HISTORY OF NIGERIAN BANKING SYSTEM

History Of Nigerian Banking System

The Nigerian banking system is one of the significant sectors contributing to the growth of Nigeria’s economy. Over the years, it has achieved tremendous growth in structure and activities.

This article focuses on the history of Nigerian banking system, its evolution and some of the components contained in its structure as of now.

The History of Nigerian Banking System

The history of banking system in Nigeria dates back to the era of colonialism. The colonial government set up Colonial Banks through which it sought to meet its commercial objectives. British West Africa and African Banking Corporation were created in 1892 as the foremost banking institutions in Nigeria. Later on, they merged with each other and metamorphosed into the present-day First Bank of Nigeria. Through the merger of National Bank of South Africa and Anglo-Egyptian Bank, Barclays Bank came into inception in 1925. The British and French Bank for Commerce and Industry commenced business in 1948 and at a later time, it developed into the present-day United Bank for Africa.

1929 marked the establishment of Nigeria’s first domestic bank named Industrial and Commercial Bank. Following its collapse in 1930, the bank was displaced in the subsequent year by Mercantile Bank. Also, The collapse of the Industrial and Commercial Bank was followed by the establishment of the African Continental Bank in 1949. Meanwhile, the latter bank [African Continental Bank] served as Nigeria’s only preservable indigenous bank after the collapse of the first indigenous bank. The Nigerian Farmers and Commercial Bank –a bank created for agricultural development –came into inception in 1947.

History Of Nigerian Bank System

History Of Nigerian Bank System

Banking Reforms in Nigeria

Nigeria has undergone two major banking reforms and each banking reform has had a significant impact on the economy of the nation. The first banking reform was effected in 2004 while the second banking reform took place in 2009.

  • 2004 Banking Reform: This banking reform was centered on the integration of banks through the adoption of acquisition and merger. In consequence of this, commercial banks were rebased to #25 billion from the initial #2 billion.
  • 2009 Banking Reform: Under this banking reform, NASS (National Assembly of Nigeria) set up AMCON (Asset Management Corporation of Nigeria) in 2009. For its financing, AMCON generates 0.3% of the entire assets of participating commercial banks plus the total sum of #50 billion from the Central Bank of Nigeria.

Re-modification of the Universal Banking Model by the CBN

Since its establishment in 1959, the CBN (Central Bank of Nigeria) has maintained its significance as the apex banking authority in Nigeria. Besides the issuance of legal tender in Nigeria, CBN performs vital functions aimed at regulating Nigeria’s economy and modifying the structure of the Nigerian banking system. In 2010, the re-modification of the existing Universal Banking Model was done by the CBN. Basically, the Universal Banking Model is a scheme that authorizes anyone who possesses commercial banking license to use chosen subsidiaries in performing direct or indirect operations in other peripheral banking. By virtue of this scheme, banking licenses have been categorized into three alternatives namely:

  • Specialized/Development Banking License
  • Merchant Banking License
  • Commercial Banking License

Structure of the Nigerian Banking System

As a complex whole, the Nigerian banking system comprises several components and each component performs functions which distinguish it from the other components. For instance, the Central Bank of Nigeria (CBN) performs regulatory functions as the central monetary authority while commercial banks are known for a broad range of functions including – but not limited to –acceptance of deposits and provision of credit facilities.

Central Bank of Nigeria (CBN)

The CBN is the central monetary authority in Nigeria as well as the sole issuer of legal tender in the country. It was created in 1958 as a result of the need to make up for the banking deficiency of WACB (West African Currency Board) and foster the development of the capital market as well as the money market at large. It is worthy of note that WACB had been operating prior to the establishment of the Central  Bank of Nigeria. Established in 1912, WACB (West African Currency Board) served as the issuer of legal tender in Nigeria before the CBN was set up few years to Nigeria’s independence. WACB had an automatic connection with the British system and was not involved in monetary management. Considering this and the certainty that Nigerians lacked the ethics of monetary management, there arose the significant need to set up the CBN. Ultimately, the CBN came into existence in 1958. However, the commencement of its operations was delayed until July 1, 1959.

