AHAM NZENWATA
ABSTRACT
This paper investigated
the role of the Central Bank of Nigeria (CBN) as the apex financial institution
regulator in Nigeria. The study undertaken mostly through the review of
literature in the subject matter. In order to achieve the objective of the
study, we reviewed literature on the history and development the financial
system, we also reviewed the process of financial system regulation as well as
the role of the central bank in the process. From the literature reviewed, we
conclude that the CBN is empowered by law to provide a direct regulation of
banks in financial system while its regulatory role in the affairs of other
non-bank financial institution regulators is carried on indirectly by providing
needed funding for the institutions. By holding board position in the other
non-bank financial institutions, the CBN is also able to influence their
activities in line with its macro-economic goals. Finally, we conclude that the
financial system regulatory role of the CBN is critical to a well functioning
economy.
1. Introduction
The
Central Bank of Nigeria is the apex regulatory authority of the Nigeria
financial system. The Central Bank of Nigeria (CBN) was established in 1959,
under the colonial Banking Act, which conferred on it a number of functions and
powers, including powers to control the operation of commercial banks (Gbosi,
2009).The colonial Banking Act was amended and consolidated in the series of
Central Bank Acts and Banking Decree of 1979. Specially, under the Decree, the
principal objectives of the CBN are the issue of legal tender (currency) in
Nigeria, the maintenance of external reserves to safeguard the international
value of the local currency, and a sound financial system in Nigeria.
The
central Bank of Nigeria like others the world over performs several functions
in the economy. These include services functions and monetary management. The
major functions of the CBN are discussed below: first, the CBN is responsible
for currency issue and distribution. This function is very important because
economic transactions to a large extent are cash oriented in Nigeria. Another
important function of the CBN is its role as banker of banks. The CBN has the
statutory function of acting as banker to other banks within and outside
Nigeria; third, is its role of regulation of banks in Nigeria in order to
promote a sound financial system.
Fourthly,
it serves as a financial adviser to the government. It is the organ of
government for maintaining monetary stability. As an operator in the financial
market, it serves as an important link between the government and the business
community. Fifth, it also provides the forum for cheque clearing, the
inter-bank clearing is a key feature of efficient banking system. Sixth, the
CBN also acts as banker to the Federal Government. Specifically; the Bank
undertakes most of the Federal Government banking activities within and outside
Nigeria. It is also involved in managing the country’s foreign reserves.
Considering
its functions as listed above, we come to the conclusion that the CBN is most
important regulator of the financial system for several reasons. The financial
system consists of institutions the most important of which is the banking
system. The activities of banks permeate through all other sectors of the
economy. Thus, whoever controls banks will to a large extent be able to
determine the direction and pace of other sectors in the economy.
This
is also true for the rest of the financial system (non-bank financial
institutions) whose activities require regulation. Financial system regulation
is a form of government controls which subject banks and other financial
institutions to certain requirements, restrictions and guidelines. This
regulatory structure creates transparency between the institutions and
individuals and corporations with whom they conduct business, among other
things. In most cases, the government carries out these regulatory activities
through its agencies the most important of which is the Central Bank.
The
purpose of this paper is to assessment of the regulatory role of the central
bank of Nigeria in order to determine how well the central bank has performed
not only in regulating banks but also other non-bank financial institutions in
Nigeria.
2 History and Development of Nigeria
Financial System
The
Nigerian financial system consists of banks and non-bank financial institutions
which are regulated by the central bank of Nigeria (CBN) and the Federal
Ministry of Finance, Nigeria deposit insurance corporation (NDIC), securities
and exchange commission (SEC),the national insurance commission (NIC), and the
federal mortgage bank of Nigeria (FMBN).
Generally,
the Nigerian financial system has undergone remarkable changes in terms of
ownership, structure of its institutions, the instruments traded, and the
regulatory framework within which the system operates. The deregulation
introduced in 1978 under the structural adjustment program provided powerful
incentives for the expansion of both the bank and the non-bank financial
institutions of all sizes, structure and complexity (Sanusi, 2002).
