Course info

Godfrey Okoye UNIVERSITY ENUGU

FACULTY OF LAW

COURSE CODE: LAW 317

COURSE TITLE: BANKING AND INSURANCE LAW 1

 

COURSE OUTLINE/CONTENT

1.   Background to the Nigerian Banking System

-          Early Historical Development of the Concept of Banking

-          Banking during the Colonial Era

-          Emergence of Indigenous Banks in Nigeria

-          Post-Independence Banking Era and Acquisition of Foreign Banks by the FGN

-          Banking Sector Reforms in Nigeria

·       Structural Programmes in Nigeria (SAP)

·       Charles Soludo’s Reform

·       Sanusi Lamido’s Reform: Bridge Bank

·       Emergence of Microfinance Banks

-          Islamic Banking

-          Introduction of Electronic Banking in Nigeria

·       Deposit Money Bank (DMB)

·       Specialised Banks (e.g. BOA, FMBN, BOI)

·       Microfinance Bank

·       Supervisory Bank – CBN (Apex Bank)

 

2.   Banker-Customer Relationship

-          Meaning of Relevant Terms

·       Bank

·       Banker

·       Banking Business

·       Finance Institutions

·       Wonder Banks

-          “Money Lender” Distinguished from “Banker”

-          Legal Nature of Banker–Customer Relationship

a)   General Contract Perspective of Banker–Customer Relationship

b)   Special Contract Perspective

c)    Legal Duties/Obligations of the Banker

d)   Legal Duties/ Obligations of the Customer

e)    Determination of Banker – Customer Relationship

 

3.   Types of Account & Bank Charges

a)   Current Account: Overdraft

b)   Corporate Account

c)    Joint Account

d)   Trust Account

e)    CLIENTS Account (Solicitors Account)

 

4.   Securities For Loan Or Advances

a)   Banker’s Lien

b)   Pledge

c)    Hypothecation

d)   Charges

e)    Land

f)     Guarantee

 

5.   Banking Supervision & Regulation

a)   Structure and Function of the CBN – CORE Regulation

b)   Structure and Function of the NDIC – 2^ND Regulation

c)    Relevant Legislation and regulation

Supervisory and Regulating Banks & Other Financial Institutions

d)   Rationale for Regulation & Supervision

 

·       BOFIA

·       CBN ACT

·       NDIC ACT

·       AMCON

·       Money Laundering (Prohibition) Act 2011

·       Dishonoured Cheques (Offences Act)

·       Nigerian Sovereign Investment Authority Act

·       Microfinance Policy – Regulation & Supervisor Framework for Nigeria

·       Failed banks (Recovery of Debts)

·       Financial Malpractices in Banks Act – Cap B1 LFN 2004.

·       Code for Corporate Governance for Banks in Nigeria.  

·       Central Bank of Nigeria Guidelines on Electronic Banking in Nigeria, 2003.

·       CFRN

·       Guide to Bank Charges 2004.

 

6.   Negotiable Instrument

-          Cheques: Dishonour of Cheques, Meaning and Legal Issues – Dishonour Cheques Offences Act

-          Promissory Notes

-          Bank Draft

-          Bills of Exchange

7.   Letters of Credit & Performance Bonds

8.   International Banking

9.   Tutorial Classes

 

RECOMMENDED TEXTS:

v  LAW of Banking in Nigeria I.J. Goldface – Irokalibe

v  Nigerian Electronic Banking Law

v  Relevant Acts of the National Assembly & CBN Guidelines 2009

v  Law of Banking And Negotiable Instruments by K. I.  Igweike

v  Central Bank Act 2007

Lecturers: Dr. Anthony Onuigbo

Dr. Maureen Ujah

Mrs. Joy Nnani

 

Entrepreneurial Contents of the Outline

1.   Legal Editor

2.   Legal Consultancy

3.   Project Management

4.   Business Advising  

5.   Policy Analysis

6.   Legislative aids

7.   Data protection Specialist

Skills Inherent in the Outline

1.   Advocacy skill

2.   Problem-solving skill

3.   Communication skill

-          Listening skill

-          Fluency

-          Attention to details

4.   Negotiation skill

5.   Bargaining skill

6.   Alternative Dispute Resolution Skill

7.   Resolute skill

 

NOTE ON LAW BANKING 317 BANKING AND INSURANCE LAW I

BACKGROUND TO NIGERIA BANKING SYSTEM

Historical Development of the Concept of Banking

 The modern banking system in Nigeria began in 1892 when the African Banking Corporation based in South Africa opened a branch in Lagos. The bank was incorporated in Britain, and owned by Elder Dempster Company, a shipping firm based in Liverpool. The principal aim of the company then was to service British trading interests in Nigeria, such as the Royal Niger Company and other allied companies. In 1893, the bank was reorganized as the Bank of British West Africa (BBWA). The bank was subsequently renamed Standard Bank of Nigeria and very much later renamed First Bank of Nigeria, and which it still bears today.

