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. NIGERIANS RECENT BANKING REFORM 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 month period, there were a number of mergers and acquisitions among Nigerian banks in order to meet this new capital requirement.
In the end, the 89 banks that existed in 2004 decreased to 25 larger, better capitalized banks. Thirteen banks did not meet the deadline for increasing their capital and their banking licenses were revoked. On June 4, 2009, Lamido Sanusi, former managing director of First Bank, took office as Governor of the Central Bank of Nigeria. Early in his term, he empanelled a special joint committee of the Central Bank of Nigeria and the Nigerian Deposit Insurance Corporation to conduct a special examination of all 24 universal banks in Nigeria.
On August 14, 2009, the CBN announced the results of the examination of 10 banks and determined that five banks were insolvent – Oceanic Bank, Union Bank, Afribank, Finbank, and Intercontinental Bank. The aggregate percentage of non-performing loans of these five banks was 40. 81%. In addition, these banks were chronic borrowers at the Expanded Discount Window (“EDW”) of the CBN indicating that they had little cash on hand. To improve the banks’ liquidity, CBN, as the lender of last resort, injected 420 billion naira (roughly US $2. billion) into these banks in the form of a subordinated loan. These banks in aggregate represented significant systemic risk as they held approximately 30% of the deposits in the Nigerian banking system. In addition, the CBN referred the results of their examination to the Economic and Financial Crimes Commission for prosecution of criminal action. For instance, Cecelia Ibru, Managing Director of Oceanic Bank, was accused of fraudulent activity, including allegedly employing staff for the bank through a recruitment firm she controlled and claiming rent for new branches opened by Oceanic.
Other senior executives of the insolvent banks have also been charged with crimes. In an unprecedented move, Sanusi published a list of the names of debtors of non-performing loans held by Nigerian banks. Subsequently, the CBN completed its special examination of the remaining 14 universal banks in Nigeria to determine their solvency. As a result of this audit, on October 3, 2009, the CBN dismissed the CEO’s of three additional insolvent banks – Bank PHB, Spring Bank, and Equatorial Trust Bank – and injected an additional 200 billion naira into these banks.
A fourth bank, Unity Bank, was determined to be insolvent but had sufficient liquidity to meet its current obligations. Similar to the banks receiving capital injections after the August 2009 audit, these three banks received funds through the Expanded Discount Window of the Central Bank of Nigeria in the following amounts: Bank PHB (64 billion naira), Spring (80 billion naira), and Equatorial Trust (56 billion naira of which 30 billion has been repaid). The CBN appointed new managing directors for each of these eight banks.
Sanusi has stated clearly that these actions were not intended as a nationalization of these banks, rather they were intended to prevent a serious disruption of the banking system. Thus far, eight banks have received 620 billion naira or approximately US$ 4. 1 billion from the CBN,34 representing 2. 5% of Nigeria’s entire 2010 GDP of US $ 167 billion. Following the special examination and during the period from December 2008 to December 2009, Nigerian banks wrote off loans equivalent to 66% of their total capital; most of these write offs occurred in the eight banks receiving loans from the CBN.
After the completion of the audits, the CBN itself noted, “We have come to the end of the first phase of the process of restoring financial sector stability . ” The special examination also revealed some banks operating in Nigeria were financially sound. In particular, Access Bank, Zenith Bank, GT Bank, and Firstbank were relatively well capitalized. Besides, the foreign-owned banks operating in Nigeria were similarly examined and found to be sound. These included Stanbic-IBTC, a subsidiary of South African-owned Standard Bank, Standard Chartered Nigeria, Citibank Nigeria, and Ecobank.
Realizing that its dramatic action after the first audit would shake foreign investor confidence in the Nigerian banking system, Governor Sanusi in August 2009 travelled to London to explain these actions to investors and correspondent banks of the affected Nigerian banks. The CBN took the extraordinary action of guaranteeing all foreign credit lines and interbank placements and has extended the guarantee until Dec. 31, 2010. In addition, the CBN under Sanusi’s leadership has also instituted significant changes in accounting practice for Nigerian banks.
