Pre-independence period
The first bank in Nigeria, the Bank of British West Africa, was established in 1894 by colonial trading companies. The present First Bank traces its roots to that institution. Several foreign banks soon followed, and in 1928 the first truly indigenous bank was established, followed by 24 others in the years to 1952.
During the 1950s, however, the colonial Government became more concerned about the soundness of many of the banks and it enacted a new Banking Ordinance, which introduced a system of licensing, minimum capital requirements, reserve and liquidity requirements, and banking supervision. As a result, 21 of the indigenous banks collapsed. At independence in 1960 only 13 commercial banks were operating in the country.
Independence and national control
With the approach of independence in 1960, the country took measures to effect national control over the currency and foreign-exchange market. The Central Bank of Nigeria was established in 1958, and in 1961 the Lagos Stock Exchange Act created the framework for capital-market development. In 1962 the Exchange Control Act provided the Government with control over capital movements in and out of Nigeria.
During the 1960s, as one of the Government’s measures to strengthen further its control of the banking system, the 1968 Companies Decree obliged foreign banks to incorporate under Nigerian law. Development-finance companies were also created to supply medium- and long-term funds to industry and agriculture. Many of the new states created at this time also established their own banks.
Indigenization in the 1970s
With the Indigenization Decree of 1973 the Government embarked on a major policy initiative to indigenize economic development. It acquired 40 per cent of the shares of the three largest foreign-owned banks, Barclays, Standard and the United Bank for Africa. In a second wave of indigenization, in 1977, the holdings of foreign banks were further reduced to 40 per cent or less of the shares in all banks.
Merchant banking was introduced at this time, with five such banks established between 1973 and 1975. Thereafter and up to 1986 the banking system grew at a slow but steady rate, with on average one new bank per year. By 1986 the number of commercial banks had grown to 29 and merchant banks to 12.
The banking explosion of the late 1980s
By 1987 the Government was pursuing a liberal bank-licensing policy, with the result that by the end of 1990 there were 106 licensed banks. Most of the new banks were privately owned, with a few belonging to state governments. The main spur for the rapid entry of new banks at this time, when the economy was faltering, was the access to profits from the foreign-exchange distribution system available to owners of banks. In late 1986 the licensing system for imports was abolished, and a new foreign-exchange allocation system was introduced in the form of a weekly auction. Under the new system banks could make a risk-free gross return on equity of over 300 per cent.
The bank failures of the 1990s
In early 1991 the financial system comprised 122 commercial and merchant banks with a total of over 2,000 braches. About 80 per cent of the assets of the commercial banks and 45 per cent of the assets of the merchant banks were majority-owned or controlled by governmental agencies. In this period the banking sector began to exhibit signs of weakness. The Central Bank of Nigeria (CBN) determined that nine banks were technically insolvent as of November 1990 - probably an under-estimate. There was a steady decline in portfolio quality, owing in part to the harsh economic environment in which the banks were operating, including high interest rates, as well as to the poor management of many banks characterized by fraud and insider abuse. Many banks resorted to reporting “fictitious profits” in their annual accounts.
When CBN issued its “prudential guidelines for licensed banks” in November 1990, setting mandatory and quantitative requirements for provision for bad debts on non-performing loans, many banks were in severe crisis. On average, between 40 to 50 per cent of their loan portfolios had non-performing status. As a result, 34 banks were forced to close their doors between 1994 and 2000 when the Central Bank refused to renew their licenses. One further bank, Savannah Bank (one of the country’s 10 largest), had its licence revoked in 2002, and another, Peak Merchant Bank, in 2003. Before its dissolution in 1999 the Failed Banks Tribunal, which was established by the Federal Government to try cases of bank malpractice, had a total of 2,464 cases pending. The Failed Banks Act under which the Tribunal had been set up, though still in force, has had its unresolved cases, both civil and criminal, transferred to the jurisdiction of the Federal High Court. Even though the problem of non-performing loans continues to cause intermittent distress in the system, the actions of the Failed Banks Tribunal went a long way to sanitize the system. There has been a remarkable improvement in bank compliance with the prudential guidelines.
The financial system today
The Nigerian banking sector has witnessed remarkable changes since the late 1990s in terms of its ownership structure and scale and the dynamism of operations, driven largely by the deregulation of the financial sector and the increasing impact of globalization in the financial market place. CBN reports that as at end June 2004 there were 89 deposit-money banks in the country, comprising institutions of various sizes and degrees of soundness. The 10 largest banks account for about 50 per cent of the industry’s total assets and liabilities, and the largest bank has a capital base of about $240 million, compared to $526 million for the smallest bank in Malaysia. Most banks in Nigeria have a capitalization of less than $10 million. In the latest CBN assessment of all banks 62 were classified as sound/satisfactory, 14 as marginal, and 11 as unsound, while two had rendered no returns.
