Banking Reform in Nigeria

Topics: Bank, Banking, Fractional-reserve banking Pages: 8 (3093 words) Published: May 7, 2011
A formal legal structure to banking in Nigeria is a relatively recent invention. Prior to 1952 there was no legislation governing the banking system in Nigeria. The British Bank of West Africa (BBWA) started operating in Nigeria by the year 1892. After the BBWA, Barclays Bank became the second expatriate bank to operate in Nigeria by the year 1917. The first indigenous bank, The Bank of Nigeria was founded in the year 1933 and also operated successfully. After the World War 11, British rule over Nigeria weakened with the passage of the 1946 Constitution that gave majority of the seats in the National Assembly to native Nigerians. The Nigerian government began to regulate banking with passage of the Bank Ordinance of 1952. A motivation for the passage of the 1952 Ordinance was the failure of 21 of 25 Nigerian banks in the period from 1947 to 1952. The creation of the Central Bank Ordinance of 1958 further strengthened the bank regulatory structure of Nigeria. The Central Bank began full operations on July 1, 1959. The 1960s and 1970s saw more financial institutions being created and a greater role of Nigerian government in regulating and owning banks in Nigeria. The Nigerian government took ownership of 60% of the equity in expatriate banks operating in Nigeria, including First Bank, United Bank of Africa. Until 1979, banks predominately owned by the federal government dominated the Nigerian banking industry. After 1979, privately held banks began to emerge again in Nigeria, but the federal government still dominated banking till the introduction of the Structural Adjustment Program. In 1986, the Nigerian government, as a condition of an agreement to borrow from the International Monetary Fund, introduced a structural Adjustment Program that generally required economic liberalization and decreased government regulation and ownership in much of the economy. Bank licensing requirements were significantly eased resulting in a large increase in the number of banks operating in Nigeria. From 1985 – 1992, the number of banks increased from 40 – 120 banks. During this period in 1988, the Nigerian Deposit Insurance Corporation was created to offer deposit insurance to depositors in failed banks. Later in 1991, the Bank and other Financial Institutions Decree was enacted and brought the supervision and regulation of all Financial Institutions, not just banks under the Central Bank of Nigeria. Before then, supervision of non-banks was shared between CBN AND THE Ministry of Finance.

The current reform effort by Governor Sanusi follows a significant reform effort begun by his predecessor Charles Soludo in 2004 that resulted in the consolidation of the banking industry in Nigeria. Charles Soludo took office as Governor of the Central Bank of Nigeria in June 2004. The following month Soludo announced a new policy to increase the minimum paid in capital of banks to 25 billion naira (US$ 173 million) from 2 billion naira (US$ 14 million). Banks were required to obtain this capital by the end of December 2005, roughly 18 months from the policy announcement. The clear intent of the policy was to consolidate the existing banks into fewer, larger, and financially stronger banks. In 2004, the banking industry of Nigeria consisted of 89 banks. The industry was fragmented into relatively small, weakly capitalized banks with most banks having paid in capital of US $10 million or less. The best capitalized bank had capital of US $240 million as compared to Malaysia where the least capitalized bank had capital of US $526 million at the time. Most of the smaller banks were family-owned and privately held. However, the industry was heavily concentrated, with the ten largest banks controlling 50% of the assets and deposits in the Nigerian banking system. The result of this new, much larger capital requirement was the consolidation of banks into larger entities. During this 18...
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