the impact of public policy on the banking system in nigeria

Mismanagement and fraud undermined <strong>the</strong> efficacy <strong>of</strong> liberalisation to improve resource
allocation, not least because <strong>the</strong> prudential regulation <strong>of</strong> banks was deficient.
It is arguable that poor design and inappropriate sequencing <strong>of</strong> <strong>the</strong> reforms made a major
contribution to <strong>the</strong> financial distress which emerged in <strong>the</strong> banking industry in <strong>the</strong> late 1980s
and early 1990s, in three important respects. First, <strong>the</strong> prudential legislation was revised and
supervisory capacities were streng<strong>the</strong>ned only several years after <strong>the</strong> de facto liberalisation <strong>of</strong>
bank licensing. Second, <strong>the</strong> reforms to <strong>the</strong> foreign exchange market, which introduced a
managed auction, provided a strong incentive for private investors to set up banks, not to
conduct conventional banking business but to obtain access to foreign exchange at
preferential rates. Hence <strong>the</strong>re were both opportunities and incentives for <strong>the</strong> rapid growth <strong>of</strong>
banks which lacked <strong>the</strong> managerial resources to conduct prudent banking. Third, given <strong>the</strong>
macroeconomic instability afflicting Nigeria, liberalisation <strong>of</strong> entry requirements and interest
rates probably increased <strong>the</strong> risks <strong>of</strong> financial fragility for even well managed banks, in
particular because it intensified competition for deposits and forced up nominal deposit and
lending rates.
7 CONCLUSION
The banking system in Nigeria has experienced major changes since independence, many <strong>of</strong>
which were shaped by government policies. At independence banking markets were
dominated by a relatively small number <strong>of</strong> mainly foreign banks. In <strong>the</strong> following three and a
half decades <strong>the</strong> number <strong>of</strong> banks expanded and <strong>the</strong> ownership structure diversified with first
<strong>the</strong> <strong>public</strong> sector and <strong>the</strong>n <strong>the</strong> Nigerian private sector becoming <strong>the</strong> dominant participants.
Beginning in <strong>the</strong> 1960s, <strong>the</strong> government intervened extensively in banking markets to control
resource allocation and to promote <strong>the</strong> indigenisation <strong>of</strong> <strong>the</strong> economy. The policies pursued
by <strong>the</strong> government were those <strong>of</strong> ’financial repression’. The CBN issued detailed guidelines
to banks to control interest rates and <strong>the</strong> volume and direction <strong>of</strong> credit. The Federal
Government acquired controlling equity stakes in all <strong>of</strong> <strong>the</strong> foreign banks during <strong>the</strong> 1970s
while a number <strong>of</strong> banks were set up by <strong>the</strong> state governments. In <strong>the</strong> late 1970s <strong>the</strong> CBN
initiated a rural banking programme under which <strong>the</strong> commercial banks were instructed to
establish branches in <strong>the</strong> rural areas.
Financial repression and <strong>public</strong> sector ownership had significant consequences for banking
markets. Competition was stifled, providing some degree <strong>of</strong> protection for inefficient banks,
but <strong>the</strong> financial performance <strong>of</strong> <strong>the</strong> <strong>public</strong> sector banks was never<strong>the</strong>less poor. Policy
lending - loans extended to <strong>the</strong> <strong>public</strong> sector or to priority sectors in accordance with credit
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