CASE STUDIES FROM AFRICA

The fifth phase of banking sector development, between 1994 and 1995, was classified as the
era of economy-wide regulation (period of second bank failure). In 1994, the CBN announced the
revocation of the licenses and winding up of the operations of four banks—Financial
Merchant Bank Limited, United Commercial Bank Limited, Capital Merchant Bank Limited,
and Alpha Merchant Bank Limited—whilst two banks, Republic Bank and Broad Bank, were
suspended from the banking-clearing house pending recapitalisation by their shareholders.
The two banks were eventually wound up in June 1995 due to their inability to meet CBN’s
conditions. Also, about 200 community banks experienced symptoms of distress by
September 1995. 36
The era of guided deregulation, which constitutes the sixth phase of banking sector
development in Nigeria, occurred between 1995 and 2004 and was announced in the 1995
budget. Major tenets of the new reforms included total deregulation of interest rates in
October 1996; increase of minimum paid-up capital of banks in 1997 to N 500 million and
later to N 2 billion. Universal banking came into effect in Nigeria on January 1, 2000. The
policy accorded banks the right to engage in any financial service ranging from accepting
deposits, lending, trading in financial instruments, foreign exchange transactions,
underwriting of debts, equity issues, brokerage, real estate mortgaging, leasing, investment
managements, and insurance.
The current phase (seventh phase) of the policy and regulatory development of the banking
sector in Nigeria commenced in 2005 and is regarded as the era of bank consolidation. The first
part of this phase of bank consolidation was designed to ensure a diversified, strong, and
reliable banking sector, to ensure the safety of depositors’ money, the playing of active
developmental roles in the Nigerian economy, and the banks becoming competent and
competitive players both in the African and global financial systems. It involved
encouraging the emergence of regional and specialised banks. Emphasis was placed on
recapitalisation and proactive regulation based on a risk-based or risk-focused supervision
framework. The key elements of the first part of the bank consolidation exercise were:
The increase of the minimum capitalisation for banks from N 2 billion
(approximately $ 15 million) to N 25 billion (approximately US$ 250 million) with
full compliance by the end of December 2005. Only banks that met this requirement
were allowed to hold public sector deposits and participate in the Dutch Auction
System for buying and selling foreign exchange.
Consolidation of banking institutions through mergers and acquisitions.
Phased withdrawal of public sector funds from banks.
Adoption of a risk-focused and rules-based regulatory framework.
Adoption of zero tolerance in the regulatory framework.
Adoption of automation process for reporting of returns.
Establishment of a hotline, confidential Internet address for all Nigerians wishing to
share any confidential information with the Governor of the CBN on the operations
of any bank or the financial system.
Strict enforcement of the contingency planning framework for systemic banking
distress.
Establishment of an assets management company as an important element of distress
solution.
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CBN, 1995.
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