Banking and Finance

Origin of Banking in Nigeria

The history of Banking has really been long in Nigeria accounting for more than a century and a half in the economic spheres of the country. Here is a comprehensive attempt to track the origin of banks in the country and its evolution all through the stages and years. To grab an in-depth and a rightful perspective of the work, it is pertinent to open with the meaning of a bank.

“Banking generally may be described as the business activity of accepting and safeguarding money owned by other individuals and entities, otherwise called depositors, and then lending out this money to earn profit, and create financial multiplication in the economy through a process economics describes as the multiplier effect. In effect, banks core activity is acting as intermediaries between depositors and borrowers, just as the taking of deposits and the granting of loans singles banks out from other financial institutions. Banks also offer liquidity to their customers.”

The origin of modern banking in the country dates back to 1883 when the African banking corporation was laid down followed in 1884 by the formation of the British bank of west Africa. Notwithstanding that the former failed shortly after its formation, the latter has lived till the present day with changed names over the period, initially to standard bank west Africa, standard bank of Nigeria and presently, First Bank of Nigeria PLC.  Other financial institutions in forms of banks followed suit soon including the precursors of the present-day union bank of Nigeria PLC. Owing to the fact that these banks were established to protect the interest of their foreign owners, the policies of the banks were rather discriminatory against the very indigenes who, being denied credit advances in these banks, became effectively excluded from the mainstream of the economy. The resultant alienation ignited the protagonist of the nationalist of the wholly indigenous banks in Nigeria.  Thus, for the periods spanning 1929 and independence in 1960 nothing less than 26 such banks were formed out of which only four survive till present day. They are namely national bank of Nigeria, Wema bank {formerly Agbonmagbe bank}, African continental bank of the north.

The widespread public concern occasioned by the spate of collapse of indigenous banks, warranted the government to setup the Paton’s commission to look into the collapse of one of such banks. The report of the commission laid the foundation the need to enact the banking ordinance of 1952 which heralds the commencement of banking legislation in the country. This 1952 ordinance brought about for the first-time legal prerequisites as to the formation and running of banks. It disallowed the operation of any banking business in the country without a license granted by the financial secretary. With this and some other executive powers vested by the ordinance, the financial secretary became the pioneer supervisory and regulatory authority in this country’s banking industry.  Notwithstanding this, the concern of the nationalists seemed to be just the formation of a Central Bank which would play a more wide-ranging role in the economy and would be better established to take over and practice the regulatory and supervisory powers then vested in the financial secretary.

After a series of debate and similarly following the reports of J.B Loynes in the 1957, the colonial government eventually passed the central bank of Nigeria ordinance 1958, which came with the establishment of the Central Bank of Nigeria with the following functions:

• Issuance of a legal tender currency in Nigeria
• Maintenance of external reserves to safeguard the international value of the currency.
• Promotion of monetary stability and a sound financial system.
• Banker and financial adviser to the federal government and Banker to other banks in Nigeria and Abroad.

Central bank of Nigeria ordinance 1958 came into force in 1959 and since then the bank has passed a series of legislation which assumed wider powers and similarly increasing prominent loans focused on the development of Nigeria’s banking industry.

Historical Development.

Pertinent to reiterate that the history of banking in the country Nigeria dates to 1883 when the African Banking Corporation began the operations of banking in Lagos. The African Banking Corporation was a South African bank which came to Nigeria and usurp business from Elder Dempster Merchants, who were formerly on quasi banking business before then. This was followed by the British Bank of West Africa (BBWA), which initially was a Trust Fund in 1884 by Sir Alfred Jones. It began banking activities in Lagos in 1894 and formed a branch in Calabar in 1900. The British Bank of West Africa was registered in form of a limited liability company at the time it began operations in England before forming the Lagos. It was headed the Elder Dempster Merchants and similarly supported by the colonial government. In 1894, the British Bank of West Africa absorbed the African Bank Corporation operations in Nigeria. The British Bank of West Africa changed its identity to the Bank of West Africa, and subsequently to the Standard Bank of West Africa Limited until it metamorphosed into the First Bank of Nigeria (FBN), in 1979 when the government of Nigeria increased local interests holding in foreign banks in the country.

The Period 1952-1985

The period between independence to the 1980s witnessed the establishment of several banks, however not without the laid down 1952 Banking Ordinance, and similarly the Banking Amendment Act. The era marked the commencement of banking regulation in the country. It also saw the formation of some specialized banks namely Development Banks and Merchant Banks, which are named as the Nigerian Industrial Development Bank (NIDB), the Nigerian Bank for Commerce and similarly the Industry (NBCI) and the Nigerian Agricultural and Credit Bank. The Nigeria Industrial Development Bank was formed in 1964 through a reconstruction of the then Investment Company of Nigeria Limited (ICON), which was initially incorporated in 1959 as one industrial development finance company.

This period which witnessed the beginning of merchant banking coupled with the establishment of Philips Hill Nigeria Limited, and in the same vein the Nigeria Acceptances Limited (NAL), both of which underwent merge rand became Nigeria Acceptances Limited in 1969, and subsequently to Merchant Bank Limited. Similarly, between 1973 and 1975, about four merchant banks were formed namely International Merchant Bank Limited by First National Bank of Chicago, Continental Merchant Bank Limited through the merger of First National Bank of New York and Chase Manhattan Bank, ICON (Merchant Bankers) Limited, and Nigeria Merchant Bank PLC. Summarily, the timeframe between 1959 and 1985 saw consolidated growth in the banking sector. In 1970, there were a total of 14 commercial banks which rose to 29 in 1980. In 2007, there were 24 capitalized commercial megabanks, 12 arising out of a season of series of mergers and acquisitions in the banking industry to restore public and investors’ confidence and forestall a total collapse of the sector.

The period 1986-Date From 1986

This was a period of massive expansion and structural changes in the banking sector, such that by 1991 there were already in existence about one hundred and twenty-one commercial and merchant banks in Nigeria. The figure was made up of sixty-six commercial and fifty-five merchant banks. Only in 1991, twenty new banks were licensed, from the whole idea of deregulation of the then economy by the ruling government at the federal level, and this brought a free-market enterprise and similarly liberalization of the whole banking licensing scheme. Deregulation of the economy as at that time and the proliferation of financial institution since 1986 came with attendant consequences, among which are that since 1996, there has been thinning out of banking enterprise.

