Understanding the Legality of the New Offer Letter Clause for Nigerian Banks Credit Facilities

The legality of the new offer letter clause for Nigerian banks is a critical development aimed at reducing non-performing loans through the Global Standing Instruction (GSI) mandate. This article explores how the Central Bank of Nigeria empowers lenders to recover debts directly from a borrower’s accounts across any financial institution. By incorporating these specific clauses, banks gain a powerful tool to offset outstanding balances without traditional litigation.

The analysis details the requirements for clear disclosure and the borrower’s mandatory consent to ensure these terms remain legally binding. While the GSI streamlines debt recovery, it also raises vital questions regarding consumer protection and data privacy. This guide serves as a strategic resource for understanding the shifting regulatory landscape of Nigerian banking.

The CBN Directive

The CBN directive required that the following covenants and undertakings be included in offer letters and loan agreements to be signed by prospective obligors:
(a). a covenant to repay the loan as and when due;
(b). a covenant that in the event of failure to repay the loan and the loan becomes delinquent, the bank shall have the right to report the delinquent loan to the CBN through the Credit Risk Management System or by any other means;
(c). an undertaking authorising the bank to request the CBN to exercise its regulatory power to direct all banks and other financial institutions to set off the obligor’s indebtedness from any money standing to the obligor’s credit in any bank account and from any other financial assets they may be holding for the obligor’s benefit;
(d). a covenant that the bank shall have the power to set-off the obligor’s indebtedness under the loan agreement from all such monies and funds standing to the obligor’s credit/benefit in any and all such accounts or from any other financial assets belonging to the obligor in the custody of such bank;
(e). a waiver of all rights of confidentiality arising whether under common law or statute or in any other manner whatsoever;
(f). An undertaking that the obligor shall not argue to the contrary before any court of law, tribunal, administrative authority or any other body acting in any judicial or quasi-judicial capacity.

The CBN circular further directs that all loan documentation must from the date of the circular contain the Bank Verification Number (BVN) of the obligor for individual loans and Tax Identification Number for corporate loans for ease of identification of other deposits of the individual or corporate borrower as the case may be. Upon default on a credit obligation by a borrower, the bank that originated the credit shall request the CBN to invoke the utilization of the defaulting borrower(s) deposits in other banks in repayment of the obligation.

Does the Central Bank of Nigeria have the power to make directives and regulations to bind banks in Nigeria?

In order to understand if the Central Bank of Nigeria has the power to make directives and regulations binding on banks, it is important to examine the enabling laws of the Central Bank.

The Central Bank of Nigeria (CBN) Act and the Banking and Other Financial Institutions Act (BOFIA)

The CBN Act of 2007 establishes the CBN as the regulating body for all banking matters in Nigeria. The main objects of CBN includes the following: ensuring monetary and price stability; issuing legal tender currency in Nigeria; maintaining external reserves to safeguard the international value of the legal tender currency; promoting a sound financial system in Nigeria; and acting as banker and providing economic and financial advice to the Federal Government.

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