At the start of business, the CBN had the initial capital expenditure of #3 million approved by and completely paid by the Federal Government. By virtue of its authority as Nigeria’s central monetary system, the CBN plays a key role in the management of the economic system and in serving as an overseer. The CBN maintains the right to implement monetary policies intended to stimulate the growth of Nigeria’s economy. These monetary policies affect the activities of commercial banks in a way intended to regulate the economy. Moreover, the CBN carries out vital foreign and domestic operations required to enhance economic management. Annually, the CBN issues a “monetary circular” to the merchant and commercial banks in order to facilitate their roles in achieving the economic goals of the Nigerian banking system.

Commercial Banks

In Nigeria, commercial banks have been in existence before the inception of merchant banks as well as the evolution of the CBN. Basically, commercial banks function as institutions to which people entrust money and other valuables for the purpose of safekeeping. Meanwhile, the emergence of commercial banks instigated the need for an institutionalized saving of money and other valuables. The importance of commercial banks can never be undermined in any discussion about the Nigerian banking system.

Primarily, commercial banks in Nigeria perform two elaborate functions which are described as the “banking function” and the “savings function”. By virtue of the “banking function”, commercial banks create and issue commercial deposits and credits. In the second place, the “savings function” implies the diversion of funds from surplus units to the non-functioning units of the economy. This is aimed at the establishment of capital projects as well as the promotion of consumer terms.

Roles Performed by Commercial Banks

  • Helping customers to receive proceeds of banking instruments
  • Helping customers open and keep several types of accounts
  • Provision of credit facilities to customers
  • Fundraising through the provision of debentures to members of the public or other interested persons
  • Guiding customers on the effective use of credit facilities
  • Provision of additional banking services including secure deposit facilities, fund remittance, etc.
  • Receival of deposits –such as target and time deposits –from organizations, firms, and individuals

Merchant Banks

1960 marked the beginning of merchant banks in Nigeria. At a later time, the first merchant bank united with the Nigeria Acceptance Limited –existing as of then –to form Nal Merchant Bank Limited. Significantly, the introduction of merchant banks was aimed at bridging the gap in the composition of credit facilities provided by commercial banks. In 1995, Nigeria had a total of 149 merchant bank branches.

Merchant banks are concerned with the provision of long-term loans as well as the acceptance of large deposits usually from #50,000 upwards. Moreover, they help customers with the management of equipment and provide loan syndicate for carrying out capital-intensive projects. Amongst other functions, merchant banks provide people with professional advice on:

  • transfer of public enterprises to private ownership
  • managers and acquisitions
  • capital reconstruction

Indigenous Banks

From 1929 to 1952, Nigeria experienced massive establishment of indigenous banks. Excluding the National Bank of Nigeria Limited –which was established in 1933 –all the indigenous banks collapsed. Established in 1938, the Agbonmagbe Bank Limited metamorphosed into what is presently known as Wema Bank Limited. Being another indigenous bank, the Africa Continental Bank was founded in 1948. Notably, it once underwent bankruptcy as a result of ineffective management. But as of now, the bank has commenced operations afresh.

Community Banks

Community banks are different from other banks in the sense that their ownership and management are usually in the hands of the community –or group of people –that established them. The scheme which introduced community bank in Nigeria was officially declared in the budget speech of 1990. Meanwhile, community banks are managed as unit banks with their financing and activities carried out by their owners –usually a community or group of persons. They are primarily set up to promote the interests of their members usually in the provision of credits, deposits and other financial instruments. Through the idea of a community bank, members work collectively to render financial assistance to one another based on creditworthiness and self-recognition. A community bank may be set up in order to

  • Cultivate the habit of banking among residents of rural areas
  • Facilitate Nigeria’s structure of small-scale production in urban and rural areas
  • Extend the banking services required to facilitate rural development
  • Promote the growth of occupational activities in rural areas
  • Integrate financial system across the nation

That’s all about the history of Nigerian banking system.

Related: 

Tags: History Of Nigerian Banking System, History Of Banking System In Nigeria, types of banking system in Nigeria

Leave a Reply