By; Banking & Finance Practice Group
INTRODUCTION
Access to debt financing is, for most Nigerian businesses, not merely a commercial objective it is a precondition for growth. Whether the facility in question is a term loan from a deposit money bank, a revolving credit facility from a non-bank financial institution, or a multi-bank syndicated arrangement, the legal documentation that underlies every borrowing relationship contains obligations, restrictions, and risks that most borrowers do not fully appreciate until they have already signed.
This article examines the legal framework governing debt financing in Nigeria, identifies the key provisions of facility agreements that carry the greatest risk for borrowers, and explains what every Nigerian company from an SME accessing its first bank facility to a mid-market corporate managing a complex capital structure — must understand before committing its signature to a loan agreement.
I. The Regulatory Framework: BOFIA 2020 and the Role of the CBN
Debt financing in Nigeria’s institutional sector operates within a regulatory framework anchored by two principal statutes: the Banks and Other Financial Institutions Act 2020 (BOFIA 2020)[1] and the Companies and Allied Matters Act 2020 (CAMA 2020). Together, these instruments govern not only the institutions that lend money but also the corporate borrowers that receive it, the security interests that are created to support facilities, and the consequences that flow from default.
BOFIA 2020 is the primary statute governing the lending activities of banks and other financial institutions. Its most consequential provision for borrowers is Section 19(1)(c), which prohibits any bank or financial institution from granting an unsecured advance, loan or credit facility, except in accordance with the CBN’s collateralisation regulations.[2] In practical terms, this means that virtually every institutional loan in Nigeria will require the borrower to provide security. Understanding what form that security takes and what granting it actually means is foundational to informed borrowing.
BOFIA 2020 also introduced a dedicated Credit Tribunal for the enforcement and recovery of eligible loans, a significant institutional development that alters the litigation dynamics of loan disputes and gives lenders a faster recovery pathway than was previously available under general civil procedure.[3]
II. Security Interests: Fixed Charges, Floating Charges, and the STMA 2017
Every secured loan involves the grant of a security interest — a legal right that allows the lender to realise the secured asset in the event of default. In Nigeria, security interests take three primary forms in commercial lending: fixed charges, floating charges (governed by CAMA 2020), and security interests over movable assets (governed by the Secured Transactions in Movable Assets Act 2017 (STMA 2017)).
A. Fixed and Floating Charges Under CAMA 2020
A fixed charge is a security interest over a specific, identified asset — a piece of real property, a plant, or a vehicle. The borrower cannot deal with the charged asset (dispose of it, charge it again, or encumber it) without the lender’s consent. A floating charge, by contrast, is an equitable charge over a class of assets — typically a company’s book debts, inventory, or entire undertaking — that allows the company to continue dealing with those assets in the ordinary course of business until a crystallising event occurs.[4]
Under CAMA 2020, section 203, a floating charge crystallises — converting from a floating charge to a fixed equitable charge — when the company goes into liquidation, when the chargee appoints a receiver pursuant to the debenture, or when a court appoints a receiver on the chargee’s application.[5] Upon crystallisation, the charge fixes on the specific assets covered and the company loses the right to deal freely with them.
The priority implication is critical: under CAMA 2020, section 204, the holder of a fixed charge has priority over all other debts of the company, including preferential debts.[6] A floating charge ranks below fixed charges and, unless it covers all or substantially all of the company’s assets, below certain preferential creditors in insolvency. Borrowers must therefore understand the hierarchy of security they are granting and the effect that granting a fixed charge over a key asset will have on their ability to deal with that asset going forward.
B. Security Over Movable Assets: The STMA 2017 and the National Collateral Registry
The STMA 2017 introduced a parallel — and, for many SME borrowers, more accessible — security regime. Under section 1(a), the STMA applies to all security interests in movable assets created by an agreement that secures payment or the performance of an obligation.[7] ‘Movable assets’ is broadly defined to include tangible and intangible property other than real property — encompassing machinery, equipment, inventory, receivables, and intellectual property rights.
Security interests under the STMA are perfected by filing a financing statement with the National Collateral Registry (NCR), housed within the CBN[8]. Under the STMA, priority between competing security interests is determined by the date of registration at the NCR — the first to file has priority.[9] This is a significant departure from the CAMA 2020 regime, under which priority is governed by the date of creation of the charge (provided it is registered within 90 days).
Nigerian borrowers must now navigate a dual registration regime: a charge over company assets may require registration at both the CAC (under CAMA 2020, s. 222) and the National Collateral Registry (under the STMA 2017). Failure to register under either regime carries serious priority and enforceability consequences.