In 1917, another British Bank, the Barclays Bank opened its first branch in Lagos and became the second bank to be established in Nigeria. This second bank transformed into the Union Bank of Nigeria Plc. In 1949, the British and French Bank was established. The bank later transformed into the United Bank for Africa. Thus, the banking industry in Nigeria was monopolized by foreign banks until the establishment of the first indigenous bank, the National Bank of Nigeria in 1933.

 The Growth of Indigenous Banks

As earlier indicated above, the Banking system of Nigeria was dominated by foreign banks. These banks monopolized the banking business in Nigeria. These foreign banks exhibited a profound lack of active interest in the business of the indigenous people. This lack of active interest in indigenous people and their interest earned expatriate banks much criticism from Nigerians both at the time and in succeeding years. ^[1]These foreign banks were accused of being deliberately unhelpful and unwilling to provide credit facilities to the indigenous business community. This led to the Nigerian government to pursue vigorously policies aimed at establishing and developing Indigenous banks. Following discrimination suffered at the hands of these foreign banks, some patriotic Nigerians grouped themselves for the purpose of breaking the monopoly as a result of which the National Bank of Nigeria was founded in 1933. ^[2]Thus, in the spirit of breaking the monopoly of the foreign banks and end the exploitative tendency of the British colonial business people, indigenous banks were established. Among the indigenous banks established the Afbonmagbe Bank in 1945, the African Continental Bank and the Nigerian Farmers and Commercial Bank, both established in 1947. Others include Pan African Bank, Afro-Seas Credit Bank, Nigerian Trust Bank of Nigeria, Onward Bank of Nigeria, Standard Bank of Nigeria, and Premier Bank, all established in 1951.

Also, in 1957 many more banks were established. These include the Merchant Bank of Nigeria, the Provincial Bank of Nigeria, etc. The major factor in the establishment of these Indigenous banks was the quest for the liberalization of credit to the indigenous people, particularly, the businessman and women. With the attainment of regional autonomy in the political development of Nigeria in 1954, the government got involved in the development of indigenous banking through the ownership and operation of banks in Nigeria, especially in western and Eastern regions.

However, not long after the establishment of these banks, most of them collapsed and went into liquidation. A galaxy of factors was responsible for the sudden collapse and liquidation of these early indigenous banks. Some of the factors include most of them were under-capitalized. Yet, another problem was too rapid expansion with a short span of operation. For instance, the Nigerian Farmers and Commercial Bank with a paid-up capital of the equivalent of N26,000 expanded to twenty-eight branches within six years of operation.

Another reason was dishonesty, incompetency, and inefficient management. Most of the personnel in control of the affairs of these banks lacked the requisite professional skill and expertise and consequently. Ill-equipped to run the affairs of big financial organizations like banks, hence their eventual collapse and liquidation. Aggressive competition from the expatriate banks also took its toll on the indigenous banks. There was no regulations or rules to regulate banking activities. It was then free for all comers.

 

THE STRUCTURE OF NIGERIAN BANKING SYSTEM

The Central Bank of Nigeria

          The Central Bank of Nigeria was established in 1958 and came into operation in 1959 as the apex bank of Nigeria. The Current Act on the Central Bank activities in Nigeria in the 2007 Act

Functions of the Central Bank of Nigeria (CBN)

According to Section 17 of the Central Bank Act 2007^[3], the functions of the Central Bank of Nigeria include the following:

1.    Issue and distribution of Nigeria currency. One of the primary duties of the Central Bank of Nigeria is to issue, distribute and safe custody of the issued currency. The core function of a Central Bank is to issue notes and regulate the volume of currency, and the legal tender of money in the country. This exclusive right was associated with the origin of Central Banks which were formally called banks of issue.^[4]

In performing the duty of note issue, it adheres to the following considerations:

i.               Uniformity of Currency

ii.             Elasticity of currency

iii.           Security of currency

This function of note issue helps the Central Bank. Maintain the external and internal value of money.

