The Impact of Banking Regulation and Supervision in Nigeria Commercial Banks

The Impact of Banking Regulation and Supervision in Nigeria Commercial Banks

Banking Regulation – The uniqueness of banking in the economic system singles out the industry for much heavier regulations than any other activity.Gardner (1994) right observes than in virtually all developed market economics, the banking industry is more heavily regulated than any other commercial of industrial sectors.  In less developed countries, the position is not so different.  Unlike many other economic activities, banking is regulated from cradle since regulation starts with the grave.  Approval must obtain to close down.  Historically, formal regulation of banking was prompted by the frenetic experiences of the brings banking crises and bank failure of 1973/74 in the United Kingdom and the similar crises in banking system of Western European and the United States.

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NWANKWO G.O. (1990) says that after banking failures it become clear that no major country could ignore formal regulation of banking.  This he adds derived from the experience of the speed with much financial crises is one financial center were and could be transmitted to other financial centers, gives the internationalization and globalisation of national and international financial markets resulting from competitive pressure and developments in technology, in the Nigeria case, the massive bank failure of the 1940’s and 1950’s forced the government to promulgate the first ever banking legislation, the banking ordinance of 1952.  In the United Kingdom, it was the finger banking crises of 1973/74 that prompted the enactment of the 1979 banking acts.  Indeed, it is now necessary to define banking regulation and why banking is more regulated than other sectors.

LIEWELLYN D.L. (1990) defines the prudential regulation of banking as a body of specific rules or agreed behaviour either imposed by some government within the industry that constrains the activities and business operations of the institutions.  Prudential regulation LIEWELLYN says is made up of these elements, the rules of agreed behaviour and other maintaining and secreting to ensure compliance.  Its nature, roles and form vary between countries and considerable difference in scope, intensity and methods depending or the socio-politically evolution these countries.

AGENE C.E. (1992) is of the new that the rationale for banking regulation includes the prevention of systematic risks maintained of public conference and bank solvency.  He goes on to observe that the Campbell commission in Australia (1981) opned that international was necessary to ensure efficiency and system stabliting, competitive neutrality, diversity of choice and macro-economic and political stability.

ROBERT BENCH (1992) agrees with AGENE in his view the primary objectives of banking regulation have been to maintain continuance and stability within the industry, to manage monetary policy to promote efficient intermediation and protect against systematic risk and collapse.

NWANKWO G.O. (1990) is of the opinion that the rationale for banking regulation does exceeds the desire to maintain confidence and protect against banks and other financial institution to preclude or limit foreign ownership in a sector which is regarded as vial to the proper functioning of the national economy and the attainment of national policy goals.  The other reason is that in many developing countries with underdeveloped and uncompetitive banking system concerns for the competitions situation of the domestic banks has followed the usual in fault industry arguments.

PECCHIOLI (1993) emphasis that banking is a key sector of the economy providing the community with money balances and payment arrangement control of ownership of banks should therefore be maintained in Australia hands to ensure concern for the national interest.  Prudential regulation.  ROBERT BENCH (1992) has opined should have the following core elements:

(i)      Regulation covering pricing products and permissible activities (or non permissible activities).

(ii)     Protection regulation for customers, and the system as a whole but not necessarily market protection.

NWANKWO G.O. (1991) suggests the following four dimension classification as being more suitable to the Nigeria situation.  The first is structural, encompassing entry branching capital requirement and mergers.  The second is prudential, covering limit to permissible business, risk concentration, capital and liquidity adequacy statutory return etc.  The third involves the regulation for monetary policy purpose includes control over leading generally.  Interest rates, structure of lending and reserve requirements.  There are finally fair play controls.  This include controls over advertising, loans to staff and directions limits to insider trading truth in lending etc.  Structural regulation deals with entry, expansion exist and merging.


In this attempt is made to examine the various approaches in trying to regulate the bank sector.  These regulatory policies are broken down into phases.

According to EPEN YOUNG DB (1995) the phase are FREE BANKING ERA 1852; some glaring features of this period were;

The complete monopoly of the sector by foreign banks, which included the Africa corporation (now first bank of Nigeria).  The colonial bank (now Union Bank) and the British and French Bank (now United Bank for Africa).

The establishments of several banks a total 185 banks were reportedly established between 1947 and 1952 of which 145 were registered in 1952.

