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1951 Has Become Known As the Era of 'Free-Banking' in Nigeria, Because of the Complete Absence of Laws Go'

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1951 Has Become Known As the Era of 'Free-Banking' in Nigeria, Because of the Complete Absence of Laws Go' - Journal of Finance And Economic Research Vol. 2, No.1, March 2009 SCOPE AND EFFICACY OF BANKING SECTOR REFORMS IN NIGERIA SINCE THE 1950S: AN APPRAISAL. By Hamilton O. Isu, Ph.D Professor of Banking, Finance and Forecasting Abia State University Uturu. ABSTRACT Over the past six decad.__s, many changes have taken place in Nigeria's banking sector. In fact, many stakeholders believe that our banks lack the capacity and durability to compete in the international banking space, and that the system is increasingly vel}' marginal relative to the potential of the economy. Many banks have shown signs of perennialzmder--capitali::ation, are perennially under-controlled, under• supervised, and under-regulated. Some of the banks were unable to withstand mildfinancial shock" (IS shown in the frequent technical insolvencies pervading their existence and operations. 171ispaper takes incisive excursions into the issues that have necessitated periodic reforms of the banking sector, 'i.:, critical assessments of the reform strategies and results. Keywords: Banks, Financial System, Banking Sector,Capitalization, Systemic Risk, Insolvency. Non-performing Loans, Undercapitalization. 1.0 INTRODUCTION. Banking institutions occupy a central position in the financial system of any economy. Banks, as we know. act as intermediaries for the efficient transfer of resources from surplus to deficit units, through the normal processes of intermediation. One recalls that formal commercial banking activities began in Nigeria iJ:1 189). when the South Africa based African Banking Corporation (ABC) opened a branch in Lagos. TIle opening of (1 branch of Barclays Dank DCO (1-[(y\'; Urjz;.t1 Bank of Nigeria) in Lagos in J 917 was a significant event. The two expatriate commercial banks monopoiizeo banking business in Nigeria until 1927 when the first indigenous bank Industrial and Commercial Bank Limited was established (CBN - F and E Review 1968). The period from 1892 - 1951 has become known as the era of 'free-banking' in Nigeria, because of the complete absence of laws go'. erning the establishment and management 0:( banks. According to Nwankwo, 1972, the establishment of banks in those days was not a function of the capacity of the economy to effectively absorb the sharp growth in financial assets [Jut was more related to the political expediency and strategic idiosyncrasies that pervaded the period. In the case of the establishment of indigenous bunks, it was substantially motivated by nationalistic impulses often at variance with the economic realities. As a result,most of the indigenous banks collapsed in rapid succession owing to incidents of capital inadequacy, fraudulent banking practices, and bad management (Okigbo, 1981). One also recalls that the involvement of government in the ownership of foreign banks brought some unethical conduct into' the' sector, \'v'ith the Federal Government's acquisition of 40% equity shares in the major foreign banks, the Journal of Finance And Economic Research Vol. 2, No.1, March 2009 sector moved from being foreign-dominated, to a banking industry largely colonized by government, who frequently appointed non-professionals as directors. The distress phenomenon in the Nigerian Banking Industry dates back to the early 1930s, when a number of failures and bankruptcies were recorded. The table below highlights the situation in the Banking Sector from 1892 to 1966. ....,.._._ -- ___ ._...,._._ • u;.....,.....,._.. ~.____ ..,._ _ "H0. Co:m.mtt!ciJJ 'M.olJ Ddt -_._._-------------_._-------_~t.ili1h;1-~ ._-,-----,---- 1 Jif:J:i.cHa BMl.I.ni Corpofatioo 189l t L'tthbB4J1k(J(W~rt A('rlel 1854 !. 1t"t~31I.lUlk.D,C.O ... 4. 1,'b<!rn,mtrW ltld Cotnm~ Bttn.'k 1917 19:1i FAilw·itt HlS{) Ii. nl.~Nt!~ti~M~~rl!) &tlx 19~1 r!l.i!~Jili192l! 6. NlIa.ttLlJB.mk ortr"ll!,\M 1933 7. }~i>l~fI(Mt.A&w~ iSH ~. !n" rJt?;C:1!lIJ }';::;;ny !!I;JJ); \}, A!rlom C<ntllJ~ nlal &r:l'k 10. ThIl N~Ilri.m F':um.;.u 1.llc Culiil.nitci.ll Ell.cX Fih+J in l ft53 11. IHUth i.:::.\.II"r«och.Bank 1943 P~f.i.11(l~!);;;;d E-£IliZ!OiAfdc:ila 1%1 1~ }.ii:"t¢l'ni! DBnk lP~2 FSll&J In 121;0 13, P.\=lN'tgenl P.Jio'1 19'::;1 ?:.ired by t.b~ zad ..it. .1~.s-! H. SLw6.ni Rmt;!)( Ui~rl. 1:;151 :::£tit! by tho tnd otJ%~ 1&. ('nl{)l~:r&nl lS51 do lB. Niltlu~Tl\lti~&ai: 19$1 Yl. Ait~ C:...qJjt Balli 1951 18. OnwMd B.-u!kof Nljtqrl\ 1,B61 19. C¥J\t:ru Baoi (It NII:l!N 19.5\ " ZO. rro\'i;tt;!~1I~~ oj Nit;'!'i,ll' 1951 ..*. 2~. Mclropdit..n Bmk or Ni~ti.t 1~5:2 Z~ Unioa &nk: or BriUrJl.MriCi H52 .. 23. Ucit.!