History and Evolution of Banking in Nigeria

The origin of modern banking in Nigeria dates back to 1883 when the African banking corporation was established followed in 1884 by the establishment of the British bank of west Africa. Shortly after its establishment, the African banking corporation collapsed giving way for the British bank of west Africa which has survived till the present day. The British Bank of West Africa though over the years changed names at different periods; initially to standard bank west Africa, standard bank of Nigeria and presently, First Bank of Nigeria PLC.

Other financial institutions in forms of banks followed suit soon including the precursors of the present-day union bank of Nigeria PLC. Owing to the fact that these banks were established to protect the interest of their foreign owners, the policies of the banks were rather discriminatory against the very indigenes who, being denied credit advances in these banks, became effectively excluded from the mainstream of the economy. The resultant alienation ignited the protagonist of the nationalist of the wholly indigenous banks in Nigeria. Thus, for the periods spanning 1929 and independence in 1960 nothing less than 26 such banks were formed out of which only four survive till present day. They are namely national bank of Nigeria, Wema bank {formerly Agbonmagbe bank}, African continental bank of the north.

As a result of the widespread public concern generated by the spate of collapse of indigenous banks, government setup the Paton’s commission to investigate the collapse of one of such banks. Its report laid the foundation for the enactment of the banking ordinance of 1952 which marks the beginning of banking legislation in this country.

The 1952 ordinance introduced for the first time legal requirements as to the establishment and operation of banks. It provided that no company can carry on banking business in Nigeria unless it holds a license for that purpose granted by the financial secretary. with this and other executive powers conferred by the ordinance, the financial secretary emerged as the pioneer supervisory and regulatory authority in this country’s banking industry.

However, the feeling of some nationalists was that what was needed to address the problems confronting the industry was a central bank which would play a more wide ranging role in the economy and which would be better placed to take over and exercise the regulatory and supervisory powers then vested in the financial secretary.

After a series of debate and similarly following the reports of J.B Loynes in the 1957, the colonial government eventually passed the central bank of Nigeria ordinance 1958, which came with the establishment of the Central Bank of Nigeria with the following functions:

  • Issuance of a legal tender currency in Nigeria
  • Maintenance of external reserves to safeguard the international value of the currency.
  • Promotion of monetary stability and a sound financial system.
  • Banker and financial adviser to the federal government and Banker to other banks in Nigeria and Abroad.

Central Bank of Nigeria

The 1958 Central bank of Nigeria (CBN)ordinance came into force on 1st July 1959 and since then the central bank has through a series of legislation assumed wider powers and increasing prominent loans in the development of Nigeria’s banking industry.

Historical Development

Pertinent to reiterate that the history of banking in the country Nigeria dates to 1883 when the African Banking Corporation began the operations of banking in Lagos. The African Banking Corporation was a South African bank which came to Nigeria and usurp business from Elder Dempster Merchants, who were formerly on quasi banking business before then. This was followed by the British Bank of West Africa (BBWA), which initially was a Trust Fund in 1884 by Sir Alfred Jones. It began banking activities in Lagos in 1894 and formed a branch in Calabar in 1900. The British Bank of West Africa was registered in form of a limited liability company at the time it began operations in England before forming the Lagos. It was headed the Elder Dempster Merchants and similarly supported by the colonial government. In 1894, the British Bank of West Africa absorbed the African Bank Corporation operations in Nigeria. The British Bank of West Africa changed its identity to the Bank of West Africa, and subsequently to the Standard Bank of West Africa Limited until it metamorphosed into the First Bank of Nigeria (FBN), in 1979 when the government of Nigeria increased local interests holding in foreign banks in the country.

The Period 1952-1985

The period between independence to the 1980s witnessed the establishment of several banks, however not without the laid down 1952 Banking Ordinance, and similarly the Banking Amendment Act. The era marked the commencement of banking regulation in the country. It also saw the formation of some specialized banks namely Development Banks and Merchant Banks, which are named as the Nigerian Industrial Development Bank (NIDB), the Nigerian Bank for Commerce and similarly the Industry (NBCI) and the Nigerian Agricultural and Credit Bank. The Nigeria Industrial Development Bank was formed in 1964 through a reconstruction of the then Investment Company of Nigeria Limited (ICON), which was initially incorporated in 1959 as one industrial development finance company.

