Banking Regulation in Africa

The Case of Nigeria and Other Emerging Economies

Folashade Adeyemo

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000517071
• Edition: 1
• Topic: Law
• Subtopic: Law Theory & Practice
• Index: Law

There is little literature on the development of banking regulation in Nigeria, or the scope of powers of the Central Bank of Nigeria, which is its core banking sector regulator. The critical impetus of this book is to contribute to the literature of this area, with a detailed exploration of the Nigerian regulatory architecture. In addition, the book also engages in a comparative analysis with two emerging economies in Africa: South Africa and Kenya. It also considers the UK and the US as comparator jurisdictions in light of their regulatory responses to the global financial crisis of 2008. This book contributes to the ongoing discourse in this area by exploring, in detail, the theoretical underpinnings of regulation and supervision, to determine whether there is an understanding of what constitutes effective regulation in these jurisdictions.

Given that Nigeria is the core jurisdictional focus, a historical account of banking exchanges from the pre-colonial era to more recent times is provided. Offering an understanding of how political, local and economic settings, in conjunction with the theories of regulation, have impacted and influenced regulatory development in Nigeria, the book engages in an examination of Nigeria's historical experiences with bank failures, including the banking crisis it experienced in 2008. The newly enacted Banks and Other Financial Institutions Act 2020 is also explored as part of this discourse. Through a critical analysis of the law, the book demonstrates that the Nigerian regulator has historically adopted a reactionary strategy, instead of a proactive and pragmatic approach, which is imperative for an effective regulatory regime. The outcome of this analysis is that there are lessons to be learned, and proposals are discussed in order to rethink the act of banking regulation.

1 The Nigerian banking system

DOI: 10.4324/9781003173960-1

1.1 Introduction

This book contributes to the ongoing discourse on banking regulation and the improvement of the regulatory regime in Africa. The main jurisdictional focus of this book is Nigeria, and the text considers, in detail, the banking crisis it experienced in 2008. It engages in a comparative analysis with two other emerging economies in Africa, namely South Africa and Kenya. It also interrogates the regulatory responses to the 2007–2009 global financial crisis by the UK and the US as comparator jurisdictions. In order to postulate a cogent understanding of the concept of banking regulation, it is important to engage in the discussion of regulation as a theoretical concept, and its origins. Thus, this book provides a discourse on the role of the regulator and why effective regulation and supervision are important.

While there have been a number of discussions on the legal,¹ the institutional² and the regulatory framework³ of Nigerian banking law, the book argues that these erudite observations have generally been a merger of efforts of different reform proposals without the proactiveness of improving regulation. These prior efforts have moved forward the academic discourse; however, there are further issues to unearth which this book explores.⁴ In A Proper Regulatory Response,⁵ the impact of the global financial crisis on Nigeria was examined in detail with the weakness of the regulatory framework coming up for particular criticism. This ‘weakness,’ it was argued, was an amalgamation of the agencies adopting a reactive, rather than proactive approach, and the absence of an ‘effective’ mechanism.⁶ This book hopes to contribute to this issue by bridging the gap in the understanding of why effective regulation in the African setting is important in improving the regulatory environment.

1 Iwa Salami, ‘The Effect of the Financial Crisis on the Nigerian Capital Market: A Proper Regulatory Response’ (2009) Journal of Banking and International Law 24 (12) 612; Tunde Ogowewo and Chibuke Uche, ‘(Mis) Using Bank Share Capital as a Regulatory Tool to Force Bank Share Capital in Nigeria’ (2006) Journal of African Law 50 (2) 165, 161. 2 Seth Apati, The Nigerian Banking Sector Reforms: Power and Politics (Basingstoke: Palgrave Macmillan, 2012) 125–127. 3 ibid. 4 See also, Olusean Oliide, ‘Banking Regulation in Nigeria Since the Revolution’ (2013) Journal of International Banking Law and Regulation. 5 Salami (n 1) 5. 6 A case in point is the special examination into the Nigerian banking sector, followed by the creation of AMCON as a reaction to the Nigerian crisis itself. See also, Nwude C Emmanuel ‘The Crash of the Nigerian Stock Market: What Went Wrong, the Consequences and the Panacea’ (2012) Developing Country Studies 105–106 <http://www.iiste.org/Journals/index.php/DCS/article/view/2973> Accessed 01 February 2021.

