CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Modern banking began in Nigeria in 1982 when the African Banking Corporation (ABC) based in South Africa opened a branch in Lagos. ABC was taken over by British Bank for West Africa (BBWA) and subsequently changed its name to Standard Bank in 1894 and then to First Bank of Nigeria in 1894. According to Nwankwo (1991), other early comers included the Anglo-African Bank established in 1891, which later became Bank of Nigeria in 1905 and the Colonial Bank in 1916. The Colonial Bank was taken over by Barclays Bank (now Union Bank Plc) in 1925. As at 1928, the British Bank for West Africa and Barclays Bank were only banks operating in Nigeria.
Indigenous banks started emerging in the early 1930s, several of them sprang up rapidly but most collapsed with the same rapidity due to such factors as poor management, illiquidity, inadequate capital, speculative features of their operations and most importantly the absence of a regulatory framework. By 1954, 21 of the 25 indigenous banks had failed with 16 of them collapsing in 1954 alone. Of the remaining 4 indigenous banks, Mercantile Bank failed in 1962 leaving only National Bank, African Continental Bank and Agbomagbe Bank (now WEMA Bank). The spate of bank failures made the colonial administration to enact the Banking Ordinance in 1952; this was followed by regulations to strengthen the banking system. The commencement of operations by the CBN in 1959 stemmed the wave of bank failures (Adekanye 1986).
According to Obadan (1997), the banking sector was dominated by expatriate banks until 1977 when the Federal Government promulgated the Nigerian Enterprises Promotion Decree which pegged the equity shares in foreign banks to 40%. Since then, the banking industry has grown steadily, peaking at 120 in 1992 following government’s liberalisation and deregulation of the banking sector under the Structural Adjustment Programme (SAP) introduced in 1986. This development led to financial distress in the sector. The distress in the era could be traced to inadequate executive capacity, unhealthy competition, weak corporate governance, insider abuse and poor capitalisation. By 2005, 89 banks were operating in the country with total assets in excess of N2 trillion and a branch network of over 3000. Majority of the banks exhibited various degrees of weaknesses ranging from poor asset quality, illiquidity, insolvency, weak capital base, poor corporate governance and poor management system.
Valencia and Nocera as cited in Opoku-Adarkwa (2011:1) opine that past decade has seen the world witnessing one of the most shocking financial meltdowns. The effects of the crisis were pervasive and hit almost every sector of global businesses; the most affected sector was the financial services industry, specially the banking sector. The banking sector did not only witness the dramatic disappearance of the most renowned institutions like Leman-Brothers and Bear Stearns, it also became a regular target for tougher regulations, public anger and academic criticism. There are numerous explanations on the causes of the current financial crisis. One factor that has received significant attention during this crisis is risk management discourse
It seems that risk management has become an important tool, from which banks try to achieve legitimacy in the eyes of the public and regulators. This triggering effect has given stakeholders in the Nigerian banking industry cause not only to consider the returns made in the sector, but also critically examine frameworks used to manage risks in the sector and safeguard their interests. This is because the failures faced by the industry in recent times have been blamed largely on the weaknesses of the regulatory frameworks and the risk management practices of the financial institutions. The greatest impact of the crisis has been on the banking industry where some banks that were hitherto performing well suddenly announced large losses with some of them going burst. Some reasons put forward for the failures in risk management in this regard include the limited role of risk management in the granting of loans in most banks. This is largely because the banks are unable to influence business decisions of their borrowers coupled with the fact that their considerations are subordinated to profitability interests and lack of capacity to adequately make timely and accurate forecasts. This has resulted in the flouting of basic risk management rules such as avoiding strong concentration of assets and minimizing the volatility of returns.
Though the impact of the global financial crisis on the banking sector in Nigeria has been quite minimal such that it did not threaten the survival of banks in the sector, it serves as a wake-up call to all financial institutions. This is largely because the sector has little exposure to complex financial instruments and relies mainly on low-cost domestic deposits and liquidity unlike banks in the developed countries.