For years it has been difficult to find an acceptable definition of a bank. Several attempts have been made to offer a comprehensive and acceptable definition. Starting from J.W. Gilbart, who defined banks as intermediate parties between borrower and lender (Iganiga, 1998). This is so because the banks borrow from one party and lend to the other. Though this definition emphasized the two traditional functions of a bank which are mobilization of depositions and granting of loans and advances.
However, banks of today have expanded considerably by venturing into different functions thereby nullifying the comprehensiveness of Gilbart's definition. In 1969, the Banking Act of England defined Banking by the following activities:
1. The business of receiving money from outside sources as deposit irrespective of the payment of interest.
2. The granting of loan, acceptance of credit or the purchase of bills, cheque and sales of securities.
3. The purchase and sales of securities on behalf of customers.
The above definition fits better into the modern day role of banks in the economy because it goes beyond the collection of depositor's fund. The major goal of the bank is to contribute significantly to achieve the stated macroeconomic objective of economic transformation.
ROLES OF A BANK
Banks offers various roles ranging from the following:
Payment services: A bank is obliged to pay back to the customer any amount as specified by the customer according to the value of the account held (Freixas & Rochet, 2008). A bank customer may also want his cheque cashed up to a stated amount and within a specified period, at another branch of the bank or another bank.
Lending function: The deposits in the banks need not be left idle as not all deposits are requested for by depositors at a time. It is therefore prudent for the banker to lend such money to investors at a higher rate which brings some revenue to them. They achieve this through overdraft, loans, bills discounting or through direct investment (Idahosa, 2000).
International trade services: Banks help provide the link through which payments for goods and services bought or sold by importers and exporters can be settled. In addition, they provide guarantee to exporters who need such guarantee before they can release their goods (Isedu, 2001).
Currency transaction: Banks trade on foreign currencies especially US Dollars and Pound sterling. They engage competitively in foreign currency transaction as it provides them a significant source of revenue.
Performance bond services: A performance bond is issued on behalf of customers in the real sector of the economy where they are required to supply the bond before they can tender for contract. The bonds guarantee that the company has adequate financial resources to execute the contract successfully.
Liquidity: Liquidity in banking refers to assets that can easily be converted into cash. Money in the form of cash is regarded as most liquid asset in the banking industry (Freixas & Rochet, 2008). In order to perform this role, banks offer saving, deposit and current facilities to the public. Banks also help in keeping other convertible equities like certificate of occupancy, share certificate, deeds of conveyance etc.
THE NIGERIAN BANKING INDUSTRY
OVERVIEW
The Nigerian banking industry which is regulated by the Central Bank of Nigeria, is made up of deposit money banks referred to as commercial banks, development finance institutions and other financial institutions which include; micro-finance banks, finance companies, bureau de changes, discount houses and primary mortgage institutions.
There is no doubt that the banking sector plays a significant role in the Nigerian economy. Banks facilitate economic growth in a variety of ways. In the first instance, they act as financial intermediaries between the surplus generating units and the deficit spending ones. In essence they tend to move resources from the former to the latter thereby generating the required productive economic activity. Banks also play a pivotal role in an economy by providing a mechanism for producers/buyers and consumers/sellers to settle transactions between themselves. They do this not only within a country but also across national boundaries through highly efficient and technologically enabled payments systems. In the process, banks encourage specialization and division of labor, a major advantage of which is the enhanced production and economic growth of the country. Nigerian banking industry has been driven and influenced by a number of factors these are: the extensive branch network of the old generation banks as well as the customer confidence/loyalty built over the years. The investment of these banks also includes a considerable proportion of public sector funds being deposited.
History of Nigerian Banking Industry
The Nigerian Government has experienced series of 'buyouts' and 'takeovers' since 1892 and according to Rasheed Olajide Alao (European Journal of Social Sciences - Volume 15, Number 4) can be phased into three (3) namely the embryonic phase, the expansion phase and the consolidation/reform phase.
The embryonic phase: In 1892 the Nigerian banking system was pioneered by The African Banking Corporation whose headquarter is in South Africa later followed in 1894 by the British Bank for West Africa (known today as First Bank of Nigeria Plc) while Barclays Bank D.C.O. (now Union Bank of Nigeria Plc) and the British and French Bank (now United Bank for Africa Plc) were established in 1925 and 1949 respectively. Indigenous banking in Nigeria began February 1933 by the establishment of the National Bank of Nigeria Limited, Agbonmagbe Bank Limited (now Wema Bank) followed suit in 1945 and African Development Bank Limited (known today as African Continental Bank Plc) was founded in 1948. The influx of indigenous banks brings about competitiveness in the banking industry as against the early monopoly enjoyed by the foreign owned banks.
