University of Nigeria Research Publications

UMOBONG, Asian A

Aut

hor

PG/MBA/96/19115

Title

The Impact of Direct Foreign Investment in the Nigerian Banking Sector

Facu

lty

Business Administration

Dep

artm

ent

Banking and Finance

Dat

e

March, 1998

Sign

atur

e

i i i

'I'his Study o r is I k c 1 icalccl to A l ~ i i i g l ~ t y God

(PGIMRhI96IlOllS) presc~itcd to tlic Depat-tmcnt of B:~~iltinp and

Finance, Univessity of Enugii Carnlms (UNEC) is original ~ n d has not

bccn subtnittcd for the award of ally degsee 01- diploma eithcr in this or

any other t e ~ ~ i t a r y institution.

This is to certify that this research work by Asian Asian Umobong

(PG/M HA19611 91 15) presented to the Department of Ballking atid

1-inmce. U~iivessity oi' Nigeria, E~iugu Ca~npwi (IJNEC), was strbmittecl ill

Head 01- Department Ballliitlg arid Finance

contribution in onc way or tlic otlicr for which I wish to plitcc o n record I iy gxtituclc.

Ciiikclczc who look ti~nc out oI' his vcry tiyht schcil~rlrs to rcxl tlirouglt the originill

mat~uscript of my project report and off'ercd uschil advise md inst~-ucti:)~is 011 i t .

I also wish to record my gratitude to t l~c following pcoplc. Mr Julius I

Nwadiaro of thc Central Bank of Nigcrm, Port 1Ia1-court; M r Jude Okcja oS tlic

Instilute of Dcvcloprncnt Studics Library i t UNliC; Mr Clilford Nwankwo oi' Union

Ua~lk of Nigcria Plc, E~iugu; MI- I-Icnry Ngoka of Utlitcd I3mk for Africa Plc, IJnrigu;

Staff of tlic Rcscarcli Dcpnrtnlcnt o f tlic Ccntrnl Dank of Nigeria, Tkug I; S~ t l ' f of t l~c

banking and !;ina~icc, D~par t~~ic~ l l i \ l Libwry IJ111vcl sily of Nigcriii, I k ~ g u .

Iniobong. IIcr woi-cls of c t m u q y l e n t and undcrstat~ding has becn my sour-cc OF

strength throughout tlic psngramrnc.

10 Camcroun Lanc, Uwani, Ei,nugu, whosc cxpcrl fingers played on tllc compulcr

the rcal impact of foreign invcsllncnls in the Nigerian banking scctor mtl :o m ~ l y s c

thc managcmc~il policics and operations of' tlic Sorciyi banks against thc backgroi~nd

of o u r 11inc1-o-cconon~ic pol icics.

In tllc literature rcvicw, thc study discussctl solnc ol' the conccplual issues in

'I'hc ~nain sousccs of' data usccl for thc scsc;~rch consist of seco11tla1-y data

arcliivcs 01' somc of thc ~ix~jos banks. lntcrvic\vs \VCI.C also held with so~iic scsca~-ch

DEDICA'I'ION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ACKNOWLII;,IlG11M1~N'1'

