ABOUT THE BOOK
Banking in Nigeria
Authored in 2019
Banking is and has been one of the most regulated industries. In all countries and at all times since the establishment of Banking, governments have impose controls on banking institutions, even when most other business were free to operate, subject only to the statutes and other general rule of law. In Nigeria, the extent of Bank regulation has ranged from the free Banking period of 1892 to 1952 and to the extensive controls since 1969.
The mass failure of indigenous banks in the early 1950s was attributed largely to the absences of an appropriate regulating framework for the operation of Banks; consequently the enactment of the 1952 Banking Ordinance, which ushered in the era of formal control of Banking system in Nigeria.
The period 1952-1959 is often described as free bank era, this period was virtually devoid of regulation, this situation led to mass bank failure, on account of that, the period 1959 to 1985 witnessed several regulation aimed at sanitising banking practice to enable the bank play their role in nation building and development process. By 1985, the economy as a whole, mostly the banking sector had shown such strain that made the shift in the regulatory framework very imperative. In doing this, the two agencies that supervised the activities of banks in Nigeria are the CBN and the NDIC.
The CBN, as the apex bank is responsible for the implementation of monetary policies. By the BOFID 25, 1991, the CBN is charged with the responsibility of monitoring the activities of all licensed banks. The management of monetary policy depends critically on the condition of domestic banking institutions. Monetary policy making and implementation becomes much more complicated when the authorities are faced with widespread insolvency and illiquidity among banks. Thus it is very vital for the CBN to have a hand in the regulation and supervision of banks. The existence of risk of widespread insolvency and distress had, in time past, necessitated the arrangement of short term, special liquidity support by CBN for ailing Banks to promote sound Banking system and protect the interest of depositors.
The NDIC was set up in 1988 by a special Degree to divest the CBN of such direct finance and support to banks facing solvency problem and to act as a support to the CBN in the task of ensuring a sound banking system. The NDIC was established to insure the deposit liabilities of licensed Banks. The primary objective of the NDIC is therefore to assist depositors by preventing bank failure and in the event of bank failure, to protect their interest. In carrying out this function, the NDIC has an important role to play in the monitoring of banks and restructuring of banks in difficulty.
It is believed that by this simple arrangement, there are some overlap or even duplication in the supervisory activities of the CBN and the NDIC. Little wonder therefore when section 54 of BOFID 1991 stated as follows ”the provision of this Decree shall supply without prejudices to the provision of NDIC Decree 1988 and where any of the provisions of this Decree are inconsistent with any provision of that Decree, the provision, of this Decree shall prevail.” This two supervisory agencies have, however established a framework of co-operation that should enhance their effectiveness. They often exchange information and accept each other’s report of examination.
No CBN/NDIC policy prescriptions have turned out exactly the way they were intended. Banks have over the time found it difficult to keep to target set most especially in the areas of growth of money supply. The operators, shareholders and bank management placed their goals and objective as priority and the CBN/NDIC regulatory/supervisory guideline are secondary and when there is conflict, the Banks even prefer to pay fine.
The various manipulations in the policy measures and constant change in the policies only point out the fact that monetary policy as it relate to Bank failure prevention is one of the most poorly understand and appreciated issues in the economy. The CBN introduced to a large extent variety of policy to facilitate stability and sound Banking environment, the de-regulation, foreign exchange management, privatisation, indigenization in the banking industry only resulted in more instability and failure.
Critiques argue therefore that the CBN/NDIC monetary policies and operation has created more problems than solving the problem in the Banking sector. Most of them considered to be very unacceptable the maximum of N50,000.00 to be covered by NDIC as insured to the bank depositors when some depositors invest million of naira in the Banking industry, they are therefore not motivated. In view of all the above, therefore, this book is set out to appraise the impact of the CBN/NDIC on the Nigeria Banking sector as it affect control and or prevention of distress and bank failure.
The main objective of this book is to re-appraise and examine in the context of the Nigeria Banking Industry; how the CBN/NDIC have been able to control distress. In the past years we have witnessed several distress/failure of Bank leading to out right liquidation and this total winding up could result to loss of investment to the general public maintaining bank account with such distressed banks.
What exactly is the role of CBN/NDIC, this and other vital issues shall be dealt with as it affects the Banking sector. Furthermore some key monetary policy(ies) shall not be left out. I shall identify the problem of the banking industry, the causes of distress and shall proffer solution, which if given adequate consideration and implemented will improve banking practice.
This book has in its kitty some hypothesis based on the objective of Monetary Policy of Central Bank of Nigeria (CBN) and Nigeria Deposit Insurance corporation (NDIC) in performance of their duties. These are:
- That implementation of monetary policies and supervision of the financial sector is a necessity;
- That government through CBN/NDIC should regulate the market with the formulation of workable, practicable and indeed effective policy guidelines to eliminate distress in the financial sector;
- That without set out standard of good banking practice as instituted by CBN/NDIC for banks to follows in their dealings, distress will not cease in the banking industry.
