Finance is the bedrock of an economy and the intermediation function of banks is an essen tial ingredient for rapid economic growth. Thus the financial sector, which comprises a net work of financial institutions (bank and non-bank) or agents operating under given rules for rendering or regulating financial services, usually in the form of providing and promoting financial intermediation, is very important for an economy.
To ensure effective performance of the intermediation function, ele ments such as financial institutions, financial resources, financial rules and regulations and financial interactions must be in place. These ele ments and their linkages constitute the financial sector, of which finance and banking constitute an integral part.
Finance and banking, in the Nigerian context, have evolved over the years. The first commercial bank (First Bank of Nigeria Pie) was established in 1892 and the Central Bank of Nigeria (CBN) start ed operation on July 1, 1959. The sector has evolved and several developments have been made to date. They have been induced largely by a rapidly changing policy environment, technologi cal innovations, market conditions, relationships among financial institutions and instruments, and several laws and regulations of Government. Nigeria has a financial sector comprising the regu latory/supervisory authorities; money market and its institutions; capital market and its institutions; development finance institutions; and others. This module reviews developments in the Nigerian financial sector with particular reference to:
(i) The Regulatory Framework and Regulatory/Supervisory Authorities;
(ii) Money Market and its Institutions;
(iii) Capital Market and its Institutions;
(iv) Development Finance Institutions'
(v) Other Financial Institutions and
(vi) Distress in the Financial Institutions
Regulatory Framework And Regulatory/Supervisory Institutions: Finance and banking activities are governed by rules and regulations which are reviewed from time to time to reflect the changing economic environment. Among some of the recent rules and statutes which govern the operation of the banks are the Central Bank of Nigeria Decree No. 24 of 1999 as amended; Bank and other Financial Institutions (BOFI) Decree No. 25 of 1991 as amended; the Dishonoured Cheque (Offenses) Decree of 1977; the Failed Bank (Recovery of Debt) Decree No. 18 of 1994 as amended; and the Money Laundering Decree No. 3 of 1995.
The National Insurance Commission Decree No. 1 of 1997 and the Insurance Decree No. 2 of 1977 provide the regulatory framework for the operation of the insurance industry. Other rele vant laws which affect the operation of the financial system include: the Foreign Exchange (Monitoring and Miscellaneous Provisions) Decree No. 17 of 1995; Nigerian Investment and Promotion Commission Decree No. 16 of 1995; and the Companies and Allied Matters Decree No 1 of 1990, which provides the legal framework for Unit Trust operations in the country.
The major regulatory/ supervisory authorities are the Federal Ministry of Finance (FMF), Central Bank of Nigeria (CBN), Securities and Exchange Commission (SEC), National Insurance Commis sion (NAICOM), Federal Mortgage Bank of Nigeria (FMBN), and the National Board for Community Banks (NACB). The CBN is at the apex of all bank ing institutions operating in the money market and has responsibility for controlling and supervising all commercial, merchant and community banks, the People's Bank, finance companies, discount hous es, primary mortgage institutions, bureaux de change, and all development banks. This role has significantly influenced the development of the financial system, especially the money and capita] markets. The CBN's regulatory/supervisory role for commercial and merchant banks is complimented by the Nigerian Deposit Insurance Corporation (NDIC).
Money Market and Its Institutions: The money market in Nigeria offers opportunity for trad ing in short-term instruments and also provides the basis for the implementation of monetary policy. The major short-term instruments traded include Treasury Bills, Treasury Certificates, Call Money, Certificate of Deposits and Commercial Papers. Prior to 1993, the money market was dominat ed by deposit money banks. The number of partic ipants in the money market has increased substan tially with the establishment of discount houses and low income/rural sector target institutions like the People's Bank of Nigeria and Community banks. Activities in the money market have increased sub stantially with the deregulation of the financial sector in September 1986.
As at 1997, total instruments outstanding in the market amounted to N251,317.6 million. Currently, the major participants in the money market include:
(i)Discount Houses: Established first in 1993, discount houses provide discount ing and rediscounting facilities in gov ernment short-term securities. As at 1997, there were five discount houses with total asset of M6.996.1 million.
(ii)Commercial Banks: These are the major players in the money market and have been in existence in Nigeria since 1892. The deregulation of the financial sector in 1986 resulted in rapid growth in the number of commercial banks. For instance, the number of commercial banks rose from 30 in 1986 to 64 in 1997. Total assets/liabilities stood at 14578,543.5 million in 1997 while deposit liabilities amounted to N267.378.3 million in the same year. Commercial banks also accounted for 83.9 and 89.7 per cent of the banking system's total assets and deposit liabili ties, respectively, in 1997.
