the impact of public policy on the banking system in nigeria

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eight banks were <strong>the</strong>n insolvent, a figure which would have been higher had banks used proper accounting practises (Oluranti 1991: 59). The financial problems afflicting <strong>the</strong> state government banks are attributable to a number <strong>of</strong> factors. The quality <strong>of</strong> <strong>the</strong>ir management has been very poor because <strong>of</strong> political interference in <strong>the</strong> appointment <strong>of</strong> directors, managers and staff. Appointments were determined by political patronage ra<strong>the</strong>r than merit while boardroom disputes and <strong>the</strong> insecure tenure <strong>of</strong> board and management due to frequent changes in <strong>the</strong> political control <strong>of</strong> state governments fur<strong>the</strong>r undermined <strong>the</strong> quality <strong>of</strong> management (Ebhodaghe 1994: 17). Earnings have been eroded by high operating expenses: <strong>the</strong> 14 state government banks in <strong>the</strong> survey by Ibe incurred operating expenses amounting to 76 per cent <strong>of</strong> net earnings compared to 49 per cent for o<strong>the</strong>r banks (Ibe 1992: 250). Many <strong>of</strong> <strong>the</strong> banks were set up without adequate capital and were unable to meet <strong>the</strong> minimum capital requirements when <strong>the</strong>se were raised in <strong>the</strong> late 1980s and early 1990s. 8 The most important cause <strong>of</strong> <strong>the</strong> financial distress <strong>of</strong> this sector has been <strong>the</strong> accumulation <strong>of</strong> bad debts, including those extended as a result <strong>of</strong> political interference to <strong>the</strong>ir own governments and to politically influential borrowers. As noted above, 60 per cent <strong>of</strong> <strong>the</strong>ir total loan portfolio was non performing in 1994. In June 1991 <strong>the</strong> non performing loans owed by <strong>the</strong> state governments to state government and distressed banks 9 amounted to N795 million: this was equivalent to 16 per cent <strong>of</strong> <strong>the</strong> total classified loans <strong>of</strong> <strong>the</strong> state government banks in 1991 (Ebhodaghe 1992a: 12; NDIC 1992: 17). 10 The fiscal crises afflicting <strong>the</strong> state governments since <strong>the</strong> early 1980s has undermined <strong>the</strong>ir ability to service <strong>the</strong>ir debts and to recapitalise <strong>the</strong>ir own banks. Frequent changes <strong>of</strong> government at <strong>the</strong> state level have exacerbated <strong>the</strong> problem <strong>of</strong> non performing debt, as incoming governments have not regarded <strong>the</strong> servicing <strong>of</strong> loans contracted by previous incumbents as a priority. 4 THE GROWTH OF THE LOCAL PRIVATE SECTOR BANKS Since <strong>the</strong> mid 1980s <strong>the</strong> locally owned private sector banks (henceforth local banks) have grown rapidly, and now account for a substantial share <strong>of</strong> commercial and especially merchant banking markets. 11 Local banks are defined here as those banks which were set up with local private sector investors as <strong>the</strong> major shareholders, ra<strong>the</strong>r than by foreign investors 8 Six state government banks had not met <strong>the</strong> minimum statutory requirement <strong>of</strong> N50 million for paid up share capital in 1992 (NDIC 1992: 20-22). 9 All except one <strong>of</strong> <strong>the</strong> <strong>the</strong>n distressed banks were owned by state governments. 10 Of <strong>the</strong> outstanding credit extended to <strong>the</strong> state governments by <strong>the</strong>ir own banks and <strong>the</strong> one o<strong>the</strong>r distressed bank, 94 per cent was non performing in June 1991. Non performing debts owed to Federal Government banks by state governments were even larger, amounting to N1.3 billion (Ebhodaghe 1992a: 12). 11 In 1992 <strong>the</strong> locally owned private sector banks held 25.7 per cent <strong>of</strong> <strong>the</strong> total assets <strong>of</strong> commercial banks and 68.2 per cent <strong>of</strong> <strong>the</strong> total assets <strong>of</strong> merchant banks (NDIC 1992: 35-6). 10
