PRACTICE OF BANKING

COVENANT UNIVERSITY M.SC/ACIB

PROGRAMME
 Introduction
 Practice of Banking (POB) is a course that interfaces
with law, banking methods and processes and
regulations of financial institutions.
 Because of the large legal content in the course, we
approach the course from legal perspectives and
understanding and adopt the legal approach in dealing
with issues emanating from scenarios-based questions
that forms the bulk of issues in POB Examination.
 In summary, in dealing with issues in Practice of
Banking, we must think like lawyers and not as
bankers. As the saying goes in POB, it is not what
bankers think that matters, but what the law says.
 Key Deliverables
 It is expected that at the end of the course, students
should:
a. Acquire full understanding of banking principles,
procedures and practices with particular reference to
Nigeria
b. Understand the rules governing banker-customer
relationship and the legal consequences that underpin
the relationship
c. Understand the different types of account relationships
and rules governing their conduct and operations and
legal consequences that attend to each account
relationship
a. Understandthe rights and duties of bankers and
customers in Nigeria and legal consequences that
may arise from breach of such duties.
b. Developcritical and legal thinking on emerging
banking practices and issues.
 Recommended Texts
1. Ajayi, O. A. (2002), Law and Practice of Banking, Ibadan:
Bash-Moses Printing Co.
2. Ajayi, O.A. (2007), Banking: Law and Ethics, Ibadan: Bash-
Moses Printing Co.
3. Asuzu, C.C.N. (1996), Practice of Banking I/Banking
Operations for Tertiary Institutions, Awka: J. F. Publishers.
4. Cowdel, P. (1996), Law and Practice, London: CIB.
5. Enyinnaya, C. (1992), Practical Banking Operations, Lagos:
Pace Publishers.
6. Enyinnaya, C. (1997), Practice of Banking II for Tertiary
Institutions, Aba: Model Academic Publishers.
7. Layi, A. (2005), Law and Practice of Banking, Ibadan: Heinemann
Educational Books.
8. Mather, L.C. (1992), Banker/Customer Relationship and the
Accounts of Personal Customers, London: Water Loo Limited.
9. Robert, G. (2001), Law Relating to Financial Services, Canterbury:
Financial World Publishing.
Further Reading
1. Adeboye, T.O. (1994) Model Questions and Answers on Practice of
Banking, Ilorin: Dabof Books Ltd.
2. Esezobor, E. A. (2006) Questions & Answers on Practice of Banking
Section A, Lagos: CIBN Press Ltd.
 
 Banker-Customer Relationship
 Banker-customer relationship shares major
characteristic of any contractual transaction which
exist between; principal and agent, bailor and bailee,
buyer and seller, hirer and hireree, and debtor-
creditor relationship.
 Although these relationships underpin banker-
customer relationship, there are several uniqueness in
legal application to the practice of banking.
 To understand these uniqueness, we must first of all
understand the meaning of the wordings used to
phrase the relationship.
 What is a Bank?
 A bank is a person or company carrying on the business of
receiving monies and collecting drafts for customers
subject to the obligation of honouring cheques drawn
upon from time to time by customers to the extent of the
amount available on their account” (Hart Gilbert)
 As a body legally recognized as bank (Chief Abdul Yekini
Ojukutu vs Agbommagbe Bank and 2 other (1966)). (Banks
not subject to the provisions of Money Lenders Act.
 the Banking Ordinance of 1952 defined a bank as “any
company carrying on banking business or using the
word bank or any of its derivatives as part of the title
under which it carries on business”
 Section 61 of BOFID (now Act) 1991 defines bank
business as “the business of receiving monies from
outside sources as deposits sources as deposits
irrespective of the payment of interest or the granting
of money loans, and acceptance of credits or the
purchase of bills and cheques or the purchase and sale
of securities or the incurring of the obligation to acquire
claims in respect of loans prior to their maturity or the
assumption of guarantee and other warranties for the
other or the affecting of transfer and clearing and such
other transactions as the Minister may under the
recommendation of CBN, by order published in the
Gazette designated as banking business”.
 Basedon the above definition, the essential
properties of a bank include;
 Current account must be opened.
 Cheques could be drawn on the bank for
payment.
 Cheques for customers will be collected.
 Provision of finance and other banking
services.
 Who is a Banker?
 The Supreme Court of Nigeria held in Akwule and 10 others
Reginam (1963) that the word banker refers to company
carrying on banking business and not an individual
employee.
 Who is a Bank Customer?
 Some people make subsisting transaction while others
make one-off transaction.
 Conditions to become a bank customer
a. As soon as the bank opens account for someone (Ladbroke
and Company vs Todd-1914
b. The relationship starts as soon the bank agrees to
provide the service (Woods vs Martins Bank Ltd (1958),
where the bank manager gave advice about investment.
c. Duration is not of essence in banker-customer
relationship: Where a bank simply exchanges cheque for
cash for a person who does not maintain an account
with the bank, the person is not a customer (Great
Western Railway Co. vs London and County Banking Co
Ltd.
d. Where an account is opened by fraud (Stoney Stanton
Supplies Coventry vs Midland Bank 1966).
 However, some have argued that only current account
holders are bank customers because of the provisions of
s.82 of Bills of Exchange Act 1990 “If a banker acts in
good faith and without negligence when collecting
cheque for a customer”.
NATURE OF BANKER-CUSTOMER RELATIONSHIP
 Up until now, banker-customer relationships do not fit
uniquely into any legally pattern of relationship.
Banker and Creditor Relationship:
 A bank is not a trustee for money deposited and is
therefore not accountable to the customer for its use.
 In accepting deposit, the bank is not an agent, and
therefore not bound to deal with it as the property of the
principal.
 Money deposited with the bank is not safe custody and
therefore, the customer will not be entitled to receive the
same form or kind of money deposited during withdrawal.
 
