An Overview of the Nigerian Financial System

CONTRIBUTED BY: AJIBADE FARIDA

INTRODUCTION

The Financial system of a country appears to be one of the government’s most regulated and controlled agencies. It is a well-known knowledge that the more sophisticated and developed a country’s financial system is, the more investment opportunities it attracts[1]. It is on this background that a review of the structure and evolution of the Nigerian financial system, with a particular focus on the development of the financial structure of Nigeria, is examined.[2]

Thus, this article will have as its major focus, the evolution of the financial system, its functions, and laws regulating the Nigerian Finance Sector, as well as the conduct of monetary and financial policies.

THE EVOLUTION OF THE FINANCIAL SYSTEM

The evolution of financial systems in developing countries reflected their diverse political and economic histories. In Nigeria, the financial system consists of institutional units (such as corporations or government agencies) and markets that interact typically in a complex manner to mobilize funds for investment and provide facilities.

Prior to the establishment of the CBN in 1959, the main banks in Nigeria were local branches of banks of the metropolitan countries whose lending and related activities were largely confined to the financing of expatriate businesses which consisted largely of the export of primary commodities and import of manufactures. The banks as such were mere enclave institutions that had little to do with the economic development and efforts of the country. Although their activities in Nigeria were based on decisions made at the head office of the home country, Indigenous merchants deprived of credit from these enclave financial institutions established a total of 25 wholly indigenous banks between 1925 and 1952.[3] These early attempts, however, failed due to an inadequate capital base and imprudent banking practices. The asset/liability structure of the banks was characterized by self-liquidating commercial credit, the virtual absence of term loans and a sizeable portfolio of overseas investments.

Indeed, the banks were a medium for the export of capital from Nigeria because of the lack of local avenues for short-term investments. Soon after the establishment of the Central Bank, it assumed responsibility for the Nigerianisation of the credit base through the creation of local money and capital market instruments in which financial institutions could invest their surplus funds instead of in the money and capital markets abroad. However, the banks were not fully persuaded to invest in these instruments until administrative, legislative and regulatory instruments were put in place in line with developments in the economy to make it attractive or mandatory for them to hold the instruments. Developments in the economy and the changing views of the monetary authorities on the perceived roles of the financial system continued to influence the evolution of the financial system.[4]

LAWS THAT REGULATE THE FINANCIAL SYSTEM IN NIGERIA

The primary legislation governing banking activities in Nigeria are the:

  1. Banks and Other Financial Institutions Act 2020 (BOFIA).
  2. Central Bank of Nigeria Act (CBN) 2007.
  3. Companies and Allied Matters Act (CAMA) 2020.
  4. The Nigerian Deposit Insurance Corporation Act (NDIC) 2006.
  5. Foreign Exchange (Monitoring and Miscellaneous Provision) Act 1995.
  6. BANKS AND OTHER FINANCIAL INSTITUTIONS ACT, 2020 (BOFIA)[5]

Before the BOFIA 2020, the BOFIA 1991 existed for over 20 years until November 12, 2020, when the current president assented to new legislation, which is currently in use and acts as:

      1. Empowerment of the Central Bank of Nigeria to supervise and regulate all banks and other financial institutions in Nigeria.
      2. On the application for the grant of a banking license, Section 3(3) BOFIA 2020[6] gives the CBN governor absolute powers to refuse to grant a banking license without giving any reasons whatsoever.
      3. On revoking or varying conditions of a license, Section 5[7] of the Act stipulates the penalty for failing to comply with the conditions of a license.
      4. The Section also imposes an additional penalty on the officers or directors of the bank that failed to take reasonable steps to ensure compliance with the conditions[8].
      5. According to the Act, such a director or officer shall be liable to imprisonment for a term not less than 3 years or a fine, not less than #2,000,000 (Two Million Naira), or for both such imprisonment and fine[9]
      6. On the revocation of a banking license, Section 12 of the Act also introduced circumstances that may result in the revocation of a banking license by the CBN Governor.[10]
  1. THE CENTRAL BANK OF NIGERIA ACT 2007

The CBN is the lead regulator of the financial system in Nigeria, and is charged with the overall control and administration of the monetary and financial sector policies of the Federal Government in Nigeria as stipulated by the CBN Act of 2007.[11]

  1. Section 2 of the Act stipulates the objectives of the CBN which include ensuring monetary and price stability, issuance of legal tender, and maintaining external reserves to safeguard the international value of the legal tender currency and this promotes a sound financial system in Nigeria to which the provides economic and financial advice to the Federal Government.[12]
  2. The Act also empowers CBN to issue guidelines and circulars relating to its responsibility to banks, foreign exchange market, and other financial institutions.[13]
  3. THE COMPANIES AND ALLIED MATTERS ACT, 2020

This Act is charged with the regulatory powers over all registered companies in Nigeria, including banks and other financial institutions.

  1. The Act governs banking activities because to operate a financial institution or banking business in Nigeria, one has to be duly registered and incorporated under the CAMA.[14]
  2. CAMA also provides various regulations and compliances that banks must follow from issuance of shares[15] to meetings of companies[16], among others.
  3. The Act also stipulates that every registered company must file an annual return with the CAC as a mandatory requirement to which the Banks must adhere.[17]
  4. THE NIGERIAN DEPOSIT INSURANCE CORPORATION ACT, 2006 (NDIC)

This Act is responsible for ensuring all deposit liabilities of licensed banks. The Act seeks to ensure that liquidation proceeds carried out by Banks are orderly.

