriorating credit quality of the protected exposure;
iii. would prevent the protection provider from being obliged to pay
out in a timely manner in the event that the original obligor fails to
make any payments due; or
iv. could allow the maturity of the credit protection to be reduced by
the protection provider; and
d. it must be legally effective and enforceable in all jurisdictions which are
relevant at the time of the conclusion of the credit agreement.

In addition to the legal certainty requirements, for a guarantee to be


recognised, the following conditions must be satisfied:
a) on the qualifying default/non-payment of the counterparty, the bank
must have the right to pursue in a timely manner the guarantor for any
monies under the claim in respect of which the guarantee is provided;
b) the guarantor may make one lump sum payment of all monies under the
claim to the bank or the guarantor may assume the future payment
obligations of the counterparty covered by the guarantee;
c) the bank must have the right to receive any such payments from the
guarantor without first having to take legal actions in order to pursue the
counterparty for payment;
d) the guarantee must be an explicitly documented obligation assumed by
the guarantor;
e) the guarantee must cover all types of payments the underlying obligor is
expected to make in respect of the claim; and

940
f) Where a guarantee covers payment of principal only, interest and other
amounts not covered by the guarantee must be treated as the
uncovered portion.
5.2 Operational Requirements for Credit Derivative Contract
In order for a credit derivative contract to be recognised, the following
conditions must also be satisfied:
a. the credit events specified by the contracting parties must, at a minimum,
cover:
i. failure to pay the amounts due under terms of the underlying
obligation that are in effect at the time of such failure (with a grace
period that is closely in line with the grace period in the underlying
obligation);
ii. bankruptcy, insolvency or inability of the obligor to pay its debts, or
its failure or admission in writing of its inability generally to pay its
debts as they become due, and analogous events; and
iii. restructuring of the underlying obligation involving forgiveness or
postponement of principal, interest or fees that results in a credit loss
event (i.e. charge-off, specific provision or other similar debit to the
profit or loss account)
b. the credit derivative shall not terminate prior to expiration of any grace
period required for a default on the underlying obligation to occur as a
result of a failure to pay, subject to the provisions of paragraph covering
maturity mismatch;
c. In the case of credit derivatives allowing for cash settlement, a robust
valuation process must be in place in order to estimate loss reliably. There
must be a clearly specified period for obtaining post-credit-event
valuations of the underlying obligation.
d. if the protection purchaser’s right/ability to transfer the underlying
obligation to the protection provider is required for settlement, the terms
of the underlying obligation must provide that any required consent to
such transfer may not be unreasonably withheld;
e. The identity of the parties responsible for determining whether a credit
event has occurred must be clearly defined. This determination must not
be the sole responsibility of the protection provider. The protection buyer
must have the right/ability to inform the protection provider of the
occurrence of a credit event.

941
5.3 Eligible Guarantor and Credit Protection Provider
Guarantee and credit protection provided by sovereign entities, central banks
and banks will be recognised for treatment of CRM. For determining the risk
weight of the foreign banks incorporated outside Nigeria, the rating of the
respective foreign sovereign with one rating grade less favourable, will be
taken.
For the purposes of credit risk mitigation, the following types of credit
derivatives and instruments are recognised:
a) Credit default swaps;
b) Total return swaps;
c) Credit linked notes;
5.4 Currency Mismatch
Where the credit protection is denominated in a currency different from that in
which the exposure is denominated (i.e. there is a currency mismatch), the
amount of the exposure deemed to be protected (GA) shall be reduced by
the application of a haircut HFX as follows:

GA = G x (1 - HFX)
Where:
G = nominal amount of the credit protection
HFX = haircut appropriate for the currency mismatch between the credit
protection and the underlying obligation
5.5 Maturity Mismatch
For the purposes of calculating risk-weighted assets, a maturity mismatch
occurs when the residual maturity of a guarantee/credit protection is less than
the maturity of the underlying exposure.
Definition of Maturity
Under all CRM treatments, effective maturity of the underlying exposure and of
the guarantee/collateral is defined as:
a) the longest possible remaining time before the counterparty is scheduled
to fulfil its obligation, taking into account any grace period; and
b) the shortest possible maturity for the guarantee/collateral, taking into
account embedded options that may reduce the term of the credit
protection;
A guarantee/collateral shall be recognised only when its original maturity is
greater than or equal to 12 months.
The maturity of guarantee/collateral for exposures with original maturities of
less than 12 months must be matched in order to be recognized.

942
In all cases, guarantee/collateral with maturity mismatches shall not be
recognised when it has a residual maturity of 3 months or less.

Adjustment for Maturity Mismatch


Where there is a maturity mismatch between the exposure and the credit
protection, the following adjustment shall be applied:

Pa = P x (t - 0.25) / (T - 0.25)
Where:
Pa = value of the credit protection adjusted for maturity mismatch
P = credit protection (e.g. collateral amount, guarantee amount)
adjusted for any haircuts
t = min (T, residual maturity of the credit protection arrangement)
expressed in years T = min (5, residual maturity of the exposure)
expressed in years.

Annexure 1 Categories of Off-Balance Sheet Exposures


The definitions in this section apply to off-balance sheet exposures. The term
“off-balance sheet exposures”, as used in this guideline, encompasses
guarantees, commitments, derivatives, and similar contractual arrangements
whose full notional principal amount may not necessarily be reflected on the
balance sheet. Such exposures are subject to a capital charge irrespective of
whether they have been recorded on the balance sheet at market value or
not.
The credit equivalent amount of Securities Financing Transactions (SFT) and
derivatives that expose a bank to counterparty credit risk is to be calculated.
SFT are transactions such as repurchase agreements, reverse repurchase
agreements, security lending and borrowing, and margin lending transactions,
where the value of the transactions depends on the market valuations and the
transactions are often subject to margin agreements.
The counterparty credit risk is defined as the risk that the counterparty to a
transaction could default before the final settlement of the transaction’s cash
flows. An economic loss would occur if the transactions or portfolio of
transactions with the counterparty has a positive economic value at the time
of default. Unlike a bank’s exposure to credit risk through a loan, where the
exposure to credit risk is unilateral and only the lending bank faces the risk of
loss, the counterparty credit risk creates a bilateral risk of loss: the market value
of the transaction can be positive or negative to either counterparty to the

943
transaction. The market value is uncertain and can vary over time with the
movement of underlying market factors.

Off-Balance Sheet Items (Other than OTC Derivative)

Direct Credit Substitutes


Direct credit substitutes include guarantees or equivalent instruments backing
financial claims. With a direct credit substitute, the risk of loss to the bank is
directly dependent on the creditworthiness of the counterparty. Examples of
direct credit substitutes include:
1) guarantees given on behalf of customers in respect of their financial
obligations and to satisfy these obligations should the customer fail to do
so; for example, guarantees of: i. payment for existing indebtedness for
services
ii. payment with respect to a purchase agreement
iii. lease, loan or mortgage payments
iv. payment of uncertified cheques
v. remittance of (sales) tax to the government
vi. payment of existing indebtedness for merchandise purchased
vii. payment of an unfunded pension liability
2) standby letters of credit or other equivalent irrevocable obligations,
serving as financial guarantees, such as letters of credit supporting the
issue of commercial paper,
3) risk participation in bankers’ acceptances and risk participation in
financial letters of credit (Financial letter of credit is a legal instrument
which provides assurance to the beneficiary that payment will be made
to the beneficiary in the event of failure of the seller or service provider
to discharge his obligation under the contract). Risk participation
constitutes guarantees by the participating bank such that, if there is a
default by the underlying obligor, they will indemnify the selling bank for
the full principal and interest attributable to them,
4) securities lending transactions, where the bank is liable to its customer for
any failure to recover the securities lent, and
5) credit derivatives in the banking book where a bank is selling credit
protection;

Transaction-Related Contingencies
Transaction-related contingencies relate to the on-going business activities of
counterparty, where the risk of loss to the reporting bank depends on the
944
likelihood of a future event that is independent of the creditworthiness of the
counterparty. Essentially, transaction-related contingencies are guarantees
that support particular performance of non-financial or commercial contracts
or undertakings, rather than supporting customers’ general financial
obligations. Performance-related guarantees specifically exclude items
relating to non-performance of financial obligations.
Performance-related and non-financial guarantees include items such as:
1) Performance bonds, warranties and indemnities. Performance standby
letters of credit represent obligations backing the performance of non-
financial or commercial contracts or undertakings. These include
arrangements backing:
i. subcontractors’ and suppliers' performance
ii. labour and material contracts
iii. delivery of merchandise, bids or tender bonds
iv. guarantees of repayment of deposits or prepayments in cases of
non-performance,
2) Customs and excise bonds. The amount recorded for such bonds should
be the bank's maximum liability.

Trade-Related Contingencies
These include short-term, self-liquidating trade-related items such as
commercial and documentary letters of credit issued by the bank that are, or
are to be, collateralized by the underlying shipment.
Letters of credit issued on behalf of counterparty back-to-back with letters of
credit of which the counterparty is a beneficiary ("back-to-back" letters) should
be reported as documentary letters of credit.
Letters of credit advised by the bank for which the bank is acting as
reimbursement agent should not be considered as a risk asset.

Sale and Repurchase Agreements


A repurchase agreement is a transaction that involves the sale of a security or
other asset with the simultaneous commitment by the seller that, after a stated
period of time, the seller will repurchase the asset from the original buyer at a
pre-determined price. A reverse repurchase agreement consists of the
purchase of a security or other asset with the simultaneous commitment by the
buyer that, after a stated period of time, the buyer will resell the asset to the
original seller at a pre-determined price. In any circumstance where they are
not reported onbalance sheet, they should be reported as an off-balance
sheet exposure with a 100% credit conversion factor.
945
Forward Asset Purchases
A commitment to purchase a loan, security, or other asset at a specified future
date, usually on pre-arranged terms.

Forward/Forward Deposits
An agreement between two parties whereby one will pay and the other
receive an agreed rate of interest on a deposit to be placed by one party with
the other at some pre-determined date in the future. Such deposits are distinct
from future forward rate agreements in that, with forward/forwards, the deposit
is actually placed.
Partly Paid Shares and Securities
These are transactions where only a part of the issue price or notional face
value of a security purchased has been subscribed and the issuer may call for
the outstanding balance (or a further instalment), either on a date pre-
determined at the time of issue or at an unspecified future date.

Note Issuance/Revolving Underwriting Facilities


These are arrangements whereby a borrower may issue short-term notes,
typically three to six months in maturity, up to a prescribed limit over an
extended period of time, commonly by means of repeated offerings to a
tender panel. If at any time the notes are not sold by the tender at an
acceptable price, an underwriter (or group of underwriters) undertakes to buy
them at a prescribed price.

Over-the-counter (OTC) Derivative Contracts

Future/Forward Rate Agreements


These are arrangements between two parties where at some pre-determined
future date a cash settlement will be made for the difference between the
contracted rate of interest and the current market rate on a pre-determined
notional principal amount for a pre-determined period.

Interest Rate Swaps


In an interest rate swap, two parties contract to exchange interest service
payments on the same amount of notional indebtedness. In most cases, fixed
interest rate payments are provided by one party in return for variable rate
payments from the other and vice versa. However, it is possible that variable
interest payments may be provided in return for other variable interest rate
payments.

946
Interest Rate Options and Currency Options
An option is an agreement between two parties where the seller of the option
for compensation (premium/fee), grants the buyer the future right, but not the
obligation, to buy from the seller, or to sell to the buyer, either on a specified
date or during a specified period, a financial instrument or commodity at a
price agreed when the option is arranged. Other forms of interest rate options
include interest rate cap agreements and collar (floor/ceiling) agreements.

Forward Foreign Exchange Contracts


A forward foreign exchange contract is an agreement between a bank and a
counterparty in which the bank agrees to sell to or purchase from the
counterparty a fixed amount of foreign currency at a fixed rate of exchange
for delivery and settlement at a specified date in the future or within a fixed
optional period.

Cross Currency Swaps


A cross currency swap is a transaction in which two parties exchange
currencies and the related interest flows for a period of time. Cross currency
swaps are used to swap fixed interest rate indebtedness in different currencies.
Cross Currency Interest Rate Swaps
Cross currency interest rate swaps combine the elements of currency and
interest rate swaps.

Financial and Foreign Currency Futures


A future is a standardized contractual obligation to make or take delivery of a
specified quantity of a commodity (financial instrument, foreign currency, etc.)
on a specified future date at a specified future price established in a central
regulated marketplace.

Precious Metals Contracts and Financial Contracts on Commodities


Precious metals contracts and financial contracts on commodities can involve
spot, forward, futures and option contracts. Precious metals are mainly gold,
silver, and platinum. Commodities are bulk goods such as grains, metals and
foods traded on a commodity exchange or on the spot market. For capital
purposes, gold contracts are treated the same as foreign exchange contracts.

Annexure 2 Securitization – Definitions and Terminologies

ABCP program – Asset backed commercial paper (ABCP) means a program


where commercial paper with an original maturity of one year or less which is
947
backed by assets or other exposures held in a bankruptcy-remote SPE is
predominantly issued.
• Banking book - means all on-balance sheet and off-balance sheet
exposures of a bank other than its trading book positions.
• Clean-up call – A clean-up call is an option which permits the originator
in the securitization transaction to repurchase the outstanding
securitization issues once the amount of the outstanding securitization
issues, or of the underlying exposures that have not been repaid, has
fallen below a level specified in the documentation.
In the case of traditional securitizations, this is generally accomplished by
repurchasing the remaining securitization exposures. In the case of a
synthetic transaction, the clean-up call may take the form of a clause
that extinguishes the credit protection.
• Credit derivative - means any contract which transfers the credit risk of a
reference obligation or set of reference asset(s) from the protection
buyer to the protection seller, such that the protection seller has an
exposure to the reference asset(s).
• Credit enhancement - means a contractual arrangement in which a
bank retains or assumes a securitization exposure that, in substance,
provides some degree of credit protection to other parties to the
securitization.
• Credit-enhancing interest-only strip - A credit-enhancing interest-only
strip (I/O) is an onbalance sheet asset that (i) represents a valuation of
cash flows (expected future excess spread) related to future margin
income, and (ii) is subordinated to the claims of other parties to the
transaction.
• Credit risk mitigation (CRM) - means any technique used by a bank to
reduce the credit risk associated with any exposure which the bank
holds.
• Early amortisation provision- means a contractual clause which requires
on the occurrence of defined events, an investor’s position to be
redeemed prior to the original maturity of the securities issued.
• Eligible liquidity facility – It means an off-balance sheet securitization
exposure of the bank arising from a contractual agreement under which
the bank provides funding in respect of the securitization transaction to
ensure the timeliness of cash flows to investors in the securitization issues
in the transaction.

948
• Excess spread - means any gross finance charge collections and other
income received by the trust or SPE after deducting certificate interest,
servicing fees, charge-offs, and other senior trust or SPE expenses.
• Gain-on sale - means any increase in the equity capital of a bank which
is an originator resulting from the sale of underlying exposures in a
securitization.
• Implicit support – means any support that a bank provides to a
securitization in excess of its predetermined contractual obligations.
• Netting - means bilateral netting, including –
i. netting by novation, where obligations between two counterparties to
deliver a given currency on a given value date under a transaction,
are automatically amalgamated with all other obligations under
other transactions to deliver on the same currency and value date,
thereby extinguishing former transactions with a single legally binding
new transaction; and

ii. close-out netting, where some or all of the on-going transactions


between two counterparties are terminated due to the default of
either counterparty or upon the occurrence of a termination event as
defined in the netting agreement, whereupon the values of such
transactions are combined and reduced to a single payable sum.
• NGR - means the ratio of the net current replacement cost to the gross
current replacement cost
• OTC derivative transaction - means an exchange rate contract, interest
rate contract, equity contract, precious metal or other commodity
contract or credit derivative contract which is not traded on an
exchange.
• Reference asset - means any asset specified under a credit derivative
contract used for purposes of either determining cash settlement value
or the deliverable asset.
• Re-securitization exposure - means any transaction or scheme involving
the tranching of credit risk associated with an exposure or a pool of
exposures and which has the following characteristics:
a) payments in the transaction or scheme depend on the performance
of the exposure or pool of exposures;
b) the subordination of tranches determines the distribution of losses
during the ongoing life of the transaction or scheme; and

949
c) junior tranches can absorb losses without interrupting contractual
payments to more senior tranches;
• Securitization exposure - means any exposure of a bank to a
securitization, and includes -
a) any on-balance sheet exposure to securities issued pursuant to a
securitization (e.g. asset-backed securities, mortgage backed
securities and collateralised debt obligations);
b) any off-balance sheet exposure to a securitization (e.g. through
credit enhancements, liquidity facilities, credit derivatives, tranched
cover, interest rate swap or currency swap), regardless of whether it
was retained by the bank at, or repurchased by the bank after, the
origination of the securitization; and
c) reserve accounts (e.g. cash collateral accounts) recorded as an
asset by the originating bank
• Security financing transaction (SFT) - means a securities or commodities
financing transaction comprising any one of the following:
a) repo or reverse repo;
b) securities or commodities lending transaction or securities or
commodities borrowing transaction;
c) Margin lending transaction, for which the value of the transaction
depends on market valuation and the transaction is often subject
to margin agreements.
• Special purpose entity (SPE) - means a corporation, trust, or other entity
established for a specific purpose, the activities of which are limited to
those appropriate to accomplish that purpose, and the structure of
which is intended to isolate the SPE from the credit risk of an originator or
seller of exposures.
• Synthetic securitization transaction – means a securitization transaction
where the credit risk of reference pool of underlying exposures are
transferred, whole or in part, through the use of credit protection
afforded the underlying exposures.
• Traditional securitization transaction – means a securitization transaction
where-
a) The pool of underlying exposures, is sold by the originator, in the
transaction to an
SPE; and
b) The cash flows from the pool of underlying exposures are used to
service payment to investors or other parties to the transaction.
950
• Underlying exposure – in relation to a securitization transaction, means
one or more onbalance sheet or off-balance sheet exposures in respect
of which credit risk is transferred by the originator to other persons in the
transaction.

Annexure 3 Illustration on Computation of Exposure for


Collateralized Transaction with Revised Haircut

A. Particulars of the Transactions:


An illustration on computation of exposure for the collateralized transaction
with revised haircut is shown below:
Bank has borrowed from counterparty N 10 billion

Collateral Provided by the Bank 7th FGN Bond 2030 Series

Face Value of the FGN Bond N 12 billion

Coupon 10%

Market value of the FGN Bond N 10.1688 billion


Minimum Holding Period (assumed by the
15 Days
bank)
Re-margining Period Weekly (7 days)
4% (sovereign bond with
remaining maturity of more
Supervisory Haircut on Security than 5 years with
10 day minimum holding
period)
Haircut on Cash 0%

951
B. Formula

H = HM √ {NR + (TM - 1)}


√ TM
Where:
H = haircut
HM= haircut under the minimum holding period
TM= minimum holding period for the type of transaction
NR= actual number of business days between re-margining for capital market
transactions or revaluation for secured transactions.

C. Computation of Exposures for Collateralized Transactions with Revised


Haircut
(In this case, the security lent is the exposure of the bank while cash borrowed
is the collateral)

Amounts
Sl.
Items Particulars (in billion
No
Naira)
1 Exposure (before haircut) Market value of 10.1688
security
2 Collateral Amount borrowed 10
4%
3 Haircut on Security (HM) Under minimum
holding period
Actual number of
business days between
re-margining for
4 Re-margining period (NR) capital market 7 days
transactions or
revaluation for
secured transactions.
5 Minimum holding period (TM) 15 days

952
Revised Haircut (H) 4% * [((7 +
6 5.7966%
Use the formula in section B (151))/10]^0.5
Exposure Amount (after
7 10.1688 * (1+5.7966%) 10.7582
haircut)
10 x 1.00
Collateral Amount (after
8 [haircut being 0% for 10
haircut)
cash]
Net Exposure after adjustment
9 10.7582 – 10 0.7582
of collateral [7 – 8]

Annexure 4 Illustration on computation of RWA of exposure with financial


collateral as credit risk mitigation

A. Particulars of the Transactions:

An illustration on net exposure computation with financial collateral as


credit risk mitigation as seen below:

Type of Facility (extended by the bank to a


Term Loan
corporate entity)
Facility Amount (exposure) N 15 billion

Haircut for Exposure (Cash) 0%


Lagos State Government
Collateral provided by the borrower
Bonds Series 2025

Coupon 12.50%

Face value of the bond (collateral) N 8 billion

Market value of the bond (collateral) N 8.5 billion

Risk Weight of the above bond issuer (the


20%
bond is a liquid security as notified by CBN)
Haircut for collateral (Lagos State
4%
Government bond)

953
B. Formula
E* = max {0, [E x (1 + He) – C x (1 – Hc – Hfx)]}
Where:
E* = the net exposure value after risk mitigation
E = the current value of the exposure
He = haircut appropriate to the exposure
C = the current value of the collateral received
Hc = haircut appropriate to the collateral
Hfx = haircut appropriate for currency mismatch between the collateral and
exposure

C. Computation of RWA for Exposure with Financial Collateral as Credit


Risk mitigation

Comprehensive Approach
Sl. Amounts
No Items Particulars (in billion
Naira)
1 Exposure (credit facility) Haircut as 0% 15
Haircut for collateral (Lagos State
2 4%
Government bond)
3 Collateral value 8.5
4 Haircut adjusted collateral value 8.5 x (1-0.04) 8.16
5 Net exposure [1 – 4] 15 – 8.16 6.84
6 Risk weight of unrated corporate 100%
7 RWA of net exposure [5 x 6] 6.84 x 100% 6.84

954
CENTRAL BANK OF NIGERIA

Guidance Notes on Supervisory Review Process

955
SUPERVISORY REVIEW PROCESS
1.0 Introduction
The Supervisory Review Process is structured along two separate but
complementary stages.
i) The Internal Capital Adequacy Assessment Process (ICAAP) 24, and
ii) The Supervisory Review and Evaluation process (SREP) 25

2.0 Internal Capital Adequacy Assessment Process (ICAAP)


• The ICAAP is based on appropriate risk management systems that require
adequate corporate governance mechanisms, an organisational
framework with clear lines of responsibility, and effective internal control
systems because capital cannot be regarded as a substitute for
addressing inadequate risk management processes.
• The ICAAP shall be documented, understood and shared by all bank
structures and shall be subject to independent internal review.
• The respective banks’ boards are entirely responsible for the ICAAP. They
are expected to independently establish the design and organisation in
accordance with the risk appetite of the bank. They are also responsible
for the implementation and the annual update of the ICAAP and the
resulting calculation of internal capital in order to ensure it is still in
conformity with the banks’ operations and environment.
• On an annual basis, banks shall render returns to the Central Bank of
Nigeria (CBN) on the key features of the ICAAP, their risk exposure and
the level of capital deemed adequate to support those risks. The report
shall also contain a self-assessment of the ICAAP, areas for improvement,
any deficiencies in the process and the corrective measures to be taken.
2.1 General Rules for the ICAAP
i) Banks shall have a process for determining the total capital, currently and
prospectively necessary to support all material risks. This process shall be;
• formalized and documented,

24 The ICAAP requires banks to perform an independent and complete assessment of the risks to which they are
exposed and calculate an internal capital requirement
25 SREP is performed by the CBN, who reviews the ICAAP, formulates an overall opinion about the bank and,

where necessary, takes remedial measures. The SREP is the process by which the CBN reviews and assesses the
ICAAP, analyses the bank’s own assessment of its risk profile, the corporate governance system as it relates to the
ICAAP and the internal control system, and verifies overall compliance with prudential rules in calculating internal
capital
956
• subject to internal review and approval by board and
management.
• proportionate to the nature, scale and complexity of the business
conducted.
ii) The calculation of total capital requires an assessment of all the risks to
which a bank is or may be exposed, including those not considered in
calculating the capital requirement under Pillar 1.
iii) Banks shall determine the risks, other than credit, counterparty, market
and operational risks, for which the adoption of quantitative
methodologies that can be used in determining internal capital would be
appropriate 26, and those for which control and mitigation measures, in
combination or alternatively, would be more suitable.
2.2 Proportionality in the ICAAP
The principle of proportionality shall apply to the following aspects:
i) The methodologies used in measuring/assessing risks and in
determining the related internal capital;
ii) The type and nature of the stress tests adopted;
iii) The treatment of correlation among risks and the determination of total
internal capital;
iv) The organizational structure of the risk control systems;
v) The scope and detail of ICAAP reporting to the CBN.
2.3 Features of the ICAAP
In developing an Internal Capital Adequacy Process, banks shall take
cognizance of the key supervisory principles as enunciated by the Basel
Committee on Banking Supervision (BCBS July 2006 paragraph 725-­‐760).
The main features are summarized below:
2.3.1 Comprehensive Identification of Risks
a) Banks shall independently identify the risks to which they are exposed, taking
into consideration their operations and the markets in which they operate.

26 For the purposes of the provisions of this Regulation, “internal capital” shall mean capital at risk, i.e.
the amount of capital related to a given risk that the bank deems necessary to cover losses exceeding a
given expected level (this definition assumes that the expected loss shall be covered by net value
adjustments–specific and portfolio of equal amount; where the latter is lower, internal capital shall also
cover this difference).
“Total internal capital” shall mean the internal capital related to all material risks faced by the bank,
including any internal capital associated with strategic factors. “Capital” and “total capital” shall mean the
capital elements that the bank feels it can use to cover “internal capital” and “total internal capital”,
respectively.
957
b) This analysis shall consider at a minimum, the risks listed in Annex A. This list is
not exhaustive: the identification of any further risk factors connected with its
specific operations is left to the prudent assessment of each bank.
c) Banks and banking groups shall clearly identify the sources of the various
forms of risks and where these are to be found at the level of operating units,
enterprise-wide, within the group or from external counterparties. This makes
it possible to ascertain whether the regulatory capital requirements
calculated at the individual level for the most significant legal entities
adequately cover the risks effectively faced by these entities.
2.3.2 Sound Capital Assessment
• In order to calculate internal capital banks should have:
a) Designed policies and procedures that clearly identify, measure and
report all material risks;
b) A process that relates capital adequacy to the level of risks assumed;
c) A process that relates capital adequacy goal with the banks’ strategic
focus and business plan;
d) A process of internal controls that reviews and audits continuously the
activities of the banks to ensure robustness and integrity of the overall risk
management process;
• In addition, banks are required to quantify all material risks they are exposed
to using methodologies they deem appropriate in relation to their
organisational and operational features.
• For credit, counterparty, market and operational risks, a methodological
starting point is provided by the regulatory systems for calculating capital
requirements for such forms of risk;
• With regard to interest rate risk, all banks shall assess the impact of
hypothetical shocks on the interest rate exposure of the banking book.
Where this should cause a significant reduction of a bank’s regulatory
capital, the CBN shall examine the results with the bank and may adopt
appropriate actions; and,
• The ICAAP of banks must be able to show how total capital reconciles
with the definition of regulatory capital. Specifically, they shall explain the
use of capital instruments that may not be included in regulatory capital but
are included in the calculation of internal capital
2.3.3 Stress Testing
• Banks shall conduct stress testing of their risk mitigation and control systems
and, where necessary, the adequacy of their internal capital, in order to
enhance the assessment of their exposure to risks.

958
• Stress tests are quantitative and qualitative techniques used by banks to
assess their vulnerability to exceptional, but plausible, events. They involve
assessing the impact on banks’ exposures of specific events (sensitivity
analysis) or joint movements of a set of economic and financial variables
under adverse scenarios (scenario analysis).
2.3.4 Corporate Governance in the ICAAP
• The board and management of banks shall be responsible for the ICAAP.
• They shall establish a framework for assessing the various risks, develop a
system to relate risk to banks’ capital level, and establish a method for
monitoring compliance with internal policies. It is likewise important that the
board of directors adopts and supports strong internal controls and written
policies and procedures and ensures that management effectively
communicates these throughout the organization. (BCBS July 2006, Par 730)
2.3.5 Monitoring and Reporting
Banks should have a system for monitoring and reporting risk exposures and
assessing how their changing business risk profiles affect their capital needs.
They are therefore required to:
a) Evaluate the level and trend of material risks and their effects on capital
levels;
b) Evaluate the sensitivity and reasonableness of the key assumptions used
in capital assessment;
c) Determine that they hold sufficient capital against the various risks and
ensure compliance with established capital adequacy goals; and,
d) Assess future capital requirements based on reported risk profiles and
indicate any necessary adjustments to be made to the banks’ strategic
plan based on that assessment.
2.3.6 Internal Control Review
• An effective ICAAP requires that the relationship between risk and capital
level is monitored
• The board should ensure that its system of internal control can monitor its
business environment
• The bank should ensure conduct of periodic review to ensure integrity,
accuracy and reasonableness of its risk management process. Such reviews
should cover:
a) Appropriateness of the ICAAP
b) Large exposures and risk concentration
c) Accuracy and completeness of data input
d) Reasonableness and validity of scenarios used in the assessment

959
e) Stress testing and analysis of assumptions/inputs
2.4 Regulatory Reporting of the ICAAP
2.4.1 Content and Structure
a) The ICAAP report will enable the CBN to conduct a complete, documented
assessment of the key qualitative features of the capital planning process,
the overall exposure to risks and the consequent calculation of total internal
capital.
b) The report is transmitted to the CBN along with the relevant board resolutions
and senior management reports containing their comments on the ICAAP,
in accordance with their respective responsibilities and functions.
c) The report shall be organized, at a minimum, into the areas specified in
Annex B.
2.4.2 Frequency of ICAAP Reporting
• On an annual basis, banks shall, not later than the end of April, submit to the
CBN the ICAAP report as at 31 December of the previous year.
• Based on the capital reported at the close of the previous year, the ICAAP
document shall provide the bank’s strategies for taking on risk and ensuring
that the related capital needs through the end of the current year are met.

3.0 Supervisory Review and Evaluation Process (SREP)

3.1 General Rules for the SREP


The SREP shall be conducted for banks and banking groups on an annual
basis in order to verify that they have established capital and organizational
arrangements that are appropriate for the risks they face and ensures
overall operational equilibrium.
3.2 Stages of the SREP
The SREP is organized into the following main stages:
a) Analysis of exposure to all material risks and the relative control systems;
b) Verification of compliance with capital requirements and other
supervisory rules;
c) Assessment of the procedure for calculating total internal capital and of
the adequacy of total capital in relation to the bank’s risk profile;
d) Issuance of specific opinions for each form of risk and of an overall
opinion on the situation of the bank;
e) Determination of any supervisory response

960
3.3 Proportionality in the SREP
The supervisory review and evaluation process is also informed by the
principle of proportionality, under which:
a) Corporate governance systems, risk management processes, internal
control mechanisms and the determination of capital deemed
adequate to cover risks shall be proportionate to the nature, scale and
complexity of the business conducted by the banks;
b) The frequency and the comprehensiveness of the SREP shall have regard
to the systemic importance, nature, size and complexity of banks. The
CBN, as part of its Risk Based Supervisory process, will review and
evaluate the soundness of banks’ ICAAP against the expectations set out
under the features of ICAAP in this guideline. This review will also consider
the comprehensiveness of the ICAAP and the quality of risk management
to form a view on the appropriateness of the banks’ internal capital
targets and its capacity for meeting the targets. Based on these reviews,
the CBN may require any bank to, among other things, take action to
improve its capital and risk management processes if it is not satisfied with
the bank’s ICAAP.
While the board and senior management of banks maintains primary
responsibility for their institution’s capital adequacy, the CBN reserves the
power to intervene at an early stage to prevent a bank’s capital from falling
below the level that it deems adequate to support its risks. The CBN may
require rapid remedial action if adequate capital is not maintained or
restored. This may include the following:
a) Altering the risk profile of the bank through business or operational
restrictions;
b) Directing banks to raise additional capital;
c) Strengthening of the systems, procedures and processes concerning
risk management, control mechanisms and internal assessment of
capital adequacy;
d) Prohibition of distribution of profits or other elements of capital;
e) Directing the bank to hold an amount of regulatory capital greater
than the legal minimum for credit risk, counterparty risk, market risk
and operational risk;
f) Using other measures as contained in the CBN Supervisory Intervention
Framework (SIF) and the BOFIA.

961
ANNEX A: RISKS SUBJECT TO THE INTERNAL CAPITAL ADEQUACY ASSESSMENT
PROCESS (ICAAP)

1. Pillar 1 Risks
a) Credit risk (including counterparty risk,);
b) Market risks;
c) Operational risk.

2. Other Risks
a) Concentration risk: the risk arising from exposures to counterparties,
groups of connected counterparties, and counterparties in the same
economic sector or which engage in the same activity or are from the
same geographic region;
b) Interest rate risk in the banking book: the risk arising from potential
changes in interest rates;
c) Residual risk: the risk that recognized credit risk mitigation techniques used
by the bank may be less effective than planned;
d) Securitization risk: the risk that the economic substance of a securitization
operation is not fully reflected in risk assessment and management
decisions;
e) Business and Strategic risk: the current or prospective risk of a decline in
profits or capital caused by changes in the business environment or
erroneous decisions, the inadequate implementation of decisions or poor
responsiveness to competitive developments;
f) Reputational risk: the current or prospective risk of a decline in profits or
capital should customers, counterparties, shareholders, investors or
supervisors take a negative view of the bank;
g) Liquidity risks; Banks’ liquidity profile and the liquidity of the markets in
which they operate.
h) Compliance with minimum standards and disclosure requirements;
i) Factors external to the bank, e.g., business cycle effects

962
ANNEX B: GUIDE FOR ICAAP REPORTING

1. Strategies and Forecasting Horizon Adopted


a) Business plan and annual budgets; schedule of reviews of business plan
and its components; extraordinary events necessitating review;
b) Reconciliation between time horizon of business plan and capital plan;
c) Ordinary and extraordinary sources of capital.
2. Corporate Governance, Organizational Arrangements and Internal
Control Systems Connected with the ICAAP
a) Description of the process for the preparation and updating of the
ICAAP;
b) Description of the process for reviewing the ICAAP;
c) Definition of the role and functions assigned to the board and senior
management bodies for the purposes of the ICAAP;
d) Definition of the role and functions assigned to various corporate
functions for the purposes of the ICAAP (for example, internal auditing,
compliance, planning, risk management, and other units such as head
office and branch network commercial units, accounting and audit);
e) Description of organizational and contractual safeguards relating to any
elements of the ICAAP that is outsourced;
f) Indication of internal regulations relevant to the ICAAP.
3. Risk Exposures, Risk Measurement and Aggregation Methodologies,
Stress Testing
a) Risk mapping: illustration of the position of the bank in respect of Pillar 1
and Pillar 2 risks;
b) Risk mapping in relation to bank’s operating units and/or legal entities of
the group;
c) Techniques for risk measurement, internal capital determination and
stress testing;
d) Description, for every category of measurable risk, of the main
characteristics of the main risk control and mitigation instruments;
e) General description of systems for control and mitigation of non-
measurable risks.
4. Components, Estimation and Allocation of Internal Capital
a) Quantification of internal capital for each risk and total internal capital;
b) Any methods for allocating internal capital (by operating unit and/or
legal entity).

963
5. Reconciliation of Internal Capital, Regulatory Requirements and
Regulatory Capital
a) Reconciliation of total internal capital and regulatory requirements;
b) Listing and definition of capital components covering internal capital;
c) Eligibility of components covering internal capital to be calculated for
supervisory purposes; explanation of inclusion of ineligible components;
d) Estimate of cost of using other capital sources in addition to those used.

6. Self-Assessment of ICAAP
a) Identification of the areas of the process amenable to improvement
b) Planning of capital or organizational actions.
7. Organization of the ICAAP Report
1. Executive Summary
2. Structure and Operations
3. Governance Structure
4. Risk Assessment and Capital Adequacy
5. Stress Testing
6. Capital Planning
7. Design, Approval, Review, and Use of ICAAP
8. Challenges and Further Steps
9. Summary of Internal Capital Adequacy Assessment Process
10. Risk Appetite Statement
11. Use of Internal Models for Capital Assessment
12. Review of ICAAP

964
965
966
967
09- 462-36401

BSD/DIR/GEN/LAB/08/024

May 20, 2015

LETTER TO ALL BANKS

RE: NEW CASH RESERVE REQUIREMENT

Further to our earlier letter referenced BSD/DIR/GEN/LAB/08/009 and dated


February 11, 2015, all banks are invited to note the following changes to the
cash reserve requirement (CRR) regime as decided at the 244th Monetary
Policy Committee meeting held on May 18 & 19, 2015;
1. CRR rates on all banks’ deposits are now harmonized at 31.0 per cent.

2. The maintenance period will be weekly, commencing on Thursday May 21,


2015.

3. The CRR rate will be applied on the average adjusted deposits for the
preceding maintenance period and not on the incremental deposits.

4. The computed Cash Reserve would be maintained for the subsequent


period.

Please be guided accordingly.

‘TOKUNBO MARTINS (MRS.)


DIRECTOR, BANKING SUPERVISION

968
09-462-36401
BSD/DIR/GEN/LAB/08/022

April 22, 2015

LETTER TO ALL BANKS AND DISCOUNT HOUSES

RECOVERY OF DELINQUENT CREDIT FACILITIES

The Central Bank of Nigeria has observed the rising trend of non-performing
loans (NPL) in the industry. In order to ensure that the industry NPL ratio does not
exceed the prudential limit of 5%, and to improve the credit culture in the
banking industry, banks and discount houses are directed to observe prudent
credit underwriting and monitoring standards.

Furthermore, banks and discount houses are required with effect from May 1st
2015 to:
i. Give the delinquent debtors three months of grace to turn their accounts
from non-performing to performing status.

ii. Publish the list of delinquent debtors that remain non-performing in at least
three national daily newspapers quarterly (The delinquent debtors are those
whose accounts have been classified lost and include the persons, entities,
directors, subsidiaries and other related parties). The list must be sent to the CBN
as soon as the publication is made.

Banks and Discount houses are also to note that delinquent debtors in the
category described above will be blacklisted by the CBN and are therefore:
i. Banned from participating in the Nigerian foreign exchange market.

ii. Banned from participating in the Nigeria Government securities market.

Please be guided accordingly.

‘TOKUNBO MARTINS (MRS.)


DIRECTOR OF BANKING SUPERVISION
969
09-462 36403

BSD/DIR/GEN/LAB/08/013

April 17, 2015

LETTER TO ALL BANKS

CURRENCY SUBSTITUTION AND DOLLARISATION OF THE NIGERIAN ECONOMY

The Central Bank of Nigeria (CBN) is aware of the rising trend of currency
substitution and dollarization of the economy in recent time. The CBN
condemns this development and hereby reiterates that the Naira currency
remain the only legal tender in Nigeria.
Please be reminded that Section 15 of the CBN Act 2007 provides that the unit
of currency in Nigeria shall be the Naira. Section 20 (1) of the same Act
provides that the currency notes issued by the Bank shall be legal tender in
Nigeria at their face value for the payment of any amount and Section 20 (5)
further provides that a person who refuses to accept the Naira as a means of
payment is guilty of an offence and liable on conviction to a fine or 6 months
imprisonment.

Based on the above provision the general public is hereby warned that it is
illegal to price or denominate the cost of any product or service (Visible or
Invisible) in any foreign currency in Nigeria and no business offer or acceptance
should be consummated in Nigeria in any currency other than the Naira.

Consequently, deposit money banks operating in Nigeria are advised to desist


from the collection of foreign currencies for payment of domestic transactions
on behalf of their customers and the use of their customers’ domiciliary
accounts for making payments for visible and invisible transactions
(fees,charges, licenses e.t.c) originating and consummated in Nigeria.

970
This however is without prejudice to foreigners, visitors and tourists who are
encouraged to use their cards for payments or exchange their foreign currency
for local currency at any of the authorized dealers’ outpost including hotels.

Appropriate sanctions shall be meted on any bank that breaches this


regulation.
Please note that this circular supersedes the provisions of Memorandum 16 of
the Central Bank of Nigeria Foreign Exchange Manual and Paragraph (XI)
Section 4.2.1 of the Monetary, Credit, Foreign Trade and Exchange Policy
Guidelines for Fiscal Years 2014/2015.

Yours faithfully,

K. O. BALOGUN
FOR: DIRECTOR OF BANKING SUPERVISION

971
09-462-36401

BSD/DIR/GEN/MCF/08/20 www.cenbank.gov.ng

April 14, 2015

LETTER TO ALL BANKS


CESSATION OF RENDITION OF RETURNS ON MICRO CREDIT FUND
You may recall that the Micro Credit Fund (MCF) which had been in operation
since February 8, 2008 was discontinued through the decision reached at the
298th Bankers’ Committee Meeting of March 15, 2010.

This decision was borne out of the fact that after two years of its existence,
deposit money banks were not forthcoming in their contributions to the fund
and in the same vein, only few states responded to the programme.

Consequently, the Bankers’ Committee decided to discontinue its operations.


We however, observed that some banks still render returns on MCF to the
Central Bank of Nigeria more than five years after the discontinuation of the
scheme.

Banks are hereby directed to stop forthwith, the rendition of this return to the
CBN

Thank you.

TOKUNBO MARTINS (MRS)


DIRECTOR OF BANKING SUPERVISION

972
09-46236454
BSD/DIR/GEN/LAB/08/017
April 2, 2015

LETTER TO ALL BANKS AND DISCOUNT HOUSES


REPORTING UNETHICAL CONDUCT/WHISTLE BLOWING

The Central Bank of Nigeria (CBN) wants to reiterate its commitment to its
established policy of zero tolerance standard of honesty and integrity as it
relates to its members of staff performing their duties in your institution. To
uphold the standard, a monitoring procedure to ensure that business ethics
and professionalism have been established.
Your full cooperation is hereby solicited, by reporting any unethical practice(s)
that borders on dishonesty and lack of integrity among others, in the
action/behavior of CBN staff that visit your institution in the course of performing
his/her duty.
Such report(s) or observation(s), which should contain detailed information to
enable us act promptly, should be send Directly, Confidentially or anonymously
by post to:
Head, Ethics & Anti-Corruption Office
Governors’ Department
Central Bank of Nigeria
No. 31 Tafawa Balewa Street
Central Business District
Abuja, FCT
Alternatively, the report could be sent by e-mail to:
a) anticorruptionunit@cbn.gov.ng
b) ethicsoffice@cbn.gov.ng
c) or by telephone to 09-46239246 & 09-46236000

Yours faithfully,
TOKUNBO MARTINS (MRS)
DIRECTOR OF BANKING SUPERVISION

973
09-46236418/ 09-46236415

BSD/DIR/GEN/LAB/08/016

March 31, 2015

LETTER TO ALL BANKS


NEED TO IMPLEMENT MEASURES TO DISSUADE THE ISSUANCE OF DUD CHEQUES IN
THE NIGERIAN BANKING SYSTEM.

The Central Bank of Nigeria (CBN) has noted with great concern the impunity
with which some customers of banks issue dud cheques on their accounts
despite the provisions of the Dishonoured (Dud) Cheques Act of 1977 and CBN's
recent directives to banks’ customers to desist from such practice.

In order to sustain the positive achievements already recorded in the Nigerian


Payment System, it is essential that confidence and integrity in our negotiable
instruments, especially cheques, should be restored and enhanced.

Consequently, it has therefore become imperative for the CBN to implement


further measures to dissuade the issuance of dud cheques to the barest
minimum.

Therefore, in furtherance to our directives via our letters dated 5th July 2013 and
May 13, 2014 reference no. FPR/DIR/CIR/GEN/03 /005 and
BSD/DIR/GEN/LAB/07/012 respectively, the CBN has put in place additional
regulatory measures against dud cheque issuers. Upon CBN’s compilation and
dissemination of information on serial issuers of dud cheques based on bank’
returns, banks would be required to;

1. Recall/cancel all unused cheque books issued to serial issuers of dud


cheques.

974
2. Bar the affected customers from use of the clearing system for a period of
five (5) years.
3. Forward the names of Dud Cheque offenders to the three Private Credit
Bureaux and the Credit Risk Management System (CRMS). The customers’
names would be listed on the database of the private credit bureaux and
CRMS for a period of five (5) years from the date of submission, after which
offenders will be eligible for removal. However, if the offender is found wanting
after the name is removed, such an offender shall be permanently reinstated in
the data base of both the three (3) Credit Bureaux and the CRMS.
4. Bar the serial issuers of dud cheques from accessing credit facilities from the
banking system for a period of five (5) years. No institution shall, EXCEPT with the
prior written approval of the CBN, remove such a person’s name from the three
Credit Bureaux and the Credit Risk Management System (CRMS).
5. Perform status check on a potential customer from CRMS and at least two
Credit Bureaux BEFORE on-boarding a customer.
6. Where an Institution fails to report a serial dud cheque issuer in its return to the
CBN CRMS and Private Credit Bureaux as required, it shall be considered as
concealment and misrepresentation of material fact and the affected
institution shall be penalized in accordance with the relevant provisions of the
Banks and Other Financial Institutions Act, LFN 2004 CAP B3 (BOFIA). In addition,
the Chief Executive Officer (CEO), Chief Financial Officer (CFO), Chief
Compliance Officer (CCO) and Chief Risk Officer (CRO) shall be liable to
sanctions in line with the relevant provisions of the BOFIA. Any Institution that
contravenes the above directives shall be appropriately sanctioned.

The measures are effective from the 1st of April 2015.

Yours faithfully,

TOKUNBO MARTINS (MRS)


DIRECTOR OF BANKING SUPERVISION

975
09-462-36403

REF: BSD/DIR/GEN/LAB/08/014

March 16, 2015

LETTER TO ALL BANKS


GUIDELINES ON BANCASSURANCE PRODUCTS- REFERRAL MODEL

In the light of developments and the need to ensure synergy in the financial
system, the Central Bank of Nigeria in exercise of its power under Section
33(1)(b) of the CBN Act 2007 and the provision of Part 2, Section 3, Item (l) of
the CBN Scope, Conditions & Minimum Standards for Commercial Banks
Regulations No. 01, 2010, considered it necessary to issue the attached
guidelines on Bancassurance Products.

The guidelines, which set out the regulatory framework for the offering of
Bancassurance products through the non-integrated referral model, takes
immediate effect.

Please be guided accordingly.

Yours faithfully,

TOKUNBO MARTINS (MRS)


DIRECTOR OF BANKING SUPERVISION

976
GUIDELINES ON BANCASSURANCEP RODUCTS - REFERRAL MODEL

1.0 Introduction
In 2010, the CBN Regulation on the Scope of Banking Activities and Ancillary
Matters No. 3, 2010 was issued to repeal the Universal Banking Model, which
hitherto permitted banks to engage in non-core banking financial activities
either directly or indirectly through designated subsidiaries.
In the light of developments and the need to ensure synergy in the financial
system, the Central Bank of Nigeria (CBN) in exercise of its power under Section
33(1)(b) of the CBN Act 2007 and the provision of Part 2, Section 3, Item (l) of
the CBN Scope, Conditions & Minimum Standards for Commercial Banks
Regulations No. 01, 2010 has considered it necessary to issue these guidelines
on Bancassurance.

The guidelines set out the regulatory framework for the offering of
bancassurance products through the non-integrated referral model. The
choice of this model is premised on the fact that it does not preclude banks
from focusing on their core banking businesses and does not undermine the
essence of the CBN’s New Banking Model.

2.0 Definitions
Bancassurance - An arrangement in which insurance companies leverage on
the customer base of banks to sell insurance products to banks’ customers.
Referral Model - In this model, a bank refers its customers to its partner insurance
companies. In return, the bank receives a commission on each lead closed by
the insurance company. The bank is not involved in marketing the products.
Bancassurance Agreement – A contract duly executed between a bank and
an insurance company to engage in the referral model of bancassurance.

Bancassurance Products – Insurance products which fall under the General


and Life insurance business that are sold to banks’ customers by the insurance
company under a bancassurance referral model agreement. The product is
distinct from insurance covers that serve as mitigants for losses against credit
and other risks.

Commission – Referral fee payable to the bank by the insurance company in


line with the provisions of the Bancassurance Agreement.

977
3.0 Prohibited Business
1. Banks shall not engage in any other model of bancassurance other than that
permitted under these guidelines and for which approval has been obtained
from the CBN.
2. Banks shall not offer banking products that incorporate insurance features.
3. Banks shall not offer free premium payments as a feature of any of their
products.
4. Banks shall not provide the bancassurance products in a manner that
contravenes these guidelines or any other statutory provision or law that applies
to insurance products and services.

4.0 Bancassurance Arrangement between Banks and Insurance Companies


1. The referral model of bancassurance arrangement between a bank and an
insurance company shall not be valid without an executed Bancassurance
Agreement.
2. Banks shall not undertake any insurance marketing, underwriting or claim
settlement. This must be clearly stated in the Bancassurance Agreement. 4
3. Banks shall ensure that no risks are transferred to it and shall not assume any
fiduciary responsibility or liability for any consequences, financial or otherwise,
arising from the subscription to insurance policies by customers.
4. Banks shall conduct a thorough due diligence/periodic assessment for the
selection of partner insurance companies, which would be restricted to two
insurance companies.
5. Banks shall ensure that only bancassurance products approved by relevant
regulatory authority are offered to their customers by the insurance companies.
6 Banks shall not enter into bancassurance agreement with insurance
companies who do not hold a valid operational license from National
Insurance Commission (NAICOM).

5.0 Approval
The offering of bancassurance products by a bank is subject to the CBN’s
approval. A bank that intends to offer bancassurance products is required to
submit the following alongside its application:
1. Extract of Board resolution approving the bancassurance product (approved
by NAICOM) and the insurance companies it proposed to partner with.
2. Draft Bancassurance Agreement between the bank and the insurance
company, which should at the minimum set out:
a. The bancassurance products to be offered;

978
b. The duties and responsibilities of each of the parties under the arrangement
during and upon termination of the contract;
c. The conditions for the termination of the agreement;
d. Commissions and fees to be charged (as approved by NAICOM and CBN);
e. The duration of the contract and whether it is renewable;
f. Dispute resolution mechanism and measures to safeguard confidential
information;
g. Disclaimer that the products shall be underwritten by the insurance company
with no recourse to the bank in terms of claims or any legal proceedings
between the insurance company and the bank’s customer; and
h. Other relevant information.
3. The bank’s assessment of risks and mitigants put in place.
4. The product brochure, stating features and benefits of the product.
5. The evidence of “no objection” obtained by the insurance companies from
NAICOM.
6. The Referral Agent approval obtained by the bank from NAICOM.
Upon approval, the bank shall forward the signed copy of the bancassurance
agreement to the CBN. Banks shall notify the CBN on renewal of the
bancassurance agreement. Any amendment to the bancassurance
agreement shall be subject to the approval of the CBN. Upon the termination
of the contract, the bank shall notify the CBN stating the reason(s) for the
termination.

6.0 Marketing of Bancassurance Products and Policy Documents


1. Banks shall only refer their customers to insurance companies. Thus, marketing
of the insurance products shall be done by the staff of the insurance
companies.
2. The referral document shall contain a disclaimer that the products shall be
underwritten by the insurance company with no recourse to the bank in terms
of claims or any legal proceedings between the insurance company and the
bank’s customer.
3. The insurance products to be sold shall be strictly the products of the
insurance company.
4. The bank’s name or logo shall not appear in any of the policy documents.
5. The Insurance marketers may be allowed to occupy a space in the banking
hall.
6. Banks shall maintain adequate records of all transactions which will be
reviewed during supervisory activities.