  • The collapse of the banks.
  • Money of the banks were under capitalized
  • Rapid and indiscriminate bank expansion
  • Bad management, persistent stealing, imprudent lending.

This period as also described as the fre banking era because of the ease (absence of regulations) with which banks were established (which was the cause of the mass bank failure)

THE ERA OF BANKING REGULATION 1959 – 1983  The legislation that were enacted during this period were aimed primarily at remedying identified defects in the system and closing iropholes in the previous legislation and stem the tide of bank failure that occurred in the previous period.  This era began with the enactment of the Central Bank of Nigeria Act of 1959, which gave legal banking to the establishment of the Central Bank of Nigeria.  During the period 1959 – 1970 several important legislation were enacted aimed at promoting and integrating the Nigeria financial system and it became effective 1959, 1961, 1962, 1964 amendments and the 1969 banking decree.  The immediate outcome of these legislation were:

  • The development of the money and capital market.
  • Emergence of more commercial banks between 1959, 1962, 17 new commercial bank were established.

The 1969 banking act for example adjusted the capital requirements for both indigenous and expatriate banks provided for the first time for capital deposit ratio; increased the capital loan ratio and extended the CBN power to include renting bank advertisements and authorizing opening and closing of branches and banks amalgamation.

The 1968 companies Act required foreign banks opening in the country to be incorporated in the country.  Banking regulation during this period was largely prudential which aimed at ensuring sound banking practices and to protect customers.  The second period of this phase (1970 – 1985) witnessed several regulating measure taken by government.  Between 1970 and 1977, the government too two important measures.  The indigenization promotion decree, 1972 which was amended in 1977, the acquisition of controlling interest (40%) by government in the then existing expatriate banks (first bank, Union bank, UBA) in line with the indigenization and the establishment in 1976 of a financial system review committee to review the whole financial system in other to strengthen the efficiency of the financial (the Okigbo committee 1976)

During this period as a means of strengthen the banking sector and accelerating its impaction economic development government established and wholly owned the Nigeria Agriculture and co-operative bank, the Nigeria bank for commerce and industry and reconstituted the Nigeria.  Building society ad the federal Mortgage bank of Nigeria state followed by establishing state commercial banks and development finance companies.

This period also witnessed a more intensive intervention by the public sector in the financial sector which took a form of direct credit, street control of interest rates and sustained increase in the paid up capital of new banks form this period upwards, although the policy objective were to ensure sound banking practice and to protect customers, the control instrument became rather restrictive for example, interest rates on bank deposits and loans were administrative controlled to give preferential treatment to certain priority sectors, e.g. agriculture industry, manufacturing, direct and selective credit control were imposed on the size of lending to the primate sector, minimum proportion of available credit was allocated to certain sectors which needed a substantial amount of credit.



One of the principal objectives of central bank is to promote monetary stability and soundness in the financial system.  To achieve this, the central bank of Nigeria (CBN) conducts regular supervision and examination of banks as a means of maintaining surveillance on banking activities and operations to ensure that banks comply with the banking laws and other directives stipulated by the monetary authoristies.

MULLER H.L. (1990) observe that: A virile supervisory system requires a sand infrstractural base.  The specific structures and administration frame works that are necessary and relevant within a banking context include a codified set of laws relating to business organisation, the development of a adequate and well defined according standards, a system of independent auditing and arrangement in England, HALL M.J.B. (1992) note that: until the implementation of banking Act 1979, statutory played on relatively minor role in the prudential control of bank operating in the United Kingdom.  Later, the bank of England, (the bank) was happy to continuous the long standing tradition of allowing the banking a high degree of self-regulation.  In this manner, the bulk of supervisory cost were borne by the industry itself and supervision was exercised by those most fully painted with its far reaching ramifications.  Moreover, minimal damage was done to the industry’s international competitiveness and to its ability to adapt to market change because of the resultant high supervisory touch.  As for the effectiveness of such approach the threat of public censure by a self regulatory body or ultimately, expansion from any of the various banking association was seen as a sufficient deterrent to ensure prudent behaviour.