1.2 The role of the regulator

The term ‘regulation’ should be distinguished from ‘supervision.’ Regulation generally relates to the act of using rules and guidelines to regulate or control an institution. On the other hand, supervision generally relates to the act of overseeing the activities of an institution. One of the primary roles of a regulator is to ensure the promotion of financial and monetary stability within the banking sector which it regulates.⁷ This is the core objective of the CBN. Through an analysis of the historical banking failures and crises that have plagued Nigeria since the pre-colonial era, and its regulatory response to the financial crisis of 2008, this book will demonstrate how the CBN has failed to realise these objectives despite the introduction of the Bank and Other Financial Institutions Act, 2020, and why it is time to rethink the regulatory regime in Nigeria.

7 George J Benston and George G Kaufman, ‘The Appropriate Role of Bank Regulation’ (1966) The Economic Journal 106 (436) 688–697.

1.2.1 The Nigerian regulator

The main laws which govern Nigerian banking activity are the Bank and Financial Institution Act⁸ and the Central Bank of Nigeria Act.⁹ It has been previously argued that the CBN should adopt the UK approach, rather than continue in its dual roles of regulator and supervisor.¹⁰ While this argument may understandably not be endorsed by the CBN, it is suggested that a separation of powers in this area would allow the CBN to focus on discharging one role exclusively and more adequately.¹¹ The general approach adopted by developing countries is to consider a legal transplant approach, by learning from the lessons of countries with historical and colonial ties. The objective of this book is not to argue that Nigeria needs to directly transplant the regulatory regimes of the UK or the US, given that both countries experienced the financial crisis, and discounting some colonial ties. The book also does not seek to argue that it should directly transplant from other EU countries, since a number of these countries also suffered from the global financial crisis.¹² However, to develop the banking regulatory environment and improve the outlook of banking, there is a need to reexamine how banks are regulated within the system, and to reconsider the purpose of regulation, by revisiting the important, fundamental principles of banking regulation.

8 Banks and Other Financial Institutions Act, As Amended (1991) Cap B3, LFN, 2004. This Act has been replaced by BOFIA, 2020. 9 Central Bank of Nigeria Act No. 7 (1991) 2007, now referred to as the CBN Act 2007, unless otherwise stated. 10 Ogowewo and Uche (n 1). 11 ibid. 12 Jennifer Welch, ‘The Financial Crisis in the European Union: AN Impact Assessment and Response Critique’ (2011) European Journal of Risk Regulation 2(4) 481–490.

While this text undertakes a comparative analysis of the UK, the US and two emerging economies (South Africa and Kenya), the key impetus of the book is to evaluate the effectiveness of the banking regulatory framework, with these selected jurisdictions in mind. The book argues that in discharging regulatory and supervisory obligations, it is imperative that the regulatory framework is equipped within effective infrastructure and that the laws to permit this discharge are explicit in their provisions. This is based on the presumption that the regulatory regime is effective not only in the management of a crisis, but also in its prevention. Given the pre-colonial evolution of the Nigerian banking industry and the changes that the banking sector itself has embraced, including the number of banks within the sector and the eventual creation of the CBN in 1958, it is submitted that the regulatory infrastructure, the laws undergirding this and the methods adopted to regulate are not robust enough to achieve this.

The thematic thrust of the book is based on three important issues within the Nigerian banking sphere, which played an instrumental role in shaping the banking regulatory environment and amplified the present role of the CBN. The first is the historical development of banking law with the initial introduction of the Bank Ordina...

Table of contents

• Cover
• Half-Title
• Series
• Title
• Copyright
• Contents
• Foreword
• Preface
• Acknowledgements
• 1 The Nigerian banking system
• 2 Banking regulation: Justification, theory and rationale
• 3 Banking regulation in Nigeria
• 4 Regulatory responses to financial crises
• 5 Understanding Nigerian bank regulation: A closer look at bank licence revocation
• 6 A scheme for reform
• Index