The practical implication of this dual regime is significant: a borrower that grants security without properly advising its own counsel may inadvertently create priority conflicts between lenders, or discover on a refinancing that a prior registration at the NCR encumbers assets it believed were unencumbered.[10] This underscores the importance of conducting a thorough security search at both the CAC and the NCR before committing to any new financing.
III. The Registration Obligation: A Trap for the Unwary
Under CAMA 2020, section 222, every charge created by a company must be registered with the CAC within 90 days of creation.[11] Failure to register within this period has a draconian consequence: the charge becomes void against any liquidator and any creditor of the company. This means that a lender holding an unregistered charge will lose its secured status and rank as an unsecured creditor in the company’s insolvency — a potentially catastrophic outcome in Nigerian insolvency proceedings where unsecured creditors routinely recover little or nothing.
For borrowers, the registration obligation carries a different but equally important implication: the costs of registration, stamp duty and CAC filing fees are typically borne by the borrower under the terms of the facility agreement. These costs can be material, particularly on large facilities where the ad valorem nature of stamp duty makes the perfection exercise expensive. Borrowers should budget for perfection costs as part of their overall cost of funds calculation, and not treat them as an afterthought.
IV. Financial Covenants: The Provisions That Trap Borrowers Most Often
Of all the provisions in a Nigerian facility agreement, financial covenants are the ones that most frequently cause distress for borrowers who did not fully understand what they were agreeing to when they signed. Financial covenants are undertakings by the borrower to maintain certain financial ratios or thresholds throughout the life of the loan — typically tested quarterly or semi-annually against the borrower’s financial statements.
The most common financial covenants in Nigerian institutional loan agreements include:
- A minimum interest coverage ratio — requiring the borrower’s earnings before interest and tax (EBIT) to exceed its interest expense by a specified multiple, typically 1.5x to 3.0x;
- A maximum leverage ratio — capping the borrower’s total indebtedness as a proportion of its EBITDA or shareholders’ funds; and
- A minimum liquidity ratio — requiring the borrower to maintain a specified level of liquid assets relative to its current liabilities.
Breach of a financial covenant even where the borrower is current on all interest and principal payments will typically constitute an event of default under the facility agreement, entitling the lender to accelerate the entire outstanding balance and demand immediate repayment.[12] Many borrowers first encounter the severity of this consequence when commodity prices fall, naira depreciation affects their import costs, or a cyclical downturn compresses their EBITDA — events entirely outside their control but which push covenant ratios below the agreed thresholds.
Financial covenants must be negotiated carefully before signing. A covenant that seems comfortable at the time of drawdown can become a tripwire within twelve months if the borrower’s operating environment deteriorates. A well-advised borrower will model covenant compliance under downside scenarios before agreeing to any financial ratio.
V. Other Key Provisions Borrowers Must Scrutinise
A. Material Adverse Change (MAC) Clauses
A material adverse change clause gives the lender the right to withhold further drawdowns, or to call an event of default, if there has been a material adverse change in the borrower’s financial condition, business, or prospects.[13] The breadth of these clauses is frequently contentious: lenders draft them broadly, while borrowers seek to narrow their scope by reference to objective, measurable criteria. In the Nigerian market, where economic volatility is endemic and currency depreciation can alter a borrower’s financial profile rapidly, MAC clauses require particular care.
B. Negative Pledge and Cross-Default Clauses
A negative pledge clause prohibits the borrower from creating any further security interest over its assets without the lender’s prior consent. For a borrower that anticipates needing additional financing in the future, a broadly drafted negative pledge can significantly constrain its ability to access credit from other sources. Borrowers should ensure that carve-outs for permitted encumbrances including security arising by operation of law and pre-existing charges are expressly documented.
A cross-default clause provides that a default under any other financial indebtedness of the borrower (whether to the same lender or any third party) will constitute an event of default under this facility. In a market where many Nigerian corporates maintain banking relationships across multiple institutions, a cross-default clause can trigger a cascade: default with one bank ripples instantaneously across every other facility the borrower holds.
C. Single-Obligor Limits and the CBN’s Prudential Exposure Framework
Borrowers dealing with multiple lenders must be aware that BOFIA 2020 empowers the CBN to impose prudential exposure limits on individual bank lending. The 2014 CBN Revised Guidelines for Finance Companies historically restricted single-obligor exposure to 20% of a bank’s shareholders’ funds.[14] Where a borrower’s aggregate indebtedness to a single bank approaches this limit, the bank may be unable or unwilling to extend further credit regardless of the borrower’s creditworthiness. Sophisticated borrowers will monitor their exposure levels relative to their lenders’ thresholds as part of their treasury management.
