the impact of public policy on the banking system in nigeria

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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 22
guidelines - contributed to <strong>the</strong> build up <strong>of</strong> extensive non performing loans in <strong>the</strong> portfolios <strong>of</strong> <strong>the</strong> Federal Government and state government banks. Many <strong>of</strong> <strong>the</strong> state government banks were very badly managed and used for patronage and as a source <strong>of</strong> finance for <strong>the</strong>ir owners. State governments and o<strong>the</strong>r <strong>public</strong> sector agencies were among <strong>the</strong> major defaulters <strong>of</strong> <strong>the</strong> <strong>public</strong> sector banks. The larger Federal Government banks were able to avoid serious financial difficulties, despite <strong>the</strong>ir bad debts and high overheads. They retained experienced management, <strong>the</strong> cost <strong>of</strong> <strong>the</strong>ir deposit base was low and <strong>the</strong>ir size enabled <strong>the</strong>m to be well diversified. But extensive bad debts rendered some <strong>of</strong> <strong>the</strong> smaller Federal Government banks and many <strong>of</strong> <strong>the</strong> state government banks insolvent. Their financial fragility was concealed by a combination <strong>of</strong> <strong>public</strong> subsidy and improper accounting until <strong>the</strong> late 1980s. Since <strong>the</strong>n stricter prudential standards and a less accommodating stance towards liquidity support by <strong>the</strong> authorities have exposed <strong>the</strong> widespread distress among <strong>the</strong>se banks. Financial liberalisation began in 1986/87 after <strong>the</strong> government had adopted a SAP. The deregulation <strong>of</strong> banking markets was partial and, especially with regard to interest rates, inconsistent. Entry requirements (in terms <strong>of</strong> <strong>the</strong> granting <strong>of</strong> banking licenses) were relaxed in <strong>the</strong> mid 1980s and this facilitated a dramatic expansion in <strong>the</strong> number <strong>of</strong> commercial and merchant banks owned by <strong>the</strong> Nigerian private sector. Some <strong>of</strong> <strong>the</strong>se banks have attracted a significant share <strong>of</strong> banking markets and have brought benefits for customers in terms <strong>of</strong> greater competition and improved services, albeit mainly confined to urban areas. In contrast many o<strong>the</strong>rs were set up largely to take advantage <strong>of</strong> arbitrage opportunities in foreign exchange markets ra<strong>the</strong>r than to undertake more conventional banking business. Bad management and fraud, including insider lending, has been endemic among <strong>the</strong>se banks and has led to widespread distress. The introduction <strong>of</strong> more liberal economic policies in <strong>the</strong> second half <strong>of</strong> <strong>the</strong> 1980s, toge<strong>the</strong>r with <strong>the</strong> emergence <strong>of</strong> extensive bank distress, necessitated reform to <strong>the</strong> system <strong>of</strong> prudential regulation and supervision. The deficiencies <strong>of</strong> <strong>the</strong> prudential system had included a lack <strong>of</strong> political independence for <strong>the</strong> supervisors, inadequate banking legislation and <strong>the</strong> priority given to ensuring that banks complied with allocative ra<strong>the</strong>r than prudential regulations. Banking legislation was streng<strong>the</strong>ned in 1990 and 1991, with <strong>the</strong> CBN given greater powers to enforce compliance with <strong>the</strong> banking laws and to intervene in distressed banks. In addition <strong>the</strong> NDIC was set up in 1988 to insure bank deposits and to assist <strong>the</strong> CBN to restructure or liquidate distressed banks. The reforms to <strong>the</strong> financial system implemented since <strong>the</strong> mid 1980s - liberalisation and privatisation, streng<strong>the</strong>ning <strong>the</strong> prudential system and <strong>the</strong> take-over <strong>of</strong> some <strong>of</strong> <strong>the</strong> distressed banks - are an important step towards reshaping banking markets in <strong>the</strong> direction <strong>of</strong> efficiency, competition and prudent management. Never<strong>the</strong>less <strong>the</strong> banking system in 23
Page 1 and 2: THE IMPACT OF PUBLIC POLICY ON THE
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Page 5 and 6: economy) and the o
Page 7 and 8: esource allocation by the</
Page 9 and 10: The financial performance o
Page 11 and 12: or the pub
Page 13 and 14: The restriction of
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Page 17 and 18: Decree established the</str
Page 19 and 20: This strengthened
Page 21: deposit and lending rates lagged si
Page 25 and 26: Federal Government banks plus some
Page 27 and 28: Table 3 Number and Ownership Struct
Page 29 and 30: Table 5 Minimum Paid-Up Capital Req
Page 31 and 32: Manu, Ballama, 1994, ’Critical is
Page 33: PERIODICALS African Vision, various

the impact of public policy on the banking system in nigeria

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