AUS'I'I<AC"l' . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi i

'I'ABLI.~ 01: CONTEN'I'S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix

Cl IAI' 'I 'I~I< t ) N l <

INTRODUCTION

. . . . . . . IN'l'RODUC'I'ION/I3ACI<Gl<OI.JNII ' 1 ' 0 'l'l-11; S'I'IJIIY 1

S r I A ' l h I N ' I I l O l 1 I . . . . . . . . . . . . . . . . . . . . 7

RESEARCII QUESTIONS . . . . . . . . . . . . . . . . . . . . . . . . 9

013JI~C'I'IVIIS 01; '1'1 I1 : S'i'UIIY . . . . . . . . . . . . . . . . . . . 1 0

SCOPE AND LIMI'TKI'IONS 01; '1'1 111 STUDY . . . . . . . . . 12

SIGNI171CANC12 01; 1'IIE STUDY . . . . . . . . . . . . . . . . . . 12

l<EFERENCl;. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

CI IAr'-I'l:I< TWO

LCONOMIC '1'1 IL;,OIIIES 01; I;OI<IIIGN DIIZI3CT INVI~S'TMIJN'1'19

1 'IIIl I<EI.EVANCE 0 1 : INTllliNA'I'IONAL 'I'IZAI>E AND DACI'1'OR

MOUI 1,I'I'Y '1'1 I IiOI<Y IN CJN I>IXS'I'ANI>ING I;OIZl;I<;N 11 II<I:CPS

INVESTMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

MO'SIVA'I'IONS ]:OK FOIIIJIGN Dl IUXX 1NVIW:MLiN'I' . , 22

. . . . . . . . . . . . . . . . . MAIIIC'r EXPANSION MOTIVES 23

. . . . . . . . . . . . . . . . . . RESOURCE SEEKING M O T I V 1 3 25

O l l G N INVIJSTMIIN'I' AN]) MIJI ,'I'INA'I'IONAI, 13ANK

. . . . . . . . . . . . . . . . . . . . . . AC1'IVIrI'I1S IN NIGISIIIA 20

2.5 THE ROLE OF FO11EIGN DIRECT INVESTMENT IN ECONOMIC

. . DEVELOPMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 29

2.6 ADVANTAGES OF FOREIGN DIRECT INVESTMENTS . . . 30

2.7 REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

CHAPTER TIIREE

RESEARCI-I METI-IODT>LOGY

3 . 0 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

3.1 SOURCESOFDATA . . . . . . . . . . . . . . . . . . . . . . . . . . 35

. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.1 PRIMARY DATA 35

3.1.2 SECONDARY DATA . . . . . . . . . . . . . . . . . . . . . . . . . . 35

. . . . . . . . . . . . . . . . 3.2 RESEARCH INSTRUMENTS USED 36 F

. . . . . . . . . . . . . . . . . . 3.3 METHOD OF DATA ANALYSIS 38

3.4 POPULATION AND SAMPLE USED . . . . . . . . . . . . . . . 38

3.5 PROBLEMS ENCOUNTERED . . . . . . . . . . . . . . . . . . . . . 38

3.6 REFERENC1;JS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

xii

CHAPTER FOUR

PRESENTATION, ANALYSIS AND IN'I'ERI'RE~ATION 01: I>ArI'A

REVIEW OF BANKING ERAS IN NIGERIA . . . . . . . . . . . 41

OWNERSHIP STRUCTURE 01' 1'IIE BANKING INDUSTRY AND

ITS EFFECT ON T H E ECONOMY .. . . . . . . . . . . . . . . . . 54

CHAPTER FIVE

SUMMARY O F FINDINGS, RECOMMENDATIONS AND CONCLUSIONS

5.1 SUMMARY O F FINDINGS . . . . . . . . . . . . . . . . . . . . . . 58 9

5.2 RECOMMGNDATIONS . . . . . . . . . . . . . . . . . . . . . . . . 62

5.3 CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

BIBLIOGRAPI-IY . . : . . . . . . . . . . . . . . . . . . . . . . . . . 66

1.0 INTRODUCTIONII3ACKGROUND TO THE STUDY

A foreign iilvestinent is the ownership of property abroad usually in a company

for financial returns, while a forcign ilirect invcstment is a subset of forcign

investment that takcs place wl~eil control follows invcstment'. In ordcr to properly

characterize foreign direct investmcnls, somc authors distinguish three arcas i n which

contrast arc cmpl~asizcd . 'I'licsc arc ;

- Economic Definition

- Organizalivnal Definition

- Motivational Definition

The econonlic definition of forcign direct iilvcstlnent stresscs the size,

geographical sprcad and exlcnt of forcign involvcmcnt of thc invcstmcnt. 'IXs

ccono~nic (Icfinition dil'Scrcnli;ltcs bclwccn a di~-cct li~rcign invcs~mcnt ;lnd;

a> a large domestic firm which does little invcsting abroad

2

b) a domcstic firm which may invest abroad but rcmains a small economic unit;

C) a largc portfolio investor who doec'not seek to control his invcst~nc~lts or to

take cntreprenenural risk.

I The organizational definition takes thc size and. spread of the investment for

granted and analysis factors which make some inore discci than othcrs by virtue of the

nature of their organization, their centralization of decision making and authority,

their global strategy, or their ability to act as onc cohesivc unit under changing

circumstances. This definition highlights tlic diffcrcnce bctwccn thc relatively loosc,

independent and unco-ordinatcd structurc of small f'oscign investors and that of

complex I~iesaschical and well-knit direct investment corporations. A truly dircct

forcign investillcnt acts as an organization maximizing onc corporate ovcrall ol,jcctive

for all its units, tscats the wllole world (or the parts opcn to it) as its operational asca

and is able to co-ordinate all its functions in a way necessary to achieve the above

mentioned objcctives2.

The motivational definition pays attention to corporate philosophy and

motivalion in laying down the criteria for il multinational fcturc. Thus a truly dircct

investment is indicaled by a lack of nationalism, or a concern with the firm as a whole

As a rcsult of the colonial history of Nigeria, and conscqucntly t le history of L

the growth and development of its econon~ic and financial sysfern, foreign

participation in thc ownership, managcmcnl and control of banks have c.xisted in one

form or the othcr all through her history.

