What is a bank?
There are various definitions of the word bank or banker according to different authors.
The word “bank” derives from the Italian word “banco”, which means “bench”. This word
described early banking activities as practiced by Goldsmiths who conducted banking
transactions while sitting on benches. Goldsmiths were early bankers receiving deposits of gold
and other precious metals from clients in exchange for receipts. The receipts eventually
circulated among merchants as bank notes.
The Bills of Exchange Act of 1882 in UK describes “a bank to include a body of persons
whether incorporated or not, who carries on the business of banking”.
Dr. Heber defines a banker as a person or company carrying on the business of receiving
monies and collection of drafts for customers subject to the obligation of honouring cheques
drawn upon them by the customers to the extent of the amount available on their account.
Sir John Pagets definition states that a bank is ‘a corporation or person who accepts cheques or
money on current account, pays cheques on such account on demand and collects cheques for
customers.
The major defect in the above definition is that emphasis is concentrated on current account as if
the other types of account are not important. Also, a somewhat loose definition of a banker could
be found in the Exchange Control Act 1882 which loosely defines a banker as “any person
carrying on the business of banking.
Although, banking activities were pioneered by the practices of Goldsmiths. The definition of a
bank therefore derives mainly from statutes and case laws on banking related matters. In Nigeria,
the definition of banking stems from provisions of Banks and other Financial Institutions
Decree of 1991 and subsequent amendments.
In Nigeria, the statutory definition of a bank was stated in the 1969 Banking Act (now repealed)
as follows. “The business of receiving money from outside sources as deposits irrespective of the
payment of interest and the granting of money, loans and acceptance of credit or the purchase of
bills and cheque or the purchase and sales of securities for account of others or the incurring of
the obligation to acquire claims in respect of loans prior to their maturity or the assumption of
guarantees and other warranties for others or the effecting of transfers and clearing and such
other transactions as the commissioner may on the recommendations of the Central bank by
order published in the Federal Gazette designated as banking business”
The banks and other financial institutions decree 1991 describes a bank as that “company
operating a banking business, it must hold a valid license and this is restricted to a limited
liability company duly incorporated in Nigeria under the Companies and Allied Matter Decree
1990. It is unfortunate that the Decree did not define banking business.
A follow-up of this broad definition would naturally invoke the question: what is Banking
Business? The combining effort of Section 53 of the Central Bank of Nigeria Decree and Section
2 (1) and Section 61 of the Banks and other financial Institutions Decree of 1991, provides its
definition as “the business of receiving deposits on current account, savings account or
other similar accounts; paying or collecting cheques drawn or paid in by customers;
provision of finances, consultancy and advisory services relating to corporate and
investment matters; making or managing investment on behalf of any person; and the
provision of insurance, marketing services and capital market business or such other
services or business as the Governor of the Central Bank of Nigeria, may by order
published in gazette, designate as banking business”
A bank in Nigeria is any company duly incorporated in Nigeria and holding a valid license to
carry on banking business.
Statutory Definition of a Bank
Section 2 (1) of Banks and Other Financial Institutions Act (BOFIA) 2004 defines a bank as a
corporate body, duly incorporated in Nigeria and holds a valid banking licence issued under the
Act by the Governor of the Central Bank of Nigeria. Section 61 of the same Act defines a
banking business as the business of:
i. Receiving deposits on current accounts and similar accounts;
ii. Paying or collection of cheques drawn by or paid in by customers;
iii. Provision of finance, consultancy and advisory services relating to corporate and
investment matters, making or managing investment on behalf of any person;
iv. Provision of insurance marketing and capital market services
v. Such other business as the Governor of the Central Bank may designate as banking
business.
The Chartered Institute of Bankers of Nigeria Act No 5 of 2007: Section 16 (1) defines a banker
as a person who, in consideration of remunerations received or to be received engages
himself in the practice of banking or holds himself out to the public as a banker
It further states that if he renders professional service or assistance in or about matters of
principle or detail relating to banking procedure, such a person is a banker. In brief therefore, a
banker may be defined as a person who is engaged in practice of banking as a profession in
consideration of remunerations to be received. In the opinion of CIBN, the word ‘bank’ refers to
the artificial person created by law, while ‘banker’ refers to a natural person acting as agent of a
bank. Legal personalities can only act through natural persons. These two words are often used
interchangeably in banking related discuss.
