The banking system in Nigeria has undergone radical changes during the 35 years since independence. Banking developed from an industry which in 1960 was dominated by a small number of foreign owned banks into one in which public sector ownership predominated in the 1970s and 1980s and in which Nigerian private investors have played an increasingly important role since the mid 1980s.
Extensive government intervention characterised financial sector policies, beginning in the 1960s and intensifying in the 1970s, the objective of which was to influence resource allocation and promote indigenisation. Since 1987 financial sector reforms have been implemented, encompassing elements of liberalisation and measures to enhance prudential regulation and tackle bank distress.
The paper concentrates on the commercial and merchant banks, which together accounted for 85 per cent of the total assets of the main financial institutions in Nigeria, excluding those held by the Central Bank of Nigeria (CBN), in 1993. It explores explores two related issues.
First, that government controls on financial markets, public ownership of banks and theneglect of prudential regulation, had detrimental effects on the banking system, especially in terms of the quality of banks’ loan portfolios, efficiency and competition. Second, that the efficacy of financial liberalisation and other financial sector reforms to enhance the efficiency of intermediation in banking markets has been limited, in part because of the legacy of prereform intervention in banking markets, which left large sections of the banking industry in financial distress, but also because some of the reforms were inappropriately sequenced and others were not implemented in a consistent manner.