The evolution of thc commercial banking SYS~CIII i n thc late l?th century up

to the middle of the 20th century was charactesizcd by this feature of roreign

participation as Nwankwo, G.O. (1980)' acknowledged that it was duri ~g this ern that

thc threc biggest forcign banks werc cstalAislicrl. 'I'l~csc foreign bank:; wcrc:

- British Bank of West hiri& (BBWA)

- The Barclays Bank

- Thc British and French Bank

As a ~nattcr of fact, the historical rccords hwc it that the firs. banking office

was establishcd in Lagos as a subsidiary of the African Banking Co~poration a bank

in South Africa - in 18925.

To briefly recall this historically rccords, beforc thc advent of colonial rule,

the traditional barter system was widely practised, although r! multiplicity of

indigenom curicncics (eg: cowries, manilla, ivory) and foreign curr-ncies circulated

side by sidc within Nigeria. British silvcr coins werc imported iicto West Africa

colonies to ~nonctize thcir eco~~omics. And it was thc need for finaxial institulions

to assumc thc responsibility for thc importation and distribution of tiese silver coins

that'1cad to the establishment of the African Banking Corporation 3Fficc in Lagos

following an agreement reached bctwccn thc Crown Agc~its and the African J3anking

. Corporation based i n South Africa. As a rcsult of the tradc recession which hit Lagos

in later 1892, thc hank could not survive and was talcen over in Mar41 1893 2nd run

by Eltlcr Dcmpstcr and Company (a shipping Co~npany) as a priwte bank. It was

subsequently absorbed in Jawnry 1594 by the British Bank of West Africa (BBWA)

formed by the Crown Agents in the Unitcd ICingdom for that purpose. Thc scco~ld

bank to be sct up in Nigeria - The Anglo-African Bank was cstablishcd in I899 by thc

Piagcs Trading firm jn Eastcrn Nigcria! The bank was in competilion with thc

British Bank of West Africa (BBWA) until it was absorbctl by the BBWA in 1912.

So as at the time thc Wcst Africa Currcrlcy Board (WACTJ) was forned in 1912, tlic

BBWA became its sole agent for clistriburing tl'tc currency within :he Wcst African

Subregion and thc colony. Another purely forcign bank-thc colonial bank based in thc

6

Wcst Indics opcnccl for busincss in Lagos in 1916. It was takcn ovcs in 1925 by

Barclays Bank (DCO). Barclays Bank (DCO) latcr arnalga~nntcc' with thc Anglo-

Egyptian Bnnli and thc National 13mk df South Africa to form thc ncw Barclays Bank

Dominion colonial and Overseas (DC0I7.

A striking revelation in this brief history is tliat thc Niger an banking sector

was initially dominated by foreign banks for ovcr a period of 40 :rears.

Evcn during thc scco~id era of our banking history-an era when inerchant

banking scrviccs wcre introduced in. Nigeria, forcign investors still featured

prominently for instance the Nigcrian Acceptances Limited (NAL) a fclrmcrly wholly

owned subsidiary of John I-Iolts (Liverpool) L,iniitcrl was thc first discount house mrl

Merchant banking house in Nigeria.

This dominance of foreign banks in thc Nigcridn bankkg sector continued

until the indigenization era (1970 - 1985) when the govertirnent :ook boldstcps to sct

up the stage for the indigenization of the Nigerian I'inancial sy:item particrilarly the

#

banking systcm which occupies commariding heights of thc Natim's economy. Even

when state banks started springing up, They were doing so still ivith some clcment of

foreign bank presence in the form of affiliation. #

. the fcdcral govcrnmcnt canx up with ~Ilc Nigerian Invcstmcnt Pro nolion Comnlission .

b Decree No.16 of 1995 which repcalcd the provisions the (.:xisting htel-pr-iscs

prornot ion decree.

1.2 STATEMENT OF PROBLEM

A dctailcd writc up on thc history and evolution of banking prncticc i1-i Nigeria

from iliception to datc will be replete with various foreign i~nestment othcr in the

form of direct or portfolio investments.

