Central Bank, Abuja

Regulatory Authorities

The Nigerian financial system comprises bank and non-bank financial institutions which are regulated by the Federal Ministry of Finance (FMF), Central Bank of Nigeria (CBN), Nigeria Deposit Insurance Corporation (NDIC), Securities and Exchange Commission (SEC), National Insurance Commission (NIC), Federal Mortgage Bank of Nigeria (FMBN), and the National Board for Community Banks (NBCB).

The Federal Ministry of Finance (FMF)

The Federal Ministry of Finance advises the Federal Government on its fiscal operation and co-operates with CBN on monetary matters. Recent amendment to the laws of the Central Bank of Nigeria compels it to report through the Federal Ministry of Finance to the Presidency.

The Central Bank of Nigeria (CBN)

The CBN is the apex regulatory authority of the financial system. It was established by the Central Bank of Nigeria Act of 1958 and commenced operations on 1st July 1959. Among its primary functions, the Bank promotes monetary stability and a sound financial system, and acts as banker and financial adviser to the Federal Government, as well as banker of last resort to the banks. The Bank also encourages the growth and development of financial institutions. Enabling laws made in 1991 , gave the Bank more flexibility in regulating and overseeing the banking sector and licensing finance companies which hitherto operated outside any regulatory framework.

The Nigerian Deposit Insurance Corporation (NDIC)

The NDIC complements the regulatory and supervisory role of the CBN. It is however autonomous of the CBN and reports to Federal Ministry of Finance. NDIC effectively took off in 1989 and was set up to provide deposit insurance and related services for banks in order to promote confidence in the banking industry. The NDIC is empowered to examine the books and affairs of insured banks and other deposittaking financial institutions. Licensed banks are mandated to pay 15/16 of 1 per cent of their total deposit liabilities as insurance premium to the NDIC. A depositor's claim is limited to a maximum of N50,000.00 in the event of a bank failure.

The Securities and Exchange Commissions (SEC)

Formerly called the Capital Issues Commission, the SEC was established by the SEC Act of 27th September 1979, which was further strengthened by the SEC Decree of 1988. It is the apex regulatory organ of the capital market. Its major objective is the promotion of an orderly and active capital market. In doing this, the SEC has the major functions of ensuring adequate protection of securities; determining the time company securities are to be sold; approving the volume of such securities and registering all securities dealers, investment advisers and market places ( such as Stock Exchange branches) in order to maintain proper standards of conduct and professionalism in the securities business. The Commission approves and regulates mergers and acquisitions and authorises the establishment of unit trusts. In the course of deregulation of the capital market, the function of price determination has been transferred to the issuing houses. The SEC maintains surveillance over the market to enhance efficiency. It issues guidelines on the establishment of Stock Exchanges in furtherance of the deregulation of the capital market. Following the enactment of the Nigerian Investment Promotion Commission Decree and the Foreign Exchange (Monitoring and Miscellaneous Provisions) Decree in 1995, SEC released guidelines on foreign investment in the Nigerian capital market.

National Insurance Commission (NIC)

The National Insurance Commission (NIC) replaced the Nigerian Insurance Supervisory Board (NISB). The NIC is charged with effective administration, supervision, regulation and control of the business of insurance in Nigeria. Its specific functions include the establishment of standards for the conduct of insurance business, protection of insurance policy holders and establishment of a bureau to which complaints may be submitted against insurance companies and their intermediaries by members of the public. NIC ensures adequate capitalisation and reserve, good management, high technical expertise and judicious fund placement in the insurance industry.

The Federal Mortgage Bank of Nigeria (FMBN)

The FMBN took over the assets and liabilities of the Nigerian Building Society. The FMBN provides banking and advisory services, and undertakes research activities pertaining to housing. Following the adoption of the National Housing Policy in 1990, FMBN is empowered to licence and regulate primary mortgage institutions in Nigeria and act as the apex regulatory body for the mortgage finance industry. The financing function of the Federal Mortgage Bank of Nigeria was carved out and transferred to the Federal Mortgage Finance, while the FMBN retains its regulatory role. FMBN is under the control of the Central Bank.

