CBN’s Fraud Penalty: A Game-Changer or a Burden on Nigeria’s Banking Sector?

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By Epiphanus Obia

The Central Bank of Nigeria’s (CBN) directive to the Nigeria Inter-Bank Settlement System (NIBSS) to debit commercial banks for fraudulent transactions is set to redefine accountability in the financial sector. Effective January 2025, this policy aims to curb fraud by holding financial institutions directly responsible for lapses in their transaction monitoring and Know Your Customer (KYC) compliance. However, questions remain: Will this directive actually reduce crime? Is Nigeria’s financial system prepared for a fraud-free future? And who bears the true burden of this policy—banks or ordinary Nigerians?

Will the CBN Fraud Penalty Actually Reduce Crime?

The success of CBN’s directive hinges on its ability to deter fraudulent transactions. By making banks liable for fraud proceeds, the policy incentivizes financial institutions to strengthen their fraud detection systems. The losses incurred in Q2 2024 alone—₦42.6 billion, according to the Financial Institutions Training Centre (FITC)—underscore the urgency of reform. see story

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However, skeptics argue that fraudsters are highly adaptive. If banks tighten their monitoring, criminals may resort to more sophisticated methods, including colluding with insiders or exploiting alternative financial channels. Moreover, the effectiveness of this policy depends on swift enforcement and transparency in fraud verification.

“What this means is that banks and fintechs are now responsible for the money that comes to them,” said Adedeji Olowe, founder of Lendsqr. “This has always been the foundation of KYC, not just in Nigeria but in every financial jurisdiction in the world.”

Is Nigeria’s Financial System Ready for a Fraud-Free Future?

The CBN’s initiative signals a broader push for fraud-free banking, but is the system ready? Banks and fintechs will need to make substantial investments in fraud detection infrastructure, staff training, and real-time transaction monitoring. Some institutions have already begun strengthening controls on large or unusual transactions.

However, regulatory enforcement remains inconsistent. Many financial institutions fail to report fraud cases due to reputational risks. According to a NIBSS report, only 60 of Nigeria’s 163 financial institutions reported fraud incidents in 2023 (see story). Without comprehensive reporting and data sharing, fraudsters may exploit gaps in the system.

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Additionally, the rapid expansion of digital financial services has outpaced regulatory frameworks. Fintechs, in particular, face heightened scrutiny due to their handling of high transaction volumes with minimal physical verification. As seen in December 2024, when a major fintech’s settlement account was debited over a ₦7 billion fraud case, the new directive could pose existential threats to smaller financial startups with limited risk-mitigation capabilities.

Who Exactly Is the Victim of the New CBN Policy: Ordinary Nigerians or Banks?

While the policy is designed to hold financial institutions accountable, its ripple effects will inevitably impact ordinary Nigerians. Banks may respond to the increased risk of penalties by tightening KYC processes, leading to delays in account opening and transaction approvals. Additionally, to offset potential losses, financial institutions could introduce higher service fees, making banking more expensive for consumers.

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On the other hand, the policy’s immediate victims are banks and fintechs that fail to conduct due diligence. Those unable to recover fraud proceeds before the NIBSS debits their accounts will suffer financial losses. This could force banks to impose stricter restrictions on transfers, causing inconvenience for legitimate customers.

A Balancing Act

The CBN’s fraud penalty directive is a bold step toward financial accountability, but its success depends on careful implementation. While it could significantly reduce fraud, its unintended consequences—higher banking costs, delays, and potential overregulation—must be mitigated. A collaborative approach involving regulators, banks, fintechs, and consumers will be crucial in shaping a secure yet accessible financial landscape in Nigeria.

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