979
7.0 Premium Collection
1. The premium paid, may be collected by banks as collecting agents for the
insurance companies and paid into the company’s account with the bank.
2. Banks shall not share in the premium paid by the insured/policy holder to the
insurance company.

8.0 Referral Commission


1. Insurance companies shall pay to the banks all agreed commission(s) on
consummated transactions as approved by NAICOM.
2. The applicable commission(s) shall be clearly stated in the Bancassurance
Agreement.

9.0 Claims Handling and Settlement


1. Banks shall not be responsible for claims handling and settlement as these
are the responsibilities of the insurance companies.
2. The insurance companies shall be solely responsible for the collection of
necessary documents and information related to claims.

10.0 Consumer Protection Safeguards


1. The referral shall be based on the need of the customers as assessed by the
banks and would be advisory in nature. This shall be made known to the
customer.
2. Banks are prohibited from influencing or compelling customers in any way to
take up insurance products from insurance companies they have
bancassurance referral agreement with.
3. Banks shall not charge their customers service fee, processing fee,
administration charge or any other fee for the referral.
4. Banks shall ensure the confidentiality of consumer data and information.
5. Banks shall ensure that the insurance company has in place an appropriate
complaints redress mechanism.
11.0 Annual Disclosure
Banks shall disclose in the notes to the annual financial statements referral
commission earned from bancassurance products.
12.0 Sanction for Non-Compliance
Banks should ensure compliance with these guidelines as any breach of the
Guidelines shall attract sanctions in accordance with Section 64(1) of the BOFIA

980
2004. In addition, the bank may be prohibited from offering bancassurance
products.

BANKING SUPERVISION DEPARTMENT


CENTRAL BANK OF NIGERIA
MARCH, 2015

981
09-462-36401

BSD/DIR/GEN/LAB/08/009

February 11, 2015

LETTER TO ALL BANKS


RE: CASH RESERVE REQUIREMENT MAINTENANCE CALENDAR FOR 2015

Further to our earlier letter referenced BSD/DIR/GEN/LAB/08/001 and dated 5th


January 2015 on the above subject, all banks are invited to note the following
changes to the cash reserve regime:

1. Henceforth, cash reserve requirement (CRR) would be computed on a


fortnightly basis and effected every Thursday, commencing on 12th February
2015.

2. All banks should note that the CRR would be computed based on the
incremental average deposits over the prior fortnight period.

Please be guided accordingly.

‘TOKUNBO MARTINS (MRS.)


DIRECTOR, BANKING SUPERVISION

982
234 – 09 – 46236403

BSD/DIR/GEN/LAB/08/008

February 5, 2015

LETTER TO ALL BANKS AND DISCOUNT HOUSES

Dear Sir/Madam,
RE-PROHIBITION FROM BORROWING TO CAPITALIZE BANKS

It has become imperative to remind financial institutions of the currency of the


provisions of our circular titled “Prohibition from Borrowing to Capitalize Banks”
dated November 9, 2000.

For the avoidance of doubt, the requirement that funds for the (re)
capitalization of financial institutions should NOT be sourced from borrowings
within the banking system still subsists. In this regard, funds raised for the
recapitalization of financial institutions must not be borrowed from the banking
system and where such funds are borrowed outside the banking system, they
must be of the type and nature that qualify as part of capital in accordance
with our Guidance Notes on the Calculation of Regulatory Capital.

All capital raising exercises will continue to be subjected to verification by the


CBN and failure to meet any of our requirements will constitute a ground for the
rejection of the funds.

Financial institutions are advised to strictly adhere to the above, as breaches


will be met with severe regulatory sanctions.

Yours faithfully,

‘TOKUNBO MARTINS (MRS.)


DIRECTOR OF BANKING SUPERVISION

983
09-462 36403

January 28, 2015

BSD/DIR/GEN/LAB/08/006

LETTER TO ALL BANKS


DAILY RENDITION OF NET OPEN POSITION

Please recall that the Central Bank of Nigeria issued a circular dated October
24, 2014 and referenced BSD/DIR/GEN/LAB/07/037, titled “Prudential Regulation
for the Management of Foreign Exchange Risks of Banks”.
The regulation provides among others that the Net Open Position (NOP) of
foreign currency assets and liabilities (on and off-balance sheet) of a bank
should not exceed 20% of its shareholders’ funds unimpaired by losses. In this
regard, banks were required to compute the NOP on a monthly basis using the
Gross Aggregate method.
However, the CBN has considered it necessary that banks should henceforth
compute the NOP on a daily basis and forward same to
BSDReturns@cbn.gov.ng.
This circular takes immediate effect.

Please be guided accordingly.

Yours faithfully,

‘TOKUNBO MARTINS (MRS.)


DIRECTOR OF BANKING SUPERVISION

984
09-462-36401

January 7, 2015

BSD/DIR/GEN/LAB/08/002

LETTER TO ALL BANKS

OIL AND GAS INDUSTRY CREDIT RISK MITIGATION

Please refer to our letter titled “Oil and Gas Industry Credit Risk Mitigation”
dated December 10, 2014.

In view of the on-going implementation of the Basel II/III capital adequacy


framework, the application of this regulation has been deferred till further
notice. A new date would be advised to all banks in due course.

However, the banks are required to put in place adequate risk mitigating
techniques for the management of their Oil and Gas risk exposures which
would be reviewed during our regular risk-based supervision activities.

Please be guided accordingly.

K. O. BALOGUN
For: DIRECTOR OF BANKING SUPERVISION

985
09-462-36401

BSD/DIR/GEN/LAB/08/001

January 5, 2015

LETTER TO ALL BANKS

CASH RESERVE REQUIREMENT MAINTENANCE CALENDAR FOR 2015

Further to the implementation of the cash reserve regime, find below the
calendar for year 2015 for your information.
SN START DATE END DATE
1 Wednesday, January 07, 2015 Tuesday, February 03, 2015
2 Wednesday, February 04, 2015 Tuesday, March 03, 2015
3 Wednesday, March 04, 2015 Tuesday, April 07, 2015
4 Wednesday, April 08, 2015 Tuesday, May 05, 2015
5 Wednesday, May 06, 2015 Tuesday, June 02, 2015
6 Wednesday, June 03, 2015 Tuesday, July 07, 2015
7 Wednesday, July 08, 2015 Tuesday, August 04, 2015
8 Wednesday, August 05, 2015 Tuesday, September 08, 2015
9 Wednesday, September 09, 2015 Tuesday, October 06, 2015
10 Wednesday, October 07, 2015 Tuesday, November 03, 2015
11 Wednesday, November 04, 2015 Tuesday, December 08, 2015
12 Wednesday, December 09, 2015 Tuesday, January 05, 2016

Please be guided accordingly.

K. O. BALOGUN
For: DIRECTOR OF BANKING SUPERVISION

986
987
988
989
990
991
09-46236403

09-46236413

BSD/DIR/GEN/LAB/07/008

March 11, 2014.

LETTER TO ALL BANKS AND DISCOUNT HOUSES

TRANSFER OF ALL NON-PROPRIETARY ASSETS TO LICENSED CUSTODIANS

The Central Bank of Nigeria has observed with dismay, the apathy by money
market operators in appointing custodians as stipulated in the Guidelines for
Custodianship in Money Markets and Other Fixed Income Instruments issued in
2007. This has resulted in the assets of banks and discount houses being
comingled with those of their clients/customers. Consequently, this has made it
difficult for the Central Bank of Nigeria to segregate the assets of banks and
discount houses from those of their clients/customers. Consequently, to ensure
full compliance with the provisions of the above guideline, the Central Bank of
Nigeria, in exercise of the powers conferred on it by section 57 (2) of BOFIA 2004
directs as follows:

• All Deposit Money Banks and Discount Houses are required to appoint a
licensed Custodian, not later than March 31, 2014.

• All non-proprietary financial assets (e.g. Treasury Bills and Bonds) in the
custody of Deposit Money Banks and Discount Houses should be
transferred to the Custodian so appointed, not later than April 30, 2014.

• All Deposit Money Banks and Discount Houses shall notify their
clients/customers, not later than April 30, 2014, the Custodian to which
their financial assets have been transferred. Subsequently, investors
should be notified of the Custodian at the time of making the investment.

992
• All Deposit Money Banks and Discount Houses shall display to the public,
in a conspicuous place, in the head office and all branches, a notice
that

o Brokerage will be charged for purchase of financial assets on their


behalf in line with the Guidelines for Custodianship in Money
Markets and Other
Fixed Income Instruments issued in 2007

o Custody of customers’ investments in financial assets (e.g. Treasury


Bills and Bonds) shall be transferred to a named licensed Custodian
and

• A Client or customer who makes an investment in financial assets


subsequent to the issuance of this circular reserves the right to choose a
custodian for his investment.

• In all cases, an investor in financial assets has the right to change his/her
custodian at no extra fee.

Failure to appoint a Custodian or transfer all non-proprietary financial assets, as


stipulated in this Circular, shall constitute an infraction and attract sanctions,
which may include, among others, the loss of money market dealership. In
addition, 50% of the financial assets portfolio of such Deposit Money Bank or
Discount House shall be regarded as non-proprietary and, consequently, be
excluded from the computation of its Liquidity Ratio.

A list of licensed custodians can be obtained from the Central Bank of Nigeria’s
website.

Please be guided accordingly.

Yours faithfully,

‘TOKUNBO MARTINS (Mrs.)

DIRECTOR BANKING SUPERVISION

993
09 – 46236403

BSD/DIR/GEN/LAB/07/034

October 10, 2014

LETTER TO ALL DEPOSIT MONEY BANKS (DMBs)

GUIDELINES FOR PROCESSING REQUESTS FROM DMBs TO EXTEND


NEW/ADDITIONAL CREDIT FACILITIES TO LOAN DEFAULTERS AND AMCON
OBLIGORS

Following the issuance of our circular of June 30, 2014 titled “Prohibition of Loan
Defaulters from Further Access to Credit Facilities in the Nigerian Banking
System”, the CBN has received several requests from DMBs seeking approval to
extend further credit facilities to the above concerned obligors.

Having consideration of the various points raised by the DMBs, the CBN in this
regard is issuing the following guidelines for the process of considering such
requests.

1) AMCON OBLIGORS
An institution, having done a credit appraisal on the delinquent obligor and is
desirous of extending a new facility to the obligor; should approach AMCON
and obtain the following:
a. The value of the obligor’s EBA purchased by AMCON;
b. The terms of settlement reached between the obligor and AMCON,
including a copy of the offer letter issued by AMCON upon
restructuring of the facility;
c. The current performance status of the obligors’ facility (ies) with
AMCON and details of repayments so far made with dates;
994
d. Obligor’s good faith payment made (if any) and collaterals held; and
e. A letter from AMCON expressing no objection (not guarantee) for the
grant of the new/additional facility by the DMB.

After obtaining AMCON’s expression of no objection, the Financial Institution


should write to the CBN seeking an exception for the obligor. The letter should
be forwarded along with the following:
a) The above information received from AMCON and AMCON’s letter of no
objection (not guarantee) for the grant of the new/additional facility;
b) Details on the proposed additional facility and the purpose of the facility.
The institution’s request should include reasons advanced by the obligor
for non-repayment of initial facility(ies) availed;
c) Details on how the new facility would positively impact on the obligor’s
outstanding indebtedness to AMCON or on any other delinquent facility
(ies);
d) Details of the collateral/credit risk mitigants proposed for the new facility
and the level of perfection of title. This should also include valuation
reports, from two independent valuers, indicating the open market value
and forced sale value of the proposed collateral. The security/collateral
should be distinct from whatever collateral is being held by AMCON for
the EBA (Eligible Bank Asset) or where not different, details of agreements
reached in this regard; and
e) The sign-off of the bank’s Chief Risk Officer (CRO).

2) OTHER CATEGORIES OF DELINQUENT OBLIGORS


The Institutions’ request to the CBN should contain the following information:
a. Details on the proposed additional facility and the purpose of the
facility.The institution’s request should include reasons advanced by the
obligor for non-repayment of initial facility(ies) availed;
b. Details on how the new facility would positively impact on the obligor’s
outstanding indebtedness to any other financial institution;
c. Details of the collateral/credit risk mitigants proposed for the new facility
and the level of perfection of title. This should also include valuation
reports, from two independent valuers, indicating the open market
value and forced sale value of the proposed collateral;
d. Evidence of the institution’s board approval for the new facility which
shows that the board is aware that the borrower had defaulted on its

995
previous loans and the institution is desirous of extending an additional
facility to the obligor; and
e. The sign-off of the bank’s CRO.
1) In addition to the requirements for AMCON obligors and other delinquent
obligors above, the lending Institutions must meet the following prudential
requirements:
a. The Institutions must have met the minimum regulatory and internal
economic capital adequacy ratio and liquidity ratio requirements for 6
months prior to the request;
b. The non-performing loans ratio of the institution should not have
exceeded 5% in the last 6 months prior to the request; and
c. The bank would be required to make a provision of 50% on the loan from
the onset of the loan irrespective of performance status and 150% if for
any reason the loan later turns out to be non-performing.
After a review of the bank’s request, the CBN would either note the bank’s
submission or decline. Institutions should be aware that the CBN’s position does
not compel the bank to avail any facility to the obligor.

Please be guided accordingly.

TOKUNBO MARTINS (MRS.)

DIRECTOR OF BANKING SUPERVISION

996
997
998
09-462 36401

BSD/DIR/GEN/LAB/02/032

October 3, 2014

LETTER TO ALL BANKS

Dear Sir,

RE: INCESSANT REQUEST FOR ISPO BY BANKS TO LEND TO STATES, LOCAL


GOVERNMENTS AND COMMUNITY ASSOCIATIONS

We refer to a letter dated June 4, 2014 forwarded to all banks by the Debt
Management Office (DMO), which specified the guidelines on the above
subject.

The Central Bank of Nigeria has noted with serious concern that some banks
have failed to adhere to the guidelines specified by the DMO in relation to
lending to any tiers of government.

It is in this regard that we write to direct banks to be guided by the guidelines


and all extant laws and regulations on this matter and henceforth, desist from
inundating the DMO with requests for ISPOs.

Banks are warned to be guided accordingly as the CBN will not hesitate to
impose SEVERE penalties on erring banks.

Yours faithfully,

A.O. IDRIS

For: DIRECTOR OF BANKING SUPERVISION

999
09-462-36401

October 24, 2014

BSD/DIR/GEN/LAB/07/037

LETTER TO ALL BANKS

PRUDENTIAL REGULATION FOR THE MANAGEMENT OF FOREIGN EXCHANGE


RISKS OF BANKS

The Central Bank of Nigeria has noted with concern the growth in
foreign currency borrowings of banks through foreign lines of credit
and issuance of foreign currency denominated bonds (Eurobonds).
The lower interest rate on foreign debt has created an incentive for
banks to borrow abroad, and this has the advantage of providing
fairly stable and long term funds to extend credit facilities in foreign
currency and enhance their capital base. However, this also
exposes banks to foreign exchange risks and other risks.
Therefore, to ensure that these risks are well managed and avoid
losses that could pose material systemic challenges, the CBN issues
the following prudential and hedging requirements:

Prudential Requirements
a. The aggregate foreign currency borrowing of a bank
excluding intergroup and inter-bank (Nigerian banks)
borrowing should not exceed 75% of its shareholders’ funds
unimpaired by losses. The 75% limit supersedes the 200%
specified in Section 6 of our Guidelines for Foreign Borrowing
for on-Lending by Nigerian Banks issued on November 26,
2001.
b. The Net Open Position (long or short) of the overall foreign
currency assets and liabilities taking into cognizance both
those on and offbalance sheet should not exceed 20% of

1000
shareholders’ funds unimpaired by losses using the Gross
Aggregate Method. Banks whose current NOP exceed 20% of
their shareholders’ funds are required to bring them to
prudential limit within six (6) months. Banks are required to
compute their monthly NOP using the attached template.
c. The current NOP limit of 1% of shareholders’ funds has been
renamed as Foreign Currency Trading Position. This will
continue to subsist in line with guidelines issued by the CBN.
d. Banks are required to have adequate stock of high-quality
liquid foreign assets i.e cash and government securities in
each significant currency to cover their maturing foreign
currency obligations. In addition, banks should have in place
a foreign exchange contingency funding arrangement with
other financial institutions.

Hedging and Other Requirements


a. Banks should borrow and lend in the same currency
(natural hedging) to avoid currency mismatch associated
with foreign currency risk.
b. The basis of the interest rate for borrowing should be the
same as that of lending i.e. there should be no mismatch in
floating and fixed interest rates, to mitigate basis risk
associated with foreign borrowing interest rate risk.
c. With respect to Eurobonds, any clause of early redemption
should be at the instance of the issuer and approval obtained
from the CBN in this regard, even if the bond does not qualify
as tier 2 capital.
Banks are required to adhere to the provisions of this circular with
immediate effect.

Yours faithfully,

TOKUNBO MARTINS (MRS.)

DIRECTOR OF BANKING SUPERVISION

1001
Monthly Computation of Net Open Position (Gross Aggregate Method)
US Euro Pound Others Total
Dollars
FOREIGN ASSETS
BALANCE SHEET ITEMS:
Holdings of Foreign Currency
Balances held with Foreign
Banks
Placement with Foreign Banks
Balances held with Offices &
Branches Abroad
Treasury Securities of Foreign
Governments
Other financial Instruments in
foreign currency
Loans and Advances in foreign
currency
Other Foreign Assets (not
captured above)*
OFF BALANCE SHEET ITEMS:
Undelivered spot purchases
Forward purchases
Others
TOTAL FOREIGN ASSETS [A]

FOREIGN LIABILITIES
BALANCE SHEET ITEMS:
Balances Held for Foreign
Banks
Takings from Foreign Banks
Balances Held for Offices and
Branches Abroad
Foreign currency Deposits
Financial Instruments Issued in
foreign currency
Loan and advances in foreign
currency

1002
Other Foreign Liabilities (not
captured above)*
OFF BALANCE SHEET ITEMS:
Undelivered spot sales
Forward sales
Others
TOTAL FOREIGN LIABILITIES [B]

NET OPEN POSITION (A-B)

AGGREGATE LONG POSITION


[C]
AGGREGATE SHORT POSITION
[D]
GROSS AGGREGATE POSITION
(Absolute values) [C+D]
SHAREHOLDERS’ FUNDS
UNIMPAIRED BY LOSSES
GROSS AGGREGATE OPEN
POSITION AS
PERCENTAGE OF
SHAREHOLDERS' FUNDS

*Including derivative contracts


All figures are to be reported in Naira equivalent using mid-
market spot rate of the reporting date with the rates presented
below:
US dollars
Euro
Pounds
Others

1003
09-46236403

October 23, 2014

BSD/DIR/GEN/LAB/07/036

LETTER TO ALL BANKS AND DISCOUNT HOUSES

RE: TRANSFER OF ALL NON-PROPRIETARY ASSETS TO LICENSED CUSTODIANS

The recently concluded Risk Based Examination of banks revealed that some
banks have ignored with impunity our directive on transfer of non-proprietary
assets to custodians as contained in our circular BSD/DIR/GEN/LAB/07/008
dated March 11, 2014. You will recall that compliance was required no later
than 30th April 2014. You will also recall that the sanctions for non-compliance
within the stipulated period included possible loss of money market dealership,
exclusion of 50% of the financial assets portfolio from the calculation of Liquidity
Ratio, as this will be deemed non-proprietary, amongst others.

In line with the CBNs stance of non-tolerance of regulatory infractions or


treating regulatory directives with levity, these banks shall be sanctioned in line
with the circular and the provisions of BOFIA.

Banks are once again reminded to immediately comply with this circular and
ensure compliance on an on-going basis. You are however to note that
compliance at this time will not preclude the CBN from penalizing the period of
non-compliance.

Please be advised that compliance is in the best interest of your bank.


Yours faithfully,

‘TOKUNBO MARTINS (MRS)


DIRECTOR BANKING SUPERVISION

1004
09-462-36425

BSD/DIR/CON/LAB/07/026

September 5, 2014

LETTER TO THE DOMESTIC SYSTEMICALLY IMPORTANT BANKS IN NIGERIA

FRAMEWORK FOR THE REGULATION AND SUPERVISION OF DOMESTIC


SYSTEMICALLY IMPORTANT BANKS (SIBs) IN NIGERIA

In line with global trends, and as part of reform efforts to foster financial stability,
the Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance
Corporation (NDIC) have developed the attached Framework for the
Regulation and Supervision of Domestic Systemically Important Banks in Nigeria.
The Framework specifies among others, the assessment methodology for
identifying the SIBs, higher loss absorbency and additional regulatory
requirements such as liquidity, stress testing, disclosure and reporting
requirements.

The Framework takes effect from March 1, 2015.

Yours faithfully,

TOKUNBO MARTINS (MRS.)

DIRECTOR, BANKING SUPERVISION DEPARTMENT

1005
Framework for Regulation and Supervision of Domestic

Systemically Important Banks

Central Bank of Nigeria

Nigeria Deposit Insurance Corporation

September 2014

1006
1.0 Preamble
The global financial crises, which started in 2007, have led to the need for the
strengthening of the regulation of Systemically Important Financial Institutions
(SIFIs). The failure of large and complex financial institutions generates severe
undesirable externalities that include disruption of the financial system and the
real economy. One of the fall-outs of the meltdown is the call for measures to
deal with this class of institutions. Consequently, the G20 leaders at their
meeting of November 2011 requested the Basel Committee on Banking
Supervision (BCBS) and the Financial Stability Board (FSB) to develop a
framework for Domestic Systemically Important Banks (D-SIBs)1 in addition to the
Global Systemically Important Financial Institutions (G-SIFIs).
When Systemically Important Banks (SIBs) were in danger of failure in the past,
only one model of rescue had been followed which was government capital
injections/bailouts and guarantees to keep the financial system stable, while
shareholders lost out, as a result of dilution in shareholding. This has warranted
the need for enhanced supervisory measures for D-SIBs which current regulatory
policies do not adequately address.
SIBs have become the target of legislation and regulatory reforms as a result of
the financial crises, which has led to increase in bank capital requirements and
introduction of higher capital surcharges. Hence, the Central Bank of Nigeria
(CBN) and Nigeria Deposit Insurance Corporation (NDIC), have developed a
supervisory framework for D-SIBs in Nigeria. This initiative is in tandem with BCBS
and other global initiatives where each jurisdiction or country designs a policy
framework for the identification and regulation of their D-SIBs so as to limit the
economic impact of bank distress and promote financial system stability.
1The Basel Committee as well as the Financial Stability Board do not establish

laws, regulations or rules for any financial institution directly but are only policy
research and development entities; therefore they act in an advisory capacity.
Thus, each country’s regulators responsibilities to enact whatever portions of the
recommendations they deem appropriate and define what a Systemically
Important Financial Institution is.

2.0 Definition
The Financial Stability Board described G-SIFIs as "financial institutions whose
distress or disorderly failure, because of their size, complexity and systemic
interconnectedness, would cause significant disruption to the wider financial
system and economic activity"2. A SIFI can be a bank, an insurance company,
or any other financial institution whose failure might trigger a financial crisis. The

1007
BCBS has identified factors for assessing a financial institution as systemically
important based on size, interconnectedness, substitutability, cross-jurisdictional
activity and complexity. In Nigeria, due to the dominance of banks in the
financial system, this framework shall focus on the enhanced supervision of SIBs.
This framework has adopted similar indicators used in determining G-SIFIs by the
BCBS in the identification and supervision of SIBs in Nigeria.

3.0 Objective
The objective of this framework is to ensure that all SIBs are subjected to
appropriate degree of oversight and regulation. This entails defining the
regulatory parameters and calibrating the intensity of oversight by the
regulators.
The overall goal of this framework is to:
I. comply with the BCBS requirements on Supervision of D-SIBs,
II. ensure transparent assessment of the basis for their regulation,
III. create incentives for stronger risk management practices that would
reduce the systemic risk which SIBs pose to the system, and
IV. Limit the impact of external negativities on the financial system.

2The FSB designates banks as G-SIBs annually based on emerging data and
publish the G-SIBs every November.

4.0 Assessment Methodology


The BCBS suggested several methodologies for identifying SIBs which include
the indicator-based measurement approach, bucketing approach, supervisory
judgement, periodic review and refinement. However, in this framework, the
indicator-based measurement approach as well as supervisory judgement
were used to determine SIBs in Nigeria.
4.1 Indicator-Based Measurement Approach
The indicator-based measurement approach considers the following factors in
the classification of SIBs:
I. Size
II. Interconnectedness
III. Substitutability
IV. Complexity

1008
Size
The size of a bank is of critical importance to the stability of the financial system
and the economy. Since there is no uniform global standard for the assessment
of the size of a bank, this framework adopted total assets as the principal
determinant in the assessment of size.
In Nigeria, when banks are compared according to their size as measured by
total assets, the data showed that the eight (8) largest banks accounted for
more than 70% of the total industry assets.
Interconnectedness
The more interconnected a bank is to other financial institutions, the greater the
potential for the failure of that bank to transmit distress through the financial
system and the broader economy. The systemic impact of a bank greatly
depends on its degree of interconnectedness with other financial institutions
and can be measured by the volume of its intra financial systems assets and
liabilities3, short-term financing by interbank and money market operations. In
this framework, the determinant of interconnectedness is net-interbank
transactions.
Substitutability
The systemic impact of a bank’s distress is greater when it cannot easily be
replaced in a short term period either as a market participant or financial
service provider. Typical determinants of substitutability are value of assets
under custody, payments cleared and settled through payment systems, values
of underwritten transactions in debt and equity markets and quantum of
lending and deposits of a particular bank. This framework identified total net
credits and total deposits of a bank as the determinants of its substitutability.
Complexity
The systemic impact of a bank would be higher if its business model, structure
and operations make it difficult or very costly to liquidate by the regulatory
authorities. Complexity can be viewed from the network of both domestic and
foreign subsidiaries as well as its affiliation with institutions in other sectors of the
financial system, which can complicate the process of liquidation of the bank.
In tandem with Nigeria’s current banking model, the major determinants
considered were the branch network and number of foreign subsidiaries.
Weights
In adopting the indicator-based measurement approach, weight of 30% each
was assigned to size and substitutability, while complexity and
interconnectedness were weighted 25% and 15%, respectively. The

1009
determinants within complexity were assigned 12.5% each whereas
determinants under substitutability were each assigned 15% weight.
4.2 Supervisory Judgement
The Central Bank of Nigeria applied supervisory judgement in arriving at the
results that were derived from the indicator-based measurement approach of
the assessment methodology. While the BCBS Indicator-based measurement
approach assigned equal weights to all factors, this framework has taken into
cognizance the domestic environment in assigning varied weights to the
factors.

5.0 Identified SIBs


For a bank to be continually classified as SIB, the assessment criteria must be
met for six (6) consecutive months. Any bank classified as SIB would remain as
such for a period of 6 months after which a re-assessment would be carried out
by the CBN.
For a bank to be considered as a SIB, its “cumulative score”4 should be at least
5% using the indicator-based measurement approach, subject to review by the
Central Bank of Nigeria from time to time. A bank that had total assets of at
least 5% as well as minimum total credits and deposit liabilities of 6% each of the
industry in the past six (6) months can be considered as a SIB.

6.0 Higher Loss Absorbency


The capital adequacy ratio (CAR) for banks in Nigeria currently stands at 10%
and 15% for national/regional banks and banks with international banking
licence, respectively. In the computation of CAR recommended by BCBS, Tier 2
capital should not constitute more than 50% of the qualifying capital, that is,
100% of Tier 1. However, banks designated as SIBs would be required to
maintain a minimum CAR of 15% out of which Tier 2 capital should not
constitute more than 25% of the qualifying capital. In other words, Tier 1 capital
should be at least 75% of the bank’s qualifying capital. In addition, SIBs in
Nigeria would be required to set aside Higher Loss Absorbency5 (HLA) or
additional capital surcharge of 1% to their respective minimum required CAR.
This should be met with Common Equity Tier 1 (CET1) capital6. The aim of the
additional loss absorbency requirement is to ensure that the SIBs have a higher
share of their balance sheet funded by instruments that re-enforce the
resilience of the institution as a going concern.
In a situation where the foreign subsidiary of a Nigerian bank is considered
systemically important by the host authority, the Central Bank of Nigeria and

1010
the host authorities would make arrangements to coordinate and cooperate
on the appropriate HLA requirement, within the constraints imposed by the
relevant laws in the host jurisdiction.

7.0 Additional Requirements


In addition to the HLA requirement for systemically important banks in Nigeria,
the following additional requirements and policy measures are considered
appropriate to address the risks posed by the SIBs.

Liquidity Standards
The current liquidity ratio requirement for banks shall be imposed on the SIBs;
however, this would be subject to change from time to time.
Stress Testing
Stress testing requirements are designed to work in tandem with the capital
plan. The results of the test would be used to make appropriate changes to the
bank’s capital structure. The CBN and NDIC shall conduct periodic analysis of
the capital of each SIB to evaluate its ability to absorb losses in situations of
adverse economic and financial conditions.
The SIBs would be required to carry out stress test of their capital and liquidity on
a quarterly basis and the result of the stress test would be reviewed by the
Central Bank of Nigeria
Recovery and Resolution Planning
The SIBs shall be required to develop specific recovery plan which shall be
submitted to the Central Bank of Nigeria and Nigeria Deposit Insurance
Corporation by 1st January of every year.
Enhanced Supervision
There shall be greater frequency and intensity of on-site and off-site supervision
of SIBs. Monthly monitoring of the key performance indicators of the SIBs shall
be carried out by the CBN in order to ensure their safety and soundness as well
as the going concern status of the banks. Banks shall be expected to provide
high quality data to the regulatory authorities for the purpose of the enhanced
supervision. In the event that an SIB has a High Composite Risk rating, half-yearly
meetings shall be held with the board and management to address issues of
supervisory concern.
Disclosure Requirements
The SIBs shall make quarterly disclosures of their financial condition and risk
management activities to the regulators as prescribed by the Central Bank of
Nigeria. The disclosures shall include but not limited to the following areas:

1011
I. Risk governance and risk strategies/business model
II. Capital adequacy and risk weighted assets
III. ICAAP Policy and Computation
IV. Liquidity/Funding
V. Market risk
VI. Credit risk
VII. Operational risk
VIII. Other identified risks
SIBs are expected to adopt international bank risk disclosure best practices.

Addendum to Monthly SIB Report

The current monthly report captures the following:

1) Total Credit and their classification, growth, sectoral spread or


concentration.
2) Non-performing credit to Total credit.
3) Director-related credit.
4) Recoveries.
5) Top 100 Users of fund.
6) Liquidity Ratio.
7) Capital Adequacy Ratio.
8) Net-Interbank placement.
9) Government Bond and Treasury Bills holding and their Mark to Market
gain/loss.
10) Unaudited Profit/Loss.
11) Net Open Position.
12) Shareholders’ Fund.
13) Gain/Loss on Foreign Exchange Derivative.
In addition to the above, the under-listed shall also be monitored:
1. The top 100 users of funds should be further analyzed and related to the
industry.
2. Top 50 providers of funds.
3. Government (public sector) deposits.
4. Corporate Governance issues should be reported on.
5. Liquidity Contingency Funding Plan.
6. Analysis of Contingent Assets and Liabilities containing the trend and
comparison to the Total Assets and Total Credit.

1012
7. Quarterly management report of Off-shore subsidiaries should be
reviewed and reported on.
8. Details of placement with off-shore banks to be compared with the lines
of credit from the correspondent banks (from FX Group).
9. Recovery plan should be monitored and reported on.
10. The quarterly disclosures of a SIB’s financial condition and risk
management activities should be reviewed and monitored.
11. SIBs should render monthly returns on the extent of compliance with the
Basel framework. This should include risk measures, targets, violations and
other measures as suggested by Basel II.
12. Quarterly unaudited financial statement.
8.0 Sanctions Appropriate sanctions shall be imposed for non-compliance
with the requirements of this Framework.

1013
09-462-36401

BSD/DIR/GEN/LAB/07/021

August 5, 2014

LETTER TO ALL BANKS AND DISCOUNT HOUSES

Exclusion of Non-Distributable Regulatory Reserve and Other Reserves in the


Computation of Regulatory Capital of Banks and Discount Houses

As part of the ongoing reforms by the Central Bank of Nigeria (CBN) aimed at
ensuring more prudent assessment of the regulatory capital of Nigerian banks
and in line with global efforts aimed at raising the quality and loss absorbency
of the capital base of banks, the CBN hereby informs banks on the exclusion of
following reserves in the computation of total qualifying capital:

1. The Regulatory Risk Reserve created pursuant to Section 12.4 (a) of the
Prudential Guidelines which was effective on July 1, 2010 will henceforth
be excluded from regulatory capital for the purposes of capital
adequacy assessment;
2. Collective impairment on loans and receivables and other financial
assets will henceforth not form part of Tier 2 capital; and
3. Other Comprehensive Income (OCI) Reserves will be recognized as part
of Tier 2 capital subject to the limits set in paragraph 3.2 of the CBN
Guidance Notes on the Calculation of Regulatory Capital. For the
avoidance of doubt, total Tier 2 capital (including OCI Reserves) is limited
to 33.33% of total Tier 1 capital. Also, banks are required to note that
unaudited OCI gains will not be recognized as part of capital while
unaudited OCI losses shall be deducted from the institution’s capital in
arriving at total qualifying capital.
The provisions of this circular supersede the provisions of S. 12.4 (b) of the
Prudential Guidelines as well as S. 2 of our Guidance Notes on the Calculation
of Regulatory Capital.

Please note that the requirements of this circular take immediate effect.

TOKUNBO MARTINS (MRS)

DIRECTOR OF BANKING SUPERVISION

1014
09-462 36401

09-462 36403

BSD/DIR/GEN/LAB/07/19

July 10, 2014.

LETTER TO ALL BANKS, DISCOUNT HOUSES, AND DEVELOPMENT FINANCE


INSTITUTIONS

RESPONSIBILITY OF ALL BANKS, DISCOUNT HOUSES, AND DEVELOPMENT FINANCE


INSTITUTIONS WITH RESPECT TO HUMAN RIGHTS UNDER THE NIGERIAN
SUSTAINABLE BANKING PRINCIPLES (NSBP)

It has come to the notice of the Central Bank of Nigeria that banks, discount
houses, and development finance institutions are not in full compliance with
the spirit and letter of Principle 3 of the NSBP on ‘Human Rights’ which states
that “We will respect human rights in our Business Operations and Business
Activities”. The Principle further provides that:

1. A sustainable banking approach recognizes and respects human and


labour rights in a bank’s business operations as well as its business
activities.
2. A bank’s approach to human rights should be consistent with promoting
the requirements, and improving the enforcement, of: the Nigerian
Constitution, the United Nations Declaration on Human Rights, and other
international treaties to which Nigeria is a signatory.
3. Key policies and requirements should include recognition of employees’
entitlement to safe and fair labour conditions and to exercise collective
and individual rights to associate and speak freely, as allowed by
national law.
Consequently, banks, discount houses, and development finance institutions
are advised to note that their staff/employees are at liberty to freely associate
in furtherance of their rights as allowed by national regulations and laws, and
international conventions and treaties Nigeria is a signatory to. It shall constitute

1015
an infraction which will attract sanctions where a bank, discount house, or
development finance institution is found in any manner to hinder or prevent its
staff/employees from exercising their rights to free association, as required
under Principle 3 and other extant regulations and laws.

Please be guided accordingly.

Yours faithfully,

TOKUNBO MARTINS (MRS.)

DIRECTOR OF BANKING SUPERVISION

1016
09-46236401

09-46236418

BSD/DSIR/GEN/LAB/07/017

July 4, 2014

LETTER TO ALL BANKS

BANCASSURANCE AND OTHER NON-PERMISSIBLE ACTIVITIES

The Central Bank of Nigeria has noted with concern that some banks engage in
non-permissible activities including bancassurance in contravention of the
regulation on the CBN Scope, Conditions & Minimum Standards for Commercial
Banks Regulations No. 01, 2010.

Banks are therefore directed to henceforth cease such activities as the CBN will
not hesitate to impose SEVERE sanctions on erring banks.

Please be guided by the provisions of the above regulation.

Yours faithfully,

‘TOKUNBO MARTINS (MRS.)

DIRECTOR OF BANKING SUPERVISION

1017
09-46236425

09-46236418

BSD/GCA/BAS/CON/01/115

July 02, 2014

LETTER TO ALL BANKS AND DISCOUNT HOUSES

EXTENSION OF PARALLEL RUN OF PILLAR I OF BASEL II IMPLEMENTATION

It would be recalled that the Central Bank of Nigeria (CBN) released the
guidelines on the implementation of Basel II/III for the Nigerian Banking Sector in
December 2013 and directed banks to commence the parallel run of Pillar I in
January, 2014 while the full adoption was intended to commence by the end
of June, 2014.

However, the initial challenges observed in the parallel run have necessitated
for an extension of the parallel run particularly with regards to the requirements
of reporting capital charge for credit, market and operational risks.

Consequently, banks are hereby directed to continue the parallel run for an
additional period of three (3) months while the full adoption will commence on
1st October, 2014.

Meanwhile, banks are required to use this period to re-assess their current
capital levels with a view of complying at full adoption, with the minimum
capital requirements.

Finally, all banks are reminded to continue to submit their monthly returns to
bsdreturns@cbn.gov.ng on or before the fifth working day after each reporting
month.

Thank you.

Yours faithfully,

TOKUNBO MARTIN (MRS)

DIRECTOR OF BANKING SUPERVISION


1018
1019
1020
09-462-36425
09-462-36418

June 17, 2014

BSD/DIR/GEN/LAB/07/014

LETTER TO ALL BANKS

GUIDELINES ON THE ESTABLISHMENT AND RATIONALIZATION OF BRANCHES AND


OTHER OUTLETS FOR BANKS IN NIGERIA

Following developments in the financial system and the need to provide


additional guidance to the banking industry on the establishment and
rationalization of branches and other outlets, the Central Bank of Nigeria, in
exercise of its powers under Section 33(1)(b) of the CBN Act 2007 and Section 6
of the Banks and Other Financial Institutions Act, Cap B3, LFN 2004, issues the
following Guidelines.

The Guidelines, which are intended to ensure uniformity in the establishment


and rationalization of branches and other outlets for banks, takes immediate
effect.

Please be guided accordingly

Yours faithfully,

TOKUNBO MARTINS (MRS.)

DIRECTOR OF BANKING SUPERVISION

1021
GUIDELINES ON THE ESTABLISHMENT AND RATIONALIZATION OF
BRANCHES AND OTHER OUTLETS FOR BANKS IN NIGERIA

BY

CENTRAL BANK OF NIGERIA

JUNE 2014

1022
GUIDELINES ON THE ESTABLISHMENT AND RATIONALIZATION OF BRANCHES AND
OTHER OUTLETS FOR BANKS IN NIGERIA

1.0 Introduction
The CBN in exercise of its statutory powers under Section 33(1)(b) of the CBN
Act, 2007 and Section 6 of the Banks and Other Financial Institutions Act
(BOFIA), Cap B3, LFN 2004, issues the following Guidelines, which specify the
minimum requirements for establishing and rationalizing branches and other
banking outlets.
2.0 Definition of Terms
1. Branch - means a bank’s place of business outside the Head office
where banking operations with full products and services are offered.
2. Cash Center - means a banking outlet that provides banking services i.e
cash deposits and withdrawal to its customers, excluding foreign
exchange transactions and the extension of credit facility.
3. Electronic Banking Office or Automated Teller Machine (ATM) Center -
means an electronic banking outlet which offers cash withdrawal and
deposit services via Automated Teller Machines to customers without the
aid of a branch representative or teller. It may also include self-service
internet banking and telephone services.
4. Teller Implant - means a banking outlet which offers services to specific
customers, who receive high volume of payments in their premises. The
teller implant is strictly for the purpose of serving the specified customer.
3.0 General Criteria for Establishing Banking Outlets
a. An application to open/close/merge/downgrade/upgrade a branch or
other banking outlet shall be accompanied by all documentation
requirements provided for in these Guidelines.
b. Banking outlets other than branches must be affiliated to specific
branches which should be clearly stated in banks’ applications.
4.0 Documentation Requirements for Establishing a Branch
An application should be accompanied by the following:
a) A resolution of the Board of Directors approving the establishment of the
branch stating the estimated cost of the outlet;
b) A detailed feasibility report, which should cover the following:
(i) Suitability of the location including evidence of commercial and
industrial establishments;
(ii) Basic social and infrastructural facilities in place;
1023
(iii) Competition/number of banks in the area;
(iv)Range of products and services to be provided;
(v) Estimated initial capital expenditure and other operating costs for the
proposed branch with breakdown of the estimates;
(vi)Financial projection for the proposed branch - at least 3 years
Statements of Financial Position and Income Statement including notes
and assumptions on the projection;
(vii) Staffing requirements; and
(viii) Security arrangement in place to ensure safe operations.
c) List of unutilized approvals granted for banking branches to the
bank and reason(s) for non-utilization.
5.0 Documentation Requirements for Establishing Cash Center
The documentation requirements for the establishment of cash centers are the
same as those for branches as per Section 4.0 of these Guidelines. However,
the range of services to be provided should be restricted to that of a cash
center.
6.0 Documentation Requirements for establishing Electronic Banking Office or
ATM Center
The application should be accompanied by the following:
• A resolution of the Board of Directors approving the establishment of the
e-banking office or ATM center stating the estimated cost of the outlet;
• A detailed feasibility report, which should cover the following:
a. Suitability of the location including evidence of
commercial/industrial establishments and/or bankable population;
b. Basic social and infrastructural facilities in place;
c. Competition/number of banks in the area;
d. Range of services to be provided;
e. Estimated initial capital expenditure and other operating costs for
the proposed e-banking office or ATM center with breakdown of
the estimates;
f. Staffing requirements;
g. Security arrangement in place to ensure safe operations; and
h. Proposed Cash-in-transit companies to be used.
Banks should ensure compliance with the provisions of the Guidelines on
Electronic Banking in Nigeria of August 2003 and Nigeria Financial Services IT
Standards Blueprint in this regard.

1024
7.0 Documentation Requirements for Establishing Teller Implant
The application should be accompanied by the following:
a A resolution of the Board of Directors approving the establishment of the
teller implant stating the estimated cost of the outlet;
b A detailed feasibility report, which should cover the following:
i Suitability of the location;
ii Basic social and IT infrastructural facilities like key logger
prevention, access road and ATM;
iii Range of services to be provided should be restricted to that of a
teller implant;
iv Estimated initial capital expenditure and other operating costs for
the proposed implant with breakdowns;
v Staffing requirements;
vi Security arrangement in place to ensure safe operations; and
vii Proposed Cash-in-transit companies to be used for the
evacuation of cash.
8.0 Approval
Banks are required to seek the CBN’s approval when establishing branches in
line with Section 6(1) of the BOFIA. The provision of this Section is also extended
to cash centers, e-banking office or ATM Center and teller implants. The validity
of approval granted is for a period of one (1) year for branches and six (6)
months for other banking outlets from the date of issue of the letter of approval.
9.0 Revalidation of Approval to Open Branches and Other Banking Outlets
Where a bank is unable to commence operations within the validity period, an
extension of time (6 and 3 months for branch and other banking outlets
respectively) may be granted provided that the bank provides cogent
reason(s) for the delay.
The bank will be required to apply for an extension of time three (3) months to
the end of the validity period. Where approval is granted, the bank is expected
to commence operations within the period, failing which the approval would
automatically lapse. However, where the bank still intends to open a branch or
other banking outlet in the same location, it would be required to re-apply,
attaching all documentation requirements.

1025
10.0 Documentation Requirements for Closure of a Branch and Other Banking
Outlets
10.1 Closure of Branches and Other Banking Outlets
In line with Section 6(1) of BOFIA, no bank is permitted to close any branch
without the prior approval of the CBN. The provision of this Section is extended
to other banking outlets.
An application for closure of branches and other banking outlets should be
accompanied by the following:
a A resolution of the Board of Directors approving the
closure/rationalisation;
b Justification for the closure;
c Number of other bank branches/other banking outlets;
d Total number of customers accounts, indicating the account types;
e List of outstanding credit facilities and their performance ratings;
f Income statements for the last 3 years;
g The nearest branch of the bank and its distance from the affected
branch/other banking outlets;
h Total number of staff working in the affected branch/other banking
outlets and the bank’s restructuring plans with respect to the staff of the
branch/other banking outlets; and
i How the bank intends to cater for existing customers to ensure they
continue to enjoy banking services.
10.2 Merging of Branches and Other Banking Outlets
Banks are permitted to merge branches or banking outlets where cogent
reason(s) are provided to justify the merger. However, such an application
would be considered on the basis of its merit. An application for the merger of
a branch/outlet with another should be accompanied by the following:
• A resolution of the Board of Directors approving the merger and cost
involved;
• Justification for the merger;
• Estimated cost of the merger with breakdown of the estimates;
• The addresses of the branches or outlets to be merged;
• The distance between the branches or outlets to be merged;
• The total number of customers in both branches or outlets; and
• Total number of staff working in the affected branch or outlet and how
the bank intends to absorb them.
10.3 Upgrade of Other Banking Outlets to Branches
This follows the same approach for the opening of branches.

1026
10.4 Downgrade of Branches to Other Banking Outlets
Banks are permitted to apply for the downgrade of branches to cash centers,
teller implants and e-banking office or ATM centers. However, the application
would be considered on the basis of its merit.
11.0 Documentation Requirements for Relocation of Branches and Other
Banking Outlets
The application should be accompanied by the following:
a) A resolution of the Board of Directors approving the relocation;
b) Justification for the relocation;
c) Cost implication for the relocation;
d) Other banks existing in the former area and the new area;
e) Distance between the present and proposed location; and
f) Bank’s arrangement for existing customers to prevent inconvenience.
12.0 Other Requirements
Upon commencement of operation of an approved branch or outlet, banks
are required to notify the CBN within 14 days, providing the telephone number,
address and date that the branch or outlet opened.
Upon closure/upgrade/downgrade of an approved branch or outlet, banks
are required to notify the CBN within 14 days providing date that the branch or
outlet closed, relocated, or merged. A bank shall post notice to customers in a
conspicuous manner in the branch or outlet prior to its date of
closure/relocation/merger. The notice shall remain posted in the branch or
outlet until it is closed/ relocated/merged.
13.0 Reporting Requirements
All banks shall annually render returns on branches and other banking outlets
opened, closed, rationalized and relocated during the year as well as the total
number of the branches and outlets as at the end of the reporting year in the
attached format in print and soft copies to the Director Banking Supervision
and BSDReturns@cbn.gov.ng. In addition, banks should ensure rendition of
returns with respect to branches and other banking outlets in the following
returns in e-FASS and finA:
• MBR 300-Monthly Statement of Assets and Liabilities;
• MBR 338-Monthly Return on Branch Network; and
• SBR 1920-Semi-annual Return on Branch Network.
14.0 Penalty for Non-Compliance
Banks should ensure compliance with these guidelines as any breach with the
provisions of the Guidelines shall attract sanctions in accordance with Sections
6(2) and 60(1) of the BOFIA.

1027
Reporting Templates

Format for Reporting on Branches and Other Banking Outlets Opened


During the Year

Type of Date of
banking Banking Date of commencement
S/N outlets Location/Address approval of operation

1028
09-46236401

09-46236418

REF: BSD/DIR/GEN/LAB/07/013

23rd May, 2014

LETTER TO BANKS AND DISCOUNT HOUSES

STATUS AND REPORTING LINE OF CHIEF COMPLIANCE OFFICERS OF BANKS

Information available to the CBN has revealed that Chief Compliance Officers
of some banks and discount houses are below the grade of General Manager
without prior approval of the CBN. Equally worrisome, is the fact that most of
them do not report directly to the Board of Directors.

This is a flagrant disregard to extant laws and regulations on the subject. For the
avoidance of doubt:

I. The CBN circular ref BSD/2/2002 dated 8th August, 2002 and
FPR/DIR/GEN/001/022 dated 18th July 2013 directed that banks and
discount houses should designate Chief Compliance Officers, not below
the grade of a General Manager to, among other things, apply the
provisions of the relevant Acts and circulars on money laundering at
various levels of their institutions; and

 Section 9(1) of the Money Laundering (Prohibition) Act, 2011(as


amended) also requires them to designate, at management level, Chief
Compliance Officers in their Head Offices and branches, who have the
relevant competence, authority and independence to implement their
institutions AML/CFT Compliance Programme.
III. Paragraphs (I) and (II) are reinforced by sections 7(1) and 7(2) of the CBN

AML/CFT Regulation, 2013 (as amended).

IV. Section 7(2) of Central Bank of Nigeria (AML/CFT in Banks and Other
Financial Institutions in Nigeria) Regulations, 2013 stipulates that the Chief
1029
Compliance Officer shall be appointed at management level and shall
report directly to the Board on all matters under the Regulations.

On the basis of the foregoing, all Deposit Money Banks and Discount Houses
must ensure:

 that no Chief Compliance Officer in their institutions is below the grade


of General Manager without the CBN prior approval
 that he/she reports to the Board of Directors with dotted lines to the
MD/CEO without interlocking roles.
Accordingly the particulars of all current CCOs with evidence of the CBN
approval of same and reporting line should be forwarded to the Director
Banking Supervision within 1(one) week from the date of this letter.

The CBN also observed with concern the lack-lustre attendance of CCOs to the
monthly meetings of the Committee of Chief Compliance Officers of Banks in
Nigeria (CCCOBIN), resulting in the inability of the forum to form the required
quorum necessary to take vital decisions pursuant to its mandate.

Going forward, CBN will monitor the attendance by CCOs at the monthly
meetings of the CCCOBIN and will not hesitate to take the appropriate
regulatory action to stem the unsatisfactory attendance at this important
forum.

K.O.BALOGUN

FOR: DIRECTOR OF BANKING SUPERVISION DEPARTMENT

1030
09-462-36401

09-462-36418
BSD/DIR/GEN/LAB/07/011
April 10, 2014
LETTER TO ALL BANKS AND DISCOUNT HOUSES

TIMELINES FOR RENDITION OF STATUTORY RETURNS THROUGH THE FinA


APPLICATION TO THE CBN AND NDIC

Subsequent to the ‘Go-Live’ of the FinA Regulatory Reporting Application in


December 2013, all banks and discount houses have been required to submit
Daily, Monthly, Quarterly and Semi-Annual returns concurrently via the e-FASS
and FinA Applications.

In consideration of the need to enable reporting institutions become familiar


with the new Application (FinA), the deadlines for submission of returns were not
strictly enforced. It is also observed that some institutions do not even render
their returns through FinA.