Financial Services Coordinating Committee (FSCC)

This is a committee established to coordinate the activities of all regulatory institutions in the financial system. The Committee is chaired by the Federal Minister of Finance.

This is a market for short-term debt instruments. The major function of the money market is to facilitate the raising of short-term funds from the surplus sectors to the deficit sectors of the economy. The deficit units, which could be public or private, obtain funds from the market to bridge budgetary gaps by trading in short-term securities such as Treasury Bills, Treasury Certificates, Call Money, Certificates of Deposit (CD), and Commercial Papers (C P). With the commencement of Open Market Operations (OMO) by the CBN, the scope of the money market has been expanded. The number of participants in the market also increased with the establishment of five discount houses. Money market institutions constitute the hub of the financial system. These institutions include discount houses, commercial and merchant banks, and special purpose banks, like the People's Bank of Nigeria and Community banks. Total instruments outstanding in the market amounted to N123,655.0 million at the end of 1996.

Discount Houses

A discount house as a special, non-bank financial institution intervenes in mobilising funds for investments in securities in response to the liquidity of the system. It does this by providing discount/rediscounting facilities in government short-term securities. In the process of shifting the financial system from direct market-based monetary control, discount houses were established to serve as financial intermediaries between the CBN, licensed banks and other financial institutions. Five discount houses are currently in operation in Nigeria. They are First Securities Discount House Limited, Express Discount House Limited, Associated Discount House Limited, Kakawa Discount House Limited and Consolidated Discount House Limited. Total assets of the discount houses amount to N7,766.9 million in 1996.

Commercial and Merchant Banks

Commercial and Merchant Banks operate under the legal framework of the Banks and Other Financial Institutions Decree 25 of 1991 (as amended). Prior to this, the banks' activities were governed by the 1952 Banking Ordinance and Banking Act of 1969 (and amendments)

Commercial Banks

The first commercial bank was established in Nigeria in 1892. Commercial banks perform three major functions, namely, acceptance of deposits, granting of loans and the operation of the payment and settlement mechanism. Since the Government commenced active deregulation of the economy in September 1986, the commercial banking sector has continued to witness rapid growth, especially in terms of the number of institutions and product innovations in the market. The number of commercial banks and their branches rose, respectively, from 30 and 2,397 in 1986 to 64 and 2,402 in 1996. Many branches were closed down in structural rationalisation. The minimum capitalization of both commercial and merchant banks has been increased to a uniform level of N500 million (from N50 million and N40 million respectively). The commercial banks continue to dominate the banking sector accounting for 82.6 percent of the banking system total assets and deposit liabilities in 1996. The total assets of the commercial banks increased to N536,057.9 million while deposit liabilities rose to N225,298.7 million in 1996.

Merchant Banks

Merchant banks take deposit and cater for the needs of corporate and institutional customers by way of providing medium and long-term loan financing and engaging in activities such as equipment leasing, loan syndication, debt factoring and project advisers to clients sourcing funds in the market. The first merchant bank in Nigeria, Nigerian Acceptance Limited (NAL), started operations in 1960. By the end of 1996, there were 51 merchant banks with 147 branches, while their total assets amounted to N111,266.9 million.

People's Bank of Nigeria

The decision to establish the People's Bank of Nigeria was announced by the Federal Government in the 1989 Budget with an initial capital of N30 million. Specifically, the bank is to meet the credit need of small borrowers who cannot satisfy the stringent collateral requirements normally demanded by commercial banks. The bank is expected to facilitate access to credit for urban poor small scale operators and thereby increase their self-reliance. Initially, it granted loans in the range of N50 to N5,000. The lending floor and ceiling have been removed and applications are treated on their individual merits. The activities of the bank have stabilized with 275 branches established. Its total assets (revised) have risen to N1,073.0 million in 1996.

