The Central Bank of Nigeria proposed strict limits on loans, guarantees, asset transfers and other financial exposures between banks and their affiliated companies, part of a regulatory framework designed to prevent financial distress from spreading across corporate groups.
SCOPE AND MECHANICS
The Exposure Draft Guidelines on Ring-Fencing Operations of Closely Linked Entities, signed by the CBN's Director of Financial Policy and Regulation, Rita Sike, and issued to stakeholders for consultation, requires transactions between banks and closely linked entities, including fintech subsidiaries, microfinance institutions and holding companies, to be conducted on arm's-length terms, fully documented and disclosed to the regulator. The CBN said the framework aimed to ensure that financial difficulties in one entity did not threaten the stability of other entities in the same group, particularly deposit-taking institutions.
The proposal comes as financial groups expand rapidly into payments, technology and other financial services, and the CBN warned that excessive interconnectedness could allow losses in one subsidiary to spill over into regulated banking operations. The CBN said intra-group funding arrangements, guarantees and cross-collateralisation would be subject to limits to protect depositors' funds from risks originating elsewhere in a financial group. The draft also requires boards of directors to establish formal ring-fencing policies and ensure conflicts of interest are identified and disclosed.
"Closely linked entities must operate independently, maintain adequate capital and liquidity, and segregate customer funds from group operations," the CBN said, adding that customer funds may not be used for intra-group lending, debt servicing or proprietary trading.
MARKET AND REGULATORY IMPLICATIONS
The CBN said banks must treat affiliated companies in the same manner as third-party customers, with pricing, collateral requirements and contractual terms reflecting prevailing market conditions.
The CBN said promoters of closely linked entities may be required to establish a non-operating holding company structure or consider consolidating operations under a single licence.
Under the draft, affiliated entities must put formal service-level agreements in place for shared services, subject them to independent audits and obtain CBN approval where necessary, and maintain business continuity plans, recovery strategies and resolution frameworks.
Customers must give explicit consent before being onboarded into products or services of related entities, and customer data may not be shared across affiliated entities without explicit consent, in line with Nigeria's Data Protection Act.
The ring-fencing proposal follows other CBN reforms, including an April 2026 draft revision of its Guide to Charges by Banks and Other Financial Institutions that introduced fee caps and enhanced disclosure requirements.
The draft caps cross-directorships among affiliated entities at 20%, requires intra-group transactions to be conducted at market rates and reported to the CBN quarterly, bars affiliated entities from extending loans or guarantees to one another without prior regulatory approval, and is expected to take effect later in 2026 after stakeholder consultation. Breaches may attract penalties under the Banks and Other Financial Institutions Act 2020, including fines, management changes or licence withdrawal.
Sources: Nairametrics Finance