Consequently, it has become necessary to remind all banks and discount


houses about the timelines for the rendition of statutory returns through eFASS
and FinA, shall henceforth, be strictly enforced:

1. Daily returns: To be submitted on or before 10.00 a.m. of the


following working day; and
2. Monthly, Quarterly and Semi-Annual returns: To be submitted on or
before the 5th day after the month end. Where the 5th day
happens to be weekend or public holiday, returns should be
submitted the previous day.
This letter takes immediate effect and all reporting institutions are hereby
requested to note the above timelines as any future breach shall be promptly
met with the applicable sanctions.

‘TOKUNBO MARTINS (MRS.)

DIRECTOR, BANKING SUPERVISION


1031
09-46236403
09-46236401

BSD/DIR/GEN/LAB/07/009

March 13, 2014

LETTER TO ALL BANKS

TRANSMUTATION OF EXECUTIVE DIRECTORS TO NON-EXECUTIVE DIRECTORS OF


DEPOSIT MONEY BANKS

You will recall that in furtherance of our efforts in strengthening corporate


governance practices in banks, we issued two Circulars referenced
BSD/DIR/GEN/NED/003/019 dated August 27, 2010 titled, “Re: Compliance with
the Provisions of Paragraph 5.3.10 of the CBN Code of Corporate Governance”
and BSD/DIR/GEN/EXA/003/026 dated September 08, 2010 titled, “Compliance
with the Provisions of Paragraph 8.2.3 of the CBN Code of Corporate
Governance”. These Circulars reminded banks on the need to ensure
compliance with the provision of the CBN Code of Corporate Governance as it
relates to the delimitation of tenures of their non-executive directors and
external auditors, respectively. We also issued another Circular referenced
BSD/DIR/GEN/CCG/003/074 dated December 29, 2010 titled, “Re: Compliance
with the Provisions of Paragraph 5.3.10 and 8.2.3 of the CBN Code of Corporate
Governance”, in response to enquiries from banks on the interpretation of these
policies.

The above policy documents were, however, silent on possible transmutation of


executive directors to non-executive directors upon the expiration of their
tenures. Following recent developments in the system leading to concerns over
the ability of the aforementioned individuals to effectively function with the
independence and objectivity required by the tenets of good corporate
governance and in line with global best practices, it has become imperative to
1032
issue this circular. In this regard, banks are required to extend the provision in
our regulation of January 19, 2010, titled, “Guidelines for Tenure of Managing
Directors of Deposit Money Banks and Related Matters” to cover transmutation
from executive director to non-executive director. In other words, executive
directors aspiring to take up non-executive directorship positions in their banks
or its subsidiaries, which are under the supervision of the Central Bank of Nigeria
or the Nigeria Deposit Insurance Corporation, are required to serve out a
minimum “cooling-off” period of 3 years.

Please note that this requirement shall apply notwithstanding the terms of any
contract of engagement or the provisions of the Memorandum and Articles of
Association of the institution.

Banks are advised to be guided accordingly.

Yours faithfully,

‘TOKUNBO MARTINS (MRS)

DIRECTOR OF BANKING SUPERVISION

1033
09-46236403
09-46236413

BSD/DIR/GEN/LAB/07/008

March 11, 2014.

LETTER TO ALL BANKS AND DISCOUNT HOUSES

TRANSFER OF ALL NON-PROPRIETARY ASSETS TO LICENSED CUSTODIANS

The Central Bank of Nigeria has observed with dismay, the apathy by money
market operators in appointing custodians as stipulated in the Guidelines for
Custodianship in Money Markets and Other Fixed Income Instruments issued in
2007. This has resulted in the assets of banks and discount houses being
comingled with those of their clients/customers. Consequently, this has made it
difficult for the Central Bank of Nigeria to segregate the assets of banks and
discount houses from those of their clients/customers. Consequently, to ensure
full compliance with the provisions of the above guideline, the Central Bank of
Nigeria, in exercise of the powers conferred on it by section 57 (2) of BOFIA 2004
directs as follows:

1 All Deposit Money Banks and Discount Houses are required to appoint a
licensed Custodian, not later than March 31, 2014.
2 All non-proprietary financial assets (e.g. Treasury Bills and Bonds) in the
custody of Deposit Money Banks and Discount Houses should be
transferred to the Custodian so appointed, not later than April 30, 2014.
3 All Deposit Money Banks and Discount Houses shall notify their
clients/customers, not later than April 30, 2014, the Custodian to which
their financial assets have been transferred. Subsequently, investors
should be notified of the Custodian at the time of making the investment.

1034
2. All Deposit Money Banks and Discount Houses shall display to the public,
in a conspicuous place, in the head office and all branches, a notice
that
o Brokerage will be charged for purchase of financial assets on their
behalf in line with the Guidelines for Custodianship in Money
Markets and Other Fixed Income Instruments issued in 2007
o Custody of customers’ investments in financial assets (e.g. Treasury
Bills and Bonds) shall be transferred to a named licensed
Custodian and
 A Client or customer who makes an investment in financial assets
subsequent to the issuance of this circular reserves the right to choose a
custodian for his investment.
 In all cases, an investor in financial assets has the right to change his/her
custodian at no extra fee.

Failure to appoint a Custodian or transfer all non-proprietary financial assets, as


stipulated in this Circular, shall constitute an infraction and attract sanctions,
which may include, among others, the loss of money market dealership. In
addition, 50% of the financial assets portfolio of such Deposit Money Bank or
Discount House shall be regarded as non-proprietary and, consequently, be
excluded from the computation of its Liquidity Ratio.

A list of licensed custodians can be obtained from the Central Bank of Nigeria’s
website.

Please be guided accordingly.

Yours faithfully,

‘TOKUNBO MARTINS (Mrs.)

DIRECTOR BANKING SUPERVISION

1035
234 – 9 – 46236403
234 – 9 – 46236418
February 5, 2014

BSD/DIR/GEN/LAB/07/004

LETTER TO ALL BANKS AND DISCOUNT HOUSES

RE: THE NEED FOR THE CBN PRIOR CLEARANCE OF PROSPECTIVE EMPLOYEES OF
BANKS

We refer to our circular to all banks dated July 16, 2004 on the above subject,
wherein banks were required to obtain the prior approval of the Central Bank
of Nigeria (CBN) for all prospective employees.

The intendment of the above referenced circular was to prevent the recycling,
within the banking industry, of erstwhile bank employees indicted, terminated
or dismissed for fraud and other acts of dishonesty.

Following representations made by banks during the CBN/Banks’ Human


Resources forum held in December 2013 regarding difficulties in the strict
implementation of the above circular, the Management of the CBN hereby
approves the following amendments:

 New employees of banks and discount houses may assume duty prior to
obtaining the approval of the CBN, if this proves difficult or impractical.
 However, for employees that assume duty without CBN’s prior approval,
banks and discount houses shall, within 30 days of their assumption of
duty, submit their curriculum vitae and other relevant information on the
new employees to the CBN for clearance.
 Banks
 and discount houses shall include as part of the terms of employment
(OFFER LETTER) that “the offer is subject to the receipt of satisfactory

1036
responses on any background checks or other inquiries on the employee
from relevant authorities”.
 The above amendments shall NOT apply to new employees on the
grade of Assistant General Manager and above. Banks are required to
continue to obtain the prior written approval of the CBN before
resumption of duty for these categories of staff.
This circular supersedes our earlier circular of January 16, 2004 and takes
immediate effect.

TOKUNBO MARTINS (MRS)

DIRECTOR OF BANKING SUPERVISION

1037
09-462-36401

09-462-36403

BSD/DIR/GEN/LAB/07/001

January 3, 2014

LETTER TO ALL BANKS

CASH RESERVE REQUIREMENT MAINTENANCE CALENDAR FOR 2014

Further to the implementation of the cash reserve regime, find below the
calendar for year 2014 for your information.

S/N START DATE END DATE

1 Wednesday, January 08, 2014 Tuesday, February 04, 2014

Wednesday, February 05,


2 2014 Tuesday, March 04, 2014

3 Wednesday, March 05, 2014 Tuesday, April 08, 2014

4 Wednesday, April 09, 2014 Tuesday, May 06, 2014

5 Wednesday, May 07, 2014 Tuesday, June 03, 2014

6 Wednesday, June 04, 2014 Tuesday, July 01, 2014

7 Wednesday, July 02, 2014 Tuesday, August 05, 2014

1038
Tuesday, September 02,
8 Wednesday, August 06, 2014 2014

Wednesday, September 03,


9 2014 Tuesday, October 07, 2014

Wednesday, October 08, Tuesday, November 04,


10 2014 2014

Wednesday, November 05, Tuesday, December 02,


11 2014 2014

Wednesday, December 03,


12 2014 Tuesday, January 06, 2015

Please be guided accordingly.

A. O. IDRIS
FOR: DIRECTOR OF BANKING SUPERVISION

1039
CENTRAL BANK OF NIGERIA

REGULATORY CAPITAL MEASUREMENT AND MANAGEMENT


FRAMEWORK FOR THE IMPLEMENTATION OF BASEL II/III FOR THE
NIGERIAN BANKING SYSTEM

1040
Introduction

The CBN pursuant to Section 13 of the Banks and Other Financial Institutions Act
(BOFIA), 1991 as amended and in line with its core mandate of ensuring
financial system stability as contained in Section 2 (d) of the Central Bank of
Nigeria Act, 2007, herewith issues this Regulatory Capital Measurement and
Management Framework for The Implementation Of Basel II/III for the Nigerian
Banking System. The document contains guidance notes that outline the
expectations of CBN with respect to the implementation of Basel II1/III by banks
and banking groups in Nigeria.

It specifies the approaches for quantifying the risk weighted assets for credit risk,
market risk and operational risk. The computations are consistent with the
requirements of Pillar I of Basel II which is expected to ensure that banks have
sufficient high quality capital to support their risk taking activities and that they
establish effective risk management systems commensurate with their level of
operations.

Banks and Banking groups are expected to adopt the basic approaches for
the computation of capital requirements for credit risk, market risk and
operational risk as follows:

i. Credit Risk Standardized Approach

ii. Market Risk Standardized Approach

Basic Indicator Approach


iii. Operational Risk (BIA)

Within the first two years of the adoption of these approaches under Pillar 1, it is
hoped that an effective rating system would have developed in Nigeria. Banks
and banking groups are projected to have gathered more reliable data and
gained experience that would prepare them to consider the adoption of more
sophisticated approaches. The adoption of the Standardized Approach (TSA)
for operational risks and other advanced approaches will be subject to the
approval of the CBN.

These Guidelines emphasize the need for banks to have comprehensive risk
management policies and processes that effectively identify, measure, monitor
and control their risk exposures in addition to having appropriate board and
senior management oversight.

1041
The assessment of adherence to the standards and requirements set out by the
CBN under the supervisory review process is key to ensuring that all risks are
identified and appropriate actions are taken in a timely manner as well as
ensuring that banks and banking groups have adequate internal capital
management plans. A template to aid banks carry out their Internal Capital
Adequacy Assessment Process is included in the relevant Guidance Note.

Minimum standards for both qualitative and quantitative disclosures are given
to ensure that relevant material information are disclosed by banks and
banking groups for enhanced transparency and related market discipline.

While the definition of regulatory capital has not significantly changed from
those contained in the 1998 Accord, a section on the definition and
constituents of regulatory capital is included to provide expectation on the
calculation of capital under Basel II.

Although the document complies significantly with the requirements of the


Basel II framework, certain sections were adjusted to reflect the peculiarities of
our environment. From time to time; the CBN will also issue additional guidance
notes to clarify its expectations on compliance with the technical provisions of
these Guidelines.

The minimum capital requirement is retained as 10 percent and 15 percent for


national and internationally active banks respectively.

This document is applicable to all banks and banking groups licensed to


operate in Nigeria and should be applied on a solo and consolidated basis.

1042
CENTRAL BANK OF NIGERIA

Guidance Note on the Calculation of Capital Requirement for


Market Risk

Standardised Approach

1043
1.0 Introduction
This regulation identifies and prescribes the treatment of positions and
settlement risk pertaining to interest rate-related instruments and equities in the
trading book and foreign exchange risk and commodity risk throughout the
bank for estimating capital requirement for market risk. The capital requirement,
takes into account both on- and off balance sheet positions that are subject to
market risk. Banks that are not able to properly measure and manage the risks
associated with financial instruments which are sensitive to multiple risk factors
shall not conduct business in those instruments.

Market risk is the risk of losses in on- and off-balance sheet positions 27 arising
from movements in market prices. Market risk includes:

a) Interest rate risk;


b) Equity position risk;
c) Foreign exchange risk; and
d) Commodity risk.
Capital requirement will be computed using the Standardised Approach.
Under this approach, banks are to compute their capital requirements using a
building-block approach, by summing up the capital requirement for individual
risks mentioned above.

A bank shall calculate its market risk taking into account the risk of losses in:
a) bank’s trading book position held in:
i. debt securities;
ii. debt and interest rate related derivative contract;
iii. equity; and
iv. equity related derivative contract

b) bank’s position (in trading book and banking book) held in:

i. foreign exchange (including gold);


ii. foreign exchange rate related derivative contract;
iii. commodity; and
iv. commodity related derivative contract;

27 Position risk on account of options is computed separately and aggregated with respective risk to
which the underlying exposure belongs, like interest rate risk, equity position risk, foreign exchange risk
or commodity risk.
1044
A bank will not include a position in calculation of market risk if the position is:
a) a credit derivative contract in bank’s trading book treated as a hedge to
a credit exposure in the banking book;
b) an exposure required to be deducted from bank’s capital;

2.0 Position Risk in Trading Book


A bank will use fair value of its positions, based on marked-to-market or marked-
to-model methodology, to calculate its market risk capital charge. A bank shall
allocate to the trading book any position in a financial instrument or
commodity which is held with trading intent or hedge other positions held in the
trading book.
The market risk is assessed on positions in the trading book and it consists of the
following two components:
a) Specific risk means the risk of loss in value of bank’s trading book
positions arising from changes in prices of debt securities, equities and
their related derivative contracts owing to factors related to the issuers of
such debt securities, equities or the underlying instruments held in the
trading book;
b) General risk means the risk of loss (arising from changes in interest rate,
equity prices, exchange rate and commodity prices in the value of a
bank’s trading book positions held in debt securities, equities, foreign
exchange (including gold), commodities and other related derivative
contracts.

1045
The table 1 below summarises the specific risk and general risks inherent in cash
position in instruments and derivatives.

Table 1Position risk in trading book


Risk type (Both long and short position)
Specific risk Trading book positions in debt and equity securities and
their related derivative contracts
General risk i. Trading book position in debt and equity securities
and debtrelated and interest rate related derivative
contracts;
ii. Interest rate exposures arising from trading book
positions in equity related derivative contract;
iii. Interest rate exposures arising from foreign exchange
derivative positions (in the entire book). iv. Interest
rate exposure arising from commodity related
derivative contracts (in the entire book).

3.0 Interest Rate Risk


A bank shall calculate its market risk capital requirement for interest rate risk by:
a) identifying the positions in its trading book which have interest rate risk;
b) allocating the positions into individual currency portfolios;
c) for each currency portfolio –
i. calculating the net positions in accordance with paragraph 3.3;
ii. including these net positions in the calculation of its specific risk
capital requirement after applying any offsets allowed according to
paragraph 3.5;
iii. including these net positions in the calculation of its general market
risk capital charge; and
d) summing up all specific risk and general market risk capital charges for
each currency portfolio;

3.1 Scope

In calculating its market risk capital charge for interest rate risk, a bank shall
include all its trading book positions, whether long or short, in instruments
(including derivatives and offbalance sheet instruments) whose market values
are affected by changes in interest rates. This includes positions in any interest
1046
rate-related instrument that is sold or lent under security financing transactions
(SFT) (repo, etc.), but excludes any interest rate-related instrument that is
bought or borrowed under an SFT (reverse repo, etc.).
A bank will exclude the positions in the following instruments for assessment of
market risk-
i. convertible bond which has been included in the equity position risk;
ii. capital investment that is deducted in the calculation of eligible capital;
or
iii. option which is accounted for under section7 on “Treatment of options”

3.2 Measurement of Position with Interest Rate Risk

A bank shall use the current market value of its positions in interest rate-related
instruments to calculate its market risk capital charge for interest rate risk.
a) A bank shall convert its interest rate-related derivatives into notional
positions in specific-risk-free securities (zero-specific risk) and use the
current market values of the specific-risk-free securities to calculate its
market risk capital charge for interest rate risk.
b) A bank shall convert its credit derivatives into notional positions in the
relevant reference assets and use the current market values of the
reference assets to calculate its market risk capital charge for interest
rate risk, except in the case of credit linked notes, where the current
market value of the notes shall be used.

3.3 Netting of Matched Positions


A bank will net its positions (long and short positions) in debt securities or
notional positions in specific-risk-free securities for calculating specific risk and
general risk capital charge. A bank will net:
a) long and short positions(including any notional positions) in identical
issues (even though the issuer is the same, no netting will be permitted
between different issues since differences in coupon rates, liquidity, call
features, etc. mean that prices may diverge in the short run.); and
b) a matched position in a futures contract or forward contract and its
corresponding cash position in the trading book 28 (Annexure F –
illustrative example);

28 A notional position in zero-specific-risk free security for interest rate risk is created by representing the

cash flows with settlement date as maturity.


1047
A bank may net opposite positions in the same category of debt securities,
notional position in specific-risk-free securities or interest rate-related derivative
contracts if:
a) the positions relate to the same instruments;
b) the positions are of the same notional value; and
c) the positions are denominated in the same currency; and –
i. in the case of futures contracts, the offsetting positions in the notional or
underlying instrument to which the futures contract relates, are for
identical products and mature within seven days of each other;
ii. in the case of swaps and FRAs, the reference rates (for floating rate
positions) are identical and the coupons are closely matched (i.e.
within15 basis points); and
iii. in the case of swaps, FRAs and forwards, the next interest fixing date or
for fixed coupon positions or forwards, the residual maturity, corresponds
as follows:
1. on the same day, if the next interest fixing date or residual maturity
is less than one month;
2. within seven days, if the next interest fixing date or residual maturity
is between one month and a year; or
3. within30 days, if the next interest fixing date or residual maturity is
more than a year;
3.4 Offset of Positions Hedged by Credit Derivatives

a) Offsetting in Full
A bank may fully offset its position in derivative contract against a cash position
(in trading book) in similar instrument which is identical to underlying asset in
derivative contract. Similarly, a position in a derivative contract may fully offset
a position in another derivative contract where the values of the two positions
(one being long and another being short) always move in opposite directions
and broadly to the same extent. This will be the case when:
i. the two legs consist of identical instruments;
ii. a long cash position is hedged by a total rate of return swap (or vice
versa) and there is an exact match between underlying asset(in the
credit derivative contract) and the cash position and notwithstanding
that the maturity of the total return swap may be different from that of
the cash position.

1048
When a bank has fully offset its position in the credit derivative contract
against a cash position in underlying instrument in the trading book, no
specific risk capital charge is required to be calculated in respect of those
positions.
Example of full offset of cash position against credit derivative position
(position in underlying asset):
A bank has a long (cash) position in a corporate bond for N 5 billion (face
value), in its credit portfolio. The bank also purchased credit protection, for
the same long position (for N 5billion) in the corporate bond, under a credit
default swap for same amount.
Working:
1. Cash position in the instrument – long position in corporate bond
2. Underlying asset in credit default swap – corporate bond (purchase of
protection)
3. Amount (face value) of cash position = amount of underlying asset in credit
default swap = N 5 billion

Bank’s long cash position is fully offset by purchase of protection under credit
default swap resulting in no position in the corporate bond instrument.

b) Offsetting by 80%
A bank may offset 80% of specific risk capital charge of its position in credit
derivative contract against a position in underlying instrument in its trading
book where the values of the two positions (being long and short positions)
always move in the opposite directions but not broadly to the same extent.

In order to be eligible for offsetting by 80%, the following conditions must be


satisfied:
a) A long cash position is effectively hedged by a credit default swap or
credit linked note ( or vice versa) and there is an exact match
between:
i. the reference asset and the underlying instrument (i.e. the cash
position);
ii. the maturities of both the reference asset and the underlying
instrument; and,
iii. the currencies of the two offsetting positions;

1049
b) The key features of the credit derivative contracts (e.g. credit event
definitions, settlement mechanism) do not cause the price movement
of these derivative instruments to materially deviate from the price
movement of the position in the cash position; and
c) The credit default swap or the credit linked notes transfers credit risk
effectively taking account of any restrictive payment provisions
(including fixed pay outs and materiality threshold).

Where the above conditions are satisfied and a bank offsets its positions in a
derivative contract:
a) only 20% of specific risk capital charge is required to be calculated
for the position with higher specific risk; and
b) Specific risk capital charge to be calculated for the other position
will be zero.

c) Partial Offsetting
A bank may partially offset its position in derivative contract against a cash
position when the values of the two legs (similar but not identical) usually
move in opposite directions and where:
1. There is an asset mismatch between the reference asset and the
underlying instrument (i.e. cash position) and:
i. the reference asset ranks pari-passu with or is junior to the position
in underlying instrument; and
ii. the reference asset and the underlying instrument are issued by the
same issuer and legally enforceable cross default or cross default
acceleration clauses are included in the terms of the positions in
the reference asset and underlying instrument;
2. there is a currency or maturity mismatch between the contract and the
position in underlying instrument; and
3. there is a mismatch between underlying instrument and reference asset
in the contract and the position in the underlying instrument is included in
one of the deliverable assets specified in the contract;
Where the above conditions are satisfied, a bank will apply specific risk
capital charge for a position having higher specific risk and specific risk
capital charge for the other position will be zero.

3.5 Specific risk capital charge


1050
A bank shall compute specific risk capital charge for each of the net
positions (actual as well as notional) in debt securities, debt-related derivative
contracts, credit derivatives and deltaweighted position of options. However,
notional positions in specific-risk-free securities (e.g. interest rate and currency
swaps, FRAs, forward foreign exchange contracts, interest rate futures and
futures on an interest rate index) do not attract specific risk capital charge.

Example:
Notional Position in Specific-risk-free Security and Treatment of Specific Risk
Charge:
A bank, under a swap contract, is receiving fixed annual interest of 12% p.a.
and paying floating rate linked to 3 month NIBOR. The swap has a remaining
maturity of 3 years.
Working:
For computation of market risk under Standardised Approach, the swap will
be converted into a long position in a fixed rate bond with 12% interest rate
with 3 years maturity and a short position in a floating rate bond with 3 month
maturity (up to next reset date).
Both bonds are specific-risk-free instruments and no specific risk will be
computed for positions in the long fixed rate bond and short floating rate
bond.
A bank, for the purpose of computing specific risk capital charge, shall:
a) assign those positions into classes based on credit quality grades and
residual maturities specified in the table 2 below;
b) Multiply those positions by appropriate specific risk capital charge
factors specified in the table; and
c) Calculate the total specific risk capital charge as the sum of specific
risk capital charge of each of those positions.

1051
Table 2 Specific Risk Capital Charge Factors
Security class Risk Residual Specific risk
weight maturity (M) capital
charge
factors
Debt securities 0% All maturities 0%
issued/guaranteed by M<= 6 month 0.25%
Central government, Central
bank or MDBs that qualify for risk 20% to 6 month<M<= 24
weight under credit risk 50% month 1.00%
regulations.
Maturity > 24
months 1.60%
100% All maturities 8%
150% All maturities 12%
Debt securities 20% to M<= 6 month 0.25%
issued/guaranteed by State 50%
government or local authorities 6 month<M<= 24
that qualify for risk weight under month 1.00%
credit risk regulations
Maturity > 24
months 1.60%
100% All maturities 8%
150% All maturities 12%
Debt securities issued or 20% to M<= 6 month 0.25%
guaranteed by supervised 50%
institutions which would qualify 6 month<M<= 24
for risk weight in Standardised month 1.00%
Approach under credit risk
regulations. Maturity > 24 1.60%
months
100% 8%
150% 12%
Debt securities issued or 20% to M<= 6 month 0.25%
guaranteed by corporate which 50%
would receive a risk weight 6 month<M<= 24 1.00%
under credit risk regulations. month
1.60%
1052
M> 24 months

100% 8%
150% 12%
Other qualifying securities M<= 6 month 0.25%

6 month<M<= 24 1.00%
month
1.60%
M> 24 months
Debt securities by persons
(including legal entity) for which
a credit assessment by an ECAI All maturities 8%
is not available.

For the purposes of the above table, “other qualifying securities” shall include
positions satisfying any one of the following conditions:
a) security which has a credit quality grade of “2” or above within the
framework of the standardized approach under credit risk; or
b) security issued by supervised institutions which receive a risk weight of
50% or less (higher grade) under credit risk standardized approach;
c) security for which a credit assessment by a nominated ECAI is not
available and which is considered by the concerned bank to be-
i. sufficiently liquid; and
ii. of investment grade

3.6 General risk capital charge

The general risk capital requirement is intended to capture the risk of loss
arising from changes in market interest rates. A bank shall calculate the
general risk capital charge for the portfolios by applying either the maturity
method or the duration method (subject to CBN approval) to calculate the
general risk capital charge for interest rate portfolios. General risk capital
charge for foreign currency portfolio will be computed separately using one
of the above approaches.
1053
A bank shall use separate maturity ladders for positions in each currency, with
capital charges calculated separately for each currency and then summed,
with no offsetting between positions of different currencies. Where business in
one or more currencies is insignificant, known as residual currency, the bank
may construct a single maturity ladder for those currencies and record, within
each appropriate time band, the net long or short positions in each currency,
rather than having to use separate maturity ladders for each currency. The
bank shall sum the absolute value of the individual net positions within each
time band, irrespective of whether they are long or short positions, to
produce a gross position figure.

In each method, positions are allocated across a maturity ladder and the
capital charge is calculated as the sum of three components:
a) a small proportion of the matched positions in each time band (the
‘vertical disallowance’);
b) a larger proportion of the matched positions across different time
bands (the ‘horizontal disallowance’); and

c) the net short or long weighted position across the whole trading book;
Vertical disallowance is designed to capture the basis risk. It is the risk that the
relationship between changes in prices of similar instruments, even in same
time zone, is not stable over time. Horizontal disallowance on the other hand
captures the imperfect correlation of interest rates along the yield curve,
applicable to securities in different time zones.
3.6.1 Maturity method
In the maturity method, long or short positions in debt securities and interest
rate exposures, including derivative instruments, are entered into a maturity
ladder comprising thirteen time bands (or 15 time bands in the case of low-
coupon instruments, i.e. coupon of 3% and below) (refer to Table 3). A bank
shall allocate fixed-rate instruments according to the residual term to maturity
and floating-rate instruments according to the residual term to the next
repricing date. Zero-coupon bonds and bonds with a coupon of less than 3%
must be entered according to the time bands set out in the second column
of Table 3 below. A bank may omit from the interest rate maturity framework
opposite positions of the same amount in the same issue (but not different
issues by the same issuer) and closely matched swaps, forwards, futures and
forward rate agreements (FRAs) that comply with paragraph 3.3 above.

1054
To calculate the general risk capital charge using the maturity method, a
bank shall:
a) multiply long and short position in interest rate exposure in each time
band by the risk-weight corresponding to the position’s time band
(refer to Table 3 below); then
b) offset the total risk weighted long and short positions in each time
band to produce a single risk weighted long or short position in each
time band; then
c) offset the weighted longs and shorts within each zone (refer to Table
4), using only positions that have not been already offset under (b);
then
d) offset the weighted longs and shorts between zones using positions
that have not already been offset under (b) and (c); The net amount
remaining is the net position.

Table 3 Time bands and risk weights


Risk Assumed
Coupon less than 3%
weight changes
Coupon 3% or more or the duration method
(%) in yield
(%)
1 2 3 4
1 month or less 1 month or less 0.00 1.00
Over 1 and up to 3 Over 1 and up to 3 0.20 1.00
months Months
Over 3 and up to 6 Over 3 and up to 6 0.40 1.00
months months
Over 6 and up to 12 Over 6 and up to 12 0.70 1.00
Months months
Over 1 and up to 2 Over 1 and up to 1.9 1.25 0.90
years Years
Over 2 and up to 3 Over 1.9 and up to 2.8 1.75 0.80
years years
Over 3 and up to 4 Over 2.8 and up to 3.6 2.25 0.75
years years
Over 4 and up to 5 Over 3.6 and up to 4.3 2.75 0.75
years years
Over 5 and up to 7 Over 4.3 and up to 5.7 3.25 0.70
1055
years years
Over 7 and up to 10 Over 5.7 and up to 7.7 3.75 0.65
years years
Over 10 and up to 15 Over 7.7 and up to 9.3 4.50 0.60
years years
Over 15 and up to 20 Over 9.3 and up to 5.75 0.60
years 10.6 years
Over 20 years Over 10.6 and up to 12 6.00 0.60
Years
Over 12 years to 20 8.00 0.60
years
Over 20 years 12.50 0.60

Vertical disallowance- A bank shall then calculate the vertical disallowances


for each time band as 10% of the offsetting positions (being smaller of the two
opposite positions), whether long or short. The vertical disallowance is
computed when a bank has offsetting long and short positions in the same
time bucket. The opposite positions do not offset interest rate risk completely
due to basis risk (positions mapped to different interest rate indices) and
capital, in the form of vertical disallowance, should be maintained for the
residual interest rate risk (to the extent of no offsetting).

Horizontal disallowance- The horizontal disallowance is computed when a


bank has offsetting (opposite) long and short positions in the adjacent time
buckets. Horizontal disallowance arises due to unequal changes in yield
curve for different time buckets at the same time period. A bank must then
calculate the horizontal disallowances as the sum of:

a) 40% of the offsetting positions within zone 1;


b) 30% of the offsetting positions within zones 2 and 3; and
c) 40% of the offsetting positions between zones 1 and 2, and between
zones 2 and 3.
d) 100% of the offsetting positions between zones 1 and 3.

1056
Table 4 Horizontal Disallowances
Zone Time band Within the Between adjacent Between zone 1
zone zone and 3
1 2 3 4 5
Zone 0 - 1 month 40%
1 1- 3 month
3 – 6 month
6 – 12 40%
months
Zone 1 - 2 year 30% 100%
2 2 – 3year 40%
3 – 4 year
Zone 4 – 5 year 30%
3 5 – 7 year
7 – 10 year
10 –15 year
15 –20 years

The bank shall calculate the market risk capital charge for general risk as the
sum of:
a) vertical disallowance;
b) horizontal disallowance;
c) net unmatched positions (long or short);

3.6.2 Duration Method


A bank may, with prior approval of the CBN, adopt the duration method to
measure general risk by calculating the price sensitivity of each position
separately. A bank which elects to use this method shall do so consistently,
unless a change in method is approved by the CBN.
A bank, applying the duration method, shall:
a) calculate the duration of each instrument;
b) slot each net position into the appropriate duration band according
to the modified durations of the instruments;
c) calculate the weighted long and short position for each duration
band by multiplying the net positions by the modified duration of the
position and the relevant assumed change in yield (column 4 of table
3);
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d) calculate vertical disallowances for each time band as 5% of the
offsetting positions, whether long or short;
e) Carry forward the net position in each time band for horizontal
offsetting subject to disallowance as carried out in the maturity
method.

4.0 Equity Position Risk


4.1 Scope
A bank will compute specific risk capital charge and general risk capital
charge for each of its positions (whether long or short) in equities and equity
related derivative contracts except positions deducted from capital and
equity options (included in section 7 on the treatment of options) .

4.2 Measurement of Position with Equity Position Risk


A bank shall use the current market value of its cash positions in equity
instruments to calculate its market risk capital charge for equity position risk.
The bank shall convert its equity derivative instruments into notional positions
in the relevant underlying equity instruments and use the current market
value of the underlying instruments to calculate its market risk capital charge
for equity position risk.

A bank shall calculate its market risk capital requirement for equity position
risk by:
a) identifying the positions in its trading book which have equity position risk;
b) calculating the net positions (long or short) in each equity instrument and
equity index;
c) computing the net long position as sum of all long positions in equities;
d) computing the net short position as sum of all short positions in equities;
e) computing the equity position for specific risk as sum of absolute values
long and short position (long position + Absolute(short position))
f) specific market risk charge for equity = Equity position for specific risk *
specific risk capital charge factor
g) computing the equity position for general risk as the net of long position
and short position (long position – Absolute (short position))
h) General market risk charge for equity = equity position for general market
risk * general market risk charge factor.

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Positions in different equity markets or countries will be treated as separate
portfolio and capital charge for equity positions in these markets/countries will
be computed separately.

A bank shall treat positions in futures contract or forward on a single equity as


a notional position in that equity 29.

4.3 Netting of Matched Positions


For the purpose of calculating the specific risk and general risk capital charge
for its equity positions, a bank may net a long and a short position (including
notional positions) in an identical equity or equity index in the same equity
portfolio. No netting is allowed between positions in equity, equity derivatives
or equity indices in different market or country.

4.4 Specific Risk Capital Charge


A bank shall compute specific risk capital charge for each of its positions in
an equity instrument by multiplying the gross amount (Gross long position plus
Absolute gross short position) with specific risk capital charge factor of 8%.

4.5 General Risk Capital Charge


A bank will compute general risk capital charge for equity position risk by
summing the net positions(Gross long position minus Absolute gross short
position)) in equities, equity indices (including delta-weighted position on
equity and equity indices) in the same equity market and then by multiplying
the resultant amount by general risk capital charge factor of 8%.

4.6 Market Risk for Qualifying Equity Indices


In addition to general risk charge for equity position risk, a bank will apply an
additional risk charge of 2% on net short or long position in a qualifying equity
index (as notified by CBN from time to time). This is required to cover
execution risk.

5.0 Foreign Exchange Risk

5.1 Scope
A bank shall calculate its net open position in each currency by summing:

29A notional position in zero-specific-risk free security for interest rate risk is created representing the
cash flows with settlement date of the derivative as the maturity date.
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a) the net spot positions (i.e. all asset items less all liability items, including
accrued interest and accrued expenses, denominated in the currency in
question);
b) the net forward positions (i.e. all amounts to be received less all amounts
to be paid under forward foreign exchange transactions, including
currency futures and the principal on currency swaps, if not included in
the spot position);
c) guarantees and other similar instruments denominated in foreign
currency which are certain to be called and are likely to be irrevocable;
d) net future incomes or expenses not yet accrued but already fully
hedged, as may be determined by the bank;
e) any other item representing a profit or loss in foreign currency; and
f) the net delta-weighted positions of foreign currency options in interest
rate, equity, foreign exchange and commodity instruments, where the
bank is using the delta-plus method, for computation of market risk
capital charge for options;

A bank shall convert its foreign currency derivative instruments and derivative
positions in gold into notional positions in the relevant foreign currency and in
gold for computing market risk capital charge for foreign exchange risk.

5.2 Net Open Position (Using Short-Hand Method)

A bank shall calculate its net open position of the overall foreign currency
assets and liability by –
a) identifying the positions which have foreign exchange risk;
b) calculating the net open position in each currency in accordance with
paragraphs 5.1 above and the net gold position;
c) converting the net open position in each currency and the net gold
position into naira equivalent (the base currency) at prevailing foreign
exchange spot rates;
d) computing the overall net open position (using Short-hand Method) by–
i. calculating the aggregate long position by summing exposures in
currencies having long positions; and
ii. calculating the aggregate short position by summing exposures in
currencies having short positions; and
iii. selecting the higher of absolute values of aggregate long position
and aggregate short position;
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5.3 Capital Charge for Foreign Exchange Risk

A bank shall calculate its market risk capital charge for foreign exchange risk
for its positions in foreign exchange (including gold) and exchange rate
related derivative contracts by summing –
i. the net open position in foreign currency calculated according to
Short-hand Method as detailed in paragraph 5.2 (d) above; and
Ii.The absolute value of the net position (long or short) in gold; And
then multiply the above net open position by market risk capital
charge factor of 8%.

6.0 Commodity Risk

The commodity risk arises from holding positions in commodities such as


precious (excluding gold) and base metals, agricultural products, minerals
(including oil) and electricity. Holding positions in commodities is subject to
extant regulations.

If a bank is exposed to interest rate or foreign exchange risk from funding


commodities positions, the relevant positions must be included in the
calculation of interest rate or foreign exchange risk. A bank shall convert its
commodity derivative instruments into notional positions in the relevant
commodities.

A bank shall measure commodities risk using either the simplified approach or
the maturity ladder approach. Approval from the CBN is required for
adoption of maturity ladder approach.

6.1 Scope
A bank shall include all positions, whether long or short, in trading book as well
as in banking book for calculation of market risk capital charge for
commodity risk except position in gold which is included in the scope of
foreign exchange risk.

6.2 Measurement of Position with Commodity Risk


A bank shall calculate its market risk capital charge for commodity risk by –
a) identifying the positions which have commodity risk;
b) converting each commodity position (long or short) into standard unit of
measurement for that position (e.g. barrels, kilos, grams);
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c) converting each position into naira equivalent (the base currency) at the
prevailing foreign exchange spot rates and the current spot price for the
commodity;
d) calculating the market risk capital charge for each commodity position
according to the simplified approach or the maturity ladder approach
(as approved by CBN); and
e) aggregating the capital charge for the entire commodity portfolio;

6.3 Netting of matched positions


A bank shall offset long and short positions in the same commodity for
calculating net open position in that commodity and shall not offset its
position in different types of commodities.

6.4 Simplified approach


A bank shall calculate market risk capital charge for its commodity positions
as the sum of:
a) 15% of bank’s net position in each commodity; and
b) 3% of bank’s gross position (long plus short) in each commodity.

6.5 Maturity ladder approach


A bank, using the maturity ladder approach, shall calculate the market risk
capital requirement for each commodity by –
a) offsetting long and short positions, maturing –
i. on the same day; or
ii. in the case of positions arising from contracts traded in markets with
daily delivery dates, within ten business days of each other;
b) allocating the remaining positions to the appropriate maturity time
bands as per table 5 below:
Table 5 Commodity Time Bands
Time bands
1 month or less
Over 1 month and up to 3 months
Over 3 months and up to 6 months
Over 6 months and up to 12 months
Over 1 year and up to 2 years
Over 2 years and up to 3 years
Over 3 years

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c) Matching the long and short positions within each time band. In each
instance, calculating a spread charge equal to the sum of long and
short position multiplied by the spread rate of 1.5%.
d) carrying unmatched positions remaining to another time band where
they can be matched, and matching them till all matching positions
are exhausted, calculating;
i. a carry charge equal to the carried position multiplied by the carry
rate of 0.6% and the number of time-bands by which the position is
carried;
ii. a spread charge equal to the sum of long and short positions; and
iii. matched position multiplied by the spread rate of 1.5%;
e) calculating the outright charge on the remaining positions (which will
either be long position or short position) equal to the sum of remaining
position (in absolute terms) multiplied by the outright charge of 15%;
f) summing the capital charge on account of spread rate, carry rate
and the outright charge as determined above;

7.0 Treatment of Options


A bank must obtain prior approval of the CBN to use any of the approaches
for the measuring price risk for options.

A bank:
a) shall use the simplified approach for the treatment of options if,
i. it has only purchased options in its trading book and it does not
write options; or
ii. it writes option and all written options are perfectly hedged by
perfectly matched long positions in its trading book; and
b) shall use the delta-plus method, where it has open position in written
options;

7.1 Simplified Approach

A bank using the simplified approach shall apply the capital charges outlined
in Table 6. In this approach, the positions for the options and the associated
underlying assets, cash or forward, are not subject to the Standardised
Approach but rather are ‘carved-out’ and subject to separately calculated
capital charges that incorporate both general risk and specific risk. The
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capital charges thus generated are then added to the capital charge for the
relevant category, i.e. interest rate related instruments, equities, foreign
exchange and commodities.

Table 6 Simplified approach: Capital charges


Position Treatment
Long cash and The capital charge will be the market value of
long the underlying security multiplied by the sum of
put specific and general risk capital charges for the
or Short cash and underlying less the amount, the option is in the
long call money (if any) bounded at zero. The charge for
currency option will be 8% and for options in
commodities 15%
Long call or Long The capital charge will be the lesser of:
put a)the market value of the underlying security
multiplied by the sum of specific and general
risk capital charges for the underlying; and
(b) the market value of the option;

7.2 Delta-Plus Approach

A bank that adopts delta-plus approach shall include delta-weighted options


positions within the respective category under the Standardised Approach.
The bank shall report such options as a position equal to the sum of the
market values of the underlying multiplied by the sum of the absolute values
of the deltas. As delta does not cover all risks associated with options
positions, the bank must measure gamma (which measures the rate of
change of delta) and vega (which measures the sensitivity of the value of an
option with respect to a change in volatility) in order to calculate the total
capital charge. These sensitivities must be calculated using an internal model
or a proprietary options pricing model approved by the CBN.

Thus a bank that adopts delta-plus approach shall:


a) incorporate delta-weighted positions of such outstanding contracts into
its respective risk category (interest rate, equity, foreign exchange and
commodity); and

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b) calculate the following market risk capital charge against those option
positions;
i. specific risk and general risk capital charge for delta risk under
respective risk category;
ii. market risk capital charge for gamma risk; and
iii. market risk capital charge for vega risk

Capital Charge for Gamma Risk:

The capital charges for ‘gamma risk’ must be calculated as:


Gamma impact = ½ × gamma × (VU)
Where VU denotes the variation in the price of the underlying option. VU must
be calculated as follows:

a) for interest rate options, if the underlying is a bond, the market value
of the underlying must be multiplied by the risk weights and treated
for assumed change in yield for general risk under Standardised
Approach
b) for options on equities and equity indices, the market value of the
underlying must be multiplied by the market risk capital charge factor
of 8%;
c) for options on foreign exchange and gold, the market value of the
underlying must be multiplied by 8%; and
d) For options on commodities, the market value of the underlying must
be multiplied by 15%.
Each option on the same underlying will have a gamma impact that is either
positive or negative. A bank must sum these individual gamma impacts,
resulting in a net gamma impact for each underlying that is either positive or
negative. Only those gamma impacts that are negative are included in the
capital calculation. The total gamma capital charge is the sum of the
absolute value of the net gamma impacts.

Capital Charge for Vega Risk


To calculate Vega risk, a bank must multiply the Vega for each option by a
25% proportional shift in the option's current volatility. The results must then be
summed across each underlying. The total capital charge for Vega risk is

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calculated as the sum of the absolute value of Vega across each underlying.

8.0 Annexures
8.1 Annexure A - Derivation of Notional Position for Interest Rate Related
Derivatives
The bank shall convert futures and forwards on debt securities, interest rate
forwards and forward rate agreements (FRA, interest rate swaps and foreign
exchange swaps) into notional positions in:
a) The underlying debt securities; or
b) Notional interest rate securities to capture the pure interest rate risk,
arising from future payments and receipts of cash, which are called
zero-specific-risk-free securities; or
c) Both a) and b)

8.1.1 Futures and forwards on debt security


A bank shall treat positions in forward and futures as two notional positions as
follows:

Table 7 Notional position for positions in future and forward on debt security
Instrument type Notional short position in: Notional long position
in:
Long position a zero coupon zero- the underlying debt
(purchased) in specificrisk security with a security;
a forward or maturity equal to the
futures expiry date of the future
or forward; and
Short position the underlying security; a zero coupon
(sold) in a zerospecific-risk
forward or security with a
futures maturity equal to the
expiry date of the
future or forward.

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8.1.2 Interest Rate Forwards and Forward Rate Agreement (FRAs)
Interest rate futures or FRAs must be treated as the two notional positions (one
long, one short) shown in table 8 below:

Table 8 Notional position in interest rate forwards and FRAs


Instrument Notional short position in: Notional long position in:
type
Long position a zero coupon zero- a zero coupon zerospecific-risk
(purchased) specificrisk security with a security with a maturity equal
in an interest maturity equal to the to the expiry date of the
rate future or expiry date of the interest interest rate future or
short position rate future or settlement settlement date of FRA plus the
(sold) in FRA date of FRA; and maturity of the notional
borrowing/deposit.
Short position the underlying security; a zero coupon zerospecific-risk
(sold) in a security with a maturity equal
to the expiry date of the future
or forward.

8.1.3 Interest Rate Swap and Foreign Exchange Swap


A bank shall treat interest rates swap or foreign exchange swap as two
notional positions as specified in table 9 below:

Table 9 Notional positions in interest rate swap and foreign


exchange swap
Instrument type Notional short position in Notional long position
a: in a:
Bank receives fixed Zero-specific-risk security Zero-specific-risk
and pays floating with a coupon equal to security with a
the floating rate and a coupon equal to the
maturity equal to the next fixed rate of the swap
reset date. and a maturity equal
to the maturity of the
swap.

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Bank receives Zero-specific-risk security Zero-specific-risk
floating and with a coupon equal to security with a
pays fixed the fixed rate of the swap coupon equal to the
and a maturity equal to floating rate and a
the maturity of the swap. maturity equal to the
next reset date.

8.2 Annexure B - Derivation of Notional Position on Foreign Currency and Gold


Derivative Instruments

8.2.1 Foreign Exchange Forwards, Futures Contracts


A bank should treat a foreign exchange forward or futures contract as two
notional currency positions:

a) a long notional position in the currency which the bank has


contracted to buy; and
b) a short notional position in the currency which the bank has
contracted to sell.

8.2.2 Foreign Exchange Swaps


A bank shall treat a foreign exchange swap as –
a) a long notional position in the currency which the bank has contracted
to receive interest and principal; and
b) a short notional position in the currency which the bank has contracted
to pay interest and principal.

8.2.3 Gold Forward or Future Contracts


A bank shall treat a forward or futures contract on gold as a notional position
in gold with a value equal to the amount of gold underlying the contract
multiplied by the current spot price for gold, except in the case of a forward
where the bank, may use the net present value of each position, discounted
using prevailing interest rates and valued at prevailing spot rates.

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8.3 Annexure C- Derivation of Notional Position for Commodity or Forward
Contract

A bank shall treat a forward, futures contract on a single commodity, which


settles according to the difference between the price set on trade date and
that prevailing at the maturity date of the contract, as a notional position
equal to the total quantity of the commodity underlying the contract that has
a maturity equal to the expiry date of the contract.

Where a commodity is part of a futures contract or forward, any interest rate


or foreign exchange risk from the other leg of the contract, shall be reported
as part of exposure under interest rate or foreign exchange sections.

8.4 Annexure D –Treatment of Credit Derivative in the Trading Book


A bank shall convert its credit derivatives into notional positions in the relevant
reference assets and use the current market value of the reference assets to
calculate its market risk capital charge for interest rate risk, except in the case
of credit linked notes, where the current market value of the notes shall be
used.

8.4.1 Treatment of the Protection Seller


a) A total return swap creates a long position in reference asset and a
short position in specific-risk-free security with a maturity equal to the
term remaining until the next interest fixing date;
b) A credit default swap creates a long position in reference asset. If
premium or interest payments are due under the swap, these cash
flows must be represented as a long position in a specific-risk-free
security. Where the derivative has an external rating and meets the
condition for a qualifying debt item, the bank may recognise a long
position in the derivative.
c) A single-name credit linked note (CLN) creates long position in:
i. The reference asset specified in the note; and
ii. The note issuer.
Where the CLN has an external rating and meets the requirements for a
qualifying debt item, a single long position in the CLN shall be
recognized.

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Table 10 Summary of Treatment of Credit Derivatives in the
Trading Book
Instrument Risk Long position / Short position /
type category protection seller protection buyer
General risk Long position in a Short position in a
zerospecific-risk security zerospecific-risk
if there are any security if there are
premiums or interest any premiums or
Credit payments to be paid interest payments to
be paid
default Specific risk Long position in the Short position in the
swap reference asset, or long reference asset, or
position in the swap if it short position in the
is a qualifying debt swap if it is
security a qualifying debt
security

General risk Long position in the Short position in the


reference asset, and reference asset, and
Total short position in a zero- long position in a zero-
rate of specificrisk security if specificrisk security if
return there are any there are any
swap premiums or interest premiums or interest
payments to be paid payments to be paid
Specific risk Long position in the Short position in the
reference asset reference asset
Single General risk Long position in the Short position in the
name note issuer note issuer
Credit Specific risk Long position in the Short position in the
linked note issuer and long reference assets, or
notes position in the short position in the
reference assets, or note if it is a qualifying
long position in the debt security
note if it is a qualifying
debt security

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8.4.2 Treatment of the Protection Buyer

For the protection buyer, the positions are determined as the mirror image of
the protection seller, with the exception of a credit linked note.

8.5 Annexure E –Trading book – Policy Statement, Requirements, Management


and Prudent Valuation Practices
A bank shall allocate all its positions to either its trading book or its banking
book. For the avoidance of doubt, all positions excluded from the trading
book shall be deemed to be part of the banking book.

8.5.1 Policy Statement


A bank shall have a trading book policy statement which covers, at a
minimum, the policies and procedures, including the methodologies, by
which the bank –

a) defines its trading book and identifies positions to be included in its


trading book;
b) allocates positions between the banking book and the trading
book;
c) actively manages and values its positions in the trading book;
d) measures its trading book risks; and
e) controls the transfer of positions between the banking book and
the trading book; A bank shall obtain the approval of its Board on
its trading book policy statement. The bank shall review and where
necessary update the policy statement, at least annually. The bank
shall obtain the approval of the Board for all significant changes.

The bank shall, at a minimum, address the following in its trading book policy
statement as part of defining the trading book and its strategy:

a) the activities that the bank considers to be trading and the types of
positions that are to be allocated to the trading book for the purposes
of calculating its regulatory capital requirements;
b) the types of positions that are excluded from the trading book; and
c) the procedures to ensure that the criteria by which positions are
allocated to the trading book are adhered to on a consistent basis,
including details on –

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i. the unit or department within the bank responsible for monitoring
adherence to the trading book policy statement;
ii. how often this monitoring is conducted;
iii. how this monitoring is done; and
iv. How the continuing appropriateness of allocations is confirmed.

8.5.2 Requirements of the Trading Book Positions


A bank must allocate to the trading book, positions in financial instruments
including derivative products and other off-balance sheet instruments, that
are held either with trading intent or to hedge other elements of the trading
book.

A position shall be considered to be held with trading intent if;


a) it is held for short-term resale;
b) it is taken on by a bank with the intention of benefiting in the short term
from actual or expected differences between its buying and selling price,
or from other price or interest rate variations; or
c) it is taken on by a bank to lock in arbitrage profits;
d) there is a clearly documented trading strategy for the position,
instruments or portfolios that has been approved by senior management
(which must include the expected holding horizon); and
e) there are clearly defined policies and procedures for the active
management of the position such that:
i. positions are managed on a trading desk;
ii. position limits are set and monitored for appropriateness;
iii. Dealers have the autonomy to enter into and manage positions
within agreed limits and according to the agreed strategy.
iv. positions are marked-to-market daily and when marked-to-model,
the parameters are assessed on a daily basis;
v. positions are reported to senior management as an integral part of
the bank’s risk management process; and
vi. Positions are actively monitored with reference to market
information sources and assessments are made of the market
liquidity or the ability to hedge positions or the portfolio risk profile
which includes assessments of the quality and availability of market

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inputs to the valuation process, level of market turnover and sizes of
positions traded in the market.