2.     Controller of credit in the economy. The Central Bank holds the cash reserves of all commercial banks and also supports them by lending in times of their need.

3.    Banking Supervision and Examination: This function compliments those relating to the promotion of monetary stability and maintenance of sound financial system. In order to promote monetary stability and a sound financial system, the Central Bank of Nigeria has to supervise and monitor the banks.

4.    Banker and Adviser to the Government: The Central Bank acts as a banker, adviser, and agent for the government. As a banker to the Government, the Central Bank holds accounts of both Federal and State Governments and performs banking transactions. As an adviser, it advises the government on all monetary and banking matters, like foreign exchange policy, commercial policy, etc.

5.    Banker’s Bank: The Central Bank performs the function of a banker’s bank. Banks are required to maintain a part of their deposits as reserve with the Central Bank thus, necessitating a need for maintaining accounts with the Central Bank. The three key purposes of reserve requirements are prudential, monetary control, and liquidity management.^[5] In the course of transacting banking business, commercial banks transfer and receive funds from each other and thus, need a common platform to settle transactions. This platform is provided by the Central Bank.

6.    Development Function: Besides the traditional function of the Central Bank, it plays active roles in other areas of economic development. These include:

i.               The development of the money and capital market. In this respect, helped in the setting up of some key financial institutions such as the Securities and Exchange Commission (SEC).

ii.             Promotion of agricultural activities through agricultural financial and agricultural credit guarantee.

 

Merchant Banks

Merchant bank is defined as bank whose business includes receiving deposits on discount, provisions of finance, consultancy and advisory services relating to corporate and investment matters, making or managing investments on behalf of any person[6]. The first merchant banking business in Nigeria began in 1961 with the opening by Philip Hills of London of an office in Lagos. In 1969. The merchant bank was transferred to and employed as springboard for the establishment of the full –fledged Merchant Bank in Nigeria, the Nigerian Acceptance Limited (NAL).[7] Today, there are many Merchant Banks in Nigeria.

Functions of Merchant Banks

Generally, merchant banks perform the following functions:

(a)  Financing trade, real estate, agricultural, industrial, and related activities, particularly capital equipment.

(b) Issuing and dealing in shares, debenture stock and other securities, including federal and state governments.

(c)  Taking and placing deposits and dealing in money market instrument including banker’s acceptances and commercial notes.

(d) Arranging syndicated credits and providing direct loans and overdraft both for short and long-term periods.

(e)  Providing trade finance services such as letters of credit, bills for collection and foreign exchange transactions

(f)   Managing investment portfolios and other financial matters such as direct foreign investments, merger and acquisition, project financial and other financial matters

Development Banks

The term development bank is generic employed to describe a financial institution, not always a bank, which has for its purpose the provision of capital and, or other material assistance to aid development in a particular sector of the international or national economy[8].

Development banking has its origin in the devastation of the Second World War at the end of which national leaders mainly in Europe and America put their hands and minds together on how to salvage their war torn economies. This necessity gave birth to the premier development bank, the International Bank for Reconstruction and Development (World Bank). The World Bank has established in 1946 sequel to the Brethren Wood Agreement of 1944 between the World Leaders at the time.

In Nigeria, the necessity for setting up development banks became imperative after the establishment of the Central Bank of Nigeria. This was due to the fact that neither the commercial banks nor the merchant banks were then in a position to provide medium and long term funds needed for the rapid economic development of Nigeria. Accordingly, with the active encouragement and support given to Nigeria by the International Bank for Reconstruction and Development (World Bank), the Nigerian Industrial Development Bank was the established to provide medium and long term capital for manufacturing industrial enterprises.

 

This was followed by the establishment of the Nigerian Agricultural and Co-operative Bank. This specialized in the provision of agricultural finance and the promotion of Agro-allied business activities. The Federal Mortgage Bank was also established in1977, which took over the business activities of the Nigerian Building Society etc.