In June 2009, Sanusi issued a policy requiring Nigerian banks to adopt a common accounting year for 2009. By year end 2009 all banks must change their accounting years to the calendar year, and all subsidiaries of the parent bank must follow the same accounting year. Different reporting years for Nigerian banks made financial comparison difficult among banks and limited transparency of bank financial results. The CBN’s stated purpose for this policy change was “to further enhance the level playing field in the banking sector post-consolidation. The CBN is also seeking banks to adopt International Financial Reporting Standards (“IFRS”) by the end of 2012. Currently, most banks follow Nigerian GAAP while some Nigerian banks with international operations have issued their 2009 financial statements using IFRS. On January 18, 2010, CBN issued a circular detailing the type and format of financial information that must be disclosed by banks in their annual financial statements. As illustrated by these actions, CBN is aggressively pursuing accounting reforms to improve disclosure to regulators, investors, and depositors regarding the financial health of Nigerian banks.
In January 2010, the CBN issued regulations limiting the terms of CEO’s of banks to a maximum of ten years which will require some sitting CEO’s to resign by July 31, 2010. The intent of the regulation is to improve corporate governance of Nigerian banks by avoiding the “sit-tight syndrome” where bank executives manage the bank as a personal business as opposed to a publicly held corporation accountable to shareholders, depositors, and government regulators. CEO’s are limited to two renewable five year terms and are disqualified from serving as a director for three years after their second term as CEO expires.
The rule applies retroactively. Three currently sitting CEO’s – Tony Elumelu of United Bank of Africa, Jim Ovia of Zenith Bank, and Akinsola Akinfemiwa of Skye Bank – will be required to resign by July 31, 2010. Sanusi expects a similar rule to be imposed on bank auditors and non-executive directors in the near future. This new policy resulted from the special examination discussed earlier that revealed serious corporate governance deficiencies among the insolvent banks.
While some commentators have commented that life directorship is not consistent with company law, others have criticized this policy arguing that its retroactive application is counter to Nigerian law, it usurps the rights of shareholders in electing management, and that there is no evidence linking the length of executive service to fraud committed by corporate executives. Likewise, in March 2010, the Central Bank of Nigeria announced its plans to dismantle a central tenet of banking regulation in Nigeria – the exclusivity of universal banks as the vehicle for conducting banking in Nigeria.
The CBN plans to categorize banks by function and allow a variety of banks to operate in Nigeria with varying levels of capital depending on the bank’s function as opposed to the single current minimum capital of 25 billion naira (approximately US $173 million). The intent is to allow the creation of banks that would serve different market segments, such as small and medium-sized enterprises, and to phase out the “one size fits all” requirement by September 2011. Each type of bank would apply for a different license.
This policy is a fundamental reversal of the consolidation policy of 2005 and is likely to encourage the development of an increased number of financial institutions in Nigeria. Critics of the proposed policy argue that the CBN does not have sufficient regulatory staff, in either number or professional skill, to supervise various types of banks. Similarly, the private sector may not have a sufficient number of trained bank professionals to staff these new types of financial institutions.
SANUSI’S FRAMEWORK FOR BANKING REFORM. The reform program advocated by Sanusi rests on four pillars: (1) enhancing the quality of banks, (2) establishing financial stability, (3) enabling healthy financial sector evolution, and (4) ensuring the financial section contributes to the real economy. In his February speech, Sanusi elaborated on each. Pillar 1: Enhancing the Quality of Banks Under this first pillar, the CBN will create “industrial remedial programs. ” Laws must be enforced, and all criminal cases need to be pursued to completion.
Selective prosecution based on the political influence of the accused can no longer be allowed. The corporate governance of banks must be enhanced. Good governance is good business, and this principle must guide CBN and bank policy. The CBN will issue new corporate governance guidelines, require banks to update their corporate governance statements, and educate board members about their responsibilities. The CBN will create a new amnesty program under which current directors can make full disclosure of any conflicts without penalty.
Banks above a certain size will be required to create international advisory panels on corporate governance. The CBN plans to implement risk-based supervision to international standards and will conduct a systematic review of current banking regulations and guidelines with the goal of raising to “world-class standards the supervision processes, technology and people within the various financial regulators. ” Consumer protection is part of the reform program. The CBN will become the consumer’s advocate and create a consumer protection department within the CBN.
