The History of Nigerian Banking System

The storey of Nigerian margeing comp bothing SystemThe existence of borders in Nigeria dates back as far as 1862 when the first Nigerian intrusting concerncame into being. There was no desireing legislation until 1952 at that prison term, Nigeria hadthree foreign strands and 2 indigenous banks with a collective total of forty branches.Despite the ring standards by the 1952 ordinance, the growth of contain deposits was sloweddown by the Nigerian lust to prefer heavy(p) and distrust checks for debt settlements.1912 experienced the establishment of the due west African currency board which was to help6in financing the trade trade of foreign firms in West Africa and to issue a West Africancurrency which could be converted to British pound sterling. The colonial policies barredthe local investment of reserves, discouraged deposit expansion, precluded discretion forpecuniary management and did nothing to educate Africans in developing indigenous financial institutions. T his led to a motion by several Nigerian members of the digest toestablish a central bank to facilitate economic development. though the motion wasdefeated, the colonial administration appointed a bank of England to sphere the issue and he conscious against a central bank with fierceness on their effectiveness in an un authenticcapital market. An different hear was conducted in 1957 and this turn uped in the creation of aNigerian central bank and the introduction of the Nigerian currency. The role of the centralbank was to establish the Nigerian currency, get everywhere and regulate the banking governing body, serveas bankers to some opposite banks in Nigeria and function come on the politicss economic policy in themonetary field.This policy include control of bank commendation growth, credit distribution by sector, cashreserve requirements for commercialised banks, discount ratesinterest rates the aboriginal border super charged commercial and merchandiser banksan d the ratio of banks long- full term additions todeposits. Changes in Central hope restrictions on credit and monetary expansion affectedtotal demand and income. For example, in 1988, as inflation accelerated, the Central banking companytried to bear monetary growth.During the civil war, the government trammel and later susp finised repatriation of divid destinationsand profits, cut back foreign travel every(prenominal)owances for Nigerian citizens, limited the size ofallowances to overseas creation offices, required official permission for all foreign payments,and, in January 1968, issued refreshing currency notes to replace those in circulation. Although in1970 the Central confide advised against dismantling of import and financial constraints toosoon after the war, the embrocate boom soon permitted Nigeria to relax restrictions.The three largest commercial banks held ab step up triad of total bank deposits. In 1973 thefederal government undertook to acquire a 40-percen t equity ownership of the three largestforeign banks. In 1976, under the bit Nigerian Enterprises Promotion code requiring60-percent indigenous holdings, the federal government acquired an supernumerary 20-percentholding in the three largest foreign banks and 60-percent ownership in the other foreign7banks. Yet indigenization did not change the management, control, and carrying orientation coursetoward planetary trade, particularly of foreign companies and their Nigerian subsidiariesof foreign banks.At the end of 1988, the banking system consisted of the Central jargon of Nigeria, forty-twocommercial banks, and twenty quaternity merchant banks, a substantial increase since 1986.Merchant banks were allowed to open checking accounts for corporations save and couldnot immerse deposits below N50, 000. Commercial and merchant banks together had 1,500branches in 1988, up from 1,000 in 1984. In 1988 commercial banks had assets of N52.2 one million million compargond to N12.6 bill ion for merchant banks in early 1988. In FY 1990 thegovernment put N503 million into establishing lodge banks to encourage communitydevelopment associations, cooperative societies, farmers groups, patriotic unions, tradegroups, and other local organizations, especially in rural argonas. opposite financial institutions include government- have specialized development banksthe Nigerian Industrial Development savings bank, the Nigerian Bank for Commerce and Industry,and the Nigerian sylvan Bank, as well(p) as the national Savings Banks and the nationalMortgage Bank. Also guessive in Nigeria were numerous insurance companies, pension coin, and pay and leasing companies. Nigeria withal had a investment company telephone telephone exchange (establishedin Lagos in 1961) and a number of pipelinebrokerage firms. The Securities and shiftCommission (SEC) Decree of 1988 gave the Nigerian SEC powers to regulate andsupervise the capital market. These powers included the rectify to revoke stockbrokerregistrations and approve or disapprove any parvenu stock exchange. Established in 1988, theNigerian Deposit Insurance Corporation increase confidence in the banks by protectingdepositors against bank failures in authorise banks up to N50, 000 in return for an annualbank allowance of virtually 1 percent of total deposit liabilities.1.5.3 Types of BanksA bank is a profit making business providing financial function which includes receivingdeposits of gold, lending notes and processing transactions. There are different types ofbanks and so do their functions