An unregulated banking system is undesirable and prepared for failure. This is clear from history all over the world, and particularly that of Nigeria. One of the perceived reasons for the failure of most of the over 170 banks established between 1929 and 1952 in Nigeria was the absence of a defined banking ordinance to state a ‘code of conduct’ for the banking system.
Therefore, starting with the Banking Ordinance of 1952, which had its roots in the recommendations of the G.D. Paton commission set up after the failure of the Penny Bank in 1946, unto the two main statutes that run the system today, the Nigerian banking system has survived over the years on the shoulders of relevant ordinance, decrees, and acts.
What kind of institution exactly should we regard as a bank? In Wema Bank v. Osilaru , Per Alfred Pearson Eyewumi Awala, JCA reportedly said on the meaning and nature of a bank, “A Bank, on the other hand, is defined by the learned authors of Black's Law Dictionary 8th Edition reads: ‘A Bank is a quasi public institution, for the custody and loan of money, the exchange and transmission of the same by means of bills and drafts and issuance of its own promissory notes (cheques) payable to bearer, as currency, or for the exercise of one or more of these functions, not always necessarily chartered but sometimes so, created to serve the public ends. It is a financial institution regulated by law. A bank is wholly the creation of statute to do business (for profit) by Legislative grace and the right to carry on a banking business through the agency of a corporation is a franchise which is depended on a grant of corporate powers by the state.’ …”
Also in Associted Discount House Ltd. Almagamated Trustees Ltd. the court held that the word “bank” is not defined in the Nigerian constitution, nor in the Interpretation Act. But in the grammatical meaning, it connotes an organization that provides financial services.
As earlier mentioned, the banking system is regulated by two principal statutes, namely, the Central Bank of Nigeria (Establishment) Act, and the Banks and Other Financial Institutions Act (BOFIA).
Additionally, the entire financial system of the country is governed by regulatory institutions responsible for its growth and development. They operate based on their enacted regulatory documents and ensure compliance with the laid down rules and regulations of the financial system, of which the banking system is key.
These regulatory institutions include the Central Bank of Nigeria (CBN), Nigeria Deposit Insurance Corporation (NDIC), Securities and Exchange Commission (SEC), Federal Ministry of Finance (FMF), Federal Mortgage Bank of Nigeria (FMBN) and the Assets Management Corperation of Nigeria (AMCON).
Of these institutions, and specifically as stated by their respectively operative acts, the Central bank of Nigeria oversees the birth and growth of banking institutions, while the Nigeria Deposit Insurance Corporation (NDIC) help to stabilize a failing bank, as well as serve as its liquidator if it fails.
The Central Bank of Nigeria (CBN)
The central bank of Nigeria acts as the apex regulatory institution of the financial system in the country. This institution is well equipped to perform its functions by the Central Bank of Nigeria (Establishment) Act 2007 (CBN ACT), and the BOFIA, 2020.
The CBN ACT affirms the establishment of a body known as the Central Bank of Nigeria. The act also states the fundamental objects of the bank, which include the sole power to issue notes and coins , maintain external reserve for Nigeria , and generally supervise the entire banking system in Nigeria.
As part of the 13 point Soludo reforms program for Nigerian banks, banks are required to have a base capital of #25billion with the central bank.
The BOFIA empowers the Governor of the CBN to issue a license to anyone wanting to start a banking business in Nigeria, with specific procedures. The act prohibits anyone from operating a banking business in Nigeria without such license. This provision has been given judicial standing in the case of Guardian Express Bank Plc v. Odukwu & Anor.
Moreover, the BOFIA provides that no bank shall engage in a change of the control of the bank, transfer of a significant shareholding, merger, restructuring, re-organization, sale, disposal or transfer of any part or the bank as a whole (See Section 7, BOFIA 2020).
Additionally, Section 30 empowers the governor of the CBN to issue regulations, guidelines and policies to banks, specialized banks, and other financial institutions in Nigeria. And to appoint officers to supervise and examine these institutions according to the dictates of the governor.
The Act also empowers the CBN to revoke the license of any bank for stipulated reasons.
Finally, the BOFIA empowers the central bank to assume control over a failing bank, in liaison with the Nigeria Deposit Insurance Corporation (NDIC)
Nigeria Deposit Insurance Corporation (NDIC)
The Nigeria Deposit Insurance Corporation was established on 15th June 1988 , following the recommendation of the former governor of the Central Bank of Nigeria.
The establishment of the Nigeria Deposit Insurance Corporation was necessitated by the collapse of some banks in Nigeria. It became pertinent to protect depositors in order to strengthen the confidence of the public in the banking sector. At present, the activities of the NDIC is regulated by the Nigerian Deposit Insurance Corporation Act, 2006 .
The NDIC is statutorily saddled with the responsibility of insuring deposit liabilities of licensed banks and other deposit-taking financial institutions, granting relevant assistance to insured institutions for financial stability, guaranteeing payment of appropriate deposit to depositors of insured institutions, and such other actions necessary to carry out its objective.
The NDIC ACT, 2006, requires all licensed banks and other deposit-taking financial institution in the country to insure their deposits liabilities with the corporation. The corporation is further empowered to create a separate Deposit Insurance Fund (DIF) for each category of insured institutions.
The Act also empowers the corporations to receive required information from insured institutions. An insured institution is obliged to render a monthly detailed report of its returns of frauds, forgeries or outright theft occurring within that month. Insured institutions are also obliged to notify the corporation of any of their staff dismissed terminated, advised to retire or resign on account of a fraudulent practice. And any insured institution may not recruit such an individual without first notifying the corporation.
Any failure by a deposit-taking financial institution to insure its deposits, or to render required information to the corporation constitutes an offense under the act, and attract stipulated penalties.
According to Section 37 of the Act. The corporation may give financial assistance to a failing insured institution at the request of such institution or under certain conditions.
Moreover, in the event of a failing insured institution, NDIC may establish bridge banks to assume the deposits and/or liabilities, and purchase the assets of such failing institution. An example of such bridge bank is the keystone Bank Ltd., which took over Bank PHP.
Ultimately, whenever the license of an insured institution is revoked by the Central Bank, the corporation shall act as the liquidator of such failed financial institution.
Following the failure of an insured institution, the corporation is empowered to notify depositors of such institution to forward their claim to the corporation. This notification can be done through advertisements on national newspapers or other news media.
In nut shell, the NDIC is so empowered, not only to be relevant in the stabilization of existing financial institutions, but also to midwife an insured institution at its dying/death, and burial/ post burial stages.
In conclusion, extant provisions declare the functions of the Central Bank of Nigeria as overseeing the birth, growth and development of banking, and even non-banking financial institutions, while the Nigeria Deposit Insurance Corporation takes care of the operations of such institutions through their existing, dying and post burial stages – both regulatory corporations working to sustain and increase public confidence in the banking sector.
Writer: Inioluwa Olaposi, founder LawGlobal Hub