This period which witnessed the beginning of merchant banking coupled with the establishment of Philips Hill Nigeria Limited, and in the same vein the Nigeria Acceptances Limited (NAL), both of which underwent merge rand became Nigeria Acceptances Limited in 1969, and subsequently to Merchant Bank Limited. Similarly, between 1973 and 1975, about four merchant banks were formed namely International Merchant Bank Limited by First National Bank of Chicago, Continental Merchant Bank Limited through the merger of First National Bank of New York and Chase Manhattan Bank, ICON (Merchant Bankers) Limited, and Nigeria Merchant Bank PLC. Summarily, the timeframe between 1959 and 1985 saw consolidated growth in the banking sector. In 1970, there were a total of 14 commercial banks which rose to 29 in 1980. In 2007, there were 24 capitalized commercial megabanks, 12 arising out of a season of series of mergers and acquisitions in the banking industry to restore public and investors’ confidence and forestall a total collapse of the sector.

The period 1986-Date From 1986

This was a period of massive expansion and structural changes in the banking sector, such that by 1991 there were already in existence about one hundred and twenty-one commercial and merchant banks in Nigeria. The figure was made up of sixty-six commercial and fifty-five merchant banks. Only in 1991, twenty new banks were licensed, from the whole idea of deregulation of the then economy by the ruling government at the federal level, and this brought a free-market enterprise and similarly liberalization of the whole banking licensing scheme. Deregulation of the economy as at that time and the proliferation of financial institution since 1986 came with attendant consequences, among which are that since 1996, there has been thinning out of banking enterprise.

The banking sector experience distress resulting from several named reasons such as mismanagement in the form of grants, bad loans and advances then ownership structure, which means owner’s direct intervention in the banks. Among the long list of reasons for the distress includes inappropriate corporate governance, inadequate regulatory and supervisory capacity; asymmetric information; under capitalization, among numerous others. The distress itself led to the crisis and erosion of public confidence, diminution of trust and of relationship commitment, which once betrayed, do not return easily. Nothing less than twenty-seven (27) banks failed and were wound up from the resultant effects of the distress in the banking sector as at that time. This led to loss of wealth, public confidence in the system and in more challenging monetary management. It is worthy of note that banks failure was not peculiar to the first era alone but cuts across all other periods as well. There were quite significant cases of failure, which is indeed more pronounced in the period 1986- 2003, which thus necessitated drastic regulatory measures to be taken in the succeeding years to stem the tide of failure, which was on the high side and, to restore public confidence in the banking sector. Owing to the harvest of banks failure, the Nigerian Deposits Insurance Corporation (NDIC), was established by Decree 22 0f 1988, to insure deposit liabilities of licensed banks; provide financial and technical assistance to banks and contribute to the quest of a safe and sound banking environment in Nigeria. In essence, it was created to carry out the final mortality process of ailing banks whose licenses have been revoked by the Central Bank of Nigeria (CBN). The period from 2004 to the present has been one of mixed feelings in the sector, as the CBN in late 2004 issued a directive ordering banks to jerk-up their capital base (paid-up) from ₦25 billion (twenty-five billion Nigerian Naira) by December 2005, a period of eighteen months. This provoked vehement protests from the bankers, but the order was irreversible. And the result is that by 2006, there remained one just twenty-five banks in existence resulting from reorganizations, mergers, and acquisitions. The interesting that is that what appeared a mission impossible at the onset has metamorphosed to something practicable through dogged determination of operatives.

Evolution of Banks in Nigeria

Scholars who observed the tracing of the evolution of banking concluded that there may be no crystal clear, water-tight distinction when it comes to differentiating between the historical development and evolution of banking in Nigeria as the two go Pari-passu, the one engendering the other. According to Prof. G.O. Nwankwo

“the historical evolution of banking in any country provides or can provide the rationale for and methodology of prudential regulation of banking in that country.”

The evolution of banking within the Nigerian terrain may then be summarily categorized into phases as phased out above. That is between 1892-1954, which constitute a period of free and monoculture banking, the timeframe of the 1952-1985 which notably was an era of classical liberalism and in the same vein the period between 1986-the present, which has been attributed by several of structural adjustment programmes of different and varying sorts, and reforms and consolidations in the banking sector for sectoral viability and in the same vein for customers and investors’ confidence in the system. This has been regarded as very necessary to assure a clean break from the very irritating and unpalatable past. The initial part of the first era was a period of monopoly however it was broken by the entrance into the sector by indigenous banking enterprises.