8.5.3 Trading Book Management and Valuation Practices


The Board has the ultimate responsibility for management of market risk and
must ensure that the bank has in place adequate systems to identify,
measure and manage market risk, including identifying responsibilities,
providing adequate separation of duties and avoiding conflicts of interest.

The trading book policy should describe, in detail, the extent of active
management and prudent valuation practices including:

a) the extent to which a position can be marked-to-market daily by


reference to an active and liquid two-way market;
b) for positions which are marked-to-model, the extent to which the bank
can:-
i. identify the material risks of the position;
ii. hedge the material risks of the position; and
iii.derive reliable external estimates for the key assumptions and
parameters used in the model;
c) the extent to which the bank can, and is required to, generate valuations
for the positions which can be validated internally or externally by an
expert in a consistent manner;
d) the extent to which the bank can, and is required to, maintain
documents to support valuations of its trading book positions; and hedge
out or manage risks under severe market conditions;

The bank should also consider how prudent valuation principles will be met in
a stressed scenario.

The trading book policy should also lay down guidelines for transfer of
securities between banking and trading books, including –

a) the extent to which a bank may transfer positions between the


banking book and the trading book and the criteria for such transfers;
b) the procedures to effect such transfers; and

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c) The controls in place to prevent inappropriate transfers of positions
between the banking book and the trading book.

8.5.4 Stress Testing and Scenario Analysis of Trading Book Positions:

A bank must conduct a regular programme of stress testing and scenario


analysis of its trading book positions, both at the trading desk level and on a
bank-wide basis. The results of these tests must be reviewed by senior
management and reflected in the policies and limits set by the bank.

The bank's stress testing programme should be comprehensive in terms of


both risk and coverage, and appropriate to the size and complexity of
trading book positions held.

As part of the stress testing programme, the trading book policy should
specify the following.
a) The frequency of the stress testing of trading book positions (which should
be determined by the nature of the positions);
b) The stress testing should include shocks which reflect the nature of the
portfolio and the time it could take to liquidate the portfolio completely
or hedge the portfolio risk.

8.6 Annexure F – Netting of Matched Positions- Illustrative Example

A bank has a long cash position in 16.39% FGN Jan 2022 bond with a face
value of N10 billion. The bank also entered into a forward contract to sell the
same bond (value date 3 month later) for the face value of N5 billion at the
rate of N110.50 for each face value of N100.
Workings:
1. Net long position of the bond (face value) = N10 billion – N5 billion (sold) =
N 5 billion
2. The forward contract is fully offset.
3. Amount to be received on settlement date of the contract (after 3 months)
= N5 billion x (110.50/100) = N5.525 billion which represents a long position in
a specific-risk-free security due after 3 month.

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New long position in specific-risk-free security = N5.525 billion with 3 month
maturity.

8.7 Illustration on Calculation of Market Risk Capital Charge for Commodity


Risk under Maturity Ladder Approach

Assuming that a bank has the following positions in the same commodity
which are converted at current spot rates into Naira, the total market risk
capital requirement should be calculated as follows:

(All positions in naira ‘000)


Time-band Position Capital calculation
Spread
Up to 1 month 1.50%
More than 1 1.5%
month but not
more than-3
months
More than 3 Long 1000 1.5% (1) 1000 long + 1000 short (matched)
months but Short 1500 Spread charge = 2,000*1.5% = 30
not more than (2) 500 short carried forward to 1-2
6 months years
Carry charge = 500*0.6%*2 = 6.00
More than 6 1.5%
months but
not more
than12 months
More than 1 Long 800 1.5% (2) 500 long + 500 short
year but not (matched)
more 2 years Spread charge = 1000*1.5% =15
(3) 300 long carried forward to
over 3 years
Carry charge = 300*0.6%*2 = 3.60

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More than 1.5%
2 years
but not
more
than-3
years
More than 3 Short 1000 1.5% (3) 300 long + 300 short (matched)
years Spread charge = 600*1.5% = 9
(4) Net position = 700
Outright charge = 700*15% = 105
(5) Total market risk capital
requirement =
168.60

8.8 Illustration on Net Open Position for Foreign Exchange Positions

The net open position (NOP) is the aggregate position of a bank’s currency
risk exposure. An illustration of computation of NOP is as shown below.

A. Particulars

Where aggregate long position and the aggregate short position details are
provided:

Aggregate Long Position (in Aggregate Short Position (in


Naira) Naira)
2,500,000,000 -3,000,000,000

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B. Computing the NOP Under Gross Aggregate Method

Net Open Position


= ABS (Aggregate Long Position) + ABS (Aggregate Short
Position)
= ABS (2,500,000,000) + ABS (-3,000,000,000)
= 2,500,000,000 + 3,000,000,000
= 5,500,000,000

C. Computing the NOP Under Net Aggregate Method

Net Open Position


= ABS[ABS (Aggregate Long Position) - ABS (Aggregate
Short
Position)]
= ABS[ABS (2,500,000,000) - ABS (-3,000,000,000)]
= ABS[2,500,000,000 - 3,000,000,000]
= ABS [-500,000,000]
= 500,000,000

D. Computing the NOP under the Shorthand Method

Net Open Position


= Max[ABS (Aggregate Long Position), ABS (Aggregate
Short
Position)]
= Max[ABS (2,500,000,000), ABS (-3,000,000,000)]
= Max[(2,500,000,000),(3,000,000,000)]
= 3,000,000,000
E. Note

1077
NOP Net Aggregate Method<NOPShorthand Method <NOPGross
Aggregate Method

Under circumstances where the bank does not hold any short positions
then all the three (3) methods shall give the same result for NOP.

8.9 Definition of Terms


• Banking Book: Bank’s on-balance sheet exposure and off-balance sheet
exposure except those falling under the scope of trading book.
• Credit Derivative: A forward contract, swap, option or similar derivative
contract entered into by two parties with the intention of transfer of credit
risk in relation to a reference asset from one party (protection buyer) to
another party (protection seller).
• Credit Event: In relation to a credit derivative, means an event mentioned
in the contract, if it occurs, obliges the protection seller to make payment
to the protection buyer.
• Credit-Linked Note: It means a form of structured note with an
embedded credit default swap which allows the issuer of the note
(protection buyer) to transfer credit risk to the buyer of the note
(protection seller).
• Debt Related Derivative Contracts: It is a forward, future, FRA, swap or
option whose underlying exposure is an interest rate instrument like debt,
note or loan representing the asset of a counterparty.
• Delta: With reference to an option, it represents a ratio of change in price
of the option with change in prices of the underlying instrument. It
measures the sensitivity of the option with reference to change in prices
of its underlying instrument. Deltaequivalent amount represents the fair
value of the underlying instrument (or notional amount) multiplied by
delta.
• Derivative Contract: It means a financial instrument (other than a bond,
loan, share or note) the value of which is determined with reference to
the value of one or more underlying asset, index, financial instrument or
rate as mentioned in the instrument.
• Modified Duration: The modified duration of a bond represents price
sensitivity of the bond for changes in interest rates or the yield curve. It is a
weighted average maturity of an instrument where the present values of
the cash flows are treated as weights.

1078
• Equity Related Derivative Contract: It means a forward contract, swap,
option or similar derivative contract the value of which is determined by
reference to the value of one or more equity or equity index.
• Fair Value: A fair value amount for which the asset can be exchanged
between knowledgeable and willing parties in an arm’s length
transaction.
• Forward Contract: It is a contract between two parties for a purchase or
sale of a specified amount of commodity, currency, financial instrument
or things at a future date at an agreed price.
• Interest Rate Instruments: A financial instrument whose value can be
determined with reference to current or specified interest rate.
• Interest Rate Related Derivative Contract. It is a forward, future, FRA, swap
or option whose underlying exposure is an interest rate instrument like
debt, note, loan or interest rate.
• Marked-to-Market: It means to revalue a transaction, position, exposure
or contract at current market value.
• Marked-to-Model: It represents the valuation of an exposure, position or
transaction using a model whose parameters are estimated, on
continuous basis, based on the market price or market factors.
• Reference Asset: It represents, in relation to a credit derivative, a specific
obligation (in the form of debt instrument, loan or note) of a reference
entity (obligor) based on which the settlement under the contact are
determined.
• Repo-Style Transaction: It represents a transaction carried by two
counterparties whereby one party agrees to sell (buy) securities to (from)
the other party for specified amount of money (at certain rate of interest)
with a commitment to buy back (sell) the securities at an agreed price at
a future date. It represents a transaction for collateralised
borrowing/lending.
• Total Return Swap: It is a credit derivative transaction under which a
protection buyer-
a) agrees to pay the protection seller all cash flows arising from
the reference asset including any appreciation of market value
of the reference asset; and
b) receives, in return, a spread over a specified index together
with any depreciation in the value of the reference asset;

1079
• Trading Book: The trading book represents a bank’s exposure in financial
instruments which are held with the intention of trading or hedging
internal exposures.
• Underlying Asset: It represents, in relation to a credit derivative, an on-
balance sheet or off-balance sheet exposure (in the form of a financial
instrument or loan) of a bank whose credit risk is being transferred under
the credit derivative.

1080
CENTRAL BANK OF NIGERIA

Guidance Notes on the Calculation of Regulatory Capital

REGULATORY CAPITAL

1081
1.0 Introduction

This document lays down the new supervisory regulations for assessing the
capital adequacy levels of banks and banking groups. The regulations have
been revised following the changes that were introduced in international
regulations1 to take account of developments in risk management
methodologies adopted by banks and the new policies and criteria
underpinning supervisory activities.

The rules governing regulatory capital2, the total capital requirement, internal
capital assessment process and risk concentration shall be applied on solo and
consolidated bases.

The following regulation is applicable to all banks licensed by the CBN.

2.0 Composition of Regulatory Capital

This guideline establishes the procedures for calculating regulatory capital


which shall be the sum of

Capital elements:

 Tier 1 Capital3 (a) Paid-­‐up share capital/common stock

(b) Disclosed reserves4


 Tier 2 Capital5 (a) Revaluation reserves

c. General provisions/general loan-­‐loss reserves


d. Hybrid (debt/equity) capital instruments
e. Subordinated debt
Less any

d) From Tier 1:

(i) Goodwill and increase in equity capital resulting from a


securitization;
(ii) Investment in own shares (treasury stock)
(iii) Losses carried forward and losses for the current financial
year
(iv) Intangible assets
e) The following items shall be deducted 50% from Tier 1 and 50% from Tier 2
capital:
1082
(i) Investments in unconsolidated banking and financial
subsidiary companies.
(ii) Investments in the capital of other banks and financial
institutions.
(iii) Significant minority investments in other financial entities.

3.0 Qualifying Criteria for the Assessment of Capital Components

3.1 Tier 1 Capital

This includes only permanent shareholders' equity (issued and fully paid
ordinary shares/common stock and perpetual non-­‐cumulative preference
shares) and disclosed reserves (created or increased by appropriations of
retained earnings or other surpluses).

In the case of consolidated accounts, this also includes minority interests in


the equity of subsidiaries which are not wholly owned. This basic definition of
capital excludes revaluation reserves and cumulative preference shares.

There is no limit on the inclusion of Tier 1 capital for the purpose of calculating
regulatory capital. For this purpose, the equity shares with the following
characteristics are included in Tier 1 capital:

• Issued directly by the bank;


• Clearly and separately identified in the balance sheet;
• Have no maturity (are perpetual);
• Fully paid;
• Cannot be refunded beyond the possibility of the liquidation of bank
or reduction of share capital;
• Do not give to the holder rights to a minimum remuneration nor are
there any clauses that require the compulsory payment of dividends;
• The dividends are paid solely out of distributable profits or retained
earnings distributable;
• Classified as equity instruments in accordance with IFRS.

3.2 Tier 2 Capital6

(b) Revaluation Reserve


i) Fixed Asset Revaluation Reserve: This relates to revaluation of fixed assets
in line with market values reflected on the face of the balance sheet.
1083
Prior approval of the CBN must be obtained by any bank before the
recognition of the revaluation surplus on fixed assets in its books, which
can only be done taking into consideration the following:

 The valuation must be made by qualified professionals and the basis of


the revaluation as well as the identities of the valuers must be stated;

 The difference between the market and historic values of the eligible
fixed assets being revalued shall be discounted by 55%;

 The revaluation of fixed assets is applicable to own premises only; and

 The revaluation of fixed assets (own premises only) is permissible within


a minimum period of seven years after the date of the purchase of
the asset or the last revaluation.

ii) Other Revaluation Reserves: The inclusion of other revaluation reserves


created by the adoption of the International Financial Reporting
Standards (IFRS) as part of the Tier 2 capital shall be subject to the
limitations that will be specified by the CBN from time to time.
(c) General Provisions/General Loan-­‐Loss Reserves
For the purpose of the standardized credit risk measurement approach,
provisions or loan-­‐loss reserves held against future (presently
unidentified), losses are freely available to meet losses which
subsequently materialize and therefore qualify for inclusion in Tier 2
capital. Provisions ascribed to specific or identified deterioration of
particular assets or known liabilities, whether individual or grouped
(collective), are excluded. Furthermore, general provisions/general loan-
­‐loss reserves eligible for inclusion in Tier 2 will be limited to a maximum of
1.25 percentage points of credit risk weighted assets and subject to the
approval of the CBN.

(d) Hybrid (debt/equity) Capital Instruments


These include financial instruments which combine characteristics of
equity and debt capital. Essentially, they should meet the following
requirements:

• they are unsecured, subordinated and fully paid-­‐up;


• they are not redeemable at the initiative of the holder or without the prior
consent of the CBN;

1084
• they are available to participate in losses without the bank being obliged
to cease trading (unlike conventional subordinated debt);
• although the capital instrument may carry an obligation to pay interest
that cannot permanently be reduced or waived (unlike dividends on
ordinary shareholders' equity), it should allow service obligations to be
deferred (as with cumulative preference shares) where the profitability of
the bank would not support payment.
• Hybrid capital instruments that are redeemable must have a maturity of
at least 10 years. The contract must clearly specify that repayment is
subject to authorization by the Central Bank of Nigeria
Cumulative preference shares, having these characteristics, would be
eligible for inclusion in this category.

c) Subordinated Term Debts


Subordinated debts issued by banks shall form part of the Tier 2 capital
provided that the contracts governing their issue expressly envisage that:

• In the case of the liquidation of the issuer, the debt shall be repaid only
after all other creditors not equally subordinated have been satisfied;
• The debt has an original maturity of at least five years; where there is no
set maturity, repayment shall be subject to at least five years’ prior
notice;
• Early repayment of the liabilities may take place only at the initiative of
the issuer and shall be subject to approval of the CBN.
• The contracts shall not contain clauses whereby, in cases other than
those referred to in points a) and c), the debt may become redeemable
prior to maturity.
• During the last five years to maturity, a cumulative discount (or
amortization) factor of 20% per year will be applied to reflect the
diminishing value of these instruments as a continuing source of strength.
Unlike instruments included in hybrid capital above, these instruments are
not normally available to participate in the losses of a bank which
continues trading. For this reason, these instruments will be limited to a
maximum of 50% of Tier 1 Capital.

4.0 Prudential Filters

Due to the adoption of International Financial Reporting Standards (IFRS)


by banks and for the purpose of calculating regulatory capital, the CBN
may from time to time apply prudential filters.
1085
5.0 Frequency of Reporting and Procedures for Calculating Individual
Regulatory Capital

Banks shall continue to report on regulatory capital in accordance with


the CBN’s extant rules.

Annex A: Example of Capital Adequacy Ratio Computation

The table below represents the balance sheet of Bank A with an average gross
income of N120 in the last three years and the Basic Indicator approach is
adopted for operational risk capital charge. In addition, the bank adopted
Standardized approach for Market risk with a capital charge of N25. Assume
that the all loans and advances were rated B and no credit risk mitigation
technique is used, calculate the capital adequacy ratio of Bank

Statement of Financial Position

N N
Cash 1,400 Deposits 21,000

FGN Bonds 5,100 Other Liabilities 1,700


Bende State 1,000 Qualifying debt 3,000
Bonds Capital

Loans Secured by 1,400


Residential Mortgage

Total Shareholder 2,250


Equity
Other loans and
advances

18,000

1086
Property, Plant &
Equipment

300

Total Liabilities +
Shareholder Equity

27,200 27,200

Total Assets
Off-­‐Balance Sheet
Items
Performance Bonds 750

Revolving committed
but undrawn
credit facilities with maturity 1,500
of less than 1
year.

Solution:

1. Convert the off-­‐balance sheet exposures to their credit


equivalents using appropriate credit conversion factors;
S/N Exposures Amount CCF Credit
(N) (%) Equivalent

1 Performance Bonds 750 50 375

1087
2 Revolving committed but 1500 20 300
undrawn credit facilities with
maturity of less than 1
year.
2. Calculate the credit risk weighted assets:
Gross
Net Risk
Exposure
Exposure/ Weight
Exposures CRM RWA
Before
after Category
CRM
CRM
Cash 1,400 0 1,400 0% 0
FGN Bonds 5,100 0 5,100 0% 0
Bende State Bonds 30 1,000 0 1,000 20% 200

Loans Secured by
Residential Mortgage 1,400 0 1,400 100% 1400

Retail Portfolio 0

Other loans and 18,000 18,000


0 100% 18000
advances
Building and Equip
300 0 300 100% 300
Off Balance Sheet
0
Exposures
Performance Bonds
375 375 100% 375
Revolving committed
but undrawn credit
facilities with maturity 300 300 100% 300
of less
than 1 year.
Total Credit Risk 20,575
Weighted Assets
3. Calculate operational risk capital charge:

= Relevant Indicator (gross profit) x α (15%)

30 The 20% risk weight applies to state government bonds that meet the CBN

eligibility criteria for classification as liquid assets.


1088
120 x 15% = N18

4. Calculate the total qualifying capital (i.e. Tier 1 + Tier 2) =


Equity + Qualifying Debt

N (2,250+750) = N3,000

(Note; Tier 2 is limited to 33.3% of Tier 1 Capital) Calculate the capital


adequacy ratio (CAR)

CAR = 𝐓𝐓𝐓𝐓𝐓𝐓𝐓𝐓 𝒂𝒂𝒂𝒂 ! 𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻 𝟐𝟐 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪

x 100
𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪 𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹 𝑾𝑾𝑾𝑾𝑾𝑾𝑾𝑾𝑾𝑾𝑾𝑾𝑾𝑾𝑾𝑾 𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨!𝟏𝟏𝟏𝟏.𝟓𝟓 (𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴 𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓 𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄 𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄!
𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶 𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓 𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄 𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄𝒄)

𝐶𝐶𝐶𝐶𝐶𝐶= !""" x 100


!",!"!!!".! (!"!!")

CAR = 14.13%

1089
CENTRAL BANK OF NIGERIA

Guidance Notes on the Calculation of Capital Requirement for


Market Risk

STANDARDIZED APPROACH

1090
MARKET RISK CAPITAL REQUIREMENT

1.0 Introduction

• Banks and banking groups shall comply on an ongoing basis with capital
requirements for risks generated by operations in markets for financial
instruments, foreign exchange and commodities. The capital requirement,
takes into account both on-­‐ and off-­‐balance positions that are subject to
market risk.
• This regulation identifies and prescribes the treatment of positions and
settlement risk pertaining to interest rate-­‐related instruments and equities in
the trading book and foreign exchange risk and commodity risk throughout
the bank.
• Capital requirements will be calculated using the Standardized Approach.
Under this method, banks are to calculate their total capital requirement
using a building-­‐block approach, by summing up the individual capital
requirements for the risks mentioned above.
• For the purpose of calculating capital requirements for market risks,
positions shall be measured at fair value at the close of each business day.
• In the case of off-­‐balance-­‐sheet transactions without a reference
instrument1, the notional principal amount shall be used, except where one
of the present values or sensitivity methods set out under the treatment of
position risk in the supervisory trading book applies.
• For off-­‐balance-­‐sheet transactions involving options and warrants, one of
the methods set out under the treatment of options shall be apply.
• Foreign exchange transactions shall be converted into naira at the spot
exchange rate at the close of each business day. Unhedged off-­‐balance-
­‐sheet transactions other than unsettled spot transactions may be
converted into naira at the current forward exchange rate for maturities
equal to the residual life of the transaction.

2.0 Position Risk in the Supervisory Trading Book

• Position risk is calculated for the bank’s supervisory trading book, and it
consists of two separate components:
a) General risk refers to the risk of losses, caused by general adverse
movements in the prices of financial instruments such as debt and equity
securities due to adverse movements in market interest rates.
b) Specific risk refers to the risk of losses caused by adverse movements in
the price of financial instruments due to factors related to the individual
issuer’s situation.
• Separate calculations of the position risk and the related capital
requirements shall be made for:
a) Debt securities and other financial instruments whose values depend on
interest rates and creditworthiness, including credit derivatives
1091
b) Equity securities and other financial instruments whose values depend on
the developments in the equity market.
• Banks must have clearly defined policies and procedures for determining
which exposures to include in, and exclude from, the trading book for the
purpose of calculating their regulatory capital. They must also comply with
this regulation and take into account the bank’s risk management
capabilities and practices. Compliance with these policies and procedures
must be fully documented and subject to periodic internal audit.
• Banks that are not able to properly measure and manage the risks
associated with financial instruments which are sensitive to multiple risk
factors shall not conduct business in those instruments.
• Where positions originate with financial instruments that are sensitive to more
than one risk factor, the capital requirements shall be calculated on the
basis of the requirements for the individual risk components separately using
any one of the two approaches below,:
a) Separation into elementary contractual components (securities and
derivatives) that are sensitive to one type of risk only and application of
the capital treatment for the corresponding type of risk;
b) Transformation of a complex instrument into a series of sensitivity positions
to material risk factors and application of the capital treatment for the
corresponding type of risk to those positions. These sensitivity positions
shall be calculated using a standard market measurement model.
• Where a bank holds positions that originate with financial instruments whose
values depend on risk factors not expressly specified in this regulation, the
position risk and the corresponding capital requirement shall be computed
using the rules for the risk factor that are most closely correlated.
• If none of the risk factors mentioned is sufficiently correlated with the risk to
which the price of the security in question relates, a capital requirement of
15% of the value (notional for derivatives and market for other types of
instruments) of the contract shall be applied and netting shall be permitted
only with existence of identical instruments of opposite sign.
• Banks may choose between two different methods for treating convertible
bonds as follows.
i) include convertible bonds among debt securities.
ii) treat convertible bonds as debt securities or equity securities based on
the likelihood of conversion (through the delta equivalent value)2. Where
a bank adopts this method, it shall apply it to all securities of the same
type.
2.1 Position Risk in Respect of Debt Securities

• In calculating position risk for debt securities, banks shall consider the
supervisory trading book positions in respect of:

1092
• Debt securities whose values depend on interest rates or similar risk factors
(e.g., inflation rates) represented by on-­‐balance-­‐sheet assets and
derivative contracts on debt securities;
i) Interest rate derivatives;
ii) Credit derivatives;
iii) Other instruments whose values depend on interest rates or similar risk
factors.
• All derivatives and other off balance sheet transactions in the trading
portfolio for supervisory purposes that depend primarily on interest rate must
be converted according to the methods described under the treatment of
derivatives in underlying positions and are subject to the capital
requirement for both general and specific position risks.
• In order to determine the capital requirement against the specific risk in
securitization and re-­‐securitization positions, banks shall apply the
provisions referred to under securitization.
2.2 General Risk on Debt Securities

Banks may use two alternative methods i.e. maturity or duration method in
calculating general risk on debt securities. However, banks are not allowed
to adopt the duration method without the prior approval of the CBN which
once adopted, must be used continuously unless a further approval is
obtained for a switch.

2.2.1Calculation of the Capital Requirement

A. Maturity Method

The capital requirement for general risk on debt securities shall be


calculated using an interest rate risk measurement system that reflects the
position described in Annex B, sub-­‐section 1 the calculation of the net
position for each issue and the resulting distribution, separately for each
currency, into time-­‐bands. This is given by the sum of the values of the
residual and matched positions, the latter is then weighted using the
method set out in Annex B, sub-­‐section 1.3

In the case of residual currencies the gross positions in each time-­‐band will
be subject to either the risk weightings set out in Annex A1, if positions are
reported using the maturity method, or the assumed change in yield as
shown in Annex A3, if positions are reported using the duration method, with
no further offsets.

B. Duration Method

The procedure to be followed in using the duration method is set out in


Annex B, sub-­‐section 2.

1093
2.2.2 Treatment of Derivatives Contracts

• Only for purposes of general risk, the positions of opposite sign relative to
derivative contracts of the same type can be compensated in advance
when the following conditions are met:
a) The positions have the same nominal value and are denominated in the
same currency and they mature within 7 days of each other.

b) The reference rate for floating-­‐rate positions is identical and the spread
does not differ by more than 0.15 per cent on an annual basis, or the
nominal interest rate for fixed-­‐rate positions does not differ by more than
0.15 per percent on an annual basis.
c) The next interest fixing date (for floating-­‐rate positions) or the residual
maturity (for fixed-­‐rate positions) correspond within the following limits:
i) less than one month corresponds same day limit;
ii) between one month and one year corresponds within seven days
limit;
iii) over one year corresponds within 30 days limit.
• The first measurement method consists of treating the positions by residual
maturity, as a combination of a cash asset and a cash liability of equal
amount.
For example:

i) Off-­‐balance-­‐sheet transactions in which fixed-­‐rate flows are


exchanged for floating-­‐rate flows (e.g., interest rate swaps) correspond
to a combination of a fixed rate asset (liability) and a floating-­‐rate
liability (asset).
Banks shall therefore record a long (short) position corresponding to the
fixed-rate asset (liability) in the time-­‐band for the maturity of the
contract4 and a short (long) position corresponding to a floating-­‐rate
liability (asset) slotted in the time band preceding the next interest fixing
date;

ii) For other off-­‐balance-­‐sheet transactions (e.g. forwards, futures,


forward rate agreements, and swaps) banks shall record a long position
or short in the time band related to the settlement date and a short
position or long in the time band for the residual maturity of the contract.5
• The second method consists of using present value or sensitivity approaches
to calculate positions, which shall be broken down based on maturity or
average duration6. Specifically, banks may use one of the following two
methods:
i) The first method consists of converting the individual payments in respect
of the derivative into their present values. For this purpose, each payment
shall be discounted using zero coupon cash yields. A single net present
1094
value shall be entered into each time-­‐band, as with zero coupon
bonds; these values shall be multiplied by the weights given in Annex B,
Table 1;
ii) An alternative method which may be used only by banks that adopt the
duration method for calculating general risk for debt securities consists of
calculating the sensitivity (duration) of the net present value7 of the
derivative implied by the change in the yield for each maturity
• Each sensitivity (duration) obtained shall be multiplied by the present value
of the derivative and allocated to the corresponding time-­‐band set out in
Annex B, Table 3. The output shall be weighted for the hypothetical change
in yield only.
2.3 Specific Risk on Debt Securities

2.3.1 Calculation of the Capital Requirement

• In general, and by excluding the securitization positions, the capital


requirement for specific risk on debt securities shall be calculated as follows:
the net positions in each security in the supervisory trading book, calculated
in accordance with the rules for netting, shall be allocated to uniform
categories based on the nature of the issuer or obligor, the existence of risk
mitigation instruments, any external or internal credit assessment and
residual maturity:
1) "Positions related to zero weighted issuers" factor (0% weighting),
2) "Positions related to qualified issuers" (weighting factors, as
appropriate, are 20% and 50%);
3) "Positions related to unskilled issuers” (100% weighting),
4) "Positions related to high risk issuers" (risk weight 150%).
• Each of these categories is given a capital requirement (equal to the
product of the above-­‐mentioned weighting factors and 10% and 15% for
national and internationally active banks).
• The capital requirement for specific risk is the sum of the net weighted
positions, without offsetting long and short positions.
• The respective rule set out under securitization section should be applied in
securitization positions and items included in the trading portfolio of
correlation.
• Interest rate derivatives, exchange rates, repurchase agreements and debt
securities deducted from regulatory capital are excluded from the
calculation of the specific risk.
• In the case of derivatives with underlying debt securities, the weight for the
capital requirement relating to specific risk corresponding to the credit
quality of the underlying instrument shall be applied.
• A risk weight of zero shall be applied to debt securities issued or guaranteed
by central governments, central banks, denominated and funded in the
domestic currency.

1095
2.3.2 Calculation of the Capital Requirement for Positions Hedged By Credit
Derivatives

• Banks may use credit derivatives to reduce specific risk. For the purposes of
calculating the specific risk capital requirement, a distinction shall be made
between:
i) Transactions for which a full allowance is recognized;
ii) Transactions for which an 80% allowance is recognized;
iii) Transactions where less that 80% allowance is recognized;
iv) Transactions for which no allowance is recognized.
• Where the hedging derivative contractually provides for a payment in a
fixed amount less than the amount of the hedged asset, this exposure should
be subject to the rules on securitization because it leads to a segmentation
of the risk ("tranched transactions").
• With regard to the credit derivatives based on a basket of debtors such as
"first-to-default", the activity is considered secured within the basket which
corresponds to the lower exposure weighted for specific risk.
• With regard to the credit derivatives based on a basket of debtors' (nth-­‐to-
­‐default) protection against credit risk is recognized only when the (n-­‐1)th
admitted protection has already been satisfied or have been declared in
default (n‐1)activities that are included in the basket.
• Once these conditions are met, the activity is considered secured within the
basket which corresponds to the weighted smaller exposure for specific risk.
Transactions for which a full allowance is recognized

• Full allowance for the hedging transaction will be recognized for regulatory
capital purposes where the values of the long and the short positions always
move in opposite directions and to the same extent.
• This situation occurs in the case of a long cash position hedged by a total
rate of return swap (or vice versa) where there is an exact match between
the reference asset and the hedged position.
• In such cases, no specific risk capital requirements shall apply to both sides
of the position.
Transactions for which an 80% allowance is recognized

• An 80% offset will be recognized when the value of two positions (i.e. long
and short) always moves in the opposite direction but not broadly to the
same extent. This would be the case when a long cash position is hedged by
a credit default swap or a credit linked note (or vice versa) and there is an
exact match in terms of the reference obligation, the maturity of both the
reference obligation and the credit derivative, and the currency of the
underlying exposure.
• In addition, key features of the credit derivative contract (e.g. credit event
definitions, settlement mechanisms) should not cause the price movement

1096
of the credit derivative to materially deviate from the price movements of
the cash position.
• To the extent that the transaction transfers risk (i.e. taking account of
restrictive payout provisions such as fixed payouts and materiality
thresholds), an 80% specific risk offset will be applied to the side of the
transaction with the higher capital charge, while the specific risk
requirement on the other side will be zero.
Transactions for which a partial allowance is recognized

• A partial allowance may be recognized where the values of the two


positions (long and short) usually move in opposite directions, for example:
i) In the case of a long cash position hedged by a total rate of return swap
(or vice versa) where there is a mismatch between the reference asset
and the hedged position but the following conditions are met:
a) The reference asset ranks pari passu with or is junior to the hedged
obligation;
b) The underlying asset and hedged obligation were issued by the same
issuer and contain legally enforceable cross-­‐default or cross-
­‐acceleration clauses;
ii) In the case of a long cash position hedged by a credit derivative (or vice
versa) on the same asset where there is a currency or maturity mismatch
between the underlying asset and the hedged position;
iii) In the case of a long cash position hedged by a credit derivative (or vice
versa) on another underlying asset where the hedged position is included
in the deliverable obligations.
• For each of the above cases, banks shall take account of only the greater
of the specific risk capital requirements relating to the credit derivative and
to the hedged position.
Transactions for which no allowance is recognized

For cases that do not meet the conditions established above, the specific
risk capital requirement shall be calculated for both the credit derivative
and the hedged position.

2.4 Credit Derivatives

2.4.1 General Rules

For the purposes of calculating the capital requirement for position risk, the
notional amount of the credit derivative shall be used unless otherwise
specified.

This amount may be reduced by an amount equal to the reduction in the


market value of the examined credit derivative. With regard to the
calculation of the capital requirement for the specific risk on derivatives

1097
other than total rate of return swaps, banks shall use the residual maturity of
the derivatives contract in place of the residual maturity of the obligation.

2.4.2 Treatment of Positions in Respect of Protection Sales

The positions shall be calculated as follows:

a) For the purpose of general risk, a total rate of return swap gives rise to a long
position in the reference obligation and a short position in a government
security with a maturity equal to the term remaining until the next interest
fixing date8. The same breakdown shall also apply for specific risk purposes;
b) For the purpose of specific risk, a credit default swap (CDS) gives rise to a
long position in the reference entity. Where the derivative has an external
rating and meets the conditions for a qualifying debt item, the bank may
recognize a long position in the derivative. If premium or interest payments
are due under the CDS, these cash flows must be represented as notional
positions in government bonds;

c) For the purposeo f general risk, a single-­‐name Credit Linked Note (CLN)
gives rise to a long position in the CLN itself. For the purpose of specific risk,
the bank shall recognize a long position in respect of the reference entity as
well as another long position in respect of the issuer of the CLN. Where the
CLN has an external rating and meets the requirements for a qualifying debt
item, a single long position in the CLN shall be recognized;
d) For the purpose of general risk, a multiple-­‐name CLN providing proportional
protection gives rise to a long position in the CLN itself. For the purpose of
specific risk, it gives rise to a long position in each reference entity, each in
an amount equal to the proportion of the notional amount of the CLN
represented by each reference entity.
For each reference entity the risk weight for specific risk shall be that in
respect of the obligation with the highest risk weighting among those that
can be selected. Where the CLN has an external rating and meets the
requirements for a qualifying debt item, a single long position in the CLN shall
be recognized;

e) A first-to-default credit derivative gives rise to a long position in an obligation


of each reference entity, each in an amount equal to the notional amount.
In any case, the capital requirement shall not be greater than the amount
of the maximum credit event payment.
An nth-­‐to-­‐default credit derivative gives rise to a long position in an
obligation of each reference entity except for the n-­‐1 with the lowest
specific risk capital requirement, each in an amount equal to the notional
amount.

1098
In any case, the capital requirement cannot be greater than the amount of
the maximum credit event payment.

Where such a derivative has an external rating and satisfies the requirements
for a qualifying debt item, a single long position for the derivative shall be
recognized;

f) A CDS index shall be broken down into as many CDSs as there are index
components, each treated in accordance with the provisions for single-
­‐name CDSs;
g) Single-­‐name credit spread derivatives shall be treated as CDSs. In the case
of options, the amount shall be calculated as the delta equivalent value of
the notional;
h) Derivatives on CDS indices that give rise to a position in the underlying CDS
index; the rules set out in point vi above shall apply to such positions. In the
case of options, the amount shall be calculated as the delta equivalent
value of the notional.
2.4.3 Treatment of Positions in Respect of Protection Purchases

• For protection buyers, positions shall be determined as the mirror image of


the protection seller, with the exception of an issued Credit Linked Note,
which only gives rise to a short position in the reference entity.
• If there are call options on the security, the maturity of the short position shall
be equal to the maturity of the option.
• In the case of nth-­‐to-­‐default credit derivatives, protection buyers may
offset specific risk for all underlying assets excluding the riskiest n-1 for
specific risk purposes.

2.5 Position Risk in Respect of Equity Securities

2.5.1 Calculation of the Capital Requirement

The capital requirement for the position risk relating to equity securities shall
be the sum of the following capital requirements:

• For general risk on equity securities: 10% and 15% of the overall net
position
• For specific risk on equity securities: 10% and 15% of the overall gross
position
For the purpose of calculating equity position risk, account shall be taken of
all positions in the supervisory trading book in respect of shares and similar
instruments, such as, derivatives on equity indices9.

The overall gross position shall be the sum, in absolute value, of all net long
and short positions. The difference, in absolute value, between all net long
positions and all net short positions, calculated market-­‐by-­‐market (i.e.
1099
separately for each country in which the individual securities held by the
banks are traded) shall constitute the overall net position in securities traded
on regulated markets.

In order to compute the overall gross and net positions, stock index
derivatives10 may be treated as separate securities or broken down into as
many positions as there are equity securities that contribute to the
calculation of the index. In this case, the individual positions resulting from the
breakdown of the index may be offset against opposite positions in the same
equity securities relating to other transactions.

If the matching of the positions is part of a deliberate arbitrage strategy and


the positions are subject to separate control, a capital requirement of 2% of
both the offset positions to cover divergence and execution risk shall be
required.

Offsetting shall be permitted even where the set of positions in equity


securities that are offset does not fully reflect the composition of the index
under the contract, provided that the total value of these positions
represents at least 90% of the market value of the index.

The portion of stock-­‐index derivatives that is not offset shall be treated as a


long or short position.

2.5.2 Derivative Contracts on Well-diversified Stock Indices traded on a


Regulated Market

Banks that do not break down derivative contracts on well-­‐diversified stock


indices traded on a regulated market may decide not to apply a specific
risk capital requirement for such derivatives, provided that the following
conditions are met:

• The index shall reflect the stock market generally (sectorial indices are
therefore excluded) and regard a regulated market with at least 200
listed equities;
• The index shall be based on a basket composed of at least 30 equities;
• None of the equities that make up the basket shall have a weight of
more than10% in the calculation of the value of the index. This limit may
be increased to 20% if the top 5 equities in the basket do not account for
more than 60% of the entire basket.
In addition to the general risk capital requirement, banks shall apply a
capital requirement of 2% to the net long or short positions in the contracts in
question to cover execution risk.

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3.0 Settlement Risk in the Supervisory Trading Book

• Transactions in debt securities, equity securities, derivatives, currencies and


commodities that remain unsettled after the maturity date expose banks to
the risk of loss arising from the counterparty’s failure to settle.
• The provisions of this Section require the application of capital requirements,
calculated in accordance with the methods set out in the following sub-
­‐sections, for risks in relation to all unsettled transactions in financial
instruments (including derivatives), currencies and commodities.
• Where the transactions are settled on a "Delivery versus Payment" (DVP)
basis11, the loss is the difference between the agreed settlement price and
the fair value of the financial instruments, the currencies or commodities to
be received (delivered);
• Transactions settled on a non-DVP basis where cash is paid before the
underlying is delivered, or the underlying is delivered before cash is paid
(also called "free delivery"), the loss is the fair value of the financial
instruments, currencies or commodities transferred to the counterparty for
which payment is not received, or the cash paid without delivery of the
underlying.
These rules shall not apply to repurchase and reverse-­‐repurchase
agreements or securities or commodities lending or borrowing transactions.
In the event of system-­‐ wide failure of a settlement or clearing system, the
CBN may temporarily waive, in part or in full, the application of capital
requirements to unsettled transactions until the situation is rectified. In such
circumstances, the failure of a counterparty to settle a trade shall not be
deemed a default for the purposes of credit risk.

3.1 Capital requirements for DVP transactions

The capital requirement shall be calculated by multiplying the difference


between the agreed settlement price and the fair value of the financial
instruments, currencies or commodities to be received (delivered) -­‐ by the
following percentages, broken down by time-band:

Number of business days Risk weight


after the settlement date (%)
5 to 15 10
16 to 30 50
31 to 45 75
46 or more 100

3.2 Capital requirements for non-­‐DVP transactions

• Banks that pay cash for or deliver financial instruments, currencies or


commodities and do not receive the corresponding deliverable or payment
1101
due in the course of the same day or, for cross-­‐border transactions, by the
next working day, shall recognize the transferred asset as a receivable from
the counterparty and apply the same calculation method for the capital
requirement used for exposures not included in the supervisory trading book.
• Banks may apply the following risk weights to the exposures in respect of
unsettled transactions:
a) The risk weights used in the standardized approach where they have
no other exposures to the counterparty in the banking book; or
b) A 100% risk weight.
• Regardless of the method used, where the exposure amounts in respect of
unsettled DVP transactions are not material, banks may apply a 100% risk
weight.
• Banks that made payment or delivery but yet to receive the deliverable or
payment from the counterparty by the fourth business day after the agreed
delivery date12 must deduct from its regulatory capital, both the amount
transferred and any positive difference in its favour between the fair value of
the underlying receivable and the cash transferred or between the cash
receivable and the fair value of the transferred deliverable.
4.0 Foreign Exchange Risk

Banks shall comply with a capital requirement of 10% and 15% of their net open
position in foreign currency and gold. The net open position will be determined
in accordance with the provisions of in the foreign exchange manual issued by
the CBN.

5.0 Commodities Risk

• Banks shall hold a specific capital requirement against the risk of losses
on positions in commodities including precious metals but excluding
gold. The calculation of the capital requirement on commodity positions
shall cover all on-and off-balance sheet assets and liabilities in
commodities. Commodity positions held solely for the purposes of stock
financing may be excluded.
• Bank may use the simplified approach or the maturity ladder approach
method to calculate the capital requirement.
5.1 Simplified Approach

• Banks that use the simplified approach shall hold a capital requirement
for each commodity calculated as the sum of the following elements:
i) 15% capital charge on the net position in each commodity (long or short)
converted at current spot rates.
ii) 3% additional capital charge of the bank’s gross positions, long plus
short, in each commodity converted at current spot price.
• The total capital requirement for commodities risk shall be calculated as
the sum of the capital requirements calculated for each commodity.
1102
5.2 Maturity Ladder Approach

• Banks that opt to use the maturity ladder approach to calculate their
capital requirements shall notify the CBN. The method selected by banks
shall be applied on an ongoing basis.
• The bank shall use a separate maturity ladder13 for each commodity.
Positions held in the same commodity shall be assigned to the
appropriate maturity bands.
Stocks shall be assigned to the first maturity band.

• Positions in the same commodity may be offset and assigned to the


appropriate maturity bands on a net basis for positions in contracts
maturing on the samedate and for positions in contracts maturing
within 10 days of each other if the contracts are traded on markets
which have daily delivery dates.
• The bank's capital requirement for each commodity shall be calculated
on the basis of the relevant maturity ladder as the sum of the following14:
i. The matched position in the same maturity band for each band
multiplied by 1.50% and by the spot price of the commodity;
ii. The unmatched position in the same maturity band multiplied by
0.6 % (carry rate), the number of maturity bands into which it is
carried forward15, and the spot price for the commodity;
iii. The residual unmatched position, multiplied by 15 % (outright rate)
and by the spot price for the commodity.
• The bank's overall capital requirement for commodities risk shall be the
sum of the capital requirements calculated for each commodity as
above.
6.0 Treatment of Options

• For the purpose of calculating capital requirements for market risks,


special treatment shall be applied to options. Options are derivative
products whose price risk is difficult to measure in view of the potential for
errors in applying linear instruments to them.
• Banks may use one of the following alternative methods in the treatment
of options:
i) The simplified approach;
ii) The delta-­‐plus method;
ii) The scenario approach.
6.1 Simplified Approach

• Banks that use a limited range of purchased options may adopt the
simplified approach. Under this approach, positions in options and the
associated underlying, both spot and forward, shall be subject to
separately calculated capital requirements that incorporate both
general risk and specific risk.
1103
• The capital requirement calculated under this approach is as follows:
i) For long positions in the underlying (cash and forward) associated
with purchased put options or short positions in the underlying (cash
and forward) associated with purchased call options, the capital
requirement shall be: the market value of the underlying security
multiplied by the sum of specific and general market risk charges for
the instrument, less any positive intrinsic value of the option;
ii) For purchased call options or purchased put options, the capital
requirement shall be the lesser of:
a) The market value of the underlying multiplied by the sum of the
specific and general risk weights for the underlying;
b) The market value of the option16.
6.2 Delta-Plus Method

• The delta-­‐plus method uses the sensitivity parameters associated with


options. Banks that adopt this method shall recognize options as positions
equal to the market value of the underlying multiplied by the delta (the
delta-­‐weighted position) in measuring position risk in the supervisory
trading book, foreign exchange risk and commodities risk.
• However, since delta does not sufficiently cover the risks associatedwith
options positions, banks shall also calculate capital requirements for
gamma (the rate ofchange of delta) and vega (the sensitivity of the
value of an option to a change in price volatility) in order to calculate
the total capital requirement.
• These sensitivities shall be calculated in accordance with a standard
market model or with the bank’s proprietary model, previously endorsed
by the CBN.
• The capital requirements for specific risk shall be calculated separately
by multiplying the delta equivalent value of each option by the
appropriate risk weights.
6.2.1 Calculation of the Capital Requirement for General Delta Risk

• Delta-­‐weighted positions for options with debt securities as the


underlying shall be incorporated in the calculation of the capital
requirement in aordance with one of the procedures reflected in the
sub-­‐section on position risk on debt securities after slotting the positions
into the time-­‐bands set out in Annex B.
• The capital requirement for options with equities as the underlying shall
be calculated on the basis of the delta-­‐weighted positions in
accordance with the provisions reflected in the sub-­‐section on position
risk on equity securities. The capital requirement for delta-­‐weighted
positions in respect of options on foreign currency shall be calculated on
the basis of the method specified in the section on foreign exchange risk
while that for delta-­‐weighted positions in respect of options on

1104
commodities shall be calculated in accordance with any of the
methods set out in the section on commodity risk
• For other derivatives, banks shall adopt a two-­‐legged approach, with
one entry at the time the underlying contract takes effect and another
at the time the underlying contract matures17. Banks shall treat floating-
­‐rate instruments with caps or floors as a combination of floating rate
securities and a series of European-style options18.
6.2.2 Calculation of the Capital Requirements for General Gamma and Vega

Risk

• Banks shall calculate the gamma and vega for each option position
(including hedged positions) separately.
• For the purpose of calculating the capital requirement for gamma, a
“gamma impact” shall be calculated for each option on the same
underlying using a Taylor series expansion: gamma impact = 1/2*
gamma * VU2 where VU is the variation of the underlying19and
calculated as follows:
i) For interest-­‐rate options if the underlying is a bond, the market value of
the underlying shall be multiplied by the risk weights set out in Annex B,
Table 1. An equivalent calculation shall be carried out where the
underlying is an interest rate, based on the assumed changes in the
corresponding yield in Annex B, Table 1;
ii) For options on equities and equity indices and for foreign-­‐exchange
and gold options, the market value of the underlying shall be multiplied
by 0.10 and 0.15 as the case may be;
iii) For options on commodities, the market value of the underlying shall be
multiplied by 0.1520;
iv) In the case of financial instruments sensitive to more than one risk
factor21, in calculating the gamma impact for each risk factor, the
market value of the underlying shall be multiplied by the corresponding
coefficient referred to in the previous points.
v) However, for positions in the same underlying for general gamma and
vega risks the following shall apply:
• for interest rates, each time-band as set out in Annex B table 3
• for equities and stock indices, each national market;
• for foreign currencies and gold, each currency pair and gold;

• for commodities, each individual commodity


• The individual gamma impacts for each option on the same underlying
shall be summed to obtain a net positive or negative gamma impact
for each class of the underlying.
• The total gamma capital requirement shall be the sum of the absolute
value of the net negative gamma impacts.
1105
• Banks shall calculate the capital requirements for volatility risk by
multiplying the sum of the vegas for all options on the same underlying by
a proportional shift in volatility of ± 25%. The total capital requirement for
vega risk shall be the sum of the absolute value of the individual capital
requirements for each underlying.
6.3 Scenario Approach

• The scenario approach uses simulation techniques to calculate variations


in the value of an option’s portfolio and the associated hedging positions
as a result of hypothetical changes in the level and volatility of the prices
of the underlyings.
• Under this approach, the capital requirement for general risk is
determined by the scenario (i.e. the combination of price and volatility
changes) that produces the greatest loss.
• Banks that intend to adopt the scenario approach for options shall follow
the procedures set out in the guidelines for recognizing internal models
for calculating capital requirements for market risk.
6.3.1 Calculating the Capital Requirements

• For the purpose of calculating the capital requirement for general risk,
banks shall construct a series of matrices in which they record changes in
the value of the option portfolio for simultaneous changes in the option’s
underlying rate or price and in the volatility of that rate or price. A
different matrix shall be constructed for each individual underlying.
• The options and related hedging positions shall be evaluated over a
specified range above and below the current value of the underlying.
• The range for interest rates shall be consistent with the assumed changes
in yield set out in Annex B, Table 3. Other ranges are ± 10%/15% for
equities, ± 10%/15% for foreign exchange, and ± 15% for commodities. In
the case of financial instruments sensitive to more than one risk factor,
the intervals shall be those associated with the material risk factors.
• For all risk categories, at least seven observations (including the current
observation) shall be used to divide the range into equally spaced
intervals.
• For the second dimension of the matrix – regarding the change in the
volatility of the underlying rate or price, a shift of ±25% shall be adopted.
The CBN may require individual banks to use different changes in
volatility.
• After calculating the matrix, each cell contains the net profit or loss of the
option and the underlying hedged instrument. The capital requirement
shall then be calculated as the largest loss contained in the matrix.
• The capital requirements for specific risk shall be calculated separately
by multiplying the delta equivalent value of each option by the
appropriate risk weights

1106
• Banks with significant options business for which no capital requirements
have been established shall monitor the other risks associated with such
operations.
Specifically, these include ‘rho’22, which is the rate of change in the value
of the option with respect to the interest rate, and theta, which is the rate
of change inthe value of the option with respect to time.