HALL M.L.B. (1992) is quick to point out that despite the adoption of this fairly liaise regulation and supervision of banks a back up statutory frame work nevertheless existed.  The experience of the past has shown that the fortunes or misfortunes of an individual bank can have for reaching implication for whole banking system if any bank failed the financial and psychological effects are transmitted throughout the whole economy.  This makes it desirable for the government to regulate the operations of the banks.  Thus the overall objective of the bank surveillance of supervision is to foster and maintain a sound banking system.  Its goal is to protect the system against the weakness of individual banks and to assist the weak or problem banks to become stronger financial institutions.

The two important elements of banking supervision in Nigeria are on side examination of the books and affairs on banks and off site supervision, which involves the secreting, and review of bank statistical returns.  The procedure enable the supervisor to monitor the bank position from time to time through physical examination of books and operations and analysis of prudential returns for instance contact with management enables the supervision to access the competence of management and present an appropriate form to discuss present problems and remedial measures.  In addition, the opportunities enable the supervisor to keep in touch with the market to learn of new products, and ideas.


The CBN has responsibly for the supervision of banking system.  This responsibly is discharged by under taking both sides offside and on-side examination.  The former requires that commercial bank submit statutory returns to the CBN for appraisal by the bank.  On the other hand, on side examination involves examine banks books and records to ensure compliance with regulation set out for banks in statute as well as in CBN applied.  Such penalties include lines and payment of short falls in loans to the banks, which are then applied to relevant sectors such as agriculture industry or housing, which the regime directed credit lasted.

Over the years, the scope of supervisory role has been expanded both in terms of the technique and the type of institutions covered.  The 1958 Act is amended in 1962 required any one on organization intending to carry out banking business to obtained license from the CBN.  Prior to 1967, the federal ministry of finance was responsible for site examination through a scruting sector.

The CBN assured both function in 1967 the decree of 1991 provided that, finance and insurance companies because de-change and development banks render regular and timely returns out their operation in the CBN, the amendment to the Boli Decree in January 1997 effectively expand, the scope of the CBN’s supervisory role to cover all financial institution.  The CBN now has commercial and merchant banks, people.  Banks of Nigeria community, banks, finance companies, discount houses.  Primary mortgage institutions, Bureau de-change and all development banks.


Bank regulation involves the formulation and enforcement of specific banking rule.  These laws and regulation establish a frame work for banks behaviour expected to foster the maintance of a safe and sound banking system and a fair and efficient of bank services to customers.  The banking system has recorded a remarkable evolution since the CBN commenced economic condition and the rapid expansion of financial institutions, there have been reviews and changes in the laws and regulations governing the operations of banks and other financial intermediaries, substantial reforms were introduced in Nigeria banking laws through the promulgation of the Central bank of Nigeria Decree 24 of 1991 and banks and other financial institution (Boli) Decree 25 of 1991.  The former replaced the CBN Act of 1958 (as amended) and considerable endarged the powers of the powers of bank in the execution of its primary duties.  The Boli Decree replaced the banking Act of 1969 (as amended) and provides for several changes aimed at establishing or sound financial system.

The legal frame work provides that no person may carry on banking business in Nigeria except or company duly incorporated in Nigeria and which holds a valid banking license issued by the CBN with effect from January 1994, merchant banks wishing to undertake commercial banking business could seek the necessary approval of the CBN.  There are various provision on the CBN and Boli Decree which govern the operation of banking business in Nigeria.  The provisions among other things, cover minimum capital requirements, returns to be submitted to the CBN by banks, power of the CBN to conduct routine and special examination, management and control of ailing banks power of the CBN to revoke banks license officials of the CBN who are appointed as bank supervision and examiners have the authority to examine periodically the books and affairs of each bank.  Right to access at all times, to the books of accounts and vouchers of banks is guaranteed by law as well as the right to request for information and explanation on any aspect of banking business failure by banks to comply with the laid down rules and regulation attract stiff penalties which are stipulated in the Boli Decree.

When there are reasons to suspect that a bank might have contravened certain provision of the decree or that a bank asset are inadequate to cover its liabilities to the public a special examination may be conducted.

The Boli Decree also protects bank from unfair competition by restricting the business of deposit taking only to these institutions approved by the banks.  In addition, the failed bank tribunals (Recovery of debt) and financial malpractice in banks decree was promulgated in December, 1994 to strengthen existing banking laws.  The Boli Decree was amended with effect from 1st January, 1997 to enable the CBN to effectively assumed the leadership of all the financial institution in Nigeria consequently, with effect from date the CBN was responsible for supervising all commercial, merchant, people’s and community banks, finance companies, discount houses, mortgage institution and bureau de-change and all development banks.