The banking sector experience distress resulting from several named reasons such as mismanagement in the form of grants, bad loans and advances then ownership structure, which means owner’s direct intervention in the banks. Among the long list of reasons for the distress includes inappropriate corporate governance, inadequate regulatory and supervisory capacity; asymmetric information; under capitalization, among numerous others. The distress itself led to the crisis and erosion of public confidence, diminution of trust and of relationship commitment, which once betrayed, do not return easily. Nothing less than twenty-seven (27) banks failed and were wound up from the resultant effects of the distress in the banking sector as at that time. This led to loss of wealth, public confidence in the system and in more challenging monetary management. It is worthy of note that banks failure was not peculiar to the first era alone but cuts across all other periods as well. There were quite significant cases of failure, which is indeed more pronounced in the period 1986- 2003, which thus necessitated drastic regulatory measures to be taken in the succeeding years to stem the tide of failure, which was on the high side and, to restore public confidence in the banking sector. Owing to the harvest of banks failure, the Nigerian Deposits Insurance Corporation (NDIC), was established by Decree 22 0f 1988, to insure deposit liabilities of licensed banks; provide financial and technical assistance to banks and contribute to the quest of a safe and sound banking environment in Nigeria. In essence, it was created to carry out the final mortality process of ailing banks whose licenses have been revoked by the Central Bank of Nigeria (CBN). The period from 2004 to the present has been one of mixed feelings in the sector, as the CBN in late 2004 issued a directive ordering banks to jerk-up their capital base (paid-up) from ₦25 billion (twenty-five billion Nigerian Naira) by December 2005, a period of eighteen months. This provoked vehement protests from the bankers, but the order was irreversible. And the result is that by 2006, there remained one just twenty-five banks in existence resulting from reorganizations, mergers, and acquisitions. The interesting that is that what appeared a mission impossible at the onset has metamorphosed to something practicable through dogged determination of operatives.

Evolution of Banks in Nigeria

Scholars who observed the tracing of the evolution of banking concluded that there may be no crystal clear, water-tight distinction when it comes to differentiating between the historical development and evolution of banking in Nigeria as the two go Pari-passu, the one engendering the other. According to Prof. G.O. Nwankwo

“the historical evolution of banking in any country provides or can provide the rationale for and methodology of prudential regulation of banking in that country.”

The evolution of banking within the Nigerian terrain may then be summarily categorized into phases as phased out above. That is between 1892-1954, which constitute a period of free and monoculture banking, the timeframe of the 1952-1985 which notably was an era of classical liberalism and in the same vein the period between 1986-the present, which has been attributed by several of structural adjustment programmes of different and varying sorts, and reforms and consolidations in the banking sector for sectoral viability and in the same vein for customers and investors’ confidence in the system. This has been regarded as very necessary to assure a clean break from the very irritating and unpalatable past. The initial part of the first era was a period of monopoly however it was broken by the entrance into the sector by indigenous banking enterprises.

It was reported that:

“…the failure of most of these concerns for reasons stated above warranted the promulgation of the Banking Ordinance of 1952, which was a first step at regulating the banking sector. The 1952 Ordinance addressed vital issues by establishing a minimum paid-up capital, examination and supervision of banks, maintenance of reserve fund and capital, unsecured loans, unsecured loans, among others. The ordinance also adopted a classification of banks into indigenous and expatriate banks, which were to maintain a minimum paid-up capitalization of £12, 500 (₦25,000) and £100,000 (₦200,000) respectively. All new banks were required to obtain a license from the Minister of Finance before operating. Further to this came the Central Bank of Nigeria Ordinance of 1958, and the Banking Ordinance of 1958 which was repealed in 1969. The 1958 Banking Ordinance further jerked up the authorized paid-up capital to £200,000 for the foreign banks leaving the indigenous banks at the old rate. The Ordinance introduced credit ceiling, prohibited banks from trading or beneficially acquiring real estate. The 1969 Banking Act which repealed the 1958 Ordinance came with an objective of strengthening the banking system while increasing the powers of the Central Bank of Nigeria on the sector and on overall economy of the country…”

The Act provides that banks incorporated within the country must have a minimum paid-up share capital plus an additional ₦600,000, while banks abroad must have ₦1, 500,000. And that the paid-up capital plus the legally required statutory reserve of a bank in either category must not fall below 10 per cent of its total deposit. The Act similarly provided for compulsory incorporation of all local banks Nigeria. The opening and the closing of different branches by banks was also to be subject to the prior approval of the Central Bank of Nigeria. From 1969 to 1991, there were numberless of amendments to the two Acts, such as the Central Bank of Nigeria Act (Cap 47), Laws of the Federation of Nigeria (LFN) 1990, and Cap C4, LFN 2004; the Banking Act (Cap 28) LFN 1990, and the Banks and Other Financial Institutions Act B3, LFN 2004. The 1990 Acts have been perfectly repealed by the 1991 CBN Decree. The successive Acts and Decrees brought about new innovations into the manner of regulation of the industry to enhance and promote the standard and proper monitoring of the banking sector. With the advancement of the economy came the necessity for diversification in the banking sector, hence over the years, there were different types of specialized banks established in the country for different specific purposes.

The sector began on a mono-culture system as afore stated, and later developed to one where specialized bank began to spring-up. In 1960, Merchants Banks debuted, while the 1970s witnessed the coming on the scene of the Development Banks, then Community banks and Mortgage Banks came in the 1990s. there is also the Nigerian Export-Import Bank which was established in 1991 to facilitate economic development through commerce, and then Urban Development Bank, which was established by the Federal Government to finance urban development and the rehabilitation and maintenance of urban areas in the country. In 1977, the CBN introduced the Rural Banking Programme for the first time to facilitate rural development. It was a programme in three phases to cover a period of years from 1977 through 1991, by which time at least, 290 out of the 300 identified and allocated centers had been opened, hence it was a huge success. This encouraged commercial banks opening branches in rural areas, which brought about the opening of the rural areas.

Law regulating the establishment and operation of Banks

Within the Nigerian political terrain and the economy of the country, the prime legislations that regulates, monitors and directs the affairs and running of banks in Nigeria is the Banks and other Financial Institution Act (BOFIA of the Act) and similarly the Central Bank Act. The BOFI Act vested in the Central Bank of Nigeria the power and authority to also supervise and regulate all banks and similarly other financial institutions in Nigeria. Some other laws regulating banking activities in Nigeria includes, the Nigerian Deposit Insurance Corporation Act, Companies and Allied Matters Act 2020, the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act. Two of the aforementioned Acts will be discussed below as they form the backbone for the formation and regulation of banks in Nigeria:

Central Bank of Bank Act, 2011

The Central Bank of Nigeria as a financial institution established the Central Bank of Nigeria Act. The Centra Bank of Nigeria is a lead banking regulator vested with the entire and overall control and administration of the monetary and financial sector policies of the Federal Government in Nigeria. Section 2 of the Act provides for the principal objectives of the CBN as follows;

1. To ensure monetary and price stability.
2. To issue legal tender currency.
3. To maintain external reserves to safeguard the international value of the legal tender currency.
4. To promote a sound financial system in Nigeria; and
5. Act as a bank and provide economic and financial advice to the Federal Government.

