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INTRODUCTION
The financial sector - banking, capital markets and securities, insurance, as with any other sector of the economy, is vital to Nigeria's growth and development, thus it is crucial to properly safeguard it by means of laws, adequate supervision and monitoring. This is especially important as it ensures that a balance is maintained because failure to do so may have a ripple effect on all other sectors of the economy. This then explains the role regulation plays in preserving the economy of any society or state. Regulation in this regard, comprises of the various laws, rules and institutions which exist to ensure that the financial ecosystem of a society is protected with a view to preventing and or absorbing financial risks as they may arise, as well as protect the investing public, and ensuring financial stability of the economy.1 In other words, it is the body of rules which govern the product and services offered by financial institutions. These laws establish agencies which oversee the functioning and compliance of financial service firms through a series of policies and regulations, and with the aim of protecting investors/consumers from exploitative practices and promoting financial stability.2 For example, the Central Bank of Nigeria (CBN) is the primary regulatory body tasked with the role of supervising and monitoring banks and other financial institutions in Nigeria through its oversight functions.
However, irrespective of the measures put in place over the years, the financial sector has been severally plagued with distress since the inception of banking business in Nigeria. In carrying out its functions, the CBN has severally stepped in to rescue financial institutions from failing e.g., revocation of the licenses of failed banks and through its recapitalization policy for distressed banks which was occasioned by a decline in their capital base largely due to bad loans given by these institutions.3
Historically, Nigeria's financial regulatory system has made no small amount of progress, coupled with innovations, which have become necessary in preventing or at best, managing economic crises as have been witnessed in the past.4 It has been argued that regulations are generally ineffective and therefore, not necessary because it has failed to prevent re-occurrences of financial crises both in Nigeria and elsewhere resulting in rising costs of inflation and a decline in investments in general.5 It must however be noted that regulatory laws and bodies cannot be dispensed with because of the sensitive position the financial sector holds and a resultant significant cost a lack of regulation can incur. This underscores the importance of regulating financial institutions because regulations seek to prevent and investigate fraudulent practices which occur in the sector through its objective of promoting efficiency and transparency which serves to build the confidence of the investing public in the sector and prevents panic.6
Ultimately, despite the arguments against regulating the sector, it would seem that the pros outweigh the cons. The need for standard regulatory laws, monitoring and supervision of the financial sector must continuously be emphasized such that in the advent of crises, it can be effectively managed and maybe prevented to a large extent. This essay considers the role and effectiveness of several regulatory agencies in light of their enabling laws in respect of the Nigerian financial sector vis-à-vis the banking sector.
OVERVIEW OF THE NIGERIAN FINANCIAL SECTOR
Before the enactment of the CBN Act in 1959, the development of banking business in Nigeria commenced with the establishment of the African Banking Corporation in 1883, and subsequently, the Bank of British West Africa in 1884 to meet the business demands and facilitate trade in the colonial era. Several indigenous banks were later set up from 1929,7 however, a majority of these banks failed due to factors which include inadequate capital base, inexperienced management, etc.8 These events necessitated the enactment of the Banking Ordinance of 1952 upon the recommendations made by the G.D. Paton commission of enquiry into banking activities in Nigeria which put forward measures for controlling banking activities, and placed supervisory powers in the Financial Secretary. The Ordinance aimed to oversee the establishment of commercial banks and act as a check on unregulated banking activities.9 This era also saw the formation of several specialized banks – community banks, development banks and merchant banks e.g., Nigerian Industrial Development Bank, Nigerian Bank for Commerce, and Nigerian Agricultural and Credit Bank.10
The enactment of the CBN Act in 1959 empowered the CBN with supervisory and regulatory powers previously vested in the Financial Secretary under the Banking Ordinance, with its objectives which includes issuing of a legal tender in Nigeria and safeguarding the value of the currency both in domestic and international markets, promoting stability and securing a sound financial system, advising the government on financial policies, and serving as a bank of last resort to other domestic banks.11 These objectives are achieved through the formulation of policies and rules to which all financial institutions must comply. The decades after the enactment of the CBN Act saw an increase in indigenous banking activities to meet with the demands of the advancing sector.12 The Nigeria Deposit Insurance Corporation (NDIC) was also established in 1988 by virtue of the Nigeria Deposit Insurance Corporation Act, with its core functions supplementing those of the CBN in carrying out and executing sound financial policies, supervising and ensuring safe banking services by monitoring actors in the financial sector through insuring financial institutions and paying out deposits of failed insured financial institutions.13 Other bodies such as the Asset Management Corporation of Nigeria, Corporate Affairs Commission, The Securities and Exchange Commission, The Financial Reporting Council of Nigeria etc., all work to check unsafe practices in the financial sector.14
Over the years, studies have identified several factors which are responsible for banking failures such as poor management and weak internal structures of banks, poor regulation, monitoring and supervision etc., resulted in banking failures in the 1950's and 1980's.15 Other economic factors including inflation and exchange rate, capital inadequacy, lack of transparency and a high volume of non-performing loans, also contribute to the fragility of the sector, with as much as 53 Deposit Money Banks being closed down by the CBN following a revocation of their operating licenses between 1994 and 2018, while 51 other banks were in the process of being wound up with the NDIC appointed as liquidator.16 Thus, regulations seek to put in place several measures to mitigate the effects of such occurrences. The CBN carries out this function through its committees e.g., the Monetary Policy Committee, Monetary Policy Forum etc., which are tasked with evaluating economic and financial conditions, and determining economic conditions both in the long and short run.17