Bank Customer Relationship

Before proceeding to examine the relationship between the banker and customer, it is essential to know the precise meaning of the terms bank and banker. For the purposes of law of banking, the terms bank and banker are often employed interchangeably. Consequently, precise definition of both terms appeared to be confronted with difficulties. This situation is worsened by the fact that there is no precise statutory definition of either bank or banker in our statues.

Bank means a bank Licensed under this Act[9]. In Patil V FRN[10], the Court of Appeal defined banks thus: in its ordinary grammatical meaning ‘bank’, means any organization that provides financial services. It is a financial establishment for the deposit, loan exchange or issue of money and for transmission of funds. Also, the Black’s Law Dictionary defines bank as a financial establishment for deposits, loan exchange or issue of money and for the transmission of funds, organized in accordance with the state or federal law.[11] The term bank will be employed here to refer only to those institutions where a substantial part of their business consists of the receipts of money on current account to be drawn upon cheques.[12]

Banker

A banker is defined as one who engages in the business of banking. According to Sukhvinder, a banker is an official of bank who accepts deposits from public subject to the withdrawal by cheque, draft or order and uses these deposits to make advances to the public for investments. Banking business means the business of receiving deposits on current account, savings account or other similar account, paying or collecting cheques, draw by or paid in by customers, provisions of finance or such other business as the Governor may, by order published in the Federal Gazette.

Banker/Customer Relationship

Meaning of Customer

There exists no statutory definition of customer. This point was captured by Igweke[13] when he opined that: no statutory attempt has been made to define who is a customer of the bank and the question has been left to the judiciary for interpretation. Ordinarily, a customer of a bank can be defined as a person who maintains an account in the bank. It has been argued that the relationship of banker/customer relationship can hardly come into existence on the basis of mere casual dealings without an account being opened.[14] The Supreme Court in Nigeria Guarantee Trust Bank v Chukeumezie Peter Ekemezie defined customer thus:

“A customer is someone who has an account with a bank or without having an account the relationship of banker and customer exists. Some money transaction must connect banker and customer, but arise from the nature of the contract”

The facts of this case were that the plaintiff/respondent claimed that he was approached by one Bidemi Olaoli who was at all times material to action a marketer with the respondent bank. The case of the plaintiff/respondent was that in  the course of the said Bidemi Olaoli marketing the products   and services of the appellant bank, the gave 4 million to the said Bidemi Olaoli to be placed a fixed deposit with the appellant bank. The plaintiff/respondent never opened an account with the bank nor did he receive any alert when he paid the said money. Instead he claimed that exhibit P1 was given to him as evidence to his investment with the bank.

When his investment was due for repayments, the plaintiff/respondent approached the appellant. But the appellant had no evidence of the transaction in its book and as a result, the appellant refused to make any payment. The plaintiff/respondent then insinuated an action in the court. The appellant was able to show that the plaintiff/respondent gave money to the said Bidemi but the exhibit slip given to the plaintiff/respondent did not match the format of the appellant bank. The appellant bank in addition pleaded the requirements of being a customer of the bank to wit; opening of an account by filling forms and being assigned an account officer. All these were absent in this case. The appellant maintained that the transaction between the respondent and Bidemi was personal and private and did not involve the appellant. At the end of trial, the trial judge gave judgment in favour of the respondent. Dissatisfied with the judgment, the appellant bank appealed the judgment and Appeal court set aside the judgment, hence the definition of the customer as defined by the court and shown above.

The court of Appeal held that: the possible contractual relationship between a banker and a customer could arise in any of the following:

(a)  The relationship of creditor and debtor that arises in regard to the customer’s funds in the hands of the bank.

(b) The relationship of creditor and debtor arises when the bank loans money to the customer or allows him to overdraw his account.

(c)  The relationship that arises from the role of the bank as a collecting bank of cheque drawn on other banks or branch of the same bank.

(d) The possible role of the bank as a holder for value of a negotiable instrument.

In the instant case, none of the above enumerated describes the relationship between the respondent and the appellant.

It therefore, follows that for a person to be considered a customer of a bank, it is essential and indispensable that the person should have opened an account with the bank. It has been held in Great Western Railway Coy V London and Country Bank[15] that a person who for about twenty years has been cashing bank’s cheque payable to him over the counter without opening an account with the bank is not a customer of the bank. According to Lord Davey in this case: there must be some sort of account, either deposit or current account or some similar relation to make a person customer of the bank.

