In Search of Financial Stability in Nigeria: From Legislation to Effective Regulation of Banks

Pages20-46
Author
Published date01 February 2017
Date01 February 2017
DOI10.3366/ajicl.2017.0180

Banks play invaluable roles in the economy because they carry out financial intermediation functions through the mobilisation of necessary funds from depositors for onward lending to borrowers. This facilitates efficient productivity, effective operation of the payments system, and financial stability in the economy.1 These invaluable roles of the financial institutions underline the imperative of ensuring their operational efficiency, transparency and stability. The state of banking regulation in Nigeria, especially before the introduction of reforms in the sector, had given serious cause for concern. This observation is in the light of serious illiquidity and systemic distress that was synonymous with the banking sector in Nigeria in the 1990s and even into the opening years of the twenty-first century.2 The systemic importance of banks brings to the fore the inevitability of exploring ways of keeping banks strong and within the safety level desired by their depositors and the financial managers of the economy.3

The unprecedented spate of failures that plagued the banking system in the early years following the introduction of the banking concept in Nigeria largely influenced the institutionalisation of banking regulation.4 Legislation subsequently progressed often in response to constantly changing realities in the banking sector. An example of this scenario in Nigeria includes developments that followed the aftermath of the deregulation of the banking sector as part of the Structural Adjustment Programme in 1986.5 Deregulation introduced an exponential explosion in the number of licensed banks in Nigeria. From 21 commercial and merchant banks that were in operation before deregulation, about 120 banks operated within the Nigerian banking system by the onset of the 1990s.6 This position reflected the highly liberalised bank licensing policy introduced in 1986 by the Central Bank of Nigeria (CBN). This deregulated banking business environment still persists to the present day.

Regulation of the banks has indeed resulted in remarkable changes in the banking system in Nigeria. It has not only seen to the arrest of the persistent bank failure syndrome and the consequential loss of deposits, but has also institutionalised relative systemic stability and a measure of sanity in the manner of doing banking business and financial stability. This has resulted in substantial realisation of the objectives behind the introduction of banking regulation in Nigeria. Although a common trend even in some other jurisdictions, enactment of new statutes to address evolving challenges in the banking sector may not always be necessary.7 However, in introducing, new measures to address challenges, there should be policy consistency, as this would reassure investors and other stakeholders, such as bank depositors. Policy inconsistency has the tendency to create confusion and uncertainty. The problem is compounded in Nigeria due to the hastiness of introducing new laws or policies, for example the universal banking policy and the divestment of government stakes in the banks.8 Rather, what may engender effective banking regulation is a shift of emphasis from the constant introduction of new legislation on the financial system to the pursuit of effective enforcement of existing laws on the issue.

This article examines the legal frameworks for banking regulation in Nigeria in the quest to attain financial stability in the economy and considers the evolution of legislative enactments on the subject. The article finds that the problem militating against effective regulation of banks in Nigeria may not necessarily have to do with the dearth or non-comprehensiveness of statutes on the subject but rather lies with ineffective and uncoordinated enforcement of the provisions of existing statutes. Allied to this observation is the problem of policy inconsistency on the part of banking regulators. This situation engenders confusion, uncertainty and instability because prospective investors tend to be more hesitant, depositors shy away from keeping their money with banks and banks tend to have to grapple with persistent illiquidity, when the system is shrouded in unpredictability. The article therefore advocates a major shift of policy from legislative review to effective enforcement of existing laws regulating the monitoring and supervision of banks in Nigeria. It also reiterates the imperative for the evolution of policies that grow Nigerian licensed banks into transparent, efficient, strong and globally competitive institutions.

The extant statutes relating to banking regulation in Nigeria include the Banks and Other Financial Institutions Act (BOFI Act) 1991, the Central Bank of Nigeria Act (CBN Act) 2007, the Nigeria Deposit Insurance Corporation Act (NDIC Act) 2006, the Asset Management Corporation of Nigeria Act (AMCON Act) 2010 and the Failed Banks (Recovery of Debts) and Financial Malpractices in Banks Act (Failed Banks Act) 1994. It will be useful to discuss these statutes as they relate to banking regulation, in order to identify areas where they are affected by the discussion in this article.