Community Banks

A community bank in Nigeria is a self-sustaining financial institution owned and managed within a community to provide financial services to that community. The National Board for Community Banks (NBCB) processes applications for the establishment of community banks. The first community bank commenced operation in December 1990. Since then, NBCB has issued provisional licences to 1,366 community banks and are expected to be issued final licences by the CBN after operating for two years.

The Nigerian Capital Market is a channel for mobilizing long-term funds. The main institutions in the market include the Securities and Exchange Commission (SEC), which is at the apex and serves as the regulatory authority of the market, the Lagos Stock Exchange (LSE), the issuing houses and the stock broking firms. The capital market is classified into primary and secondary segments. The Lagos Stock Exchange commenced business in 1961. To encourage small as well as largescale enterprises gain access to public listing, the NSE operates the main exchange for relatively large enterprises and the Second-Securities Market (SSM), where listing requirements are less stringent, for small and medium scale enterprises.

The Primary Market:

This is a market for new issues of securities. The mode of offer for the securities traded in this market includes offer for subscription, rights issues, offer for sale and private placements. In aggregate, a total of 40 issues, involving 2,124.5 million shares worth N5,844.7 million, were raised in the market in 1996 compared with 21 new issues involving 1,146.3 million shares worth N4,424.2 million in 1995.

The Secondary Market:

This is a market for trading in existing securities. This consists of exchange and over-the-counter markets where securities are bought and sold after their issuance in the primary market. Activities in the secondary market have increased substantially over the years. There are six trading floors in Nigeria (Lagos, Kaduna, Port Harcourt, Ibadan, Kano and Onitsha). The number of stock brokers trading on the Exchange stood at 168 in 1996. The market capitalization rose to N286.5 billion in 1996.

The Unit Trust Scheme:

This is a mechanism for mobilizing the financial resources of small and big savers and managing such funds to achieve maximum returns with minimum risks through efficient portfolio diversification. Unit Trusts have functioned since 1990 and there are now 14. Two new unit trusts issued in 1996 boosted the activities in the new issues market with 2.5 million units worth N2,050.0 million.

Specialized banks or development finance institutions (DFIs) have been established to contribute to the development of specific sectors of the economy. They consist of the Nigeria Industrial Development Bank (NIDB), Nigeria Bank for Commerce and Industry (NBCI), Nigerian Agricultural and Co-operative Bank (NACB), and Urban Development Bank (UDB). Like other financial institutions, all development banks are now under the supervision of the Central Bank of Nigeria (CBN).

The Nigerian Industrial Development Bank (NIDB)

The NIDB was established in 1964 following the restructuring of the Investment Company of Nigeria (ICON). Specifically, the NIDB was set up to provide credit and other facilities to industries, particularly medium and large-scale enterprises. Recently, some small scale enterprises have also benefited from its financing. The NIDB sources funds from banks, the CBN, the Federal Government and the International Finance Corporation. The total assets of the NIDB amounted to N6.0 billion at the end of 1995. The NIDB loan sanctions in 1996 dropped to N351.0 million, while disbursements rose substantially to N925.4 million.

The Nigerian Bank for Commerce and Industry

The Federal Government established NBCI in 1973 in the wake of its indigenization of the economy policy in 1972. NBCl was set up to develop national enterprise in small and medium scale. Sources of funds for NBCI are subventions from the Federal Government and CBN through penalties imposed on commercial and merchant banks for credit short-falls on loans to small and medium-scale enterprises. The bank also engages in share underwriting, project identification and feasibility studies.

The Nigerian Agricultural and Cooperative Bank (NACB)

The NACB was established mainly to finance agricultural development projects and allied industries . In its operations, the bank usually interacts with state ministries of agriculture. It also sources its funds from government subventions, credit short-falls on agricultural loans by commercial and merchant banks through the CBN, and loans from international finance institutions such as the International Bank for Reconstruction and Development (IBRD), African Development Bank (ADB), European Investment Bank (EIB) and the International Fund for Agricultural Development (IFAD). NACB's total assets/liabilities amounted to N5,819.5 million in 1994.

