CBN Cracks Down on Insider Loans: A Shift in Nigeria’s Banking Landscape?

The Central Bank of Nigeria (CBN) has issued a directive ordering commercial bank directors with non-performing insider-related loans to step down immediately. This move, outlined in a circular dated February 17 and signed by Adetona Adedeji, acting director of banking supervision, is aimed at reducing excessive exposure to insider loans that could destabilise the financial sector.

Under the new directive, banks must ensure that all insider-related loans exceeding statutory limits are brought within approved thresholds within 180 days. According to Section 19(5) of the Banks and Other Financial Institutions Act (BOFIA), no individual bank director is permitted to hold insider loans exceeding 5% of the bank’s paid-up capital, while the total insider-related credit exposure for an entire bank must not exceed 10%.

This latest enforcement action comes as Nigerian banks work to reduce their non-performing loans (NPLs), which fell to 4.8% in October 2024, below the industry threshold of 5%. However, the directive raises several questions about the broader impact on Nigeria’s banking sector, corporate lending culture, and economic stability.

A New Era for Bank Lending?

For years, insider-related loans—credit facilities extended to directors, major shareholders, or related entities—have been a persistent issue in Nigeria’s financial sector. While not inherently problematic, these loans become a risk when they are excessive or non-performing, eroding bank capital and threatening financial stability.

With the CBN tightening regulations, banks may be forced to reassess their lending strategies, especially towards politically connected or high-net-worth individuals with boardroom influence. Stricter credit assessments and risk management frameworks could emerge, making it harder for directors to access preferential financing.

Impact on Smaller Banks and Financial Access

While larger banks may find it easier to absorb the impact of stricter insider loan policies, smaller banks—especially those with heavy reliance on director-linked credit—could face challenges. Some may need to restructure their loan books, seek additional capital buffers, or expedite loan recoveries to meet compliance requirements.

Additionally, this could have a ripple effect on corporate lending practices, potentially leading to a more cautious approach in extending credit to businesses. With insider-related credit coming under scrutiny, Nigerian businesses accustomed to leveraging boardroom relationships for financing may now need to meet more stringent collateral and risk assessment criteria.

Investor Confidence and Banking Stability

On the flip side, this move could boost investor confidence in Nigeria’s financial system. Stricter oversight of insider lending signals a commitment to corporate governance and risk management, aligning with global best practices. If effectively enforced, the directive could create a more resilient banking sector, reducing the likelihood of financial crises tied to unchecked lending.

However, the immediate impact remains uncertain. Will banks struggle to recover outstanding insider loans within the 180-day window? Could this trigger leadership shake-ups within financial institutions? And how will Nigerian businesses adapt to a banking sector with tighter credit controls?

As the deadline for compliance looms, banks will need to navigate these challenges while ensuring continued financial stability. Whether this marks the beginning of a more disciplined lending culture or a temporary crackdown remains to be seen.