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Future Of Nigerian Banking

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By Michael Ogunbiyi



Allegations and counter-allegations of financial mismanagement, a Northern political agenda, incompetence and a deliberate policy of taking loans with no intention of repayment have dominated daily headlines for the last three weeks. Every day a new opinion is given as to what caused the crisis and why the Central Bank of Nigeria has taken such strong action.

Little attention however has been focused on what exactly it is that the five banks with new management will have to do in order to ensure long term stability and what the other banks in the system will be required to do in moving forwards under the new Central Bank regime.

Hailed as a master stroke in 2006 when the consolidation process was completed and Nigeria’s banking sector rationalized, the apparent lack of a strong regulatory framework to oversee the operations and expansion of these new ‘super banks’ could not now be clearer.

The rapid growth of the sector over the last three or four years meant there was little incentive for the banks to focus on risk management. Rather, they chose to be influenced by league tables and growth dynamics. Post 2006, the Nigerian banking landscape changed dramatically at the behest of the regulator, but we witnessed little in the way of changes to management styles or overall regard for risk management.

To analyze how the Nigerian banking system is faring, you have to evaluate banks against five things:

  • Core operational capability
  • Staff
  • Reconciliation and accounting
  • Change and new activities
  • Expense volatility

In all these areas, there is more work to be done.


The most important question any financial institution has to ask itself is ‘how much do I have to lose?’ How much capital is at risk across the whole institution if any number of unpredictable internal or external events should take place? Banks are obliged to preserve the value of shareholders and depositors funds.

To quote one of our prominent political figures “If we say that we don’t want a bank to fail because of the harm it may cause the system, then the country deserves trustworthy banks.” That trust can only be regained through appropriate disclosure, corporate governance and risk management.

The regulators have to ensure that a workable supervisory framework is in place and their capacity to oversee the sector needs to be improved. The same applies to the banking industry itself, which must work internally to ensure its adherence to the new frameworks. Legislation must not become prohibitive, but supervisory roles must be sufficient enough to safeguard all stakeholders. Let’s be pragmatic about the situation – we are not the first country to experience a crisis in the financial services sector.

One of the key factors in the process of regulating the financial services sector lies in the acceptance by all operators, of the necessary regulatory frameworks. For example, bank customers – individuals, companies and public sector – must accept a higher level of discipline from the banks when engaging with them. They have to be prepared to face more scrutiny and provide more documentation when transacting through a bank.

Despite wishing to be competitive, banks have to maintain discipline in all activities they undertake. The enterprise must avoid products and businesses it does not understand. Proper risk management depends on knowing enough to comprehend the dangers that are faced. A product or a business that is delivering outstanding growth but is too complex for management to understand is a risk too far. Put another way, if you don’t understand it, don’t do it.

The immediate focus of management and the board of directors should be to strengthen the risk management and control environments. Risk management will need to become pivotal to the decision making process in all areas of the banks.


The overarching frameworks for best practice globally already exist in the form of the Basle Accord. There is no need to re-invent the wheel. The Basle Committee exists and has provided guidance for the global community of banks. It has formulated broad supervisory standards and guidelines and recommends statements of best practice in the expectation that individual authorities will take steps to implement them through detailed arrangements – statutory or otherwise – which are best suited to their own national systems.

We must pay particular attention to the implementation of three pillars of Basle II. They are:

  • Minimum capital requirements (addressing risk) – higher return higher risk,
  • Supervisory review (banks need to assess their risk taking activities and appoint supervisors to evaluate them)
  • Market discipline – addressing disclosure.

When structures and frameworks for risk management exist alongside the will to fully implement them, our financial system will have the sound basis on which to grow strongly and sustainably for the benefit of our economy as a whole.

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