The Nigerian banking sector has evolved through scvel a1 cras in its path to

growth and dcvelopmcnt such as:

- the free banking era (1892 - 1952)

First cra of bank failrrrcs (1952 - 1959)

First Consolidation cra (1960 - 1969)

- The Indige~lization era (1970 - 1980)

- Second era of ConsoIidatiorl (1980 - 1985)

- Era of deregulation (1986 - 1992)

Era of distrcss and bank f'ailurcs (1992 - 1936)

Ilra of restructuring ml reorganization (1 9?7 - da. e)

concern of this study is h t uptill thc limc of this s r d y ovcr 160 ycars

li~tcl., son^ ccononiic atir~lysrs citn still ct~nvcnicntly : I I - ~ L I ~ that tllc N i ~ e r i i ~ n banking

scclor is u~adcl~dcvclopcd in scsporisc lo ( l ~ c clucslitm of wllcthcr .lie hanking scctor is

devclopctl, tlcveloping or utldcrdcvclopcd.. A rcvicw of lhc arlvanlagcs c!' foreign

dil-cct iuvcstmcnls point 10 OIK obviuus l';~c[ 1h:rt lIlc cxcrcisc carries w i l ! ~ it thc

cxpcricncc 01' cxper-t ~nan~rgc~ncn~ skills, tcclrriological skills a1 d tcclinology, cxpcrt

markctirig skills and capital, hut in h e Nigcria banking scctor lilllc cvidencc is lcft on

ground to support this Fact as critical ex;mination nf [he variou; eras in thc cwlutinn

of the b:triking sector will rwcal [Ira1 at c ; ~ h sl;lgc thcl-c has snmc limn 0:' t'nrcigi~

~nvcstmcnt or tlic olhcr ;11x1 up t i l l clatc tllc pcndulutn of growlil and rlcvclop!i?cnt has

been swinging from oilc era of distrcss to anolllcr without an) rc~narkablr: g:-owth lo

show for the extcnt of foreign inv:strncnt.

i i i )

the study. Allhougli this has turned out to be ;~~var~lagcous in itself' a: second<:ly data

is mnrc free from hiascs.

Sccondly , tllc study was constrained by Limc I'aktor and by thc nori-:wai!abil i[y

of financ-id scsour-ccs at tllc disposal of tltc author. As ;I result aIi 1 le orgauizarions

wlierc rclevnnt data would have hccn ot~hincd ct~ulcl not bc visited an I as a result only

research from tlie Central Rank o f Nigeria Library and archives of 1 few bmks h l

a 'I'hc scopc of this study is 11r11-1.owccl to rl~c nc~ivitics ol' com~nc:rci;~l banks from

the 1592 pcriod to the pscscnt. 'I'his scopc is chosun bcciwse 2f: t i~c clcar[li of

literature and data on tlie oI1m t y p of l ~ n k s such as mcrch:mt ~ n d development

banks. It is also lo enable rcasonablc conclusions to bc 1mc11cd.

This study is an intlcpt I-cvicw and ;~ndysis of existing w o r k . of cxpcrls in (hc

banking ildusl1.y and il is I~opcd t h a ~ tlic t'illctings woirId l x commr~nica[ecl in r\ way

tlmt it wonId bc 1ncxnin2ful to policy 1;i:rkcrs ns n ~ l l il!; to Suturc s udics. [I: is also

hnpcd that it will act as a sku-ting po(11t f i ~ r policy dubatc in Ihc area of f'orcigu .. - t invcs[~licnt i n ~ l i c I~a~lking ilitlr~s(ry.

On thc whole, it is etivisagcd t h a ~ the rcsc;ircI~ filldings will b,: of the fallowing

specific sigrlificance.

i> I t will scrvc as a guiclc to ccono~nic pnlicy maker: and phnncrs in

liiturc decisions col?ccrning fhrcign invcsllncnl in the Nigerin:~ banking

ol' thc prcscnt policy stance. on forei~ri dircct invest nent a112 indirect

invcsImcnt in tlic banking scctor.

iii) It will providc thouglit providing insigli:s on the 'mpact of forcign

direct investnient in the banking sector of our cconrniy.

i v) I t will draw the altcntion of the rcgdatcry auchclriti :s to thc ~;ecd for

thc standardization of policics antl inccnt ivcs 011 fore gn invcsl~wnls in

CHAPTER TWO

Invcstn~ents gcncrally spcaking is tlic cornn~itment of fur ds nr snvin~,s to :I

spccifietl project will1 the prinirrry motive of achirving a pri~nar:, objective - ~vllic11

could bc prol'it fkmc or gootlwill. A foreign invcstmcnt is lhc owncrsliip of propcrty

abroad, usually in a company for a financial rcturrl. A foreign llirect investment is

a subset of fc)rcign invcstn~cnt when control foIlows tllc investmen . So an invcstlncnt

is called direct when (IIC conccpt of control is in(r-oducccl to it.. In additior~ tlircct ,

invcstnicnt possess some olhcr fcattlrcs such as:

- high commiimenl of capital, personnel and lccllnology bc twccn counti.ies.

- partial av~ncrsllip.

'The ow~~ers l~ip of a coritrolting inrcrcst in n foreign opc .ation is tlrc I~iglicst

type of conmitrccnt to forcign ope!-;\lions. It involvcs Ihc transfc: of lnorc perxnncl .