The Banks and Other Financial Institutions Act 1991 (BOFI)9 is the primary statute on the regulation of banks and other financial institutions licensed to operate in Nigeria. It came into force on 20 June 1991, repealing the Banking Act 1969.10 The 1991 Act expanded the span of the regulatory functions of the CBN to include not only matters of core commercial and merchant banking but also other financial institutions.11 The enactment of the Act was aimed at curing the lacunae observed in the 1969 Act, which included the problem of weak internal governing structures in the banks, poor capitalisation, poor liquidity management and the challenges thrown up by the increasing expansion and sophistication of the nation's economy, especially after the oil boom years and deregulation of the Nigerian economy.12 According Nzegwu-Danjuma:

The deregulation of the economy was to touch on all facets of the economy including the banking industry. A situation of free market enterprise meant lesser governmental presence by way of participation in economic activities. Several legislations were enacted to establish the necessary legal framework for the exercise. Also policy decisions were also taken resulting in the liberalization of the banking licensing scheme.13

It was against this background that the BOFI Act was enacted. The Act named the CBN as the principal regulator of banks and other financial institutions in Nigeria. Thus, section 1 of the statute provides

The Central Bank of Nigeria (hereafter in this Act referred to as ‘the Bank’) shall have all the functions and powers conferred and the duties imposed on it under this Act, subject to the overall supervision of the Minister.

The Bank shall in addition to the functions and powers conferred on it by this Act, have the functions and powers conferred and the duties imposed on the Bank by the Central Bank of Nigeria Act.

A closer consideration of the above provisions, especially the implications of the second limb of subsection (1), will indicate that the entire functioning of the CBN is subject to the pleasure of the Minister of Finance, as that is the minister that the Act must have contemplated under section 1(1), as the minister in charge of the nation's economy. Since the minister is normally a political appointee of the government of the day, not necessarily the best financial expert around but appointed to function at the pleasure of the President of the Federal Republic, the implication is that the exercise of powers by the CBN, represented by the Governor of the apex bank, cannot be completely insulated from political influence or unnecessary interference

It is obvious that the BOFI Act provides relatively adequately effective regulation of banks, against the background of the state of the economy when it was enacted. However, it is obvious that the Act is long overdue for comprehensive review, considering the fact that it was enacted over two decades ago. Since its enactment, the banking system and indeed the larger economy have undergone fundamental changes that require that the Act be amended to bring it in tune with prevailing realities. Nevertheless, regulators of banks could address any observed lacunae in the statute or inadequacies in the financial system through administrative measures to achieve an effective regime of banking regulation in Nigeria.

This statute came into force on 25 May 2007,14 having been signed into law by the President of Nigeria on that date.15 The operation of the CBN had been bogged down by bureaucratic bottlenecks occasioned by the limited powers given to the apex bank to carry out its assigned responsibilities under the BOFI Act 1991 and the CBN Act 1991.16 The need to enhance the autonomy of the CBN therefore became imperative. Contemporaneous with this period was the CBN's introduction of a number of reforms in the banking sector with the overall objective of strengthening the sector while complementing the macro-economic programme of wide-ranging reforms introduced by the Federal Government of Nigeria. To attain that objective, the apex bank proposed comprehensive reforms, which included a comprehensive review of the BOFI Act and the CBN Act.17 Without doubt, this step was necessary in order to strengthen the statutory framework for the regulation of banks. Thus, the resultant legal framework was envisaged to be in tune with the prevailing situation and exigencies in the country's financial sector in particular and the economy in general.18 The two bills encapsulating the proposed review were subjected to the necessary law-making process. Unfortunately, while the CBN Act...

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