D. Foreign Currency Loans and Exchange Control Obligations
Where a Nigerian borrower accesses financing denominated in foreign currency, additional obligations arise. Under the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act, foreign loans must be registered with the CBN through an authorised dealer bank to enable lawful servicing and repayment through the official foreign exchange market.[15] Interest and fees paid to foreign lenders may also attract Nigerian withholding tax at 10% unless a double taxation agreement provides an exemption. Borrowers should factor both the exchange rate risk and the withholding tax cost into their pricing analysis before committing to a foreign currency facility.
VI. What Borrowers Must Do Before Signing
The foregoing analysis points to a single, overriding conclusion: a Nigerian borrower that signs a facility agreement without independent legal advice is accepting risks it has not quantified, restrictions it may not be able to comply with, and security obligations it may not fully understand. The following pre-signature steps are, in our view, non-negotiable:
- Conduct a pre-signing security search at both the Corporate Affairs Commission and the National Collateral Registry to establish the current encumbrance position of your assets.
- Retain independent transaction counsel — distinct from any counsel acting for the lender to review and negotiate the facility agreement, security documents, and conditions precedent.
- Model your financial covenant compliance under base case and downside scenarios over the full term of the proposed facility, including sensitivity analysis for currency movements, interest rate changes, and commodity price shifts.
- Negotiate the MAC clause to reference objective criteria rather than subjective lender assessment.
- Negotiate the negative pledge to include commercially reasonable carve-outs for trade credit, pre-existing security, and future purchase money security interests; and
- Budget explicitly for perfection costs stamp duty and CAC registration fees as part of the total cost of the borrowing.
Independent transaction counsel is not an additional cost, it is a risk mitigation measure.[16] The cost of reviewing and negotiating a facility agreement is a fraction of the cost of managing a covenant breach, a misdirected enforcement action, or a priority dispute with a competing lender.
Conclusion: Informed Borrowing Is a Corporate Governance Obligation
Debt financing is the lifeblood of Nigerian corporate growth. But the legal framework within which it operates, spanning BOFIA 2020, CAMA 2020, the STMA 2017, the CBN’s prudential guidelines, and Nigeria’s foreign exchange control legislation is complex, layered, and unforgiving of the uninformed. The borrower that signs without understanding is not simply taking a commercial risk: it is accepting a legal position it may be unable to exit.
At Enebeli & Partners Legal, our Banking & Finance practice advises borrowers at every stage of the financing lifecyclenfrom term sheet review and facility negotiation, through security creation and perfection, to covenant monitoring and event-of-default management. We act exclusively for borrowers in the transactions we handle: our obligation is to our client’s position, not to the deal.
If your business is in active loan discussions, or if you have already signed a facility agreement and are uncertain about your obligations, contact Enebeli & Partners Legal before your next compliance date — not after your lender has issued an acceleration notice.
To retain Enebeli & Partners Legal for banking and finance advisory, contact us at info@goenebeli.com or call +234 802 255 7029. Visit www.goenebeli.com to learn more about our full-service legal practice.
References
[1]Banks and Other Financial Institutions Act 2020 (BOFIA 2020), assented to on 13 November 2020 by President Muhammadu Buhari. BOFIA 2020 repealed and replaced BOFIA 1991 (as amended). It governs the licensing, regulation, and supervision of banks and other financial institutions in Nigeria under the oversight of the Central Bank of Nigeria (CBN). See KPMG Nigeria, ‘BOFIA 2020: Impact on the Financial Services Industry’ (April 2021).
[2]BOFIA 2020, s. 19(1)(C): prohibits a bank or other financial institution from granting an unsecured advance, loan or credit facility except in accordance with the CBN’s collateralisation regulations. This provision codifies the mandatory security requirement that characterises virtually all institutional lending in Nigeria.
[3]BOFIA 2020 established a dedicated Credit Tribunal for the enforcement and recovery of eligible loans. This is a significant development: the Credit Tribunal is intended to provide a faster and more specialised forum for the resolution of disputes arising from loan agreements between financial institutions and their borrowers, addressing the delay and expense of conventional litigation. See: Mondaq, ‘Banks and Other Financial Institutions Act, 2020: Highlight of Key Changes’ (May 2021).