16

and tcchrlology between comtrics than when thcrc is no con[-olling intcrcst and

usually experience in cxportirlg and importing.

Discct investments are sct up in order to gain acccss to xrtnin rcsourccs or

access to a market for a firm's product. It could be a joint v( nturc whcrc two or

more orgarlizations share in thc ownership; and nliscd vcnturc vhere thc owccrsliip

in belwccn a government and a privalc con1p:iny. It is distin~uisl~cd from loreign

portfolio investment where there is .no cor~trol of foreign orxations and foreign

a

operations and forcign operations are used only !or financia purposes. For an

intreslmcnt to be considered direct tl-la-eforc tl~crc has to be eit ~ c r a minimum of 10

or 25 perccnt ownership of the votiog rights or shares in a for, .ign enterprise.'

Thc concept of control is vcry important in the opera ion of foreign direct

investment because in niost cases it is the single most iniportatl: factor that motivates

investors to be willing to transfer tcchnology and other con~pc.itive assets.

This chaptcs discuscs rllc concept of forcign tlircct investments gcneraIly

distinguisliing bctwcen portfolio irivestmcrlts and dircct invest nents, thc motivations

for foreign direct investments, some theories o T foscign ( irect inves tmcnts and

multinational bank activities in Nigeria.

2.1 THE CONCEPT OF FOTJ3XGN DIRECT INVESrf_FM1. fix Forcigu invcstrncnt is il type of invcst~ncnt whctlicr in rc 11 or financiul asscts

across t l~c national houndiirics of the investor with [lie aim of maximizing the

objectives function of the investor. It can be undertaken by in.lividunls, firms and

go~ernrncnts.~ Conceptually forcign investments Nil1 fall into I1vo broad caiegories. z

- Portfolio Investments arid

- Direct I~lvestments

2.1.1 PORTFOLIO INwSThW-N_5_~

Portfolio investrncnt is an investment in which an' invc: tor lacks the control

ovcr thc invcstmcnt. 11 typically ta!zes the form of iuvcs~mcnts ir financial asscis such

as bonds and stocks irl which the invcslor docs no1 t w c cont olling i n k m i . 'Tile

major motivating factor i s the fiwot~rable intcrcst satc diffcrcn i d i.e. capii7.I flows

from where it is simples to whcrc it is scarcc.

DIRECT INVESTMENT '

. . By direct investment we mean air invest in a foreign country whcre tIlc

investor retains cont~ol over the investment. It typically takes tl e form of a foreign

investment starting from a subsidiary or taking the form of a foreign investment

starting from a subsidia~y or taking ovcr control of an cxisting f rm in a country.

Direct investments have always attracted a grcat deal ol attention and have

given rise to heated controversies. 11; rccent years, direct inves men; have attracted

renewed interests in both developing and developcd coun t r i c~ .~

In direct investment, the investor retains control over I he invested capital.

Direct investment and management control go hand in hand: A listinctive feature of

direct investrncnt is that the invcstor wants to retain control ove ' his investments.

2.2 TE-TEORIES OF FOREIGN D M C T INVESTMENT

It will be useful for the purposc .of this study lo re vie^ briefly the existing

literature on various definitions of foreign direct investments i,e undcr the economic,

organizational and motivational approaches, and to highlight t leir main treasures,

which to a large extent determine their effects on developing m 1st countries.

2.2.1 ECONOMIC THEORIES OF FOREIGN DmCT INV ESThU3MT

, Thcre arc two types of pure cconornic tl~cor-y - Illat o f intc .national Isaclc m c l

that of the orthodox theory of t11c firm - which in thcir 'rigorous ncoclassicnl Sonn

may bc rclcvant to thc m ~ l y s i s of foreign dirccl invcslmcllt.

The pure thcory of international tradc assun~cs pesfmtly cc rnpctitivc markcts,

i d e n h l production functions in differmt counLries, and internati ma1 movcmcnts of

capital in response to difl'crences in interest ratcs: It boils clown t o the assertion that

rich countries presumably 'capital abundant', iilvcst in c-ounties which are

'capital-scarce'. It does not provide. * I a complctc explanatior of forcign tlircct

investment as dircct from forcign borrowing or portfolio invcst~nc nt of ~ h c growth of

frirns posscssed of corlsiderablc ~nonopoly powcr-, of rich count1 ies' perpetration of

each other by their large firms, or of the transfer of- other produc tive factors such as

technology, management, marketing, which arc just as g r e ~ t a part of direct

investment as the transfer of capital.

The pure urthodox theory firm assumcs that f tms arc in

competition and so I w e equal access to all productive factors, do not exercise rnarkct

power and reach an optimum size set by long-term clislinguisliin; returns to scale.

