Founding Banking In Africa

The banking industry, the most vital sector and hub of Nigerian financial system, is in the business of managing risks to generate profits by accepting deposits from surplus sector of the economy, granting loans and trading portfolios (Fukida, Dahalan, 2012; Mishkin, 2017). They use funds deposited in trust for hope ofa good return at no or minimal risk exposureas a result of effective management.

Investments of these funds are made within the accepted risk profilebut still some exposure credit risk. Credit, if managed prudently, can build an economy, produce an efficient allocation of capital and wealth and expand the industrial sector of the economy. However, unmitigatedexposure by banks could be catastrophic to the financial institution, the depositor, the financialsystem and the whole economy through a spill-over/contagion effect. 

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Empirical evidence revealed that Nigerian financial industry is fraught with poor risk management practices;lack for basiccontrol measures, poor corporate governance;flagrant and excessive credit exposure,lack of transparency and poor disclosure of banks’ accurate financial positions (Audu, 2014). In addition to these developments are huge non-performing loans, inter-bank indebtedness, contravention of supervisory and regulatory provision, weak internal control, insider abuse, huge exposure to single or few obligors, macroeconomic instability; and incessant bank distress and failure (Okorie and Uwaleke, 2010).

As was stated by Isa (2013), these developments bring discredit to the Nigerian banking industry and trigger confidence crisis in the financial system. Sufficient empirical indication has shown that poor performance manifest in banks following high levels of credit risk, poor loans quality, inadequate capitalization, operational inefficiencies, higher incidences of non-performing loans and higher levels of liquidity risk (Ogbulu & Eze, 2016).

Banking dates as far back as 3rd century in the Greek and Roman empires but was introduced in Nigeria not until 1890sfollowing the introduction of African Banking Corporation (ABC) in 1892 (Labate, 2016).Ever since then, many other banks hasemerged but many got distressed and collapsed almost instantly. In the history of global banking, the first bank distress was recorded in 1720 –the South Sea Bubble episode (William & Rouwenhorst, 2013).

The South Sea Company of England in 1720 was assigned the responsibility of consolidating and reducing the cost of Britain’s national debt for a guaranteed profit (Kleer, 2015).The complex arrangement this ensued created opportunity for certain unscrupulous investors to take undue advantage of public excitement to kindle speculative boom which led to the South Sea Bubble(Shanbhag, 2005). 

Ever since, other incidence of distresses and failures have rocked the global banking industry. According to Hempel and Simonson (1999) as cited in (Umoren & Olokoyo, 2007), USA alone experienced 756 bank failures (about 15 per year) from 1934 to 1984. The totalidentified1commercial banksinsured fell from 15,380 in 1948 to 9,528 in 1983 (Ikpefan, 2013). Further evidence recorded that 306 bank failures occurred in 1985 alone; 998 bank failures between 1986 and 1992 and 403 failures from 2007 to 2013 (Balla, Manzur, Prescott & Walter, 2017). 

Palubinskas and Stough (1999)as cited in (Kararach and ‎Otieno, 2016) stated thatthese bank failures occur on account of poor credit management from bad lending decisions and wrong credit appraisal, poor repayment of non-performing credits and excessive focus on giving loans to certain customers. In congruence, IMF (1996) stated that out of its 181 member countries, about 133 had witnessed significant banking sector glitches and failures resulting from credit problems - bad real estate loans (Gup, 2011).

In the words of Latter (1997), credit risk led to wide spread banking problems in Switzerland, Spain, United Kingdom, Norway, Sweden, Japan and the United States of America. Likewise, the 1991 collapse of Bank of Credit and Commerce International (BCCI) was highly correlated with fictitious and non-performing loans by bank managers who looted deposits to conceal huge losses (Lohr, 1991). 

Credit management issues did not end with European countries; most African countries also experienced the bitter taste of bank distress. However, African banking system was favourably contrasted as relatively stable when compared to the chaos in the financial sector of Europe and US (Napier, 2016). The earliest tranche of banking crisis in Africa occurred during mid-1980s in Ghana, Guinea and Kenya. This was followed by series of distresses which shook the entire CFA franc zones.

The Third round of distress affected Guinea, Kenya, Nigeria and Uganda in the 1990s (Daumont, 2004). During these periods, the proportion of non-performing loans in total banking system loans of Benin, Cameroon, Cote d’Ivoire, Guinea, Senegal, Tanzania, Uganda, Nigeria and Ghana was way above 40 percent while that of Kenya was barely below 20 percent (Daumont, 2004). 

Olukotun, James and Olorunfemi (2013) trailed the earliest bank failure in Nigeria to 1930 during the Great Depression. The Industrial and Commercial Bank Limited established in 1929 was liquidated within a year of its operation following its generous and free extension of credit facilities particularly to its “managing directors”. From 1930 to the advent of Central bank of Nigeria (CBN) in 1959, 21 banks failures were recorded (Adekanmbi, 2017).

The Paton Committee was set up in 1948 to investigate the reason for the bank failures and poor management, illiquidity and lack of prudence in lending were identified as the root causes of the failures (Echem, 2016). This period referred to as free banking era has no regulations or bodies to govern the affairs of banks hence the numerous banking boom and dooms (Echem, 2016).  

However, the Banking Ordinance of 1952 was introduced followed by the Central Bank of Nigeria in 1959 (with stiff legislative clauses and demands e.g. capitalization) in a bid to curb the menace. Notwithstanding these regulatory structures, the Nigerian banking sector continued to experience bank failures which non-performing loan(s) was identified as the precursor (Clementina, 2014). According to CBN (2004), the late 1980s and 1990s witnessed rising non-performing credit portfolio in banks contributing significantly to financial sector distress (CBN, 2004). In 1954 alone, sixteen (16) banks were recorded as failed in Nigeria (Olukotun, ‎2013). 

