Banking Law

Almost every business has a bank account, and the relationship with the bank is a contract with its own rules. The bank must honour the customer’s cheques when it can, keep his affairs secret, and collect money for him. The customer must draw cheques carefully and tell the bank of any fraud.

Banks themselves are regulated, because their failure harms the public, so there are rules about who may carry on banking, what reserves they must hold and how they deal with their directors. At the top stands the Central Bank of Nigeria, which controls the currency.

Examiners ask for lists of duties, rights and bank types, and for short problems on a bank’s refusal to pay a cheque or its disclosure of an account.

This topic covers the meaning of bank and banker, the types of bank (commercial, merchant and specialised) and other financial institutions, banking business, the bank customer, the duties and rights of bank and customer, the statutory duties of licensed banks under the Banks and Other Financial Institutions Act 2020 (BOFIA), and the objects and powers of the Central Bank of Nigeria.

Bank and banker

The words “bank” and “banker” are hard to define. The Bills of Exchange Act 1882 defines a bank as any body of persons, incorporated or not, who carry on the business of banking. Under section 131 of BOFIA 2020, it is settled that in Nigeria a bank is a bank licensed under the Act, and it includes:

November 2023 asked for five specialised banks (5 marks), and the list above gives ten to choose from.

Other financial institutions

BOFIA also authorises “other financial institutions”: any individual, body or group, corporate or not, other than the licensed banks, that carries on the business of a discount house, finance company, money brokerage, authorised buying of foreign exchange, international money transfer services, mortgage refinancing company, mortgage guarantee company, financial holding company or payment service provider, whether the business is conducted digitally, virtually or electronically only.

Companies whose objects include factoring, project financing, equipment leasing, debt administration, fund management, private ledger services, investment management, local purchase order financing and other designated business are also covered.

Who may carry on banking business

Section 2(1) BOFIA prohibits anyone who is not a company incorporated in Nigeria holding a valid banking licence from the CBN from carrying on banking business. A person who violates it is liable on conviction to imprisonment of not less than five years, a fine of not less than ₦50,000,000, two times the cumulative deposits or other amount collected, or both imprisonment and fine.

Banking business

Section 131 defines banking business as the business of:

1. receiving deposits on current account, savings account or similar account;
2. paying or collecting cheques drawn by or paid in by customers;
3. providing finance, consultancy and advisory services on corporate and investment matters;
4. making or managing investments for any person, even if conducted digitally, virtually or electronically only; or
5. other business the Governor of the CBN designates by order in the Gazette.

November 2016 asked for five businesses of a commercial bank (5 marks).

The bank customer

A bank customer is any person who has an account in his name with a bank. He becomes a customer when the bank opens the account. As in all contracts, there is an offer by the prospective customer to have an account opened and acceptance by the bank. Only the person whose name appears in the bank’s books as holding an account is a customer.

Duties of the bank to the customer

May 2021 and November 2021 tested the key ones. The bank must:

1. collect the customer’s cheques, cash and other payable instruments;
2. abide strictly by the customer’s mandate, and honour his cheques and written demands to pay, provided that: (i) the account is in funds, (ii) or a credit arrangement has been agreed, (iii) the cheque is regularly drawn, and (iv) there is no legal impediment to payment;
3. keep the account confidential and secret, subject only to the legal exceptions below;
4. give reasonable notice before closing the account;
5. bring to the customer’s immediate notice any suspicious dealings that may lead to fraud or unauthorised dealings;
6. provide regular updates and statements of account;
7. keep the customer’s accounts separate, unless he has agreed otherwise (British and French Bank v Opaleye);
8. not pay out on a validly countermanded cheque. A bank that pays a stopped cheque is liable to the customer;
9. not charge unreasonable interest on loans and overdrafts (Barclays Bank DCO v Hassan); and
10. take reasonable care in opening accounts for new customers by obtaining adequate information about their standing. If it fails, it may lose the protection of section 82 of the Bills of Exchange Act for crossed cheques (United Nigeria Insurance v Muslim Bank). Where the new customer is a limited company, the bank must take references on the directors and demand the memorandum and articles (Bewac v African Continental Bank).

Beyond care, the bank must show skill in dealing with the customer’s banking affairs, across all his transactions (Agbanelo v Union Bank).

The duty of confidentiality and its four exceptions

The bank may divulge information on the account only:

1. where disclosure is compelled by law;
2. where there is a public duty to disclose;
3. where disclosure is in the bank’s interest; or
4. with the customer’s consent.

May 2021 and November 2021 asked for three instances each. The Money Laundering Act is an example of the first: a bank must report suspicious transactions despite the duty of secrecy. In November 2021 the examiners also asked when a bank may avoid the duty to keep accounts separate. The syllabus’s answer is where there is an agreement with the customer to the contrary.

Duties of the customer to the bank

May 2022 asked for four (8 marks). The customer must:

1. draw his cheque with care and diligence, to protect his account from fraud and discourage unauthorised transactions;
2. give instructions in writing to the bank when withdrawing his money;
3. notify the bank promptly of any suspicious dealings that come to his knowledge, such as a missing cheque book or leaf, or forgery of his signature; and
4. pay appropriate bank charges, such as commission and interest on loans.