The expansion phase: The second phase basically was the expansion of the Nigerian banking sector to the Rural Banking Scheme in 1977, then People's Bank in 1989 and Community Banks (known today as Microfinance Banks) in 1990 all these were to encourage community development associations, cooperative societies, farmers' groups, patriotic unions, trade unions and other local organizations especially in rural areas.
The consolidation/reform stage: This phase was staged on January 1, 2006 when the Nigerian eighty nine (89) banks shrunk to twenty five (25). The consolidation exercise then required banks to raise their minimum capital base from N2billion to N25 billion, with December 31, 2005 as deadline. The main reason was to produce a mega-banks from the then existing 89 banks as most of them were fringe players and financially unsound (Soludo, 2008). Other financial institutions included government-owned specialized development banks: the Nigerian Industrial Development Bank, the Nigerian Bank for Commerce and Industry, and the Nigerian Agricultural Bank, as well as the Federal Savings Banks and the Federal Mortgage Bank. Also active in Nigeria were numerous insurance companies, pension funds, and finance and leasing companies.
STRUCTURE, LEGAL AND REGULATORY FRAMEWORK
STRUCTURE: Regulatory Authorities
The Nigerian financial system comprises bank and non-bank financial institutions which are regulated by the Federal Ministry of Finance (FMF), Central Bank of Nigeria (CBN), Nigeria Deposit Insurance Corporation (NDIC), Securities and Exchange Commission (SEC), National Insurance Commission (NIC), Federal Mortgage Bank of Nigeria (FMBN), Financial Services Coordinating Committee (FSCC) and the National Board for Community Banks (NBCB).
The Federal Ministry of Finance (FMF)
The Federal Ministry of Finance advises the Federal Government on its fiscal operation and co-operates with CBN in monetary matter. Recent amendment to the laws of the Central Bank of Nigeria compels it to report through the Federal Ministry of Finance to the Presidency.
Functions of the Ministry
The following are the functions of the Federal Ministry of Finance:
1. Preparing annual estimates of revenue and expenditure for the Federal Government:
2. Formulating policies on fiscal and monetary matters;
3. Mobilizing domestic and external financial resources through both internal and external financial institutions, for development purposes.
4. Maintaining adequate foreign exchange reserves aimed at ensuring a healthy balance of payment position;
5. Maintaining the internal and external value and stability of the Nigerian currency; monitoring government revenue from oil and non-oil resources;
6. Supervising the insurance industry;
7. Managing revenue allocation matters;
The Central Bank of Nigeria (CBN)
The CBN is the apex regulatory authority of the financial system. It was established by the Central Bank of Nigeria Act of 1958 and commenced operations on 1st July 1959. Among its primary functions, the Bank promotes monetary stability and a sound financial system, and acts banker and financial advisor to the Federal Government, as well as banker of last resort to the banks. The Bank also encourages the growth and development of financial institutions. Enabling laws made in 1991, gave the Bank more flexibility in regulating and overseeing the banking sector and licensing finance companies which hitherto operated outside any regulatory framework.
The Nigerian Deposit Insurance Corporation (NDIC)
The NDIC compliments the regulatory and supervisory role of the CBN. It is however autonomous of the CBN and reports to Federal Ministry of Finance. The NDIC effectively took off in 1989 and was set up to provide deposit insurance and related services for banks in order to promote confidence in the banking industry. The NDIC is empowered to examine the books and affairs of insured banks and other deposit-taking financial institutions. Licensed banks are mandated to pay 15/16 of 1% of their total deposit liabilities as insurance premium to the NDIC. A depositor's claim is limited to maximum of N50000.00 in the event of a bank failure.
Securities and Exchange Commission (SEC)
This body was established in 1979. The Apex regulatory organ of the capital market. Major objective is the promotion of an orderly and active capital market. In regulating the market, the Commission undertakes the following activities meant to protect investors, market operators and also ensures that market integrity is maintained:
A. Registration of securities and market intermediaries to ensure that only fit and proper persons/institutions are allowed to operate in the market.
B. Surveillance over the exchanges and trading systems in order to forestall breaches of market rules as well as to deter and detect unfair manipulations and trading practices to prevent market disruption.
C. Investigation of alleged breaches of the laws and regulations governing the capital market and enforcement of sanctions where appropriate.
National Insurance Commission (NIC)
The National Insurance Commission was established in 1997 by NAICOM Act No. 1 of 1997 with the main objective of enhancing the effective administration, supervision, regulation and control of insurance business in Nigeria. Its mission is to promote discipline and standards that stimulate long-term viability of Nigeria's Insurance Industry, positioning it for global competition.
