The Nigerian banking industry has come a very long way since the country became a sovereign state on 1 October 1960. Little of the necessary banking infrastructure was in place even a year prior to independence and there was a long learning process for the first few years as an independent nation.
The years of coup and counter-coup were accompanied by similar levels of instability in the banking sector but comprehensive reforms after the turn of the millennium have provided lasting benefits and have now created some of Africa’s biggest and strongest banks.
Like most African colonies, Nigeria lacked a lot of the organisations required for independent government and financial management, so the required institutions were hastily set up in the run-up to independence, or in some cases even once they had actually become sovereign states. Attempts to set up Nigerian-owned banks prior to 1960 were generally short-lived, sometimes because of mismanagement but also because they lacked the same access to international financial markets as British-owned banks.
Although there was hardly an even playing field between British and Nigerian banks, the colonial government did actually order an investigation into the collapse of Nigerian-owned banks that resulted in the country’s first comprehensive banking legislation, which was passed in 1952, and which required banking licences for all operators.
However, regulation remained the task of the Financial Secretary, who reported to the Governor-General, until the Central Bank of Nigeria (CBN) was set up in 1959, one year before Nigeria’s independence. The CBN’s powers were gradually strengthened during the first post-independence decade.
Nigeria and the Nigerian banking sector gradually took on more and more characteristics of an independent nation, with various adaptations of the 1952 legislation, culminating in the Nigerian naira replacing the Nigerian pound in 1973.
It was not until 1969 that the colonial-era legislation was replaced by laws entirely devised by an independent government of Nigeria, although even then some of the basic tenets of the colonial-era laws were retained.
And it was not until 1968 that banks operating in Nigeria were required to be incorporated in the country itself, making them subject to Nigerian law. The next big legislative change was in 1977 when a minimum of 60% of the equity of any bank had to be owned by Nigerians, prompting the sale of shares to Nigerians to allow them to continue operating.
Too many banks
The main problem during the later decades of the twentieth century was not one of too few Nigerian-owned banks but rather too many. All required operating licences but the thresholds for acquiring these were generally too low and most banks were undercapitalised.
As in most of Sub-Saharan Africa, Nigerian banks targeted more wealthy customers and large corporate clients rather than mass banking penetration, so they had too few customers to share among them.
However, there was one big element of progress in the early independence decades – the growing number of well qualified and experienced Nigerian bankers taking over managerial roles from Europeans.
Many banks had very high minimum deposit levels, which dissuaded most Nigerians from opening accounts. In 1990, the government tried to encourage the formation of community banks, particularly in rural areas, that could provide accounts for non-governmental organisations, cooperatives, trade unions and farming collectives by providing finance to launch new accounts to be provided by commercial banks.
There was also too little oversight of bank executives, enabling both low management standards and financial misconduct is some cases. There were various cases of fraud, while lending was often not backed by sufficient collateral.
Police forces and other investigating authorities complained that the sheer number of banks had made it difficult for them to investigate all fraud allegations. Moreover, Nigeria became a watchword for banking scams around the turn of the millennium.
This is a pattern that has been repeated across the world, as it generally takes decades for new banking sectors to stabilise and for professional standards to take deeper root.
Nigeria’s intense political instability from the 1970s on did not help, as governments paid more attention to surviving than they did to banking reform. At the same time, they became over reliant on oil revenues, ignoring wider economic development, which would have required a more effective banking sector.
Through the 1980s and 1990s it became clear that there was an unhelpful combination of inadequate banking sector oversight, which allowed financial irregularities to go uncontrolled and unpunished, and complex regulation that stymied innovation and investment in expanding existing banks or new ones.
The early reforms
A variety of regulatory organisations were set up to increase confidence in financial services. In 1988, the Securities and Exchange Commission was given the power to regulate and supervise capital markets, while the Nigerian Deposit Insurance Corporation was set up in the same year to protect depositors against bank failure in return for an annual premium on bank liabilities.
However, the international reputation of the country’s banking industry remained poor. After the Financial Action Task Force, a subsidiary of the OECD, placed Nigeria on its blacklist of money laundering countries, and the US threatened to impose sanctions in 2002, Abuja was forced to suppress fraudulent practices and set up a financial crimes’ commission.
The CBN also began to crack down on a practice known as selling ‘free funds’, which is selling forex without any form of accounting or use of hard copy documentation. At least 16 banks found guilty of undertaking illegal forex practices were banned from trading for one year during the first quarter of 2002 alone, effectively forcing some of them to close down.
Some had failed to keep accounts, while others had not paid any tax, but all were forced to repay the profits they had made through illicit practices. One of the country’s biggest banks, Savannah Bank of Nigeria, was closed down following a damning report by an auditor which concluded that the bank was insolvent.
Other changes were designed to improve efficiency rather than tackle fraud. In May 2002, the Nigeria Automated Clearing System was set up to reduce inter-state clearing times to five working days and local clearing to two days, to ease cash flow problems for many businesses. At the same time, the central bank was tasked by government with restricting monetary growth during periods of high inflation.
Turning the corner in 2004
The big turnaround in the industry’s fortunes began in 2004, when CBN governor Charles Soludo embarked on deep-seated banking reforms. The minimum paid-up capital of banks was increased twelvefold, forcing many banks to cease trading or merge with their counterparts.
Bank oversight was greatly tightened and the sanctions for those breaking regulations were increased, with the CBN demanding accurate, transparent and timely bank reports. The CBN began to work with the Economic and Financial Crimes Commission (EFCC) to investigate allegations of money laundering and other types of fraud. The CBN was also given the power to take over failing banks.
The government had taken 60% stakes in foreign banks in the 1970s but 2004 saw the government gradually pull out of direct bank ownership. Yet in the wake of the 2008 global financial crash, the Asset Management Corporation of Nigeria was set up to buy the bad debts of commercial banks, using funding from both the CBN and commercial banks to finance its operations.
The 2004 reforms saw rapid consolidation in the industry, with the number of commercial banks falling from 89 at the start of 2004 to 25 by the end of the following year, and the number of Nigerian banks has hovered around this figure ever since. Many other banks had disappeared when the CBN introduced a minimum capital base of at least N1bn ($8.8m) at the start of 2002.
African Banker magazine was set up following a call by several of the country’s bankers, including Charles Saludo, for a dedicated pan-African banking and finance journal for this critical and expanding industry.
The next big change is already on the way through the dissemination of fintech. While the number of physical bank branches used to be an indication of the penetration of banking services within wider Nigerian society, it has become less important as a greater number of customers use online financial services, increasingly via mobile apps.
The pace of growth in digital banking is expected to have increased as a result of the Covid-19 pandemic, with banks encouraging those previously unwilling or unable to access digital banking services to try them out when they were left with no option because of lockdown branch closures.
Painful reforms have helped to create a smaller cohort of bigger, stronger banks, such as Access Bank, United Bank for Africa (UBA) and Zenith Bank, that gradually climbed their way up the ranks of the African Business Top Banks report of Africa’s biggest banks by market capitalisation.
Nigerian banks have also begun to expand across the rest of the continent, targeting other Anglophone markets in particular. UBA, Guaranty Trust Bank and Access Bank now all operate in Kenya, for example.
The CBN has been criticised during the Covid-19 crisis for refusing to relax its demand that Nigerian banks maintain a minimum cash reserve ratio of 27.5%. Lowering this threshold would have allowed them to improve access to credit at a time when lockdown measures have hit the country’s economy hard.
However, the fact that five of Nigeria’s 24 banks became insolvent as recently as 2009 makes the central bank reluctant – perhaps understandably – to lower its standards.
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