BANKING 1.6 THE BANKS AND OTHER FINANCIAL INSTITUTIONS ACT (BRIEFLY EXAMINED)
:: An unregulated banking sector is prone to failure. This was the feature of the early 1950s. In addition to the supervisory role played by the CBN, the BOFIA contains certain strict provisions which regulate banking practice in Nigeria. For the sake of clarity, the various Sections of the BOFIA shall be discussed in 10 heads.
- Pre-licensing and Registration: Section 2 BOFIA requires that a bank must be properly licenced (under the BOFIAct) and incorporated (under the CAMA) to carry on banking business in Nigeria. This can be done by making an application to the minister through the CBN. Relevant documents should be attached and requisite fees paid-Section 3 BOFIA. Then the minister has the discretion to grant the licence or reject the application without giving reasons.
- Bank Examination and supervision: The books of account of a bank are to be scrutinised by the Director of Banking Supervision and other Examiners in a bid to ascertain its viability and ensure their compliance with statutory provisions-Section 31 BOFIA.
:: In addition to this supervision, Section 32 BOFIA empowers the CBN to conduct special examination in the following instances:
- Where the bank cannot meet its liabilities.
- Where the bank contravenes the provisions of the BOFIA.
- Where such examination would be in the interest of the depositors and the general public.
- Where an application is made to the governor by a director, shareholder, depositor or creditor of the bank and the CBN Governor deems it necessary to conduct such examination.
:: Section 5 of the BOFIA empowers the CBN governor to vary the conditions of the banking licence or revoke the license. Section 12 provides that a banker’s licence may be revoked where it:
- Ceases to perform the type of banking operation it was licenced to carry for a continuous period of 6 months.
- Goes into liquidation/is wound up.
- Fails to comply with any condition subject to which the licence was granted;
- Has insufficient assets to meet its liabilities;
- Fails to comply with any obligation imposed upon it by or under this Act (the BOFIA) or the CBNAct, as amended. Provided due notice had been served on the bank.
- Requirement of written consent of CBN for certain actions:
- Before a bank can open a new branch or close an existing branch, it must seek the consent of the CBN governor-Section 6. Where the consent of the CBN is not sought and obtained, the bank shall pay 2 million or be directed to close the branch so improperly opened. In addition to 100,000 daily fine.
- Before a banker reaches an agreement to merge, restructure, re-organise, transfer management, and so on with another party-Section 7. Failure to obtain written consent of the CBN = One million Naira fine and N10,000 for each day the offence continues.
- Before a foreign bank can open its branch office in Nigeria. Else; One Million Naira fine plus 10,000 for each day the offence continues-Section 8.
- Minimum Paid up Share Capital, Reserve Ratio: Section 9 provides that the CBN may (from time to time) determine the minimum paid-up share capital for each category of banks. Non-compliance with the minimum paid-up capital stipulation may ground a revocation of licence. This is done to prevent the crisis of failing and failed banks. At inception, the minimum paid up capital was E12,500 for indigenous banks and E100,000 for foreign banks. This limit has been reviewed over the years… in 2005, the minimum was set to 25,000,000,000. This led to the failure and merger of many banks.
:: Reserve Ratio: By Section 13 a bank must maintain a minimum capital ratio as may be specified by the CBN. A non-complying bank can be precluded from accepting new deposits, granting credit or paying cash dividend to its shareholders… at worst, noncompliance can even lead to revocation of licence after 30 day’s notice and fair hearing have been given to the bank-Section 14. Also Section 15 BOFIA requires all banks to maintain cash reserve and special deposit with the CBN. The CBN Act in Section 10 imposes a fine of 500000 for each day of non-compliance with this provision.
- Voting Rights: Section 10 BOFIA provides that voting rights should be proportional to shareholding notwithstanding the provisions of the Companies and Allied Matters Act.
- Restriction on dividend: By Section 17 BOFIA, no bank shall pay dividend on its shares until it has recouped its expenses and commission and complied with the capital ratio requirement. A conviction of not more than 3 years or a fine of 5% of the dividend or both may be imposed. Meaning that the first thing a bank should do is to comply with the capital ratio requirement, then recoup its expenses and other commission before it can share dividend (bonus) to its subscribers.
- Personal interest and loan facilities: By Section 18, NO manager or official of a bank shall:
- Have a personal interest in any advance, loan or credit facility.
- Grant advance, loan or credit facility without due process and collection of collateral/security.
- Benefit from any advance, loan, or credit facility granted.
By Section 18(8), every director of a bank should not allow his personal interest conflict with that of the bank. Where he holds any office or property which could make his interest conflict with that of the bank, he should declare in a board meeting the fact, nature, character and extent of the interest.
Contravention of Section 18 could ground imprisonment for a term of 3 years or a fine of N100,000. In addition, benefits conferred or received (in contravention of this section) shall be remitted to the government.
- Prohibition of certain persons as managers, directors and officials: By Section 19 and 44(2) of the BOFIA, no bank shall have in its employment,
- Anyone that has been adjudged bankrupt.
- Anyone convicted for an offence involving fraud, dishonesty or professional misconduct.
- A director/manager that is already the director/manager of another bank.
- A director/manager who was a director/manager of a failed bank.
- A director/manager who has been disqualified from practicing his profession.
- Persons of unsound mind and ill-health.
- No bank shall be run by a management agent.
Except as permitted by the CBN.
- Prohibition of certain activities: By Section 20, No bank shall:
- Grant any advance, loan or credit facilities more than 20 percent of its shareholder’s funds unimpaired by losses. Except it is a transaction between the bank and one of its branches.
- Grant loan/advance against security of its own shares. Nor should a bank grant unsecured loans and advances. Except the bank rules permit such.
- Grant unsecured facilities above 50,000 to any of its directors… or to a company which the director has a shareholding interest of more than 5 percent.
- Grant unsecured facilities to any of its official where it exceeds the official’s one year emolument.
- Engage in wholesale or retail trading except in permitted circumstances in the course of banking operations.
Note that: Director includes “director’s wife, children and their spouses, father, mother,”
All the directors shall be liable to indemnify the bank in the event of losses arising from non-payment of unsecured advance.
- Keeping and publishing records: Section 24-30 requires all banks to keep, publish, and maintain proper books of account. Where upon the inspection of a banker’s books of account, it is discovered that the bank is about to fail, Section 34-36 BOFIA make provisions for how a failing bank is to be managed by the CBN. When the Bank has failed, the NDIC Act (which shall be discussed later) makes provisions for cushioning the effects of bank failure.
 Independent examiners can be appointed to do this.
 or an aggregate of 6 months in 12 months
 He must declare/disclose the nature of such personal interest where such exists. The disclosure must be made during a meeting of the board of directors. Disclosure shall not be necessary where the interest in the loan is immaterial or where the official owns less than 5 percent of the shares of the applicant company.
 Or a person that was involved in the management of a failed bank.
 for merchant bank: 50 percent.