The Evolution of Nigeria Banking Industry.
The African Banking Corporation was established in 1883, followed by the British Bank of West Africa in 1884, which marked the beginning of modern banking in Nigeria. Unlike the former, which went bankrupt soon after it was established, the latter has survived to this day, although under various names, including Standard Bank West Africa, Standard Bank of Nigeria, and now, First Bank of Nigeria PLC. Other international banks quickly followed, including the forerunners of what is now known as the Union Bank of Nigeria PLC. Since these banks were formed to protect the interests of their foreign owners, their policies were discriminatory against indigenous businessmen, who were essentially excluded from the mainstream of the economy because they were refused credit by these banks. The resulting sense of alienation fuelled nationalist sentiment among Nigeria’s wholly indigenous banks. There were no less than 26 such banks founded between 1929 and 1960, but only four have survived to this day. These include the Nigerian National Bank, Wema Bank (formerly Agbonmagbe Bank), and the African Continental Bank of the North. The government established Paton’s commission to investigate the collapse of one of these banks as a result of widespread public concern over the spate of indigenous bank failures. Its report paved the way for the passage of the Banking Ordinance of 1952, which marked the start of banking legislation in the United States.
For the first time, the 1952 ordinance established legal conditions for the establishment and operation of banks. It stipulated that no company can conduct banking business in Nigeria until it has obtained a license from the financial secretary. With this and other executive powers granted by the ordinance, the financial secretary became the country’s first banking supervisory and regulatory authority. Some nationalists, on the other hand, believed that a central bank, which would play a broader role in the economy and be better positioned to take over and exercise the regulatory and supervisory powers previously vested in the financial secretary, was needed to resolve the industry’s problems. After much debate and in response to Mr. J.B. Loynes’ reports in 1957, the colonial government passed the Central Bank of Nigeria Ordinance of 1958, which established the central bank with the following functions.
In Nigeria, a legal tender currency is issued.
External reserves are held to protect the currency’s foreign value.
Monetary stability and a stable financial structure are promoted.
Banker and financial advisor to the federal government, as well as other Nigerian and international banks.
Nigeria’s central bank
The 1958 central bank of Nigeria ordinance went into effect on July 1, 1959, and since then, the central bank has expanded its powers and increased the prominence of its loans in the growth of Nigeria’s banking industry through a series of laws.
The banking ordinance of 1952 was also repealed in 1958, and the banking ordinance of 1958 took its place. The power conferred on the financial secretary by the 1952 ordinance was transferred to “the minister in charge of banking,” i.e., the federal minister of finance, whose duty at the time was to issue a banking license after consulting with the central bank. No company could conduct banking business in Nigeria without a valid license issued under the ordinance, but banking licenses issued under the repealed 1952 ordinance remained valid as if issued under the 1958 ordinance.
If the minister thought that granting a banking license was not in the public interest, he was required to report the circumstances to the governor-general in council, who may order the minister to revoke the bank’s license and order it to cease operations in Nigeria. The banking ordinance of 1958 thus marked the start of a joint regulatory function between the federal ministry of finance and the Central Bank of Nigeria (CBN), which lasted until June 1991, when it was formally ended by legislation. By that time, it was clear that the federal ministry of finance’s position as the apex regulatory agency and a go-between for the CBN and the federal executive council had outlived its usefulness, as the banking industry’s circumstances had changed dramatically since 1958.
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The CBN Act was revised at least eight times during the 1960s decade. The legislation’s main goal was to enhance the CBN’s powers while keeping its duties under the 1958 ordinance. The banking act of 1969, which repealed and replaced the banking ordinance of 1958, was by far the most notable piece of banking legislation during this period. The banking act of 1969, like its predecessor, stated that no individual could conduct banking business in the United States unless they were an incorporated company with a valid banking license issued by the finance minister (s.1). Any application for a license must be made in writing and routed through the central bank. A subsequent amendment stated that a license could not be issued unless the company’s objects, as stated in the memorandum of association, had been submitted to the minister for his consideration via the CBN, and the minister had given his approval. This enabled the government to exert control over the organizational structure of banks, including the distribution of ownership and the selection of directors and top management, which has continued to this day.
While incorporation as a limited liability company was a requirement for obtaining a license, it was not required. The incorporation of the company in Nigeria was not initially needed. The Companies Act of 1968, on the other hand, made it mandatory for foreign companies operating in Nigeria to be incorporated under the Nigerian Companies Act. Furthermore, any company wishing to do business in Nigeria was required to be incorporated in the country, putting them under the jurisdiction of Nigerian law. The Companies and Related Matters Act of 1990 maintains this provision.
The Nigerian Enterprise Promotion Act (NEP Act) of 1977 had a major impact on the banking industry in Nigeria. The NEP Act of 1972, on the other hand, was silent on banks. The 1977 act stipulated that Nigerians must own at least 60% of the equity or proprietary interest in the enterprises mentioned in Schedule 2. As a result, many of the banks in service at the time were forced to make a sale of shares to Nigerians to meet the legislative requirement. From the vantage point of majority control, Nigerians began to move up into top management roles and directorships in banks and other parts of the economy’s “commanding heights.” As a result of this ability to obtain high managerial experience, Nigerian bankers were once again encouraged to venture into the establishment of wholly indigenous private banks, without fear of the disaster that befell their forefathers due to their inexperience. Despite the opportunities provided by the indigenization program, the banking industry in Nigeria has grown slowly as a result of excessive bureaucratization and high entry barriers allowed by government policy and existing bank legislation. As a result, when banks started to make big profits in the early 1980s, there was public dissatisfaction with the standard of service they provided while remaining inaccessible to a significant portion of the population. When the second republic ended in 1983, the banking industry, like other sectors of the economy, was obviously in desperate need of restructuring and revitalization.
The plethora of government regulations and controls posed significant roadblocks to national growth. The banking industry lacked innovation and competition. Until July 1986, when the government implemented the structural reform program, this was the case.