Law Of Banking And Insurance In Nigeria

TABLE OF CONTENTS
LAW OF BANKING AND INSURANCE PART I AND II.
DEFINITION OF A BANK.
DISTINGUISHING A BANK FROM OTHER SIMILAR ENDEAVOURS
BRIEF HISTORY.
BANKER AND CUSTOMER RELATIONSHIP NATURE, SCOPE, IMPLICATION,
RIGHTS AND OBLIGATION, JURISDICTION OVER BANKER-CUSTOMER
DISPUTES, AND REGULATION.
WHEN CAN A CHEQUE/WITHDRAWAL ORDER BE DISHONOURED?
REGULATION OF FOREIGN EXCHANGE.
THE CENTRAL BANK OF NIGERIA (CBN); FUNCTIONS, CONSTITUTION,
TOOLS OF MONETARY CONTROL, ETC.
THE BANKS AND OTHER FINANCIAL INSTITUTIONS ACT (BOFIA); AN
EXTENSIVE (BUT SUCCINCT) EXAMINATION OF CERTAIN ESSENTIAL
PROVISIONS.
FAILED BANKS AND BANK EXAMINATION.
THE NIGERIA DEPOSIT INSURANCE CORPORATION NDIC. JUSTIFICATION,
CONSTITUTION, FUNCTIONS, ETC.
NEGOTIABLE INSTRUMENTS. BILL OF EXCHANGE. CHEQUES.
PROMISSORY NOTES.
PART II.
LAW OF INSURANCE.
HISTORY
NATURE, CHARACTERISTICS AND DEFINITION OF INSURANCE.
PARTIES TO THE CONTRACT OF INSURANCE.
INSURABLE INTEREST IN LIFE INSURANCE.
FORMATION OF THE CONTRACT OF INSURANCE.
THE DOCTRINE OF UTMOST GOOD FAITH UBERRIMAE FIDEI.
INSURANCE INTERMEDIARIES.
WARRANTIES AND CONDITIONS.
INTERPRETATION/CONSTRUCTION OF INSURANCE POLICIES.
RISK AND CAUSATION.
ASSIGNMENT
SETTLEMENT OF INSURANCE CLAIMS.
SUBROGATION.
CONTRIBUTION AND DOUBLE INSURANCE.
MOTOR VEHICLE INSURANCE.
SETTLEMENT OF INSURANCE CLAIMS UNDER THE INSURANCE ACT.
STATUTORY REGULATION OF INSURANCE BUSINESS.
LAW OF BANKING AND NEGOTIABLE INSTRUMENT.
DEFINITION OF A BANK.
:: There is no all-encompassing definition of a bank. However, it is necessary to embark
upon the herculean task of defining a bank considering the various statutory rights, duties
and obligations attached to a bank. for example the obligation to be duly registered and
licenced to carry out banking operation imposed by Section 2 of the BOFIA.
:: By Section 2 of the Bills of Exchange Act 1990 it is a body of persons incorporated or
not who carry on the business of banking (a similar definition is provided under Section 2
of the Evidence Act).1
:: Section 43 of the Banking Act: defines a bank as any person who carries on banking
business. It goes further to define banking business as the business of receiving monies…
granting loans… acceptance of credits, bills, cheques, purchase and sale of securities… and
others as the minister may designate… Same definition of banking business is provided
under Section 66 of the Banks and Other Financial Institutions Act.
:: In UDT V Kirkwood, the court noted that a bank accepts money, honours cheques, and
keeps accounts. Lord Denning noted that he who does not do these is not a banker2.
1 This definition fails to define “banking business”. Also, a bank must be incorporated and licenced to operate
in Nigeria- Section 2 BOFIA.
2 This definition seems restrictive to the functions of commercial banks.
:: Dr Hart: defines it as a person or company carrying on the business of receiving monies
and honouring cheques for customers. A Similar definition was given by Sir John Paget3.
:: Horace White: notes that a bank is a manufacturer of credit.
:: Wordweb dictionary defines it as a financial institution which collects deposits and
channels it towards lending activities.
:: Harry G Brown notes that essentially, a bank acts as an intermediary between the surplus
spenders (depositors) and deficit spenders (borrowers). Also noted that it is a departmental
store of financing.
There are a thousand and one definitions of a bank. However, we can observe that the
combined interpretation of the various definitions of a bank would reveal that:
1. Essentially, a bank receives deposits, grants loans and honours cheques.
With the evolution of commerce and the facilitative effect of technology and
communication, banks also:
2. Deal in shares, debentures, treasury bills, bonds and other kinds of investments.
3. Deal in negotiable instruments like bill of exchange, promissory notes and so on- Woods V
Martins Bank.
