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Nigerian Banking Sector: From Tally Number To Internet Banking

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In this piece, BUKOLA IDOWU writes that the Nigerian banking sector in the last 58 years, like other sectors of the nation’s economy, have had its own share of ups and downs as it has been through the boom and burst periods.

The history of Nigeria’s banking sector can be traced way back to the colonial era when the first financial institution was established to meet the needs of the colonial government. In 1892, the African Banking Corporation was established and the Bank of British West Africa, now First Bank was founded in 1894 by shipping magnate, Alfred Lewis Jones, who originally had a monopoly on importing silver currency into West Africa.

Jones felt that without a bank economy in the colonised regions, they were reduced to using barter and a wide variety of mediums of exchange, leading to unsound practices. He believed a bank could provide a secure home for deposits and also a uniform medium of exchange.

As the ownership structure of the banks then was solely foreign, it primarily financed foreign trade, and did little lending to indigenous Nigerians, who had little to offer as collateral for loans. This led to indigenous entrepreneurs becoming involved in banking.

They quickly met a waterloo as problems such as inadequate capital, mismanagement, over-trading, lack of regulation and unfair competition from the foreign-owned banks, saw 21 out of 24 of the indigenous banks established during that period up to 1954, folding up. Nigeria a country still under leadership of the colonial masters saw its first banking crisis and the citizens suffered untold hardship. Many businesses folded up.

A semblance of normalcy seemed to return with the Banking Ordinance of 1952, the establishment of the Central Bank in 1959, and the Banking Decree of 1969 and the banking system in Nigeria started to stabilize with regulation.

The situation was aided by the oil boom which commenced in the early 1970s and brought along with it economic growth thereby making banking a thriving and lucrative business. With less than 20 banks in operation and a thriving economy, the banks had no problem making profits.

This was an era of armchair banking and customer was no king. Customers willing to make deposits or withdrawal had to be in the banking hall early enough with their mats to pick up tally numbers. Customers virtually had to live in the banking hall if they had to do any transaction.

The basic service in the industry was merely that of keeping cash safe. It was an alternative to keeping cash in mattresses or under the pillow. By the 1980s, the industry saw a boom in the number of banks which saw with the number of banks increasing to 120. Merchant banks, investment banks, cooperative, name it.

This saw a fast and unhealthy rise in the volume and value of hands that managed customers’ funds. As the few experienced hands moved to the high paying jobs, thus creating opportunities for inexperienced personnel and even misfits to be appointed or promoted into sensitive positions in the banking industry. This led to diminished professionalism, which relegated honesty and integrity to the background, elevating materialism and inordinate ambition.

Eventually, the rot began to manifest in the form of insolvency and by early 1990s, many of the banks became distressed and depositors lost billions of naira in the crisis.

The incessant failure of banks led to a severe loss of confidence in the banking system, so much so that, according to an estimate by the Nigeria Deposit Insurance Corporation (NDIC), 50 percent of money supply in the country was outside the banking system.

Substantial changes were introduced in the banking sector from 1993 to tackle inadequacies in the sector.  Among these changes were deregulation of financial activities, especially interest rate determination, treasury securities trading, credit administration, monetary management, review and update of banking laws, introduction of prudential guidelines and the relaxation in the rules for the licensing of banks.

The banking industry thrived once again and the number of operational banks rose significantly. These banks were however not strong enough and still experienced the same issues that the early banks had which was liquidity problem.

They were constantly challenged with issues of persistent liquidity, poor asset quality and under-capitalisation and depended majorly on public sector deposits.

By 2005, the then CBN governor, Professor Chukwuma Soludo, sought to ensure that these issues became history. He jerked up the regulatory capital base of the banks by a staggering 1150 per cent from N2 billion to N25 billion.

This was the era of the banking sector tsunami. There were mergers and there were acquisitions. Industry analysts believe Soludo was set to build a better banking industry by share size in all respects especially capital base.

By that, the banks would be in better position to support economic development and less susceptible to the risks of bank failures, which had almost become the common phenomenon of Nigerian banks.   Much cannot be understood in the study of Nigeria’s banking industry in the last two decades without the background provided by the first major regulator induced consolidation in the industry under Prof. Chukwuma Soludo led Central Bank of Nigeria (CBN) in 2004 – 2009.

Soludo thus pursued vigorously the agenda of recapitalisation of banks by increasing the minimum capital base from N2billion to N25 billion. The recapitalisation exercise did not only lead to the elimination of fringe players from the industry, it brought about bigger banking institutions with solid capital base that could play in the international market. The banks became not only healthier but also more adventurous and innovative. Technology was introduced into the system to displace the cumbersome tally number regime. Armchair banking was gone and banks had to work to ensure that their increased strength brought forth more profit. They wooed customers with technology and the industry saw Automated Teller Machines come in, banking software were upgraded for the most efficient banking service. The increased capital base encouraged banks to diversify into many new products and services which further drew more customers into the financial system. However their sizes made them overconfident as one year after consolidation, total assets of commercial banks had grown by approximately 60 per cent to N7.2 trillion from N4.5 trillion.

The huge resources soon found itself into bad businesses at the same time global financial crises was seeping into Nigeria. The combined effect was a bubble burst. Although banks and some in the financial industry were confident that the 2005 global financial crisis would not find its way to Nigeria, the country was hit big by 2008, leading to the next banking crisis. While the casualties were not as much as it used to be, the root of the problem remained the same. Liquidity, corporate governance, weak risk management framework and significant exposure to margin loans on the domestic front.

These factors led to the insolvency of eight banks which were classified as being in grave situations. The total toxic assets that were absorbed by the Assets Management Corporation of Nigeria (AMCON) at this time was N5.7 trillion.

Against the backdrop of these challenges, the monetary policy anchor of the CBN following the entry of Sanusi as governor was anchored on four pillars of banking reforms which were enhancing the quality of banks, establishing financial stability, ensuring the financial sector evolution and ensuring the financial sector contributes to the real economy.

Though many observers believe the risk management and corporate governance focus of Sanusi’s CBN was relatively commendable, stability in the sector was more of a transient effect of a relatively stable economy of the time as things began to go bad with reversal of oil revenue inflow into the economy in the second half of 2014. Also despite the CBN’s attempt to ensure the banks remain responsive to activating a financially driven real sector, the impact has not been too significant.

Under the Godwin Emefiele led CBN, the story seems to have changed only a little. Emefiele’s CBN is set on creating financial system stability by managing factors that create liquidity shocks and zero tolerance practices that undermine the health of financial institutions.  He seeks a zero tolerance policy on fraudulent borrowers and he also reinforced the cashless policy which was introduced in 2012 to help strengthen the payment system. The industry has seen tremendous change and healthy competition that has led to improved service delivery to customers.

Innovation is the in thing as banks strive to be the first to break new service offerings. However, with the recent revocation of the banking license of a bank once deemed a Systemically Important Bank, there is more to be done to ensure adherence to corporate governance by financial institutions in the country.





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