Urban Development Bank (UDB)

Nigerian cities experience problems of inadequate housing, transportation, electricity and water supply. In order to create a greater capacity for dealing with these problems, the Federal Government established UDB in 1992. The bank has since opened for business with an authorised equity capital of N800 million, of which N543.6 million is subscribed by the three tiers of government (Federal, State, and Local) and the Nigerian Labour Congress. The bank is operated strictly as an independent profit-making institution and provides financial resources to both the public and private sectors for the development of urban dwelling, mass transportation and public utilities.

The UDB may, with the approval of the Minister of Finance, raise funds in foreign currency. Like other specialised banks, the UDB is exempted from some of the provisions of the Banks and Other Financial Institutions (BOFI) Decree of 1991.

There are other institutions and funds within the financial system that play important intermediating roles. The institutions include:

Insurance Companies

Prior to 1992, The Federal Ministry of Finance (FMF) licensed and supervised insurance companies in Nigeria. In 1997, the National Insurance Commission was established and replaced NISB as the regulatory organ in the industry. The insurance companies consist of life and non-life as well as those which engage in both activities, and reinsurance firms. They mobilize relatively long-term funds and act as financial intermediaries. Their investments are mainly in government securities and mortgage industry. The Nigerian insurance industry has grown tremendously over the years. There were 187 insurance companies operating in the country in 1996. The total assets/liabilities of the 89 insurance companies that reported on their activities at the end of 1996 amounted to N4,376.2 million. The funds were sourced mainly through reduction in outgoings and other assets which together account for 80.8 per cent of total funds.

The Nigeria Reinsurance Corporation was established in 1977 to provide insurance cover for insurance companies. In addition, the Corporation is expected to assist the government in achieving its economic and social objectives in the field of insurance and re-insurance. All registered insurance companies in Nigeria are required to reinsure 20% of premium collected with the Nigeria Reinsurance Corporation.

Finance Companies

Finance companies are institutions that specialize in short-term, non-bank financial intermediation. They mobilize funds from the investing public in form of borrowing and provide, among others, facilities for Local Purchase Order (LPO) and project financing, equipment leasing and debt factoring. The BOFI Decree brought finance companies under the direct control and supervision of the CBN. 279 finance companies are in operation. Their total assets/liabilities amounted to N8,940.1 million in 1996.

Bureaux de Change

In order to broaden the foreign exchange market and improve access to foreign exchange, especially for small users, bureaux de change have been authorised since 1989. A total of 240 bureaux de change have been licensed and they are supervised by CBN.

Primary Mortgage Institutions (PMls)

Primary mortgage institutions operate within the framework of Decree No. 5 3 of 1989. Essentially, PMIs mobilize savings for the development of the housing sector. Their total assets/liabilities rose to N4,388.6 million in 1996. In reaction to distress in the sector, the Federal Mortgage Bank of Nigeria tightened its surveillance of the institutions by issuing "clean bill of health" to 116 mortgage institutions. The share capital requirement for new primary mortgage institutions has been raised to N20 million.

National Economic Reconstruction Fund (NERFUND)

NERFUND was set up in 1988 as a funding mechanism aimed at bridging the gap in the provision of local or foreign funds to small and medium-scale enterprises. The resources of NERFUND are mainly contributions from the Federal Government, the CBN and foreign sources such as the USD50 million from the government of the former Czechoslovakia and the USD230 million from African Development Bank ADB. Prospective beneficiary enterprises must be 100 per cent Nigeria-owned.

Nigerian Social Insurance Trust Fund

The Nigerian Social Insurance Trust Fund (NSITF) was established in 1993. The main objective of the Fund is to adopt a more comprehensive social security scheme for Nigerian private sector employees. The scheme was established to replace the defunct National Provident Fund (NPF) as a compulsory pension scheme for non- pensionable public servants and employees in the organised private sector. Nigerian private sector employees are required to contribute 2.5 percent, while their employees are to contribute 5 percent of the gross monthly emolument to NSTIF. Workers in enterprises employing more than 25 persons are to be automatically registered by their employers.