(iii) Merchant Banks: Merchant banks have continued to play their role of pro viding medium-to-long term financing by engaging in activities such as equip ment leasing, loan syndicating, debt fac toring and project financing. These are in addition to acting as issuing houses and advisers for clients sourcing funds in the capital market. From only one in 1960, merchant banks have grown to about 51 with 147 branches in 1997 and total assets amounting to 14118,967.6 million. In recent years, some merchant banks have converted to commercial banks with a lot more showing their will ingness to do so.
(iv) People's Bank of Nigeria: The People's Bank of Nigeria was estab lished in 1988 to meet the credit needs of small borrowers who cannot satisfy the stringent collateral requirements normally demanded by conventional banks. The activities of the bank have expanded since its inception such that by the. end of 1997 there were 278 branches with total assets of 141,137.4 million and total loans and advances of M360.1 million.
(v) Community Banks: These are self sustaining financial institutions owned by local communities to provide financial services to members of the communi ties. They are under the supervision of the CBN and the National Board for Community Banks (NBCB). The first community bank commenced operation in December 1990 and by end of 1997, the number increased to 1,015 with total assets, deposit liabilities and loans and dvances of 145,321.2 million, M2,511.3 million and MI,891.0 million respectively.
The Capital Market and Its Institutions: The Nigerian capital market has continued to play its traditional role of mobilising medium to long-term funds for development purposes. The Securities and Exchange Commission (SEC) is the regulatory authority of the market and the operational institu tions are the Nigerian Stock Exchange, the issuing houses and the stock broking firms.
The capital market consists of the primary market for new issues of securities and the secondary market for trading in existing securities. So far, trading floors exist at Kaduna, Kano, Port Harcourt, Onitsha, \ lbadan and Abuja. Activities in both markets have increased tremendously over the years. For instance, in 1997 a total of 37 issues involving M4,207.5 million shares worth MI 0,467.3 million were raised in the primary market.
In the same year, the total number of stock brokers trading on the secondary market was 164 while market capi talisation was M281.8 billion. The activities have been boosted by the privatisation programme. One significant development in the capital market is the establishment, in April 1985, of the Second-Tier Securities Market (SSM). This market caters for the small to medium-scale enterprises. There is ' also the Unit Trust Scheme, the first of which com ' menced operation in December 1990.
As at the end of 1997, there were 14 unit trust schemes. The capital market has undergone tremendous , reforms in recent years. Among these is the introduction of Central Securities Clearing System (CSCS), an automated clearing, settlement and delivery system aimed at causing transactions and fostering investors' confidence in the market. Equally important is the linking of performance , information on the NSE to Reuters International '. System in order to disseminate relevant market , information to subscribers.
The Abacha regime promoted the establishment of another Stock Exchange, the Abuja Stock Exchange by Federal i Government agencies. Although SEC has ; approved its establishment as of the beginning of ( year 2000, it had not commenced operations. i There are speculations that the project may be abandoned.
Development Finance Institutions:These are specialised banks established to contribute to the development of soecific sectors of the economy. They consist of the (i) Nigerian Industrial Development Bank (NIDB) established in 1964 to provide credit and other facilities to industries; (ii) Nigerian Bank for Commerce and Industry (NBCI) established through Decree No. 22 of 1973 to develop indigenous enterprises; (iii) Nigerian Agricultural and Co-operative Bank (NACB) estab lished in 1973 to finance agricultural development projects and allied industries; (iv) Nigerian Education Bank (NEB) established to replace the former Students' Loans Board and provide loans to needy students; (v) Urban Development Bank (UDB) established through Decree No. 51 of 1992 to provide financial resources to both the public and private sectors of the economy for the development (y) of urban dwellings, mass transportation and public utilities; and (vi) the Nigerian Export Import Bank (NEXIM) established to finance exports and imports, and to provide export credit guarantee and insurance to Nigerian exporters. At various times, these institutions have contributed to the develop ment of the country. However, in recent years, the operations of some of these institutions have been hampered by problems ranging from poor manage ment to insufficient funds due to low capitalisation.
Other Financial Institutions and Funds
Other financial institutions and funds which per form intermadiation functions include the following.