Definition of Terms

• Backtesting shall mean tests that compare changes in the value of the
portfolio with risk measures generated by the model.
• Banking book shall mean all positions not booked in the supervisory
trading book;
• Borrower shall mean an individual obligor or group of connected
obligors;23
• Default risk shall mean the risk of non-­‐performance by the issuer;

• Delivery versus payment (DVP) shall mean the settlement of transactions


where the counterparties simultaneously exchange performance
(delivery of cash in exchange for financial assets or vice-­‐versa);
• Delta shall mean the ratio of the expected change in an option price
and a small change in the price of the financial instrument underlying the
option. Delta approximates the probability that the option will be
exercised and is calculated as the first derivative of the fair value of the
option with respect to that of the underlying instrument;
• Delta-equivalent value shall mean the fair value of the underlying
financial assets (or, where none, the notional principal) multiplied by the
delta;
• Duration shall mean the indicator of the sensitivity of the price of a debt
instrument to small parallel shifts in the yield curve, measured as the
average maturity of all the cash flows in respect of principal and interest
generated by the instrument, weighted by the present value of the cash
flows;
• Effective net change in the portfolio shall mean the difference between
the effective revaluations of the portfolio, where the effective revaluation
is determined by subtracting commissions, the results of any intraday
trading and accrued interest from the operating result;
• Event risk shall mean the risk of rapid movements in prices that are
greater than those in the general market, due, for example, to a change
in rating grade or announcements of mergers/acquisitions;
• Foreign currency assets and liabilities shall mean all on-­‐ and off-
­‐balance sheet assets and liabilities in respect of each currency,
including transactions in naira indexed to the exchange rates of foreign
1107
currencies. Transactions in gold shall be treated as foreign currency
transactions;
• Gamma shall mean the rate of change of delta;
• Gross foreign currency short (or debtor) position shall mean the foreign
currency liabilities, foreign currencies to be delivered in respect of
unsettled transactions (cash or forward) and other off-­‐balance-­‐sheet
transactions giving rise to an obligation or right to sell foreign currency
assets;
• Gross general equity position shall mean the absolute value of the sum of
all net long and short equity positions;
• Gross long (or creditor) foreign currency position shall mean the foreign
currency assets, foreign currencies to be received in respect of unsettled
transactions (cash or forward) and other off-­‐balance-­‐sheet
transactions giving rise to an obligation or right to purchase foreign
currency assets;
• Gross long (or creditor) position shall mean the securities holdings,
securities to be received in respect of unsettled transactions (cash or
forward) and other off-­‐balance-­‐sheet transactions giving rise to an
obligation or right to purchase specified securities, foreign currencies,
commodities, indices, interest rates or exchange rates;
• Gross short (or debtor) position shall mean the technical overdrafts,
securities to be delivered in respect of unsettled transactions (cash or
forward) and other off-­‐balance-­‐sheet transactions giving rise to an
obligation or right to sell specified securities, indices or interest rates;
• Hypothetical change in the portfolio shall mean the hypothetical
revaluation difference of the portfolio, where the hypothetical
revaluation of the portfolio onday t shall refer to the value obtained by
multiplying the quantities presented in the portfolio on day t-­‐1 by the
prices on day t;
• Idiosyncratic risk shall mean the risk of price changes due to daily trading
activity;
• Incremental Risk Charge (IRC) shall mean the measure of the maximum
potential loss that would result from a change in price resulting from the
risk of default or from a change in the rating class of the issuer;
• Matched position shall mean the lesser of the two amounts in respect of
a gross debtor position and a gross creditor position;
• Multilateral trading facility (mtf), a trading system that facilitates the
exchange of financial instruments between multiple parties. Multilateral
trading facilities allow eligible contract participants to gather and transfer
a variety of securities, especially instruments that may not have an official
market. These facilities are often electronic systems controlled by
approved market operators or larger investment banks. Traders will
usually submit orders electronically, where a matching software engine is
used to pair buyers with sellers.
1108
• Net foreign currency position shall mean the difference between the
gross long position and the gross short position in each currency;
• Net general equity position shall mean the difference between the sum
of net long positions and the sum of net short positions in individual
equities in the portfolio;
• Net long or short position in a security shall mean the difference between
the gross on-­‐ and off-­‐balance-­‐sheet creditor and debtor positions in
respect of the same issue of debt securities. For this purpose, banks shall
not take account of futures and other off-­‐balance-­‐sheet transactions
that envisage the option upon maturity of delivering securities from
different issues as well as derivatives contracts on interest rates and
indices. With regard to credit derivatives, netting shall be permitted in the
following cases: a) credit derivatives with the same terms and conditions
(maturity, reference assets, etc.); b) long cash positions hedged by total
rate of return (TROR) contracts (or vice versa), provided that there is an
exact match between the reference assets and the hedged assets and
there is no maturity mismatching. For equity securities, netting shall
involve the same type of securities issued by the same issuer; for
derivatives on equity indices, netting shall be permitted provided that
they refer to the same index and have the same maturity;
• Notional principal of off-­‐balance-­‐sheet transactions shall mean the
contractually defined nominal amount of the transactions;
• Off-­‐balance-­‐sheet transactions shall mean derivatives contracts and:
• Unsettled cash or forward contracts for the sale of securities,
currencies and commodities;
• Irrevocable commitments to purchase arising in respect of
participation in an underwriting syndicate for the placement of
securities;

• Regulated market shall mean a multilateral system administered and/or


operated by the market manager, which brings together or facilitates the
bringing together of multiple third-­‐party buying and selling interests in
financial instruments -­‐ in the system and in accordance with its
nondiscretionary rules -­‐ in a way that results in a contract, in respect of
the financial instruments admitted to trading under its rules and/or
systems, and which is authorized and functions regularly;
• Residual position shall mean the residual amount from netting, equal to
the difference between a long position and short position;
• Stressed VaR (SVAR), measure the maximum potential loss that would
result from a change in price with a certain probability over a certain
time horizon obtained by considering the composition of the current
portfolio and applying market inputs collected over an historical period
characterized by adverse conditions (stress).

1109
• Value at risk (VaR) shall mean the maximum potential loss that would
result from a price change with a given probability over a specified time
horizon.
• Vega shall mean the sensitivity of the value of an option with respect to a
change in the implicit volatility of the price;
• Supervisory trading book shall mean positions held intentionally for short-­‐
term resale and/or with the intent of benefiting in the short term from
differences between the purchase and sale prices, or the changes in the
price or the interest rate. Positions shall mean proprietary positions and
positions arising from client servicing or market making.

Annex A: Requirements for the Supervisory Trading Book

Part A - Trading Intent

Trading intent shall be established through compliance with the following


requirements:

a) There must be a clearly documented trading strategy for the


position/instrument or portfolios, approved by the board and management,
which shall include the expected holding horizon;
b) There must be clearly defined policies and procedures for the active
management of the position, which shall include the following:
i) Positions entered into on a trading desk;
ii) Position limits are set and monitored for appropriateness;
iii) Dealers have the autonomy to enter into/manage the position within
agreed limits and according to the approved strategy;
iv) Positions are reported to the board and management as an integral part
of the bank's risk management process;
v) Positions are actively monitored with reference to market information
sources and an assessment is made of the marketability or hedgeability
of the position or its component risks, including the assessment of the
quality and availability of market inputs to the valuation process, level of
market turnover and sizes of positions traded in the market;
c) There must be clearly defined policies and procedures to monitor the
position against the bank's trading strategy including the monitoring of
turnover and stale positions in the bank's supervisory trading book;
At a minimum, these policies and procedures shall establish:

• The positions the bank considers to be trading and as constituting part of the
supervisory trading book for capital requirement purposes;
• The extent to which a position can be marked to market daily by reference
to an active, liquid two-­‐way market;
1110
• For positions that are marked to model, the extent to which the bank can:
i) Identify all material risks of the position;
ii) Hedge all material risks of the position with instruments for which an
active, liquid two-­‐way market exists;
iii) Derive reliable estimates for the key assumptions and parameters used in
the model;
iv) Generate valuations for the position that can be validated externally in a
consistent manner;
v) Actively risk manage the position within its trading operations;
vi) Transfer risk or positions between the banking and supervisory trading
books.
Compliance with these policies and procedures shall be fully documented and
subject to periodic internal audit.

Part B – Systems and Controls for the Prudent Valuation of Positions in the
Supervisory Trading Book

Banks shall establish and maintain systems and controls sufficient to provide
prudent and reliable valuation estimates.

B.1 Systems and Controls

Systems and controls shall include at least the following elements:

a) Clearly defined responsibilities of the various areas involved in the


determination of the valuation, sources of market information and review
of their appropriateness, frequency of independent valuation, timing of
closing prices, procedures for adjusting valuations, month end and ad
hoc verification procedures;
b) Reporting lines for the unit accountable for the valuation process must be
clear and independent of the front office.
c) Information flows (reporting) clear and independent (i.e. independent
from front office) for the department accountable for the valuation
process.
The reporting line shall ultimately be to the Board.

B.2 Prudent Valuation Methods

• Marking to market is the at-­‐least-­‐daily valuation of positions at readily


available close out prices that are sourced independently. Examples include
exchange prices, screen prices or quotes from several independent
reputable brokers.
• When marking to market, the more prudent side of bid/offer shall be used
unless the bank is a significant market maker in the particular type of
financial instrument or commodity in question and it can close out at mid-
­‐market.
1111
• Where marking to market is not possible, banks shall mark to model their
positions/portfolios before applying market risk capital treatment. Marking to
model is defined as any valuation which has to be (i) benchmarked, (ii)
extrapolated or (iii) otherwise calculated from a market input.
• The following requirements shall be complied with when marking to model:
a) The board and management shall be aware of the elements of the
trading book which are subject to mark to model and shall understand
the materiality of the uncertainty this creates in the reporting of the
risk/performance of the business;
b) Market inputs shall be sourced, where possible, in line with market prices,
and the appropriateness of the market inputs of the particular position
being valued and the parameters of the model shall be assessed
frequently;
c) Where available, valuation methodologies which are accepted market
practice for particular financial instruments or commodities shall be used;
d) Where the model is developed by the bank itself, it shall be based on
appropriate assumptions that have been assessed and challenged by
suitably qualified parties independent of the model's development
process. In particular, the model shall be developed or approved
independently of the front office and shall be independently tested,
including validation of the mathematics, assumptions and software
implementation;
e) There shall be formal change control procedures in place and a secure
copy of the model shall be held and periodically used to check
valuations;
f) The persons responsible for risk management shall be aware of the
weaknesses of the models used and how best to reflect those in the
valuation output;
g) The model shall be subject to periodic review to determine the accuracy
of its performance (e.g. assessing the continued appropriateness of
assumptions, analysis of profit and loss versus risk factors, comparison of
actual close out values to model outputs).
• In addition to daily marking to market or marking to model, independent
price verification shall be performed. This is the process by which market
prices or model inputs are regularly verified for accuracy and
independence. While daily marking to market may be performed by
dealers, verification of market prices and model inputs should be performed
by a unit independent of the dealing room, at least monthly (or, depending
on the nature of the market/ trading activity, more frequently).
• Where independent pricing sources are not available or pricing sources are
too subjective, prudent measures such as valuation adjustments may be
appropriate.

1112
B.3 Supervisory Value Adjustments

Banks shall establish and maintain procedures for considering supervisory


value adjustments.

B.3.1 General Rules

Banks shall consider the advisability of applying value adjustments in respect


of the following factors: unearned credit spreads, close-­‐out costs, early
termination of positions, investing and funding costs, future administrative
costs and, where appropriate, model risk.

B.3.2 Rules for less liquid positions

• Less liquid positions could arise from both market events and bank-­‐related
situations, for example concentrated positions and/or stale positions.
• Banks shall consider the need for making value adjustments for less liquid
positions and review their continued suitability on an ongoing basis;
• Banks shall consider several factors when determining whether a value
adjustment is necessary for less liquid positions. These factors include the
amount of time it would take to hedge the position/risks within the position,
the volatility and average of bid/offer spreads, the availability of market
quotes and the volatility and average of trading volumes, market
concentrations, the aging of positions, the extent to which valuation relies
on marking to model, and the impact of other model risks.
• When marking to model or, in the case of the valuation of units or shares in
collective investment schemes using third party valuations, banks shall
consider whether to apply a supervisory valuation adjustment.

Annex B: Instructions for Calculating General Risk for Positions In Debt


Securities

1. Maturity method

The procedure for calculating capital requirements against the position risk for
debt securities is composed of the following ten steps.

Step I: Calculation of the net position in each issue

Banks could have the following on-­‐balance-­‐sheet or off-­‐balance-­‐sheet


positions in respect of each issue:

I.1 On-­‐balance-­‐sheet positions

a) Long positions
b) Short positions
I.2 Off-­‐balance-­‐sheet positions
1113
I.2.1 Derivatives with underlying security:

a) Long positions
b) Short positions
I.2.2 Derivatives without underlying security:

a) Long positions
b) Short positions
I.2.3 Other off-­‐balance-­‐sheet transactions:

a) Long positions
b) Short positions
I.3 Total supervisory trading book

a) Long positions
b) Short positions

In order to calculate the net position in each issue, the following criteria shall be
adopted:

i) First, positions in the same category of transactions with the opposite sign
shall be offset;
ii) Where, after offsetting pursuant to point a), category 2) (off-­‐balance-
­‐sheet positions) contains positions with the opposite sign, these shall be
offset and the residual unmatched amount allocated to the type with
the largest absolute value;
iii) Where, after offsetting pursuant to point b), category 1) (on-­‐balance-
­‐sheet positions) and category 2) (off-­‐balance-­‐sheet positions)
contain positions with the opposite sign, these shall be offset and the
residual unmatched amount allocated to the type with the highest
absolute value.

Step II: Assignment of net positions in each issue to the appropriate maturity
bands and weighting the positions

II.1 On the basis of the residual maturity, each net position24 shall be
assigned to one of the maturity bands specified below.

There are thirteen maturity bands for debt securities with a coupon of 3%
or more and fifteen maturity bands for debt securities with a coupon of
less than 3%.

II.2 Within each maturity band, the net long positions and net short positions
shall be summed to obtain a net long position and net short position for

1114
the maturity band.The long and short positions of each maturity band
shall be multiplied by the appropriate risk weight.

Table 1

Maturity bands Risk


weights

Zones Coupon of 3% or Coupon of less


more than 3%
up to 1 month up to 1 month 0%
Zone over 1 month over 1 month 0.20%
1 to 3 months to 3 months
over 3 months over 3 months 0.40%
to 6 months to 6 months 0.70%
over 6 months over 6 months
to 1 year to 1 year

over 1 year to over 1 year 1.25%


Zone 2 years to 1.9 years 1.75%
2 over 2 years to over 1.9 year
3 years to 2.8 years 2.25%
over 3 years to over 2,8 years
4 years to 3.6 years
over 4 years to over 3.6 years 2.75%
5 years to 4.3 years
over 5 years to over 4.3 years 3.25%
Zone 7 years to 5.7 years
3 over 7 years to over 5.7 years
10 years to 7.3 years 3.75%
over 10 years to over 7.3 years
15 years to 9.3 years 4.50%
over 15 years to over 9.3 years
20 years to 10.6 years
5.25%
over 20 years over 10.6 years
to 12 years
over 12 years 6.00%
to 20 years
over 20 years 8.00%

12.50%

1115
• The weighted long position shall be offset against the weighted short
position in each maturity band.
• The smallest weighted long or short position shall be the matched
weighted position for the maturity band.
• The difference between the two positions shall be the unmatched
weighted long (short) position for the maturity band.

Step IV: Calculation of the capital requirement for matched positions within a
maturity band

• The first capital requirement is calculated by multiplying the sum of the


matched weighted positions for each band by a vertical disallowance
factor of 10%25.

Step V: Offsetting within a zone

• For each zone the unmatched weighted positions with the same sign in the
maturity bands in the zone shall be summed in order to calculate the
overall weighted long position and the overall weighted short position for
each zone.
• The smaller of the two shall be the matched weighted position for the zone.
• The difference between the two shall be the unmatched long (short)
position for the zone.

Step VI: Calculation of the capital requirement for matched positions within a
zone

• The second capital requirement shall be calculated by multiplying the


matched weighted positions for each zone by the disallowance factors
specified in Table 2 of this Annex and then summing the three amounts
obtained.

Step VII: Offsetting between zones

• The unmatched weighted positions in the three zones shall be offset by


matching the position in zone 1 with that in zone 2 and matching the
resulting position with that in zone 3.

Specifically the comparison of zone 1 and 2 can generate two possible


outcomes:
1116
i) The unmatched weighted positions of zones 1 and 2 have the opposite
sign;
ii) The unmatched weighted positions of zones 1 and 2 have the same sign.
VII.1 In the first case, the unmatched weighted positions of zone 1 and 2 shall
be offset.

The smaller of the unmatched weighted positions shall be the matched


weighted position between zone 1 and zone 2.

The difference between the unmatched weighted positions of zone 1 and zone
2 shall be assigned to either zone 1 or zone 2 depending on which has the
unmatched weighted position with the largest absolute value.

Where this latter difference and the position of zone 3:

i) Have the same sign, their sum shall be the "final unmatched weighted
position";
ii) Have the opposite sign, the smaller of those values shall be the
matched weighted position between zone 1 and zone 3 or the
matched weighted position between zone 2 and zone 3 depending
on whether the unmatched weighted position between zone 1 and
zone 2 was assigned to zone 1 or zone 2, respectively. The difference
between the two positions shall be the final unmatched weighted
position.

VII.2 In the second case, two further cases shall be distinguished:

• Where the unmatched weighted position of zone 3 has the same sign, the
sum of the unmatched weighted positions shall be the final unmatched
weighted position;
• Where the unmatched weighted position of zone 3 has the opposite sign of
that of zones 1 and 2, the unmatched weighted positions of zone 2 and 3
shall be offset.
• The smaller unmatched position shall be the matched weighted position
between zones 2 and 3.
• The difference between the two positions, representing the unmatched
weighted position between zones 2 and 3, shall be assigned to the zone with
the unmatched weighted position with the largest absolute value. Where
the latter position:
i) Is assigned to zone 3 and therefore has the opposite sign of that for zone
1, the smaller of these amounts shall be the matched weighted position
between zones 1 and 3. The difference between the two positions shall
be the final unmatched weighted position;
ii) Is assigned to zone 2 and therefore has the same sign as zone 1, the sum
of the two unmatched weighted positions shall be the final unmatched
weighted position.
1117
Step VIII: Calculation of the capital requirement for matched positions between
zones

• The third capital requirement shall be calculated by multiplying the


matched weighted positions between the three zones by the
disallowance factors specified in Table 2 of this Annex and then summing
the three amounts obtained.
Step IX: Calculation of the capital requirement for residual unmatched
positions

• The fourth and final capital requirement calls for a 100% weighting of the
final unmatched weighted position calculated as specified above.
Step X: Calculation of the total capital requirement

• The total capital requirement shall be the sum of the four requirements
specified in steps IV, VI, VIII and IX.

Table 2
Zones Maturity band Within the zone Between Between
zones 1
adjacent and 3
zones
Zone from 0 to 1
1 month 40%
from 1 to 3
months 40%
from 3 to 6
months
from 6 to
12 months 100%
Zone from 1 to 2
2 years 30%
from 2 to 3
years
from 3 to 4
years
Zone from 4 to 5 40%
3
years
from 5 to 7
years 30%

from 7 to

1118
10 years
from 10 to
15 years
from 15 to
20 years
over 20 years

2. Duration Method

In order to calculate the capital requirement for general risk on debt


securities with the duration method, the following procedure shall be
adopted:

a) Calculate the modified duration of each debt instrument and then


allocate them to the 15 time-­‐bands of the ladder specified in Table 3
of this Annex;
b) Multiply the amount by the specific weights (between 0.6% and 1%)
expressing the assumed change in yield for instruments with the same
modified duration;
c) Apply a vertical disallowance of 5% to the weighted long and short
positions in each time-­‐band in order to capture basis risk;
d) Carry forward the net positions in each time-­‐band for horizontal
offsetting, applying the disallowances specified in Table 2 of this Annex
and proceeding in accordance with steps V to IX in section 1 of this
Annex;
e) Calculate the total capital requirement as the sum of the three
requirements specified in steps VI, VIII and IX and the requirement
specified in point 3) above.

For the purposes of Table 1, “other qualifying items” shall include:

a) Long and short positions in assets qualifying for a credit quality step
corresponding to investment grade within the framework of the
standardized approach under credit risk regulations;
b) Long and short positions in assets qualifying for a credit quality step
corresponding to investment grade within the framework of the internal
ratings based approach under credit risk regulations:
c) Long and short positions in assets for which a credit assessment by a
nominated ECAI is not available and which meet the following
conditions:
i) They are considered by the banks concerned to be sufficiently liquid;
ii) They are considered by the banks concerned to be investment grade;

1119
d) Long and short positions in assets issued by supervised institutions subject
to capital adequacy requirements.
e) Long and short positions in assets issued by supervised institutions which
receive a risk weight of 50% under credit risk standardized approach.

1120
CENTRAL BANK OF NIGERIA

Guidance Notes on the Calculation of Capital Requirement for


Operational Risk

Basic Indicator Approach (BIA) and the Standardized


Approach (TSA)

1121
OPERATIONAL RISK CAPITAL REQUIREMENT

1.0 Introduction

In calculating the capital requirements to cover operational risk, banks are


required to assess the links among the various types of risk and identify their
possible impact in terms of operational risk. Ensuring full compliance with the
regulations would also play an important role in mitigating operational risk.

1.1 Calculation Approaches

This guidance notes make provision for two methods of calculating operational
risk capital charge; the Basic Indicator Approach (BIA) and the Standardized
Approach (TSA).

• Banks using the BIA are required to calculate their capital requirement by
multiplying an indicator of a bank's volume of business, gross income, by
a specified regulatory percentage. Banks using the BIA must hold capital
for operational risk equal to the average over the previous three years of
a fixed percentage of positive annual gross income.
• Banks using TSA are required to calculate their capital requirement by
multiplying gross income by separate regulatory percentages for each of
the eight business lines into which banks’ activities are divided (corporate
finance, trading and sales, retail banking, commercial banking, payment
and settlement, agency services, asset management and retail
brokerage)

TSA uses the gross income from the above business lines as a proxy for the
scale of business operations and thus the likely scale of operational risk
exposure within each of these business lines. The capital charge for each
business line is then calculated by multiplying gross income by the factor
assigned to that business line.

1.2 Adoption of Approaches

Banks and banking groups are expected to adopt the BIA at the
commencement date of this regulation and may seek approval to move to
TSA which requires more stringent operational risk management processes.

1122
2.0 Governance and Management of Operational Risks

2.1 Board and Management

The board of directors plays a key role in establishing an effective and


efficient operational risk management and control system and to this end
the board and senior management shall;

a) establish the general framework of the system


b) be responsible for its implementation,
c) supervise its operation and
d) verify its overall functionality and compliance with regulatory
requirements.
2.3 Processes and Procedure

Specific attention shall be paid to the processes, functions and other


aspects involved in the calculation of the capital requirement. Accordingly,
banks’ board and management shall have the specific responsibility for:

a) Identifying and measuring infrequent, yet severe loss events,


b) Identifying the various forms and manner in which operational risks may
materialize,
c) Assessing the operational risks associated with the introduction of new
products, activities, processes and systems.
d) Adopting contingency and business continuity plans that ensure their
operational resilience and limit losses in the event of severe business
disruptions.
2.4 Reversion of Approaches

Banks that have adopted TSA are not allowed to revert to the BIA without
the approval of the CBN. However, if the CBN discovers that a bank using
TSA no longer meets the qualifying criteria for the approach, it may require
the bank to revert to the BIA until it meets the conditions specified by the
supervisor before returning to TSA.

2.5 Sound Practices for Operational Risk Management

Regardless of the operational risk capital computation approach adopted,


banks are required to comply with principles in “Sound Practices for the
Management and Supervision of Operational Risk” (BCBS, February 2003).

1123
3.0 Basic Indicator Approach (BIA)

3.1 Calculation Method

a) The capital requirement using the BIA shall be equal to 15% of the average
of the last three years positive observations of the relevant indicator (i.e. gross
income). The formula for the calculation is given below;
KBIA = 𝚺𝚺 𝑮𝑮𝑮𝑮𝑮𝑮….𝜼𝜼∗𝜶𝜶 ∕𝜼𝜼

Where:

KBIA = the capital charge under the Basic Indicator Approach

Gl = positive annual gross income for the previous three years

= number of the previous three years for which gross income is positive

α=15%,

b) Gross income under this guideline includes the sum of a bank’s


Net interest income, and
Net non-­‐interest income;
All of which shall be gross of:

• Any provisions (example unpaid interest); and


• Any operating expenses, including fees paid to outsourcing service
providers;
But shall exclude;

o Realized or unrealized profits/losses from the sale or impairment of


securities in the banking book;
o Extraordinary or irregular items;
o Income derived from insurance recoveries.
c) However, if, for any given observation, the value of the relevant indicator is
negative or equal to zero, this figure shall not be taken into account in
calculating the total capital requirement. The requirement shall be calculated
as the average for the positive observations only.
d) Where data on the relevant indicator is not available for certain
observations during the applicable three-­‐year period, the calculation of the
requirement shall be based on the average of the available observations only.

1124
e) If the relevant indicator or its components are related to a period less than
12 months (e.g. in the case of newly formed banks, mergers and acquisitions),
this value must be annualized linearly.
f) Banks shall be required to reconcile the gross income used in capital
computation and the gross income reported in returns made to CBN e.g. MBR
1000
4.0 The Standardized Approach (TSA)

4.1 Approval Process

• Banks seeking the approval of CBN for the use of TSA must show that their
boards are actively involved in the oversight of operational risk management
system; the system is conceptually sound and implemented with integrity and
must have sufficient resources to support the use of the approach. They would
therefore be required to submit the following in support of their application:
a. Organization charts that specify the tasks and responsibilities of the
operational risk management and control functions;
b. A board certification of compliance with qualifying criteria;
c. A document describing the self-­‐assessment process and the related
findings; and
d. The internal audit report on the adequacy of the operational risk
management system.
• Banks authorized to use TSA shall send to the CBN annually, a formal
certification of compliance with the qualifying criteria and the internal audit
report on the adequacy of the operational risk management system.
4.2 Qualifying Criteria for the Standardized Approach

In order to obtain authorization to use the Standardized Approach, banks shall


have adequate internal control procedures and an effective operational risk
management system (specified below) in addition to adequate corporate
governance mechanisms.

4.2.1 Internal Controls

• The Self-­‐Assessment Process


The self-assessment process shall consist of a formalized set of procedures and
activities to;
a. assess the quality of the operational risk management system, as well
as
b. its continuing compliance with regulatory requirements, and;

1125
c. appropriateness to operational needs and market developments.
• The procedures for conducting the self-­‐assessment and the related
findings shall be adequately documented and reported to senior
management and board. The report shall place specific emphasis on
any aspect of the operational risk management system that requires
improvement, including changes in bank structure and operations, and
on the assessment of compliance with the qualifying criteria.
• The Internal Audit Function
The internal audit unit shall carry out periodic reviews of the operational risk
management system and the self-­‐assessment process at least once every
year with a view to evaluating their effectiveness and compliance with the
qualifying criteria.
The unit shall forward its reports on the review of operational risk to the board of
directors for necessary corrective actions.
4.2.2 Operational Risk Management System

The key features of the operational risk management system are:

a) The Mapping of Activities Into Regulatory Business Lines 31


For the purpose of calculating the capital requirement, the bank shall map its
activities into eight regulatory business lines, listed in the table below, in
accordance with the following principles:
o All activities shall be mapped into the business lines in a mutually
exclusive and jointly exhaustive manner;
o Any activity that forms an integral or ancillary part of another shall be
allocated in accordance with the mapping criteria for the main
activity;
o An activity belonging to more than one business line shall be mapped
to the dominant business line;
o Where an activity cannot be mapped on the basis of a dominant
business line, it shall be mapped to the business line yielding the
highest percentage. The same rule shall apply to any associated
ancillary activity;
o A compound activity shall be divided into its significant components,
which shall be mapped to the most appropriate business lines on the
basis of their nature and characteristics;
o Banks may use internal transfer pricing methods to allocate the
relevant indicator to the various business lines; 32

31
Business lines shall be in line with the permissible activities prescribed in the CBN banking model.

1126
o The mapping of activities into business lines shall be consistent with
the categories adopted for credit and market risks.
o The mapping criteria shall be reviewed and adjusted in line with
current business activities and the bank’s risk profiles.
o The process of mapping activities into business lines shall be subject to
internal review and documented.
o In mapping activities into business lines, banks shall take account of
the table contained in Annex A.
b) The Operational Risk Data Collection and Storage System
d) Banks are required to establish an operational risk data collection and
storage system, which at a minimum shall include material losses and any
related recoveries, which are capable of ensuring the effectiveness of the risk
management system.
e) The system shall ensure on a continuing basis that the data are relevant,
reliable and up to date. For this purpose, banks shall:
Develop information systems capable of ensuring the integrity, confidentiality
and availability of the data over time;
Carry out periodic reviews of the operational risk data collection and storage
system.
Business line Percentage (β)
Corporate finance 18%
Trading and sales 18%

Retail banking 12%


Commercial 15%
banking
Payment and 18%
settlement
Agency services 15%
Asset management 12%
Retail brokerage 12%

The total capital charge under TSA may be expressed as follows:

32
For example, the retail business line may carry out lending transactions making use of funds raised with activities typical of other business
lines such as interbank funding, which is included in the trading and sales line. In this case, internal transfer prices can be used to reallocate
the cost components from trading and sales to retail.

1127
• KTSA = !𝟑𝟑𝟑𝟑𝟑𝟑𝟑𝟑 𝑮𝑮𝑮𝑮𝟏𝟏!𝟖𝟖∗ 𝜷𝜷𝟏𝟏!𝟖𝟖 , 𝟎𝟎 ∕𝟑𝟑

Where:

KTSA = Capital charge under TSA

GI1-­‐8 = Annual gross income in a given year for the eight business
lines in the table above.

β1-­‐8 = The fixed percentages for the business lines indicated in the table
above.

Where the weighted relevant indicator of a business line is negative, it shall be


included in calculating the Standardized Approach amount. Where the
Standardized Approach amount for a given year is negative, then the result for
that year shall be zero and shall be included in the calculation of the three-
­‐year average.
Where data on the relevant indicator is not available for certain observations
during the applicable three-­‐year period, the calculation of the requirement
shall be based on the average of the available observations only 33.

If the relevant indicator or its components are related to a period less than 12
months (e.g. in the case of newly formed banks, mergers and acquisitions), this
value must be annualized linearly.
In the event that a bank or banking group migrates from the basic indicator
approach to the standardized approach during the year, the capital
requirement is calculated by using the new method from the first reporting
date.

Annex B shows an example of using standardized approach for calculating


capital requirement for operational risk.

33
Only values for the relevant indicator determined on the basis of the International Accounting Standards shall be used in calculating the
capital requirement.

1128
Definition of Terms

Relevant indicator shall mean gross income

Business lines shall mean the lines of business into which a bank’s activities shall
be classified in accordance with the criteria set out in the Standardized
Approach for computation of capital charge for operational risk.

Operational loss shall mean the adverse financial effects generated by


operational events that have been recognized in the bank’s accounts and that
have or may have an impact on the bank’s income statement.

Legal risk shall mean the risk of losses resulting from violations of law or
regulations, from contractual or constructive liability or from other disputes.

Operational risk shall mean the risk of losses resulting from inadequate or failed
internal processes, people and systems or from external events, including legal
risk.

Operating segment shall mean any area of activity such as a business line, an
organizational unit, a legal entity or a geographical area.

Standardized approach amount shall mean the algebraic sum of each of the
eight business lines divided by 3 years. Where the weighted relevant indicator
of a business line is negative, it shall be included in calculating the
Standardized Approach amount. Where the Standardized Approach amount
for a given year is negative, then the result for that year shall be zero and shall
be included in the calculation of the three-­‐year average

1129
ANNEX A: STANDARDIZED APPROACH – MAPPING OF BUSINESS LINES TO BANK
ACTIVITIES

Business lines List of activities

Corporate finance Mergers, acquisitions, placements (public tenders and


offerings, private placements, bond issues). Investment
banking activities involving equity and debt capital
(IPOs, privatizations, syndications, secondary private
placements, underwriting, etc.). Business appraisals.
Securitizations on behalf of third parties. Corporate
financial management. Capital increases (lead
manager only). Advisory and research services (capital
structure, industrial strategy, undertakings, re-
organizations, etc.). Investment advice as a specific
business.

Trading and sales Dealing on own account. Treasury management and


funding on own account (asset & liability
management, etc.). Securitization on own account.
Reception, transmission and execution of orders for
corporate and professional clients. Advice,
underwriting, placement of financial instruments
(investment funds, securities and fund portfolio
products, equities, bonds, derivatives, etc.) with
corporate and professional clients.

Retail banking Acceptance of deposits and lending. Guarantees and


commitments. Consumer credit for retail customers.
Leasing and factoring. Other transactions with retail
counterparties not allocated to other business lines.
Ancillary services such as collection and payment
(issuing debit and credit cards, funds transfer and other
payments on behalf of customers, exchanging foreign
currency, etc.) and custodianship and administration of
financial instruments.

Commercial Acceptance of deposits and lending. Guarantees and

1130
banking commitments. Leasing and factoring. Export and trade
credit. Other transactions with corporate
counterparties not allocated to other business lines.
Ancillary services such as collection and payment
(issuing debit and credit cards, funds transfer and other
payments on behalf of customers, foreign exchange,
etc.) and custodianship and administration of financial
instruments. Net income (for example, coupons and
dividends) on non-trading books.

Payment and Payment, settlement and clearing services and systems


settlement (RTGS, NIBSS, SWIFT, MASTERCARD, VISA, CSCS etc.).
Issuing and administering means of payment and funds
transfer as a specific business. Correspondent banking.

Agency services Depository bank. Custodianship and related services


(cash/collateral management, deposits with third
parties, etc.) as a specific business. Tax collection
services. Treasury services for government entities. Trust
services.

Asset management Portfolio management and other forms of asset


management (investment funds, pension funds,
securities and fund portfolio products, hedge funds,
etc.). This refers only to the production, and not the
distribution, of asset management products, except for
placement with professional clients by specialized
companies.

Retail brokerage Reception, transmission and execution of orders for


retail customers. Advice, underwriting, placing of
financial instruments and insurance products (bank
insurance, investment funds, securities and fund
portfolio products, equities, bonds, derivatives, etc.)
with retail customers.

1131
ANNEX B: STANDARDIZED APPROACH – EXAMPLE OF THE CALCULATION OF
THE CAPITAL REQUIREMENT

Business line Step 1 Beta Step 2


Factor
Annual Gross Income Calculation of the
by Business Lines weighted relevant
indicator by business

Yr1 Yr2 Yr3 Yr1 Yr2 Yr3

Corporate 10 10 10 18% 1.80 1.80 1.80


finance

Trading & 20 -60 30 18% 3.60 -10.80 5.40


sales

Retail 20 20 30 12% 2.40 2.40 3.60


banking

Commercial 20 15 10 15% 3.00 2.25 1.50


banking

Payment and 10 -40 10 18% 1.80 -7.20 1.80

Settlement

Agency 20 15 0 15% 3.00 2.25 0.00


services

Asset 0 20 30 12% 0.00 2.40 3.60

Management

Retail -10 10 20 12% -1.20 1.20 2.40


brokerage

Step 3

Algebraic Sum for the


year

1132
14.40 -5.70 20.10
Step 4

Calculation of the
Standardized Approach
amount

14.40 0.00 20.10


Step 5

Standardized Approach
capital requirement

11.50

1. Calculate the relevant indicator on an annual basis for each business


line (the result may be either positive or negative).
2. Multiply the relevant indicator of each business line by the
corresponding percentage (the result may be either positive or negative).
3. Sum the weighted relevant indicators of the eight business lines,
offsetting the positive amounts against the negative amounts. If the total result
for the year is negative, set it equal to zero.
4. Calculate the Standardized Approach amount for each of the three
years (the result may be either positive or equal to zero).
5. Calculate the total capital requirement as the simple average of the
Standardized Approach amounts for the three years.

1133
CENTRAL BANK OF NIGERIA

Guidance Notes on Pillar III

Market Discipline

1134
1.0 Introduction

The aim of Pillar III is to promote market discipline by allowing market


participants to access information on risk exposure and risk management
policies and procedures through disclosures. This section sets out the disclosure
requirements under the guideline with respect to procedure, frequency and
content of information to be disclosed.

1.1 General Disclosure Principle

Banks should have a formal disclosure policy approved by the board of


directors that addresses the bank’s approach for determining what disclosures
it will make and the internal controls over the disclosure process. In addition,
banks should implement a process for assessing the appropriateness of their
disclosures, including validation and frequency of them. (BCBS June 2006, Par
821)

2.0 Disclosure Requirements

2.1 Organization of Information and Limitation of Obligations

The information whose disclosure is governed by these regulations is listed in


Annex A.

2.2 Content and Procedures for Disclosing Information

Banks shall disclose information relating to their core activities, risks profiles and
methodologies used.
In order to ensure the comprehensiveness of disclosures, references to other
sources is not allowed.
Banks are expected to make adequate disclosure consistent with their
organizational complexity and the type of business they engage in, taking into
account their internal reporting systems to the board and management.

2.3 Disclosure Eligibility Requirements

For banks that adopt internal systems to calculate capital requirements for
credit or operational risks and for those using credit risk mitigation techniques,
compliance with specific disclosure requirements (Disclosure Eligibility
Requirements) shall be a necessary condition for the recognition of such
approach and the effects of such techniques for regulatory capital purposes.
These disclosure requirements are marked by an asterisk in the annexed tables.

1135
2.4 Derogations From Disclosure Requirements

Banks may omit the disclosure of information that is not considered material,
with the exception of information that represents a disclosure eligibility
requirement.
In exceptional cases, banks may omit the disclosure of proprietary or
confidential information (including information that represents a disclosure
eligibility requirement), provided that they specify the information that is not
disclosed and the reasons for non-­‐disclosure, and publish more general
information on the matter in question.
2.5 Disclosure Procedures and Frequency

• Information shall be disclosed through the bank’s website. Banks for whom
such means of publication is difficult or onerous shall disclose information
through the website of their respective industry association or in printed form.
• Banks shall make adequate pronouncement on the means of disclosure in
their financial statements (in the notes to the financial statements).
• Disclosures shall be published on a bi-­‐annual basis and within thirty days of
publishing the financial statements.
• Banks may publish the information on a more frequent basis, taking into
consideration their level of business, international affiliations and financial
sectors dynamics. They should also consider their participation in the financial
markets, international payment, clearing and settlement systems as well as the
volatility of their exposure.
2.6 Organization and Controls

a) Banks shall adopt suitable organizational arrangements to ensure the


compliance with disclosure requirement under these regulations. Board and
management shall independently assess and verify the quality of information.
The solutions adopted shall form part of the bank’s system of internal controls.
b) Within this framework, banks shall establish appropriate specific procedures
for verifying disclosures that are yet to be subjected to verification by external
auditors or the CBN.

Definitions of Terms

For the purposes of these regulations:

Confidential information shall mean information in respect of which the bank


has obligations to customers or other counterparty relationships binding it to
confidentiality.
1136
Material information shall mean information which if omitted or misstated could
change or influence the assessment or decision of a user relying on such
information for the purpose of making economic decisions;

Proprietary information shall mean information which, if shared with the public,
would undermine the bank’s competitive position. It may include information
regarding products or systems which, if shared with competitors, would render
the bank’s investment therein less valuable;

ANNEX A

Table 1: General Requirements

Description of disclosure

Qualitative For each risk category (including those


considered in the following tables), banks shall
disclosure
disclose risk management objectives and
policies, including:

• The strategies and processes for managing


such risks;

• The structure and organization of the relevant


risk management function;

• The scope and nature of risk measurement and


reporting systems;

• The policies for hedging and mitigating risk as


well as strategies and processes for monitoring
their continuing effectiveness.

Table 2: Scope of Application

Description of disclosure

Qualitative disclosure (a) The name of the bank to which the disclosure
requirement applies.

1137
(b) An outline of differences on the basis of
consolidation for accounting and prudential
purposes, with a brief description of the entities
within the group which:

i)Are fully consolidated;

ii)Are proportionally consolidated;

iii) Are deducted from the regulatory capital;

iv) Are neither consolidated nor deducted.

(c) Any current or potential legal or substantive


impediment to the prompt rapid transfer of
regulatory capital or funds within the group.

(d) For groups, any reduction in individual capital


requirements applied to the parent entity and
the Nigerian subsidiaries.

Quantitative (e) The names of all subsidiaries excluded from


disclosure consolidation and aggregate amount of their
capital deficiencies with respect to any
mandatory capital requirements.

Table 3: Regulatory Capital Structure

Description of disclosure

Qualitative disclosure (a) Summary information on the main terms and


conditions of the features of capital items,
especially hybrid capital instrument and
subordinated debt capital instruments.

(b) The total amount of Tier 1 capital, with separate


disclosure of individual positive and negative
items especially hybrid capital instruments.

(c) The total amount of Tier 2 capital

1138
(d) Other deductions from regulatory capital, with
separate disclosure – for banks using one of the
IRB systems –of any negative differences
between total value adjustments and expected
loss.

Quantitative (e) Total regulatory capital.


disclosure

Table 4: Capital Adequacy

Description of disclosure

Qualitative disclosure (a) Summary description of the bank’s


approach to assessing the adequacy of its
internal capital to support current and future
activities.

Quantitative disclosure (b) For banks calculating credit risk--]weighted


exposure amounts using the standardized
approach, the capital requirement for each
of the exposure classes.

(c) For banks calculating credit risk-­‐weighted


exposure amounts using the IRB approach,
the capital requirement for each of the
exposure classes envisaged in these
regulations.

For retail exposures, separate disclosure shall


be made for each of the following
categories: “exposures secured by
residential property”, “qualifying revolving
retail exposures” and “other retail
exposures”.

For equity exposures, disclosure shall be


made for:

(i) Each of the methods envisaged (simple


1139
risk weight approach, PD/LGD approach,
internal models approach); in the case of
the simple risk weight approach, separate
disclosure shall be made for the capital
requirement for:

a) exchange-­‐traded exposures;

b) private equity exposures in sufficiently


diversified portfolios;

c)other exposures;

ii) Exposures subject to supervisory transition


regarding capital requirements;

iii) Exposures subject to grandfathering


provisions regarding capital requirements.

(d) Capital requirements for market risks, with


separate disclosure for:

- Assets included in the supervisory trading


portfolio:

i)Position risk with specific evidence towards


securitization;

ii) Settlement risk

-Entire balance sheet:

iii) Foreign exchange risk;

iv)Commodity risk;

(e) Capital requirement for counterparty risks.

(f) Total and Tier 1 capital ratios.

1140
Table 5: Credit Risk: General Disclosures for all Banks

Description of disclosure

Qualitative (a)
Disclosure

Quantitative (b)
Disclosure
(c)

(d)

(e)

(f)

(g)

(h)

1141
Guidance Note on the Calculation of Capital
Requirement for Credit Risk

STANDARDIZED APPROACH

1142
CHAPTER ONE: CREDIT RISK– STANDARDIZED APPROACH

1.0 Introduction
The application of the standardized approach for calculating the capital
requirement for credit risk is supported by external credit assessments and it
entails:
a) The classification of exposures to different classes based on the nature
of the counterparty or the technical characteristics of the transaction
or the manner in which it is carried out, and
b) The assignment of diversified risk weights to each portfolio, based on
the ratings provided by the External Credit Assessment Institutions
(ECAI) or the risk weights specified for certain exposure categories
under this framework.
All unrated exposures shall be assigned a risk weight of 100% where any of
the under listed two conditions holds
c) The bank does not intend to use a rating assigned by an ECAI; and
d) Where ECAI selected by the bank has not issued a rating for the
exposure.

2.0 External Credit Assessments


External credit assessments (or external ratings) on the borrowers or specific
exposures are the basis for the determination of risk weights under the
standardized approach for exposures to sovereigns, central banks, public
sector entities, banks, corporates as well as certain specific exposures 34. The risk
weights for other categories of exposures that are not subject to external ratings
are specified in this framework.

2.1 Rules on the Use of External Ratings


The rules for the use of external ratings are as follows;
a) Banks that intend to use credit assessments from ECAIs shall furnish the
CBN with a list of such ECAIs.
b) Banks are not allowed to use credit assessments issued by connected
ECAIs.
c) Credit assessments shall be used consistently; therefore, banks that
decide to use credit quality assessments from an ECAI for a certain
class of exposures shall use them for all the exposures belonging to
that class.

34 For this purposes, banks are only permitted to use external ratings provided by rating agencies that

have been recognized by the CBN based on the eligibility criteria as provided in Annex A.
1143
d) Banks shall use only credit quality assessments of ECAIs that take
account of total exposure i.e. principal and interest.
e) External ratings for an entity within a group cannot be used to risk
weight other entities within the same group.

2.2 Single and Multiple Assessments


• Where there is only one assessment by an ECAI chosen by a bank for a
particular exposure, that assessment should be used to determine the risk
weight of the exposure.
• Where separate assessments by two different ECAIs result in different risk
weights, the higher risk weight will be applied.
• Where there are three or more assessments with different risk weights, the
assessments with the two lowest risk weights should be selected and the
higher of those two risk weights will be applied.

2.3 Unsolicited Ratings


As a general rule, banks should only use solicited ratings from recognized ECAIs
for the purposes of calculating capital requirement under the standardized
approach. Where it is expedient for any bank to use unsolicited ratings, such
bank shall obtain the CBN approval and the quality of the unsolicited ratings
must not fall below that of solicited ratings.

2.4 Revocation of ECAI’s Recognition


Where the recognition of an ECAI is revoked, banks that use the ratings
provided by such ECAI shall adjust their exposure risk weights within 30 days.

2.5 Issuer and Issues Assessment


Where a bank invests in a particular security, which has an issue-­‐specific
rating, the risk weight for this exposure will be based on this rating. Where the
bank has an investment which does not have an issue-­‐specific rating, the
following principles shall apply:
a) Where the bank’s exposure is to a borrower which does not have its
own issuer rating, but the same borrower has a rating on other
obligations (such as a debt security) to which the bank is not
exposed, the bank shall use that debt security rating in determining
the appropriate risk weight for the exposure to the borrower.
However, this is subject to the condition that the bank’s exposure
ranks pari passu or senior in all respects to the debt security which has
a rating, otherwise, the claim will receive the risk weight for unrated
exposures;

1144
b) Where a borrower has its own issuer rating, this rating typically applies
to senior unsecured exposures on that borrower. Thus, only senior
exposures on that borrower will be able to utilise this rating. Other
exposures will be treated as unrated; and
c) Where either the issuer or a single security has a low quality rating
which maps into a risk weight equal to or higher than that which
applies to unrated exposures, an unrated exposure on the same
borrower or issuer will be assigned the same risk weight as is
applicable to the low quality rating (instead of the risk weight for
unrated exposures).

2.6 Domestic and Foreign Currency Exposures


• A credit assessment that refers to an item denominated in the borrower’s
domestic currency cannot be used to derive a risk weight for another
exposure to that same borrower that is denominated in a foreign
currency
• Where unrated exposures are risk weighted based on the rating of an
equivalent exposure to that borrower, the general rule is that foreign
currency ratings would be used for exposures in foreign currency.
Domestic currency ratings, if separate, would only be used to risk weight
claims denominated in the domestic currency 35.

2.7 Short-Term and Long-Term Credit Assessments


• Where a short‐term exposure is assigned a 150% risk weight, all unrated
exposures to the counterparty whether short‐term or long‐term shall
receive a 150% risk weight;
• Where a short‐term exposure is assigned a 50% risk weight, no unrated
short‐term exposure shall receive a risk weight of less than 100%.
• When a specific short-term assessment for a short‐term exposure on a
bank maps into a less favourable (higher) risk weight than the general
preferential treatment for short-term exposures, the general short‐term
preferential treatment for interbank exposures cannot be used. All
unrated short-term exposures should receive the same risk weighting as
that implied by the specific short‐term assessment.

35Notwithstanding the above, where an exposure arises through a bank’s participation in a


loan extended, or has been guaranteed against convertibility and transfer risk, by a multilateral
development bank whose preferred creditor status, is recognized in the market, the credit
assessment on the borrower’s domestic currency item may be used for risk weight purposes, to the
extent guaranteed by the MDB.

1145
3.0 Exposures and Risk Weights Categories
The following part defines the various categories of exposures and their
corresponding risk weights under the standardized approach. On‐balance
sheet exposures shall be multiplied by the appropriate risk weight to determine
the risk weighted asset amount, while off‐balance sheet exposures shall be
multiplied by the appropriate credit conversion factor (CCF) before applying
the respective risk weights. Specifically, all exposures subject to the
standardized approach should be risk-weighted net of specific provisions 36.

3.1 Exposures to Central Governments and Central Banks


• Exposures to Central Governments and Central Banks shall be assigned
risk weights based on the rating assigned by an ECAI/Export Credit Agency
(ECA) as follows;
Credit Assessment AAA to A+ to A– BBB+ to BB+ to Below Unrated
(ECAI) AA-­ BBB-­ B-­ B-­

Risk Scores (ECA) 1 2 3 4-­‐5 6 Unrated


Risk Weight 0% 20% 50% 100% 150% 100%

• Notwithstanding the provisions of this paragraph, a risk weight of 0% shall


be assigned to the following:
a. Exposures to Federal Government of Nigeria (FGN) and Central Bank of
Nigeria (CBN) denominated in Naira (NGN) and funded in that
currency.
b. Exposures, including inter‐bank transactions guaranteed by the FGN or
CBN.
c. Inter-bank transactions among supervised institutions collateralized by
FGN Bonds or Treasury Bills.

3.2 Exposures to non ­ Central Government Public Sector Entities


• Exposures to Public Sector Entities (PSEs 37) shall be assigned a risk weight
of 100% regardless of the length of the residual maturities of the
exposures.
• Where a PSE is located in other jurisdiction, the risk weight of the sovereign
rating of that jurisdiction shall be applied.

36 Specific provisions include individual impairment provisions, as well as collective impairment provisions (and
regulatory reserves, if any) that are attributable to loans classified as impaired.
37 Public sector entities include both commercial and non-commercial entities owned by federal

government, state government or a local government. The CBN may adjust the risk weights applicable to
these entities when deemed necessary.
1146
3.3 Exposures to State Governments and Local Authorities
• Exposures to State and Local Governments in Nigeria shall receive the
following risk weights:
a. 20% risk weight for State Government bonds that meet the eligibility
criteria for classification as liquid assets by the CBN
b. 100% risk weight for other State and Local Government bonds and
exposures
• State and Local Governments of other jurisdictions shall be assigned the
sovereign risk weight of those jurisdictions.

3.4 Exposures to Multilateral Development Banks (MDBs)


• Exposures to multilateral development banks shall be risk weighted on the
basis of the rating assigned by an ECAI, as set out in the table below;
Credit Assessment for AAA A+ to BBB+ to BB+ to Below unrated
MDBs to A– BBB-­ B-­ B-­
AA-­
Credit quality steps 1 2 3 4 and 5 6 Unrated
Risk Weight 20% 50% 50% 100% 150% 50%

• However, a risk weight of 0% shall apply to exposures to the following


MDBs, regardless of any external credit rating assigned:
a) International Bank for Reconstruction and Development (IBRD);
b) International Finance Corporation (IFC);
c) African Development Bank (ADB);
d) Asian Development Bank (ADB)
e) European Bank for Reconstruction and Development (EBRD)
f) Inter‐American Development Bank (IADB)
g) European Investment Bank (EIB)
h) European Investment Fund (EIF)
i) Nordic Investment Bank (NIB)
j) Caribbean Development Bank (CDB)
k) Islamic Development Bank (IDB)
l) Council of Europe Development Bank (CEDB)
m) International Islamic Liquidity Management Corporation (IILMC)
1147
n) Any other MDBs that may be specified from time to time by the
CBN.

3.5 Exposures to Supervised Institutions


• Exposures to banks incorporated in a given country will be assigned a risk
weight one category less favourable than that assigned to exposures on
the sovereign of that country as shown in the following table.
Credit Assessment AAA to A+ to BBB+ to BB+ to Below unrated
AA-­ A– BBB-­ B-­ B-­
Credit quality steps 1 2 3 4 and 5 6 unrated
Risk Weight 20% 50% 100% 100% 150% 100%

• Short‐term exposures to supervised institutions in Nigeria with an original


maturity of three months or less shall be assigned a risk weight of 20% while
a risk weight of 100% shall be assigned to long‐term exposures.
• Shareholdings, hybrid and subordinated capital instruments issued by
supervised institutions shall be assigned a risk weight of 100% where they
are not deducted from regulatory capital. 38

3.6 Exposures to Corporates and Other Persons


• This class includes exposures to entities other than those referred to in the
above subsections as well as exposures to natural persons and small and
medium‐sized enterprises that cannot be classified under retail exposures
as provided below.
• Exposures to corporates other than small and medium-sized enterprises
shall be risk weighted on the basis of a credit assessment assigned by an
ECAI as follows;
Credit AAA to AA-­ A+ to BBB+ to Below unrated
Assessment A– BBB-­ B-­

Credit quality 1 2 3 and 5 and 6 unrated


step 4
Risk Weight 20% 50% 100% 150% 100%

• Exposures to insurance companies, securities firms, and collective


investment schemes shall be treated as exposures to corporates.