The Nigerian financial system has undergone some remarkable changes in recent times. Some of these developments include the promulgation of the Failed Banks (Recovery of Debt) and Financial Malpractice in Banks Decree No. 18 of 1994. This is to facilitate the prosecution of those who contributed to the failure of banks and to recover the debt owed to the failed banks. Another major development was the inauguration of a Financial Services Regulatory Coordinating Committee (FSRCC) by the CBN in 1994. The aime is to coordinate and standardize the regulatory policies of all financial institutions in the system with a view to evolving coherence and comprehensiveness. The CBN also granted forbearance to finance companies operating in Nigeria whereby they were given a maximum of four years to amortize their classified assets portfolio against their current profits. The minimum borrowing of the finance companies had been reviewed downward from N100,000.00 to N50,000.00 since 1994.

Three important decrees to further sanitize and streamline the financial system were promulgated in 1995. These were: the Money Laundering Decree, the Nigerian Investment Promotion Commission Decree and the Foreign Exchange (Monitoring and Miscellaneous Provisions) Decree. The Money Laundering Decree is focused mainly to prevent drug money and other illegally acquired assets from entering the Nigerian financial system in order to forestall the damaging effects of such money. The Decree limits the maximum amount of cash payments that can be made or accepted to N500,000 for an individual and N2 million for corporate bodies, respectively. Amounts in excess of these limits are to be reported to appropriate authorities.

The Nigerian Investment Promotion Commission, among other things, is charged with the responsibility of encouraging, promoting and coordinating investment activities in Nigeria. The Commission is empowered to initiate and support measures which would enhance the investment climate in Nigeria for both citizens and foreign investors. The Commission is also empowered to register any enterprises in which foreign participation is permitted and to allow foreign enterprises to buy shares of any Nigerian enterprises in any convertible foreign currency.

The Foreign Exchange (Monitoring and Miscellaneous Provisions) Decree established an autonomous foreign exchange market. The Decree empowers the Central Bank of Nigeria, with the approval of the Finance Minister, to issue guidelines to regulate the procedures for transactions in the market as well as other matters which may enhance the effective operation of the market. The decree provides for any convertible foreign currency to be traded in the market. It also allows an individual, resident in or outside Nigeria, to invest in any security in Nigeria.

In 1997, the CBN Decree 24 and BOFI Decree 25 both of 1991 were amended. The highlights of the amendments include the withdrawal of the autonomy of the CBN with its supervision placed under the Federal Ministry of Finance. However, the powers of the Bank over the institutions within the financial system were enhanced. All financial institutions are now under its supervision, including the Developmental Financial Institutions.

A new insurance decree was also promulgated which stipulates new capital requirements for insurance companies and also created the National Insurance Commission as the regulatory organ in the industry.

A computerized trading system was introduced in the Nigeria Stock Exchange to facilitate trading on the floor of the Exchange and enhance processing and settlement of transactions and facilitate the internationalization of the Exchange.

The Nigeria Deposit Insurance Corporation Decree 22 of 1988 was amended to give more powers to the Corporation to deal with insured banks and to act independent of the CBN on some matters affecting problem banks.

Review of the Nigerian Capital Market

Recurrent reviews of the investment regulations of Nigeria have correspondingly led to the issuance of ad hoc guidelines by the supervisory agencies of the Capital Market. Therefore, to stem the unsatisfactory trend of "piecemeal" guidelines, a comprehensive review of capital market related regulations was commissioned by the government and resulted in the promulgation of the Investment and Securities Decree, 1998.

The Government of Nigeria has often stressed its desire to revitalize the Nigerian capital market, and to align it to the standards of international portfolio investors. A panel was constituted in March, 1996 to undertake a comprehensive review of the Nigerian capital market.

This has led to the requisite reforms that will ensure the optimum performance of the Nigerian capital market as well as align the operations of the capital market with other reforms being undertaken in other sectors of the economy. A final detailed and comprehensive review of the Nigerian capital market, including in-depth reexamination of the role and activities of individuals, public and private sector institutions and agencies operating in/or regulating the said market should lead to modern laws and regulations that will make the Nigerian market agile and attractive to investors worldwide.