The Central Bank is saddled with the responsibility of issuing and also granting licenses to banks in order to carry on the business of banking and in the same vein supervise banks and other financial institutions. The Central Bank Nigeria has been empowered to issue guidelines and circulars that borders on its responsibility to banks, foreign exchange market, and other financial institutions. On any occasion of an impending bank failure, the Central Bank is vested with the power to meddle in the affairs of the company and empowered for due intervention by directing the Nigerian Deposit Insurance Corporation (NDIC) to take over the management and as well control of the bank. The Bank similarly develops fiscal initiatives which involves formulating and implementing policies, innovating products, and creating enabling environments for banks and other financial institutions to deliver effective services in a resourceful and sustainable manner.

The central bank established the Monetary Policy Committee (MPC) as a regulatory body under Section 12 of the Central Bank of Nigerian Act. The Committee was formed in order to facilitate the achievement of price stability and similarly support the economic policies of the Federal Government. The Committee of the MPC is headed by the Governor of the Bank and has the responsibility of formulating monetary and credit policies for banks and other financial institutions which must be strictly obeyed.  Presently, there are four monetary policy committees under the Central Bank coupled with its composition, meeting schedules, and functions. These committees are, The Monetary Policy Committee (MPC), The Monetary Policy Technical Committee (MPTC), Monetary Policy Implementation Committee (MPIC), Monetary Policy Forum.

Banks and Other Financial Institution Act, BOFIA 2020

Objectives of the Banks and other Financial Institutions Act includes:

• To update laws governing financial institutions and financial services and bring it in line with modern trends in the banking sector.
• Enhance efficiency in the process of granting banking licenses.
• Ensuring accurate delineation, the regulatory functions of the central bank of Nigeria in the financial services industry.
• Update and incorporate the laws to enhance licensing and regulation of micro finance banks.
• To regulate the activities of financial technology companies and
• Update commensurate penalties for regulatory breaches in the financial services sector.

Under Section 3 (3) of the new act, the Central Bank of Nigeria (hereinafter referred to as the Bank) may upon payment of the prescribed sum by the proposed bank, issue a license or refuse to issue a license with or without conditions or refuse to issue a license and the governor need not give any reason for such refusal. Under BOFIA, in section 3(4), where the Bank grants an application for license, it shall in addition to giving written notice to the applicant, indicate the scope of the banking business in which the applicant can engage in.

One of the significant provisions of the BOFIA,2020 is Section 5 (6) which provides that any director, manager, or officer of a bank who fails to take reasonable steps for compliance with conditions of license is guilty of an offence and liable upon conviction to imprisonment to a term not exceeding two years or a fine of Ñ 2,000,000 or for both such imprisonment and fine.

Section 12(1-6) BOFIA,2020, deals with “Revocation of Banking license” now enlarged under the Act to accommodate more grounds. The various subsections contain provisions on the appointment of a Nigerian Deposit Insurance Corporation (NDIC) who will act as a liquidator of any bank whose license has been revoked, the jurisdiction of the Federal High Court on actions to challenge the revocation of the license of a bank, the time frame within which to hear and determine an action to challenge a revocation and an appeal against the decision of the Federal High Court in respect of same, time within which to commence an action in respect of revocation of the license of a bank and so on. All of these are germane provision which are not contained in the 1991 Act.

Section 36 of the new Act was added in respect of when a bank becomes a failing bank under Section 34(1) to the effect that some relevant agencies [which are listed under section 34(2)] shall cooperate with, render assistance, among other duties, as may be required by the Governor which are necessary to resolve a banking crisis occasioned whenever two or more of the four conditions (or such other conditions as the Governor may deem fit) stated therein.

Companies and Allied Matters Act 2020 (CAMA)

Company and Allied Matters Act established the Corporate Affairs Commission (CAC), which is saddled with the regulatory powers over all registered companies in Nigeria to the inclusion of banks and other financial institutions. In order to operate the banking business or any other financial institutions in Nigeria, whatever company which seeks to conduct such banking business must be duly incorporated under the Companies and Allied Matters Act. Every registered company must file annual returns with the Corporate Affairs Commission. Additionally, the CAMA provides various regulations and compliances the banks must follow, ranging from issuance of shares to meetings of companies, among others.

A vast majority of people are mostly familiar with banks only as a place they save their money and get them withdrawn when they need them as they deem fit. And alternatively, a place where they can get loans and other forms of credit advances. Pertinent to note that banks however have a lot of other different functions and services available for public, companies, and governments. These various services and functions are provided by different types of banking institutions in Nigeria. The different types of banks can be difficult to differentiate but according to the banking licenses that are currently available in Nigeria today, we have the following types of banks as listed below.

Central Bank of Nigeria (CBN)

The Central Bank of any country is the number one bank in that country. It is the financial institution that manages and regulates the Nigerian currency and the activities of all other financial institutions in Nigeria. This bank was established by the CBN Act of 1958 and started full operations on the 1st of July 1959. The functions of the Central Bank as stated in the CBN acts include:

• Maintaining Nigeria’s external reserves, promoting monetary stability and a sound financial environment.
• To be the lender of last resort to the federal government.
• To be the financial adviser to the federal government.
• The Central Bank of Nigeria is also responsible for giving license to all other banks, other financial institution, and sectors in Nigeria.

The Central Bank of Nigeria is headed by a governor and the current governor is Mr. Godwin Emefiele. The Central Bank of Nigeria is involved in currency issue and the distribution within the Nigerian economy. The Bank had assumed all the important functions ever since 1959 when it was made to replace the West African Currency Board (WACB) pound which was then in circulation with the former Nigerian pound. The bank introduced the decimal currency denominations, Naira and Kobo, in 1973 to move to the metric system, which has since then simplified transactions. In 1976, a higher denomination note identified as N20 joined the currency profile.

Coupled with its function of mobilizing funds for government, the Central Bank of Nigeria in the past had managed the domestic debt and services external debt on the advice of the Federal Ministry of Finance adequately. When one considers the domestic front, the Bank:

• Gives advice to the Federal Government on the timing and size of new debt instruments, advertises for public subscription to new issues,
• Redeems matured stocks, pays interest and principal as and when due,
• Collects proceeds of issues for and on behalf of the Federal Government, and
• Sensitizes the Government on the implications of the size of debt and budget deficit, among others.

On external debt service, the CBN ensures it cooperates with other agencies to manage the country’s debt. In 2001, the responsibility of debt management was transferred to Debt Management Office (DMO).

Commercial Banks

Commercial Banks in Nigeria are banks that provide financial services to businesses and companies, and to the public. The commercial bank provides financial services such as accepting deposits, giving of business loans, and offering basic investment products and also serving as a financial intermediary by collecting money from depositors and lending it to borrowers. The commercial bank invests depositors’ money in certain businesses that are profitable, they issue debit, credit, and prepaid cards to customers, and make provision for both secured and unsecured loans to their customers. There are around twenty-two commercial banks in Nigeria. The Commercial bank has been popularly rated thus:

“A commercial bank is a kind of financial institution which carries all the operations related to deposit and withdrawal of money for the public, providing loans for investment, etc. These banks are profit-making institutions and do business only to make a profit. The two primary characteristics of a commercial bank are lending and borrowing. The bank receives the deposits and gives money to various projects to earn interest (profit). The rate of interest that a bank offers to the depositors are known as the borrowing rate, while the rate at which banks lends the money is called the lending rate.”