-d COOl.lJl(tt(:iol(D1!c1it) &.0): 19t,1 It 2l Coamopcllbin 6~dit l3ank 1952 26. ltun.!and. autk lS~2 2~. Ctou:p ()edit l11d.Az&wtumlB4.nk 1952 Table 1: -- ----- -- _'"-,- - ---- Journal of Finance And Economic Research Vo!. 2, N0.1, ~\1:'2rch 2G09 •• n. 1M1JSta'W &.ok 1952 ~B. WmAfri_&nk 1~62 1903 U. Mt.W1mBw. Now (janqua 1n(~Ntit:teWepour SO. &nq;t6' d. L'A.fdlQ~(!ddcntl1e 1969 Lt'JriqQ' <Xc:td!ni&6 Su~ndcred i~ u("$be.lll1.986 81. &.uk of LatOi l~&' 31 &ri:ni {&ttut-RJyud) BlIllk 1~69 n. &1\k ot tn. N~ 1969 3\1. Am-{ttka 1960 BfiPko! Mm~ wi:b (!;rlthbBJ.al:I)fVfCith~lC&.in 86, ~ Milt)hhttm &At t$el 196$. sa, R'Uli oI milie. 1{fS1 M. ArJlb &uk 1~G2 8&. ~~~itii"! &nk otW~t~m Nilo'ftia 1952 S9. Ci>~pcIlIti;·tlki.ni o!~mNi~ 1~6~ ISOURCE: Commercial Banking in Nigeria, Edited by Oyejide and Soyade, University of Ibadan Press. pp.64/6S.] Important to any interpretation of commercial banks' activities in the period frcrn 195) - 1901!, ~':: the fact that the Central Bank of Nigeria was in fact established at the bes:nni:::f; of ~1:c:-.':...i.')(1. Apart from this leading to a strengthening of banking business ill Nigeria; the eEN lias, within (lis relatively short period succeeded in localizing a substantial part of the activities of banks. While the role of banking in the economy appears to be declining in some industrial countries, banks continue to dominate the financial systems of most developing and transition economies. A sound banking system is important because of the role it plays in the economy notably in the areas 1)[ intermediation, maturity, transformation; faciiitating payment 110ViS; credit allocation, and maintaining financial discipline among borrowers. Banks provide important positive externalities as gatherers of savings, allocators of resources and providers of liquidity (L.1d payment services. E'VC!l in economies with highly developed financialmarkec., b:IL:'_::; rcm,;;~ '_'_: the centre of economic and financial activity, and stand apart from ether ;n~'tih_,Lions':3 Ti/!/t~'il_:~;-' 1:prov'Yiders 0' f pay-'~ ........men..L~ t... ~"el'\II'CCS. ("'''",::)' well as", the,1,,;;.-. f_ulc_ \,_"rum1..1.1....riJ ...._".....m.l.one.i.J ....tarv, ("l,~ . ..LD'01}" ...;rv'- ".,; _11'~11'1;.:_:_:","' l '" ~CO"" ~'(...:"....;;'-',,,'-...-, -rL-_:'c ...~ vulner- .. abilit~ .v) '" of'_ ba.....(nki ..s. leaUds...Ito PUbl11'C ..001'\)....'''" JJ..iC"_"' c_.,onjc ......ernl_"_s_,~ lL''', ."r.....·V,....1 tl.J~, e [\1"......t t.n1.".•.." _"~~':'O""...:-.,.....j:'.,I\...-'" ".....-..:';"!I.. ..'~- ""'?,;,.. _r._::...:·;... ;',~, ('"SI" SOC'l'atc~C, !witv s. h bank. \.._ 14 failures • Thes "'""e .n, eeb,ati .. l \--e· e.....xterL. naliti"t._es.fl. '-''' IJ' {_-oJ'("I[\...- 'V~1i1'1P_1..l' '( ~'."';1,J•.\•.1:-_ ,,~1.L.";l;~1,~'1...;;"..,..'--"~ __cr,:._-',.:~_";,--qt-,.'{T <I .--...... harm other institutions and economic agents. Banks, particularly Deposit Ivlc·r::::y 5a:l:.s (I'll'll are therefore derivative institutions in that their health reflects the health (.f ';~;'~::'i;us~CCt-,?1'::, which in turn reflects the health of the economy 2S a whole. 1.10 Trends in Financial Sector Reforms in Nigeria Prior to Nigeria's political independence in 1960, not less than 33 different commercial banks were registered in Nigeria. By 1959 however, only 8 banks; four '(4) expatriates and four (4) indigenous, with a' total of 160 blanches were operating. Those that failed durint1lhe 'periOd were ,r •• •• ,',i.il.,; • .' ,'. Journal of Finance And Economic Research Vol. 2, No.1, March 2009 largely those with problems of inadequate capital, fraudulent practices and bad management. The rate of bank failure before 1959 led to the enactment of the Banking Ordinance in 1951, which was the first effort directed at regulating banking business in Nigeria (Terriba, 1969). Thus with the establishment of the CBN in 1959, the Nigerian Financial System experienced some remarkable growth, in terms of the number of institutions and the array of services offered. The banking culture had started to permeate and crystallize (Ebhodaghe, 1996). One can say that interest in banking matters surged in the 1980s and beyond when many banks in the developed and developing world experienced considerable difficulties. During these periods, the number of bank failures increased sharply and banks in general experienced increasing problem loans and dwindling capital. Numerous studies have proposed explanations for the deterioration of hank asset quality (Bernanke and Blinder 1992; Caprio and Klingebiel, 2003; Brown, 1962). Three theoretical explanations have been advanced for the increased riskiness of banks: '" Increased incentives for risk taking by shareholders, '" Desperate attempts of bank managers to increase profit by assuming additional risks, ,;, Increased unexpected economic shocks in many regions of the 'world, given inbuilt economic :nterrelationships.
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