This tlicory is not very uscful in analyzing thc bchaviour ot' foreign investments which

grow in cxtrcnlely ilnpcrfect markcts, do not show marked signs of having rcaclied . ,

limits to t'ricir growth, and are subjcct to various inter-rlcpende ~cics. it could bc

argued that the vcry fact that firms necd to bc of-ccrtain sizc and posscs certain

advantages in order to invest abroad implies that the orthodox t11:ory is deficient in

certain important rcspccts wlicn applicd to forcign dircct investmr nts. Though some

aspects of the theory are relevant such as its postulate of profit Ina: itilizing bchaviour.

Reccnt thcorics on foreign direct in\lestmcnts have h~rned tr explanations based

on irnperfcctions, oligopolistic interdcpendcncc aiid the possessim of monopoIistic

advantages. The cssence of the ~Iigopolistic thcorics is that h n s operating across

national boundarks and over lo~ig dis[anccs suffcr disadvantages c luscd by difficdties

of communication, ligusitivc and ~ ~ I r u r a l diffcrcnccs, lack of cnowlcdgc . of local

market cnnditions and so for foreign direct invcst~nents to bc pro 'itable i t has to have

specific special advantages over local competitors. it is tlx reforc a necessary

C

condition of foreign direct investment that the investing, firm has some monopolistic

i >

i i)

i i i )

i v j

v > v i)

vi i )

viii)

2.2.2 rI'IIE lZELlCVANC15 0 1 7 IN'I'ISItNA'~ION/\1. I I A l ;tNI)

FACTOR RIO1~lI,I'IiY_ -.

rf'I1ll:OIZY - IN UNDJ~RSl'rWTllNG PORICl(;N DIIt15CT INVESTMT?N7',S-

Intcrnnlional trirdc o k n occurs hccausc oT cliifcrcnccs in 'acror c~~dow~ncnls

conipnrly cslnl~lisl~cs dircct i~lvcslnicill in sonlc lilrcign locatiws ; ~ i r l tlic compaliy may

I JC corupr:llctl to follow suil lo cs1ai;iish nl'ficcs irl such foreign localions in oidcr io

. lo scrvc tllc plant Sacilily. '1'l~c.s~ i~~ccti l ivcs acfuatly c11lic.c ctrrnlxt~iics to i~lvcsl ~licrc

iv) I[ r~ir~st liaw n r~rt~llirl:~tio~~;d c'cntr';~l ~nn~l:~!!c~iic~ll.

v j I t ~uusl Ilsvc a rilullinalir~rl;11 ?lock ow~~ci-sliil~ sll-uclurc.

A ha~lk's cxpalisio~i hy I'orcign invcs t~nc~~l c ; t ~ take any or 11 c I'ollowing I'orms:

a) SUl3SII)ThRl' RANK

A su l~ i t l ~:II-y is ;i scp;~r:~lc (c2;1I c111 ily 'irlcorpor.alcd in (Ilc hosl c~ ;untry

i l l nccor.tIn:icc with l r ~ ~ l I;IWS : I I I ~ I-cgul;~tions. ir I I M ~ lx :I [7ii1Il J or wli~~lly ~ w ~ i c d

enkrprisc which ol'fcrs ;t widcr I-age ol' Sinnncial scrviccs 01- prot x-ts llicn a I:il-cig~~

Ixinch. 'Fbt- instnncc, n sul?sidir~ry can cnahlc lhc parent bank to y i n xccss ta local

I)anl< ill? Iwsilicss."

17) AFN!AATK TMNK

An afliliatc h t k is a local bmk in \vhicIi n liwcign tlar k holtls a mi::osity

eclriily p;rrticip;~tion. Thc Unnks arltl c)[licr Fi~lancid I~ i s t i tuhn I) :crcc Nunibix 25 o f

I991 vicws at1 aKi1ia:c or a11 associarc hank as ;I culnp;~tly i n wllil 11 motl1c1- o\v:-.S nut

ICSS than 20 ~ICI-CCI:L o r thc S ~ I ; I K S .

~l'fi!iatc banking a r r m g c ~ n c ~ ~ t s i;ivc li,reiy 11;11lks casy a xess to ;In ai.~.;!y of

local i ~ a n k ! ~ ~ ~ I ~ L I S I I I C S S wi111c a1 ti^ sanw 11111~ rcccivi~ig a 11ii1.jos h r c or thc a!Tiiiak

I)nnk's inlcrr~ational bnsincss. Nijgcrinn lxrnks bcncl'il i~nmcnscly from this ty~it: d

first co~isorlium bank. Dnnquct Ilitcsnational Du Tkr i i r i S .A. in lie Rcpublic CJT ncnill

corlsu~nl~~io~i osicntccl inclustrics or- it rnny deal in primary goo( s for export or set up

capilal goods f'or tl~c local ~narkcts..

and ncctlctl it1 cqlital irnpo:-ling countries lilic Nigcria .