Primary functions –

Accepts deposit: The commercial bank takes deposits from their customers in the form of saving, current and fixed deposits. The bank engages the surplus balances collected from the firm and individuals by lending them to the temporary required of commercial transactions.

Provides Loan and Advances: The commercial bank performs another critical function which is embedded in the bank’s habitual offering of loan facilities and advances to the entrepreneurs, businesspeople with an attached interest. For every commercial bank, the interest is the primary source of making profits. In the process of granting loan facilities to customers, a bank usually retains a small number of deposits as a reserve and offers the remaining amount to the borrowers in demand loans, overdraft, cash credit and short-run loans amongst others.

Credit Cash: When a customer is provided with credit or loan, they are not provided with liquid cash. First, a bank account is opened for the customer and then the money is transferred to the account. This process allows a bank to create money.

MERCHANT BANKS.

Merchant banks when one considers the scope of their operations may as well be regarded as Investment Banks. These merchant banks majorly provide financial services for production and trade of goods and services, and businesses. The banks devote themselves to aiding the trade of a manufacturer of goods and services. A vast majority of the Merchant banks in Nigeria presently have been converted to either a commercial bank or retail bank.

MICRO FINANCE BANKS

Microfinance banking is very popular in Nigeria and are spread all across the country far and wide for the masses at the grassroot to have access to basic banking facilities. Most times they are created to serve the interest of a specific group of people. They provide basic micro financial services which includes savings, small loans, amongst others to individuals in public. Some private institutions in Nigeria have Microfinance Banks formed solely to serve their staffs and students.

MORTGAGE BANKS.

Mortgage banks are those financial institutions whose primary service to the masses and their customers is to provide mortgage loans to people. These banks perform distinct functions from the commercial banks and as such mortgage banks do not take deposits from individuals.

RELATIONSHIP BETWEEN BANKER AND CUSTOMER

A study of the relationship between a bank and its customers has shown itself to be a transactional relationship that is solely built on trust. Dr H.L Hart, in the Law of Banking defines a bank/banker as

“A person or company carrying on the business of receiving money and collecting drafts for customers subject to the obligation of honoring cheques drawn upon them from time to time by customers to the extent of the amount available on their current account.”

In similar vein, Section 258 of the Evidence Act 2011 defines a bank as a bank licensed under the Banks and Other Financial Institutions Act (BOFIA) and includes anybody authorized under an enactment to carry on banking business.

In an ordinary parlance, the term banking may be defined as accepting of deposit money from the general and registered public for the main goal of investing the said money which are repayable on demand. “Banking business” under Section 66 of BOFIA is defined as:

“The business of receiving deposits or current account, savings account, or other similar account, paying, or collecting cheque drawn by or paid in by customers; provision of finance or such other business as the Governor may, by order published in the Gazette, designate a banking business”.

In the case of S.B.N. Ltd. v. De Lluch (2004) 18 NWLR (Pt.905)341, this

“…. consist in the issue of notes payable on demand intended to circulate as money when the banks are banks of issue; in receiving deposits payable on demand; in discounting commercial paper; making loans of money on collateral security; buying and selling bills of exchange; negotiating loans, and dealing in negotiable securities issued by the Government, State and National, and municipal and other corporations”.

A person may not be referred to as a customer of any bank without holding an account with such bank. Pertinent to note that it becomes immaterial whether such was account is opened in the name of the said person in trust for another; the identity of such person on the bank’s record will be that of a customer. There need be contractual relationship between the parties which involves that the customer opens an account, entrust the care and managing of his money to the bank and the bank subsequently undertakes to maintain the account and provide the attendant services. It is not an assumed relationship; the fact that a person walks into a banking hall to simply cash cheques or deposit money into an account or use an automated teller machine does not automatically make him/her a customer, neither do regular casual transactions, even over a long period of time.

The court in NDIC v Okem Enterprises Limited (2004) 10 NWLR (Pt. 880) 107, Ironbar v FMF (2009) 15 NWLR (Pt. 1165) 506, defines:

“a customer of a bank as any person having an account with a bank or for whom the bank has agreed to collect items and includes a bank owning on account with another bank. Thus, a customer is a person whose money has been accepted by a bank on the undertaken to honor cheques up to the amount standing to his credit. Customers of the bank may include individuals, firms, organizations, and other banks.”

The banker-customer relationship is usually contractual in nature and it imposes certain rights and duties on the parties. It is that of debtor and creditor, with a duty on the bank to comply with existing laws and regulatory directives.

In addition to a bank’s obligations under law, the Bank also owes its customers a duty to:

• Receive all money and similarly collect bills aimed for the sake of credit to its customer’s account.
• Honor customers’ checks and such cheques must be drawn in the appropriate and proper manner. Having ascertain that the account is sufficiently funded, presented during banking hours at a branch of the bank.
• Promote secrecy and avoid disclosing information on the account to a third party.
• Honor the absolute duty of care owed in the area of protection from fraud in making payment orders.
• Making a ready record of transactions on the customer’s account and provide the customer with any such information.
• Giving all reasonable notice prior to closing a customer’s account in credit; and
• Abide by the instructions of the customer and terms of agreement within the scope of the relationship.

Some of the rights of the bank include to:

• Refusal to honor any improperly drawn cheque.
• Charging a very reasonable interest on all credit facilities granted to the customers and similarly reasonable commission for bank services rendered.
• Obtaining a re-imbursement for all expenses incurred on the customer’s behalf and debiting the customer’s account accurately in the sum of such expenses.
• Using all moneys deposited by the customer at will without forgetting the owed duty of care.
• Combining the accounts owned by customer in order to pay any balance owed probably due to another overdrawn account.
• The bank retains the right to sell a property over which the customer already has created a legal mortgage in favor of the Bank without recourse to court.
• Retain goods and securities owned by the customer (as a debtor) until the debt due is paid (right of general lien); and
• Retain money or property belonging to a customer and apply the same to the repayment of an outstanding debt; provided that, to the bank’s knowledge, such property is not part of a trust fund or is not already burdened with other debts (banker’s lien).

The customer is not without obligations/duties. These include to:

• Keep his cheque book safe and similarly issue or execute proper cheques.
• The duty to not mislead the bank, or facilitate forgery, or operate an illegitimate account.
• Pay the reasonably levied interests and charges on overdraft and credit facilities.
• Informing the bank as fast as of any suspicious issues or transactions or regarding the loss of a cheque book or leaves.
• deposit any amount of money properly and in time; and

The rights of a customer include to:

• Be issued a cheque book and receive periodic statements on account and other account information as requested or agreed.
• Have access to his its account whenever he so wills, be promptly informed of the fate of his bills or cheques sent for clearing and to stop cheques before payment.
• On repayment of a debt, collect collateral documents with which the loans were secured.
• Deposit money, demand repayment and claim interest in an interest-bearing account or on delay in crediting the account on receipt of credit advice or deposit.
• Claim damages for loss or damage due to wrongful dishonor of cheques.

give standing instruction to the banker which must be followed and to be informed before closure or dormancy of his account; and

Have his affairs with the bank kept confidential and where applicable close his account.