Again, it is necessary that the account concerned was opened in name of the supposed customer either by himself personally or by some other person with his authority to do so. In Ademuluyi and Lamuye v ACB[16] , the first and second plaintiffs opened account in their names. They were prominent members of a political party, N.C.N.C (National Congress for Nigeria and Cameroon) in the old Western Region of Nigeria. Under the mistaken belief that the plaintiffs held the trust for their party paid in a cheque endorsed for them on the firm believe that they had an account with the bank under the designated name N.C.N.C special account. The plaintiffs who opened the account in their names withdraw almost the amount for their personal use. On noticing the withdrawal, the party directed the bank to freeze the account. The plaintiff sued the bank on the ground that the bank cannot act on the directive of the party. The question that arose for determination was who was the customer of the bank the plaintiff or the party. Court held that the customer of the bank were the plaintiffs. The party is not known to the bank and therefore, not a customer of the bank.

It is pertinent to note that it is not easy to proclaim an acclaimed and universally acclaimed principles for determining who is a customer. Consequently, each case must be approached and determined on its own peculiar facts and circumstances.[17]

Nature of Banker/Customer Relationship

The relationship between a banker and customer essentially flows from the type of service being provided by the bank and thus, from the ensuing contract. Generally, the relationship which subsists between a banker and his customer is basically contractual and fundamentally that of debtor and creditor. The primary service, even by definition is of debtor and creditor, the respective position being determined by the state of the account. However, in relation to other services rendered by the banker, he can be the agent or a trustee too.[18] The Court of Appeal in GTB V Ekemezie[19] states that: the possible contractual relationship between a banker and a customer could arise in any of the following. The relation in regard to the customer’s funds in the hands of the bank;

(a)  The relationship of creditor and debtor that arises in regard to the customer’s funds in the hands of the bank.

(b) The relationship of creditor and debtor arises when the bank loans money to the customer or allows him to overdraw his account.

(c)  The relationship that arises from the role of the bank as a collecting bank of cheque drawn on other banks or branch of the same bank and

(d) The possible role of the bank as a holder for value of a negotiable instrument

The nature of the relationship between the banker and the customer which emanates from the nature of the services provided by the banker to the customer are examined below:

The relationship of debtor and credit where a bank accepts money either in current or deposit account from its customer it is a relationship of debtor and credit id essentially contractual. By receiving such money, the banker undertakes to pay only part of the money due from the customer against written orders of the customer.

Relationship as an Agent

In the process of providing various services, a bank: (a) collects the customer’s cheques, drafts, dividend warrants, fixed deposits and bills of exchange for credit. In all these situations, the customer becomes the principal and the banker the agent. This relationship was captured by the Court in Balogun v National Bank of Nigeria Ltd[20], when the court held as follows:

“The receipt of money for or on account of his customer by a bank constituents the latter the debtor of the former, and the bank undertake to pay and part of the money thus due from him to the customer against the written orders of the customer. Accordingly, the relationship so constituted is that of principal and agent. A cheque drawn on the banker by the customer represents the order of the principal to the agent to pay out of the principal’s money in his hand, the amount stated on the cheque to the payee endorsed on the cheque.”

The bank as an agent also buys and sells securities, pay bills and make payments for insurance premiums. The bank may also funds for the customer for remittance as telegraphic transfer. The bank acts in the capacity of an agent.

Relationship as a Trustee

A trustee undertakes to hold money and assets to perform certain functions for the benefit of an entity (person or a company) called the beneficiary. Thus, when the bank holds securities and other valuables for safe custody, the legal position of the banker is that of a trustee. In the event of the bank’s liquidation, securities and valuables held as trustee are not available to the general creditors.

Bailer – Bailee Relationship

Bailment is defined as the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished be returned or otherwise disposed of according to the directions of the person delivering them[21]. The person delivering the goods is called the bailor while the person to whom the goods are delivered to is called bailee. The differences between the bailor and bailee include the following:

(a)  The bailee does not represent the bailor, he merely exercises certain power of the bailor in his absence with regard to his property.

(b) The bailee has no powers to make contracts on behalf of the bailor nor can he make the bailor liable for any act that he himself involved in with respect to the bailor’s property.

It is very obvious from our discussion above that the relationship between the banker and the customer changes with the type and extent of services been provided or rendered and used but, primarily, is the relationship of a debtor and creditor.