Note: In debtor creditor relationship, the general rule is
that a debtor must seek out his creditor and pay him.
This does not apply in banker customer relationship.
 One important question to resolve is at what point
does the bank assume the position of a debtor? This
was resolved in the case of Balmoral Supermarket
Ltd v Bank of New Zealand (1974)
 Agency Relationship: The bank
 Acting upon the customer’s instruction as regards the
investment of his monies.
 Collecting proceeds of cheque for the customer.
 Paying his cheques which are presented through the
clearing system.
 Delivering safe custody items on the customer’s authority.

Note: Under the doctrine of equitable remedy, a bank acting

as an agent will not have any other obligation imposed on it
other than that of an agent.
 In Box and Others v Barclays Bank PLC (1998), three
separate plaintiffs placed money with a finance
company, Sylcon Finance Limited. Syclon paid this
money into their account at Barclays Bank. At all times
of deposits, the account was overdrawn although none of
plaintiffs were aware. The finance company was later
wound-up. The plaintiffs after proving as creditors,
received on small portion of their deposits. They then
brought action against the banker as banker of the
finance company.
 They argue that they have a right to claim against the
bank in common law for money received. The court held
that in order to do so, they would have established that
the bank received their money.
 Since the relationship between the plaintiffs and
Sylcon was contractually that of debtor and creditor
and not that of trustee and beneficiary, the claim
could not succeed.
 The plaintiff also tried to argue that they could rely on
equitable remedy to trace their money into the bank
account through a tracing order. However, equitable
remedy requires that there must be an initial fiduciary
relationship between the person claiming the trace and
the person claiming to trace and the person who is said
to have misapplied that person’s money. In both
cases the plaintiffs failed.
 Contract of Bailment, Trusteeship and
Executorship
 Bailment: A contract created when a customer
delivers to the bank and the bank accepts an item
for safe custody. Here the bank is a bailee.
 Trustee/Executorship: Bankers do act as executors of
will and if the exercise prolonged, the bank becomes
a trustee. In some cases, the bank may be asked to
administer the trust property.
 Bankers Duties and Rights

Duties of the Banker:

 The duties were laid down in Joachimson v Swiss Bank Corporation (1921)
 To collect cash, cheques and other payable instrument by its customers
 To abide by customers’ written mandate: provided that;
a. The account is in fund or credit arrangement has already been agreed on.
b. The mandate is regularly drawn
c. There is no legal impediment towards payment (Osawaye v National Bank of
Nigeria, 1973).
 To conduct the account in a condition of secrecy, subject to some exceptions
 To give reasonable notice before closing the accounts
 To draw the customers attention to any suspicious adverse events.
 To provide the customer with statement of account regularly.
 Rights of the Bank

 To charge reasonable interest on credit facilities and

reasonable commission for other services rendered
(Pappa v Bank of West Africa, 1933) It was held that
10% per annum compound interest payable on monthly
basis was fair and reasonable.
 To obtain reimbursement from the customer in respect
of expenses incurred on behalf of the customer.
Example: special clearing.
 To exercise automatic right of set-off as may be to his
advantage and as may be permitted by law and
practice of banking.
 To use moneys deposited without recourse to the
customer.
 To give reasonable notice before closing the accounts
 To recall over draft permitted on the customer when it is
the best course of action.
 To exercise right of lien on its customers properties in it
possession provided there is no agreement that is
inconsistent with lien subject to the exceptions in lien.
 To refuse payment of any cheque or other payment
orders not properly drawn and even if properly drawn, to
refuse payment if there is any legal bar towards payment
whether the customer is aware or not.
 Rights and Duties of the Customer
 Rights of the Customer is the opposite reflection of
the duties of a banker.
Duties of the Customer
a. To give written instructions to the bank if he seeks to
withdraw his money.
b. To inform the bank without delay of any suspicious
dealings on the account as may come to his
knowledge.
c. To draw his cheque with care and diligence and in a
manner that will not facilitate fraud
d. To pay reasonable commission and interest on
borrowed funds as agreed.
 Banker Customer Relationship- Duty of Secrecy

 The obligation of a bank is primarily to its customers.

This was reinforced in the case of Tassell v Cooper
(1850), where it was decided that third party cannot
interfere between bank and its customer.
 The only available to a third party is to apply to the
court for an interim injunction restraining the bank
from paying any out to the customer and the bank can
join as defendant.
 This duty is a legal one and extends to all information
the bank may come across either directly or indirectly.
 The case of Tournier v National Provincial and Union
bank of England ltd (1924) is the leading case on duty
of secrecy.
 In April 1922, Tournier’s account was overdrawn
by 9.8 pounds and he agreed to settle this on
weekly installment of 1 pound. When he breached
the promise, the bank manger called his employer
to seek for his address. In the process, he
revealed the overdrawn account and also went
further to disclose the Tournier engaged in
betting. For this, his employment was not
renewed.
 The court held that the manager owe the
customer the duty of secrecy, however the duty is
not absolute but qualified.
 The following are circumstances where the bank can
disclose;
1) Disclosure under compulsion of the law
2) Disclosure in the public interest
3) By customer’s express and implied consent
4) In the interest of the bank