Termination of Banker/Customer relationship

Where the terms of a contract become impossible to perform due to circumstances not in the contemplation of the parties, the contract is said to have been frustrated. This may also apply in a banker/customer contractual relationship. In Diamond Bank vs. Ogochukwu (2008) 1 NWLR (Part 11067), incidences which may frustrate a contract where listed to include:

• Were the subject matter of the contract has been frustrated or is no longer available.
• Due to death or incapacity of a party to a contract.
• Were the contract has become illegal to perform because of a new legislation.
• Where there is an outbreak of war; or
• Were the commercial purpose of the contract has failed.
• Death of the customer – the estate of the deceased could however have access to the account upon display of the certificate of death and other relevant documents.
• Mental incapacity of the customer – the legally appointed trustees may however access to his/her account on his behalf.
• Bankruptcy (individual) or insolvency/winding up (company) of the customer – the trustees in bankruptcy would be the ones to proceed in this instance; a new relationship may be formed between the bank and the trustee in bankruptcy or the liquidator.
• Insolvency of the bank – where the bank is itself is declared bankrupt.
• Order of court – for example, a garnishee order for the amount in the account to be paid in favor of a judgement creditor, a freeze order, a writ of sequestration issued against a customer held in contempt.

NATURE AND LEGAL EFFECT OF NEGOTIABLE INSTRUMENTS

A negotiable instrument refers to a paper which entitles an individual to some sum of money and which is transferable from person to another by mere delivery or by endorsement and delivery. The person to whom it is transferred becomes entitled to the money and also has right to further transfer it. The maxim of law nemo dat quod non-habet (no one can transfer a better title than he himself has) is an abiding principle which explains that no one can become the owner of any property unless he purchases it from the true owner or with his authority.

According to Professor Goode, instrument is described as:

“a document of title of money Therefore an instrument is a document which physically expresses the payment obligation. An instrument will be in deliverable state only if it is signed by the possessor or it should be with the authority of that person. The instrument clearly states the contractual right to payment and the right will be transferred only after the complete delivery. The person who has that entitlement and possess the instrument is consider as the true owner”.

Introduction to Negotiable Instruments Act, 1881

What are Negotiable Instruments?

According to Section 13 of Negotiable Instruments Act, 1881, A ‘negotiable instrument’ refers to such documentations as a promissory note, bill of exchange or cheque payable either to order or to bearer. An instrument may be negotiable either by:

• Statute: Here a negotiable instrument may be Promissory notes, bills of exchange and cheques are negotiable instruments under the Negotiable Instruments Act, 1881; or
• By usage: Bank notes, bank drafts, share warrants, bearer debentures, dividend warrants, scripts, and treasury bills.

An instrument may be called a ‘negotiable instrument’ if it possesses the characteristic features of being freely transferable. The transferability sometimes may be by way of delivery, or by endorsement and delivery. It is pertinent to note the following points about negotiable instrument:

1. Holder’s title free from defects: The holder of any negotiable instrument in due course usually acquires a good title notwithstanding that any defect in a previous holder’s title.
2. The Holder can sue in his own Name – A major characteristic feature of a negotiable instrument, is that its holder in due course, can sue on the instrument in his own name.
3. A negotiable instrument can be transferred infinitum: this means that it can be transferred severally and any number of times till its maturity.

In the course of deploying the use of a negotiable instrument, it is important to note that certain presumptions may be made as regarding the operations of a negotiable instrument. Such presumptions may be as follows:

Presumptions

1. Consideration: Certain consideration is presumed to have passed to from the holder of a negotiable instrument. And as such every negotiable instrument is presumed to have been drawn and accepted, endorsed, negotiated, or transferred for consideration.
2. Date: Every negotiable instrument tendered for payment is presumed to bear the date on which it is made or drawn.
3. Acceptance: Every bill of exchange was accepted within a reasonable time after the date mentioned therein and before the date of its maturity.
4. Transfer: Every transfer should be made before the expiry.

Meaning of Endorsement: When a maker of a negotiable instrument indicates the person’s name on the face or back of the instrument and puts his signatures there for the purpose of negotiation, this is called an endorsement. The individual who signs is an endorser while to whom it is endorsed is the endorsee.

Essentials of valid endorsement

• Appending signature on the back or face of the instrument.
• The endorsement must be made by maker or holder.
• The negotiable instrument must be properly signed by the endorser.
• It must be for the entire negotiation instrument.
• No specific form of words is necessary for endorsement.

Effects of Endorsement

1. The property in instrument is transferred from endorser to endorsee.
2.  The endorsee gets right to negotiate the instrument further.
3. The endorsee gets the right to sue in his own name to all other parties.

Promissory Note

Definition According to section 13 of Negotiable Instruments Act, 1881-

“A promissory note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker to pay a certain sum of money to, or to the order of, a certain person or to the bearer of the instrument”.

A promissory note may be defined as a promise in writing by a person to pay a sum of money to another specified person or to his order. The two parties to a promissory note are the Maker which is the person who makes the promissory note and promises to pay is called the maker and the Payee who is the person to whom the payment is to be made is called the payee.

Essentials or Characteristics of a Promissory Note:

From the definition, a promissory note must have the following essential elements.

1. In writing: A promissory note must be evidenced in writing. Writing may include print and typewriting.
2. Promise to pay: The promissory note must contain an undertaking or promise to pay. As such, a mere acknowledgement of indebtedness may not sufficient. Notice that the use of the word a promise is not essential to constitute an instrument as promissory note.
3. Unconditional: The promise to pay evidenced in a promissory note must not be conditional. Thus, instruments must be payable on performance or non- performance of a particular act or on the happening or non-happening of an event are not promissory notes.
4. Signed by the Maker: The promissory note must be appropriately signed by the maker of the promissory note, otherwise it is of no effect.
5. Promise to pay money only: If the instrument namely the promissory note contains a promise to pay something else in addition money, it cannot be a promissory note.
6. It may be payable on demand or after a definite period: That the promissory note must be Payable ‘on demand’ means payable immediately until it becomes time barred. A demand promissory note becomes time barred on expiry of 3 years from the date it bears.

Bill of Exchange

According to section 5 of Negotiable Instruments Act, 1881-

“A ‘bill of exchange’ is an instrument in writing, containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of a certain person, or to the bearer of the instrument. It is also called a Draft.”

Characteristic Features of a bill of exchange.

1. The bill of exchange must be in writing.
2. The bill must contain an order to pay and not a promise or request.
3. The order made in the bill must be unconditional.
4. There must be three parties, namely drawer, drawee, and payee.
5. The parties to the bill of exchange must be certain.
6. It must be signed appropriately by the drawer.
7. The sum payable as stated in the bill must be certain or capable of being made certain.
8. The order that the bill is giving must be to pay money and money alone.