4. Provide financial advice to customers4.
5. Buy and sell foreign exchange.
6. Act as agents of their customer in nearly all financial transactions like periodic subscriptions,
bill payment, online shopping, and so on. This has been facilitated by the use of credit cards,
debit cards, ATM cards, Mobile banking, Quickteller and so on.
7. Banks perform other functions which the CBN governor may direct.
The court has noted in Banbury V Bank of Montreal that the limits of a bank’s business
cannot be laid down as a matter of law5. An all-encompassing definition may be impossible.
DISTINGUISHING A BANK FROM OTHER SIMILAR ENDEAVOURS
MONEYLENDING: A moneylender is someone who lends money at an interest. Unlike a
money lender, a bank diversifies into various commercial spheres. The Moneylenders Act
does not apply to a banker- Ojikutu V Agbomagbe Bank Ltd, as in this case, the banker was
not obliged to obey the 15 percent interest ceiling imposed by Section 13 of the Money
Lender’s Act because he was not engaged in “moneylending” but banking.
A SAVINGS ORGANIZATION: Savings organization collects money from its
members/customers for saving. Although a bank does same, it diversifies into other various
3 This definition focuses on the commercial bank.
4 As was evident in Hedley Byrne V Heller and Partners Co.
5 In practice however, it should be noted that the CBN Act, BOFIA and other enactments limit banking business
in Nigeria to some extent.
fields. In AG Federation V Umoh Ekpa, the appellant was charged for operating banking
business without a valid licence. The court held that he merely collected money from market
women and deposited same into the bank. He was a daily collector and not a banker. The
appellant’s charge for operating without a valid banking licence was quashed.
INSURANCE BUSINESS. Is not the same as banking business. Just like “banking” there is
no widely accepted definition of insurance-Medical Defence Union V Department of
Trade. In Prudential Insurance Co V Inland Revenue Commissioners, it was seen as an
agreement to pay a sum of money upon the happening of an uncertain event after the
payment of consideration (called premium). A contract whereby the insurer agrees to
indemnify the insured against loss upon the happening of an event after the payment of
consideration called premium.-Charles Chime V United Nigeria. From the definition of a
bank above, they do not really seek to guard against an uncertain occurrence or risk.
Moreover, they are regulated by different Statutes.
BAILMENT: Bailment involves where the bailor gives the Bailee his property for a
particular purpose (usually for temporary keeping) on the understanding that it shall be
returned once the purpose has been fulfilled. The Bailee should keep the property in good
conditions. A bailor is generally precluded from dealing with the property bailed. A bank on
the other hand can deal with the cash deposited through lending, acquisition of properties
and other transactions. Provided it can pay the customer on demand.
:: To qualify as a bank, “banking” has to form a substantial part of the business6.
In conclusion, Lord Denning once remarked that it is easier to identify a bank than to define
it.
BRIEF HISTORY.
:: Ancient civilisations like Babylon made loans from their temple’s treasuries as early as
2000 BC.
:: The Early Goldsmiths of 17th century took deposits of gold and coins from individuals and
merchants for safekeeping as private storage was fraught with uncertainties. The depositor
was given a claim slip which he would be required to supply when he wishes to collect his
gold coins back. Subsequently, the goldsmiths began to lend the coins in their possession
provided the holder of a claim slip was paid on demand.
The Nigerian position.
:: With the advent of the British in Nigeria and the growth of commercial activities… The
Bank of British West Africa (renamed First Bank) was established in 1894 to serve the
needs of the British Colonial Government.
6 Which is the business of receiving deposit and providing loans.
:: In 1912, the West African Currency Board was established to issue and distribute
currency within the region of West Africa. Then followed Barclays Bank (now Union
Bank) in 1917. The first indigenous bank; The Industrial and Commercial Bank was
established in 1929.
:: Following the Clamour for a people-oriented indigenous bank, various indigenous banks
like; Agbonmagbe bank, Standard Bank, African Continental Bank, Afro-Seas Credit
Bank etc sprang up in the late 40s and early 50s. However, many of these banks failed due
to lack of regulation, dishonesty, inadequate record keeping and unprofessionalism.
:: The failure of these banks had dire consequences on their Nigerian customers and the
Nigerian economy. Hence, the Banking Ordinance was enacted in 1952. It mandated that
a bank’s nominal capital must not be less than £25,000 of which not less than £12,500
(N25,000) is paid up. In the case of a foreign company E100,000 (N200,000). These values
have been increased overtime by the subsequent decrees like the Banking Ordinance of
1958 and the Banking Decree of 1969.
:: In 1958, the Central Bank of Nigeria Ordinance was passed. This established the CBN
to better carry out the functions of the WACB and more.
