The History of Nigerian Banking System

The existence of banks in Nigeria dates back as far as 1862 when the first Nigerian bank

came into being. There was no banking legislation until 1952; at that time, Nigeria had

three foreign banks and two indigenous banks with a collective total of forty branches.

Despite the set standards by the 1952 ordinance, the growth of demand deposits was slowed

down by the Nigerian propensity to prefer cash and distrust checks for debt settlements.

1912 experienced the establishment of the West African currency board which was to help

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in financing the export trade of foreign firms in West Africa and to issue a West African

currency which could be converted to British pound sterling. The colonial policies barred

the local investment of reserves, discouraged deposit expansion, precluded discretion for

monetary management and did nothing to educate Africans in developing indigenous

financial institutions. This led to a motion by several Nigerian members of the house to

establish a central bank to facilitate economic development. Though the motion was

defeated, the colonial administration appointed a bank of England to study the issue and he

advised against a central bank with emphasis on their effectiveness in an undeveloped

capital market. Another study was conducted in 1957 and this resulted in the creation of a

Nigerian central bank and the introduction of the Nigerian currency. The role of the central

bank was to establish the Nigerian currency, control and regulate the banking system, serve

as bankers to other banks in Nigeria and carry out the government’s economic policy in the

monetary field.

This policy included control of bank credit growth, credit distribution by sector, cash

reserve requirements for commercial banks, discount rates–interest rates the Central Bank

charged commercial and merchant banks–and the ratio of banks’ long-term assets to

deposits. Changes in Central Bank restrictions on credit and monetary expansion affected

total demand and income. For example, in 1988, as inflation accelerated, the Central Bank

tried to restrain monetary growth.

During the civil war, the government limited and later suspended repatriation of dividends

and profits, reduced foreign travel allowances for Nigerian citizens, limited the size of

allowances to overseas public offices, required official permission for all foreign payments,

and, in January 1968, issued new currency notes to replace those in circulation. Although in

1970 the Central Bank advised against dismantling of import and financial constraints too

soon after the war, the oil boom soon permitted Nigeria to relax restrictions.

The three largest commercial banks held about one-third of total bank deposits. In 1973 the

federal government undertook to acquire a 40-percent equity ownership of the three largest

foreign banks. In 1976, under the second Nigerian Enterprises Promotion Decree requiring

60-percent indigenous holdings, the federal government acquired an additional 20-percent

holding in the three largest foreign banks and 60-percent ownership in the other foreign

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banks. Yet indigenization did not change the management, control, and lending orientation

toward international trade, particularly of foreign companies and their Nigerian subsidiaries

of foreign banks.

At the end of 1988, the banking system consisted of the Central Bank of Nigeria, forty-two

commercial banks, and twenty four merchant banks, a substantial increase since 1986.

Merchant banks were allowed to open checking accounts for corporations only and could

not accept deposits below N50, 000. Commercial and merchant banks together had 1,500

branches in 1988, up from 1,000 in 1984. In 1988 commercial banks had assets of N52.2

billion compared to N12.6 billion for merchant banks in early 1988. In FY 1990 the

government put N503 million into establishing community banks to encourage community

development associations, cooperative societies, farmers’ groups, patriotic unions, trade

groups, and other local organizations, especially in rural areas.

Other financial institutions included government-owned specialized development banks:

the Nigerian Industrial Development Bank, the Nigerian Bank for Commerce and Industry,

and the Nigerian Agricultural Bank, as well as the Federal Savings Banks and the Federal

Mortgage Bank. Also active in Nigeria were numerous insurance companies, pension

funds, and finance and leasing companies. Nigeria also had a stock exchange (established

in Lagos in 1961) and a number of stockbrokerage firms. The Securities and Exchange

Commission (SEC) Decree of 1988 gave the Nigerian SEC powers to regulate and

supervise the capital market. These powers included the right to revoke stockbroker

registrations and approve or disapprove any new stock exchange. Established in 1988, the

Nigerian Deposit Insurance Corporation increased confidence in the banks by protecting

depositors against bank failures in licensed banks up to N50, 000 in return for an annual

bank premium of nearly 1 percent of total deposit liabilities.

1.5.3 Types of Banks

A bank is a profit making business providing financial services which includes receiving

deposits of money, lending money and processing transactions. There are different types of

banks and so do their functions differ.