Parties to A Bill of Exchange

Drawer: The person who may be regarded as the maker of a bill of exchange the drawer.

Drawee: The individual directed to pay the money by the drawer is called the drawee.

Payee: The person named in the instrument, to whom or to whose order the money is directed to be paid by the instruments are called the payee.

Cheque

According to section 6 of Negotiable Instruments Act, 1881- A cheque is defined as

“A bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. Thus, a cheque is a bill of exchange with two added features, viz, it is always drawn on a specified banker; and it is always payable on demand and not otherwise.”

Essentials of Cheque:

1. In Writing: The cheque must be in writing. It cannot be verbal or oral.
2. Unconditional: The language deployed in a cheque should be such as to convey an unconditional order.
3. Signature of the Drawer: the check must be signed by the maker.
4. Certain Sum of Money: The amount in the cheque must be certain since no ambiguity will be tolerated.
5. Payees Must be certain: It must be payable to specified person.
6. Only Money: The payment should be of money only.
7. Payable on Demand: It must be payable on demand.
8. Upon a Bank: It is an order of a depositor on a bank.

Parties to a Cheque

Drawer: Drawer is such person who draws the cheque for a payee on the drawee.

Drawee: Drawee is the bank on whom the cheque has been drawn.

Payee: Payee is the person who is entitled to receive the payment of a cheque.

Types of Bank Accounts

The major aspect or role in the banking industry is that customers enjoy the provision of bank accounts. There are plethora of bank accounts that can be opened in Public and Private sector banks. In majority of the countries in the world, there are categorically three (3) forms of bank account and these include the Current Account, Savings Account, and Fixed Deposit Account. Subsequently however, advancement in the banking sector brought about various other types of bank accounts.

Savings Account

The savings accounts may be opened by an individual or sometimes jointly by two people with the sole aim to save money. Traditionally in practice, the main benefit and aim of opening savings bank account is that the bank has the practice of paying the interest for opening this type of account with them.

Features of the Savings account.

1. Usually, no limit is placed on the number of times the account holder may deposit money in the account however there is a restriction on the number of times money can be withdrawn from this account.
2. Under the savings account type of account, the rate of interest that accrues to an account holder get varies.
3. No minimum balance that needs to be maintained for this type of an account.
4. Traditionally, savings account holders can get an Automated Teller Machine /Debit Card should the customer desire they want to.

Current Account

Another type of bank account in existent is the current account. Here, the accounts are not deployed for the purpose of savings. Several of the important pointers that borders on the current bank account are as follows:

1. Current account is mostly operated by businessmen, Associations, Institutions, Companies, Religious Institutions.
2. The number of times that money may be deposited or withdrawn from the bank is limitless in a current bank account.
3. Holders of current account enjoy the rare benefits of internet banking which is made is available to the account holders by the bank.
4. This type of bank account does not have any fixed maturity.
5. The bank similarly made provision for overdraft facility is available for current bank accounts holders.
6. The holders of current account do not enjoy interest on such accounts.

Fixed Deposit Account

Fixed deposit account represents another category of bank account which may be opened in any Public or Private sector bank. The salient points on the list of important things that one need to be known concerning fixed deposit account is mentioned below:

1. The fixed deposit account is a one-time deposit and a one-time take away account. In this account, the account holder is required to deposit a certain fixed amount of sum for a fixed time.
2. The money deposited in any Fixed Deposits account may only be withdrawn at once and not in instalments.
3. Banks usually pay interest on fixed deposit account and the rate of such interest depends on the amount deposited and also the duration of the Fixed Deposit.
4. Full repayment of the amount is available before the maturity date of Fixed Deposits.

Paying and Collecting Banker

Duties and Responsibilities of Paying Banker

The bank and customer relationship is predominantly that of a debtor and creditor, and the respective position of the two entities is being determined by the existing state of account. Where the customer has a credit balance in his account with the bank, he assumes the role of a creditor and he experiences a reversal of role if he has a debit balance with the bank, he is the debtor of the bank. Simply put, the bank does not work simply as trustee of money deposited by the customer because, instead of money being set apart in a safe room, it is replaced by a debt due from the bank. Whenever a bank accepted the deposits from customers, the bank becomes the debtor of the customer and will be bound to return the equivalent amount on the demand of the customer. Thus, it is the obligation of the bank to honor the cheques issued by the customer where the following conditions are fulfilled:

(a) There must be sufficient balance in the account of the customer.

(b) The cheque must have been properly drawn and presented; and

(c) There must be no legal restriction on payment.

The banker who is regarded as liable to pay the exact value of a cheque of the customer as contained in the mandate or the contract is called “Paying Banker” or “Drawee Bank.” The payment to be made by him has arisen due to the contractual obligation. He is also called drawee bank since the cheque is drawn on him.

The bank is required to be cautious while honoring checks. He may not be pardoned if he honors an intentionally or apparently forged the cheque. Similarly, when sufficient funds are not available at the credit of the customer, the bank may not honor the check. Where the bank pays by way of oversight, the bank will be the risk of making good this loss which means making payment without sufficient funds.

Precautions

The duty of the bank to pay the customer’s check is a very delicate duty and as such the following precautions must be noted while honoring the cheques of his customers. The precautions below may guide the activities of a bank in these circumstances:

1. Proper Form: A banker should confirm whether the cheque presented is in the proper form. That essentially means that the cheque must be in the manner prescribed under the provisions of the commercial code with no condition attached.
2. Open or Crossed Cheque: One important precaution that a banker should take is about crossed cheques. He should not pay cash across the counter in respect of crossed cheques. If the cheque is a crossed one, he should see whether it is a general crossing or special crossing. If it is a general crossing, the holder must be asked to present the cheque through some banker. It should be paid to a banker. If the cheque bears a special crossing, the banker should pay only the bank whose name is mentioned in then crossing. If it is an open cheque, a banker can pay cash to the payee or the holder across the counter. If the banker pays against the instructions as indicated above, he is liable to pay the amount to the true owner for any loss sustained. Further, a banker loses statutory protection in case of forged endorsement.
3. Place of Presentment of Cheque: A banker may only honor the cheques only when it is it is presented with that branch of the bank where the drawer has an account. If the cheque is presented at another branch of the same bank, it should not be honored unless special arrangements are made by the customer in advance. The reasons are:

(a) A banker undertakes to pay cheques only at the branch where the account is kept.

(b) The specimen signature of the customer will be with the office of the bank at which he has an account.

(c) It is not possible for other branches to know that the customer has adequate balance to meet the cheque.