38 Excluding shareholdings, innovative capital instruments, hybrid capital instruments and subordinated
instruments subject to capital requirements for market risk.
1148
3.7 Regulatory Retail Portfolio
Exposures included in the regulatory retail portfolio shall be risk‐weighted at
75%. To qualify to be included in the regulatory retail portfolio, such
exposures must meet the following criteria:
i) Orientation criterion the exposure is to an individual person or persons
or to a small business. (small businesses may include sole
proprietorships, partnerships or small and medium-scale enterprises
(SMEs 39))
ii) Product criterion the exposure takes the form of any of the following:
revolving credits and lines of credit (including credit cards and
overdrafts), personal term loans and other term loans (for example
instalment loans, auto financing loans, student and educational
loans, personal finance) and small business facilities. Investment in
debt and equity securities, whether listed or not, are excluded from
this portfolio. Mortgage loans are excluded to the extent that they
qualify for treatment as exposures secured by residential property.

iii) Granularity criterion 40‐the aggregate exposure 41 to one counterpart


cannot exceed 0.2% of the overall regulatory retail portfolio;
iv) Low value of individual exposures-the aggregate retail exposure to
one counterpart cannot exceed an absolute threshold of N100
million.

3.8 Exposures secured by Mortgages on Residential Property


• A risk weight of 100% shall be applied to exposures secured by mortgages
on residential property provided that:

a) The residential property will be occupied or rented out. The borrower’s


capacity to repay does not materially depend on cash flows
generated by the property serving as collateral, but rather on the
capacity of the borrower to repay the debt from other sources 42;

39 Small and Medium Scale Enterprise (SME) is an enterprise that has asset base (excluding land) of
between N5million–N500 million and labor force of between 11 and 300
40 Banks shall aggregate all their retail exposures, which have fulfilled all other operational requirements

for regulatory retail portfolio and ascertain whether all these exposures do not exceed the granularity
threshold. If there are exposures, which exceed this threshold; they would not be eligible for the
75% risk weight and shall be treated as a corporate exposure.
41 Aggregate exposure means gross amount (excluding defaulted exposures and without taking into

account credit risk mitigation effects) of all forms of debt exposures (including off-balance sheet
exposures) that individually satisfy the other three criteria.
42 The requirement is not fulfilled in the case of real estate companies, construction companies and real

estate funds, for these subjects, indeed, the sale and/or lease the property to a third party are the main
activities.
1149
b) The amount of the exposure does not exceed 80% of the value of the
property 43. The loan to value ratio may be raised to 100% if
supplemental guarantees are provided.
• In order to enable lending banks to obtain an effective benefit from the
reduction in credit risk, the supplemental guarantees shall meet the
general requirements specified under the rules governing credit risk
mitigation.

3.9 Exposures secured by Mortgages on Commercial Real Estate


Exposures secured by mortgages on commercial real estate (property for
use as office space, distribution or other economic activities) located in
Nigeria are risk-weighted at 100%.
Other conditions for exposures secured by real estate property
Exposures secured by real estate property shall include exposures secured by a
mortgage on real estate or connected with real estate leasing contracts, in
accordance with the procedures set out in this section, provided that the
following conditions, in addition to those under subsection 3.8 and 3.9 above:

a) The value of the property does not materially depend upon the credit
quality of the debtor; 44
b) The property is appraised by an independent valuer 45 at a value that
does not exceed the market value; 46
c) The claim on the collateral is legally enforceable in all relevant
jurisdictions and may be realized in a reasonable period of time.
d) The property value shall be adequately monitored. Thus;
i. The value of the property shall be verified at least once every three
years for residential property and once every year for commercial real
estate, or more frequently where the market is subject to significant
changes in conditions;
ii. Where the verifications under point (i) reveal a material decline in the
value of the property, a valuation shall be made by an independent

43 The value of the property is equal to the market value (or mortgage lending value) reduced if

necessary to reflect the results of monitoring as well as any earlier mortgages on the property.
44 This requirement does not preclude situations where purely macro‐economic factors affect both the

value of the property and the performance of the borrower.


45 Independent valuer shall mean a person who possesses the necessary qualifications, ability and

experience to perform a valuation and who is independent of the loan granting or monitoring process.
46 Market value shall mean the estimated amount for which the property should exchange on the date of

valuation between a willing buyer and a willing seller in an arm’s‐length transaction after proper
marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The
market value shall be documented in a transparent and clear manner.
1150
valuer, based on a value that shall not exceed the market value; 47 the
property valuation shall be reviewed by an independent valuer at
least once every three years for exposures exceeding 5% of the bank’s
regulatory capital 48;
e) The types of property accepted as collateral and the related lending
policies shall be clearly documented;
f) The property serving as collateral shall be adequately insured against
damage.

3.10 Past Due Exposures 49


The treatment of exposures classified as past due (defaulted) is provided
below.

• The risk weights for the unsecured portion of past due exposures (other
than qualifying residential mortgage loans and higher risk assets, net of
specific provisions 50 (including partial write‐offs) are as follows:

i) 150% risk weight when specific provisions are less than 20% of the
outstanding amount of the exposure;

ii) 100% risk weight when specific provisions are no less than 20% of the
outstanding amount of the exposure.

For the purpose of defining the secured portion of past due exposures, eligible
collateral and guarantees will be the same as for credit risk purposes.

• Qualifying residential mortgage loans that are past due shall be risk
weighted, net of specific provisions (including partial write-offs) as follows:

i) 100% when specific provisions are less than 20% of the outstanding
amount of the exposure; and

ii) 50% when specific provisions are 20% or more of the outstanding
amount of the exposure.

47 Market value shall mean the estimated amount for which the property should exchange on the date of
valuation between a willing buyer and a willing seller in an arm’s‐length transaction after proper
marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The
market value shall be documented in a transparent and clear manner.
48 The initial independent valuation shall be carried out as of the date on which these regulations enter

into force for all operations existing for more than 3 years.
49 Definition of past due or defaulted exposures is provided under the definition of terms.
50 Specific provisions include individual impairment provisions, as well as collective impairment
provisions (and regulatory reserves, if any) that are attributable to loans classified as impaired
1151
3.11 Higher-Risk Exposures
The following exposures are regarded as higher risk exposures and are assigned
specific risk weights 51 as follows:
a) Unrated securitization shall be risk weighted 1000%
b) Unrated securitization for internationally active banks (to which
capital adequacy ratio of 15% applies) shall be risk weighted 667%
c) Securitization tranches that are rated between BB+ and BB- will be
risk weighted at 350%
d) Investment in non‐financial firms with negative financial results over
the past two years; will be weighted at 200%.
e) Investments in venture capital firms will be risk weighted 150%
f) Non‐publicly traded equity investments will be risk-weighted at
150%
g) Residential mortgage loans for abandoned housing development
project or construction will be risk‐weighted at 150%; and
h) Exposures to sovereigns, PSEs, banks, and securities firms rated
below B‐ as well as exposures to corporates rated below BB- will be
risk weighted at 150%
i) Where exposure to a particular industry within a sector (as defined
by the International Standard Industrial Classification of Economic
Sectors as issued by the CBN) is in excess of 20% of total credit
facilities of a bank, the risk weight of the entire portfolio in that
industry shall be 150%. If for instance the total exposure of a bank to
the food manufacturing industry within the Manufacturing sector is
in excess of 20% of total credit facilities, the entire portfolio of
exposure to the food manufacturing industry would be risk
weighted 150%.
j) The treatment of both defaulted and non‐defaulted exposures of
these higher risk items shall be the same.

3.12 Other Assets


• 0% Risk Weight
i) Cash in hand and equivalent cash items shall be assigned a 0% risk
weight.
ii) Gold bullion held in own vaults or on an allocated basis to the
extent backed by bullion liabilities shall be assigned a 0% risk
weight.

51 The CBN may direct banks to apply a higher risk weight in the event of adverse market conditions.
1152
iii) All exposures deducted from capital
• 20% Risk Weight
i) Cheques and Cash items in transit shall be assigned a 20% risk
weight.
• 100% Risk Weight
i) Property, plant and equipment and other fixed assets
ii) Prepayments
iii) Investments in equity or regulatory capital instruments issued by
banks, other financial institutions and other entities unless deducted
from capital base.
iv) Investments in collective investment schemes.
v) Real estate and other investments (including non‐consolidated
investment participation in other companies)
vi) Bank lending to subsidiaries in the same group: ‐where the loan is
fully secured, it would be assigned a risk weight of 100%, otherwise it
would be deducted from the capital when computing capital
adequacy.

vii) Any other assets not specified above.

3.13 Off­Balance-Sheet Exposures: Guarantees and commitments


• In order to calculate the credit risk associated with guarantees and
commitments issued, banks shall first convert the exposures to credit
equivalent amount by multiplying the exposures by the related credit
conversion factors (CCF). Then, capital requirement is derived by
multiplying the credit equivalent amount by the specific risk weight of the
counterparty. Specifically, the credit conversion factors as provided in
Annex B shall be applied to the exposures.
• In the case of asset sale and repurchase agreements and outright
forward purchases, the risk weights shall be that of the assets in question
and not that of the counterparties to the transactions.

3.1.4 Securitization Positions


The risk-weights for securitized exposures are set out in chapter two of this
framework.

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CHAPTER TWO: SECURITIZATION POSITIONS

1.0 Introduction
• This section describes the various approaches in determining regulatory
capital requirements on exposures arising from securitization (traditional
and synthetic) held in the banking book and the operational
requirements for allowing regulatory capital reduction for banks.
• All banks, whether acting as originators or as third-party investors, must
hold regulatory capital against all securitization exposures (on‐ or off-
balance sheet) in the banking book arising from traditional and synthetic
securitizations or structures that contain features similar to both. Such
securitization exposures may arise from the following activities of the
banks among others:
i) investments in any securitization issue, including retention or
repurchase of one or more securitization positions;
ii) provision of credit risk mitigants or credit enhancement to parties to
securitization transactions;
iii) provision of liquidity facilities or other similar facilities;
iv) obligations due to early amortization features in a securitization; or
v) entitlements to future income, generated by a securitization through
various forms of arrangements such as deferred purchase price,
excess servicing income, gain-on-sale, future margin income, cash
collateral accounts or other similar arrangements.
• The framework specifies a number of methods for calculating the
risk‐weighted value of securitization positions. For banks that adopt the
standardized approach in calculating the capital requirement for credit
risk, the risk‐weighted amount of the securitized asset underlying the
securitization position shall be calculated using risk weights assigned by an
ECAI to securitization exposures.
• For regulatory capital purposes, banks may use credit risk mitigation
techniques to reduce the capita requirement for securitization positions.
The methods for using these techniques are described in the section on
credit risk mitigation.

2.0 Operational Requirements for the Recognition of Credit Risk Transfer


• This section establishes the minimum requirements for the recognition of
the transfer of credit risk and the regulatory capital treatment that the
originating bank shall apply to securitize assets. Where the requirements set
out in this section are not met, the securitization shall not be recognized for
regulatory capital purposes.

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• Banks should understand the inherent risks of the activity and be
competent in structuring and managing such transactions. The terms and
conditions of all transactions between the originating banks and the
Special Purpose Vehicle (SPV) should be at market terms and conditions
(all fees payable, should be in a timely manner) and meet the institution’s
normal credit standards.

• An institution’s capital and liquidity plans should take into account the
potential need to finance an increase in assets on its balance sheet as a
result of early amortization or maturity events. The CBN may, if deemed
necessary, increase the institution's capital requirement.

2.1 Operational Requirements for Traditional Securitizations


Under a traditional securitization, an originating bank may exclude the
securitized exposures from the calculation of the credit risk-weighted assets
only if all the following requirements are met on an ongoing basis:
a) Significant credit risks associated with the securitized exposures has
been transferred to third parties.
b) The securitized exposures are not subject to claims by the originating
bank and its creditors, even in the event of bankruptcy proceedings
or receivership against the originating bank. Compliance with this
condition shall be supported by an opinion provided by a qualified
legal counsel with relevant experience in the sector;
c) The transferee is a special‐purpose vehicle (SPV) and the holders of
the beneficial interests in that entity have the right to pledge or
exchange the interests without restriction;
d) The securities issued on the securitized exposures are not obligations
of the originating bank. Thus, investors who purchase the securities
have recourse only to the underlying pool of exposures.
e) The originating bank does not maintain effective or indirect control
over the transferred exposures. The originating bank is deemed to
have maintained effective or indirect control over the transferred
credit risk exposures if it;
• has right to repurchase from the transferee (i.e. SPV) the previously
transferred exposures in order to realize their benefits; or
• Is obligated to re‐assume the risk of the transferred exposures. The
originating bank’s retention of servicing rights to the exposures will
not necessarily constitute indirect control of the exposures.
f) Clean-up call options shall be permitted, provided they satisfy the
conditions set out in sub-‐section 2.3.

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g) The contracts that govern the securitization do not contain clauses
that;
• require the originating bank to improve the credit quality of
securitization positions by altering the securitized assets
• allow for increases in a retained first loss position or credit
enhancement provided by the originating banking institution after
the inception of the transaction; or
• Increase the yield payable to parties other than the originating
bank, such as investors and third‐party providers of credit
enhancements, in response to a deterioration in the credit quality of
the securitized assets.
Where the traditional securitization complies with the significant credit risk
transfer requirement for regulatory capital purposes, but does not pass the
de-recognition test under IAS 39, the value of any securitization positions
held by the originating bank shall be determined as if the transferred assets
had been derecognized and the securitization positions recognized.

2.2 Operational Requirements for Synthetic Securitizations


Under a synthetic securitization, an originating bank may recognize the
use of Credit Risk Mitigation (CRM) techniques such as collateral,
guarantees or credit derivatives for capital relief purpose, if all the
following requirements in addition to the conditions set out under
traditional securitization are met on an ongoing basis:
a) The credit protection by which the credit risk is transferred complies
with conditions under credit risk mitigation. For this purpose, special-
purpose vehicles shall not be recognized as eligible unfunded credit
protection providers 52;
b) The instruments used to transfer credit risk do not contain terms or
conditions that:
• impose significant materiality thresholds below which credit
protection is deemed not to be triggered if a credit event occurs;
• allow for the termination of protection due to deterioration of the
credit quality of the underlying exposures;
• require positions in the securitization to be improved by the bank;

52 Accordingly, where credit risk is transferred using a credit default swap entered into by a special purpose
vehicle, the protection of the securitized assets would not be ensured by the special‐purpose vehicle itself, but by
the assets posted as collateral by the vehicle.
1156
• increase the bank’s cost of credit protection or the yield payable to
holders of positions in the securitization in response to a deterioration
in the credit quality of the underlying pool;
c) Securitization structures that include a clean-up call feature must
satisfy the conditions set out in sub-section 2.3.
d) A written opinion is obtained from qualified legal counsel that
confirms the enforceability of the credit protection in all relevant
jurisdictions.

2.3 Operational Requirements and Treatment of Clean-Up Calls


• For securitization transactions that include a clean-up call, no capital will
be required due to the presence of a clean-up call if the following
conditions are met:

a) the exercise of the clean‐up call must not be mandatory, in form or in


substance, but rather must be at the discretion of the originating
bank;

b) the clean‐up call must not be structured to avoid allocating losses to


credit enhancements or positions held by investors or otherwise
structured to provide credit enhancement; and

c) The clean‐up call must only be exercisable when 10% or less of the
original underlying portfolio, or securities issued remain, or, for
synthetic securitizations, when 10% or less of the original reference
portfolio value remains.

• Securitization transactions that include a clean‐up call that does not


meet all of the requirements above, shall be subject to the following
treatment:

a) For a traditional securitization, the underlying exposures must be


treated as if the exposures were not securitized. Banks must not
recognize in regulatory capital any income in equity capital resulting
from a securitization transaction, such as that associated with
expected future margin income resulting in a gain-on‐sale; and

b) For synthetic securitizations, the purchaser of protection must hold


capital against the entire amount of the synthetically securitized
exposures as if it had not benefited from any credit protection.

• If a clean‐up call, when exercised, is found to serve as a credit


enhancement, the exercise of the clean‐up call must be considered a
form of implicit support provided by the bank and must be treated in

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accordance with the supervisory guidance pertaining to securitization
transactions.

2.4 Treatment of Implicit Support


Where the originating bank provides implicit support 53 to a securitization, it
shall;
a) Calculate capital requirement for all of the exposures associated with
the securitization transaction as if the exposures had not been
securitized or as if the transaction did not benefit from any credit
protection (in the case of synthetic securitization);
b) Deduct from Tier 1 Capital any income in equity capital resulting from
a securitization transaction, such as that associated with expected
future margin income resulting in a gain‐on-sale; and
c) Disclose the details of the implicit support and the impact of such
support on its regulatory capital in accordance with the disclosure
requirements under Pillar III.

3.0 Standardized Approach for Securitization Exposures


• Banks are required to hold regulatory capital against all of their securitized
exposures using the guidelines contained in this section.
• Banks that apply the standardized approach for calculating credit risk
capital requirements for the type of the underlying exposure(s), securitized
are also required to use the same approach for calculating the capital
requirements for the securitization exposures.

3.1 Risk Weights for Securitization Exposures


• The risk-weighted asset amount of an on-balance sheet securitization
exposure is computed by multiplying the amount of the securitization
exposure by the appropriate risk weight as provided in the table below:

53 Implicit support may include the purchase of deteriorating credit risk exposures from the underlying
pool, the sale of discounted credit risk exposures into the pool of securitized credit risk exposures, the
purchase of underlying exposures at above market rice or an increase in the first loss position according
to the deterioration of the underlying exposures, etc. This implicit support increases market expectations
that the bank might continue to provide future support to the securitization, thereby understating the
degree of risk transfer and the required level of regulatory capital by the bank.

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• Risk Weights for Securitizations and Re-securitization Positions

External Credit AAA to A+ to BBB+ to BB+ to B+ And


Assessment AA-­ A-­ BBB-­ BB-­ below or
unrated

Securitization 20% 50% 100% 350% 1250%


Exposures
Re-securitization 40% 100% 225% 650% 1250%
Exposures

• For off‐balance sheet exposures, unless otherwise specified, the credit


exposure equivalent of the off-balance‐sheet securitization positions (such
as guarantees issued and loan commitments) shall be equal to the
nominal value multiplied by a credit conversion factor of 100%.
3.2 Use of Assessments

• Where the credit assessment made by an ECAI takes account of a credit


risk mitigation instrument provided for the entire securitization that is
recognized for regulatory capital purposes, the assessment may be used
to determine the position’s risk weight; otherwise, the assessment may not
be taken into consideration.

• Where credit risk protection is provided directly to an individual


securitization position, a credit assessment made by an ECAI that reflects
such protection shall not be considered. In this case, the general rules on
the recognition of credit risk mitigation instruments shall apply.

• The bank that holds the position cannot use the ECAI evaluations
based on the credit enhancement provided by the bank itself or by
another member of the banking group through guarantees, credit
derivatives, credit lines, etc. In this case, the bank shall consider the
position as unrated and apply the treatment provided for these positions.

• The use of assessments by different ECAIs for positions in different tranches


of the same securitization is not permitted.

3.3 Exceptions to Risk Weight for Unrated Securitization Exposures


` A 1250% risk weight is required for unrated positions with the exception of
the circumstances described under:
a) Look-through approach

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b) Positions connected with Asset‐Backed Commercial Paper (ABCP)
programmes
c) Eligible Liquidity Facilities

3.4 Treatment of Unrated Most Senior Securitization Exposures (Look-Through


Approach)
• Where a bank holds or guarantees the most senior exposure in a traditional
or synthetic securitization that is unrated, it may apply the “look‐through”
approach to determine the risk weight of the underlying exposures
provided the composition of the underlying pool is known at all times.
Under this approach, the unrated most senior position receives the
average risk weight 54 of the underlying exposures subject to supervisory
review.
• If the resulting weighted average risk weight is higher than the risk weight
of the securitization exposure below it, then the risk weight of the latter
shall apply. However, where the bank is unable to determine the risk
weights assigned to the underlying credit risk exposures, the unrated
position must be risk weighted at 1250%.

3.5 Treatment of exposures in a second loss or better position in an Asset-


­Backed Commercial Paper (ABCP) programmes
Where a bank holds unrated securitization exposures that is connected with an
ABCP programme, such exposure will be subject to a risk weight which is the
higher of 100% or the highest risk weight assigned to any of the underlying
individual exposures covered by the facility provided that the following
requirements are satisfied:
a) The exposure is economically in a second loss or better position and
the first loss position provides significant credit protection to the second
loss position;
b) The associated credit risk is the equivalent of investment grade or
better; and
c) The bank that holds such unrated securitization exposure does not also
hold or retain the first loss position in the same ABCP programme.

3.6 Risk weights for eligible liquidity facilities


• Liquidity facilities shall be deemed eligible where the following conditions
are satisfied:
a) The contractual clauses relating to the liquidity facility clearly identify
and limit the circumstances under which the facility may be drawn;

54Banks must be able to demonstrate that the composition of the underlying pool and the relevant risk weight of
each individual exposure within the pool are quantifiable at all times.

1160
b) It is not possible for the liquidity facility to be drawn so as to provide
credit enhancement by covering losses already incurred at the time
of draw‐down (for example, by providing liquidity in respect of assets
in default at the time of draw­down or by assets more than fair value);
c) The liquidity facility is not used to provide permanent or regular
funding for the securitization;
d) Repayment of utilized liquidity facilities are not subordinated to the
claims of other creditors of the securitization, except for payments
arising in respect of interest rate or currency derivative contracts, fees
or other such payments that are subject to waiver or deferral;
e) It is not possible for the liquidity facility to be drawn after all
applicable credit enhancements from which the facility would
benefit (specific or general) are exhausted;
f) The facility includes a specific provision that:
i) Provides for an automatic reduction in the amount that can be
drawn equal to the amount of the assets in default; or,
ii) Where the securitized portfolio consists of rated assets, terminates
the facility if the average quality of the securitized assets falls below
the equivalent of investment grade.
• Where the above conditions are met, the bank may apply a 50% CCF to
the eligible liquidity facility regardless of the maturity of the facility.
However, if an external rating of the facility itself is used for risk‐weighting
the facility, a 100% CCF must be applied.
• A conversion factor of 0% shall apply to liquidity facilities that are
unconditionally revocable without advance notice, provided that the
conditions set out above are satisfied and the repayment of utilized facility
are senior to any claims on the cash flows arising from the securitized
assets.

3.7 Treatment of Overlapping Exposures


• Where a bank has two or more overlapping positions in a
securitization that may be drawn under various conditions (e.g. provision of
a liquidity facility and a credit enhancement in a securitization
transaction), they shall be treated as a single position to the extent they
overlap 55. Where the overlapping facilities are subject to different capital
55 For example, if a bank provides a credit enhancement covering 20% of the underlying asset pool in an ABCP
programme and a liquidity facility covering 100% of the same underlying asset pool, the bank would be required
to hold capital against 20% of the underlying asset pool for the credit enhancement it is providing and 80% of the
liquidity facility provided to the underlying asset pool. The overlapping portion between the credit enhancement
portion and the liquidity facility portion would be subject to a capital treatment which results in the highest
capital charges.
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treatments, the treatment that results in the highest capital charge should
be applied on the overlapping portion.
• However, if overlapping facilities are provided by different banks, each
bank must hold capital for the maximum amount of the facility.

3.8 Treatment of Securitizations of Revolving Underlying Exposures with Early


Amortization Provisions
• In the case of the sale of revolving assets through a securitization
transaction that contains an early amortization provision, the originating
bank shall calculate a capital requirement to cover the risk underlying the
repurchase of the securitized assets in addition to the capital requirement
for the securitization positions.
• Where the securitized assets include both revolving and non‐revolving
items, the originating banks shall apply the additional capital requirement
to that portion of the securitized pool that contains the revolving assets. In
calculating the additional capital requirement, a distinction shall be made
between the originator’s interest and the investors’ interest. The originator’s
interest shall not be subordinate to the investors’ interest.
• The exposure of the originating bank associated with its rights in respect of
originator’s interest shall not be considered a securitization position but as
a proportionate exposure to the securitized assets as if they had not been
securitized and included in the calculation of the capital requirement for
credit risk.
• In determining the additional capital requirement, the risk-­‐weighted
amount shall be obtained by multiplying the amount of the investors’
interest by the product of the appropriate conversion factor and the
average risk weight for the securitized assets, calculated under the
standardized approach as if the assets had not been securitized.
Capital requirement for originating banks = (Investors’ interest) x CCF x (Risk
weight of underlying exposures)

The appropriate conversion factors (CCF) to be applied shall be based on


the following factors:

i) The speed of the repayment mechanism, i.e. whether the early


amortization repays investors through a controlled or non-controlled
mechanism;
ii) The type of revolving assets securitized, i.e. whether or not they are
unconditionally cancellable without notice by the originating bank.
• An early amortization provision shall be considered to be “controlled”
where the following conditions are met:

1162
a) The originating bank has an appropriate capital and liquidity
management plan in place to ensure that it has sufficient capital and
liquidity available in the event of an early amortization;
b) Throughout the duration of the transaction there is a pro-­‐rata sharing
between the originator’s interest and the investors’ interest of
payments of interest and principal, expenses, losses and recoveries
based on the value of the assets securitized at one or more reference
points during the month;
c) The amortization period is sufficient to repay or recognize as in default
at least 90% of the total debt (the sum of the originator’s interest and
the investors’ interest) outstanding at the beginning of the early
amortization period;
d) During the amortization period, the speed of repayment shall be no
more rapid than would have been achieved using straight-­‐line
amortization.
• Securitization transactions with early amortization clauses that do not
satisfy the conditions above will be treated as a non-­‐controlled early
amortization

3.8.1 Determination of CCFs for controlled and non-­‐controlled early


amortization features
• In the case of securitizations involving retail revolving assets that are
unconditionally cancellable without notice and are subject to an early
amortization provision that is triggered when the excess spread falls to a
certain level, the appropriate conversion factor shall be based on a
comparison between the three-­‐month average excess spread and the
contractually established excess spread level at which excess spread is
required to be trapped.
• Where the securitization does not contractually provide for excess spread
to be trapped, the trapping point shall be deemed to be 4.5% points
greater than the excess spread level that triggers early amortization.

• The appropriate conversion factor shall be determined separately for


each retail securitization transaction with controlled and non-­‐controlled
early amortization provisions (see table below), expressed as the ratio
between the three-­‐month average excess spread and trapping level
excess spread.

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Conversion factor for calculating the additional requirement
Ratio between the average Securitizations Securitizations with
excess spread and trapping with “controlled” “uncontrolled” early
level excess spread early amortization provisions
amortization
provisions

Greater than 133.33% 0% 0%


From less than 133.33% to 1% 5%
100%

From less than 100% to 75% 2% 15%


From less than 75% to 50% 10% 50%
From less than 50% down 20% 100%
25%

Less than 25% 40% 100%

• All other securitized revolving exposures (i.e. those that are committed and
all non-­retail exposures) with controlled early amortization features will be
subject to a CCF of 90% against the off-­‐balance sheet exposure
• All other securitized revolving exposures (i.e. those that are committed and
all non-­retail exposures) with non-­‐controlled early amortization features
will be subject to a CCF of 100% against the off-­‐balance sheet exposures.
The total capital requirement for all the originating bank’s positions
involving early amortization will be subject to a maximum capital
requirement equal to the greater of:
i) The capital required for retained securitization exposures; or

ii) The capital requirement that would apply had the exposures 56 not
been securitized 57

• Originating banks shall not be required to calculate any additional capital


requirement for:
iii) Securitizations of revolving assets whereby investors remain fully
exposed to the credit risk of future draws, so that the risk on the
56 The assets in respect of the originator’s interest shall not be included among the securitized
exposures.
57 Any gains on sale deducted from Tier 1 capital shall not be taken into consideration in calculating the

maximum requirement.
1164
securitized assets does not return to the originating bank even after
an early amortization event has occurred; this occurs even where
the early amortization provisions mirror the time structure of the
revolving assets transferred;

iv) Securitizations where any early amortization provision is triggered


solely by events not related to the financial performance of the
securitized assets or of the originating bank, such as, material
changes in tax laws or other regulations.

CHAPTER THREE: CREDIT RISK MITIGATION

1.0 Introduction
• Credit Risk Mitigation (CRM) techniques consist of the use of relevant
financial collateral, guarantees, derivatives, estate mortgages and lease
transactions or other instruments in relation to all banking book exposures
and asset classes, that, would reduce the risk recognised in calculating the
bank’s capital requirements.
• Where a rating has already taken into account a particular guarantee
which has been pledged by a borrower, then such guarantee cannot be
considered any longer for purposes of credit risk mitigation.
• Banks must demonstrate to the CBN that they have adequate risk
management policies and procedures to control risk arising from the use of
CRM techniques

2.0 Credit Risk Mitigation Categories


• Unless otherwise specified, two categories of credit risk mitigation are
recognised for standardized credit risk capital requirement calculation
methods: funded and unfunded credit risk mitigation.

2.1 Funded Credit RiskMitigation:


a) Financial collateral;
b) Master netting agreements;
c) On-­‐balance-­‐sheet netting;
d) Other funded credit protection

2.2 Unfunded Credit Risk Mitigation:


a) Guarantees and counter guarantees;
b) Credit derivatives 58.

58Among credit derivatives, credit linked notes shall be subject to the same specific eligibility
requirements as for unfunded credit protection (credit derivatives) and shall be subject to the same
1165
3.0 General Requirements for Accepting Instruments as Credit Risk Mitigants
for Capital Calculation 59
• The requirements for any of the credit risk mitigants to be used must have
been met at the time the credit protection is established and compliance
shall continue over its duration.
• The general requirements 60 seek to ensure the legal certainty and
effectiveness of credit protection including:
i) The binding nature of the legal commitment between the parties,
ii) Its enforceability and validity in the local jurisdiction
iii) Completeness of documentation,
iv) Enforceability of the protection in all relevant jurisdictions against third
parties and
v) The timeliness of liquidation in the event of breach.

3.1 Legal Certainty


• Credit protection acquired by a bank shall be legally valid, effective,
binding on the protection provider and enforceable in all relevant
jurisdictions, including in the event of the insolvency or bankruptcy of the
underlying borrower and/or protection provider 61.
• In particular, the bank shall:
a) Ensure in advance that the instrument used confers a full and freely
enforceable right to activate the protection.
b) Fulfil any requirements to ensure that the credit protection is valid,
effective, binding and enforceable under the applicable law. These
shall include, but not limited to:

prudential treatment as for funded credit protection (amounts paid upon issuance to the bank granting
the loan shall be treated as cash collateral).
59 Recognition of the impact of credit risk mitigation tools shall be subject to satisfaction of the general

requirements described in this section as well as additional specific requirements applicable to the
different types of transactions. The general and specific requirements must have been met at the time
the credit protection is established and compliance shall continue over its duration. The CBN shall verify
the adequacy of the organisational and control arrangements adopted for CRM during the supervisory
review process.
60 Specific requirements are prescribed for the features of each form of CRM and are designed to ensure

a high degree of effectiveness of the credit risk mitigation.


61In general, the possibility of bringing a revocation action shall not mean that the ‘legal certainty’
requirements for credit risk mitigation instruments have not been met. Therefore, the related effects for
regulatory capital purposes may be recognised as from the establishment of the credit protection,
without waiting for the consolidation period to lapse.
1166
i) registration and perfection of deeds of mortgage,
ii) establishing proper liens on property and other collateral or
instruments acquired or created for credit protection, and
iii) obtaining and conserving appropriate documentation explicitly
establishing the existence of the credit protection;
c) Ensuring compliance with all relevant laws and regulations that may
void the validity, effectiveness, binding and enforceability of the
protection.

3.2 Organisational Requirements


• Banks shall establish appropriate policies and processes taking account of
the complexity of its organisational structure.
• Credit Protection must be managed by a system, which governs the entire
process of obtaining, valuing, controlling and realising the CRM instruments
used. Credit protection buyers must have in place documented policies
and procedures that will:
i) Specify the types of CRM instruments eligible for regulatory capital
purposes.
ii) Value and assess the impact of instrument on the overall risk profile of the
exposure.
iii) Ensure that banks continue to perform a complete assessment of the
credit risk of the protected exposure, even when the CRM has been
recognised for regulatory capital purposes.
iv) Establish the appropriate means of measuring, managing and controlling
concentration risk and residual risks arising from the CRM instruments e.g.
failure, reduction or termination of protection.
v) Provide appropriate operational structures for ensuring compliance with
the requirements for the recognition of CRM techniques for regulatory
capital purposes.
vi) Ensure periodic reviews of the status of the legal documentation, the
impact of any changes in the law and any consequent actions to be
taken.
vii) Adopt specific measures to ensure the uniformity of local structure’s
assessments and operational procedures.

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3.3 Timely Liquidation
Credit Protection acquired by banks must be easily liquidated or realizable in a
timely manner. To this end, each bank should have in place appropriate
policies and procedures for the disposal and realisation of any acquired credit
protection should the need arise.

3.4 Disclosure
The recognition of CRM techniques for regulatory capital purposes shall be
subject to the relevant disclosure requirements prescribed for financial
institutions under Pillar III disclosure requirements.

4.0 Standardized Approach for Funded Credit Protection

4.1 Financial Collateral

4.1.1 Specific Requirements


For regulatory capital purposes, financial collateral shall have the
characteristics described below:
1. Correlation
• There shall be no positive material correlation between the value of
the financial collateral and the credit quality of the borrower.
• In all cases, securities issued by the borrower, or any related group
entity, shall not be eligible to be financial collateral.
2. Fair Value
• Banks should calculate the fair value of the collateral and revalue it at
least once every six months or whenever they have reason to believe
that a significant decrease in its fair value has occurred.
3. Segregation
• Where the financial collateral is held by a third party, banks shall
ensure segregation of the assets of the third party from the collateral
(external segregation) and the segregation of assets belonging to
other parties held by the same custodian (internal segregation) 62.

62In general, the segregation requirement may be deemed satisfied where the pledged instruments are
specifically identified and attributable to the owner (for example, registered securities) or where, although
fungible, the assets are held under a contractually governed custodial arrangement or using other
methods that ensure internal and external segregation.
1168
4.1.2 Methods of Calculating Capital Requirement
In calculating the capital requirement for credit exposures secured by eligible
financial collateral, banks may use;
a) The Simple Method
The risk weight associated with the instrument provided as credit protection
shall be applied to the collateralised portion of the exposure. Maturity
mismatching is not permitted under this method. The collateral must be
pledged for at least the entire life of the exposure, it must be marked to
market and re­valued at a minimum frequency of six months. The portion of
the exposure collateralised by the market value of the recognised collateral
will receive a risk weight applicable to the collateral instrument.
b) The Comprehensive Method
Under this method, the amount of the exposure shall be reduced by the
value of the collateral. In calculating the capital requirement, the value of
the exposure and that of the collateral shall be adjusted to take account of
market price volatility by applying appropriate haircuts to both amounts
(collateral value and exposure value) 63.
If the exposure and the collateral are denominated in different currencies,
the value of the collateral shall be further reduced by an appropriate
adjustment that reflects possible fluctuations in the exchange rate.

Once the calculation method is elected, it shall be adopted for all


exposures.
The methods described in this sub‐section shall also apply to amounts paid to
the lending bank in respect of the issue of credit linked notes and to eligible
collateral given as part of securities or commodities repurchase transactions
and securities or commodities lending or borrowing transactions, provided that
they are assigned to the banking book.

See Annex D on the application of the calculation methods.

4.2 Master Netting Agreements

4.2.1 Specific Requirements


The effects of the reduction of credit risk due to bilateral netting contracts
between the bank and a single counterparty relating to securities financing
transactions shall be recognised, provided that in addition to the general
requirements relating to legal certainty set out above, the contracts:

63 Unless cash is involved, the exposure value adjusted for volatility shall be higher than that of the
original exposure, while the adjusted value of the collateral shall be lower than its original value. Maturity
mismatching rules shall apply.
1169
• Give the non‐defaulting party the right to terminate and close‐out in a
timely manner all transactions under the agreement in the event of
default, including in the event of the bankruptcy or insolvency of the
counterparty;
• Provide for the netting, or other equivalent effect, of reciprocal debtor
and creditor positions on transactions closed out under a master
agreement so that a single net amount is owed by one party to the
other.
The specific requirements for financial collateral, where applicable, must also
be met.

The netting of banking book and trading book positions shall be permitted only
where the transactions covered by the agreement satisfy the following
conditions:

a) All the transactions are re‐valued daily at current market prices;

b) The instruments used as collateral for the transaction are among those
eligible as financial collateral (see Annex C).

These regulations shall apply to master netting agreements involving similar


transactions (single‐product netting) and master netting agreements involving
different products (cross‐product netting).

4.2.2 Methods of Calculating Capital Requirement


In calculating the capital requirement for credit exposures secured by master
netting agreements under the standardized approach, banks are expected to
use the comprehensive method only.

4.3 On-balance Sheet Netting


4.3.1 Specific Requirements
The recognition of the effects of on‐balance sheet netting shall be subject to
the following specific requirements:

i) The netting agreement shall be in writing, which shall specifically


identify the assets (loans) and liabilities (deposits) subject to netting.
ii) The bank shall be able to identify at any time, all the loans (assets)
and deposits (liabilities) in respect of the same counterparty that are
subject to the netting agreement;
iii) In adopting precautions to preserve the effective availability of the
liabilities (deposits) to be offset against the assets (loans), restrictions
on the disposal of the liabilities shall be established.

1170
iv) The bank shall monitor and control relevant exposures on a net basis.

4.3.2 Methods of Calculating Capital Requirement


In calculating the capital requirement for credit exposures secured by on-
balance netting agreements, banks may:

i) In respect of liabilities (deposits) of the lending bank, apply the same


treatment provided for cash collateral.
ii) Where the liabilities subject to the netting agreement mature sooner
than the asset, apply the provisions regarding maturity mismatch.

4.4 Other Funded Credit Protection


The instruments described below may be recognised for credit risk mitigation
purposes. In calculating the credit risk mitigation, the unfunded credit
protection calculation method shall be applied.

4.4.1 Deposits with third party institutions


The cash in the supervised institutions or similar instruments held by those outside
of a custodial service and pledged in favour of the bank that calculates the
requirement may be considered as a guarantee issued by the institution itself
provided that:
i) The borrower’s claim against the third party institution is openly
pledged or assigned to the bank and the pledge is legally effective
and enforceable in all relevant jurisdictions;
ii) The third party institution is notified of the pledge or assignment; and is
able to make payment solely to the bank or to other parties with the
bank’s consent;
iii) The pledge is unconditional and irrevocable.

4.4.2 Life Insurance


Insurance policies pledged to the bank may be treated as protection given by
the company issuing the policy, provided that:

a) The company providing the life insurance can be recognised as an


eligible guarantor.
b) The life insurance policy is openly pledged or assigned to the bank.
c) The company providing the insurance is notified of the pledge or
assignment and as a result may not pay the amount payable under
the contract without the bank’s consent.
d) The declared surrender value of the policy is non‐reducible;

1171
e) The bank has the right to cancel the policy and receive the surrender
value in a timely fashion in the event of borrower default;
f) The bank is informed of any non‐payments under the policy by the
policyholder;
g) The credit protection is provided for the maturity of the loan. Where
the insurance relationship ends before the loan relationship expires,
the bank shall ensure that the amount deriving from the insurance
contract serves as security until the end of the duration of the credit
agreement;
h) The pledge or assignment shall be legally effective and enforceable
in all jurisdictions, which are relevant at the time of the conclusion of
the credit agreement
i) The value of the credit protection shall be the surrender value of the
policy.

4.2.3 Financial Instruments Issued by Third Parties


• Financial instruments issued by supervised institutions that the issuer has
undertaken to repurchase at the request of the bearer may be treated as
a guarantee of the issuer.
• The value of the credit protection recognised shall be as follows:
a) Where the instrument will be repurchased at face value, the value of
the protection shall be that amount.
b) Where the instrument will be repurchased at market price, the value of
the protection shall be the value of the instrument calculated in
accordance with the rules applicable to unrated debt securities.

5.0 Standardized Approach for Unfunded Credit Protection


5.1 Guarantees 64 and Counter­Guarantees
5.1.1 Specific Requirements
Without prejudice to the general requirements set out for the recognition of the
credit risk mitigation, the following additional conditions will apply for the
recognition of the effects of guarantees for regulatory capital purposes:
a) The credit protection shall be direct;
b) The extent of the credit protection shall be clearly defined and
incontrovertible;

64Guarantees include inter alia; i) bank guarantee (including blanket guarantee), ii) insurance guarantee,
and iii) commitments undertaken in the delegation, novation and assumption of debt if they meet the
requirements for unfunded credit protection.

1172
c) The credit protection contract shall not contain any clause that could
allow the protection provider to unilaterally cancel the protection. If
the contract allows the protection provider to withdraw, the
agreement between the parties shall safeguard the coverage and all
obligations arising, prior to the exercise of the withdrawal;
d) The credit protection contract shall not contain any clause, the
fulfilment of which is outside the direct control of the lending bank,
which could have one of the following effects:
i) To increase the effective cost of the protection as a result of
deteriorating credit quality of the protected exposure;
ii) To prevent the protection seller from being obliged to pay out in a
timely manner in the event the original borrower fails to make any
payments due;
iii) To allow the protection seller to reduce the maturity of the credit
protection;
e) In the event of default of the counterparty, the bank shall have the
right to recoup, in a timely manner, any claim due under the
guarantee65. In particular, payment shall not be subject to the
lending bank having to pursue the borrower.
f) The guarantee shall cover all payments the borrower is required to
make in respect of the claim. Where certain types of payments are
excluded from the guarantee, the recognised value of the guarantee
shall be adjusted to reflect the limited coverage;
g) The guarantee shall be an explicitly documented obligation assumed
by the guarantor.
In the event of an asset mismatch, guarantee contracts shall contain a cross
default clause under which default in respect of a specific credit exposure of a
given borrower shall extend to all exposures to the same person.

5.1.2 Eligible Guarantors


Guarantees issued by parties falling within the categories listed below shall be
recognised:
a) Central governments and central banks;
b) Public sector entities and regional and local authorities;
c) Multilateral development banks;
d) Supervised institutions;

65 In the case of supplementary unfunded credit protection securing residential mortgage loans, the

contract may establish that the guarantor shall make payment within 24 months.
1173
e) Corporates that have a credit assessment by an ECAI associated
with credit quality step 2 or above.

5.1.3 Methods of Calculating Capital Requirement


In calculating the capital requirement:
a) Banks may substitute the risk weight of the borrower with that of the
guarantor.
b) The value of the credit protection provided by a guarantee shall be
the amount that the protection provider has undertaken to pay in the
event of the default of the borrower.
c) Where the guarantee is denominated in a currency different from
that in which the exposure is denominated (currency mismatch) the
value of the credit protection shall be reduced as provided for in
Annex F.
d) In calculating the capital requirements, a guaranteed exposure with
respect to borrowers assigned to the retail exposure portfolio may be
valued as if it were assigned to the portfolio in which the guarantor is
classified.
e) The regulations set out in this section shall apply in the event of
maturity mismatch.
f) Where the protected amount is less than the exposure value and the
secured and unsecured portions are of equal seniority (i.e. the bank
and the protection provider share the losses on a pro‐rata basis), the
capital requirements shall be reduced proportionately.
g) Where the protected amount is less than the exposure value and the
secured and unsecured portions are of unequal seniority (i.e. the
bank and the protection seller are liable for losses with different levels
of seniority), with the risk being segmented (tranched transactions),
the regulations governing securitisation operations shall apply.

5.1.4 Counter‐Guarantees and Indirect Guarantees


• Where an exposure is covered by a guarantee that is counter-guaranteed
by one of the entities in categories a) through c) listed above, the
exposure may be treated as covered by a guarantee provided by the
counter‐guarantor, provided that the following conditions are met
a) The counter‐guarantee covers all the credit risk elements of the
protected exposure;
b) Both the original guarantee and the counter‐guarantee meet the
requirements for guarantees, except that the counter‐guarantee need
not be direct;
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c) The bank is able to demonstrate that the cover is robust and that nothing
in the historical evidence suggests that the coverage of the
counter‐guarantee is less than effectively equivalent to that of a direct
guarantee by the counter guarantor.
• A counter-guarantee provided by one of the protection providers listed
above shall be recognised even where it does not guarantee the direct
guarantee of the exposure but rather a counter-guarantee of the direct
guarantee provided by a protection seller that is not an eligible counter-
guarantor.

5.2 Credit Derivatives


5.2.1 Eligible Instruments
For the purposes of these regulations, the following types of credit
derivatives and instruments that may be recognised:
a) Credit default swaps;
b) Total return swaps;
c) Credit linked notes.

In order to be recognised for regulatory capital purposes, the protection


shall be provided by a protection provider belonging to one of the
categories listed in the section on eligible guarantors.

Where a bank uses a credit derivative in the supervisory trading book to


hedge exposures in the banking book (internal hedges), the protection shall
be recognised only if the credit risk transferred to the trading book is, in turn,
transferred to one or more third parties through credit derivatives that satisfy
the eligibility requirements provided for in these regulations.

5.2.2 Specific Requirements


Without prejudice to the general requirements set out on CRM, recognition of
credit derivatives shall be subject to the specific requirements applicable to
guarantees and the following conditions: Subject to point b) below, the
credit events specified under the credit derivative shall at a minimum include
all the cases listed below, under the conditions specified:
i) The failure to pay the amounts due under the terms of the underlying
obligation that are in effect at the time of such failure (with a grace
period that is closely in line with or shorter than the grace period in the
underlying obligation);
ii) The bankruptcy, insolvency or inability of the borrower to pay its debts,
or its failure or admission in writing of its inability generally to pay its
debts as they become due, and analogous events;

1175
iii) The restructuring of the underlying obligation involving forgiveness or
postponement of principal, interest or fees that results in a credit loss
event (i.e. value adjustment or other similar debit to the income
statement);
b) Where the credit events specified under the credit derivative do not
include restructuring of the underlying obligation as described in point
(a)(iii) above, the credit protection may nonetheless be allowed subject
to a reduction in the recognised value;
c) In the case of credit derivatives providing for cash settlement, a robust
valuation process shall be in place in order to estimate loss reliably. There
shall be a clearly specified period for obtaining post‐credit‐event
valuations of the underlying obligations;
d) If the protection buyer’s right and ability to transfer the underlying
obligation to the protection provider is required for settlement, the terms
of the underlying obligation shall provide that any required consent to
such transfer may not be unreasonably withheld;
e) The identity of the parties responsible for determining whether a credit
event has occurred shall be clearly defined. This determination shall not
be the sole responsibility of the protection seller. The protection buyer
shall have the right or ability to inform the protection provider of the
occurrence of a credit event.
An asset mismatch under a credit derivative shall only be allowed if: The
reference obligation or the obligation used for purposes of determining
whether a credit event has occurred, as the case may be, ranks paripassu
with or is junior to the underlying obligation;
b) The underlying obligation and the reference obligation or the
obligation used for purposes of determining whether a credit event
has occurred, as the case may be, share the same borrower (i.e. the
same legal entity) and there are in place legally enforceable
cross‐default or cross‐acceleration clauses.

5.3.3 Method of Calculating Capital Requirement


Without prejudice to the provisions of the following sub‐section, treatment of
credit default swaps and total rate of return swaps for regulatory capital
purposes shall be the same as that for guarantees.
In the case of credit derivatives that do not include as a credit event
restructuring of the underlying obligation involving forgiveness or
postponement of principal, interest or fees that result in a credit loss event
(e.g. the making of a value adjustment or other similar debits to the income
statement), the value of the credit position:
1176
a) Shall be reduced by 40% where the amount that the protection seller has
undertaken to pay is not higher than the exposure value;
b) Shall be no higher than 60% of the exposure value where the amount that
the protection provider has undertaken to pay is higher than the
exposure value.
Credit linked notes issued by the lending bank shall be treated as cash
collateral up to the amount collected.

5.3.4 Unfunded Mutual Guarantees


Where mutual guarantee systems provide unfunded credit protection, the
specific requirement for guarantees shall be deemed satisfied where either of
the following conditions are met:
a) The bank has the right to obtain in a timely manner a provisional
payment by the guarantor calculated to represent a robust estimate of
the amount of the economic loss, including losses resulting from the non-
payment of interest and other types of payment which the borrower is
obliged to make, likely to be incurred by the bank proportional to the
coverage of the guarantee. The bank shall establish the appropriateness
of the payment with respect to the losses incurred.
b) The loss‐protecting effects of the guarantee, including losses resulting
from the non‐payment of interest and other types of payments which the
borrower is obliged to make, justify treatment as a guarantee.

6.0 Maturity Mismatches

6.1 Rules for Recognition of Maturity


a) Subject to a maximum of 5 years, the effective maturity of the protected
asset shall be the longest possible remaining time before the borrower is
scheduled to fulfil its obligations.
b) Subject to the following paragraph, the maturity of the credit protection
shall be the time to the earliest date at which the credit protection may
terminate or be terminated.
c) Where there is an option to terminate the protection that may be
exercised at the discretion of the protection provider, the maturity of the
protection shall be taken to be the time to the earliest date at which that
option may be exercised.
d) Where there is an option to terminate the protection that may be
exercised at the discretion of the protection buyer and the terms of the
arrangement at origination of the protection contain a positive incentive
for the bank to call the transaction before contractual maturity, the
1177
maturity of the protection shall be taken to be the time to the earliest
date at which that option may be exercised; otherwise such an option
may be considered not to affect the maturity of the protection.
e) Where a credit derivative is not prevented from terminating prior to
expiration of any grace period required for a default on the underlying
obligation to occur, the maturity of the protection shall be reduced by
the amount of the grace period.