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1.5.3.1 Commercial Banks

Commercial banks are authorized institutions providing retail banking services to the

public. They accept deposits from customers and in turn make loans based on those

deposits. They are noted for providing services which includes savings, current and

term/fixed deposit accounts, lending, payment and transfer of money which is now

facilitated by the recently introduced online banking. They also facilitate the transformation

of rural areas by extending banking services. They offer professional advice to their clients

on viable businesses and international trade. They are the channel for the implementation of

the monetary policies from the central bank and act as authorized foreign exchange dealers

in providing such facilities. They are collectors on behalf of other government and non

government agencies. They buy and sell securities on behalf of their customers and boost

the securities in the capital market and also sponsor companies seeking quotation on the

Nigerian Stock Exchange.

1.5.3.2 Merchant Banks

They started operations in 1961 with the establishment of Philip Hill (Nigeria) Limited

which later merged with Nigerian Acceptances Limited in 1969. Other merchant banks

later came along. As a result of the non recognition of universal banking then, merchant

banks in Nigeria operate wholesale banking, which involves loan syndication, equity and

debt issues, ventures capital and equipment leasing. They play important roles in pooling a

consortium of banks, where the borrowing required exceeds availability of funds from

commercial or any other bank. They also introduce their big clients to the Nigerian Stock

Exchange and handle international transactions through a global network of affiliated

banks. The banks are usually sited at urban areas and provide services to large

organisations and extremely wealthy individuals.

1.5.3.3 Universal Banks

Before the introduction of the universal banking concept by the federal government,

operators of merchant banks had complained that their poor performances over the years

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were due to a banking system that they claimed favoured commercial banks. The clamour

for one-stop-supermarket bank became noticed in the mid 1990’s when the financial system

was swept by the distress in the banking sector. This virtually wrecked havoc on the

economy. Many people have observed that the distinction between commercial and

merchant banking is out-dated and no longer fashionable in other developed countries.

The harmonised banking service is seen as cost-effective for providing a level playing field,

where a customer can open an account and engage in all banking and insurance transactions

from one bank to the other. The new banking concept offers a wider range of banking

services, which include retailed banking, capital market activities and insurance business.

The banking environment will no longer be restricted to certain functions. The new banking

services commenced in January 2001.

1.5.3.4 Development Banks

Development banks were established by the government, to promote national economic

development. They tend to address issues of low income, insufficient savings and

inadequate investment. The government and multilateral agencies sponsor the banks. The

first development finance institution is the Nigerian Local Development Board, which was

established in 1946 and charged with the responsibility of giving loans and grants to native

authorities, cooperative societies and other public bodies for prescribed development

projects (Agene 1990). Notable development banks include, Nigerian Industrial

Development Bank, Federal Mortgage Bank of Nigeria, Nigerian Bank for Commerce and

Industry, Nigerian Agricultural and Cooperative Bank, Peoples Bank of Nigeria and

Nigerian Educational Bank. Others include, National Economic Recovery Fund

(NERFUND), Community Banks, etc.

In a nutshell, for the long term survival of a bank, they would have to make money in their

operation so as to be able to meet up with their expenses. They accept deposits from

customers and pay interest which can only be realized from the exchange of money

between two parties. One of the ways in which they make money is by charging interest on

loans. The money deposited by customers is lent out to creditors. They charge higher

interest on money they lend out and pay lower on the deposits. The difference then serves

as own realization from the transaction.

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Also, they operate on fractionalized deposit. They use depositors’ money to make money

by giving loans and earning interest. These loans are usually real estate loans and

sometimes car loans. Prior to the depression, banks were allowed to invest in the stock

market. As a result of the bank crash, a law was passed to end the practice and force banks

and investment institutions to be different entities.

1.5.4 Impact of the Central Bank on the activities of a Bank

The Central Bank of Nigeria governs the activities of banks in Nigeria and provides rules

and guidelines for the execution of activities in the banking industry. The central bank is

charged with the general control and administration of the monetary and financial sector

policies of the federal government. Its statutory mandate includes the issuance of the legal

tender currency, maintaining of the external reserves, safeguarding the international value

of the legal tender currency, and acting as bankers and financial adviser to the federal

government; promote monetary stability and a sound financial system in Nigeria. In

understanding the monetary policy, it is important to look at it from the perspective of the

mandate set for the bank. This includes maintenance of Nigeria’s external reserves to

safeguard the international value of the legal currency, promotion and maintenance of

monetary stability and a sound and efficient financial system in Nigeria, acting as banker

and financial adviser to the Federal Government; and acting as lender of last resort to

banks.

