THE LEGAL AND REGULATORY CHALLENGES OF INTERNET BANKING SERVICES IN NIGERIA

 



1.0. INTRODUCTION

With e-banking, the 21st Century witnessed a huge reduction in physical banking and the movement of cash. There is now an avalanche of e-banking products like cash transfers, purchase of recharge cards, and payment of utility bills like Energy bills and TV Subscriptions.

At the dawn of this technological era comes an abundance of e-banking merchants and of course cyber fraudsters. Hence there is a need for a strong legal framework that will protect the need and interests of the e-banking consumers and banks who are active players in this e-banking space.

1.1. DEFINITION OF KEY TERMS

‘Banking regulation’ refers to the processes and procedures adopted by banking regulators to oversee, regulate, monitor, or control the activities of any or all banking institution(s). These processes define the parameters within which banks should operate and subject them to certain requirements, guidelines, and restrictions aimed at promoting market transparency between banking institutions and their customers.

The banking sector occupies a vital position in the Nigerian economy and therefore subjects itself to constant reform, to enable it to function efficiently. The reforms have been directed principally toward financial intermediation and financial stability, to inspire confidence in the system.1  The 2004 reforms are still seen as the most impactful in the Nigerian banking regime, as they led to the consolidation of the banks by raising their capital base from 2 Billion Naira to 25 billion Naira, and a reduction in the number of banks from 89 to 25 in 2005.2  Although the number of commercial banks in the country reduced drastically during this period, the banking sector purportedly retained reasonable asset value as a result of the consolidation.

The overall impact of the banking system reforms in Nigeria seems to have had two dimensions; on the one hand, it has favored economic growth, as it has generated more employment opportunities and provided abundant resources for industrialization; on the other, it has increased the wealth of shareholders and directors and narrowed the prospects for inclusive national growth.

Currently, the Central Bank of Nigeria (CBN) maintains that foreign investment has fallen sharply from 2017 but that the outlook for the Nigerian economy in the second half of 2019 is “optimistic” given higher oil prices and production; however, rising foreign debt and uncertainty surrounding the 2019 presidential election have been a drawback for existing reforms in the banking sector.

This chapter seeks to give an overview of the current structure of the Nigerian Banking industry; the regulatory bodies and key legislation overseeing this industry; the proposed banking regulatory reforms sought to be adopted; and an insight into the ethics, best practices, and related issues concerning overall governance in the Nigerian banking and financial sector.

Primarily, the Central Bank of Nigeria (CBN) is the key regulatory body of the banking sector. The CBN is responsible for the overall supervision of banking policies and consumer protection in the banking industry. The CBN regulates these two key sectors via the sub-departments housed within the CBN, namely: banking supervision & other financial institutions; and the consumer protection department. With respect to consumer protection, the CBN is aided by SERVICOM, which is an acronym for Service Compact, established in 2004 to promote effective and efficient service delivery in the MDAs (Ministries, Departments & Agencies). SERVICOM is an institutional mechanism conceived to fight service failure by ensuring that the organs of government in Nigeria deliver to citizens and other residents in the country the services they are entitled to.

 2.0. KEY LEGISLATION OR REGULATIONS APPLICABLE TO BANKS

The foremost laws governing the regulation of banks in Nigeria are the Banks and Other Financial Institutions Act (BOFIA) 1991 (As amended) and the Central Bank of Nigeria Act 2007. These laws empower the Central Bank of Nigeria (CBN) to supervise and regulate banks and other financial institutions in Nigeria.  The CBN is the apex regulatory and supervisory body for the Nigerian banking industry. However, there exists other legislation that assists with the regulation of banking operations in Nigeria.  These include:

1. Companies and Allied Matters Act (CAMA) 1990: This legislation establishes the Corporate Affairs Commission, which regulates all registered companies in Nigeria including banks and other financial institutions.

2. Nigerian Deposit Insurance Corporation Act 2006: This Act establishes the Nigerian Deposit Insurance Corporation (NDIC). The Corporation is responsible for ensuring all deposit liabilities of licensed banks and other deposit-taking financial institutions operating in Nigeria. They equally assist the monetary authorities with formulating and implementing banking policies to ensure sound banking practices and fair competition among financial institutions.

3. FOREIGN EXCHANGE (MONITORING AND MISCELLANEOUS PROVISIONS) ACT 1995:

This Act established the Foreign Exchange Market and provided the regulatory framework for foreign exchange transactions in Nigeria.

4. FINANCIAL REPORTING COUNCIL OF NIGERIA ACT 2011: This Act established the Financial Reporting Council of Nigeria.  The council has powers to enforce compliance with accounting, auditing, corporate governance, and financial reporting standards. It also develops and publishes accounting and financial reporting standards for the preparation of financial statements of public interest entities, which include banks and other financial institutions.

5. ECONOMIC AND FINANCIAL CRIMES COMMISSION (ESTABLISHMENT) ACT 2002: This Act establishes the Economic and Financial Crimes Commission. The agency is charged with effectively coordinating the fight against money laundering and financial crimes. The EFCC collaborates with the CBN on the anti-graft war and helps with the review of BOFIA laws in order to find solutions to money-laundering trends and other corrupt practices.

6. INVESTMENTS AND SECURITIES ACT 2007:

This Act establishes the Securities and Exchange Commission (SEC). The SEC is responsible for the regulation of the capital market to ensure the protection of investors; maintain a fair, efficient, and transparent market; and reduce systemic risk.  It is important that a majority of the banks in Nigeria fall within the category of public limited liabilities companies and are within the regulatory powers of the SEC.

