The total assets of Nigeria’s banking sector grew 15.08 per cent year-on-year to N53.17 trillion by April 2021 from N46.20 trillion in the same period of last year, a Central Bank of Nigeria (CBN) report has revealed.
This shows that the sector’s assets rose N6.97 trillion within one year in spite of the negative effect of the COVID-19 pandemic on economic activities.
With this development, the nation’s banking industry has evolved over the years to become one that is not only reckoned with globally but also driven by innovation.
Today, with more mergers, reforms and reclassifications there are 37 banks in Nigeria.
The country presently has eight commercial banks with international licences, 11 with national licences, four with regional licenses and six with merchant banking licences.
There are also new additions such as one non-interest bank with national licence, two non-interest banks with regional licences and five holding companies with focus on banking.
This is aside from the 876 microfinance banks spread throughout the country.
The Nigerian banking industry was birthed by the African Banking Corporation in 1892, followed by the Bank of British West Africa, in 1894.
This was followed by a string of other foreign-owned banking institutions created to cater for the needs of the colonial masters, traders and shipping ventures in the West African region.
With this focus, local merchants and farmers were rarely the focus of these big international banks, as local businesses and Nigerians could not access credit and were shunned.
In addressing this anomaly, the first indigenous bank, Industrial and Commercial Bank (ICB), was created in 1929, but it did not last more than a few months due to lack of professionalism.
Despite the failure of the ICB, the need for Nigerians to be financially included led to the birth of more indigenous banks.
Within three years, two banks, Nigerian Farmers and Commercial Bank and the Nnamdi Azikwe-owned African Continental Bank, were established in 1947.
With this influx came the need for regulation in the industry, leading to the Banking Ordinance Act in 1952 and the establishment of the Central Bank of Nigeria (CBN) in 1959 to regulate and ensure banking institutions obtained licenses before they began operations in the country.
By 1976, the federal government embarked on a policy called “indigenisation” or “Nigerianisation,” in an effort to wrest control of the economy from foreign hands.
The policy forced foreign-owned companies to either sell off 60 per cent of their shareholding to the Nigerian public or close shop.
While other companies were given a longer time to make the decision, banks were not, as they were deemed important to the materialisation of the policy.
The then military ruler, General Olusegun Obasanjo, said in his broadcast that this was so because of the “critical nature of banking institutions to the success of the indigenization effort and indeed the health of the Nigerian economy.”
Besides, the banks had long been a target, mostly because their lending practices geared toward short‐term profit did not coincide with the government’s plans for long term development projects.
Many of the banks, especially American banks, were licensed as merchant banks but instead operated as commercial banks where there is less risk and faster money to be made.
The largest banks here, Barclays International and Standard and Chartered, agreed to increase Nigerian equity—already over the level of 40 per cent —to 60 percent. By contrast, the American banks were 100 per cent foreign owned.
Following the indigenisation, more banks were established, and between 1985 and 1994, the number of banks in the country increased from 26 to 144 in 1994, while commercial bank branches increased from 1,297 to 2,541 during the same period.
This brought another set of problems, as the industry recorded as many bank failures as there were new banks. Industry experts opine that the failures were due to lack of professionalism and inadequate regulation within the industry.
According to analysts, many of the banks at that period created risk assets at incredibly low interest rates with or without collateral or adequate cover, and some banks were giving incredibly high interest rates on deposits.
There were also instances of insider abuse such as granting of credit to dummy individuals and organisations, high rate of loan repayment default, especially by government parastatals.
The failure of the banks were also linked to managerial incompetence, unbridled rate of bank fraud and forgeries, coupled with the general economic down-turn and adverse macroeconomic conditions.
Sanity was introduced into the system when in 2004, under the leadership of Professor Charles Soludo at the CBN, the entire system was overhauled with a recapitalisation and clean-up of the system.
The 2004 reform saw the number of banks drop rapidly from 89 banks to 25 banks as of December 31, 2005. Some of the banks that survived did so through merger and acquisition.
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The reform also resulted in the enhancement of the quality of banks in Nigeria, improvement of their financial stability and contribution to the economy as well as increased financial inclusion in Nigeria.
The recapitalisation exercise did not only lead to the elimination of fringe players from the industry; it also brought about bigger banking institutions with a solid capital base that could play in the international market.
The banks became not only healthier but also more adventurous and innovative, just as technology was introduced into the system to displace the cumbersome tally number regime.
Armchair banking was gone, leaving the banks to work to ensure that their increased strength brought forth more profit.
Banks wooed customers with technology, with Automated Teller Machines coming in and banking software upgraded for the more 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 has grown by approximately 60 per cent to N7.2 trillion from N4.5 trillion.
The huge resources soon found itself into bad businesses at a time a global financial crisis 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 hard hit in 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 rendered eight banks which were classified as being in grave situations insolvent. 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 Lamido 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 attempts by CBN to ensure the banks remain responsive to activating a financially driven real sector, the impact was not 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 has 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.