6.2 Effects on the Valuation of Credit Protection


a) Protection of less than three months residual maturity, the maturity of
which is less than that of the underlying exposure, shall not be
recognised.
b) Where there is a maturity mismatch, the credit protection shall not be
recognised where the original maturity of the protection is less than one
year.
c) Unfunded credit protection shall be recognised in the amount adjusted in
accordance with Annex G for all banks.
d) Where the bank uses the simple method in the prudential treatment of
financial collateral, the residual maturity of the guarantee shall not be
less than that of the exposure.
Definition of Terms

• Asset mismatch shall mean a situation in which the underlying asset


differs from the reference obligation due to liquidity or changes in
interest or exchange rates;

• Asset­backed commercial paper (ABCP) is a process by which an SPV


(conduit) issues a commercial paper and uses the proceeds of such
issuance primarily to obtain interests in various types of assets either
through asset purchase or secured lending transactions. An ABCP
programme includes several parties that provide services for the SPV;
credit enhancement that provides loss protection and liquidity facilities
that assist in the timely repayment of the commercial paper;

• Asset­backed securities (ABS) shall mean securities issued by


securitization vehicles as part of securitization transactions having
different levels of subordination in supporting losses;

• Capital market-driven transaction shall mean transactions giving rise to


an exposure secured by collateral, which include a provision
conferring upon the bank the right to receive margin frequently. These

1178
include margin lending and over‐the‐counter (OTC) derivatives with
the exchange of margins between counterparties;

• Cash assimilated instrument shall mean certificates of deposit or other


similar instruments issued by the bank that acquires protection;

• Central government shall mean the central government of a sovereign


state;

• Clean-up call option shall mean a contractual option that permits the
originating bank to repurchase or extinguish the securitization positions
before all of the securitized assets have been repaid, when the
amount of outstanding exposures falls below a certain threshold. In a
traditional securitization, this is usually achieved through the
repurchase of the remaining securitization positions. In a synthetic
securitization, the option usually takes the form of a clause that
extinguishes the credit risk protection of the securitized asset;

Collective Investment Schemes shall mean a scheme in whatever form,


including an open‐ended investment company, in pursuance of which
members of the public are invited to invest money or other assets in a
portfolio, and in terms of which:

i) two or more investors contribute money or other assets and hold a


participatory interest;
ii) the investors share the risk and benefit of investment in proportion to
their participatory interest in a portfolio of a scheme or any other basis
determined in the deed, but not a collective investment scheme
authorized by another act.
The types of collective investment schemes applicable in Nigeria are;

i) Unit Trust (open‐ended or closed ended)

ii) Venture capital funds

iii) Open‐ended Investment Companies

iv) Real Estate Investment Schemes

v) Specialized funds

• Credit derivatives shall mean contracts in which the protection provider is


required to perform a contractually‐agreed obligation triggered by a
specified credit event; such obligation consists of paying an amount equal
to: i) the decline in the value of the reference obligation with respect to the
1179
initial value (“cash settlement variable”); ii) the entire notional value of the
reference obligation in exchange for physical delivery of the reference
obligation or another equivalent financial instrument (“deliverable
obligation”) specified in the contract; iii) a specified fixed amount (“binary
payout”);

• Credit enhancement shall mean a contractual arrangement whereby


the credit quality of a securitization position is better than what it would have
been in the absence of this enhancement. Credit enhancement may be
provided by more junior tranches in the securitization and other types of
credit protection;
Credit event shall mean an event agreed by the parties that triggers the
protection provider’s obligation to fulfil the undertaking established in the
contract;

• Early amortization provision in securitized positions shall mean a


contractual provision that, upon the occurrence of specified events, triggers
repayment of investors’ securitization positions prior to the originally stated
maturity of the securities issued;

• Excess spread shall mean the difference between the revenue flows from
the securitized assets and the costs and expenses connected with the
securitization (for example, interest paid to holders of the ABS securities and
servicing commissions);

• Exposures shall mean on‐balance sheet assets (for example, loans,


shares, bonds, subordinated loans) and off‐balance‐sheet assets (for
example, guarantees issued). Exposures shall not include assets deducted
from regulatory capital and those allocated to the supervisory trading book
subject to capital requirements for market risk;

• External Credit Assessment Institution (ECAI) shall mean a credit


assessment agency recognized by the Central Bank of Nigeria;

• Fair value shall mean the amount at which an asset may be exchanged,
or a liability settled, in a free transaction between knowledgeable,
independent parties.

• Federal government shall mean the government of the Federal Republic


of Nigeria;

• First losses in securitized positions shall mean losses on securitized


portfolios, the amount of which reduces the right of securitization positions to
receive payments, starting with that with the highest degree of
subordination;
1180
• First­to­default derivatives shall mean contracts referring to a number
(basket) of borrowers under the terms of which the protection provider’s
payment obligation is triggered by the first default in the basket and that this
credit event terminates the protection afforded by the derivative contract;
Funded credit protection shall mean the credit risk mitigation techniques that
give the protection buyer the right to satisfy its claim with specified assets or
cash amounts. These include financial collateral, real estate collateral and
movable property collateral (other physical collateral), credit linked notes,
trade receivables, on and off‐balance sheet netting; other types of
protection are listed in sub‐section 4.4 of this chapter. Funded credit
protection shall also include guarantees given through securities repurchase
and lending/borrowing transactions and the related master netting
agreements, as well as leasing transactions;

• Future margin income (FMI) shall mean the amount of income


anticipated to be generated by the relevant exposures over a certain
period of time that can reasonably be assumed to be available to cover
potential credit losses on the exposures (i.e. after covering normal business
expenses). FMI usually does not include income anticipated from new
accounts.

• Gain-on-sale shall mean any residual interest retained by the originating


bank that is, an on‐balance sheet asset that represents a retained beneficial
interest in a securitization accounted for as a sale, and that exposes the
originating bank to any credit risk directly or indirectly associated with the
transferred asset, that exceeds a pro rata share of that originating bank's
claim on the asset.

• Implicit support securitized positions shall mean credit enhancement


provided by the originator or by the sponsor in excess of its contractual
obligations to reduce actual or potential losses by holders of securitization
positions.

• Investment grade: A securitization exposure is deemed to be of


investment grade if an ECAI recognized by the bank has assigned it a rating
within credit quality steps 1 to 3.

• Investor shall mean the person that holds a risk position in a securitization;

• Investors’ interest shall mean the portion of the pool of revolving assets
that forms the complement to the originators’ interest.

• Loan to value ratio shall mean a ratio used by lenders to express the ratio
of loan to the value of an asset purchased. The higher the ratio, the more
riskier the loan will be considered to the lender.
1181
• Liquidity facility shall mean a securitization position arising from a
contractual agreement to provide funding to ensure the timeliness of cash
flows to investors;

• Margin lending shall mean credit extended by an intermediary in


connection with the purchase, sale, carrying or trading of securities by the
counterparty for which an exchange of margins is required. Margin
lending shall not include traditional financing collateralised by securities;

• Master netting agreements are legal agreements between two parties


that have multiple derivatives contracts with each other that provide for the
net settlement of all contracts through a single payment, in a single
currency, in the event of default or termination of any one contract.

• Maturity mismatch shall mean a situation where the residual maturity of


the credit protection is less than that of the protected exposure;

• Nth-to-default derivatives shall mean contracts referring to a number


(basket) of borrowers under the terms of which the protection provider’s
payment obligation is triggered by the nth default in the basket; borrowers
may be assigned different settlement amounts;

• Originating bank: A bank shall be considered an originating bank in a


securitization transaction if it meets either of the following conditions:

i) The bank originates directly or indirectly (e.g. a bank purchases a third


party financial instrument via its balance sheet or acquires credit risk
through credit derivatives and subsequently sells or transfers to an SPV)
the underlying exposures included in the securitization; or
ii)The bank serves as a sponsor of an ABCP conduit or similar
programme that acquires exposures from third‐party entities. In the
context of such a program, a bank would generally be considered a
sponsor and, in turn, an originator if it, in fact or in substance,
manages or advises the programme, places securities into the market,
or provides liquidity and/or credit enhancements.
• Originator’s interest shall mean the value of the portion held by the
originating bank in a portfolio of revolving exposures, the drawn amounts of
which have been securitized. This portion shall be equal to the ratio between
the amount of the securitized drawn amounts whose cash flows are not
available to repay investors in the securitization and total securitized drawn
amounts. The undrawn amounts shall also be multiplied by this ratio to
determine the portion of the available margin attributable to the originator
and the portion attributable to the investors.

1182
• Protection buyer shall mean the party that purchases protection against
credit risk (or sells the credit risk);
• Protection provider shall mean the party that sells the credit risk
protection (or purchases the credit risk);

• Rating shall mean the credit assessment assigned by an ECAI;

• Reference entity shall mean the party/parties or country (in the case of
sovereign risk) to which the reference obligation refers;

• Reference obligation shall mean the obligation used to determine the


cash settlement value or the deliverable obligation;

• Reference rate shall mean the market interest rate increased or


decreased by a specified spread;

• Revolving underlying exposures involve exposures where the borrower is


permitted to vary the drawn amount and repayments within an agreed limit
under a line of credit (e.g. credit card receivables and corporate loan
commitments)

• Securities financing transactions shall mean securities or commodities


repurchase/reverse repurchase transactions, securities or commodities
lending/borrowing transactions and margin lending transactions;

• Securitization position shall mean any type of exposure to a securitization,


such as securities issued by special‐purpose vehicles, liquidity facilities,
subordinated loans, interest rate or currency derivative transactions
performed as part of a re­securitization;

• Securitization shall mean a transaction that divides the credit risk of an


asset or portfolio of assets into two or more tranches and in which:

i) Payments in the transaction are dependent on the performance of


the asset or portfolio of assets in question;
ii)Tranches have different degrees of subordination in supporting the
losses of the securitized assets or portfolio;
• Securitized assets shall mean individual assets or groups of assets that
have been securitized. These include loans, debt securities, equity securities,
ABS securities and loan commitments.

• Solicited rating shall mean a rating assigned for a fee following a request
from the entity evaluated. Ratings assigned without such a request shall be

1183
treated as equivalent to solicited ratings if the entity had previously obtained
a solicited rating from the same ECAI;

• Special-purpose vehicle (SPV) shall mean the company or other legal


entity other than the bank, organized for the purpose to carrying out one or
more securitizations which possess the following characteristics:

i) its activities are limited solely to those appropriate to accomplishing


that objective;
ii)the structure of the vehicle is designed to isolate the obligations of the
vehicle from that of the originating bank, and;
iii) the holders of the beneficial interests in it may pledge or exchange
those interests without restriction.
• Supervised institutions shall mean deposit money banks, discount houses
and other financial institutions under the supervisory purview of the CBN.

• Synthetic securitization shall mean a securitization transaction in which


the transfer of credit risk in two or more tranches is achieved through the use
of credit derivatives or guarantees with no transfer of the asset or portfolio of
assets. Synthetic securitizations shall include transactions in which it is
possible, using credit protection, to isolate within a portfolio composed of
one or more assets a risk component that supports the first‐loss portion of the
portfolio (tranched transactions);

• Total rate of return swaps (“TRORs”) shall mean contracts under which the
protection buyer (also called the “total return payer”) agrees to transfer all
the cash flows generated by the reference obligation to the protection
provider (also called the “total return receiver”), who agrees to transfer the
cash flows associated with changes in a reference rate to the protection
buyer. On the payment dates (or the termination date of the contract), the
total return payer pays the total return receiver any increase in the value of
the reference obligation (i.e. the positive difference between the market
value and the initial value of the reference obligation). In the case of a
decline in the value of the reference obligation, the total return receiver
pays the equivalent amount to the total return payer 66;

• Traditional securitization shall mean a securitization through which credit


risk is transferred by selling the securitized assets to a special-­‐purpose
vehicle that issues securities (ABS) that do not represent payment obligations
of the originating bank. Traditional securitizations shall include the transfer of

66 Basically, a TROR is a structured financial product combining a credit derivative and an interest rate derivative
(interest rate swap).
1184
credit risk by means of loans granted by the vehicle to the originating bank
(sub-­participation);

• Tranches shall mean contractually established segments of credit risk


associated with an exposure or a number of exposures, in which each
segment is associated with a greater or lesser degree of subordination in
supporting losses than another segment, without taking account of any
credit protection provided by third parties directly to holders of positions in
the tranches. Securitization exposures that cover the “first loss” incurred by
the securitized portfolio represent the junior risk (for example, junior securities,
subordinated loans); Underlying asset shall mean the on-­‐balance-­‐sheet
asset for which protection has been acquired;

• Unfunded credit protection shall mean the credit risk mitigation


techniques based on the undertaking of a third party to pay a specified
amount in the event of the default of the borrower or on the occurrence of
other specified credit events. These include guarantees and credit
derivatives, with the exception of credit linked notes;

• Unsolicited rating shall mean a rating assigned without a request from the
entity evaluated and without payment of a fee.

Definition of Past Due or Defaulted Exposures

Past due or defaulted exposures shall include; bad debts, substandard loans,
and restructured exposures. Specifically, a default is considered to have
occurred with regard to a particular obligor when either or both of the two
following events have taken place:-­‐

i) The bank considers that the obligor is unlikely to pay its credit
obligations to the banking group in full, without recourse by the bank
to actions such as realizing security (if held).
ii) The obligor is past due more than 90 days on any material credit
obligation to the banking group.
The elements to be taken as indications of unlikeliness to pay include but are
not limited to the following:
• The bank puts the credit obligation on non-­‐accrued status (e.g.
suspended interest).
• The bank makes a charge off or an account-­‐specific provision or
impairment resulting from a significant decline in credit quality
subsequent to taking on the exposure (impairment provisions on equity
exposures set aside for price risk do not signal default).

1185
• The bank sells the credit obligation at a material credit related
economic loss. (For securities financing, the facility should not be
recorded as a default if the collateral is liquidated not due to the
deterioration of an obligor’s creditworthiness but to restore an agreed
collateral coverage ratio given a fall in the value of collateral and this
has been disclosed to the customer in writing at the granting of this
facility).
• The bank consents to a restructuring of the credit obligation where this
is likely to result in a diminished financial obligation caused by the
material forgiveness, or postponement of principal, interest or (where
relevant) fees. This constitutes a granting of a concession that the
bank would not otherwise consider.
• Default of a related obligor. Banks must review all related obligors in
the same group to determine if that default is an indication of
unlikeliness to pay by any other related obligor. Banks must judge the
degree of economic interdependence between the obligor and its
related entities.
• An obligor is in significant financial difficulty. An indication could be a
significant downgrade of a borrower’s credit rating.
• Default by the obligor on credit obligations to other financial creditors,
e.g. other banks or other financial institutions.
• The bank has filed for the obligor’s bankruptcy or a similar order in
respect of the obligor’s credit obligation to the banking group.
• The obligor has sought or has been placed in bankruptcy or similar
protection where this would avoid or delay repayment of the credit
obligation to the banking group.
Default at Facility Level
For retail exposures, banks are allowed to apply the definition of default at
facility level, rather than at borrower level. For example, a borrower might
default on a credit card obligation and not on other retail obligations. As
such, default by a borrower on one obligation does not require a bank to
treat all other obligations to the banking group as defaulted. However, banks
should be vigilant and consider a borrower’s cross-­‐default of facilities if a
default on one facility is representative of his incapacity to fulfill other
obligations.
Re-­‐Ageing
The bank must have clearly articulated and documented policies in respect
of the counting of days past due, in particular in respect of the re-­‐ageing of
the facilities and the granting of extensions, deferrals, renewals and rewrites

1186
to existing accounts. At a minimum, the re-­‐ageing policy must include:

• approval authorities and reporting requirements;

• minimum age of a facility before it is eligible for re-­‐ageing;

• delinquency levels of facilities that are eligible for re-­‐ageing;

• maximum number of re-­‐ageings per facility; and

• a reassessment of the borrower’s capacity to repay.

These policies must be applied consistently over time, and must support the
‘use test’ (i.e. if a bank treats a re-­‐aged exposure in a similar fashion to other
delinquent exposures more than the past-­‐due cut off point, this exposure
must be recorded as in default for IRB purposes). Some supervisors may
choose to establish more specific requirements on re-­‐ageing for banks in
their jurisdiction.

Treatment of Overdrafts
Overdrafts must be subject to a credit limit and brought to the knowledge of
the borrower. Breaches of the limit must be monitored. If the account was
not brought under the limit after 90 days (subject to the applicable past-
­‐due trigger), it would be considered as defaulted. Banks must have in place
rigorous internal policies for assessing the creditworthiness of customers who
are offered overdraft accounts

ANNEX A: External Credit Assessment Institutions

Introduction

For the purposes of determining risk weights under the standardized


approach, the Central Bank of Nigeria shall recognize ECAIs to formulate
opinions and make credible and transparent credit assessments.

The verification of compliance with the requirements and mapping of ratings


to risk weight classes shall be performed by the CBN on the basis of the
criteria specified in this section.

Recognition may be requested for in any one of the following categories:

a) Solicited ratings;

b) Unsolicited ratings provided that the ECAI only issues credit assessments
of this kind.

1187
1. Requirements for Recognizing External Credit Assessment Institutions

•The Central Bank of Nigeria will only recognize legal persons as ECAIs.
•An ECAI may also request recognition for its subsidiaries in a single
application, provided that the latter adopts analogous methodologies
such that the assessments they issue can be considered equivalent to
those of the applicant.
•ECAIs shall satisfy the following requirements for the purposes of receiving
recognition:

a) Objectivity
i. The methodology adopted shall take into account the factors
material to differentiating the specific characteristics of the different
positions assessed and is supported by statistical evidence from its
use in the past
ii. The robustness of the methodology shall be adequately supported
by the available data concerning the default rates recorded for
individual rating grades and the migration rates between different
rating grades.
iii. The methodology must have been applied in a consistent manner
to all exposures in a given class and adequately discriminate
between exposures in different classes;
iv. The methodology must have been validated internally on the basis
of historical experience;
v. The methodology is usually calibrated in the light of systematic errors
highlighted by the back testing of outputs.
b) Independence
The formulation of ratings shall be free from external interference, and
conflicts of interest with regard to ownership, customers and other activities
performed by the ECAI and its analysis shall be managed appropriately. For
this purpose,
ECAIs applying for recognition shall certify and demonstrate that:
i. Measures have been taken to ensure independence from
ownership and to prevent external political or economic pressures
or constraints from jeopardizing the objectivity of credit
assessments;
ii. The organizational structure provides for the operational, human
resource and, possibly, legal separation of rating activity from other
activities, such as consulting and marketing, that could affect the
objectivity of the assessments;
1188
iii. Internal rules are in place to prevent conflicts of interest concerning
persons involved in assigning ratings;
iv. Rating activities are profitable and adequate financial resources
are available;
v. The structure of fees charged the rated entities and the
compensation of staff responsible for assigning ratings is not a
function of the outcome of the assessment;
vi. Measures have been taken to ensure the independence of the
ratings concerning major customers that generate a significant
share of revenues (Greater than 5%);
vii.They have sufficient staff with an appropriate level of professional
expertise and experience in performing credit assessments (for
example, at least one of the persons participating in the rating
decision process should have at least three years of experience).
viii. Internal corporate governance rules are clearly formalized;
ix. They make adequate disclosure of any conflicts of interest;
x. They have an internal audit function (or other similar function) that
is hierarchically independent of the persons responsible for
assigning ratings and is charged with verifying the effective
application of the independence conditions.
c) Regular Review

i. ECAIs shall have procedures to monitor any changes in the


assessed entity’s position that could lead to significant change in
the rating and, if necessary, to amend the rating promptly;
ii. ECAIs shall have a proven back-­‐testing procedure;
iii. Credit assessments shall be reviewed at least once a year.

d) Market Credibility
i. The degree to which an ECAI’s ratings are accepted at the
international level;
ii. Where an ECAI operates exclusively or primarily in its domestic
market, it should provide evidence of reliance of its ratings by
banks not belonging to the same banking group.

e) Transparency of Methodologies and Ratings.


i. ECAIs shall disclose the principles underlying their rating
methodology and any changes in the methodology in a manner
that is understandable to users of the credit assessments

1189
ii. Credit assessments shall be accessible in a timely manner to all
banks and, where banks are required to pay a commission, such
commission shall be set in a transparent manner. The effective
default rates and, where available, the theoretical probabilities of
default associated with the individual rating grades shall also be
accessible;

In assessing compliance with these requirements, the CBN shall


consider the adoption of a code of conduct based on international
best practices.

2. Recognition Process
The application for recognition may be submitted by the ECAI or the bank
that intends to use such ECAI. For ECAIs already recognized in other
jurisdictions, such evidence shall be submitted to the CBN by the ECAI or the
bank.

The application for recognition shall specify:

For which of the following sectors recognition is requested: 67

a) Public finance;
b) Commercial entities;
c) Structured finance (including securitization positions)

Whether recognition is requested for solicited or unsolicited ratings

The application shall provide the information requested in sufficient detail,


compliance with all the requirements for recognition indicated above. If the
application is submitted by an ECAI, it shall be accompanied by:
a) Certification by an independent external entity with proven
professional expertise and high standing affirming the compliance of
an ECAI with all the requirements for recognition. The entity shall also
certify that, where the ratings are not accessible to the public, they
correspond to those for the period in which they were produce

b) Certification of the banks that plan to use the ratings.


c) Evidence that such ECAI is registered by the appropriate regulatory
agencies as an eligible rating agency.

67Recognition may also be requested for sub-categories of borrowers within each class where the ECAI
operates in specialized sectors (e.g. by size of the undertaking).
1190
Where the application for recognition is submitted by a bank, the CBN may
request the cooperation of the ECAI for the purposes of recognition as well as
the certification referred to in point (a) above.
The CBN may also consider other information in addition to that submitted in
the application for recognition if it is deemed material and significant in
evaluating the application. The CBN shall publish the list of recognized ECAIs
and the related mapping through the appropriate channels.

4. Mapping
The credit assessments issued by ECAIs shall be associated with the risk
weight classes established in these regulations (mapping).Mapping shall be
carried out by the Central Bank of Nigeria, taking account of quantitative
and qualitative factors, with the latter including the definition of default used.
5. Ongoing Review
The CBN shall ascertain ongoing compliance with the recognition
requirements. For this purpose, ECAIs shall provide the CBN with:

i) Notice of any material change in their rating systems that would


produce a change in the ratings of a significant portion of the
entities rated in a given segment;
ii) Mapping data updated on an annual basis
iii) Update responses to the questionnaire set out below at least every
four years (including certification by an expert as provided for in sub-
­‐section 2 Recognition Process).
iv)Any other material information which may assist the CBN in its
continuous review.

Information that External Credit Assessment Institutions shall provide in the


Application for Recognition (Questionnaire)

General information
•Type of application:
a) for use in the standardized approach;
b) for risk weighting securitizations;
•Market segments for which recognition is requested:
a) Public finance;
b) Commercial entities;
c) Structured finance;
1191
•Types of credit assessments to be issued (solicited or unsolicited), where
both solicited and unsolicited ratings are issued, a brief description of the
rationale behind the policy shall be provided;
•Countries where the applicant is active.

Presentation of the Applicant


•Legal form and structure of the group to which the applicant belongs, if
any;
•Ownership structure, list of shareholders that hold 10% or more of the
share capital and/or exercise significant influence;
•Total number of employees specifying qualification and experience
•Total number of major customers68 and the percentage of total
revenues from services rendered to them;
•Financial information: financial statements for the past three years and
forecasts for the next three years, where available.

Requirements

Objectivity
•A high-­‐level description of the credit assessment methodology and the
procedures through which it is applied (in a consistent manner) and
reviewed.
•An explanation shall also be provided of the role and operation of any
committees that approve the assessments and the significance of non-
­‐public information obtained from rated entities;
•For each of the borrower or exposure group for which a core
methodology is applied, 69 a high‐level description of the quantitative and
qualitative inputs;
•A brief explanation by geographical area of the differences in the
methodologies;
•A description of the procedures used to verify the consistency and
discriminatory power of the methodologies, with details on the results
generated by such analysis;
•A Comparison of theoretical default probabilities where available and
effective default rates; 70

68Major customers shall be those who account for 5% or more of total revenues.
69 Two methodologies shall be considered distinct when their core elements change. Adaptation of a
methodology to the specific characteristics of a certain class of borrowers (for example, to take account of the
characteristics of the geographical area in which an undertaking operates) shall not, for the purposes of this
questionnaire, be considered a different methodology if the basic features remain unchanged.
1192
•The results of internal validation.

Independence
•Identification and detailed description of all factors demonstrating
compliance with the independence requirements for which specific
certification is required. Evidence demonstrating that the requirements
have been met shall also be attached.

Regular Review
•General information on the frequency and scope of regular reviews,
people involved, means used to ensure timely updating of data and
assessments, automatic warning systems, mechanisms to enable
systematic errors to feedback into changes in the methodology;
•A summary of the reviews carried out;
• An explanation of the methods for performing back‐testing and
certification that have been in use for at least one year.

Transparency
•Explanation and demonstration of the way in which the principles of the
methodologies employed and changes made to them are disclosed to
the banks involved.

Reputation
•Information demonstrating widespread reliance by the international
market on the ratings issued. For example, the following factors may be
considered:
•Market share, revenues generated by rating activities, and, more
generally, financial resources available, any pricing based on the rating,
the use of the ratings by banks for bond issues or assessing credit risk;
•Where an ECAI operates exclusively or primarily in its domestic market, it
should provide evidence of reliance on its ratings by banks not belonging
to the same banking group.
Disclosure of credit assessments
•Accessibility to the ratings on the part of banks;
•Where both solicited and unsolicited ratings are issued, the methods
employed to enable banks to distinguish between the two shall be
disclosed;

70This comparison shall be performed for at least the past five years for exposures other than in respect of
securitizations, for which a ten-period period shall be used.
1193
•Where access to ratings or other information needed for their use is
granted in exchange for payment, the criteria used to determine the
price and certification that pricing is transparent shall be described.
Mapping of Ratings for Commercial Entities and Public Finance

This shall specify the following:

•The definition of default used and the time horizon;


•Most recent two three‐year cumulative default rates (CDR);
•Average three‐year CDR based on a five‐year time series;

•Description of the methodology for calculating CDRs: method of


aggregating defaults (weighting mechanism), selection of pool (static or
dynamic, adjusted),

•For each rating grade, the number of defaults actually registered each
year and the annual default rates based on a five‐year data time series;

• Comparison between the actual and theoretical (where available)


annual default rates;

•Transition matrices with the size of the cohorts or pool of issuers and the
number of ratings withdrawn for each rating grade;

•Dynamic characteristics of the rating methodology (point‐in-time or


through‐the­cycle);

•The rating scale adopted and the meaning of the rating categories;
•The geographic coverage of the rating system;

Mapping of Securitization Ratings


•Definition of default/impairment on which the default/impairment rates
are calculated and the time horizon;
•Analysis of the performance of the rating system and description of its
main features (choice of the time horizon, impact of withdrawn and cured
ratings on default rates, how economic cycles are taken into account);
•Data on the default and/or loss/recovery rates based on a time series of
at least ten years;
•Transition matrices with the size of the cohorts and the number of ratings
withdrawn for each rating grade;
•The rating scale adopted and the meaning of the rating categories;
•The geographic coverage of the rating system.

1194
ANNEX B: Classification of Guarantees and Commitments High Risk: CCF: 100%

i. Guarantees having the character of credit substitutes;


ii. Credit derivatives: commitments in respect of the trading of credit
derivatives as a protection seller;
iii. Acceptances;
iv. Endorsements on bills not bearing the name of another bank;
v. Irrevocable standby letters of credit having the character of credit
substitutes;
vi. Spot and forward purchase commitments for securities and other
financial instruments other than foreign exchange, except for those
allocated to the supervisory trading book and subject to the capital
requirements for market risk as well as those with own equity
instruments as the underlying;71
vii. Spot and forward deposits and loans to be made;
viii. The unpaid portion of partly paid-up shares and securities, except for
those allocated to the supervisory trading book and subject to the
capital requirements for market risk;
ix. Assets transferred with option for repurchase upon demand by
transferee;72
x. Written put options on securities and financial instruments other than
foreign exchange, except for written put options allocated to the
supervisory trading book and subject to the capital requirements
for market risk, as well as those with own equity instruments as the
underlying;73
xi. Other lending commitments of certain utilization.
Above Average Risk: CCF- 50%

i. Irrevocable or confirmed documentary credits except for those in


which the of the goods serves as collateral or other self‐liquidating
transactions;
ii. Guarantees not having the character of credit substitutes;

71 The counterparty to which the risk weight refers shall be the entity that issued the financial instrument

being traded.
72 The counterparty to which the risk weight refers shall be the entity that issued the financial instrument

being traded, or in the absence of an issuer, the borrower.


73 The counterparty to which the risk weight refers shall be the entity that issued the financial instrument

being traded, or in the absence of an issuer, the borrower.


1195
iii. Warranties and indemnities (including tender, performance, customs
and tax bonds) and other guarantees;
iv. Irrevocable standby letters of credit not having the character of credit
substitutes;
v. Facilities supporting securities issues (Notes Issuance Facility (NIF); and
Revolving Underwriting Facility (RUF));
vi. Undrawn credit facilities (lending commitments of uncertain utilization,
74 commitments to provide guarantees or acceptance facilities) with
an original maturity of more than one year.
Moderate Risk: CCF: 20%
i. Irrevocable or confirmed documentary credits in which the shipment
of the goods serves as collateral or other self‐liquidating transactions
ii. Undrawn credit facilities (lending commitments of uncertain utilization,
75 commitments to provide guarantees or acceptance facilities) with
an original maturity of up to one year, which may not be revoked
unconditionally at any time without notice or that do not provide for
automatic revocation due to deterioration in a borrower’s
creditworthiness;
iii. Other medium/low risk assets.
Low Risk: CCF is 0%
i. Undrawn credit facilities (agreements to lend, purchase securities,
provide guarantees or acceptance facilities) which may be revoked
unconditionally at any time without notice, or that provide for
automatic cancellation due to deterioration in a borrower’s
creditworthiness.
ii. Retail credit lines may be considered as unconditionally revocable
where the terms permit the bank to cancel them to the full extent
allowable under consumer lending laws;
iii. Other low-risk items for banks to apply low risk CCF for guarantees and
other commitments, the following conditions must be satisfied;

• The bank has legal ability to cancel the exposure without prior
notice
• The internal controls and monitoring mechanism can immediately
detect any deterioration in the borrowers’ credit worthiness
• No legal actions are instituted against the bank in respect of the
exposures.

74 Including securities.
75 Including securities.
1196
Annex C: Financial Collateral

Eligible Instruments
The following instruments may be recognised as eligible financial
collateral:
b) Gold;
c) Cash on deposit and cash equivalent instruments held by the bank
purchasing protection; these include credit-linked notes issued by
the bank purchasing protection.

d) Debt securities issued by:

i. Central governments and their central banks, which


securities have a specific rating from an ECAI of a credit
quality step of between 1 and 4;

ii. International organisations and multilateral development


banks to which a 0% risk weight is assigned;

iii. Public sector entities and state or local governments whose


exposures meet the eligibility criteria for classification as
liquid assets by the CBN;

iv. Multilateral development banks other than those under point


ii), public sector entities and regional or local governments
other than those under point iii) whose securities have a
specific rating from an ECAI of a credit quality step of
between 1 and 3;

v. Other entities whose securities have a specific rating from an


ECAI of a credit quality step of between 1 and 3;
e) Debt securities issued by supervised institutions and corporates, with
a specific rating from an ECAI of a credit quality step of between 1
and 3 applicable to short term exposures;
f) Unrated debt securities issued by entities whose exposures are
treated as exposures to supervised institutions, provided that:

i. They are listed on a recognised exchange;


ii. They qualify as senior debt;
iii. All other issues of the same seniority by the issuing institution
have a rating associated with credit quality steps1 through 3;

1197
iv. The bank has no information to suggest that the issue would
justify a rating, if applicable, below that indicated in the
preceding indent;
v. The bank can demonstrate that the instrument has sufficient
market liquidity;
g) Equities and convertible bonds included in All Share Index (ALSI);
h) Units in Collective Investment Schemes which have a daily public
price quote and the Collective Investment Scheme’s assets are
invested in the instruments listed above.
i) If the comprehensive method is used for the prudential treatment
of financial collateral, the latter may also include:
j) Equities and convertible bonds not included in the All Share Index
(ALSI) but traded on a recognised exchange; ii. Units in Collective
Investment Schemes if they have a daily public price quote and
the unit trust’s assets are invested in instruments listed above.

Annex D: Collateral under the Standardised Approach

Calculation Methods

1. Simple Method

1. The risk weight envisaged for instruments provided as collateral shall


apply, entirely or proportionately, to exposures secured,
respectively, in whole or in part by financial collateral. The
unsecured portion of the exposure shall receive the counterparty’s
(borrower’s) risk weight.
2. The risk weight applied to the collateralised portion of the exposure
shall be at least 20%, except in the cases expressly provided below.
3. The collateral shall be assigned a value equal to the fair value of
the underlying instrument.
1.1. Risk Weights: Exceptions to The 20% Minimum Threshold

The secured portion of the following transactions may receive a risk weight of
0% provided that the conditions listed below are met.

1. Repurchase transactions and securities lending and borrowing


transactions, where:

a) Both the exposure and the collateral are cash or debt securities
issued by the persons listed in Annex A, letter c), points i) through iii)

1198
and receive a risk weight of 0% for the purposes of calculating the
capital requirement;

b) Both the exposure and the collateral are denominated in the same
currency;

c) Either the maturity of the transactions does not exceed one day or
both the exposure and the collateral are subject to daily marking-
­to-market or daily re­margining;

d) The time between the last marking‐to‐market before a failure to re-


margin by the counterparty and the liquidation of the collateral
does not exceed four business days;

e) The settlement of the transactions occurs within a settlement system


proven for that type of transaction;

f) The documentation covering the agreement is standard market


documentation for these types of transactions;

g) The documentation governing the transaction provides for


immediate termination in the event the counterparty fails to
physically deliver cash, securities or margins or otherwise defaults;

h) Upon any default event, regardless of whether the counterparty is


insolvent or bankrupt, the bank has the unfettered, legally
enforceable right to immediately seize and liquidate the collateral
for its benefit.

i) The counterparty is a core market participant.

For the purposes of the application of these rules, the category of core
market participants shall include:

1. The Federal Government of Nigeria;

2. Central Bank of Nigeria, and

3. Licensed banks and discount houses in

2. Over‐the-counter derivatives transactions listed in the regulations


governing counterparty risk whose exposure is calculated in accordance
with such regulations, subject to daily marking-to-market, collateralised
by cash or cash ­ equivalent instruments where there is no currency
mismatch.

1199
3. Transactions in which the exposure and the collateral are denominated
in the same currency and the collateral is either:

i. Cash on deposit or a cash equivalent instrument;

ii. Debt securities issued by one of the entities eligible to issue financial
collateral, excluding public sector entities, if such securities have a
0% risk weight for the purpose of calculating the capital
requirement 76 and their fair value has been discounted by20%.

Banks shall apply a 10% risk weight to the secured portion of exposures
connected with the transactions specified in point i) where the counterparty
is not a core market participant (see box). The transactions specified in point
ii) shall also be subject to the same risk weight if they are secured by debt
securities issued by one of the entities eligible to issue financial collateral,
excluding public sector entities, if such securities have a 0% risk weight for the
purpose of calculating the capital requirement.

2. Comprehensive Method

The exposure value under the comprehensive method shall be calculated as


follows:
Formula 1
E* = max {0, [E x (1 + He) – C x (1 – Hc – Hfx)]} 77
Where:

E* = The exposure value after risk mitigation

E = Current value of the exposure

He = Haircut appropriate to the exposure

76 Where the CBN has authorised the application of a 0% risk weight for repurchase transactions and securities
lending and borrowing transactions involving securities issued by that sovereign, Nigerian banks may apply the
same preferential treatment.
77 The risk weight for an asset secured by eligible financial collateral shall be obtained by multiplying the risk

weight of the counterparty by an amount equal to the difference between the exposure amount and the value
of the collateral. In order to take account of market price volatility, an appropriate ‘haircut’ shall be applied to
both the collateral value and the exposure amount. With the exclusion of cash, the volatility-adjusted
exposure value shall be higher than the value of the original exposure, and vice-versa for collateral. Where the
exposure and the collateral are denominated in difference currencies, the amount of collateral shall be further
reduced to reflect possible foreign exchange volatility.
1200
C = The current value of the collateral received

Hc = Haircut appropriate to the collateral

Haircut for currency mismatch between the collateral and


Hfx = exposure

In the case of exposures represented by loans and derivatives, “He” shall be


equal to zero. Banks may apply a haircut of zero to repurchase transactions
and securities lending and borrowing transactions only where they possess
the characteristics set out in sub-section 1.1 of this Annex 78.

Where the collateral consists of a number of eligible instruments (basket of


assets), the haircut on the basket shall be H= Σiai Hi, where ai is the weight of
the asset (as measured by units of currency) in the basket and Hi, the haircut
applicable to that asset.

When the frequency of re-margining or revaluation is longer than the


minimum, the minimum haircut numbers will be scaled up depending on the
actual number of business days between re‐margining or revaluation using
the square root of time formula below:

Formula 2

( 𝑵𝑵 𝑹𝑹 + ( 𝑻𝑻 𝑴𝑴 – 𝟏𝟏 ) ) / 𝑻𝑻 𝑴𝑴
H = HM

Where:

H = haircut

HM = haircut under the minimum holding period

TM = minimum holding period for the type of transaction

NR = actual number of business days between re‐margining for capital


market transactions or revaluation for secured transactions.

78 Where the CBN has authorised the application of a 0 haircut for repurchase transactions and securities
lending and borrowing transactions involving securities issued by that sovereign, Nigerian banks may apply the
same preferential treatment.
1201
2.1 Standard Supervisory Haircut Approach

In the case of daily revaluation, the haircuts to be applied to exposures and


collateral consisting of debt securities, equity securities, cash and gold are
those specified in Tables 1 through 4 below. Such haircuts are broken down
by
a) The type of instrument
b) The liquidation period of the transaction
c) The credit quality step,
d) The residual maturity
e) The issuer category for debt securities.

In the case of less‐than‐daily revaluation, the haircut shall be scaled up using


formula (2) under the comprehensive calculation method above.
The minimum holding period for various products is summarised in the
following table.

Transaction Type Minimum Holding Period Condition


Repo Style Transactions Five Business Days Daily Re margining

Other Capital Market Ten Business Days Daily Re margining


Transactions

Secured Lending Twenty Business Days Daily Revaluation

For the purposes of determining credit quality steps, the provisions of Annex C
concerning the identification of the various categories of eligible securities
shall apply.

With regard to the other types of instruments:

• For non-eligible securities or commodities repurchase transactions and


lending and borrowing transactions, the haircut applicable to non-main
index equities listed on a recognised exchange shall apply;
• The haircuts applicable to eligible units in collective investment schemes
shall be the weighted average haircuts that would apply to the assets, in
which the fund has invested, having regard to the liquidation period for
capital market-driven transactions. If the bank does not know the
instruments in which the fund has invested, it shall use the highest haircut

1202
that would apply to any of the assets in which the fund may invest on the
basis of its rules;
• Unrated debt securities issued by entities whose exposures are treated as
exposures to supervised institutions that satisfy the eligibility criteria under
point e of this Annex), shall receive a haircut that is the same as that for
securities issued by such entities or by corporate with a rating associated
with credit quality steps 2 or 3 as provided for under the standardized
approach to credit risk.
Table 1: Debt securities other than those with short-term ratings

Credit Residual Debt securities issued by Debt securities issued by


quality maturity Sovereigns, PSE and others
step Multilateral Development
agencies to which risk
weight of zero per cent is
assigned

Liquidation period (%) Liquidation period (%)


20 days 10 days 5 days 20 days 10 days 5 days
1 ≤ 1 year 0.707 0.5 0.354 1.414 1 0.707

2.828 2 1.414 5.657 4 2.828


years
>5 years 5.657 4 2.828 11.314 8 5.657

2–3 ≤ 1 year 1.414 1 0.707 2.828 2 1.414


4.243 3 2.121 8.485 6 4.243
years
> 5 years 8.485 6 4.243 16.971 12 8.485
4 ≤ 1year 21.213 15 10.607 NA NA NA

21.213 15 10.607 NA NA NA
years
> 5 21.213 15 10.607 NA NA NA

years

1203
Table 2: Debt securities with short­term ratings.

Credit Debt securities described in Debt securities described in


quality Annex A, letter c), points I Annex A, letter c), points iv
step through iii
Liquidation period (%) Liquidation period (%)
20 days 10 days 5 days 20 days 10 days 5 days
1 0.707 0.5 0.354 1.414 1 0.707
2– 3 1.414 1 0.707 2.828 2 1.414

Table 3: Equity instruments, cash and gold

Type of instruments or exposures Liquidation period (%)


20 days 10 days 5 days
Main index equities and main index 21.213 15 10.607
convertible bonds

Other equities and convertible bonds 35.355 25 17.678


listed on a recognised exchange

Cash 000
Gold 21.213 15 10.607

Table 4: Haircuts for currency mismatches

Liquidation period (%)


20 days 10 days 5 days
11.314 8 5.657

Annex E: Master Netting Agreements

Calculation Methods

1. Comprehensive Method

The exposure value fully adjusted for the volatility (E*) of exposures subject to
a master netting agreement recognised for regulatory capital purposes with
1204
respect to securities financing transactions shall be calculated using the
supervisory haircut approach, as contained in the description of the
treatment of financial collateral under the comprehensive method.

The fully adjusted exposure value E* is obtained by netting the exposures


under the agreement and the collateral as well as an increase that reflects
the possible changes in the price of underlying securities and any foreign
exchange risk.

This can be computed using the following formula:


fx x Hfx)]}

Where:

E*=the exposure value after risk mitigation


E=current value of the exposure
C=the value of the collateral received
Es=absolute value of the net position in a given security
Hs=haircut appropriate to Es
Efx= absolute value of the net position in a currency different from the
settlement currency
Hfx= haircut appropriate for currency mismatch

Σ (E) is the sum of all the exposures (E) under the agreement;

Σ(C) is the sum of all forms of collateral (C) under the agreement;

The net position in each type of security 79 or commodity (Es) shall be


calculated by subtracting from the total value of the securities or
commodities of that type lent, sold or provided under the master netting
agreement, the total value of securities or commodities of that type
borrowed, purchased or received under the agreement. The net position in
each currency, other than the settlement currency of the master netting
agreement(Efx), shall be calculated by subtracting from the total value of

79 “Type of security” shall mean all the securities which are issued by the same entity, have the same issue

date and the same original maturity, are subject to the same terms and conditions and are subject to the same

liquidation periods.

1205
securities denominated in that currency lent, sold or provided under the
master netting agreement added to the amount of cash in that currency
lent or transferred under the agreement, the total value of securities
denominated in that currency borrowed, purchased or received under the
agreement added to the amount of cash in that currency borrowed or
received under the agreement.
The haircut appropriate to a given type of security or cash position (Hs shall
be applied to the absolute value of the positive or negative net position in
the securities of that type.
The foreign exchange risk haircut (Hfx) shall be applied to the net positive or
negative position in each currency other than the settlement currency of the
master netting agreement.

Annex F: Unfunded Credit Protection

Treatment of Currency Mismatches

Where unfunded credit protection is denominated in a currency different


from that in which the exposure is denominated (a currency mismatch) the
value of the credit protection shall be reduced by the application of a
haircut (HFX) as follows:

G* = G x (1-­‐HFX)

Where;

• G is the nominal amount of the credit protection;


• G* is G adjusted for any foreign exchange risk;
• HFX is the haircut for any currency mismatch between the credit
Protection and the Underlying Obligation.

Annex G: Maturity Mismatches

Valuation of Credit Protection

1. Funded credit protection for banks that apply the comprehensive method
to financial collateral

The maturity of the credit protection and that of the exposure shall be
reflected in the adjusted value of the collateral using the following formula:
CVAM = CVA x (t-­‐ 0.25)/ (T-­‐ 0.25*)

1206
Where:

• CVA is the volatility adjusted value of the collateral as specified in the


comprehensive method for calculating exposure value ([C (1 – HC –
HFX)]) or the amount of the exposures, whichever is lower;
• t is the number of years remaining to the maturity date of the credit
protection calculated in accordance with the rules contained under the
definition of maturity, or the value of T, whichever is lower;
• T is the number of years remaining to the maturity date of the exposure
calculated in accordance with the rules contained under the definition
of maturity, or 5 years, whichever is lower;
• t* is 0.25.
• CVAM shall be taken as CVA further adjusted for maturity mismatch to be
included in the formula for the calculation of the fully adjusted value of
the exposure (E*) as set out under the comprehensive method.
2. Unfunded credit protection for all banks

When there is a maturity mismatch with recognised credit risk mitigants


(collateral, on-­‐balance sheet netting, guarantees and credit derivatives)
the following adjustment will be applied to derive the adjusted value of the
credit protection:
PA = P* x (t-­‐ 0.25)/ (T-­‐ 0.25)

Where:

• P* is the amount of the protection adjusted for any currency mismatch;


• PA is P* adjusted for any maturity mismatch;
• t is the number of years remaining to the maturity date of the credit
protection calculated in accordance with the rules contained under the
definition of maturity, or the value of T, whichever is lower;
• T is the number of years remaining to the maturity date of the exposure
calculated in accordance with the rules contained under the definition
of maturity, or 5 years, where the former is higher;
• PA is then taken as the value of the protection for the purposes of
calculating the value of the protection.

1207
CENTRAL BANK OF NIGERIA

Guidance Notes on Supervisory Review Process

SUPERVISORY REVIEW PROCESS

1208
1.0 Introduction
The Supervisory Review Process is structured along two separate but
complementary stages.
i) The Internal Capital Adequacy Assessment Process (ICAAP) 80, and
ii) The Supervisory Review and Evaluation process (SREP) 81

2.0 Internal Capital Adequacyassessment Process (ICAAP)


• The ICAAP is based on appropriate risk management systems that require
adequate corporate governance mechanisms, an organisational
framework with clear lines of responsibility, and effective internal control
systems because capital cannot be regarded as a substitute for
addressing inadequate risk management processes.
• The ICAAP shall be documented, understood and shared by all bank
structures and shall be subject to independent internal review.
• The respective banks’ boards are entirely responsible for the ICAAP. They
are expected to independently establish the design and organisation in
accordance with the risk appetite of the bank. They are also responsible
for the implementation and the annual update of the ICAAP and the
resulting calculation of internal capital in order to ensure it is still in
conformity with the banks’ operations and environment.
• On an annual basis, banks shall render returns to the Central Bank of
Nigeria (CBN) on the key features of the ICAAP, their risk exposure and
the level of capital deemed adequate to support those risks. The report
shall also contain a self-­‐assessment of the ICAAP, areas for
improvement, any deficiencies in the process and the corrective
measures to be taken.

2.1 General Rules for the ICAAP


i) Banks shall have a process for determining the total capital, currently and
prospectively necessary to support all material risks. This process shall be;

• formalized and documented,

80 The ICAAP requires banks to perform an independent and complete assessment of the risks to which they are
exposed and calculate an internal capital requirement
81 SREP is performed by the CBN, who reviews the ICAAP, formulates an overall opinion about the bank and,

where necessary, takes remedial measures. The SREP is the process by which the CBN reviews and assesses the
ICAAP, analyses the bank’s own assessment of its risk profile, the corporate governance system as it relates to the
ICAAP and the internal control system, and verifies overall compliance with prudential rules in calculating internal
capital

1209
• subject to internal review and approval by board and management.
• Proportionate to the nature, scale and complexity of the business
conducted.
ii) The calculation of total capital requires an assessment of all the risks to
which a bank is or may be exposed, including those not considered in
calculating the capital requirement under Pillar 1.
iii) Banks shall determine the risks, other than credit, counterparty, market
and operational risks, for which the adoption of quantitative
methodologies that can be used in determining internal capital would be
appropriate82, and those for which control and mitigation measures,
in combination or alternatively, would be more suitable.
2.2 Proportionality in the ICAAP
The principle of proportionality shall apply to the following aspects:
i) The methodologies used in measuring/assessing risks and in
determining the related internal capital;
ii) The type and nature of the stress tests adopted;
iii) The treatment of correlation among risks and the determination of
total internal capital;
iv) The organisational structure of the risk control systems;
v) The scope and detail of ICAAP reporting to the CBN.

2.3 Features of the ICAAP


In developing an Internal Capital Adequacy Process, banks shall take
cognizance of the key supervisory principles as enunciated by the Basel
Committee on Banking Supervision (BCBS July 2006 paragraphs 725-­‐760).
The main features are summarized below:

2.3.1 Comprehensive Identification of Risks


a) Banks shall independently identify the risks to which they are exposed,
taking into consideration their operations and the markets in which they
operate.

82 For the purposes of the provisions of this Regulation, “internal capital” shall mean capital at risk, i.e.
the amount of capital related to a given risk that the bank deems necessary to cover losses exceeding a
given expected level (this definition assumes that the expected loss shall be covered by net value
adjustments – specific and portfolio – of equal amount; where the latter is lower, internal capital shall
also cover this difference).
“Total internal capital” shall mean the internal capital related to all material risks faced by the bank,
including any internal capital associated with strategic factors. “Capital” and “total capital” shall mean the
capital elements that the bank feels it can use to cover “internal capital” and “total internal capital”,
respectively.
1210
b) This analysis shall consider at a minimum, the risks listed in Annex A. This list
is not exhaustive: the identification of any further risk factors connected
with its specific operations is left to the prudent assessment of each bank.

c) Banks and banking groups shall clearly identify the sources of the various
forms of risks and where these are to be found at the level of operating
units, enterprise-­wide, within the group or from external counterparties.
This makes it possible to ascertain whether the regulatory capital
requirements calculated at the individual level for the most significant
legal entities adequately cover the risks effectively faced by these
entities.

2.3.2 Sound Capital Assessment


• In order to calculate internal capital banks should have:
a) Designed policies and procedures that clearly identify, measure
and report all material risks;
b) A process that relates capital adequacy to the level of risks
assumed;
c) A process that relates capital adequacy goal with the banks’
strategic focus and business plan;
d) A process of internal controls that reviews and audits
continuously the activities of the banks to ensure robustness and
integrity of the overall risk management process;
• In addition, banks are required to quantify all material risks they are
exposed to using methodologies they deem appropriate in relation
to their organisational and operational features.
• For credit, counterparty, market and operational risks, a
methodological starting point is provided by the regulatory
systems for calculating capital requirements for such forms of risk;
• With regard to interest rate risk, all banks shall assess the impact of
hypothetical shocks on the interest rate exposure of the banking
book. Where this should cause a significant reduction of a bank’s
regulatory capital, the CBN shall examine the results with the
bank and may adopt appropriate actions; and,
• The ICAAP of banks must be able to show how total capital
reconciles with the definition of regulatory capital. Specifically, they
shall explain the use of capital instruments that may not be
included in regulatory capital but are included in the calculation of
internal capital

1211
2.3.3 Stress Testing
• Banks shall conduct stress testing of their risk mitigation and control
systems and, where necessary, the adequacy of their internal
capital, in order to enhance the assessment of their exposure to
risks.
• Stress tests are quantitative and qualitative techniques used by
banks to assess their vulnerability to exceptional, but plausible,
events. They involve assessing the impact on banks’ exposures of
specific events (sensitivity analysis) or joint movements of a set of
economic and financial variables under adverse scenarios
(scenario analysis).
2.3.4 Corporate Governance in the ICAAP
• The board and management of banks shall be responsible for the
ICAAP.
• They shall establish a framework for assessing the various risks,
develop a system to relate risk to banks’ capital level, and establish
a method for monitoring compliance with internal policies. It is
likewise important that the board of directors adopts and supports
strong internal controls and written policies and procedures and
ensures that management effectively communicates these
throughout the organization. (BCBS July 2006, Par 730)
2.3.5 Monitoring and Reporting
Banks should have a system for monitoring and reporting risk exposures and
assessing how their changing business risk profiles affect their capital needs.
They are therefore required to:
a) Evaluate the level and trend of material risks and their effects on
capital levels;
b) Evaluate the sensitivity and reasonableness of the key assumptions
used in capital assessment;
c) Determine that they hold sufficient capital against the various risks
and ensure compliance with established capital adequacy goals;
and
d) Assess future capital requirements based on reported risk profiles
and indicate any necessary adjustments to be made to the banks’
strategic plan based on that assessment.
2.3.6 Internal Control Review
• An effective ICAAP requires that the relationship between risks and
capital levels is monitored

1212
• The board should ensure that its system of internal control can
monitor its business environment

• The bank should ensure conduct of periodic review to ensure


integrity, accuracy and reasonableness of its risk management
process. Such reviews should cover:
a) Appropriateness of the ICAAP
b) Large exposures and risk concentration
c) Accuracy and completeness of data input
d) Reasonableness and validity of scenarios used in the assessment
e) Stress testing and analysis of assumptions/inputs

2.4 Regulatory Reporting of the ICAAP

2.4.1 Content and Structure


a) The ICAAP report will enable the CBN to conduct a complete,
documented assessment of the key qualitative features of the capital
planning process, the overall exposure to risks and the consequent
calculation of total internal capital.
b) The report is transmitted to the CBN along with the relevant board
resolutions and senior management reports containing their
comments on the ICAAP, in accordance with their respective
responsibilities and functions.
c) The report shall be organised, at a minimum, into the areas specified
in Annex B.
2.4.2 Frequency of ICAAP Reporting
•On an annual basis, banks shall, not later than the end of April, submit to
the CBN the ICAAP report as at 31 December of the previous year.
•Based on the capital reported at the close of the previous year, the
ICAAP document shall provide the bank’s strategies for taking on risk and
ensuring that the related capital needs through the end of the current
year are met.
3.0 Supervisory Review and Evaluation Process (SREP)
3.1 General Rules for the SREP
The SREP shall be conducted for banks and banking groups on an annual
basis in order to verify that they have established capital and organisational
arrangements that are appropriate for the risks they face and ensures
overall operational equilibrium.

