AN EVALUATION OF THE OPERATION OF NON-INTEREST BANKING UNDER THE EXISTING LEGAL FRAMEWORK IN NIGERIA

AN EVALUATION OF THE OPERATION OF NON-INTEREST BANKING UNDER THE EXISTING LEGAL FRAMEWORK IN NIGERIA

CHAPTER ONE

GENERAL INTRODUCTION

1.1Background to the Study

This work sought to carry out “an evaluation of operation of non-interest banking under the existing legal framework in Nigeria.” This is in the light of the Guidelines issued by Central

Bank of Nigeria (CBN) on banking operation under the Principles of Islamic Commercial Jurisprudence and non-interest window and branch operations of conventional banks and other financial institutions.^[1] Further to the release of the Guidelines in 2011, CBN issued a banking license to Jaiz Bank Plc in 2011 to operate under the Principles of Islamic Commercial Jurisprudence, which raised some legal issues relating to the operation of noninterest banking system.

The issues involved the power of CBN under Central Bank of Nigeria Act, 2007 and Banks and Other Financial Institutions Act^[2] to issue the license for the operation of Non-interest banking in Nigeria. Some of the issues were raised in the first Nigerian Case on the operation of non-interest bank in Nigeria, Godwin Sunday Ogbaji v. Central Bank of Nigeria & others.³ These also relate to regulatory and supervisory challenges relating to non-interest banking vis-à-vis the provisions of Companies and Allied Matters Act,^[3] Investments and Securities

Act, 2007 and Nigerian Deposit Insurance Corporation Act, 2006.^[4]

Prior to CBN guidelines on Non-Interest Financial Institutions,^[5] banks in Nigeria were based on interest. Black’s Law Dictionary, Eight Edition^[6] defines interest as „Payment a borrower pays a lender for the use of the money‟.  It is different from usury and this distinction was introduced with the passage of Usury Law in 1545 by the British Parliament. A difference between “interest” and “usury” is that the later means “charging illegal high interest”.

Interest, according to Encyclopedia Britannica, „became legalized from the 13^th Century with expansion of trade. Demand for credits increased necessitating a modification of the definition of the term “usury”. In 1545, England fixed a legal maximum interest; any amount in excess of the maximum was usury‟.

Microsoft Encarta Encyclopedia also supports the above in the following words:      “Usury, in law is a payment of interest by a borrower to a lender for the use of money, in excess of the amount fixed by statute.”

Interest, in other words, now stands for any charge paid by a borrower for the use of money within the limit allowed by CBN.

In essence, interest could take either one or two forms of interest – simple or compound. Simple interest is interest computed on the principal and principal alone. Compound interest, on the other hand, is capitalization of interest so that interest itself yields interest. In short, it is interest on both principal and accrued interest. The two forms of interest apply to both loan and overdraft. The case of NIDB v. Olalomi Ind. Ltd.^[7] illustrates what is compound interest.

The Respondent in that case borrowed total sum of N1.7million from the Appellant as term loan and working capital on 31^st December, 1983. Along the line, problem arose between the parties, which led to the Respondent suing the Appellant, claiming damages before the court of first instance. The Appellant then as Defendant counter-claimed inter-alia for total sum of

N290,931,823.08 being the total sum outstanding against the Plaintiff as at 31/3/1996. The Court of Appeal in its considered judgment awarded the claim of the Appellant in spite of the amounts paid by the respondents towards liquidating the debt.

Conventionally, charging interest is legalized depending on the discipline of advocate. Moralists (philosophers concerned with the principles of morality) on the other hand, questioned why interest should be charged with equally very weighty arguments. Therefore, from time immemorial, disputes between banks and their customers revolve around legitimacy to charge interest, at what rate, that is simple or compound and whether the rate could be varied by a bank without the customer‟s consent. Disputes also often arise where terms have not been agreed upon between the parties. This is so because an overdraft could result with or without any formality as decided in the cases of Bank of the North Ltd v.

Bernard^[8] and National Bank Ltd v. Olatunji^[9].

Generally, a banker is entitled to charge interest simple or compound based on an agreement, custom or acquiescence by customer. In the case of Union Bank of Nigeria Plc v. Sax Nig. Ltd.^[10] the Court of Appeal held that a banker has the right to charge interest on all overdrafts and that when considering whether interest is payable on overdrafts, Nigerian Courts must have regards to the custom of bankers in Nigeria. Also the Court of A ppeal in the case of Suberu v. Cooperative Bank Ltd.^[11] held as follows: “A bank is empowered to charge interest on loans or overdraft on the basis that there is a custom to that effect , or that the customer has impliedly consented where, without protest, he allows his account to be debited.”

The position has crystallized such that the Court observed that: “A bank has power to charge compound interest on loans or other advances granted to a customer even where there was no express agreement on the rate of interest to be charged. This is because the customer is taken to impliedly consent to an interest to be charged to his account.”

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AN EVALUATION OF THE OPERATION OF NON-INTEREST BANKING UNDER THE EXISTING LEGAL FRAMEWORK IN NIGERIA