differ.81.5.3.1 Commercial BanksCommercial banks are authorized institutions providing retail banking services to thepublic. They lead deposits from nodes and in turn deal adds based on thosedeposits. They are mention for providing services which includes savings, current andterm/fixed deposit accounts, lending, payment and hit of specie which is nowfacilitated by the recently introduced online b anking. They also facilitate the versionof rural areas by extending banking services. They offer professional advice to their clientson viable businesses and international trade. They are the channel for the implementation ofthe monetary policies from the central bank and act as authorized foreign exchange dealersin providing such facilities. They are collectors on behalf of other government and nongovernment agencies. They buy and sell securities on behalf of their customers and boostthe securities in the capital market and also sponsor companies seek quotation on theNigerian Stock supercede.1.5.3.2 Merchant BanksThey started carrying outs in 1961 with the establishment of Philip Hill (Nigeria) special(a)which later merged with Nigerian Acceptances Limited in 1969. Other merchant bankslater came along. As a result of the non recognition of ecumenical banking then, merchantbanks in Nigeria operate wholesale banking, which involves loan syndication, equity anddebt issues, ventu res capital and equipment leasing. They play important roles in pooling a mob of banks, where the borrowing required exceeds availability of funds fromcommercial or any other bank. They also introduce their big clients to the Nigerian StockExchange and handle international transactions by dint of a global vane of affiliatedbanks. The banks are usually sited at urban areas and provide services to largeorganisations and extremely wealthy individuals.1.5.3.3 Universal BanksBefore the introduction of the universal banking imagination by the federal government,operators of merchant banks had complained that their poor feats over the long judgment of conviction9were due to a banking system that they claimed favoured commercial banks. The clamourfor one-stop-supermarket bank became noticed in the mid 1990s when the financial systemwas sweep by the distress in the banking sector. This virtually wrecked havoc on theeconomy. Many people have observed that the distinction between commerc ial andmerchant banking is out-dated and no longer fashionable in other developed countries.The harmonised banking service is seen as terms-effective for providing a level vie field,where a customer can open an account and engage in all banking and insurance transactionsfrom one bank to the other. The new banking concept offers a wider range of bankingservices, which include retailed banking, capital market activities and insurance business.The banking surroundings allow no longer be restricted to certain functions. The new bankingservices commenced in January 2001.1.5.3.4 Development BanksDevelopment banks were established by the government, to nurture national economicdevelopment. They tend to address issues of low income, insufficient savings andinadequate investment. The government and multilateral agencies sponsor the banks. Thefirst development pay institution is the Nigerian Local Development Board, which wasestablished in 1946 and charged with the responsibility of giv ing loans and grants to nativeauthorities, cooperative societies and other public bodies for cocksure developmentprojects (Agene 1990). Notable development banks include, Nigerian IndustrialDevelopment Bank, Federal Mortgage Bank of Nigeria, Nigerian Bank for Commerce andIndustry, Nigerian Agricultural and Cooperative Bank, Peoples Bank of Nigeria andNigerian Educational Bank. Others include, National Economic convalescence Fund(NERFUND), Community Banks, etc.In a nutshell, for the long term survival of a bank, they would have to go for currency in theiroperation so as to be able to meet up with their expenses. They accept deposits fromcustomers and pay interest which can only be squareized from the exchange of silverbetween two parties. One of the ways in which they make money is by charging interest onloans. The money deposited by customers is impart out to creditors. They charge tallerinterest on money they lend out and pay lower on the deposits. The difference then serve sas own realization from the transaction.10Also, they operate on fractionalized deposit. They use depositors money to make moneyby giving loans and earning interest. These loans are usually real estate loans andsometimes car loans. Prior to the depression, banks were allowed to invest in the stockmarket. As a result of the bank crash, a law was passed to end the dress and force banksand investment institutions to be different entities.1.5.4 Impact of the Central Bank on the activities of a BankThe Central Bank of Nigeria governs the activities of banks in Nigeria and provides rulesand guidelines for the execution of activities in the banking exertion. The central bank ischarged with the general control and administration of the monetary and financial sectorpolicies of the federal government. Its statutory order includes the issuance of the judicialtender currency, master(prenominal)taining of the external reserves, protecting the international valueof the legal tender currency , and playing as bankers and financial adviser to the federalgovernment promote monetary stability and a sound financial system in Nigeria. Inunderstanding the monetary policy, it