It was reported that:

“…the failure of most of these concerns for reasons stated above warranted the promulgation of the Banking Ordinance of 1952, which was a first step at regulating the banking sector. The 1952 Ordinance addressed vital issues by establishing a minimum paid-up capital, examination and supervision of banks, maintenance of reserve fund and capital, unsecured loans, unsecured loans, among others. The ordinance also adopted a classification of banks into indigenous and expatriate banks, which were to maintain a minimum paid-up capitalization of £12, 500 (₦25,000) and £100,000 (₦200,000) respectively. All new banks were required to obtain a license from the Minister of Finance before operating. Further to this came the Central Bank of Nigeria Ordinance of 1958, and the Banking Ordinance of 1958 which was repealed in 1969. The 1958 Banking Ordinance further jerked up the authorized paid-up capital to £200,000 for the foreign banks leaving the indigenous banks at the old rate. The Ordinance introduced credit ceiling, prohibited banks from trading or beneficially acquiring real estate. The 1969 Banking Act which repealed the 1958 Ordinance came with an objective of strengthening the banking system while increasing the powers of the Central Bank of Nigeria on the sector and on overall economy of the country…”

The Act provides that banks incorporated within the country must have a minimum paid-up share capital plus an additional ₦600,000, while banks abroad must have ₦1, 500,000. And that the paid-up capital plus the legally required statutory reserve of a bank in either category must not fall below 10 per cent of its total deposit. The Act similarly provided for compulsory incorporation of all local banks Nigeria. The opening and the closing of different branches by banks was also to be subject to the prior approval of the Central Bank of Nigeria. From 1969 to 1991, there were numberless of amendments to the two Acts, such as the Central Bank of Nigeria Act (Cap 47), Laws of the Federation of Nigeria (LFN) 1990, and Cap C4, LFN 2004; the Banking Act (Cap 28) LFN 1990, and the Banks and Other Financial Institutions Act B3, LFN 2004. The 1990 Acts have been perfectly repealed by the 1991 CBN Decree. The successive Acts and Decrees brought about new innovations into the manner of regulation of the industry to enhance and promote the standard and proper monitoring of the banking sector. With the advancement of the economy came the necessity for diversification in the banking sector, hence over the years, there were different types of specialized banks established in the country for different specific purposes.

The sector began on a mono-culture system as afore stated, and later developed to one where specialized bank began to spring-up. In 1960, Merchants Banks debuted, while the 1970s witnessed the coming on the scene of the Development Banks, then Community banks and Mortgage Banks came in the 1990s. there is also the Nigerian Export-Import Bank which was established in 1991 to facilitate economic development through commerce, and then Urban Development Bank, which was established by the Federal Government to finance urban development and the rehabilitation and maintenance of urban areas in the country. In 1977, the CBN introduced the Rural Banking Programme for the first time to facilitate rural development. It was a programme in three phases to cover a period of years from 1977 through 1991, by which time at least, 290 out of the 300 identified and allocated centers had been opened, hence it was a huge success. This encouraged commercial banks opening branches in rural areas, which brought about the opening of the rural areas.

Modification of the Universal Banking Model

The CBN (Central Bank of Nigeria) is the apex regulatory authority of the financial system in Nigeria. It was established by the Central Bank of Nigeria Act of 1958 and began operations on 1st July 1959.

In 2010, the Central Bank of Nigeria made changes to the then existing banking model. Thereby permitting the holder of a commercial banking license to function in other non-core banking sectors, either directly or indirectly through stipulated subsidiaries.

The introduction of this scheme classified banking licenses into commercial, Merchant and Specialised/Development Banking Licenses.

Commercial banks are banks that offer services to the general public and to companies, while Merchant banks are banks who deal with commercial loans and investments. In modern times, it is referred to as investments banks. These were the first modern banks which began in the medieval times through merchants who traded in commodities and clothing merchandise.

Development banks are predominantly engaged in consumer banking, treasury and markets, asset management, securities brokerage, equity and debt fund-raising. They are established by the government of countries to support start-ups, businesses and other industries that are significant to the sustainable growth of the country

For example, the Development Bank of Nigeria is to bridge the gap between the Bank of Industry (BOI) and other commercial banks that could not meet the needs of the Micro, Small & Medium Enterprises in Nigeria via business funding.


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