Banking System in Nigeria: How Everything Works

The banking system is one of the most important sectors of the economy and the origin of the industry can be traced to the colonial era when the colonial banks were set up with the goal of meeting the commercial needs of the Colonial Government.

Banking System in Nigeria: A General Overview

In this post, we take a look at how the banking system in Nigeria works and we will drill down to the history and structure of the system.

But first, let’s define what a bank really is.

Basically, a bank is an institution where money and valuables are kept for safety purposes. Also, banks are involved in lending money known as a loan, paying out money on the customer’s order by means of a change and bank draft and also giving overdraft to customers.

The history of the banking system in Nigeria can be traced to the African Banking Corporation and British West Africa which was established in 1892. The bank is now known as First Bank of Nigeria.

A few decades later specifically in 1925, the Anglo-Egyptian Bank and the National Bank of South Africa forged an alliance which led to the creation of Barclays Bank in Nigeria.

Also in 1948, the British and French Bank for Commerce and Industry started operations in Nigeria, which metamorphosed into the United Bank for Africa.

The first domestic bank in the country was established in 1929, it was called the Industrial and Commercial Bank but this bank was shortlived as it was liquidated a year later and replaced by the Mercantile Bank in 1931

In the 1940s, the industry was infiltrated with an agricultural bank called the Nigerian Farmers and Commercial Bank.

The banking structure in Nigeria can be divided into following parts.

#1. The Central Bank of Nigeria

The Central Bank is the apex and it is responsible for regulating the banking system in the country. This apex bank was established in March 1958 and started operations on the 1st of July, 1959.

The CBN regulates and supervises the activities of institutions such as Bureau-de-Change (BDCs), Finance Companies (FCs) and Primary Mortgage Institutions (PMIs).

Primarily, the CBN formulates policies and monitor the banking system to ensure that operators comply with monetary, credit, and foreign exchange guidelines.

Overall, the institution is responsible for managing the cost, volume availability as well as the direction of money and credit in an economy with the goal of achieving its desired economic objectives.

#2.Commercial Banks

These are the banks you know. They include the likes of Guarantee Trust Bank, First Bank, United Bank for Africa, Stanbic IBTC among others. Commercial banks are engaged in the banking business of receiving deposits, advancing loan, discounting bill and offering related services to the general public.

Overall, Nigerian commercial banks perform three major functions: accepting deposits, granting loans and operating payment and settlement mechanisms.

#3. Merchant Banks

This type of bank specializes in providing whole sale banking, medium and long term financing, equipment leasing debt factoring, investment management, acceptance bills and management of unit trust.

#4. Development Banks

This type of bank specializes in providing long term fund for industrial, agricultural, commercial and mortgage development. Also, development banks help entrepreneurs by providing loans and consulting services to them. Some example of development banks include the following:

  • Nigerian Industrial Development Bank (NIDB)

This was established in 1964 to replace the investment corporation of Nigeria. The NIDB assists the public and private sector companies.

  • Nigerian Bank For Commerce And Industry (NBCI)

This was established in 1973 to assists the indigenous businessmen by ensuring the financial implementation of the enterprises promotion decree of 1973..

  • Nigerian Agricultural And Co-Operative Bank (NACB)

The NACB assists the agricultural sectors, individual farmer and co-operative bodies and it is fully owned by the federal government.

Based on the ownership structure we can also divide banks into three types:

  • Indigenous banks: These banks are fully owned and controlled by Nigerian citizens including the government.
  • Mixed Bank: These banks are jointly owned and controlled by foreigners and Nigerian Citizens including government
  • Foreign banks: These are banks fully owned and controlled by foreigners.

Over the years, the banking system has evolved based on reforms carried out by the Central Bank. There have been two major reforms in the sector over the last two decades.

The first reform in 2004 focused on the consolidation of banks through the mechanism of merger and acquisition. This resulted in rebasing of commercial banks from N2billion to N25billion, while the number of existing 89 Commercial banks to 25 in the country.

Also, the Central Bank reformed the automation system which resulted in enhanced banking returns. This reform established a reporting portal for bank customers for the purpose of information sharing. Under this reform, deposit from public sectors and government own agencies can be collected by the commercial banks in order to enhance their level of liquidity.

The second major reform was in 2009 when the Asset Management Corporation of Nigeria AMCON was established by the National Assembly of Nigeria.

This institution acquires non-performing loans of commercial banks and the financing of AMCON is composed of N50billion CBN fund and 0.3% of total assets of participating commercial banks.

Also, AMCON supports the implementation of the International Financial Reporting Standards (IFRS) for global reporting compliance in term of reporting.

It was this reform that led to the re-modification of the existing Universal Banking Model that permits the holder of commercial banking license to operate in other non-core banking either directly or indirectly through designated subsidiaries.

The introduction of this scheme led to the classification of banking licenses into commercial, Merchant and Specialised/Development Banking Licenses hence the Universal Banking Model by restricting commercial banks to only banking activities and also addresses excessive banking interest by the creation of non-interest bank.

The reform led to dismissal of the CEOs of five Nigerian bank and five replacements were named with immediate effect including Funke Osibodu to lead the Union Bank of Nigeria and Suzanne Iroche who took over as CEO of FinBank.

Currently, the Nigerian banking system consists of 21 commercial banks, 860 micro-finance banks, five discount houses, 64 Finance Companies, and five development finance banks.