This book shall also clearly review and emphasize on the following:
- a) Central Bank of Nigeria; Banking regulation and deregulation from ‘abinitio’ till date, i.e.
1952-1959 – Free banking era;
1960-1985 – Regulation era;
1986-1995 – Deregulation era;
1995 to date – Era of strict control & supervision.
- The role of CBN/NDIC in the banking sector and the move towards distress management and total eradication in the financial sector.
Generally, Bankers, economists, other professionals and the Nigeria public have expressed their opinion on the role and effect of CBN/NDIC in preventing bank distress and failure within the economy. While some has done this verbally at seminal, board meetings, interview, majority has indeed documented their comment/view on the supervisory authorities / bodies as to whether they have in any way JUSTIFIED their existence or rather mainly combating and liquidating banks instead of preventing them from going wrong, to ensured loss of depositors funds and indeed the spill-over or creating instability within the whole economy at large.
Therefore an attempt will be made in this book to set the record straight, clearing doubts and correcting misrepresentations and or wrong assertions.
The legislation or acts that were enacted to ensure that loopholes are closed and stern the tide of bank failure that has occurred within our financial system started as far bank as the enacting of the central bank of Nigeria Act of 1959, which gave legal backing to the establishment of Central Bank of Nigeria.
During the period 1959-1970, several important legislation were enacted; all aimed at promoting and integrating the Nigeria financial system. Five of these include:
- The 1958 ordinance, which became effective in 1959.
- The 1961, 1962, 1964 amendment and the 1969 Banking Decree: this resulting in the development of the money and capital market, emergence of more commercial banks between 1959 and 1962 about seventeen commercial banks were established.
- The 1968 Companies Act required foreign banks operating in the country to be incorporated in the country. Bankers’ regulations during this period were largely prudential which aim at ensuring sound banking practice and protect customers.
- The 1969 Banking Act: This act adjusted the capital requirement for both indigenous and expatriate banks; provided for the time capital deposit Ratio, increase the capital – loan ratio and extended the CBN’s power to include vetting bank’s advertisement and authorizing, opening and open operating and closing of branches and indeed bank amalgamation.
- The Indigenisation Enterprise promotion Decree, 1972 which was amended in 1977, the acquisition of controlling interest (40%) by government in the then existing expatriate bank, (First Bank, Union Bank, UBA). This was in line with the indigenisation programme and the establishment in 1976 of financial System Review Committee to review the whole financial system in order to strengthen the efficiency of the system. It is otherwise referred to as that Okigbo Committee 1976.
CBN/NDIC has really squared up to the situation as regards the Bank practise in Nigeria. There are instances were CBN/NDIC have achieved their objectives and where they failed. Some authorities opined that the stability of monetary policies in Nigeria has not been attained especially after 1987 for example, between 1988 and 1993 monetary growth was far in excess of target, resulting in large exchange rate depreciation and persistent inflationary pressure, federal government deficit kept rising, interest rates and inflation kept rising and there was excess liquidity build up caused by federal government fiscal deficit. Inter Bank rates also declined.
In 1990 government transferred its accounts from the banks to CBN, this simple action triggered off distress in many banks and other financial institution mainly because government parastatal’s funds largely form part of their capital base. The massive sets of regulation introduced between 1986 and several innovation as bank and other financial institution (BOFID, 1991) came out with several new products. These innovations have been largely responsible for the crash of several financial institution and Banks.
Between 1986 and 1993, the number of commercial bank increase from 29 to 66 (an increase of about 127.6% while number of branch increased from 1367 to 1939 and this show an increase of about 41.8 percent. The number of merchant Banks also increase from 12 in 986 to 54 in 1993 (an increase from 12 in 1986 to 54 in 1993 an increase of about 350%) and the number of branches increased from 27 to 84 in the same period which gives us an increase of about 211 percent by December 1991 a total of 338 financial institution had applied for CBN licensing by 1993/94, more than half of that number has gone out of business.
Finally, we should note here that, in cases where CBN/NDIC regulation has failed or described as failure, it is most probably because it was excessive, misdirected, inefficient, pervasive and or wrongly implemented. In regulating banking system therefore, an attempt is made to correct market failure, preserve confidence; monitor and regulate Bank solvency; ensure efficiency system’s stability, competitiveness, diversity of choice and macro economic and social stability.
This is what this book is all about. It is divided into Four Chapters:
Historical Background of Banks, CBN and NDIC in Nigeria
Emergence Of CBN, NDIC And Development Of Banks In Nigeria, And Banking Regulatory Frame Works And The Origin Of Bank Distress And It’s Causes In Nigeria
Research Works Into Insolvency And Illiquidity And Frauds And Forgery In Banks
Summary And Recommendations To Insolvency, Illiquidity And Prevention Of Bank Distress In Nigeria
List Of Distressed Bank In Nigeria. While some wriggled out of the situation while some went into outright liquidation.
This book is a must read. Grap a copy and explore into the Banking institute, the Financial Sector, CBN and NDIC in Nigeria.