Nigeria’s CBN Tightens Grip on Insider Lending, Orders Banks to Cut Loans Within Six months

Nigeria’s Central Bank has issued a firm directive aimed at curbing insider lending practices, requiring commercial banks to align with stricter limits or face regulatory penalties.

The CBN in a letter addressed to financial institutions, has set a six-month deadline for banks to restructure insider-related credit facilities that exceed the thresholds outlined in the Banking and Other Financial Institutions Act (BOFIA) 2020.

Insider lending where banks extend credit to directors, major shareholders, or affiliated entities has long been a weak point in Nigeria’s financial sector, raising concerns about governance and financial stability. While regulations exist to limit such exposure, some institutions have historically obtained CBN approvals without strict enforcement deadlines, leading to unchecked lending to influential insiders.

With this latest directive, the CBN is closing regulatory gaps, ensuring that all banks adhere to statutory lending limits without exceptions. Financial institutions must now report regularly on their insider lending portfolios, detailing steps taken to bring all outstanding credit facilities in line with the new requirements.

Implications for Banks

For larger, well-capitalized banks with strong governance frameworks, the new regulations may have minimal impact. However, mid-sized and smaller banks where insider lending has traditionally been more common may face operational challenges. Some may be forced to unwind large insider loan positions or explore alternative refinancing strategies to meet the compliance deadline.

A senior banking executive, speaking anonymously, noted that the directive signals an end to the era of unchecked insider lending. “Banks will need to reassess their exposure and take decisive action. Failure to comply could trigger heightened regulatory scrutiny and financial penalties.”

A Strategic Move Amid Industry Reforms

The CBN’s directive comes at a critical time when Nigeria’s banking sector is undergoing major reforms, including a recapitalization drive that is expected to reshape the industry. By tightening governance standards, the regulator aims to reinforce financial stability and mitigate systemic risks that have historically contributed to banking crises.

As the deadline approaches, financial institutions must act swiftly to bring their insider lending practices in line with regulatory expectations, ensuring that Nigeria’s banking sector operates with greater transparency and accountability.

Source: Nairametrics