BANKING 1.5 THE CENTRAL BANK OF NIGERIA

• Isochukwu
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• Banking

THE CBN.

:: Initially, the West African Currency Board was established to issue currency in the region of West Africa. However, because the WACB could not control or manage the money stock, the Central Bank of Nigeria was established under Section 1 of the Central Bank of Nigeria Ordinance 1958 following the recommendation of Mr Lyone’s report.

:: The CBN is an independent corporate entity with perpetual succession… can sue and be sued.

:: It has its head office in the FCT. Its authorised capital is N100,000,000,000 (one hundred billion). The day to day business is run by the Board of Directors which consists of:

• The Chairman.
• Governor and Deputy Governors of CBN.
• Director General of the Federal Ministry of Finance.
• The MD of NDIC.
• Four other members of integrity and professional competence.

:: The tenure for the CBN governor is five years, Directors-3 years. None of these top officials should be a legislator or officer of any licenced bank.

FUNCTIONS OF THE CBN.

Section 2 of the CBN Act enumerates the major functions of the CBN. All the functions of the CBN can be summarized into 9 categories from the general intendment of the CBN Act and other laws.

1. To ensure monetary and price stability: The CBN controls the level of liquidity in order to ward off inflation. Section 30 of the CBN Act empowers the CBN to carry out open market operations, issue treasury bills, re-purchase securities and so on… in a bid to manage liquidity and withdraw money from circulation[1].
2. Issue legal tender currency in Nigeria:

• Section 17 of the CBN Act gives the CBN exclusive authority to issue and distribute legal tender currency (Naira) in Nigeria.
• Section 20 mandates that where Naira[2] is tendered for payment, it must be accepted. Rejection attracts a liability of N50,000 or 6 months imprisonment.
• Section 20(4) criminalises counterfeiting of CBN notes. Attracts a penalty of not less than 5 years imprisonment.
• Section 21, prohibits hawking, selling, wilful abuse of Naira by tearing, piercing, defacing, spraying, matching (like during social occasions) and so on. Contravention attracts imprisonment for not less than 6 months or 50,000 or both-FMG V NDIC

3. Maintain external reserves and safeguard the international value of naira.
4. Promote a sound financial system in Nigeria: The CBN is empowered by Section 45 to require each bank to maintain a reserve requirement from time to time. This was done in 2005 by stipulating 25 billion.

• Section 57 empowers the CBN to licence and regulate Credit Bureaux in furtherance of this function.
• The CBN also prescribes the interest rates from time to time.
• The CBN also acts as a watchdog on the operations of banks and other financial institutions.

5. Banker (and financial adviser) to the Federal Government: It carries on the financial businesses of the FG. This does not however preclude the FG from maintaining accounts with other banks… nor does it prevent the government from using the State Treasury-Section 37. The CBN mobilises funds for the FG. For example Section 38 provides that the bank may grant temporary advances to the Federal government.
6. Foreign Exchange management: By Section 36 of the CBN Act, the CBN handles federal government banking and foreign exchange transactions.
7. Banker to State and Local Governments: Section 27, 39 and 40 allows the CBN to open account and accept deposits for the three tiers of government and act as their agent..
8. Banker of last resort: Section 41 empowers the CBN to act as banker to other banks within and outside Nigeria. The CBN also operates the clearing house where cheques and receipts of different banks are reconciled.
9. The CBN is empowered to supervise and examine banks under Section 33: lack of regulation has devastating effects on depositors and the economy as a whole. This was experienced in the 1950 which led to the failure of banks. In 2005 the CBN mandated banks to have a minimum paid up capital of 25,000,000,000. Many could not reach this threshold this resulted in their failure.

TOOLS OF MONETARY CONTROL.

How does the CBN control the circulation of money and how does it meet up to its duties as the Apex Bank?

• Reserve Ratio Requirement: Banks are directed from time to time to maintain certain reserves with the CBN.
• Interest Rate Regulation: the CBN prescribes interest rate ceilings for the commercial and merchant banks to control inflation.
• Credit Control: The CBN must give its approval before certain loans are granted by bankers. Section 20 BOFIA requires that credit in excess of 20% of the bank’s shareholders fund unimpaired must be approved by the CBN. Also, an unsecured credit in excess of 50,000 must be approved by CBN.
• Open Market Operation: Empowered under Section 30 of the CBN Act to carry out open market operations like; the issue of treasury bills to the public for subscription. This withdraws money from circulation. Although redemption has a reverse effect.
• The CBN prescribes discount rates in dealing with banks and the public in the sale and redemption of treasury bills.
• Banks are compelled to subscribe to a certain value of stabilisation security. Thereby reducing the amount a bank has to loan.
• Moral suasion: the CBN appeals to other banks to practice safely in the interest of the economy and the financial system as a whole.

:: In addition, the CBN has contributed to the development by setting up key financial institutions like the Securities and Exchange Commission (SEC), Nigerian Export and Import bank, promotion of Small and Medium Scale Enterprises (SME) and so on.

:: These functions (of the CBN) are carried out by the CBN governor and deputies who are appointed by the president subject to confirmation by the senate- Section 8 of the CBN Act.

:: The CBN governor and Deputies are assisted by various committees. Worthy of mention are:

• The Monetary Policy Committee of the CBN established under Section 12 of the Act. They determine interest rates chargeable by banks to attain the objective of price stability.
• Financial Services Regulation Co-ordinating committee: They co-ordinate the supervision of financial institutions-Section 43.

:: Note that the CBN Acts together with the NDIC (Nigerian Deposit Insurance Corporation) and other agents appointed by the CBN. It can appoint other banks to be its agent-Section 46.

Note also that the CBN is immune to the provisions of the Companies and Allied Matters Act, it is also immune to taxation and Liquidation Section– Section 53-55 of the CBN Act.

 

[1] This may have a reverse effect where the subscribers get their entitlement (i.e. where the treasury bills or other securities become payable).

[2] Which is the legal tender issued by the CBN.