CBN (2017) averred that the banking industry increased remarkably both in number and types of financial institutions, from forty (40) pre-1986 to one hundred and twenty (120) in 1992, following the deregulation of Nigerian financial sector in 1986 during the Structural Adjustment Programme (SAP). The banking industry during this period as stated by Echem (2016) was characterized by capital inadequacy, over-staffing, lack of prudence in lending, assets mismatch, high competition and poor management.

With the attractive interest rates on deposits and loans prevailing in the 1990s, credits were given out indiscriminately without proper credit risk appraisal and administration (Ugoani, 2015).  The attitude resulted to high portfolio of non-performing loans, sustained drop in earnings per asset, high turnover of staff, undercapitalization, liquidity crisis, incidence of fraud, instability in corporate management   and inability to meet statutory requirements (CBN, 2004).

Napier (2016) described year 2016 as when the latent fragility in African banking sector was laid to bare as the sector was greeted with series of bank distresses. In November of the said year, Zambia’s Intermarket was taken over by Zambian Central Bank on account of undercapitalization while the license of Nosso Banco of Mozambique was withdrawn barely two months after Moza Banco Zambian bank was placed under emergency management.

In the previous month of October, Twiga Bancorp (whose NPL in 2014 was 34%) was reported to have recorded negative capital of TSh21 billion resulting to the replacement of her management. Following similar trend, Crane Bank of Uganda was taken over by the Ugandian Central Bank for undercapitalization and the Banque Internationale pour l\'Afrique au Congo (BIAC) of De Republic of Congo forced to limit cash withdrawals in order to survive.  

The incidence of distress followed on to Chase Bank and Imperial Banks of Kenya who collapsed at six months interval to the Skye Bank of Nigeria (now Polaris Bank) which was taken over by Central Bank of Nigeria who forced the management to resign in July following their inability to meet the minimum thresholds required in critical prudential and adequacy ratios. As was explained by Napier (2016), mismanagement, political interference and economic woes were the causes of these sprint of bank distresses. 

As stated by Thmbi (2004), deposit money banks in every country are not self-regulating but are subjected to different types of regulations. One of the areas through which banks are regulated is their reserve ratio, that is, the minimum capital these banks should keep to absorb negative shocks (Nwanna & Oguezue, 2017). The required reserve is improved by the Basel Committee whose intention is to encourage efficient bank supervision and regulation.

The financial crisis in the international market in 1974 which led to the withdrawal of BankhausHerstatt’s banking license by the moribund West Germany’s Federal Banking Supervisory Office initiated the establishment of the Basel Committee. Bankhaus Herstatt’s foreign exchange had tripled the bank’s capital against the banks’ general code of conduct (Basant Roi, 2018).

Likewise, Franklin National Bank of New York recorded a colossal loss in its foreign exchange leading to its license retrieval. As a result of these crunches, the G10 countries established the Basel Committee on Banking Regulations and Supervisory Practices to ameliorate the crisis in the financial markets (Mourlon-Druol, 2015).

The need for credit and capital management was prompted following the rise of Mexican Banks indebtedness to about two hundred and thirty percent, while that of Brazil expanded by 160% between 1976 and 1982. Likewise, the indebtedness of Venezuela rose to 330% whereas Chile who is the worst hit was over 850% (Wessel, 1984). All these outcomes prompted the main focus of the Basel Committee to switch to credit and capital management which soon became. 

Basel 1 was introduced in 1988 focusing on credit risk. It incorporated risk into the capital requirements calculation. It further set the minimum capital requirements (minimum capital ratio of capital to risk-weighted assets) to 8% in 1992 for major financial institutions adjusted by loan’s credit risk weight (Bis.org, 2014 as cited in Zou, 2014). It was later amended in 1996 to incorporate market risk. By 2004, a new Basel II was introduced with three prong pillars.

Basel II expanded Basel 1 by including market and operational risks in the analysis. Further to this, supervisory review and market discipline concepts were introduced to encourage safe and sound banking practices. Following the 2007 financial crisis, the Basel committee were exposed to the weaknesses of Basel II which include too much leverage, inadequate liquidity accompanied by poor governance, risk management and inappropriate incentive structures manifested in credit & liquidity risks mispricing and excess credit growth (Zou, 2014).

The Basel III was announced in December 2010 effective from end 2019 strengthened the Basel II framework with some innovations such as tightened definition of capital; requirements for leverage ratio and a countercyclical buffer; the capital for liquidity risk and counterparty credit risk as the derivatives. 

Nigeria has over the years been adopting the tenets of the Basel frameworks in its regulatory structure. Following the launch of Basel I, the Central Bank of Nigeria (CBN) in 1990 issued a circular on capital relating bank’s capital requirement to risk weighted assets. It further directed the banks to maintain a minimum of 7.25 percent of its risk-weighted assets as capital and to hold at least 50 percent of total components of capital and reserves. It also instructed them to maintain the ratio of capital to total risk-weighted assets as a minimum of 8 percent effective from January, 1992.

The CBN further in 1990 introduced the prudential guidelines focusing on early recognition of loan losses and adequate provisions for bad and doubtful debts which are the major factor responsible for the insolvency of banks in Nigeria (Adegbie, Asaolu & Enyi, 2013). In a bid to ensure financial stability in the sector and minimize banking sector distress, the guideline stipulated the minimum requirements for classification and disclosure of risk assets. It also made provision for bad and doubtful debts, interest accrual and off balance sheet engagement (Nwankwo, 1990).



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