For
instance, the number of commercial banks rose from 41 in 1986 to 115 in
1996,and the branches rose also sharply from 1367 in 1986 to 2551 in 1996
(CBN,1997). By December, 2003the number of branches was 3247. In addition, 401
community banks 145 mortgage institutions and 618 finance houses were
established within this period (Sanusi, 2002).
With
the increase in the number of financial institutions in the system one would
have assumed that the concentration level would have decreased thereby
increasing both the actual and potential competition in the relevant banking
markets as well as enhancing the benefit to consumers in the form of gains in
convenience and needs. Unfortunately, despite the growth in the number of
financial institutions the financial system remained highly concentrated. For
instance, as observed by Sanusi (2004), commercial banking sector is ‘rather
structurally concentrated as the ten largest banks account for 50 percent of
the industry’s total assets/liabilities.
At
the apex of the financial development is the Central Bank of Nigeria (CBN). The
chain of financial developments in Nigeria started with the establishment of
the central bank in 1958. Since then the CBN has become a dynamic agent and a
catalyst of investment and economic growth in the economy. The expansion of the
financial assets of the CBN attests to its dynamic role in the economy.
Between
1960 and 1989, with the exception of the war years 1967-70, when the assets of
the CBN declined and of 1974 when the oil revenue rose dramatically thereby
leading to an equally dramatic increase in the financial assets of the CBN, the
CBN has maintained a fairly stable expansion in its assets. Data also indicates
that the assets of the CBN rose with every increase in oil revenues. Compare,
for example the period 1978 -1986 when there was no significant change in oil
revenue and the period 1990-2003 when the oil revenue was on the increase.
Although,
great diversity marks the activities of central banks throughout the world, it
is through the conduct of monetary policy that the central bank has its most
pervasive impact on the economy. Monetary policy allows central banks to have a
significant impact on a broad range of macroeconomic developments including
inflation, employment, growth, interest rates, exchange rates, and balance of
payments (Erb1989).
Besides
performing the traditional function of issuing the means of payments and
controlling the money supply, the CBN has been able to implement monetary and
exchange measures aimed at strengthening the institutional infrastructure of
the financial system and expanding the nascent domestic financial markets.
Modern
commercial banking started in Nigeria before the central bank. Being the oldest
unit of the Nigerian financial system, it has been one of the most advanced of
the financial institutions. The other financial intermediaries are restricted
both in their capital resources and their scope of activity. Most of them are
relatively new developments. This gives the commercial banks an edge over the
others, particularly the other similar institutions such as the federal savings
bank, merchant banks, and mortgage banks in collecting deposits and extending
credit to the economy.
Commercial
banking has undergone radical changes since independence. Commercial banking in
Nigeria developed from an industry which, in 1960, was dominated by a small
number of foreign owned banks into one in which public sector ownership
predominated in the 1970s and 80s and finally, one in which private sector is
in control.
The
period 1990 was a turbulent one for the Nigerian commercial banks. The period
witnessed a dramatic rise in asset quality problems and a wave of bank distress
and failures. By March 1994, for instance, of the 118 commercial banks in
Nigeria 40 were distress. These developments in addition to virulent inflation,
persistent economic downturn, frequent reversal in public policies, heightened
political instability, and increased incidence of fraud and embezzlement,
resulted in a highly risky and volatile financial environment (Udegbunam,
2004). Meanwhile by 2001 universal banking commenced and therefore merchant
banking activities were abolished.
The
current commercial banking consolidation initiated by CBN in June 2004 is aimed
at strengthening the financial system. The exercise has been a huge success.
The paid - up capital base of the bank was raised from N2billion to N25billion.
The banks met this requirement through mergers and acquisition (CBN, 2009).
