The History of Nigerian Banking System
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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
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
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
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.
184.108.40.206 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.
220.127.116.11 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.
18.104.22.168 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
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.
22.214.171.124 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.
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
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
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.
126.96.36.199 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
188.8.131.52.1 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)
184.108.40.206 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
development finance initiatives, advising government and the CBN Management on
commodities, SME, and micro/rural finance issues.
220.127.116.11 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
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
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
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
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
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.
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