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.
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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