Consequently, the Bank is charged with the responsibility of administering the Banks and

Other Financial Institutions (BOFI) Act (1991) as amended, with the sole aim of ensuring

high standards of banking practice and financial stability through its surveillance activities,

as well as the promotion of an efficient payment system. In addition to its core functions,

CBN has over the years performed some major developmental functions, focused on all the

key sectors of the Nigerian economy (financial, agricultural and industrial sectors). Overall,

these mandates are carried out by the Bank through its various departments.The roles of the

central bank of Nigeria also include the establishment of a national microfinance

consultative committee, evolvement of a clear micro finance policy that spells out the

eligibility and licensing criteria, provides operational standards and guidelines to

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stakeholders, adopting an appropriate regulatory and supervisory framework, minimizing

regulatory arbitrage through periodic reviews of the policy and guidelines, continuously

advocating market determined interest rates for government owned institutions and

promote microfinance funds through MFBS, promoting linkage programmes between

universal banks, specialized finance institutions and the micro finance banks.

1.5.4.1 Departments of central bank and their activities

There a basically three departments in the central bank of Nigeria and they are the banking

supervision department, development finance department and other financial institutions

department.

1.5.4.1.1 Banking Supervision Department

The banking supervision department of the central bank of Nigeria carries out on-site as

well as off site supervision of deposit money and discount houses. Its basic functions

include reviews and analyses of the financial conditions of banks based on CAMEL

parameters using prudential reports, reviews and analyses of statutory returns and other

relevant information, monitor trends and development for the banking sector, generate

industry reports on a monthly and quarterly basis. It also monitors compliance with the law,

guidelines and circulars (BOFIA (banks and other financial institutions act), CAMA, and

CBN (Central Bank of Nigeria) Act etc)

1.5.4.2 Development Finance Department

The development finance department was established to manage the agricultural credit

guarantee scheme fund and finance the marketing operations of the defunct commodity

marketing boards. In view of the expected role of the bank in the Nigerian economy, the

department was restructured and renamed as the development finance department. They are

concerned with identifying development finance market failures, designing strategies and

policies for addressing them, formulating policies, regulatory and supervisory

framework for micro/rural finance, identifying development priorities, designing and

implementing alternative funding sources, monitoring and evaluating the impact of

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development finance initiatives, advising government and the CBN Management on

commodities, SME, and micro/rural finance issues.

1.5.4.3 The Other Financial Institution Department (OFI)

The other financial institutions department is saddled with the responsibility of supervising

and regulating the other financial institution sub-sector which include the community

banks, finance companies, bureau de change, primary mortgage institution, the

development finance institutions and the recently launched micro finance banks.

The department carries out both on-site and off-site supervision of the other financial

institutions. The off-site supervision involves the appraisal and approval of the application

for licenses, nominees intothe boards and top management positions, transfer of shares and

increase in hare capital, statutory returns from other financial institutions, appointment or

exchange of the external auditors. The on-site aspect of the department’s function includes

pre commencement examination before the grant of a final license to an OFI (Other

financial institutions), routine examination which is the regular examination, target

examination addresses specific supervisory concerns arising from unprofessional conduct

of the operations of an OFI and is carried out as the need arises while spot-checks for quick

confirmation/ verification through independent on-site assessment. This includes corporate

governance, accounting systems and records, quality of assets, reliability of information

provided, internal control system/anti-money laundering controls and procedures, earnings,

liquidity, financial condition and capital adequacy.

1.5.5 Effects of the Monetary and Economic policies on the activities of Nigerian

Banks

Monetary policies refers to the specific actions taken by the central bank to regulate the

value, supply and cost of money in the economy with a view t achieving governments

macroeconomic objectives. For many countries, the objectives of the monetary policy are

explicitly stated in the laws establishing the central bank, while for others they are not. The

objectives of the monetary policy may vary from country to country but there are two main

views.

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The first view calls for the monetary policy to achieve price stability, while the second view

seeks to achieve price stability and other macroeconomic objectives. The central bank of

Nigeria like other central banks in developing countries, achieve the monetary policy goal

through the amount of money supplied.

In Nigeria, the Central Bank defines money supply as comprising narrow and broad money.

The definition of narrow money (M1) includes currency in circulation with non-bank public

and demand deposits or current accounts in the banks. The broad money (M2) includes

narrow money plus savings and time deposits, as well as foreign denominated deposits. The

broad money measures the total volume of money supply in the economy. Thus, excess

money supply (or liquidity) may arise in the economy when the amount of broad money is

over and above the level of total output in the economy.

The need to regulate money supply is based on the knowledge that there is a stable

relationship between the quantity of money supply and economic activity and that if its

supply is not limited to what is required to support productive activities; it will result in

undesirable effects such as high prices or inflation.