Eventually, this new department will become an independent Nigerian Financial Ombudsman Service. The CBN will transform itself by reorganizing its staff to achieve better supervision of banks and to better disclose its own operations. Pillar 2: Establishing Financial Stability Sanusi notes that Nigeria’s economy has underperformed compared to its potential. As part of maintaining systemic stability, Nigeria must address the volatility of oil prices and must harness its oil resources “for strategic investment purposes. In the past, “privatization [of government-owned enterprises] became a polite name for nepotism and cronyism. ” Sanusi calls for the adoption of “a more interventionist, directional economic policy” in Nigeria. In maintaining systemic stability, the Financial Stability Committee (“FSC”) and Monetary Policy Committee (“MPC”) of the CBN are the primary regulatory vehicles. The FSC will focus onmaintaining systemic stability, and the MPC will focus on price stability and avoiding asset bubbles.
The CBN must develop new macroprudential rules to aid in avoiding severe financial crises. Some possibilities include limiting lending to the capital market to a portion of the bank’s net worth, prohibiting the use of depositor’s funds for proprietary trading (the Volcker rule), and adjusting required capital levels depending on the risk profile of the financial institution. In addition, the CBN will maintain a stable exchange rate and is unlikely, at least currently, to impose capital controls or limit investment from abroad.
The CBN will champion “directional economic policy” to improve basic infrastructure in Nigeria and will “encourage reforms to improve Nigeria’s business environment including property rights, rule of law, ease of doing business and investor risk. ” Sanusi notes that certain foreign nations, such as Malaysia, Brazil and Korea, have successfully developed their economies by targeting foreign direct investment to priority sectors. At a recent meeting of the leaders of Nigeria’s 24 universal banks and a committee of governors, three sectors – power, transport infrastructure, and agriculture – were identified as priorities for investment.
As part of its development policy, the CBN must balance its target of low inflation against economic growth and poverty alleviation. Sanusi states the CBN will maintain price stability and also become “an active player in the economic development space. ” However, when setting inflation targets, the CBN will set such “targets that are compatible with our growth and poverty alleviation objectives” and indicates that single digit inflation may no longer be an absolute price stability goal.
The CBN will also encourage the further development of capital markets by “developing an infrastructure for a corporate bond market, more accessible equity markets, supporting deeper venture capital and micro-finance of new businesses and establishing a sustainable private equity environment, potentially with government seed capital. ” As part of this economic development agenda, Sanusi calls for the expansion of the Excess Crude Account to become a full-fledged stabilization fund that “quarantines oil-related excess liquidity before it reaches the Nigerian banking system. ” Pillar 3: Enabling Healthy Financial Sector Evolution
According to Sanusi, consolidation of the banking system into a smaller number of financial institutions is not an end in itself, a statement contradicting his predecessor Soludo’s policy. Considering other developing nations such as Brazil, Turkey, Malaysia and Indonesia, several different banking industry structures could serve Nigeria well. The CBN does play a major role in deciding on the structure of the Nigerian financial system. Sanusi notes that “foreign ownership played an essential role in raising standards in the industry” in Turkey, Brazil and Malaysia. Similarly, foreign banks in Nigeria could also raise standards.
The CBN is reviewing the one-size-fits-all banking model and will attempt to introduce more diversity into the Nigerian banking industry. One conclusion from the recent special examination of Nigerian banks was that the recent consolidation of the banks in 2005 placed “pressure on banks to deliver high returns to their shareholders after the rapid expansion in their capital base post-consolidation” resulting in “the highly risky behaviour that led to the collapse of some of the banks. ” Pillar 4: Ensuring the Financial Sector Contributes to the Real Economy The recent rapid financialisation in Nigeria did not benefit the real economy.
The CBN will advocate for an increase in policy lending programs. Again, Sanusi looks abroad for successful examples of policy lending, particularly Japan, Korea, China, and Viet Nam. In those countries, the state provided seed financing for new businesses. In addition to policy lending, the CBN governor will emphasize his role as economic advisor to the President, take the lead in examining “critical issues of economic development,” and create a pilot program with one of the36 states in Nigeria regarding social economic development.
Sanusi concluded his address by noting “a sustainable growth path can be achieved only through substantial and fundamental economic reform” which requires the political will to “reduce corruption and uphold the rule of law. ” CONCLUSION Sanusi’s rapid regulatory reforms since July 2009 will result in significant changes in the structure of the Nigerian banking industry and will likely create opportunities for banks and investors already operating in Nigeria and those new to the Nigerian market.