or <strong>the</strong> <strong>public</strong> sector. 12 In 1992 <strong>the</strong>re were 33 local commercial banks and 48 local merchant banks in operation. 13 Foreign investors held minority stakes in seven <strong>of</strong> <strong>the</strong> local commercial banks and seven <strong>of</strong> <strong>the</strong> merchant banks: <strong>the</strong> rest were wholly owned by Nigerian private investors. Most <strong>of</strong> <strong>the</strong>se banks were set up between 1986, when financial markets were first liberalised, and 1991, when <strong>the</strong> CBN suspended issuing new licenses in response to <strong>the</strong> emerging signs <strong>of</strong> distress in <strong>the</strong> industry. The local banks are very heterogeneous: whereas a few banks have grown into major market participants, establishing a reputation for providing efficient pr<strong>of</strong>essional services and attracting a blue chip corporate clientele, many o<strong>the</strong>rs have been associated with fraud and mismanagement and have experienced severe financial distress in <strong>the</strong> 1990s. This section examines <strong>the</strong> reasons for <strong>the</strong> growth <strong>of</strong> this sector, <strong>the</strong> salient characteristics <strong>of</strong> <strong>the</strong>se banks, and <strong>the</strong> causes <strong>of</strong> <strong>the</strong> distress which emerged in <strong>the</strong> early 1990s. The first local banks were established in Nigeria during <strong>the</strong> late 1920s and 1930s at a time when banking was effectively unregulated and entry unrestricted. The banks were set up by local businessmen, many <strong>of</strong> whom had encountered difficulties in obtaining credit from <strong>the</strong> expatriate banks. After <strong>the</strong> end <strong>of</strong> <strong>the</strong> second world war <strong>the</strong>re was an indigenous banking boom with 185 so called ’mushroom banks’ registered between 1947 and 1952, although most did not actually commence operations. Most <strong>of</strong> <strong>the</strong> banks that did start operating collapsed within a few years due to a combination <strong>of</strong> mismanagement, insider lending and inadequate capitalisation. Only four <strong>of</strong> <strong>the</strong> banks set up by local investors during <strong>the</strong> colonial period survived until independence in 1960, all with <strong>the</strong> aid <strong>of</strong> substantial financial support from <strong>the</strong> regional governments, whose explicit <strong>policy</strong> was to support <strong>the</strong> efforts <strong>of</strong> indigenous banks to finance local businesses. These banks were also used to finance political activity and to channel loans to party supporters as well as <strong>the</strong> banks’ directors. The introduction <strong>of</strong> <strong>the</strong> 1952 Banking Ordinance, which for <strong>the</strong> first time in Nigeria imposed entry conditions for banks such as minimum capital requirements, and <strong>the</strong> loss <strong>of</strong> <strong>public</strong> confidence induced by <strong>the</strong> failure <strong>of</strong> local banks, brought <strong>the</strong> indigenous banking boom to an end by <strong>the</strong> mid 1950s (Nwankwo 1980: 45-53). For a period <strong>of</strong> almost 25 years until <strong>the</strong> mid 1970s, few new banks were set up by Nigerian private investors: new investment in banking was largely initiated by foreign banks and <strong>the</strong> <strong>public</strong> sector. The Nigerian private sector began to return to banking in <strong>the</strong> mid 1970s, initially in partnership with foreign investors. 14 From <strong>the</strong> mid 1970s until 1986, 13 private sector banks were set up in which Nigerian investors were majority shareholders: in ten <strong>of</strong> <strong>the</strong>se banks foreign investors, mostly established foreign banks such as Société Générale, 12 This definition excludes <strong>the</strong> recently privatised Federal Government banks as well as those state government banks in which <strong>the</strong> private sector holds shares. 13 These figures exclude <strong>the</strong> four local banks which had been taken over by <strong>the</strong> CBN. 14 Nigerian private investors also participated in some <strong>of</strong> <strong>the</strong> state government banks. 11
Page 1 and 2: THE IMPACT OF PUBLIC POLICY ON THE
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Page 33: PERIODICALS African Vision, various

the impact of public policy on the banking system in nigeria

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