WilIi this i t niakcs possihlc tlk opcralion or Ihc indust1 p and training QS lucal

F u cxtcr-nal ol~liga~ions, rt lot dcpcuds on rldcqua~c i~~ l ' l ow 01' li~rciyi invcs~tiicnts. 1;or

available in tlic country and arc capahla of raising the production cipilalitics z f tllc

Imt country.

Morcovcr thc fact that it reprcscnts a flow of rcsourccs from a spccific

indust~y in thc sourcc cormtry to t11c corresponding intfus!ry in the rt cipient cconomy

makcs il inclust~y spccific. Tf~c flow couId be meant. to cnnble the invcstor operate

the same line of busincss in the recipient cconomy as in the sourcc Zountiy.

Howevcr, a queslion m y bc asked as to how Sorcign dircct ir: rcstors opc~xling

in Nigeria in particular have assisted in its dcvclop~ncrit aspirations

, Technological skills, cnterpreural ability and rnnnagcmcnl exp :rience haw bcerl

one of the nos t important con t r i buhx df the forcign invcstmcnt in ransfcrring lhcsc

vital resources to the local n~anagers !hrough training pl-ogrammcs 7:1d the process of

acquiring thcsc skills on the job.IL

The multinational banks are ~ o o d brceding grounds for 11ghly skilled and

experienced bankers. To have wvrkcd with any of thCsc multinati ma1 banks is like

reaching the peak of a carrier in the banking field

I . Ncxander, G.J. ct at, (1956 Funda~iicntals of 1 :lvcstments: New York: Prcnticc Hal l ntcrnational C'o. Ltd

P. 5 .

2. Ilaniel, 1.d. ct al, (1992) International Uusiric - s Environments arid

Opcr:~lio~is 6 th 13 i t i ( 11 Canada: Addison - Wcslcy Publishing 3. Ltd. P. 205.

3, Central Rank of Nigeria, Lagos nullion Several Issu :s.

4. Ccntral Rank of Nigeria, Lagos TJconoinic and I;inar:ial Revicw: Several

Issues.

5 . Ibid P. 312

6. I l ~ i t l P. 315

7. Dickic 1i .D. ct 31 (19x8) Forcigti T~tvcst~nc~cnt ar il Government . Policy in thc ' n~ i r t l 1401-ltl: l ~ o r s ~ g

I Inkrcsts I 1 ~ i ;111d

ncwfitl: London; l'hc r\ lacnlillian Frcss -- L A l . P. 3.

8. lbitl P. 121.

9. Agcnc C.E. (1935)

10, Ibid P. 18

12. Okafor, J.I. (1989)

t

13. World Bank:

"Forcign J~lvestment : s a Catalyst for Economic DeveIoprncr t in Nigeri:~ " . UNEC: Bankin~lFinar x Depar-trncnt.

World DcvcIoprnent R :port 1985 Edition P. 125.

3.0 ~NI'IZODUCTION

'l'hc Nigerian banking sector, having comc this fas al--1 with w r y little

achievcmcnts on ground lo show for any rcm:~rkabIc growth and r';velopmcn:, one is

justified to start asking questims and pointing accusing fingers a! the key players in

the sector since its history (1892) to the present dav.

Thc poor record of growth and devclop~nent have arouse 1 a lot of concerns

and authorities have long established tlic desirability of studie: to try to firid out

exactly wllcrc thc problcrns lie. The impostancc of rcscarch studic c in this arca cannot

tlicrcfore bc overeml~hasizcd .

This cmphasis tliough, should not negatc lhc nccd tc adopt proper and

systematic tooIs of data collection and analysis to crlsure the val dity of (he I-csearch

findings, In other words, to ensure this validity, it requires tl- 2 use of time-tested

methods of data collcction and tools of analysis. These are disc1 ssed in this chapter.

3.1 SOURCES OF DATA

l;or rhc purposc or this study, two ~iiain sotttccs of data 11:lvc ')ccrl utilized.

These are; the primary data and scconclary data.

3.1.1 PRIMARY DATA

Priniary data is the data expressly collcctcd for a specific pu pose. JWxn

considered from the poht of vicw of the mcthods uscd in obtaining thc data thcn

primary data is t11c data which is collectecl tht.ough pcrsonal i~~tervicws, ohscrvntions, f

experimcniation, questionnaires or- surveys. Prirnary data as thc name implies rcfers

to tlic initial or pririlc information collcctcd by a rcscarchcs for lllc I urposc oI' thc

study. 'The aim of priniaty data is lo make tlic sludy an original as pc ssiblc.'