4. Date of the Cheque: The paying bank must see that his date of the cheque was not appropriated. It must be properly dated. It should not be either a post-dated cheque or a stale-cheque. If a cheque carries a future date, it becomes a post-dated cheque. If the cheque is presented on the date mentioned in the cheque, the banker need not have any objection to honor it. If the banker honors the cheque before the date mentioned in the cheque, such bank loses statutory protection. In cases of death or mental incapacities or countermands before payment on the checks, the customer may then loose the amount seize. Undated cheques are usually in practice not honored. A stale cheque refers to one which has been in circulation for an unreasonably long period. The custom of bankers in this respect varies. Generally, a cheque is considered stale when it has been in circulation for more than six months. Banker does not honor such cheques. However, banker may get confirmation from the drawer and honor cheques which are in circulation for a long time. So, verification of date is very important.
5. Mutilated Cheque: The banker is usually very careful when mutilated cheques are presented for payment. A cheque is said to be mutilated when it has been cut or torn, or when a part of it is missing. Mutilation could occur either accidental or intentional and accidental makeovers is in proper and perfect use. the banker should get the drawer’s confirmation before honoring it. If it is intentional, he should refuse payment. In Scholey Vs Ramsbottom, the banker was held liable for wrong payment of a cheque which was dirty and bore visible marks of mutilation.”
6. Words and Figures: The amount of money indicated on the cheque must be expressed in words, or in words and figures, two of which ought to agree with each other as the bank will refuse to honor the cheque where the amount in words and figures differ, the banker should refuse payment. However, whenever there is a discrepancy online, difference between the amount in words and figures; the amount in words is the amount payable. If the banker returns the cheque, he should make a remark ‘amount in words and figures differ.
7. Alterations and Overwriting: The banker should see whether there is any alteration or over-writing on the cheque and wherever an alteration occurs, it must be confirmed by the drawer by putting his full signature. The banker will be unwilling to pay a cheque containing material alteration without confirmation by the drawer. The banker is expected to exercise reasonable care for the detection of such alterations.
8. Sufficiency of Funds: This is the most basic of the prerequisites when it comes to making mistakes of committing any error of omission banker is to see whether the credit balance in the customer’s account is sufficient to pay the cheque ordered or not. If there is an overdraft agreement, he should see that the limit is not exceeded. The banker should not make part-payment of the cheque. He should pay either full amount or refuse payment. In case of insufficiency of funds, the banker should return the cheque with the remark ‘No Funds’ or ‘Not Sufficient Funds’.
9. Verification of Drawer’s Signature: The banker is saddled with the responsibility of taking the specimen signatures of his customers at the time of opening the account and comparing this to the drawer’s signature on a cheque. This is done in order to check for forgeries and where there is any doubt created in these circumstances, then the bank may refuse to honor the cheque. If there is forgery and there is negligence on the part of the banker to detect the same, there is no protection to the banker.

Duties and Responsibilities of Collecting Banker

1. Due Care and Diligence in the Collection of Cheques: The collecting banker is required to exhibit due care and diligence in collection of cheques presented to him. In case a cheque is entrusted with the banker for collection, he is required to show it to the drawee banker within a reasonable time. Where the collecting banker failed to present the cheque for collection through proper channel within a reasonable time, the customer may suffer loss. In case the collecting banker and the paying banker are in the same bank or where the collecting branch is also the drawee branch, in such a case the collecting banker should present the cheque by the next day. In case the cheque is drawn on a bank in another place, it should be presented on the day after receipt.
2. Serving Notice of Dishonor: Whenever a cheque is dishonored, the collecting banker has the duty of giving notice of the dishonor to his customer within a reasonable time. Pertinent to note that, whenever a cheque is returned for confirmation of endorsement, the customer must be notified otherwise the collecting banker will be liable to their customer for any loss suffered by the client from such failure. Where a cheque is returned by the paying banker for confirmation of endorsement, it is not called dishonor, nonetheless, such incident must be reported to the customer.
3. Agent for Collection: In a situation where the cheque is drawn on a place where the banker is not a member of the ‘clearing-house’, he may employ another banker who is a member of the clearinghouse for the purpose of collecting the cheque. In such a case the banker becomes a substituted agent. An agent, holding an express or implied authority to name another person to act in the business of the agency has accordingly named another person, such a person is a substituted agent. Such an agent shall be taken as the agent of a principal for such part of the work as is entrusted to him.
4. Remittance of Proceeds to the Customer: Where the collecting banker has realized the cheque, the proceeds should thereafter be paid into the customer’s account or treated according to the customer’s direction. Traditionally, the amount is paid to the account of the customer on the customer’s request in writing; the proceeds may be remitted to him by a demand draft. In such circumstances, if the customer gives instructions to his banker, the draft may be forwarded. By doing so, the relationship between principal and agent comes to an end and the new relationship between debtor and creditor will begin.
5. Collection of Bills of Exchange: The collecting bank has no obligation in law to collect bills of exchange on behalf of the customer however banks often give such facility to its customers. In collection of bills, a banker should examine the title of the depositor as the statutory protection. Thus, the collecting banker must examine very carefully the title of his customer towards the bill. In case a new customer comes, the banker should extend this facility to him with a trusted reference.

Summarily, there is no doubt to say that the banker is acting as a mere agent for collection and not in the capacity of a banker. If the customer allows his banker to use the collecting money for its own purpose at present and to repay an equivalent amount on a fixed date in future the contract between the banker and the customer will come to an end.

“The words security means safety or guarantee of any kind, which may be verbal, personal, or in the form of any property. It is essential for a creditor to secure his loan or advances through different securities. Security is a right possessed by a creditor in property or anything to convert the same into cash if the debtor fails to refund the amount advanced with interest.”

Types of securities

Bankers, whenever occasion arises to advance loans, usually demand for the security to be put for the loans requested. There are a wide variety of securities used depending on the nature of the advances issued by the banks. There are however, four types of securities which are as under: –

• Lien
• Pledge
• Mortgage
• Hypothecation

Lien.

Lien which is the first kind of security refers to the right of the bank to hold onto the goods and properties of the borrower until there is a satisfactory settlement for the loan granted. The borrower retains the title of the rightful owners of the goods however, possession is passed on to the lender who has some amount of money he desires to reclaim from the owner of the goods. In the ordinary lien, the creditor merely has only the right to possession of the goods, however, he has no right to sell or dispose the goods of the borrower. The banker’s lien operates different owing to the fact that the banker has a right to sell the good after proper notice. The banker gets the property of the customer as his banker. Thus, papers of money or goods with the banker are not for the purpose other than a lien. The banker takes the possession lawfully. There must not imply or express agreement against the lien.

Pledge

Pledge is another type of securities and it may be defined as:

“Bailment of goods as protection for payment of money owing or act of a promise”.

The borrower is called pledgee and the banker is called pledgor. In situations of pledge, there should be a bailment of goods and the bailment should be on behalf of the debtor or an intending debtor. The delivery of goods is necessary and compulsory for the contract of bailment and the delivery may be actual or constructive. The constructive delivery is made when the bailee puts his lock on the doors of the place storing the pledged goods or merely key of the lock on the place door is received. It is essential that the bailee should return the same goods to the bailer or dispose of them according to his instructions.