Supervisory powers on respect of banks are vested in the directive of banking supervision and the direction of bank examination and other officials so appointed.  On side function is carried out by bank examination according practices.

The CAMEL rating (capital, assets, management, quality, earning, liquidity) is used as an internal assessment guide to determine how sound a bank is.  Routine examination is capable to revealing to the monetary authorities, liquidity or solvency problems as well as failure to comply with monetary policy guidelines.  It in the process of an examination, the CBN observes that the performance of a bank is not satisfactory, it may direct such a bank and advice it directors on the appropriate action to be taken to correct the situation.  In serious instance, written agreement or lease and desist order is issued to direct the bank to take necessary corrective measures.  If the weakness of an individual’s bank reach a critical level the bank may design a plan to provide managerial assistance.  In case of exigency, the board of governors of the bank may approve the immediate or temporary acquisition of a failed or problem bank occasionally financial assistance may be provided by the CBN to problem institution before their conditions deteriorates to a level that requires acquisition or liquidation.

Following the routine examination of a bank, a confidential report is prepared by the government of the CBN together with recommendations for improved performance, to the bank recommendations for improved performance, to the bank concerned with the directives that the report be tabled at the meeting of the board of directors of the bank specifically covered for considering the view and recommendation of the CBN, with two weeks of considering the report its reaction to the report on its strategy for implementing the recommendations of the banks.  Failure to comply with the CBN’s directives, arising from the bank examination report attracts stiff penalties.


Off-site supervision basically involves the analysis of banks returns to the CBN as statutorily required in order to ensure that no banks operations and activites are reported as accurately as possible, the CBN directs that every bank should appoint an external auditor approved by the bank.  Each bank shall seek the approval of the CBN on the termination or resignation of the banks external auditor giving reason for such action.  It is also possible that the bank may require to disclose information obtained in the course of the audit, provided that such disclosures is made in good faith and is relevant to the bank supervision.  The auditor is to ensure that prudential requirements are adhered to and is maintaining to forward copies of that banks internal report not later than three months after completing each audit exercise to the bank.  To facilitate banking supervision, the CBN introduced in March and November, 1990 a set of prudential guideline for licensed banks.  Under these guidelines banks are to adopt the risk weighted measures of capital adequate recommended by the basic committee of the bank for international settlements.  Before January 1992 banks are to adopt the risk – weighted assets as capital and from that date the ratio was reviews to a minimum of 8 percent.  Also so percent of a banks capital must be her or primary capital (paid up capital plus reserves) order this direction.  The prudential guidelines and the statement of accounting standard specifying the criteria to be used by the banks for the classification of non-performing loans, the minimum provision to be made for each category of such loans and the condition attached to interest recognition with respect to classified loans discount houses with CBN to total deposit liabilities demand, saving and time deposits should be 12% on a daily basis for each two week maintenance period.  However, effective 1st August, 1996. Merchant banks were exempted from cash reserve requirement in an attempt by the CBN to ensure a level playing field for this category at banks.

LIQUIDITY RATIO:  Banks are required to have a minimum liquidity ratio of 49 percent, out of which to percentage points should be in treasury securities (Treasury Bills and certificates).  As from 1994, the placement (net) of a bank with discount houses should count as part of that ratio.  However, only with bank placements, which are fully recurred by eligible instruments re-discountable at the CBN, shall count as part of a bank liquid asset.  Consistent with the provision on each reserve requirements, the base on which the 40 percent liquidity ratio is applied was expanded in 1997 to include total deposit liabilities certificate of deposit with the Central Bank in respect of excess credit by banks that are still subject to appropriate credit selling and cash deposit to meet the cash reserve requirement do not qualify for inclusion in competing the statutory liquidity ratio.

LOAN CONCENTRATION:  It is advisable for a bank to concentrate its lending operation on a single sector or borrower, hence guideline are provided to ensure lending atonalities are diversified.  Since the assets of a bank are mainly the loan it grants, banking supervision also aim at limiting shareholder risk through placing limits on loans and granted to a single borrower.  The Bofi Decree requires bank to report large borrowing to the CBN.  The bank also requires that total value of a loan/credit facility or any other viability in respect of a borrower, at any time should not exceed 20 and 50 percent of the shareholder funds unimpaired by losses in the cases of commercial and merchant banks respectively.