Rights of the bank

November 2017 asked for five rights (5 marks). The bank has the right to:

1. charge reasonable interest on credits and commission on turnover;
2. use the money deposited with it, without approval from the customer;
3. close the account on reasonable notice;
4. a lien over the customer’s property in its possession, in appropriate circumstances;
5. refuse payment on an improperly drawn cheque or other instrument;
6. recall an overdraft on current account, in appropriate circumstances;
7. set off, as the law allows; and
8. reimbursement of expenses reasonably incurred on the customer’s behalf.

Statutory duties of a licensed bank (BOFIA sections 15 to 22)

May 2017 tested the reserve fund (a bank wishing to pay out all its profits as dividends).

The Central Bank of Nigeria

Section 1 of the CBN Act 2007 establishes the CBN as a body corporate with perpetual succession and a common seal that may sue and be sued in its corporate name.

Objects (section 2)

1. to ensure monetary and price stability;
2. to issue legal tender currency in Nigeria;
3. to maintain external reserves to safeguard the international value of the currency;
4. to promote a sound financial system in Nigeria; and
5. to act as banker to the Federal Government and provide it with economic and financial advice.

Statutory powers

• The sole right to issue notes and coins throughout Nigeria. No government or other person may issue currency notes, coins or tokens payable to bearer on demand that are likely to pass as legal tender (section 17).
• The power to print notes and mint coins, issue, re-issue and exchange them, keep un-issued stocks safe, and destroy notes withdrawn or unfit (section 18).
• The power to buy and sell Nigerian currency, issuing and redeeming it on demand against other currencies eligible for the external reserves (section 26).
• General powers (section 27): to issue demand drafts and other remittances; open accounts for and accept deposits from governments, banks and financial institutions; keep accounts with banks outside Nigeria; act as correspondent or agent for other central banks; and accept securities for custody and buy, sell and collect securities, currencies and credit instruments in Nigeria or abroad.
• Incidental powers (sections 30 and 32): to conduct business as a bank, carry out open market operations for monetary stability, and issue “stabilisation securities”.
• Power to require information from persons and institutions about matters affecting the economy (section 33).

Working through the rules

Was the bank right to return the cheque?

May the bank disclose the account?

The reserve fund

A bank earns net profit after tax of ₦40,000,000. Its paid-up capital is ₦100,000,000 and its reserve fund ₦30,000,000. The reserve is less than the paid-up capital, so it must transfer at least 30%: ₦12,000,000. If the reserve were ₦120,000,000, the transfer would be at least 15%: ₦6,000,000. Only then can it declare dividends.

The single-borrower limit

A commercial bank with shareholders’ funds of ₦200,000,000 may not lend more than 20% to one person without CBN approval: ₦40,000,000. A merchant bank with the same funds may lend up to 50%: ₦100,000,000.

Worked problems

Problem 1: Osagie’s cheque

1. Wrongful return. The bank is wrong if the account is in funds, or a credit arrangement exists, the cheque is regularly drawn, or there is no legal impediment to payment.
2. Disclosure. The bank may disclose where compelled by law, where there is a public duty, where it is in the bank’s own interest, or with Osagie’s consent.
3. Advice. The teller was right not to tell Osula about the account, but if the account was in funds the bank must pay Osagie damages for dishonouring a good cheque.

Problem 2: Mrs Nnaji’s new account

1. The duties. To draw her cheques with care and diligence; to give instructions in writing; to notify the bank promptly of suspicious dealings, such as a lost cheque book or a forged signature; and to pay bank charges.
2. Advice. She should keep her cheque book safe, and tell the bank at once if a leaf is missing.

Problem 3: the director’s loan

1. The rules. A bank officer may not have a personal interest in any advance or credit facility without disclosing it (section 17). A bank may not permit unsecured advances above ₦1,000,000 to a company in which a director holds 5% or more without CBN approval (section 19).
2. Advice. The director commits an offence, liable to at least three years’ imprisonment or a fine of ₦5,000,000, or both, and forfeiture of any gain. The bank is in breach of section 19 unless the CBN approved.

Questions that have been asked on this topic, and how to answer them

Common mistakes in the exam

• Saying a person who uses a bank occasionally is a customer. He must have an account in his name.
• Saying a bank may disclose an account to anyone. There are four exceptions.
• Forgetting that the bank must pay only if the account is in funds, the cheque is regular and there is no legal impediment.
• Saying a bank must pay a countermanded cheque.
• Confusing the 30% and 15% reserve rates.
• Mixing up commercial and merchant banks. A merchant bank gives corporate finance and advice and cannot take deposits withdrawable by cheque.
• Saying the CBN can print money only with the government’s approval. It has the sole right to issue notes and coins.
• Forgetting that the bank has to care in opening accounts.

Quick revision

• Bank: licensed under BOFIA (s.131). Types: commercial, merchant, specialised. Only a Nigerian company with a CBN licence may do banking business (s.2(1)).
• Customer: has an account in his name. Bank’s duties: collect, honour the mandate, confidentiality (four exceptions), notice before closing, warn of fraud, statements, separate accounts, no payment of stopped cheques, reasonable interest, care in opening accounts.
• Customer’s duties: draw with care, written instructions, notify promptly, pay charges.
• Reserve fund 30% or 15%. Dividends only after write-offs and provisions. Director’s interest in loans must be disclosed. Single borrower limit 20% (50% merchant).
• CBN: five objects, sole right to issue notes and coins, general and incidental powers.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Section A style: multiple choice

Section B style: written questions

Model answers

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