Risk-Based Supervision and Digital Banking Stability under the Banking and Other Financial Institutions Act (BOFIA) 2020

Abstract

The advent of digital banking in Nigeria has revolutionised the banking sector. Its unique characteristics of new technologies, product innovations, size and speed of financial transactions have changed the nature of the banking sector. The dependence on technology and data intensity has, in the same way, introduced new risks like the cyber security risk and data protection and privacy risk. The Banks and Other Financial Institutions Act (Bofia) 2020 is the principal legislation governing and regulating banks in Nigeria, including digital banks. This paper evaluated Risk-Based Supervision and Digital Banking stability under (Bofia) 2020 and finds that the Nigeria’s prudential framework is not proportional to the risk intensity of digital banks. A sustainable banking regulation is necessary for stable digital banking in Nigeria. A doctrinal approach of research is adopted by examining statutes and existing literature on the topic. This paper recommends an amendment of (Bofia) 2020 to include tiered prudential guidelines for digital banks based on their risk intensity. This paper also recommends that the capital adequacy ratio and liquidity ratio of digital banks should reflect the risk inherent in their operation. An upgraded technology and cyber risk supervision is recommended, as digital banks are highly exposed to cyber threats.