The current banking-sector reforms
On 6 July 2004 the Central Bank announced a 13-point reform programme for banks operating in Nigeria. The following are some of the salient features of this programme:
vi. Minimum capital requirement of 25 billion naira which must be met on or before 31 December 2005. Foreign-owned banks have not been exempted from this Central Bank measure;
vii. Consolidation of banking institutions through mergers and acquisitions;
ix. Accelerated completion of the electronic Financial Analysis and Surveillance System (e- FASS) to enhance the process of rendering returns by banks and other financial institutions to the supervisory authorities. And the establishment of an Asset Management Company as an important vehicle for resolution of distress in the banking system.
The case for this radical reform agenda was predicated on the systemic distress to which the banking system was periodically subject, which was due to a number of factors, principally the relatively weak capital base of many banks in the system. Many banks continue to suffer the distress permeating the system, which leads periodically to insolvency and the consequent periodic bank failures. Thus, even though the Nigerian financial system is one of the largest in sub-Saharan Africa, overall the financial system is relatively shallow and does not support the real sector effectively. It is dominated overwhelmingly by banks, and there is relatively little non- bank financial intermediation. The banking system is therefore not currently in a position to fulfill its potential as a propeller of economic growth and development.
The Central Bank and the Government hope that the banks to emerge from the recapitalization exercise (12 large banks in some official estimates) will be better positioned to play a leading role in meeting the huge financing needs of a growing Nigerian economy in the years ahead. When the measure to increase the required shareholder capital was announced, out of the 89 banks in the country only two already met this target (First Bank and Union Bank), while four others (Union Bank of Africa (UBA), Guaranty Trust Bank, Standard Trust Bank, and Zenith Bank) came close (and Zenith Bank and Guaranty Trust Bank have since increased their capital base to reach the new minimum, as have Access Bank and Oceanic Bank).
Mergers and closures (or conversions from banks into non-banking financial advisors) were intended, and have indeed happened. For example, the country’s third largest bank, UBA, merged with the fifth largest, Standard Trust Bank. Intercontinental Bank, Equity Bank of Nigeria, Gateway Bank and Global Bank merged into one new bank named Intercontinental Group. Allstates Trust Bank, Universal Trust Bank, Lion Bank of Nigeria and Hallmark Bank merged under the name of First Amalgated Bank. First Atlantic Bank, Assurance Bank, Manny Bank and Guardian Express Bank have formed Astrabank. Prudent Bank Magnum Trust Bank, Eko International Bank, NBM Bank and Trust Bank of Africa are merging into Sterling Bank. Guaranty Trust Bank will take over a smaller enterprise, Inland Bank. Union Bank acquired Gulf Bank, Broad Bank, Universal Trust Bank and Union Merchant Bank. And several more mergers will occur.
Banking supervision in Nigeria
The Central Bank of Nigeria is the chief bank regulatory and supervisory authority in Nigeria. Nigerian banks operate under banking regulations issued by CBN. In 1989 the Nigeria Deposit Insurance Corporation (NDIC) was established to protect depositors from problems arising from bank failures. The Banks and Other Financial Institutions Decree of 1991 (replacing the Banking Decree of 1969), the Central Bank of Nigeria Decree of 1991 (replacing the Central Bank of Nigeria Act of 1958) and the Nigeria Deposit Insurance Corporation Decree of 1988 provide Nigerian bank regulators with wide-ranging discretionary powers. The Nigeria Deposit Insurance Corporation (NDIC) provides deposit insurance and related services for deposit-taking institutions in order to promote confidence in the banking system. In conjunction with the Central Bank NDIC carries out routine as well as special examination of banks, though it appears that there is no clearly delineated division of responsibility between the two institutions in the performance of these functions.
The 1991 Banks and Other Financial Institutions Act (BOFIA), as amended, brought the activities of the large number of financial institutions (deposit-money banks, finance companies, discount houses, mortgage institutions, bureaux de change, community banks, and the specialized non- deposit-taking banks, known as development-finance institutions) into the regulatory and supervisory purview of CBN. The law accords CBN the power to determine capital requirements, issue banking licences and revoke the licence of any bank, and to remove errant directors and principal officers from any bank.