BOFIA 2020 and financial system stability in Nigeria: Implications for stakeholders in the African largest economy

Abstract

This paper reviews the Banking and Other Financial Institutions Act (BOFIA) 2020 in Nigeria in the light of regulatory theories and extant empirical evidences, with a view to predicting its potential effects on financial system stability in Nigeria, domestic stakeholders and international investors. Our review shows that the new law attains a higher level of clarity in presentation of banking rules and regulations, tightens the incentive structures for compliance, widens regulatory breadth of financial sector coverage, penalises banks’ office holders more severely for regulatory breaches, emphasises banks’ compliance with prudential ratios, and improves banks’ disclosure. Empirical evidence in the literature that suggests these improvements may enhance financial system stability is corroborated by analytical statistics of banking sector data over 1983–2020 period. Our findings show that financial and prudential performance of Nigerian banks significantly improved after regulatory reforms of 2004 and 2009, suggesting that their codification in BOFIA 2020 has a strong potential to enhance financial system stability in Nigeria to the benefits of all stakeholders. These merits may, however, be undermined by inherent pitfalls in the Act such as reduction in the roles of other financial safety-net participants, negative market signals of such reduction, weak harmonisation with other Acts governing relevant banking issues, and concentration of supervisory power in a single regulatory authority with its inclination for regulatory capture, among others.