Mortgage

Mortgage as another type of security may be defined as

“A mortgage is the reassigning of interest in the particular fixed property for the reason of protection of payment of funds advanced by means of a loan, and presenting of future balanced due, or the act of commitment which maybe rise to a financial liability”.

The transferor may be known as a mortgagor. The transferee may be known as mortgagee. The contract is treated as a mortgage deed.

Hypothecation

Hypothecation is also from one of the types of securities and can be defined as

“A lawful transaction and essential goods are always accessible as security for a balance due without transferring either the property or the possession to the lender”.

Possession and ownership of the goods remain with the borrower and an equitable charge is usually created in favor of the lender. The borrower signs an agreement to give the possession of the goods to the banker whenever the banker requires him to do so. It is possible when the transfer of possession is either inconvenient or impracticable. If the borrower offers raw material or goods in possession as security, the transfer of possession will stop the functioning of the borrowers’ business. The creditor possesses the right of a pledge under the hypothecation deed. The position of the banker under hypothecation is not as safe as under a pledge. If the borrower fails to give the possession of the goods hypothecated, the bank can file a suit in the court of law for the recovery of the amount lent. The advances against hypothecation are risky. The bank should make sure that the party has a good reputation, should check the property regularly and asks the hypothecator to submit periodical reports.

FORGERY

The traditional role of a bank precludes a bank from exercising any right to make payment on a forged or unauthorized signature on a cheque under s 24 of the Bills of Exchange Act 1949 (“BEA 1949”). The bank will be held liable for conversion, a strict liability tort, notwithstanding that the forgery may be a perfect one.

In Marfani & Co Ltd v Midland Bank Ltd, Diplock LJ observed that:

“A banker’s business, of its very nature, exposes him daily to this peril. His contract with his customer requires him to accept possession of cheques delivered to him by his customer, to present them for payment to the banks on which the cheques are drawn, to receive payment of them and to credit    the amount thereof to his own customer’s account, either on receipt of the cheques themselves from the customer, or on receipt of actual payment of the cheques from the banks on which they are drawn. If the customer is not entitled to the cheque which he delivers to his banker for collection, the banker, however innocent and careful he might have been, would at common law be liable to the true owner of the cheque for the amount of which he receives payment, either as damages for conversion or under the cognate cause of action, based historically on assumpsit, for money had and received.”

Commonwealth authorities and the then Supreme Court held that there is duty on the customer to take accurate precautions in the general course of business to prevent forgeries on the part of its servants. The court further held that a customer owes only two principal duties to its banker:

• To refrain from drawing a cheque in such a manner as may facilitate fraud or forgery; and
• To notify the bank immediately upon being apprised of any forgery.

These two duties are sometimes called the Macmillan duty and Greenwood duty. A customer who failed to discharge those duties may be estopped from claiming that the banker wrongfully honored a forged cheque under Section 24 of the Bill of Exchange Act, 1949.

The Section 73A section was inserted into the BEA 1949 by virtue of the Bills of Exchange (Amendment) Act 1998. It came into effect on 1 July 1998. The section reads:

Knowingly or negligently facilitating forgery

Notwithstanding section 24, where a signature on a cheque is forged or placed thereon without the authority of the person whose signature it purports  to be, and that person whose signature it purports to be knowingly or negligently contributes to the forgery or the making of the unauthorized signature, the signature shall operate and shall be deemed to be the signature of the person it purports to be in favor of any person who in good faith pays the cheque or takes the cheque for value.

Under Section 73A, the bank bears the burden of proving the fact that it is entitled to the defense and to do this, the bank needs to prove that:

• The signature on the cheque was perfectly forged.
• The customer whose signature was forged knowingly or negligently contributed to the forgery; and
• The bank paid the cheque in good faith.

Section 73A is applicable when the signature on the cheque was forged. In situation of a corporate account holder which are those who acts through authorized signatories, the words “person whose signature it purports to be” refer to the customer of the bank. In the history and the experience of the court, there is no reported case yet in which the court has discovered a bank customer who knowingly contributed to the forgery of signature on a cheque. However, the defense is intended to protect banks from situations where the customer is somewhat complicit in facilitating the forgery. Most reported decisions on Section 73A are centered on whether displayed differing judicial opinion as to whether it is a mere codification of the Greenwood.

In Malaysia Plastics, Nallini Pathmanathan J (now JCA) held that:

“In determining whether the customer had ‘negligently contributed’ to the forgery, the court is not limited to looking into breaches of the Macmillan duty and the Greenwood duty. There my be some ‘negligent contribution to forgery’, which envisages that someone other than the customer has effected a forgery, and the customer has negligently contributed to that act of forgery.”

In Prima Nova, the Court of Appeal ruled that in as much as the forgery was occasioned by the negligence of the authorized signatories, the bank is automatically protected so long as the payment of the cheque is affected in good faith. The Court of Appeal similarly made it clear that the introduction of Section 73A emptied the courts of the power to the liability of the bank on a claim on forged cheques based on whether the customer observed the Macmillan or the Greenwood duties.

In Panaron Control, the bank’s client appointed a manager who solely oversaw the company’s administrative and financial matters. The bank’s customer threw allegations that the bank had illegally and without mandate 196 forged cheques drawn on the client’s current account. Although it was not established on evidence who had perpetrated the forgery of the cheques and the alteration of the cheque book requisition slips, strong suspicion fell on the manager who had since absconded from his employment. The customer’s statement of account had been doctored to hamper the detection of the forgery. In allowing the bank’s defense under s 73A, the Court of Appeal made these findings:

“The duty of care expected of a customer did extend to cover proper control and supervision of critical staff and to put in place appropriate procedures relating to the access to cheque books and entailed the customer’s periodic checking of its account with the bank. The forgeries of the 196 disputed cheques took place over more than four years (2002 to 2006). These cheques were encashed through the customer’s account and went undetected over that prolonged period. There was no system in place on the customer’s end to protect its monies in the account. Specifically, there was no one else to manage accounts besides the manager and the statements of account were directly sent to Bintulu, and not the customer’s Kuala Lumpur branch”.

The court further held:

“It must be noted that when it relates to instruments relating to Bills of Exchange the threshold requirement for good faith in English law is very low, that is to say, once it is established that the holder took the instrument in good faith, he is entitled to all the rights of a holder in due cause notwithstanding that he was careless, that he made no enquiry, and that he was informed of facts which would have led a reasonable man to make further inquiry, provided, however, that he had no notice of any defect in the transferor’s title (see Jones v Gordon (1877) 2 App Cas 616; Auchteroni & Co v Midland Bank Ltd [1928] All ER Rep 627).”

Thus, although the court had judicially recognized that Section 73A of the Bills of Exchange Act 1949 imposes a duty of care on a customer, the courts while appearing to be sympathetic however unclear in their approach as to when a customer has been negligent in the overall management of its account. In a relatively subjective view, the best way forward will be for the bank to enter an express and clear agreement that imposes an obligation on the customer to promptly verify its monthly statement of account and notify.