(i) Insurance Companies: These compa nies were established to provide insur ance cover (life and non-life) to individu als and corporate bodies against risk occurrence. The insurance industry has grown tremendously over the years, with the number of insurance companies standing at 181 by the end of 1997. The Nigerian Reinsurance Corporation was established in 1977 to provide re insurance cover for insurance compa nies. The industry is regulated and supervised by the National Insurance Commission (NAICOM).
(ii) Finance Companies: Finance companies specialise in short-term non-bank financial intermediation such as financ ing Local Purchase Order (LPO), project financing, equipment leasing, and debt factoring. Finance companies became prominent in Nigeria after the 1986 financial sector liberalisation. As at end of 1997, 229 finance companies were in operation.
(iii) Bureau de Change: These institutions were established to broaden the foreign exchange market and improve accessi bility to foreign exchange. They are linenspd and renijlatpd hv thfi CRN
(iv)Primary Mortgage Institutions (PMIs): The enabling law for the establishment and operation of PMIs is Decree No. 53 of 1989. The major function ot PMIs is to mobilise savings for the development of the housing sector. PMIs were initial ly supervised by the Federal Mortgage Bank of Nigeria (FMBN) but that func tion has since been transferred to the CBN. PMIs have grown over the years to about 115 in 1997 while their total assets/liabilities stood at M6,078.9 mil lion in the same year.
(v) The National Economic Reconstruc tion Fund (NERFUND): NERFUND was established under Decree No. 25 of 1988 with the broad objective of providing local and foreign funds to small and medium-scale enterprises. The Fund draws its resources from the Federal government, the CBN, African Development Bank and foreign governments that provide fund ing by way of export credits for the. scheme. Cumulative disbursements of M306.8 million and US$80.1 million had been made to projects under the scheme as at the end of 1994.
(vi) Nigerian Social Insurance Trust Fund(NSITF): Established by Decree No. 73 of 1993 to replace the defunct National Provident Fund (NPF), NSITF's main function is to adopt a more com prehensive social security scheme for , Nigerian private-sector employees. ; Under the scheme, Nigerian private sector employees are expected to con i tribute 2.5 per cent of their respective gross monthly income while the employ er is expected to contribute 5 per cent of i gross monthly emolument. As at the third quarter of 1995, a total of 25,318 contributors had been registered while estimated savings with NSITF were MI,117.5 million in 1997.
Financial Sector Distress
The Nigerian financial sector recorded severe incidences of distress during the period from the late 1980s to the mid 1990s. Internal factors (weak I management; inadequate capital; fraudulent and corrupt practices; poor asset and liability manage ment) and external factors (macroeconomic insta bility, inadequate legal framework and political inter ference and instability) were responsible for the distress. Between 1989 and 1996, the number of banks classified as distressed increased from 8 to 52, declining thereafter to 47 in 1997 following the lifting of holding actions on some of the distressed banks.
The rnanagement of distress in the banking sector rests on the CBN and the NDIC established by Decree No. 22 of 1988 to provide deposit insur ance and related services for banks. As at the end of January 1998, licences of about 31 banks had been revoked. Varying degrees of distress existed among other financial institutions such as primary mortgage institutions, community banks, finance houses and insurance companies. Consequently, the licences of 353 dis tressed community banks and 97 Primary Mortgage Institutions (PMIs) were revoked in 1997. However, following measures adopted by the Federal Government, the CBN, the NDIC and NAICOM, the problem of distress has been seri ously curtailed; sanity and confidence have gradu ally returned to the financial sector.
The Nigerian finance and banking sector has grown from a simple structure at independence in 1960 to the present complex system. Much of the growth came since the 1980s following the financial sector deregulation. Since then, the finance and banking sector has encouraged economic and social development through its intermediation func tion. This development function was threatened by the frightening incidence of distress in the financial sector. The quick intervention of the Federal Government and regulatory authorities has reveTSed the trend.
Today, sanity and confidence have returned to the finance and banking sector. Emerging trends which will impact significantly on the financial sector include the introduction of Universal Banking in January 2000 and the opening of the sector to foreign players again. Citibank Nig. Ltd is now a subsidiary of the Citibank banking group of the United States of America. Standard Chartered Bank (Nig) Ltd, a wholly owned sub sidiary of the Standard Chartered banking group commenced operations in early February 2000. These trends should result in greater efficiency in the delivery of banking services in Nigeria and also facil itate the process of attractina investment into Nigeria.