is important to look at it from the perspective of themandate set for the bank. This includes maintenance of Nigerias external reserves tosafeguard the international value of the legal currency, promotion and maintenance ofmonetary stability and a sound and efficient financial system in Nigeria, acting as bankerand financial adviser to the Federal Government and acting as lender of last resort tobanks.Consequently, the Bank is charged with the responsibility of administering the Banks andOther Financial constitutions (BOFI) Act (1991) as amended, with the sole aim of ensuringhigh 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 social classs performed so me major developmental functions, focused on all thekey 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 thecentral bank of Nigeria also include the establishment of a national smallfinanceconsultative committee, evolvement of a adopt micro finance policy that spells out theeligibility and licensing criteria, provides operational standards and guidelines to11stakeholders, adopting an allow regulatory and supervisory framework, minimizingregulatory arbitrage through periodic reviews of the policy and guidelines, continuouslyadvocating market determined interest rates for government owned institutions andpromote microfinance funds through MFBS, promoting linkage programmes betweenuniversal banks, specialized finance institutions and the micro finance banks.1.5.4.1 sections of central bank and their activitiesThere a basically three departments in the cen tral bank of Nigeria and they are the banking inadvertence department, development finance department and other financial institutionsdepartment.1.5.4.1.1 Banking Supervision incisionThe banking charge department of the central bank of Nigeria carries out on-site aswell as off site supervision of deposit money and discount houses. Its basic functionsinclude reviews and analyses of the financial conditions of banks based on CAMELparameters utilise prudential reports, reviews and analyses of statutory returns and otherrelevant learning, monitor trends and development for the banking sector, depict pains reports on a monthly and quarterly basis. It also monitors respect with the law,guidelines and circulars (BOFIA (banks and other financial institutions act), CAMA, andCBN (Central Bank of Nigeria) Act etc)1.5.4.2 Development Finance DepartmentThe development finance department was established to manage the agricultural creditguarantee scheme fund and finance the marketing operati ons of the inoperative commoditymarketing boards. In view of the expected role of the bank in the Nigerian economy, thedepartment was restructured and renamed as the development finance department. They areconcerned with identifying development finance market failures, designing strategies andpolicies for addressing them, formulating policies, regulatory and supervisoryframework for micro/rural finance, identifying development priorities, designing andimplementing alternative documentation sources, monitoring and evaluating the impact of12development finance initiatives, advising government and the CBN steering oncommodities, SME, and micro/rural finance issues.1.5.4.3 The Other Financial Institution Department (OFI)The other financial institutions department is saddled with the responsibility of supervisingand regulating the other financial institution sub-sector which include the communitybanks, finance companies, bureau de change, primary mortgage institution, thedevelopment finance institutions and the recently launched micro finance banks.The department carries out both on-site and off-site supervision of the other financialinstitutions. The off-site supervision involves the appraisal and approval of the practisefor licenses, nominees intothe boards and top management positions, transfer of shares andincrease in hare capital, statutory returns from other financial institutions, appointment orexchange of the external auditors. The on-site aspect of the departments function includespre commencement examination before the grant of a final license to an OFI (Otherfinancial institutions), routine examination which is the regular examination, objective lensexamination addresses specialized supervisory concerns arising from unprofessional conductof the operations of an OFI and is carried out as the need bob ups while spot-checks for quickconfirmation/ verification through independent on-site assessment. This includes corporategovernance, accounting syste ms and records, quality of assets, reliability of informationprovided, 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 NigerianBanksMonetary policies refers to the particularized actions taken by the central bank to regulate thevalue, supply and cost of money in the economy with a view t achieving governmentsmacroeconomic objectives. For many countries, the objectives of the monetary policy areexplicitly stated in the laws establishing the central bank, while for others they are not. Theobjectives of the monetary policy may vary from country to country but there are two mainviews.13The first view calls for the monetary policy to win set stability, while the second viewseeks to achieve price stability and other macroeconomic objectives. The central bank ofNigeria like other central banks in developing countries, achieve the mo netary policy goalthrough the union 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 publicand demand deposits or current accounts in the banks. The broad money (M2) includesnarrow money plus savings and time deposits, as well as foreign denominated deposits. Thebroad money measures the total volume of money supply in the economy. Thus, excessmoney supply (or liquidity) may arise in the economy when the amount of broad money isover and higher up the level of total output in the economy.The need to regulate money supply is based on the knowledge that there is a inactiverelationship between the quantity of money supply and economic military action and that if itssupply is not limited to what is required to support productive activities it will result inundesirable effects such as high prices or inflation.In summary, monetary policy in the Niger ian circumstance refers to the actions of the CentralBank of Nigeria to regulate the money supply, so as to achieve the ultimate macroeconomicobjectives of government. Several factors influence the money supply, some of which arewithin the control of the central bank, while others are outside its control. The specificobjective and the focus of monetary policy may change from time to time, depending on thelevel of economic development and economic fortunes of the country. The choice of cats-paw to use to achieve what objective would depend on these and othercircumstances.1.6. History of the banks surveyed1.6.1 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 subsequentlylaunched what motionlessness remains the most successful Initial Public Offering (IPO) in the explanation14of the Nigerian Capital Market. Its 6,000,000,000 (six billion) ordinar y shares of 50 kobo distributively were later listed on the Nigerian Stock Exchange on October 21, 2004. Zenith BankPlc achieved yet another milestone when it raised N53.63bn in February 2006 by a PublicOffer of 3,000,000,000 (three billion shares), one of the largest amount in the history of theNigerian Capital Market.Zenith Bank Plc is one of the largest and most profitable banks in Nigeria with total assetsplus contingents of over N714.5 billion after consolidation.The Bank has continue to record remarkable performance on several parameters.Zenith Banks growth and performance has earned keen ratings from both local andinternational rating agencies. Agusto co. ltd has systematically rates the bank Aaa for sixconsecutive years. Also of prise is the fact that the bank has the lowest non performingloans to total loans ratio of 1.7% against the industry ordinary of 18% and has grown itsasset base at an average of over 50% per annum in the last five years.Its service whirl covers but are not limited to corporate and commercial bankingservices, 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 theiroperation. It sets out to differentiate itself in the banking industry through the quality ofservice 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 useof information and communication technology.The banks overall vision is to make the brand a reputable international financial servicesnetwork recognized for innovation, superior customer service and performance whilecreating premium value for all stakeholders.1.6.2 Guaranty verify Bank PlcGuaranty Trust Bank plc was incorporated i n July 1990, as a private limited liabilitycompany wholly owned by Nigerian individuals and institutions. The bank was licensed asa Commercial Bank in stately 1990 and commenced operation in February 1991.In September 1996, Guaranty Trust Bank plc became a publicly quoted company and wonthe Nigerian Stock Exchange Presidents Merit portion out that aforementioned(prenominal) year and again in the years152000, 2003,2005 and 2006. The Bank was also runner-up for the quoted company of theyear swag in 2005. In February 2002, it obtained a Universal Banking license and wasappointed a settlement bank by the Central Bank of Nigeria (CBN) in 2003.Its avocation to continue adding value to the businesses of its stakeholders has seen it emerge asa pacesetter and industry leader over the years. This is evident in its introduction of realtime online banking in 1990, mobile, telephone and internet banking in 2002, Slip freebanking in 2006 and the first fully interactive self service call cen tralize GT Connect in 2006.The bank was able to meet their financial obligations as they fell due and this got them therecognition of three rating agencies. Agusto Co reaffirmed its twofold a risk rating everyyear fro the last quaternity years, Fitch also designate the bank a double A minus risk rating inrecognition of its strong internal franchise, good quality assets and sound earnings recordand finally, Standard Poors, assigned the Bank a double B minus (BB-) risk rating. TheBank is the only Nigerian financial institution with such a rating, which is the equivalent as theAgencies Sovereign rating for Nigeria.The bank has over the years been a recipient of several awards for superior financialperformance, customer service delivery, excellent share performance, managementefficiency some of which are the most consider financial institution in Nigeria (2006), thehighly commended bank of the year award in Africa (2005), Most Customer friendly Bank(2007), Best Bank for Brand Dev elopment 2007.Despite the challenges which characterized the year under review(2006-2007 Financialyear), the bank was able to grow its gross earnings by 46% from N34 billion to N49 billionwhile its profit before tax rose by 50% from N10.5 billion in the previous year to N15.7billion. In the same period, total asset and contingents increased by 54% from N391billiona year earlier to N603 billion.