The Federal Mortgage Bank of Nigeria (FMBN)
The FMBN took over the assets and liabilities of the Nigerian Building Society. The FMBN provides banking and advisory services, and undertakes research activities pertaining to housing. Following the adoption of the National Housing Policy in 1990, The FMBN is empowered to licence and regulate primary mortgage institutions in Nigeria and act as the apex regulatory body for the mortgage finance industry. The financing function of the Federal Mortgage Bank of Nigeria was carved out and transferred to the Federal Mortgage Finance, while the FMBN retains its regulatory role. The FMBN is under the control of the Central Bank.
Financial Services Coordinating Committee (FSCC)
This is a committee established to co-ordinate the activities of all regulatory institutions in the financial system. The Committee is chaired by the Federal Minister of Finance. The CBN in April 1994 undertook to facilitate a formal framework for the co-ordination of regulatory and supervisory activities in the Nigerian financial sector by establishing the Financial Services Coordinating Committee (FSCC) to address more effectively, through consultations and regular inter-agency meetings, issues of common concern to regulatory and supervisory bodies. The name of the Committee was subsequently changed to Financial Services Regulation Coordinating Committee (FSRCC).
Objectives
The objectives of the reconstituted Committee were to:
Coordinate the supervision of financial institutions; Cause the reduction of arbitrage opportunities usually created by differing regulatory and supervisory standards among supervisory authorities in the country;
Deliberate on problems experienced by any member in its relationship with any financial institution;
Eliminate any information gap encountered by any regulatory agency in its relationship with any group of financial institutions;
Articulate the strategies for the promotion of safe, sound and efficient practices by financial intermediaries
Deliberate on such other issues as may be specified from time to time.
THE CENTRAL BANK OF NIGERIA
Central Banks all the world over simply refers to a central authority or an apex financial institution within the entire financial structure which is poised with the task of promoting monetary stability and a sound financial system. Central banks carry out various functions and differ in terms of structures and powers compared to Deposit Money Banks. Before the establishment of Central Bank of Nigeria by the CBN Act of 1958, there has been in existence a body known as the West African Currency Board (WACB). The body was established by the then British Colonial Government, which was to serve as a Central Bank for the Anglophone West African countries. Therefore, the board was charged with the primary responsibility of issuing the West African Pound, which served as the legal tender currency in Ghana, Nigeria, Sierra-Leone and Gambia. Furthermore, the body was charged with the management of the reserves held in trust for these colonies. Such reserves were invested by the board on behalf of the West African countries as instruments in the London Money Market. The weakness of the board for which it was criticized is as follows:
It carried on commercial banking activities alongside other commercial banks;
The board lacked the basic apparatus to control the supply of money;
ยง The board got involved in physical distribution of currency from one point to another;
Its activities were considered discriminatory against indigenous West African industrialist;
It was not on the development of the colonies and most of its activities were based on commerce and trade.
These factors led to the widespread agitation for indigenous Central Banks in the area. Not long afterward, the Central Bank of Nigeria was established.
Central Bank Act, 1958.
The Central Bank of Nigeria (CBN) is the apex regulatory authority of the financial system in the country. It was established by the CBN Act of 1958 and commenced operations on July 1st, 1959. The promulgation of the CBN decree 24 and Banks and other financial institutions (BOFI) Decree 25, both in 1991 gave the bank more flexibility in regulation and supervision of the banking sector and licensing finance companies which hitherto operated outside any regulatory frame work. The Central Bank Act, 1958 and the Banking Decree of 1969 constituted the legal framework within which the CBN operates and regulates banks. The wide range of economic liberation and deregulation measures following the adoption in 1986 of a Structural Adjustment Programme (SAP) which resulted in the emergence of more banks and other financial intermediaries.
The Banks and Other Financial Institutions (BOFI) Decrees 24 & 25 of 1991, which repealed the banking Decree, 1969 and all its amendments were therefore enacted to strengthen and extend the powers of CBN to cover the new institutions in order to enhance the effectiveness of monetary policy, regulatory and supervision of banks as well as non- banking financial institutions.
Unfortunately, in 1997 the Federal Government Of Nigeria enacted the CBN (amendment Decree No 3 and BOFI) Decree No 4 in 1997 to remove completely the limited autonomy enjoyed by the bank since 1991. The 1997 amendment brought the CBN bank under the supervision of the Ministry of Finance. The Decree made CBN directly responsible to the Minister of Finance with respect to the supervision and control of bank and other financial institutions, while extending the supervisory role of the bank to other specialized banks and financial institutions. The amendment placed enormous powers on the Ministry of Finance while leaving the CBN with a subjugated role in the monitoring of the financial institutions with little room for the Bank to exercise discretionary powers.