THE EVOLUTION OF BANKING LAWS IN NIGERIA
The evolution of banking business/banking laws in Nigeria can be grouped as follows:
Era of Laissez-faire banking (1894 – 1952)
The era of limited banking regulation (1952 – 1958)
The era of intensive regulation (1958 – 1986)
The period of Banking Deregulation (1986 – 2004)
The Consolidation/Soludo era (2004 – 2008)
Reform period (August 2009 till date)
The period of Laisse- faire banking (1894-1952)
The first phase was characterized as a period when banking business was largely dominated by
expatriate banks, particularly by the then Bank of British West Africa (now First Bank of Nigeria
established in 1894), the colonial Bank (now Union Bank established in 1925) and the British
and French Bank (now United Bank for Africa established in 1947). As a result of cases of
accusation of discriminatory practices of the foreign banks against Nigerian businessmen, some
indigenous banks were hurriedly established to take care of the interest of indigenous
businessmen. Between May 1945 and December 1951, about 22 indigenous banks were
established, but only three of them managed to survive. The failure was due to the inability of
these banks to compete effectively with their expatriate counterpart resulting from
insufficient capital, bad management, or inexperienced personnel, poor asset quality,
undercapitalization, overtrading, illiquidity and complete absence of any form of
regulation and supervision during the period.
The Era of Banking Regulation (1952-1986)
The era of banking regulation began with the enactment of the Nigeria Banking ordinance in
1952. The ordinance resulted from the concern by the authorities to protect depositors from loss
arising from bank failure. It stipulated the standard and procedure for banking operations by
stating the minimum capital requirement for banks and measures to curb bank failures.
Although, this law marked a significant landmark in the bid to develop a sound financial system
in Nigeria. It did not make provision to assist banks in distress and offer means of investing idle
funds which banks were required to keep in order to maintaining the required level of liquidity.
The foreign banks still monopolized the banking industry in the country as well as enjoyed
the patronage of the British business organizations since the indigenous banks could not
compete effectively with the expatriate banks, all the banks established during this period
collapsed.
This was followed by the promulgation of the Central Bank of Nigeria Act of 1958. The Act
established and empowered the CBN to promote sound financial system in the country. This Act
was able to stimulate measures to curb the trend of bank failures and bring sanity into the system.
By 1969, a more comprehensive Banking Decree replaced the earlier banking legislation to
further strengthen the banking system and increase the power of the CBN to cope effectively
with the task of the nation’s monetary management.
The Decree spelt out provisions for increased regulation and control of the monetary and
financial system. It specifically made provisions for the granting of licenses to banks, imposition
of restrictions on certain activities of licensed banks, stipulation of CBN of liquidity and capital
adequacy requirement for banks and ceiling on interest rates and bank credit to the economy and
categories of investments that banks cannot undertake.
Following the 1968 Companies Act, all expatriate banks were required to be incorporated in
Nigeria. The government also required controlling shares in a number of foreign banks including
the leading three commercial banks.
The period of Banking Deregulation (1986 – 2004)
This was the inception of Structural Adjustment Programme (SAP) era, which brought about the
deregulation of the financial system to allow for a market-determined pricing system. However,
SAP came on the heels of economic and financial crisis which characterised the nation’s life
when the favourable trend in resource profile in the 1970s changed drastically to dwindling
fortunes in the 1980s. There was the deregulation of exchange control with the introduction of
the second-tier foreign exchange market (SFEM) in September 1986 (change to FEM and now
IFEM). There was also liberalization in the granting of banking license from 1986 and, by the
end of December 1990, 107 (58 commercial and 49 merchant) licensed banks were operating in
Nigeria from 40 (28 commercial and 12 merchant) licensed banks as at the end of December
1985 (CBN, 1988). This was to allow for competition, creativity and efficiency in banking
services delivery.
The deregulations of interest rates started in August 1987 to assist banks maximize their deposit
mobilization. This was seen as an integral part of the deregulation process of freeing the financial
system for market forces to prevail, and motivate the banks to mobilise the reservoir of idle
funds in the economy. The promulgation of decree No.22 of June 15, 1988 led to the
establishment of Nigeria Deposit Insurance Corporation (NDIC). The NDIC insures bank
deposits in order to promote stability, confidence, safety and soundness in the country’s banking
system.