3 Financial System Regulation in Nigeria
Considering
the importance of banks in the financial system, our analyses of the regulation
of the financial system will centre on the regulation of the banking system. Notable
regulatory reform measures in the 1980’s in the banking industry, in line with the
Structural Adjustment Program (SAP) was de-regulation the sector. With this,
the number of entrants into the industry increased significantly such that by
1993, the number of commercial banks was 66 as against 28 operating in Nigeria
in 1985. Other measures included:
·
The promulgation of the
CBN Decree No. 24 of 1991 (which had to be amended in 1993, giving more teeth
to the CBN to bite harder).
·
The Banks and Other
Financial Institutions Decree (BOFID) No.25 (also of 1991) meant to effectively
control the industry and ensure soundness;
·
The promulgation of the
Nigeria Deposit Insurance Corporation (NDIC) Decree No. 22 in 1988 though the
Corporation commenced operations in 1989 with functions which included insuring
deposit liabilities of licensed banks, providing technical and financial
assistance to the banks and assisting in the quest for a healthy banking
environment and initial rationalization and eventual removal of credit ceilings
for sound banks and shift to indirect approach to monetary management with Open
Market Operations (OMO) as main instrument.
During
this deregulation period all controls on interest rates were removed with CBN
fixing only its minimum rediscount rate (MRR) to indicate its desired direction
of interest rates (Odedokun, 1998).
In
1990, prudential regulations (Prudential Guidelines) were introduced and there
was prescription of a maximum margin between each bank’s average cost of funds
and its maximum lending rates with a later prescription of savings deposit rate
and maximum lending rate. In 1992, partial deregulation was restored and banks
were required to maintain a specified spread between their average cost of
funds and their maximum lending rates. In 1993, the maximum lending rate ceiling
was removed and direct interest rates controls were restored in 1994.
The
improvement in payment system started with the implementation of the magnetic
ink character recognition (MICR) technology for processing inter-bank transfers
and in-house cheques and promotion of automation of payment systems by banks.
This has been described by many as significantly sanitizing banking operations
in the country and has been very useful in stemming financial distress.
A
review of this period shows that the banking industry witnessed cut-throat
competition with many, especially the new entrants, adopting all kinds of
strategies to outwit each other. Branch network of banks increased
astronomically (CBN, 2010).
The
merchant bank branches for example increased from 26 in 1985 to 144 in 1994
while branches of commercial banks within the same period, increased from 1,297
to 2,541. However, some banks created risk assets at incredibly low interest
rates with or without collaterals or adequate cover while some generated liabilities
at incredibly high rates (the extreme case being 100 per cent).
In
all, insider abuse manifested in several dimensions (granting loans secured and
unsecured to dummy organizations and individuals, outright stealing and so on),
high rate of loan repayment default especially by state governments, federal
ministries and parastatals; managerial incompetence; general economic down turn
and adverse macro-economic conditions; political problems (the June 12 crisis
and its aftermaths); the use of stabilization securities with debited funds not
made available to banks in the face of problems, withdrawal of government funds
without prior notice, and non-payment of contractors who had executed projects
for government; and inadequate regulatory/supervisory capacity among others
were major contributory factors that brought about crisis in the banking
industry which reached an epidemic proportions in 1995 when 55 out of the 120
operating banks were distressed (Odedokun, 1998).
This
period also witnessed a gradual return of confidence in the banking industry
through government actions that came belatedly. For instance, the establishment
of the NDIC was to ensure industrial safety and soundness.
Establishment
of the Failed Banks (Recovery of Debts) and Financial Malpractices Decree
which, despite its post event enactment was meant to check and punish insider
excesses and other associated crimes. Many bankers received wide range of
punishments under this Decree. The Guided De-regulation and Globalization Era
(1996 and beyond) and meeting Nigeria’s Development Challenges Some of the
major reforms of this period were to ensure that Nigerian banks became globally
competitive.