The CBN Act, 2007 which is the current legal framework within which the Bank operates. It repealed the CBN Act of 1991 and all its amendments. The current Act provides that the CBN shall be a fully autonomous body in the discharge of its functions under the Act and the Banks and Other financial Institutions Act with the objective of promoting stability and continuity in economic management. In line with this, the Act widened the objects of the CBN to include ensuring monetary and price stability as well as rendering economic advice to the Federal Government.
Objectives of Central Bank of Nigeria:
To promote monetary stability and a sound financial system.
To serve as banker to other banks within Nigeria and abroad.
To serve as the banker and financial adviser to the Federal Government.
The issuance of legal tender currency in Nigeria.
To maintain the external reserve and value of the legal tender in order to safeguard the international value of the currency.
Functions of Central Bank of Nigeria:
To achieve the above objectives, CBN undertakes the following functions as stated in the Act. The basic functions performed by CBN can be broadly categorized into three namely traditional functions, regulatory functions and developmental functions.
TRADITIONAL FUNCTIONS
1. It issues the legal tender (currencies) - Naira and Kobo.
2. It acts as the Banker and financial adviser to the federal government.
3. CBN act as the banker to other banks and finance institution.
4. It manages the accounts and debt of the country.
5. CBN act in banking supervision and examination.
REGULATORY FUNCTIONS
The regulatory functions of the CBN are mainly directed at the objective of promoting and maintaining the monetary and price stability in the economy. To perform this regulatory function CBN formulates policies to control the amount of money in circulation, control other banks and major players in the financial market, control rates of banks credits and therefore the supply of money in the economy. The instruments used by CBN to achieve these functions are; Open Market Operation (O.M.O), Bank Rate, Rediscount Rate, Direct Control of Banks' Liquidity, Direct Control of Bank Credit, Special Deposits, Moral Persuasion, Minimum Cash Ratio.
DEVELOPMENTAL FUNCTIONS
The establishment of CBN in 1959 was premised on the need to promote and accelerate the much needed economic growth and development in Nigeria, which would invariably promote the growth of the financial market. This financial market comprises the Money and Capital market, assistance to development banks and institutions and the formulation and execution of government economic policies. The CBN also helps to promote and assist the development banks and institutions. These include the Nigerian Industrial Development Bank (NIDB), the Nigerian Banks for Commerce and Industry (NBCI), the Nigerian Agricultural Insurance Company ((NAIC), the Federal Mortgage Bank of Nigeria (FMBN), the Nigerian Deposit Insurance Corporation (NDIC), the Nigerian Export-Import Bank (NEXIM) and the Securities and Exchange Commission (SEC).
The CBN is involved in the formulation and execution of viable economic policies and measures for the government. Also since 1970, the bank has been instrumental in the promotion of wholly owned Nigerian enterprises. Thus, the recent directive to banks to set aside 10% of their profits before tax to finance Small and Medium Scale Enterprises.
PROBLEMS
The CBN is faced with a number of problems in the Nigerian financial sector, among these problems are as follows:
1. One of the failings of the CBN is their inability to guide against unethical actions of Commercial banks in the areas of money laundering, interbank forex exchange, fraud etc;
2. The CBN's inability to curb the current rising inflationary rate in the country;
3. Its lack of effective regulatory measures has led to high lending rates imposed by commercial banks on their customers;
4. It also lacks the capacity to effectively execute Government economic policies.
5. The body has been unable to promote the needed saving culture among Nigerians which could have helped the nation's capital base.
ACHIEVEMENTS
The Central Bank of Nigeria in its bid to curb banks unethical actions have periodically increased their capital base and have instituted the Inter-bank foreign exchange market to check capital flight and to regulate foreign exchange rates.
CBN has also achieved a level of autonomy since the advent of the democratic dispensation in Nigeria, this is reflected in her aggressive execution of Government economic policies in the areas of orientating the Nigerian populace to embrace the savings culture, the encouragement of foreign investors by creating an enabling environment/policies for investment and above all the facilitation of good conduct of monetary and fiscal policies for ensuring macroeconomic stability and stable governance.
Recent moves by the Central bank to tap into the limitless opportunity derivable in the Information Technology world are also part of its achievements. This is reflected in the massive promotion of Universal Banking in the country. The CBN took the bull by the horn by first starting a restructuring and reengineering project which is perceived to tackle the business processes in its structural and institutional deficiencies to enhance its effectiveness, efficiency and productivity.