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Footnotes
1. O. Olanipekun, SAN., Banking Regulation and Supervision: Concept, Theory & Rationale (Aucourant Lagos, 2016) 5.
2. M. Schmidt, C. Stapleton and A. Courage, Financial Regulators: Who They Are and What They Do. (https:investopedia.com/articles/economics/09/financial-regulatory-body.asp) accessed on 23 July 2023.
3. C. Didigu et al, 'Monetary Policy and Banking Sector Stability in Nigeria'CBN Journal of Applied Statistics, 13 (1) 4.
4. Systemic banking failures have been resolved either through restructuring, bank bailouts etc, with the CBN bailing out as much as 14 indigenous banks in the last decade. See: Charles N.O. Mordi, The Nigerian Financial Crisis: Lessons, Prospects and Way Forward. (https://dc.cbn.gov.ng/bullion) accessed on 20 July 2023.
5. Proponents of deregulation argue that elaborate legislations reduce investment opportunities and stunt economic growth. Examples of the Stock Market Crash of 1929 and the Great Recession of 2008 have often been cited to buttress this point which all happened despite regulations which were in place. See: Deregulation: History, Effects, and Purpose (www.investopedia.com) accessed on 20 July 2023.
6. Regulations seek to build the confidence of the public especially in the banking sector. This seeks to prevent panic or bank runs. For example, the earlier part of 2023 saw the collapse of the Silicon Valley Bank in the United States due to a bank run in March, and its subsequent takeover by First Citizens. See: The Week in Business: A Bank Takeover (www.nytimes.com/business) accessed 23 July 2023.
7. The Industrial and Commercial Bank was the first indigenous bank established in Nigeria in 1929, although it failed in 1930.
8. This is also referred to as the free era of banking where no sustainable framework for the supervision of banks existed. See: Central Bank of Nigeria/History. (www.cenbank.org/AboutCBN/history.asp) accessed 23 July 2023.
9. T. Ajayi and M. Sosan, The Evolution of Nigerian Banking System, Supervision and Current Challenges (https://ssrn.com/abstract=2286200) accessed 23 July 2023.
10. Ibid.
11. Central Bank of Nigeria Act, 2007.
12. A push for deregularization and liberalization of the sector led to an exponential rise in commercial banking activities which promoted competition in the industry. See: Historical Development of Banking in Nigeria. (www.thelawlane.com) accessed 23 July 2023.
13. NDIC: Mandate, Powers and Functions (www.ndic.gov.ng) accessed 23 July 2023.
14. Financial Reporting Council of Nigeria Act 2011, s. 1.
15. B. Adeyemi, 'Bank Failure in Nigeria: A Consequence of Capital Inadequacy, Lack of Transparency and Non-Performing Loans?'(2011)6 (1) Banks and Banks Systems, 99.
16. Closed Financial Institutions/NDIC (www.ndic.gov.ng/failureresolution) accessed 23 July 2023. This is in addition to CBN interventions. It was reported that the CBN and AMCON have spent about N3.83 trillion in bailing out distressed banks since 2009 (Closed Financial Institutions/NDIC (www.ndic.gov.ng/failureresolution) accessed 23 July 2023. This is in addition to CBN interventions. It was reported that the CBN and AMCON have spent about N3.83 trillion in bailing out distressed banks since 2009 (https://businessday.ng/exclusives/article/cbn-amcon_spendn38-trillion-rescuing-sick-banks-since-2009/) accessed 23 July 2023.
17. (www.cbn.gov.ng) accessed 23 July 2023. The CBN also released regulatory and supervisory guidelines for Development Financial Institutions in 2015 in order to encourage and maintain the overall socio-economic atmosphere.
Originally published Tue 24 Sep 2024
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