Importance of Regulation to the Banking Business
Over the years, the banking environment has faced periodical challenges that have culminated, or threatened to culminate, in its lack of efficiency and operational failure.
In reference to the early development of the banking system, history has remarked that to have the banking business largely unregulated is a definite way to prepare it for its systemic or total impairment. This realization is affirmed evidentially all over the world, and particularly in Nigeria.
Before delving into the downfall of banks, as occasioned by lack of any or enough regulations, it is expedient to grasp an understanding of the word ‘bank’ and ‘bank regulation’.
In Lubcon Limited v. Classmate Technologies co. Ltd (2019) LPELR-47414(CA), the bench remarked that, “A bank has been defined by the Black’s Law Dictionary, eight edition as a financial establishment for the deposit, loan exchange or issue of money, and for the transmission of money. A quasi public institution for the custody and loan of money, the exchange and transmission of the same by means of bills and drafts.”
Also, a Bank regulation is a form of government regulation which subjects banks to certain requirements, restrictions and guidelines, designed to create market transparency between banking institutions and the individuals and corporations with whom they conduct business, among other things. (Wikipedia)
All over the world, it is realizable from experience that leaving regulations out of any society will lead to chaos and anarchy. In fact, one of the primary reasons any government is set up in any society is to define and enforce required laws for the orderliness of such society. The banking system is not an exception to this. Thomas Hobbes is renowned to have pointed out that life without a government would be ‘nasty, brutish, and short.’
The United State of America is well recognized has one of the most developed economies in the world, and does not also lag in the banking environment. However, the free banking era of the country (1834 to 1864), which was characterized by lack of federal control and regulation of its banking milieu, suffered several banking crises and financial instability. It made for a disorderly currency characterized by thousands of different banknotes circulating at varying discount rates (Investopedia). Little wonder the era had to come to an end with the introduction of the National Banking Act of 1863, which brought in some new regulations.
China, on its own end, has in operation some of the most trusted banks in the world. However, the ‘Jiaozi’ was a form of banknote which appeared around 10th century in the Sichuan capital of Chengdu, China. These notes were totally run by private individuals (between 960 and 1004), until the government decided to regulate the business on alleged increasing fraud cases and disputes, and licensed 16 biggest merchants.
Similar situations can be spotted in other countries like Switzerland, affirming the fact that banking without the backing of relevant regulations is undesirable, and can be destructive, as the case was in Nigeria.
Failure of Early Banks in Nigeria
It has been pointed out as generally observed that the lack of banking regulations was one of the factors that resulted in the failure of the banks established in Nigeria between 1929 and 1952. However, deeply, it can be argued that the absence of adequate regulations that could work for the then situation of the country was what resulted in the establishment of the failing indigenous banks in the first place.
The earliest banks that started operating in Nigeria, like the Bank of British West Africa (BBWA) [Now First Bank of Nigeria Ltd.] and the Barclays Bank D.C.O [Now Union Bank of Nigeria Plc.], were established basically as instruments of the effective operation of the financial transactions of the then British colonial administration and other British commercial interests.
In light of the aforementioned fact, it is not surprising to realize that these banks were concerned mainly with keeping and maintaining accounts of British personnel, officials of British commercial houses, expatriate civil servants, other private British professional people. Although, there were hundreds of Nigerian customers maintaining saving accounts, indigenous current account holders were comparatively few, and only in exceptional cases were there Nigerian borrowers.
In a nutshell, a major failure of the earliest expatriate banks, in catering for the Nigerian banking community, was their lack of active interest in the businesses of the indigenous people. Such a failure as this, could have been avoided by the formation of adequate ordinances for banking operations in Nigeria.
Failure of Early Indigenous Banks in Nigeria
In light of the point mentioned of early banks hereinbefore, and other possible factors, indigenous banks began to spring up in the country’s banking system. The first among which was the Industrial and Commercial Bank, set up in 1929. Unfortunately, this bank failed within its first year of operation. Many other banks were established in the country which also failed in their operations, until 1952.
These indigenous banks failed due to a number of reasons, including insufficient capital, poor management and poor record-keeping, rapid expansion of offices, illiquidity, fraudulent directors, reckless and imprudent lending, fierce competition from expatriate banks, and of course, the absence of banking regulations to specify their code of conduct. These indigenous banks even had the power to issue their own legal tender, however, there are no evidences to prove that any of them did.
Some of the other banks that were established in Nigeria between 1929 and 1952 include the Nigerian Mercantile Bank, Agbonmagbe Bank, The African Continental Bank (ACB), Pan Nigerian Bank, Nigerian Trust Bank, Provincial Bank of Nigeria, United Commercial Credit, Mainland Bank, Nigerian Farmers and Commercial Bank, and Industrial Bank and West Africa Bank.
The Financial Secretary to the government during the debate on the 1952 ordinance in the House of Representatives had remarkably said, “The situation at present is that there are over 170 companies registered with the registrar of companies using the word ‘bank’.
Obviously, all that was needed to start a bank before any specific banking regulation in Nigeria was to register a company with the word ‘bank’.
G.D. Paton Committee
Going forward, the failure of the Penny Bank in 1946 moved the then colonial government to set up a Panel of Enquiry to look the banking practices in Nigeria, and give recommendations. This committee was headed by G.D. Paton. Although this committee submitted its recommendations a month after which it was set up, nothing was carried out as an effect until 1948.
The report of the committee set out, as a first of its kind, guidelines for the operation of Nigerian banks. Every upcoming bank was to meet these guidelines and existing banks were granted a three-year period to comply with them.
The recommendations of the G.D. Paton Commission were to finally form the basis of the first banking statute in Nigeria, the Banking Ordinance of 1952, which was repealed by the Banking Ordinance of 1958 [Cap. 19]. The Central bank of Nigeria was established in 1959, as well as the foundation of the country’s money and capital market.
Since the first Banking Ordinance of 1952, the operations of the Banking system of Nigeria has evolved into what it is today. There has been significant reduction in the rate of failure of banks, and the confidence of the public in the banking sector has been strengthened. Presently, the banking business in Nigeria is regulated by two main statutes – the Central Bank of Nigeria (Establishment) Act, and the Banks and Other Financial Institutions Act (BOFIA), 2020.
In conclusion, it is evidently undesirable to leave the steering of the banking sector of a country to the sole dictates of its directors, most especially when these directors are ardent capitalists. It is therefore crucial for any state that desires a developing banking sector to make appropriate and sufficient regulations for the operations of the sector.