The
implementation of many past reform measures were put in place with a view to
ensuring that stability in the system was continued. Major tenets of the new
reforms included total de-regulation of interest rates in October 1996; upward
review of minimum paid up capital of banks in 1997 to N500 million and later to
N2 billion; the adoption of universal banking in 2001; the re-introduction of
Dutch Auction System (DAS) in July 2002 with a view to realigning the naira
exchange rate, enhancing transparency and curbing capital flight from the
country.
Under
the system, there is intervention by the CBN twice weekly and end-users bought
Foreign Exchange at their bid rates through authorised dealers. Guidelines were
rolled out by the CBN in 2004 on electronic banking (e-banking) practice in
Nigeria in line with global trend and banks were encouraged to install
automated teller machine (ATM) for cash withdrawals.
Specific
guidelines were also put in place on standards and use of electronic money
(e-money) products such as credit cards, debit cards; digital cash and so on were
spelt out by the CBN in line with international best practices. CBN promoted
automatic payment system in order to reduce delays in clearing of payment
instruments, reduce cash transactions and enhance monetary policy’s
transmission mechanism. Real Time Gross Settlement (RTGS) System was
implemented in order to eliminate risk in large value payments and increase
efficiency of the payment system.
Seven
banks that met CBN’s requirements were appointed as Settlement Banks to perform
clearing and settlement functions for other banks and National Savings
Certificate and variations of Cash Reserve Requirement (CRR) and the MRR were
introduced to enhance liquidity management.
The
National Economic Empowerment and Development Strategy (NEEDS) which is the
government’s reform agenda has identified the problems confronting the
financial sector to include the inability of the sector to play a catalytic
role in the real sector, shallowness of the capital market, dependence of the
banking system on public sector funds as a significant source of deposits and
foreign exchange trading, inaccurate information, non-harmonization of fiscal
and monetary policies, non-prompt repayment of bank loans (Soludo, 2004).
In
order to tackle the problems identified above, government policy trust under
NEEDS centred around building and fostering a competitive and healthy financial
system to aid development while at the same time avoiding systemic distress by
deepening in terms of asset volume and instrument diversity; drastically
reducing and ultimately eliminating the financing of government deficits by the
banking system such that resources are freed up for lending to the private
sector; reviewing capitalization of financial institutions in the system; and
developing a structure of incentives to enable the financial system to play a
developmental role by financing the real sector of the economy.
Hinging
the success of NEEDS in part on effective financial intermediation in the
economy, the following strategies were to be incorporated into the monetary
policy framework and adopted by the regulatory authorities:
·
Comprehensive reform
process aimed at substantially improving the financial infrastructure(legal codes,
information system); restructuring, strengthening, and rationalizing the
regulatory and supervisory framework in the financial sector;
·
Addressing low
capitalisation and poor governance practices of financial intermediaries that
submit inaccurate information to the regulatory authorities, and the consequent
costs to the financial sector;
·
Collaborating with
banks and other financial institutions, to work out a structured financing plan
that ensures less expensive and more accessible credit to the real sector,
·
Directing government
policy towards financial deepening (establishing links between rural and urban,
banking and non-banking, and formal and informal financial systems).
·
Financial product
diversification which requires filling the missing gap for commercial financial
services for small and medium-size enterprises with new services based on
best-practice technologies for cash flow financing, leasing and so on.
4 Regulatory Role of the Central Bank of
Nigeria
Institutional
regulations are a form of government controls which subject institutions to
certain requirements, restrictions and guidelines. This regulatory posture
creates transparency between institutions and the individuals and corporations
with whom they conduct business, among other things.
Institutions
are regulated to ensure that they adhere to minimum requirements both in
capital and risk management. The regulator also supervises licensed institutions
for compliance with the requirements and responds to breaches of the requirements
through obtaining undertakings, giving directions, imposing penalties or
revoking license. Finally, regulation ensure market discipline by requiring
that the regulator supervises the regulated institutions for compliance with
the requirements and responds to breaches of the requirements through obtaining
undertakings, giving directions, imposing penalties or revoking the license.
