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CBN restricts use of BAs by banks

By Babajide Komolafe
LAGOS — THE Central Bank, CBN, has barred banks from using Bankers Acceptances, BAs, to finance service related activities.

In the guidelines for treatment of Bankers Acceptances and Commercial Papers, CPs, released yesterday, the apex bank stated, “Unless otherwise specifically provided for in these guidelines or approved by the CBN, the ‘sale’ or ‘purchase’ of services shall not be eligible for BA financing.”

The CBN also barred the use of BAs to finance transactions between two units or departments of an organisation as well as transactions between two companies owned by same individual.

It stated, “A bank shall not accept a BA that is drawn to finance a sale or purchase of goods, where: (a) The two parties to the trade transaction are part of a single legal entity (e.g. Production Department and Marketing Department of one company or one branch and another branch);

(b) The two transacting parties are sole proprietorships operated or owned by the same individual or where the proprietors are different individuals related to each other (parent/child or spouse);

or (c) The two transacting parties are partnerships in which the partners are the same individuals or the majority of the partners are common, or one or more common partners own the majority share in the partnerships.

(vii) Where the two transacting parties are related corporations, a BA may still be drawn provided that the accepting bank shall take reasonable measures to verify that: (a) The related corporations are indeed separate legal entities; (b)

The trade transaction between the two related corporations was undertaken at arm’s length and there was a genuine transfer of title to the goods concerned, evidenced by proper and adequate documentation. (c) The transaction is to finance cross border trade.”

BAs and CPs are debt instruments used by organisations to finance trade activities and are not recorded in the balance sheets of banks hence regarded as off-balance sheet items. But due to abuse, the CBN on July 23 suspended its treatment as off-balance sheet item and directed banks to record them in their balance sheets.

However the CBN at its last Monetary Policy Committee, MPC, meeting announced the lifting of the suspension on BAs and CPs effective November 16 while guidelines will be issued later.

The CBN stated that the guidelines were issued to ensure uniform practice and correct treatment of Bankers Acceptances and Commercial Papers by Banks and Discount Houses in Nigeria, and to deepen and facilitate the effective and efficient functioning of the Nigerian money market.

It stated, “Non-compliance with these guidelines or any part thereof shall attract appropriate penalties as prescribed in Section 60 (1) of the Banks and Other Financial Institutions Act 1991 (as amended) and may also include debarring from the BA or CP market, or as may be prescribed by the CBN from time to time.”


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