Provisioning are made on the basis of perceived risk of default on specific credit facilities.  Even performing loan contain some element of risk or loss no matter how small there is need, therefore, to make adequate provision for bad and doubtful debt of banks.  The CBN tries to satisfy adequate by considering method and system in place for loan recovery.  Inadequate provisioning misleads depositors and the general public about a banks state of affairs.


Bank failures have a ripple effect on the entire economy, in order to minimize fraud and ensure that banks do not engage in activities inimical to the economy.  Internal control is indeed in the financial system.  These help to ensure that asset are safeguard and that commitment and payments are duly authorized.  Bank examiners focus on the internal control system of bank for these resources.



In its supervisory roles, the CBN is responsible for approving the board of directors and any change in the control of commercial and merchant banks.  Anyone who control a bank as a shareholder in any way must satisfy that he is suitable for the position of occupies.  Suitability as determined by criteria, which are set out by CBN and Bofi Decree factors such as competence and the integrity of the initiating or acquiring person, or group of person as well as the effect of the venture on competition amongst institution are considered by the CBN for the approval of the management team of a bank.


Whenever a banking / financial institution regulated by the CBN proves unable to meet its objections and indicates, its desire to suspend payment or admit insolvency problem arise the CBN conducts a special examination to such bank/institution and it convinced that the bank situation may take numerous action ranging from the prohibition of the bank from further credit activities to the removal of its directors from office.  This is aimed at dealing with defaults and distress in the system in order to entrance public confidence the most cost effective option.  Including takeovers restructuring and act right liquidation of terminally distressed banks may be applied.


The bank supervision in conducted through date collection and analysis of information from statistical returns and visit the bank the CBN in line with its deregulator stance, grater reasonable degree of freedom to banks to run their affairs.  The bank has to be satisfied that their risk are adequately assessed and the interest of depositors are protected the operation of the CBN are conditioned by the rapid institution and structural changes in the economy.  Overtime there has been a moderate growth in the staff strength of the bank in response to its expanded responsibility.  The bank has also continued its drive to computerize its activities in all its branches in response to these challenges most user in all department are regularly trained our information technology to increase their knowledge and improve the bank supervisory role supervision and examination enable the early detection of problems which banks and reelected institution may experience.

Recent developments in the financial services industry have increased the need for the CBN to follow these trend and arrest difficult situation before they deteriorate.


Prior to 1988, there was no institution to ensure depositors fund.  As a result of a rapid expansion of the banking system, the need to insure depositor fund became more obvious.  The NDIC was thus established by decree 22 of June 1988 to provide insurance cover for depositors funds and complement the supervisory role of the CBN currently, all institutions licensed as bank by the CBN are covered by a depositors protection scheme.

(a)     Pay off depositor up to a maximum of $50,000

(b)     Transfer insured deposits to another bank or other banks.  Such that the customer continues normal banking business with the new bank.

(c)      Arrange for another bank to assume all of a failing bank asset in return for cash payment by the NDIC in purchase and assumption transaction.

(d)     Establish a new bank as a bridge with a name different from that of the failed bank and assets of the failed bank to the new bank, but transfer the deposit liabilities and assets of the failed bank to the new bank such that the new bank manages then for a temporary period before liquidation.  If demand necessary there is a standing commits consisting of both the CBN and NDIC officials for resolving the difficulties of problem banks.


Some of the impact of regulatory and supervision policies are institutional unstable bank operating environment (externalities).  Untimely data acquisition and appropriate technology.

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  1. the strength and weakness of the first banking legislation was not listed categorically for easy view but this write up is good, thank for knowledge shared.

  2. Orode Julius says:

    Pls, Nigeria Banks needs to improve in the network, so that the cashless system can be effective.

  3. prisca tina says:

    Please, what is the meaning of acount maintenance which we are been charged in first bank.

  4. Clinton I. Okoro says:

    Pls which body is in charge of coming in between a customer and a commercial back especially when they miss behave.
    Currently I have a problem with Heritage Bank, pls kindly send their name and email address.
    Thanks. Clinton I. Okoro.

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