[4]CAMA 2020, s. 203: defines a floating charge as an equitable charge on the present and future assets of a company, which floats over those assets and allows the company to deal with them in the ordinary course of business until a crystallising event occurs. See further: Mondaq, ‘Hanging in the Balance: Securing a Company’s Debt by a Fixed or Floating Charge?’ (February 2025).
[5]CAMA 2020, s. 203(2): a floating charge crystallises (i.e. becomes a fixed equitable charge) upon: (a) the company going into liquidation; (b) the chargee appointing a receiver pursuant to the debenture; or (c) a court appointing a receiver on the application of the chargee. Upon crystallisation, the floating charge attaches to the specific assets it covers and the company loses the right to deal freely with those assets.
[6]CAMA 2020, s. 204: the holder of a fixed charge has priority over all other debts of the company, including preferential debts. This priority advantage is a key reason lenders routinely insist on fixed charges over specific high-value assets. See: Baker Tilly Nigeria, ‘Highlights of Critical Changes Introduced by CAMA 2020’ (May 2024).
[7]Secured Transactions in Movable Assets Act 2017 (STMA 2017), s.1(a): the Act applies to all security interests in movable assets created by an agreement that secures payment or performance of an obligation. The term ‘movable assets’ is defined to mean tangible or intangible property other than real property. The STMA established the National Collateral Registry (NCR) within the CBN. See: Mondaq, ‘Registration of Security under the Secured Transactions in Movable Assets Act, 2017’ (January 2026).
[8] STMA 2017, s.8(1)
[9]STMA 2017, s. 23, Priority between competing security interests is governed by the date of registration at the NCR — the first-to-file rule. See: Lexology, ‘Analysis of the Secured Transactions in Movable Assets Act 2017’ (August 2017).
[10]The concurrent operation of CAMA 2020 and the STMA 2017 creates a dual registration regime for security interests in Nigeria: charges over company assets may require registration at both the CAC (under CAMA 2020, s. 222) and the NCR (under the STMA). Priority under CAMA 2020 is governed by date of creation (provided registration occurs within 90 days), while priority under the STMA is governed by date of registration. This divergence creates a material risk for lenders who fail to register under both regimes..
[11]Companies and Allied Matters Act 2020 (CAMA 2020), s. 222: any charge created by a company must be registered with the Corporate Affairs Commission (CAC) within 90 days of creation. Failure to register within this period renders the charge void against any liquidator and creditor of the company..
[12]Financial covenants in Nigerian loan agreements typically include: (a) a minimum interest coverage ratio (EBIT/interest expense); (b) a maximum leverage ratio (total debt/EBITDA or total equity); and (c) a minimum liquidity ratio. These covenants give lenders early warning of financial deterioration before formal default occurs. Breach of a financial covenant will typically constitute an event of default entitling the lender to accelerate the loan.
[13]In Nigerian loan practice, material adverse change (MAC) clauses typically define a MAC as any change in the financial condition, business, operations or prospects of the borrower that, in the lender’s reasonable opinion, materially and adversely affects: (a) the ability of the borrower to perform its obligations under the facility agreement; or (b) the validity or enforceability of the loan documentation. Nigerian courts have not yet extensively interpreted MAC clauses, making careful drafting critical.
[14]BOFIA 2020, s. 20: prior to the enactment of BOFIA 2020, individual banks were largely free to determine their own exposure limits. BOFIA 2020 now empowers the CBN to impose prudential exposure limits. The 2014 CBN Revised Guidelines for Finance Companies historically restricted single-obligor exposure to 20% of shareholders’ funds. Borrowers dealing with multiple lenders must be aware that the aggregate of their borrowings may trigger these regulatory limits at the lender level, affecting the availability of further credit.
[15]SHQ Legal, ‘Understanding Syndicated Loans in Nigeria’ (March 2026): ‘Where loans are denominated in foreign currency, the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act provides the legal foundation for compliance with exchange control regulations. It guarantees that foreign loans registered with the CBN can be serviced and repaid through the official FX market.’ Borrowers must also note that interest or fees paid to foreign lenders may attract withholding tax unless exempted under an applicable double taxation agreement.
[16]In Nigerian lending practice, a well-advised borrower will engage independent transaction counsel — distinct from counsel acting for any lender — to: (a) review and negotiate the facility agreement and security documents; (b) advise on the implications of the covenant package; (c) confirm that the security being granted does not breach any negative pledge in pre-existing agreements; and (d) ensure that all perfection and registration steps are completed within the required timeframes.