  1. The Act with directives from the CBN, the NDIC takes over the management and control of a failing bank and ensures the efficient closure of the failed bank and financial institutions without any disruptions.[18]
  2. It also ensures the cost-effective realization of assets and settlement of claims to depositors, creditors, and shareholders.
  3. THE FOREIGN EXCHANGE (MONITORING AND MISCELLANEOUS PROVISIONS) ACT,1995

This Act provided the regulatory framework for Foreign Exchange transactions and controls

  1. The Act provides that transactions in the foreign exchange market are to be conducted in convertible foreign currency.[19]
  2. Section 2 (2) of the Act listed specific money instruments that can be used in the market. These include foreign bank notes, bank drafts, Mail or telegraph transfers, and any other money market instruments that the Central Bank may with the approval of the Finance Minister.[20]

WHAT ARE THE FUNCTIONS OF FINANCIAL SYSTEMS?

A well-functioning financial system is supposed to perform several functions, some of these functions include:

  1. Facilitating payments: The transfer of goods and services can take place smoothly only if there is a mechanism in place to ensure that the payment reach in due time this function is carried out by the payment systems and this can be seen as a subset of the financial system and this is composed of several institutions such as banks, depository institutions, and private companies. [21]
  2. Risk Management: The derivatives market and the insurance market are important parts of the financial system. These markets were developed solely for rationalizing risk, which is an unavoidable aspect of both individual and corporate life. Using the financial system, individuals can pool their resources and cover themselves in case any unforeseen event happens in their lives. In many countries, the government has created a social welfare system. This can also be viewed as an insurance scheme that is a component of the overall financial system.
  3. Efficient Middleman: The function of an effective middleman is played by the financial system. This is so that funds can be directed toward profitable endeavours with the fewest possible transaction costs. The financial system is made up of various systems that were developed with the requirements of the various markets in mind. For instance, banks and the debt-holder-based system have been created to fund infrastructure projects that continue over the long term. At the same time, equity-based securities have been created for investors who want to participate directly in the business by taking the associated risks.[22]

CONCLUSION

Glancing at the financial system of Nigeria as a whole, one can argue that the ultimate reasons why regulations and policies are employed are to serve socio-economic purposes or to achieve socio-economic ends. The regulatory bodies earlier discussed to which all forms of financial systems are bound can confirm the perspective. However, there is a general downplay of facts, regarding the influence of political groups on financial and monetary policies. Nigerian Financial system policies, laws, and regulations are often dominated by political redistributive considerations. The leading law and economics scholar, Richard Posner affirms this by submitting that the “ultimate premises of law are political, and the Nigerian financial laws, regulatory policies, and supervisory structures reflect this position.[23]

  1. See also G.O Nwankwo, “The Structure of The Nigerian Economy and the Nigerian Banking Environment “, Nigerian National Economic Recovery at page 16
  2. ibid
  3. Akamiokhor, G.G. “The relationship between non-bank financial institutions and the Exchange commission and the Nigerian Stock Exhange”: paper presented at a seminar on non-bank financial institutions, August 13, 1987
  4. Central Bank of Nigeria. Twenty Yean of Central Banking in Nig_eria, 1979, p. 31.
  5. Banks and Other Financial Institutions Act (BOFIA) Cap. B3 Laws of the Federation of Nigeria 2020
  6. See Section 3(3) of the Banks and Other Financial Institutions Act (BOFIA) Cap. B3 Laws of the Federation of Nigeria

    2004

  7. See Section 5 of the e Banks and Other Financial Institutions Act (BOFIA) Cap. B3 Laws of the Federation of Nigeria 2004
  8. ibid
  9. Ibid
  10. See Section 2 of the e Banks and Other Financial Institutions Act (BOFIA) Cap. B3 Laws of the Federation of Nigeria 2004
  11. ibid
  12. ibid
  13. ibid
  14. Companies and Allied Matters Act (CAMA) Cap B3 Laws of the Federation of Nigeria 2020
  15. See Section CH 8,138 of the Companies and Allied Matters Act (CAMA) Cap B3 Laws of the Federation of Nigeria 2020
  16. See CH 10, Section 235 of the Companies and Allied Matters Act (CAMA) Cap B3 Laws of the Federation of Nigeria 2020
  17. See CH 16, Section 417- 421 of Companies and Allied Matters Act (CAMA) Cap B3 Laws of the Federation of Nigeria 2020
  18. See The Nigerian Deposit Insurance corporation Act (NDIC) Cap B3 Laws of the Federation of Nigeria 2006
  19. See PT III , Section 10 of the Nigerian Deposit Insurance Corporation Act Cap B3 Laws of the Federation of Nigeria 2006
  20. The foreign exchange(monitoring and miscellaneous) Act, 1995,S2(2)
  21. See Aremu, J. A. (2002), “Financial Sector Policy Design and Management in Nigeria”, A lecture delivered at NCEMA Training programme on Macroeconomic Policy Analysis and Management: Cases and Applications. September 2-27, 2002.
  22. ibid
  23. See Richard Posner “How Judges Think” Harvard University Press, 1 Jul 2009.at page 49. See also “Theories of Economic Regulation” 1975 Yale Journal of Economics, and Management Science., at page 200.

Newsletter Updates

Enter your email address below and subscribe to our newsletter

Leave a Reply

Your email address will not be published. Required fields are marked *