1213
3.2 Stages of the SREP
The SREP is organised into the following main stages:
a) Analysis of exposure to all material risks and the relative control
systems;
b) Verification of compliance with capital requirements and other
supervisory rules;
c)Assessment of the procedure for calculating total internal capital
and of the adequacy of total capital in relation to the bank’s risk
profile;
d) Issuance of specific opinions for each form of risk and of an overall
opinion on the situation of the bank;
e)Determination of any supervisory response
3.3 Proportionality in the SREP
The supervisory review and evaluation process is also informed by the
principle of proportionality, under which:
a) Corporate governance systems, risk management processes, internal
control mechanisms and the determination of capital deemed
adequate to cover risks shall be proportionate to the nature,
scale and complexity of the business conducted by the banks;
b) The frequency and the comprehensiveness of the SREP shall
have regard to the systemic importance, nature, size and complexity
of banks. The CBN, as part of its Risk-­‐Based Supervisory process, will
review and evaluate the soundness of banks’ ICAAP against the
expectations set out under the features of ICAAP in this guideline. This
review will also consider the comprehensiveness of the ICAAP and the
quality of risk management to form a view on the appropriateness
of the banks’ internal capital targets and its capacity for meeting the
targets. Based on these reviews, the CBN may require any bank to,
among other things, take action to improve its capital and risk
management processes if it is not satisfied with the bank’s ICAAP.

While the board and senior management of banks maintains primary


responsibility for their institution’s capital adequacy, the CBN reserves the
power to intervene at an early stage to prevent a bank’s capital from falling
below the level that it deems adequate to support its risks. The CBN may
require rapid remedial action if adequate capital is not maintained or
restored. This may include the following:
a) Altering the risk profile of the bank through business or operational
restrictions;
b) Directing banks to raise additional capital;
1214
c) Strengthening of the systems, procedures and processes
concerning risk management, control mechanisms and internal
assessment of capital adequacy;
d) Prohibition of distribution of profits or other elements of capital;

e) Directing the bank to hold an amount of regulatory capital greater


than the legal minimum for credit risk, counterparty risk, market risk and
operational risk;
f) Using other measures as contained in the CBN Supervisory
Intervention Framework (SIF) and the BOFIA.

ANNEX A: RISKS SUBJECT TO THE INTERNAL CAPITAL ADEQUACY ASSESSMENT


PROCESS (ICAAP)
1. Pillar 1 risks
a) Credit risk (including counterparty risk,);
b) Market risks;
c) Operational risk.
2. Other risks
a) Concentration risk: the risk arising from exposures to counterparties,
groups of connected counterparties, and counterparties in the same
economic sector or which engage in the same activity or are from the
same geographic region;
b) Interest rate risk in the banking book: the risk arising from potential
changes in interest rates;
c) Residual risk: the risk that recognized credit risk mitigation
techniques used by the bank may be less effective than planned;
d) Securitization risk: the risk that the economic substance of a
securitization operation is not fully reflected in risk assessment and
management decisions;
e) Business and Strategic risk: the current or prospective risk of a
decline in profits or capital caused by changes in the business
environment or erroneous decisions, the inadequate
implementation of decisions or poor responsiveness to competitive
developments;

1215
f) Reputational risk: the current or prospective risk of a decline in
profits or capital should customers, counterparties, shareholders,
investors or supervisors take a negative view of the bank;
g) Liquidity risks; Banks’ liquidity profile and the liquidity of the markets
in which they operate.
h) Compliance with minimum standards and disclosure requirements;

i) Factors external to the bank, e.g., business cycle effects

ANNEX B: GUIDE FOR ICAAP REPORTING


1. Strategies and forecasting horizon adopted
a) Business plan and annual budgets; schedule of reviews of
business plan and its components; extraordinary events necessitating
review;
b) Reconciliation between time horizon of business plan and capital
plan;
c) Ordinary and extraordinary sources of capital.
2. Corporate governance, organizational arrangements and internal
control systems connected with the ICAAP

a) Description of the process for the preparation and updating of the


ICAAP;

b) Description of the process for reviewing the ICAAP;

c) Definition of the role and functions assigned to the board and


senior management bodies for the purposes of the ICAAP;

d) Definition of the role and functions assigned to various corporate


functions for the purposes of the ICAAP (for example, internal auditing,
compliance, planning, risk management, and other units such as
head office and branch network commercial units, accounting and
audit);

e) Description of organizational and contractual safeguards relating


to any elements of the ICAAP that is outsourced;

f) Indication of internal regulations relevant to the ICAAP.

3. Risk exposures, risk measurement and aggregation methodologies,


stress testing

1216
a) Risk mapping: illustration of the position of the bank in respect of
Pillar 1 and Pillar 2 risks;
b) Risk mapping in relation to bank’s operating units and/or legal
entities of the group;
c) Techniques for risk measurement, internal capital determination
and stress testing;
d) Description, for every category of measurable risk, of the main
characteristics of the main risk control and mitigation instruments;
e) General description of systems for control and mitigation of non-
measurable risks.
4. Components, estimation and allocation of internal capital

a) Quantification of internal capital for each risk and total internal


capital;
b) Any methods for allocating internal capital (by operating unit
and/or legal entity).
5. Reconciliation of internal capital, regulatory requirements and
regulatory capital
a) Reconciliation of total internal capital and regulatory requirements;

b) Listing and definition of capital components covering internal


capital;
c) Eligibility of components covering internal capital to be calculated
for supervisory purposes; explanation of inclusion of ineligible
components;
d) Estimate of cost of using other capital sources in addition to those
used.

6. Self-Assessment of ICAAP

a) Identification of the areas of the process amenable to


improvement;
b) Planning of capital or organisational actions.

7. Organization of the ICAAP Report

1. Executive Summary
1217
2. Structure and Operations

3. Governance Structure

4. Risk Assessment and Capital Adequacy

5. Stress Testing
6. Capital Planning

7. Design, Approval, Review, and Use of ICAAP

8. Challenges and Further Steps

9. Summary of Internal Capital Adequacy Assessment Process

10. Risk Appetite Statement

11. Use of Internal Models for Capital Assessment

12. Review of ICAAP

1218
09-462-36425 November 14, 2013

09-462-36418

Ref: BSD/DIR/GEN/LAB/06/051

Letter to all Credit Bureaux, All Banks and Other Stakeholders Dear
Sirs,

RE: GUIDELINES FOR THE LICENSING, OPERATIONS AND REGULATION OF CREDIT


BUREAUX AND CREDIT BUREAUX RELATED TRANSACTIONS IN NIGERIA

The Central Bank of Nigeria, in exercise of its powers under the CBN Act 2007,
has revised the Guidelines for the Licensing, Operations and Regulation of
Credit Bureaux in Nigeria issued in October 2008.

The guidelines renamed “Guidelines for the Licensing, Operations and


Regulations of Credit Bureaux and Credit Bureaux Related Transactions in
Nigeria” have been prepared taking into cognizance the inputs from various
stakeholders. The guidelines, which are expected to create a better platform
for the sustainable growth of the sector, take effect from the date of this letter.

Yours faithfully

‘TOKUNBO A. MARTINS (MRS)

DIRECTOR OF BANKING SUPERVISION DEPARTMENT

1219
GUIDELINE FOR THE LICENSING, OPERATIONS AND
REGULATION OF CREDIT BUREAUX AND CREDIT BUREAU
RELATED TRANSACTIONS IN NIGERIA

BY

CENTRAL BANK OF NIGERIA

ABUJA

NOVEMBER 2013

1220
GUIDELINE FOR THE LICENSING, OPERATIONS AND REGULATION OF CREDIT
BUREAUX AND CREDIT BUREAU RELATED TRANSACTIONS IN NIGERIA

SECTION 1 - INTRODUCTION

1.1 Background

In the exercise of the powers conferred on the Central Bank of Nigeria by


Section 57 of the CBN Act 2007, the provisions herein are made as guidelines to
the licensing, operations and regulation of all Credit Bureaux and Credit Bureau
Related Transactions in Nigeria.

1.2 The guideline shall apply to all Central Bank of Nigeria licensed Credit
Bureaux and Credit Bureau related transactions in Nigeria.

1.3 The objective of the guideline is to define the licensing, operational and
regulatory requirements for a privately owned Credit Bureau under the
CBN Act 2007.

SECTION 2 - DEFINITION OF TERMS

2.1 “Act” - means the Central Bank of Nigeria Act, 2007.

2.2 “Adverse action” shall include, but not limited to, actions taken by a User
resulting in the denial of Credit, cancellation of Credit, reduction of value
of a Credit line, denial of employment or denial of any advantage to
which a Data Subject would otherwise be entitled.

2.3 “Banks” shall have the same meaning as defined in the Banks and Other
Financial Institutions Act, 1991 as amended.

2.4 “Board of Directors”- means the Board of Directors of a Credit Bureau.

2.5 “CBN” – means the Central Bank of Nigeria.

2.6 “Consent” – means a signed written authorization by the Data Subject,


his/her legal representative or authorized agent indicating his/her
approval to inquire about his/her data from the Credit Bureaux.

2.7 “Credit Bureau” (CB)/Credit Reference Company - means an institution


that collects information from creditors and available public sources on a
borrower or potential borrowers’ credit history.

2.8 “Credit Bureau Association” – means an association registered with the


Corporate Affairs Commission for the sole purpose of promoting the
activities of Credit Bureau operations in Nigeria.

1221
2.9 “Credit File” – means an electronic or physical docket containing the
Data Subject’s personal and Credit Information that are collected,
processed and maintained by a Credit Bureau.

2.10 “Credit Information” – means the history of a Data Subject with regard to
credit and financial obligations that a Credit Bureau may collect from
Data Providers.

2.11 “Credit Report” – means credit information issued by a Credit Bureau


containing all or part of the data subject’s information and data
available in the credit file or a summary thereof.

2.12 “Credit Scoring” – refers to a measure of default probability.

2.13 “Data” – means borrower’s or guarantor’s information or data, including


loan applications, and total credit exposures such as loan size, maturity,
terms and conditions, overdue, past due, charge off, or delinquent status
and collaterals of a credit transactions between a borrower and a Data
Provider.

2.14 “Database” - means a set of information administered by a Credit Bureau.

2.15 “Data Provider” – means entities that are allowed under this guideline to
furnish credit information to a Credit Bureau and include banks and other
financial institutions and such other institutions that provide any form of
credit and entities that have personal or credit information or Data
related to the Data Subject’s payment habits or credit worthiness and
furnish them to the Credit Bureaux as per this guideline.

2.16 “Data Subject” – means any person or entity or a guarantor of any person
or entity whose Credit Information is administered by the Credit Bureau.

2.17 “Debt” - means direct, indirect and contingent obligations incurred by a


person or entity or guaranteed by a person or entity with third parties
including interest / profit thereon.

2.18 “Director”- means an individual that is a member of the Board of Directors


of a Credit Bureau.

2.19 “Top Management”- in relation to a Credit Bureau, includes the Chief


Executive Officer, Chief Financial Officer, Chief Risk Officer, Chief Internal
Auditor, Chief Compliance Officer or Manager of a significant unit of the
Credit Bureau;

2.20 “Other Financial Institutions”- shall have the same meaning as the
definition of Other Financial Institutions in the Banks and Other Financial
Institutions Act, 1991 as amended.

1222
2.21 “Permissible Purpose”- means those activities specified in 5 (1) (b).

2.22 “Public Database”- means a database owned or operated by a public


entity in Nigeria that may contain data on a borrower, potential
borrower, guarantor or potential guarantor.

2.23 “Rules of Reciprocity”- means a set of norms defining the level of mutual
information exchange and cooperation between Data Providers and the
Credit Bureau.

2.24 “User”– means entities that are allowed under this guideline to seek Credit
Information from a Credit Bureau for Permissible Purposes and include
Banks and Other Financial Institutions and such other institutions that
provide any form of credit.

SECTION 3- LICENSING REQUIREMENTS OF CREDIT BUREAUX

An individual or an entity shall not operate a Credit Bureau in Nigeria


unless licensed to do so by the Central Bank of Nigeria.

The process of licensing a Credit Bureau shall be in three (3) stages:

d) Receipt and appraisal of application.


e) Issuance of Approval-in-Principle (AIP).
f) Issuance of Final Operating Licence.

3.1 Application

A promoter(s) seeking to operate a Credit Bureau in Nigeria shall apply in


writing to the Governor of CBN. Such application for a Credit Bureau
licence shall be accompanied with the following:

a. Non-refundable application fee of N250,000 (Two hundred and fifty


thousand Naira) made payable to the CBN.

b. Minimum capital requirement of N500,000,000.00 (Five Hundred Million


Naira) made payable to the CBN, fifty percent (50%) of which will be
released upon the grant of Approval-in-Principle, while the balance will
be released with the accrued interest based on the prevailing Monetary
Policy Rate (or any other rate that the CBN may from time to time
determine) upon the grant of Final Licence.

c. Memorandum and Article of Association of the proposed Credit Bureau.

d. Detailed feasibility report of the proposed Credit Bureau which shall


include:

i. The objectives and aims of the proposed Credit Bureau.


1223
ii. A detailed and comprehensive business plan of the Credit Bureau.
iii. A three (3) year financial projection for the operation of the Credit
Bureau indicating its expected growth and profitability.
iv. Details of the assumptions upon which the financial projections have
been made.
v. The conclusions based on the assumptions made in the feasibility report.
vi. The organizational structure of the proposed Credit Bureau, setting out in
details: functions, relationships and responsibilities of Board, Management
and staff.
vii. The composition of the Board of Directors and the curriculum vitae (CV)
of each member including information on positions held by them in other
organizations.
viii. Proposed Management Information Systems, Internal Controls and
Procedures, including Operational Manual.
ix. A table of the list of promoters and shareholders showing their residential
addresses, their businesses or companies and addresses, the amount
invested in the Credit Bureau as well as addresses of their current
bankers.
x. Copy of the Software License Agreement, Management or Service Level
Agreements, if any, which have been concluded with other parties or
any Memorandum of Understanding in that regard.
xi. Submission of specimen copies of Credit Reports as well as th e proposed
charges for such Credit Reports.
xii. Code of Conduct, Reciprocity Rules and other relevant rules for the
functioning of the system.
xiii. Sworn declaration of the Promoters and Directors attesting to their
willingness to adhere to these requirements and any code(s) of proper
conduct and integrity as may be issued by the CBN from time to time.
3.2 Approval in Principle (AIP)

a) The CBN having satisfied itself with 3.1 above shall issue an AIP to the
Credit Bureau which will stipulate the conditions for granting of final
licence.
b) An AIP granted to a proposed Credit Bureau shall be for a period of one
hundred and eighty days (180 days) within which the proposed Credit
Bureau must comply with all the conditions specified in the AIP, at the
end of which period the AIP shall be deemed to have lapsed.
c) Should the promoters of a lapsed AIP wish to continue with the
establishment of the Credit Bureau, they will be required to submit fresh
application.
d) Where the application for a Credit Bureau licence is declined, the CBN
shall communicate the decision in writing to the applicant and return
the deposit to the applicant with accrued interest.

1224
3.3 Final Operating Licence

The CBN shall grant a Final Operating Licence to a Credit Bureau subject to the
following:

a) The Credit Bureau has satisfied all conditions as specified in the AIP.
b) The CBN has conducted on-site verification to ascertain its readiness to
commence operations.
c) It is in the public interest to do so.
3.4 The Credit Bureau so licensed shall comply with the provisions of the
guidelines, regulations and circulars as may be issued by the CBN from
time to time.

3.5 A Final Operating Licence shall automatically expire if a Credit Bureau


has not commenced operations during the first six (6) months
immediately after the date of issue of the Final Operating Licence.

3.6 All licensed Credit Bureaux shall be required to add “Credit Bureau” to
their names e.g. XYZ Company limited (Credit Bureau).

3.7 Except with the written consent of the Governor of CBN, no Credit Bureau
shall be registered or incorporated with a name which includes the words
“Central”, “ Federal”, “Federation”, “National”, “Nigeria”, “Reserve”,
“State”, “Christian”, “Islamic”, “Moslem”, “Quranic” or “Biblical”.

SECTION 4- OWNERSHIP AND MANAGEMENT OF A CREDIT BUREAU

4.1 Ownership of a Credit Bureau

i. Individuals or entities are at liberty to invest in a Credit Bureau subject to


CBN approval.
ii. Investment by a bank and its subsidiaries in a Credit Bureau shall not
exceed 10% of the total paid-up capital of the Credit Bureau.
iii. Banks shall not invest in more than one (1) Credit Bureau at any one time.
4.2 Management

4.2.1 Directors

a) The maximum number of Directors [including Executive Directors] on


the Board of a Credit Bureau shall be eleven [11] (one of which must be
an Independent Director), while the minimum shall be five [5]. The Non-
Executive Directors should comprise the majority of the members of the
Board at any point in time.
b) No individual shall be a Director in more than one [1] Credit Bureau at
any point in time.
c) The appointment of a director and promotion with respect to top
management staff shall be subject to the prior consent of the CBN.
1225
4.3 Qualification for Directors and Top Management Appointment in a Credit
Bureau

The following minimum qualifications and experience are mandatory for


directorship and top management positions in the Credit Bureau:

i. Managing Director/Chief Executive- a recognized university degree or its


equivalent with at least ten (10) years relevant post-qualification
experience.
ii. Executive Director- a recognized university degree or its equivalent with
at least eight (8) years relevant post-qualification experience.
Departmental or Unit Head - a recognized university degree or its
equivalent with at least seven (7) years post-qualification experience.
iii. Non-Executive Director- A Non-Executive Director must possess a
minimum of first degree or its equivalent and appreciable experience
and exposure in a reputable organization.

SECTION 5- OPERATIONAL PROCEDURES OF CREDIT BUREAU 5.1 (a)


Functions of Credit Bureaux

In addition to the dissemination of credit information under the circumstances


listed in 5.1(b) below, Credit Bureaux may also:

i.Investigate an application for credit on behalf of any person or entity to


whom an application for credit has been made;
ii. Furnish non-credit information to Users;
iii. Carry out such other services and functions as are compatible with the
nature of its business provided that the confidentiality of credit
information, as protected in this guideline, shall be maintained at all times.
5.1 (b) Permissible Purpose

To access any Credit Information from a Credit Bureau, the User should have a
Permissible Purpose.

The Permissible Purpose is represented in the following:

I. Application for credit by a borrower, a potential borrower, a guarantor or


potential guarantor.
II. Reviewing, renewing, restructuring or monitoring of existing credit
facilities.
III. Opening of new accounts (as part of KYC principle).
IV. Prospective or current employment and Non-Executive Directors’
verification checks.
V. Tenancy contracts (for identification and payment ability purposes).
VI. Grant or renewal or review of new or existing insurance policies.

1226
VII. Acceptance of guarantee(s) on behalf of borrowers or potential
borrowers.
VIII. Application for credit contracts or other post-paid services.
IX. Debt collection for the recovery of a valid and enforceable debt.
X. Request by an individual or entity to validate the correctness or otherwise
of Credit Information held by Credit Bureaus in respect of themselves.
XI. The provision of Credit Scoring Services by Credit Bureau.
XII. Other purposes with the written consent from the individual or entity.
XIII. Where a person is required by an applicable law to provide Credit
Information in respect of an identifiable individual or entity.
5.2 Data Collection

5.2.1 A licensed Credit Bureau shall collect relevant information for Permissible
Purposes only on the background and Credit History relating to the
commitment of persons, enterprises and other organizations, in order to
determine their identity, banking relationships, overall debt exposure,
repayment behaviour and other contractual obligations.

5.2.2 All Data Providers and Users, whether regulated by the CBN or not, will be
subject to the same rules and obligations as provided in this guideline.

5.2.3 A Credit Bureau may collect Data from any of the following sources:

i. Banks and Other Financial Institutions operating in Nigeria pursuant to


the Banks and Other Financial Institutions Act, 1991 as amended.
ii. CBN Credit Risk Management System (CRMS).
iii. Mortgage Finance Companies.
iv. Finance/Operating Leasing Companies.
v. Insurance Companies.
vi. Institutions that offer credit to medium, small and micro enterprises.
vii. Asset Management Companies.
viii. Courts.
ix. Suppliers of goods and providers of services on a post-paid or
instalment payment basis.
x. Other Credit Bureaux licensed by the Central Bank of Nigeria.
xi. Other entities that have relevant data and information that complies
with Permissible Purposes and serves the purposes of the Credit
Bureau.
5.2.4 At the time of receiving Credit Information on a Data Subject, a Credit
Bureau shall have reasonable procedures in place to ensure that all
available relevant Credit Information on the Data Subject is obtained.

5.2.5 A Credit Bureau may consult other Public Databases as sources of


relevant information, provided that the confidentiality of the Data
Subject shall be maintained and it is for Permissible Purposes.

1227
5.3 Information Dissemination and Consent of Data Subjects

5.3.1 A Data Provider shall be required to give notice to all its customers or
potential customers of its duty to seek for Credit Report and to report
Credit Information to licensed Credit Bureaux. Such notice can be given
by placement in the banking halls, on ATM screen, text messages and on
Account Opening forms.

5.3.2 Every User shall be required to obtain the consent of a Data Subject
before requesting for the credit report of that Data Subject from licensed
Credit Bureaux. If the credit report however is required by either a law
enforcement agency, a regulatory body or pursuant to a directive of a
regulator or a court order, then the Data Subject’s consent is not
required.

5.4 Responsibilities and Duties of Banks, Other Financial Institutions and Other
Users

5.4.1 All Banks and Other Financial Institutions must have data exchange
agreements with at least two (2) licensed Credit Bureaux.

5.4.2 All Banks and Other Financial Institutions must obtain credit reports from at
least two (2) licensed Credit Bureaux before granting any new credit
facility, or when reviewing, renewing or restructuring an existing facility.

5.4.3 All Banks and Other Financial Institutions shall obtain credit reports for
quarterly credit reviews on all existing facilities from at least two licensed
Credit Bureaux.

5.4.4 All Banks and Other Financial Institutions shall upload all existing loan data
on all its existing credit customers to Credit Bureaux with which it has
executed data exchange agreements. The data uploaded shall include
names, date of birth, gender, legal status, addresses,
photographs,existing credit facilities, existing overdraft arrangements,
schedule of loan repayments, details of loan repayments, loan value
and/or authorized credit limit, the outstanding balances, type of facility
or product, maturity date, outstanding instalments due, types of
collaterals offered in addition, and notice of legal action commenced,
to any other information that meet the requirements of this guideline and
the CBN.

5.4.5 All Banks and Other Financial Institutions shall update any change in the
Data submitted to a Credit Bureau pursuant to clause 5.4.4 above at
least on a monthly basis or more frequently or in accordance with a
schedule provided by the Credit Bureau.

1228
5.4.6 All Users shall adopt reasonable procedures to ensure that all Credit
Information is kept confidential.

5.4.7 All Users shall utilize the Credit Information collected solely for Permissible
Purposes set out in this guideline.

5.4.8 Each User shall have its own credit decision making rules. The Credit
Information and other services provided by the Credit Bureau shall be
considered as one of the tools for a credit risk decision process, but the
decision shall not be made solely on the basis of the Credit Information
obtained from the Credit Bureau.

5.5 Responsibilities and Duties of Credit Bureaux

A Credit Bureau shall –

a. Implement strict data quality control procedures in order to ensure the


quality of its database and the continuity of its services.
b. Utilize the Credit Information collected solely for Permissible Purposes set
out in this guideline.
c. Adopt reasonable procedures to ensure that Data Providers can update
data regularly and at least once in every calendar month.
d. Adopt reasonable procedures to allow Data Providers, CBN, other Credit
Bureaux or Data Subjects to correct data found to be inaccurate, invalid,
incomplete or out of date.
e. To notify all Users accessing incorrect Credit Information during the
previous 3 months of the correction of the error to forward a copy of the
correct Credit Information at no cost to the User, and that a copy is also
sent to the borrower or guarantor or potential borrower or guarantor.
f. Provide to the CBN, unrestricted access to all the Credit Information
managed by the Credit Bureau, either through access to its systems or in
a manner stipulated by the CBN, for the purpose of supervision.
g. Observe, through its shareholders, Directors and Officers, policies and
procedures, a perpetual duty of confidentiality with regard to the Credit
Information in its database.
h. Not transfer, directly or indirectly, physically or otherwise any database,
or provide access to any database containing Credit Information to any
person or entity other than the CBN. Where the Credit Bureau needs to
give access to its database to consultants and technical partners for the
purpose of creating or designing products, such consultants and
technical partners shall be contractually bound to observe the duties of
confidentiality imposed on the Credit Bureau under this guideline and
shall enter into agreements accordingly.
i. Ensure that all Users and Data Providers that are not statutorily under the
regulatory purview of the CBN are contractually bound to the duties and
responsibilities of Data Providers and Users specified in this guideline.
1229
j. Credit Bureaux must adopt reasonable procedures to ensure that they
can update data regularly and at least once in every calendar month.
k. Credit Bureaux must have reasonable and accessible Dispute Resolution
Processes and procedures to allow Data Subjects to correct data found
to be inaccurate, invalid, incomplete or out of date.
A breach of items (a) – (k) above shall constitute a contravention of this
guideline.

5.6 Nature of Data Collected by Credit Bureaux and Data Retention Period:

5.6.1 A Credit Bureau must maintain a Credit File on each Data Subject which,
if available, should contain, at a minimum the Data Subject’s personal
and credit data including:

a) Personal History Data:

i. Natural Person: They include the name, nationality, photograph, date


and place of birth, identification documents, present and past
addresses in the last three years, profession, details of present and
past jobs in the past three years, spouse name in addition to any other
data that meet the requirements of the Credit Bureau.

ii. Legal Persons: They include the name, legal status, shareholding
structure of 10% and above of the paid up capital, company
registration certificate and any other information that meet the
requirements of the credit bureau.

b) Credit Data: It includes loan value and/or authorized credit limit, the
outstanding balances, type of facility or product, maturity date,
outstanding installments due and types of collaterals offered in addition
to any other information that meet the requirements of the credit bureau.

c) Payment Habits: These are historical data for a minimum of five


preceding years, reflecting the extent to which clients are regular in
meeting their commitments on due dates and they include:
i. Positive information: Information that reflects the clients' payment of
obligations on due dates.
ii. Negative information: Information related to clients' delinquencies
including: payment delays, irregularities, dishonored cheques and
bills, defaults, delinquency, court sentences, seizures, protested bills
of exchange, insolvency and bankruptcy.

d) Public Record Information: Information available in public records


including civil, commercial, real estate, court registries, the Police, utilities,
etc.

1230
e) Inquiries made to the credit file: It includes the user’s name, business and
date of inquiry. The credit file should not contain data related to political
party, other general organizations affiliation, religious beliefs or health
condition.

5.6.2 (1) A Credit Bureau shall maintain a historical database covering a five (5)
year period for the purpose of providing detailed Credit Information,
and shall keep the database for a period of not less than ten (10) years
after which it shall be archived.

(2) A Credit Bureau shall implement procedures and systems that ensure
that the Credit Information in its database is updated on an on-going
basis.
(3) A Credit Bureau shall update its database as and when information is
provided by the data collection sources as listed in Section 5.2.1. The
information shall be updated on a regular basis and as often as may
be required in standardised formats/procedures.

5.7 Maintenance of Data Integrity & Security

1. A Credit Bureau shall take the reasonable security and control


measures in order to avoid unauthorized access or improper use or
mismanagement of information in its database by its staff,
contractors, and technology partners, Users, other Credit Bureaux,
Data Providers or Data Subjects.
2. A Credit Bureau shall not request, collect or share Credit Information,
other than as permitted in this Guideline.
3. All data collected by a Credit Bureau on a Data Subject must be
aggregated and the resulting Credit Information must only be made
available on request to Users or CBN for Permissible Purposes.

5.8 Fees and Charges

1. A Credit Bureau may charge fees for its services. Such charges shall
continue to be approved by CBN pending the issuance of the Guide
to Credit Bureau Charges.
2. The Data Subject shall have access, free of charge, to a copy of their
Credit Report once per year or at a time when an Adverse Action
was taken by a User.

SECTION 6 - RIGHTS OF DATA SUBJECT

6.1 Subject to 5.8.(2), a Data Subject shall, upon production of satisfactory


identification and payment of stipulated fee, have unhindered access to
inspect his or her Credit Information at any Credit Bureau.

1231
6.2 Where the Data Subject believes that the information contained in the
database is inaccurate, incomplete or out of date he or she may request
the Credit Information to be corrected.

6.3 Any entry or statement confirmed as inaccurate or incomplete by the


data provider shall be remedied within fifteen working days.

SECTION 7 - DISPUTE RESOLUTION

7.1 All Credit Bureaux and Users shall establish readily accessible processes
and procedures, supported by a Complaint Resolution Unit to handle all
complaints or disputes in respect of its data or operations.

7.2 For the duration of the investigation, the Credit Information in the Credit
Bureau must indicate that the Credit Information is under dispute.

7.3 Where there are Legal Liabilities or cost arising from the inaccurate data,
as a result of illegal activity, gross negligence or reckless behaviour, the
Data Provider or the Credit Bureau shall be liable, depending upon their
degree of culpability.

7.4 If a party to a dispute is not satisfied with the outcome, that party has the
right to appeal to the CBN which shall establish readily accessible
processes and procedures, supported by a Complaint Resolution Unit to
handle all complaints or disputes. The determination of the CBN is
deemed to be final but an unsatisfied party has the right of recourse to
an appropriate Court in Nigeria.

7.5 The Credit Bureau shall render monthly returns on all disputes and
complaints to the CBN in a format approved by the CBN.

7.6 Any dispute, contrary, claim arising out of, or relating to Credit Bureau
related transaction, shall be settled between the parties and if settlement
is not reached, the dispute shall be referred to arbitration in accordance
with the Arbitration and Conciliation Act, Cap A18, Laws of the
Federation of Nigeria, 2004.

7.7 (i) A Credit Bureau may file a claim against the Data Provider whenever it
is held liable for any incorrect, incomplete or out of date information.

(ii)Users of Credit Information provided by a Credit Bureau shall be held


liable in the event of wrongful or fraudulent use of the Credit Information,
or if the Users cause material damage to the Data Subject’s financial
reputation.

7.8 The CBN may request, at any time, information from Credit Bureaux, Users,
or Data Providers in order to evaluate complaints, accusations or

1232
inconsistencies detected related to the operations of a Credit Bureau or
of a User or Data Provider.

SECTION 8 - OPENING AND CLOSURE OF CREDIT BUREAU OFFICES

8.1 A Credit Bureau must obtain the approval of the CBN before opening,
relocating or closing its offices.

8.2 Such opening or closure of offices by a Credit Bureau must be approved


by the Board of Directors in accordance with its business plan.

SECTION 9 - SUBMISSION OF RETURNS AND AUDITED ACCOUNTS TO THE CBN

9.1 Every Credit Bureau shall submit to the CBN on monthly basis details of its
activities as specified by CBN ten (10) working days into the following
month.

9.2 All Credit Bureaux shall submit their Audited Financial Statements not later
than three (3) months after their year-end for approval by CBN for
publication.

9.3 CBN shall conduct yearly or as the need arises, an examination of the
activities of the Credit Bureaux for compliance with this guideline and
other relevant legislations.

9.4 The CBN as part of its supervisory functions of the activities of Credit
Bureaux in Nigeria shall have unrestricted access to the database and
records of all licensed Credit Bureaux.

SECTION 10- THE ROLE OF CBN CREDIT RISK MANAGEMENT SYSTEM (CRMS)

10.1 The CBN Credit Risk Management System (CRMS) shall continue to serve its
regulatory functions.

10.2 Banks and Other Financial Institutions shall continue to render the
mandatory returns and comply with all relevant circulars and guidelines
relating to the operation of CRMS.

10.3 The CRMS shall operate as a Public Registry and would therefore share its
information with the Credit Bureaux. Credit Bureaux may, from time to time
request information from the CRMS and include information obtained from
the CRMS in Credit Reports issued to Users.

10.4 The CBN shall not be liable or joined in any dispute(s) arising from wrong
information given in respect of a credit report on Data Subject.

1233
SECTION 11 – COMPLIANCE WITH THE GUIDELINE

11.0 Credit Bureaux, Users and Data Providers must comply strictly with the
provisions of this guideline. However in case of confirmed contravention,
CBN shall apply appropriate sanctions on the Credit Bureau and Data
Providers under its regulatory purview.

11.1 Where a Credit Bureau, through its shareholders, Directors or Officers


illegally discloses any Credit Information, before or after its dissolution, the
responsible party is liable to pay a penalty of Five Hundred Thousand
Naira only (N500, 000.00) and, in the case of a continuing offence, an
additional fine, not exceeding Ten Thousand Naira only (N10, 000.00)
each day for which the offence continues.

11.2 All the Officers who are directly involved in the commission of the offence
shall also be blacklisted by the CBN.

11.3 In the attainment of its corporate purpose and the performance of its
activities, a Credit Bureau shall comply with any directives issued by the
CBN.

11.4 The Board of Directors of a Credit Bureau, Data Provider or a User is


responsible for ensuring compliance and internal dissemination of this
guideline.

SECTION 12 - DISSOLUTION, LIQUIDATION AND REVOCATION OF LICENSE

12.1 Where a Credit Bureau is to be dissolved and liquidated, it shall notify CBN
in writing accompanied by the following documents:

a. A copy of the minutes of the special meeting of shareholders in which


the agreement to dissolve was recorded.
b. Financial Statements as at the date the agreement to dissolve was
made, as well as a report from the auditor appointed by the CBN for that
purpose.
c. A sworn statement from the Chief Executive Officer specifying
outstanding obligations (if any).
d. Evidence of appointment of a liquidator.
e. The CBN shall on receipt of notice of dissolution or liquidation conduct an
investigation of the Credit Bureau.

12.2 The Official Receiver or Liquidator of the Credit Bureau shall comply with
the decision of the CBN with regards to the management and control of
its database on dissolution.

1234
12.3 The Official Receiver or Liquidator of a Credit Bureau shall deliver its
database containing Credit Information to the CBN in the form, and
upon the terms and conditions stipulated by the CBN.

12.4 A Credit Bureau Licence is valid until revoked by the CBN. The CBN may
revoke a Credit Bureau Licence if it is satisfied that:

i. There have been substantial unaddressed violations of this guideline.


ii. The Credit Bureau is insolvent.
iii. It is in the public interest to do so.

1235
1236
September 10, 2013

BSD/DIR/GEN/LAB/06/040

LETTER TO ALL BANKS

REPORTING OF ALL CREDIT FACILITIES OF N1 MILLION AND ABOVE IN THE


CREDIT RISK MANAGEMENT SYSTEM

The Central Bank of Nigeria has observed with dismay that banks do not report
the credit facilities availed to their board members and staff in the Credit Risk
Management System (CRMS).

For the avoidance of doubt, the CRMS, which is a central database for credit
information on borrowers, established by the CBN Act No. 24 of 1991 [Sections
28 and 52] as amended made it mandatory for all banks to render returns to
the CRMS in respect of all credit facilities of N1 million and above. Thus, the
credit facilities availed to board members and staff of banks are not exempted.
Please note that the provisions of Sections 3.4 and 3.5 of the Prudential
Guideline for Deposit Money Banks in Nigeria, July 2010, does not preclude
banks from reporting credit facilities availed to its board members and staff in
the CRMS.

Banks are therefore required to report all credit facilities (principal plus interest)
of N1 million and above availed to their board members and staff in the CRMS
as well as regularly update these credit facilities on monthly basis.

This Circular serves as a reminder and warning to all banks as any observed
breach will attract severe sanctions.

Please be guided accordingly.

TOKUNBO MARTINS (MRS.)

DIRECTOR OF BANKING SUPERVISON

1237
BSD/DIR/GEN/LAB/06/039

September 5, 2013

LETTER TO ALL BANKS

RE: REVIEW OF THE CASH RESERVE REQUIREMENT (CRR) FOR DEPOSIT MONEY
BANKS

Following the issuance of our circular ref: BSD/DIR/GEN/LAB/06/034 and dated


25th July 2013 on the review of the Cash Reserve Requirement for DMBs, it has
become necessary to provide further guidance on the reporting requirements.

It would be recalled that in our circular under reference, DMBs were required to
report government deposits as additional memorandum items in their Monthly
Bank Return/Daily Bank Return (MBR 300/DBR 300) on e-FASS.

Subsequent to the above, all DMBs are requested to note that, for the purposes
of reporting in accordance with the provisions of the above circular, public
sector deposits should include all Federal Government MDAs and Companies,
State Government MDAs and Companies as well as Local Government MDAs
and their Companies.

Furthermore, for the avoidance of doubts, deposits from the following


institutions should be regarded as public sector for this purpose:

 NNPC Joint Venture accounts;

 Sovereign Investment Funds

 Government MDAs/Companies’ Collection Accounts such as: Customs,


FIRS, etc

 Pilgrim welfare Board

 All accounts belonging to Government Universities

1238
However, deposits from the following Government institutions are excluded
from the reporting of public sector deposits in line with our circular:
 Asset Management Corporation of Nigeria (AMCON)

 Bank of Industry (BOI)

 Nigerian Export-Import Bank (NEXIM)

 Federal Mortgage Bank of Nigeria (FMBN)

 Bank of Agriculture (BOA)

 Bank of Infrastructure

 Closed pension funds belonging to Government Institutions.

 State pension Boards

 Governments Staff associations and cooperative societies.

Please be guided accordingly.

Yours faithfully,

TOKUNBO MARTINS (MRS.)

DIRECTOR, BANKING SUPERVISION

1239
July 25, 2013

BSD/DIR/GEN/LAB/06/034

LETTER TO ALL BANKS

REVIEW OF THE CASH RESERVE REQUIREMENT (CRR) FOR DEPOSIT MONEY BANKS

Following a review of recent developments in the economy, the Monetary


Policy Committee at its 233rd meeting held on July 22nd and 23rd, 2013
resolved among others, to:

1. Maintain the CRR for non-public sector deposits at 12%; and

2. Introduce a 50% CRR on public sector deposits which comprise deposits


of all tiers of Government, their Ministries, Departments, Agencies and
Companies.

Also, the remuneration on “excess” above the cash reserve requirement of 8%


is discontinued forthwith.

The implementation of these decisions will take effect from the next CRR
maintenance period commencing August 7, 2013.

In order to enhance the rendition of returns on Government deposits, banks are


henceforth required to separately report the details of Federal, State and Local
Government deposits as additional memorandum items in their Monthly Bank
Return/Daily Bank Return (MBR 300/DBR 300) as shown below. This is without
prejudice to other returns on deposit.

1240
DESCRIPTION IN
S/N ITEM CODE MBR/DBR NEW REPORTING REQUIREMENT

IN MBR/DBR 300

300

All Federal Government MDAs


1 20170 Federal Government and

Demand Deposits Companies’ Naira Deposits

All Federal Government MDAs


2 20171 Federal Government Time and

Companies’ Domiciliary
Deposits Accounts

Deposits in Naira

All State Government MDAs


3 20180 State Government and

Demand Deposits Companies’ Naira Deposits

All State Government MDAs


4 20181 State Government Time and

Companies’ Domiciliary
Deposits Accounts

Deposits in Naira

5 20182 Local Government All Local Government MDAs and

Demand Deposits Companies’ Naira Deposits

6 20183 Local Government Time All Local Government MDAs and

Companies’ Domiciliary
Deposits Accounts

Deposits in Naira

1241
Please note that the CBN will closely monitor the implementation of these
decisions. Banks are therefore enjoined to ensure strict compliance with this
directive and render their reports transparently and accurately as any
deviation will attract SEVERE sanction.

Please be guided accordingly.

BENJAMIN A. FAKUNLE

FOR: DIRECTOR OF BANKING SUPERVISION

1242
BSD/DIR/GEN/RRTB/06/027

June 12, 2013

LETTER TO ALL BANKS

REGULATORY REPORTING OF FGN-ISSUED AND CBN-ISSUED TREASURY BILLS

It has been observed that DMBs report both FG-issued and CBN-issued treasury
bills as ‘treasury bills’ on their balance sheet on e-FASS. Whilst this categorization
is sufficient for liquidity management purposes, it should be noted that CBN bills
also serve as instruments of monetary policy.

In order to enhance the monitoring of these instruments, henceforth all DMBs


are required to report CBN-issued and FG-issued treasury bills separately. While
FG-issued treasury bills should continue to be reported under Code 10410:
Treasury Bills, CBN-issued treasury bills should be reported under Code 10430:
CBN Registered Certificates.

Yours faithfully,

B.A. FAKUNLE

FOR: DIRECTOR, BANKING SUPERVISION

1243
09-46236403

09-46236401

BSD/DIR/GEN/LAB/06/025

May 30, 2013

LETTER TO ALL BANKS AND DISCOUNT HOUSES

EXTERNAL AUDITORS’ RECOMMENDATIONS IN THE MANAGEMENT LETTERS IN


BANKS AUDITED FINANCIAL STATEMENTS

Pursuant to the provisions of Section 27 of the Banks and Other Financial


Institutions Act of 1991 as amended, banks and discount houses are required to
obtain the approval of the CBN prior to the publication of their audited
financial statements. An integral part of the audited financial statements is the
Management Letter, wherein the external auditors’ concerns regarding the
operations of a bank/discount house is enunciated. In recent times, our
appraisal of the annual financial statements has shown that the
recommendations by external auditors in the Management Letters are more
often than not left unimplemented, and repeated along with new ones in
subsequent audited financial statements. This practice of
refusing/failing/neglecting to implement auditors’ recommendations is a source
of regulatory/supervisory concern, considering the critical nature of some of the
recommendations to the operations of the banks/discount houses.
Consequently, to forestall future occurrence of this adverse trend, banks and
discount houses are invited to note that:

1. Henceforth, non-compliance with auditors’ recommendations in the


Management Letters will constitute a ground for the imposition of
penalties in line with Section 60 of the BOFI Act 1991, as amended;

2. Banks/discount houses are now required to submit to the Central Bank of


Nigeria, on quarterly basis, progress reports on the implementation of
auditors’ recommendations in the Management Letters; and

1244
3. External auditors are now required, in line with the provisions of Section 63
of the Investment and Securities Act 2007, to “issue a statement as to the

4. existence, adequacy and effectiveness or otherwise of the internal


control system”, in their audit reports.
5. Please, be guided accordingly.

‘TOKUNBO MARTINS (MRS)

DIRECTOR OF BANKING SUPERVISION

1245
09-462-36403

09-462-36418

BSD/DIR/GEN/LAB/06/017

April 2, 2013

LETTER TO ALL BANKS AND DISCOUNT HOUSES

RE: REVIEW OF RISK WEIGHTS ON CERTAIN INDUSTRY EXPOSURES IN THE


COMPUTATION OF CAPITAL ADEQUACY

The review of risk weights assigned to certain industry exposures was intended
to mitigate perceived emerging risks, concentration risks and to ensure that
banks have adequate capital to support their risk taking activities. Therefore,
the Central Bank of Nigeria (CBN) would like to make the following
clarifications:

 Where exposure to a particular industry within a sector (as defined by the


International Standard Industrial Classification of Economic Sectors as
issued by the CBN) is in excess of 20 per cent of total credit facilities of a
bank, the risk weight of the entire portfolio in that industry shall be 150 per
cent. If for instance the total exposure of a bank to the food
manufacturing industry within the Manufacturing sector is in excess of 20
per cent of total credit facilities, the entire portfolio of exposure to the
food manufacturing industry would be risk weighted 150 per cent.

 Investments in the Federal Government of Nigeria Bonds shall continue to


attract zero per cent risk weight. State Government Bonds that meet the
eligibility criteria set out in the Guidelines for Granting Liquidity Status for
State Government Bonds would be risk weighted at 20 per cent while
others would continue to be risk weighted at 100 per cent.

1246
 All breaches of the single obligor limit without the prior approval of the
CBN shall be regarded as impairment to capital.

 For the purposes of credit transactions, banks’ related parties within a


holding company structure shall include, amongst others, the financial
holding company and other subsidiaries within the group. Credit
transactions by the bank within the group would therefore, be treated as
follows:

 Financial holding company lending to a bank within its group: – the


bank should treat the loan as a liability.

 Lending by a bank to its financial holding company: - this would be


regarded as a return of capital and deducted from the capital of
the bank in computing its capital adequacy.

 Bank lending to subsidiaries in the same group: - where the loan is


fully secured, it would be assigned a risk weight of 100 per cent,
otherwise it would be deducted from the capital when computing
capital adequacy. For the avoidance of doubt, security must be
tangible, realizable and meet the conditions of providing a secured
way out.

This letter supersedes our earlier letter referenced: BSD/DIR/GEN/LAB/06/003


dated January 31, 2013 and is to take effect from 1st January, 2014.

TOKUNBO MARTINS (MRS)

DIRECTOR OF BANKING SUPERVISION

1247
09-46236403

09-46236401

March 28, 2013

BSD/DIR/GEN/RFS/06/016

Dear Sir/Madam,

RE: LETTER TO BANKS ON THE RECAPITALIZATION OF FOREIGN SUBSIDIARIES

We refer to the above circular no BSD/DIR/GEN/RFS/024 dated May 18, 2012


which placed restrictions on banks recapitalizing their foreign subsidiaries as a
result of directives from host regulators. The circular further sought to encourage
the foreign subsidiaries of banks to source fresh capital from their local
operating environments. The motive was to avoid a dependency culture on
parent banks and serve as a check on discriminatory capital regimes in some
jurisdictions.

The Central Bank of Nigeria hereby issues the following clarification based on
enquiries from operators and other stakeholders:

The Bank will continue to consider applications for recapitalization in the


following cases:

1. Where the capital of a subsidiary is impaired in the normal course


of business due to operational and other losses

2. Where it is demonstrated that the increase in capital is


commensurate with the level of business and profitability of normal
banking operations such that there is no incentive to take unfair risks in
the quest for returns

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3. Where a Nigerian bank is setting up a new subsidiary in another
country with reasonable capital requirements

4. Where Host Regulators require an increase in capital that is


reasonable and realistic, gradual and consistent with economic realities
of the environment.

The Central Bank of Nigeria will not approve export of capital to recapitalize a
subsidiary of a Nigerian bank where:

a) The host regulator issues discriminatory guidelines that give


preference to so-called “local banks” over foreign banks either in
amount required, or timelines, or sanctions, or howsoever. The playing
field has to be level; and

b) Where the host regulator requires an amount of capital injection


where the Central Bank of Nigeria believes the amount, or timeframe
given, or the rate of growth will subject the banks to undue risk.

All banks are to be accordingly guided.

TOKUNBO MARTINS (MRS)


DIRECTOR, BANKING SUPERVSION

1249
09-462-36401

09-462-36418

BSD/DIR/GEN/LAB/06/003 January 31, 2013

LETTER TO ALL BANKS AND DISCOUNT HOUSES

REVIEW OF RISK WEIGHTS ON CERTAIN EXPOSURES IN THE COMPUTATION OF


CAPITAL ADEQUACY

The recent crisis in the Nigerian banking industry highlighted several weaknesses
in the system, key of which was the excessive concentration of credit in the
asset portfolios of banks. Past experience revealed concentrations across
products, business lines, and legal entities. The management of concentrations,
or pools of exposures, whose collective performance may potentially affect a
bank negatively, needs to be properly managed through the establishment of
sound risk management processes.

Without prejudice to the risk management control functions put in place by


banks and discount houses to mitigate credit concentration risks, the Central
Bank of Nigeria, in line with its risk based supervisory review process has
reviewed the risk weights assigned to some identified exposures as follows:

 The risk weight assigned to direct lending to Local Governments, States,


Ministries, Departments and Agencies of Governments (MDAs) is increased from
100 per cent to 200 per cent.
 Investments in Federal Government of Nigeria Bonds shall continue to
attract zero per cent risk weight. However, State Government Bonds, that meet
the eligibility criteria set out in the Guidelines for Granting Liquidity Status for
State Government Bonds would continue to be risk weighted at 20 per cent.
 Where the exposure to any industry economic sector (as defined by the
International Standard Industrial Classification of Economic Sector as issued by
the CBN) is in excess of 20 per cent of the total credit facilities of a bank, the risk
weight of the entire portfolio shall be 150 per cent. Total exposure to a
particular industry would include off-balance sheet engagements in which the
bank takes the credit risk.
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 All breaches of single obligor limits without the prior approval of the CBN
shall be regarded as impairment to capital.

 For the purposes of credit transactions, banks’ related parties within a


holding company structure shall include, among others, the financial holding
company (FHC), and other subsidiaries within the group. Credit transactions by
the bank within the group would be treated as follows:

FHC lending to a bank within its group – the bank should treat the loan as a
liability

Credit by a bank to its FHC – this would be regarded as a return of capital and
deducted from the capital of the bank in computing its capital adequacy.

Bank lending to subsidiaries within its group – where the credit is fully secured, it
would be assigned a risk weight of 100 per cent, otherwise it would be
deducted from the capital when computing capital adequacy.

All banks and discount houses are required to ensure compliance with this
directive immediately.

Please, be guided accordingly.

TOKUNBO MARTINS (MRS)

DIRECTOR, OF BANKING SUPERVISION

1251

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