:: In 1991, the Banks and Other Financial Institutions Decree was enacted. It mandated
that a bank must be properly incorporated and licenced to carry on banking activities.
:: In 1998 Section 1 of the NDIC Act7 established the Nigerian Deposit Insurance
Corporation. The NDIC aims to protect customers (depositors) and enhance bank stability
by administering the Insurance Deposit Scheme. The IDS is a risk control mechanism
which mandates all banks and deposit taking institutions to insure their deposits with the
NDIC-Section 15 NDIC Act. The premiums/monies so insured shall be used to resuscitate
a failing bank or settle depositors of a failed bank.
:: The Universal Banking System was introduced on the 1st of Jan 2000 which sought to
widen the range of services which a bank can offer. Hitherto, banks were classified based
on the range of banking services they offered. For example Commercial, Merchant,
Agricultural Bank, Mortgage bank, Micro-finance Bank, etc. with the introduction of the
UBE, a single bank can offer commercial, mortgage, agricultural, merchant and other
services all at once.
:: In 2005 the CBN mandated that banks must attain a minimum capital of N25,000,000,000.
Many banks failed due to their inability to meet up with the N25,000,000,000 requirement.
:: Over time, various issues and developments have arisen in the banking sector… At
present, the Nigerian banking system consists of the CBN, the NDIC, the Federal Ministry
7 now 2006.
of Finance and the banking sector regulated by the various Acts. In 2006, NDIC Act was
enacted and in 2007 CBN Act was enacted as revisions of the previously existing statutes.
BANKER AND CUSTOMER RELATIONSHIP.
DEFINITION OF A BANKER AND CUSTOMER.
Who Is A Banker?
:: The layman defines a banker as a person that works in a bank. This is CERTAINLY NOT
the legal position.
:: In Akanle V Reginam, the court noted that “banker” refers to the company licenced to
carry on banking business. The conviction of the manager for granting illegal loans was
quashed on the ground that the banker rather than the manager ought to have been sued since
the banker customer relationship was that of debtor-creditor.
:: Section 2 Bills of Exchange Act 1954 defines a banker as a body of persons whether
incorporated or not who carry on the business of banking. This definition is faulty as Section
2 of the Banks and Other Financial Institutions Act makes it a condition precedent for
persons carrying on banking business to be incorporated.
:: By Section 2 of the Evidence Act, a person, partnership or company carrying on the
business of banking. Similar definition given by Section 41(1) of the Banking Decree.
:: A banking business has been defined in Section 66 BOFIA as the business of receiving
monies… granting loans… acceptance of credits, bills, cheques, purchase and sale of
securities… others as the minister may designate.
Therefore, a banker refers to a company that has been incorporated and licensed to carry on
banking business. E.g. Stanbic IBTC, GTB, UBA and so on.
Who Is A Customer?
:: In ordinary terms, he is regarded as a person buying the goods or employing the services
of another. It is however important to know the strict legal meaning of a customer in order
to decipher whom the bank legally owes a duty.
:: In Ladbroke and Co V Todd, the court held that to qualify as a customer, one must have
an account with the bank. Same position was followed in Commissioners of Taxation V
English Scottish and Australian Bank, where it was held that duration was irrelevant
provided there was an account with the bank. In Woods V Martins Bank, the court noted
that a finalised agreement to open an account could suffice notwithstanding that no actual
deposit has been made. In Robinson V Midland Bank, where A opened an account in B’s
name. The court held that the banker-customer relationship was between A and the bank
notwithstanding that the account was opened in B’s name since the bank only knew A. In
Great Western Railway Company V London and County Banking Co, one Huggins had
been cashing cheques over the counter at the defendant bank for almost 20 years. The court
held that since Huggins had no account with the bank, he was not a customer. Similarly, in
Ademiluyi and Lamuye V ACB, A and B (prominent members of a ruling party; NCNC)
opened an account with ACB. ACB believed that the account was opened on behalf of
NCNC whom they regarded as their customer. “A” sought to cash money from the account
but NCNC countermanded the cheque. The court held that the countermand by NCNC was
ineffective because the banker-customer relationship existed only between ACBank and
AandB who were the account holders.
A SHIFT IN POSITION: The cases of Hedley Byrne Co V Heller and Partners and
Agbonmagbe Bank V CFAO Ltd the courts drawing from the decision of Donoghue V
Stevenson, have held that a bank can be liable in negligence to a person notwithstanding
that he does not have an account with the bank so long as it is reasonably foreseeable that
they shall be affected by the bank’s negligence.
In conclusion, every case must be determined on its own merits. The courts may impose a