7. ASSET MANAGEMENT CORPORATION OF NIGERIA ACT 2010: This Act establishes the Asset Management Corporation of Nigeria for the purpose of efficiently resolving the non-performing loan assets of banks in Nigeria.

Though there are no specific roles played by supra-national regulatory bodies in Nigeria, the CBN has on behalf of the country, signed several treaties and agreements with friendly neighboring nations; seeking to partner with each other in the harmonization of their monetary and fiscal policies as well as modeling a cause that could lead to the creation of an ECOWAS Single currency. Such agreements gave rise to the establishment of the West African Monetary Agency (WAMA) in 1996, and the West African Monetary Zone in 2000.

8. THE CODE OF GOVERNANCE FOR BANKS AND DISCOUNT HOUSES 2014 categorically provides that the board of directors of a bank and its management are accountable and responsible for the performance and affairs of the bank, in line with the provisions of the Companies and Allied Matters Act (CAMA) 2004. The Governance Code states that the board shall be made up of qualified persons of proven integrity who shall be knowledgeable in business and financial matters and who shall be in conformity with the CBN Guidelines on Fit and Proper Persons Regime. The guidelines provide the qualification criteria for the appointment of a person to the management team of a bank.

The Code, on the other hand, further states that there shall be a minimum number of five and a maximum number of 20 directors on the board. The board shall consist of executive, non-executive directors, and independent directors, with the number of non-executive directors exceeding the executive directors.  The reasons for the appointment of the independent directors are in line with Corporate Governance best practices: to ensure the appointment to the board of persons who have no material relationship with the bank – a relationship which may impair the director’s ability to make independent judgments or compromise the director’s objectivity.

In a bid to ensure stability and the introduction of new ideas, the Code limits the tenure of a non-executive director to a maximum of three (3) terms of four (4) years.

The guidelines prescribe the term of an independent director to a maximum of two terms of four years each and encourage the banks to have a clear succession plan for their executive directors.

In determining the remuneration to be paid to directors, the Code states that particular attention shall be paid to ensure that banks align the executive and board remuneration with the long-term interests of the bank and its shareholders. To further ensure accountability, a committee of non-executive directors shall determine the remuneration of the executive directors, and executive directors shall not be entitled to receive sitting allowances or directors’ fees.

Banks are to disclose the following regarding remuneration in their annual reports:

details of the shares held by directors and their related parties;

the remuneration policy of the bank put in place by the board;

total executive compensation, including bonuses paid/payable;

total non-executive directors’ remuneration, including fees, allowances; and

details of directors, shareholders, and their related parties who own 5% or more of the bank’s shares.

Essentially the board is responsible for overseeing the management of the bank’s compliance with laid-down rules, regulations, and laws. This task is made easier when the bank has a designated unit or department solely focused on compliance.

In a bid to combat the laundering of proceeds of crime or other illegal acts,

Section 9(1) of the Money Laundering Prohibition Act 2011 mandates every financial institution and designated non-financial institution to assign an officer of the company who is at the management level at its head office and all its branches, who shall be the compliance officer. In a bid to lessen the burden on banks and make compliance with this directive easier, the CBN approved the establishment of zonal compliance officers for banks who – at the minimum – must be at the same level with the management of the zone where they work; that is to say, there is no need to have compliance officers for every bank branch.

In order to ensure strict compliance with all extant laws and regulations in relation to foreign exchange transactions, the Financial Action Task Force (FATF) and Anti Money Laundering/Combating the Financing of Terrorism (AML/CFT), the CBN also, in a Circular to all Deposit Money Banks 2016, directed banks to not only appoint a chief Compliance Officer (CCO), who shall not be below the rank of a General Manager but an Executive Compliance Officer (ECO) who shall not be below the rank of an Executive Director.  The CCO reports to the ECO, who in turn reports to the Board. The CBN shall penalize any ECO and/or ECO found wanting in his/her duties.

CAMA mandates every public company (Deposit Money Banks are required to be public limited liability companies) to have an Audit Committee (statutory audit committee) in addition to other relevant committees. The Code equally directs every board to have the following committees which shall be headed by a non-executive director: Risk Management Committee; Audit Committee; Board Governance Committee; Nominations Committee.

The Code of Corporate Governance for public companies requires all public companies to have an internal audit function. Where the board fails or decides not to have an internal audit function, substantial reasons must be disclosed in the company’s annual report, with an explanation as to how assurance of effective internal processes and systems such as risk management, internal control, etc., will be secured.

There is no local regulation laid down providing for the segregation of staff used for front-office trading activities from staff used for middle and back-office activities, but banks have, as a matter of internal operational risk-management policy, set down various rules guiding the segregation of staff used for front office trading activities from staff used for middle and back office administration activities.

The extent to which banks outsource their internal functions varies. Nevertheless, the following internal audit functions are normally outsourced by Nigerian banks:

(a) Establishment of an Accounting System.

(b) Monitoring/Supervision of the Accounting System.

(c) Evaluation of Accounting System.

(d) Design of Internal Control System (ICS).

(e) Who will serve as Custodian of ICS.

(f) Soundness, Adequacy & Application of ICS.

(g) Ensuring Compliance with Established Policies, Plans & Procedures.

(h) Examination of Financial Report before External Audit.

(i)    Economy, Efficiency & Effectiveness of Operations.

(j)    Verifying the Existence of Assets.

(k)   Conducting Special Investigations.

(l)    Detailed Test of Transaction & Balances.

(m) Human Resource Management.

(n) Security of Documents (e.g. audit trail).

(o) Security of Information Technology (IT) Database.

 



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