In summary, monetary policy in the Nigerian context refers to the actions of the Central

Bank of Nigeria to regulate the money supply, so as to achieve the ultimate macroeconomic

objectives of government. Several factors influence the money supply, some of which are

within the control of the central bank, while others are outside its control. The specific

objective and the focus of monetary policy may change from time to time, depending on the

level of economic development and economic fortunes of the country. The choice of

instrument to use to achieve what objective would depend on these and other

circumstances.

1.6. History of the banks surveyed

1.6.1 Zenith International Bank Plc.

Zenith Bank Plc was incorporated on May 30, 1990 as a private company limited by shares.

In July 2004, the Bank became a public company limited by shares and subsequently

launched what still remains the most successful Initial Public Offering (IPO) in the history

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of the Nigerian Capital Market. Its 6,000,000,000 (six billion) ordinary shares of 50 kobo

each were later listed on the Nigerian Stock Exchange on October 21, 2004. Zenith Bank

Plc achieved yet another milestone when it raised N53.63bn in February 2006 by a Public

Offer of 3,000,000,000 (three billion shares), one of the largest amount in the history of the

Nigerian Capital Market.

Zenith Bank Plc is one of the largest and most profitable banks in Nigeria with total assets

plus contingents of over N714.5 billion after consolidation.

The Bank has continued to record remarkable performance on several parameters.

Zenith Bank’s growth and performance has earned excellent ratings from both local and

international rating agencies. Agusto & co. ltd has consistently rates the bank Aaa for six

consecutive years. Also of repute is the fact that the bank has the lowest non performing

loans to total loans ratio of 1.7% against the industry average of 18% and has grown its

asset base at an average of over 50% per annum in the last five years.

Its service offering covers but are not limited to corporate and commercial banking

services, funds and asset management, investment banking and financial advisory services ,

private bank, treasury and cash management services.

In delivering their vision, they put strategies in place which has being their guide in their

operation. It sets out to differentiate itself in the banking industry through the quality of

service it render, the caliber of their clients and the drive for a unique customer experience.

The bank is easily associated with attributes such as innovation, best risk asset portfolio,

high quality personnel, consistent superior financial performance and leadership in the use

of information and communication technology.

The bank’s overall vision is to make the brand a reputable international financial services

network recognized for innovation, superior customer service and performance while

creating premium value for all stakeholders.

1.6.2 Guaranty Trust Bank Plc

Guaranty Trust Bank plc was incorporated in July 1990, as a private limited liability

company wholly owned by Nigerian individuals and institutions. The bank was licensed as

a Commercial Bank in August 1990 and commenced operation in February 1991.

In September 1996, Guaranty Trust Bank plc became a publicly quoted company and won

the Nigerian Stock Exchange President’s Merit award that same year and again in the years

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2000, 2003,2005 and 2006. The Bank was also runner-up for the quoted company of the

year award in 2005. In February 2002, it obtained a Universal Banking license and was

appointed a settlement bank by the Central Bank of Nigeria (CBN) in 2003.

Its quest to continue adding value to the businesses of its stakeholders has seen it emerge as

a pacesetter and industry leader over the years. This is evident in its introduction of real

time online banking in 1990, mobile, telephone and internet banking in 2002, Slip free

banking in 2006 and the first fully interactive self service call centre; GT Connect in 2006.

The bank was able to meet their financial obligations as they fell due and this got them the

recognition of three rating agencies. Agusto& Co reaffirmed its triple a risk rating every

year fro the last four years, Fitch also assigned the bank a double A minus risk rating in

recognition of its strong domestic franchise, good quality assets and sound earnings record

and finally, Standard & Poor’s, assigned the Bank a double B minus (BB-) risk rating. The

Bank is the only Nigerian financial institution with such a rating, which is the same as the

Agencies Sovereign rating for Nigeria.

The bank has over the years been a recipient of several awards for superior financial

performance, customer service delivery, excellent share performance, management

efficiency some of which are the most respected financial institution in Nigeria (2006), the

highly commended bank of the year award in Africa (2005), Most Customer friendly Bank

(2007), Best Bank for Brand Development 2007.

Despite the challenges which characterized the year under review(2006-2007 Financial

year), the bank was able to grow its gross earnings by 46% from N34 billion to N49 billion

while its profit before tax rose by 50% from N10.5 billion in the previous year to N15.7

billion. In the same period, total asset and contingents increased by 54% from N391billion

a year earlier to N603 billion.