At
the top of the financial institutions regulators in Nigeria is the Central Bank
of Nigeria. The CBN was established by an Act of parliament in 1958 as the apex
monetary authority in Nigeria. This role quite simply means that all financial
institution (bank or non-bank) operating within the country feel the regulatory
impact of the CBN. It is worthy of note that the CBN made proposals and helped
to develop the frameworks for the establishment of most of other regulators
within the financial system like NAICON, SEC, PENCOM, FMBN etc. The CBN also
championed the establishment of The Financial Services Regulation Coordinating
Committee (FSRCC) which as the name implies coordinates the regulatory
activities of all other financial system regulators. The committee is also
chaired by the CBN governor.
In
its function as the banker to the government, the CBN provide the seed capital as
well as funding for the establishment and operations of other financial system
regulator. Through this very important role, the CBN is strategically
positioned to dictate the direction of other regulators.
Where
other financial system regulators and the firms they regulate are expected to
have minimum capital requirement, such fund are naturally housed with the CBN.
For example, insurance companies house their regulatory capital with CBN same
goes for stock broking firms, pension fund managers, primary mortgage
institutions and micro-finance banks etc. And other financial system regulatory
institutions like AMCON and NDIC, PENCOM, FMBN etc also have all their funds
housed and supervised by the Central Bank of Nigeria.
Finally,
the CBN sits on the board of all the other regulators within the financial
system. This ensures that the Central Bank plays a prominent role in setting
the day-to-day operating policies of the institutions.
From
the foregoing, we can see that the CBN holds position like no other in the
financial system for example, if it wants the economy to move in a certain
macro-economic direction and finds the role of any of the other regulatory
institutions to be inimical to its position, it can quite easily whip the
erring institution into line through its monetary control or board position in
the institution.
5 Summary
and Conclusion
This paper
investigated the role of the Central Bank of Nigeria (CBN) as the apex
financial institution regulator in Nigeria. The study undertaken mostly through
the review of literature in the subject matter. In order to achieve the
objective of the study, we reviewed literature on the history and development
the financial system, we also reviewed the process of financial system regulation
as well as the role of the central bank in the process.
From
the literature reviewed, we conclude that the CBN is empowered by law to
provide a direct regulation of banks in financial system while its regulatory
role in the affairs of other non-bank financial institution regulators is
carried on indirectly by providing needed funding for the institutions. By
holding board position in the other non-bank financial institutions, the CBN is
also able to influence their activities in line with its macro-economic goals.
Finally, we conclude that the financial system regulatory role of the CBN is
critical to a well functioning economy.
References
CBN
(2009) Annual Report and Statement of Accounts, 2009,
http://www.cenbank.org/OUT/2010
Erb,
Richard D. (1989), ‘The role of central bank’, Finance and Development, No4,
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Ezirim
C. B (2005). Finance Dynamics, Principles Techniques and Application. Port
Harcourt: Markowitz Centre for Research Development
Gbosi,
A. N., (1998) The impact of Nigeria’s Domestic Debt on Macroeconomic
Environment. First Bank Review Journal.
Odedokun.
M (1998), Financial Intermediation and Economic Growth in Developing Countries,
Journal of Economic Studies, Vol. 25 (2-3), pp.203-22
Sanusi,
L. S., (2002). The Importance of Financial Intermediation In Sustaining
Economic Growth And Development: The Banking Sector Review, Central Bank Of
Nigeria, Abuja.
Soludo,
C. C. (2004), ‘Consolidation the Nigerian banking industry to meet the
development challenges of the 21st century’.
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R. I. (2004), ‘Asset portfolio composition, size, and bank stock risk evidence
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Umejiaku
R. I. (2011). Financial Reform and Financial Development In Nigeria: A
Graphical Analysis, International Multi-Disciplinary Journal, Ethiopia, Vol. 5
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