The Universal Banking was introduced in 2001. With the return to civilian rule on May 29, 1999,
there was an apparent return to the path of economic reform. Universal banking was adopted in
January 2001 in response to unprecedented pressure from merchant banks clamouring for a level
playing field due to their disadvantaged position, especially with respect to cost of funds. In the
five (5) years 1999 to 2004, the CBN stepped up its supervisory role over banks while making
concerted efforts to shut down arbitrage windows in the foreign exchange markets. In addition to
the above, the CBN undertook an internal reform programme tagged project EAGLE, which was
designed to improve its regulatory efficiency and effectiveness. However, the universal banking
system was repealed in 2010 to give way to a new banking model of regional, merchant, national
and international.
The Consolidation/Soludo era (2004 – 2008)
This is the popular era called Soludo reforms and consolidation in 2004. This period was tagged
“the 13-piont Reform Agenda for repositioning the CBN and Financial System for the 21 st
Century”. To achieve this prospect, the following framework (13 issues) was put in place:
i. Requirement that the minimum capitalization for banks should be ₦25 billion with full
compliance before the end of December 2005. Only banks that met with the above requirement
were licensed to undertake banking business. Others that failed to meet up either merged or were
liquidated. For the first time, the Nigerian banking industry witnessed a merger between the
small and big banks.
ii. Phased withdrawal of public sector funds from banks from July 2004
iii. Consolidation of banking institutions through mergers and acquisition.
vi. Adoption of zero tolerance in the regulatory framework; especially in the area of
data/information rendition/reporting, where all returns by banks must be signed
by the managing directors of the banks. Hiding of information under other
assets/liabilities, off-balance sheets will henceforth attract serious sanctions.
v. The automation process for rendition of returns by banks and other financial
institutions through the electronic Financial Analysis and Surveillance System (e-
FASS) will now be emphasized.
vi. Adoption of a risk-focused and rule-based regulatory framework.
vii. Establishment of a Hotline, Confidential Internet address (governor@cebank.org)
for all Nigerians wishing to share any confidential information with the Governor
of the CBN on the operations of any bank or the financial system.
viii. Strict enforcement of the contingency planning framework for systemic banking
distress.
ix. Establishment of an Asset Management Company as an important element of
distress resolution.
x. Promotion of the enforcement of dormant laws, especially those relating to the
issuance of dud cheque, and the law relating to vicarious liabilities of the board
members of the banks in cases of failings of banks.
xi. Close collaboration with the Economic and Financial Crimes Commission
(EFCC) in the establishment of the Financial Intelligence Unit (FIU), and the
enforcement of the anti-money laundering laws.
xii. Revision and updating of relevant laws, and drafting of new ones relating to the
effective operations of the banking system.
xiii. Single obligor limit of 10% of shareholders’ funds as opposed to the present 25%,
with aggregate borrowing pegged at 800% of shareholders’ funds. This was
actually stated by the CBN Director of Banks Supervision.
aggregate borrowing pegged at 800% of shareholders’ funds. This was actually stated by
the CBN Director of Banks Supervision.
Reform period (August 2009 till date)
The objectives of Bank Regulations
Regulation as a means of securing depositor’s fund has been justified on a number of grounds,
including the following:
i. The number one objective of bank regulation is to facilitate the execution of
macroeconomic policies of the government.
ii. To protect banks against risks.
iii. To ensure systematic stability in the sector.
iv. Restoration of confidence to the public: Confidence is key for the banking sector to
thrive. If that confident collapses, the sector and the entire financial system face
imminent collapse.
v. Safeguard against market failures: The market failures which resulted in the banking
boom and crash of the late 1940s and the early 1950s led to the first banking legislation
in Nigeria. Bank distress in the late 1980s and the early 1990s led to the prudential
guidelines of 1991 and BOFIA of 1991.
vi. Another objective of bank regulation is to limit the foreign participants in the industry.
vii. To create a healthy environment and competition.
viii. To bring our banking practice to the international standard. This is called best global
practice.
Regulatory Institutions most relevant to the Nigerian Financial Systems.
The Central Bank of Nigeria (CBN)
The Nigeria Deposit Insurance Corporation (NDIC)
The Securities and Exchange Commission (SEC)
The Federal Ministry of Finance (FMF)
National Insurance Commission (NAICOM)
National Pension Commission (PENCOM)
Corporate Affairs Commission (CAC)
Financial Services Regulatory Coordinating Committee (FSRCC)
Others are:
Nigerian Communication Commission
Debt Management Office
Federal Montage Bank
The Investment and Securities Tribunal (IST)
Monetary and Fiscal Policy Coordinating Committee
Economic and Financial Crime Commission (EFCC)
Independent Corrupt Practices Commission (ICPC)