For thc purpose of this sludy, primary data was obtained through the personal

interviews Iicld with a sarnplc of sesponclcnts from somc old generat 011 banks and

researcliers at thc rcscarch deparhncnt of thc Ccntrd bank of Nigcria.

3. t .2 SECONIIARY DATA

Secondary data is thc data collcctcd for somc other purpose wl ich the author

linve uscd for t l ~c purpose of thc study at hand. Rcscnrch expel-1s ha\ : ndviscd thal

secondary data is a morc valid rcse;~scl~ data as the methods used in c btnining primary a,

data arc ol-~CII O ~ C I I fo nhuscs a l ~ l hinscs.'

Thc scconda~y data obtained for this slucly include the follo ving:

i> Ccntral bank of Nigcria Annual Reports and Statcmcnt of Ac ;aunts for scvcral

ycnrs.

8

ii) Ccnlral bank of Nigcria Economic and Financial Rcvicws r w sevcraI years.

iii) Central bank of Nigeria Briefs Scncral Issucs.

iv) World Bank - world Dcvclopment Rcport for scvcral ycal;.

v) First Bank of Nigeria Plc publication "100 ycnrs of bankir g in Nigcria"

vi) Tc stl)ooks

3.2 RESEARCH INSTRTJR43i:iJTS USED

For thc purpose of this study, the following instrurnents w :re used extensively

in the collection of primary and secondary clnta.

Mnrc altc~liion was givcn to this instrunlcnt in this sPldy bccausc i t gave

opportunily for face to face contact with the respondcnts

At tltc rcsearch rlcpartmcnt of t l~c Ccnlrnl I3nrik a samplc of scnior rcsc:\i-chcrs

wcrc intcrvicwctl. Audicncc was also got from a fcw ncr gencrnlion barks

that had some clcmcnts of Sorcign ownership C S . CITIJJAT K.

ii) Library Ticscarch

Library rescardl ir:st~-umcnt was uscd 10 cxplt rrc Ihc tllcnrcticnl

fountlalions of rorcign i ~ ~ v c s t n ~ c ~ ~ t s . As a rcsult of thc nat ~ r c of data rquircd

for his topic, the ~~cscarchcs &cnsivcly coilsulicd mati rials in thc various

librat-ics visitcd Sor tlic prlrposc of this study.

A lot of tcxtlwok tnatcrials, research journals and magazi m, n~onogra!ihs ant1

bulletins werc consulted at such libraries as:

i) Ccntlxl Bank uf Nigcria LAxnry at IS~iugtl

ii) nr-itish Cour~cil Library at Eilugu

iii) Thc University of Nigeria Enugrr Campus 1,ibrary

iv) Institute of Dcvcloprnc~lt S tvdies 1,ibrat-y at UNEC

v) National Library Complcx at Enugu

annlysis w r c uscd and tllcrc wcrc:

i ) Contcnt Analysis wliicli consisted o i a c.arcf'irl analysis of 11 e rclatcd li',cratur-c

rcvicw rlr~ririg tl~c ilcriod nf library rcscnrcl,.

ii) Percentage Analysis wilich co~isisted of a few cnmparison>, or mcasurcmcnt of

inipacts using thc star ist ical tool of pcrcciitagcs.

364 POI'ULATIONAND SARWII15 tJSKJl

Thc population ~ ~ t ~ d c r focus for the purpxc of this study c ~vcrs all co~~~ancrci;d

hanks operating in Nigeria from thc pcriod (1892 to dak). But a sample is tukcn of

ten (10) ba~lks that have survived t l~c various cras i n tllc Nigcria I banking 11isla1-y and

have one element of Forcign o~vnership ar the otlw.

39

1:1 obtairling data thr-ough thc use of interview, it was diffic~ It to gct adequate

attctltion from thc rcspondcnts as a result of thc Ilitturc of tllcir jol s. Sccclndly, thc

rcspondcnts urcre widely dispcrsccl that thc author had difficulty rcachit~g all of

In collecting secondary data the author had ihc prol)lc~n of c lsily rtcccssing thc

archivcs of somc of the banks visitccl for lllc purposc of stncly.

In any casc, the problem c:~countercd are not cnough to q l estion thc validity

of the findings as the researcher made good use of the ~naterials hat wcre zvailable

at (lie Ccntsal Bank of Nigeria lilxary and rescarcli dcparlmcnt.

1 . I-hwkit~s, Y. (1976) B ~ ~ s i r s s S t t i c 1,011dot1: Pitman Pi blishing Co. 11~1.

l'KICSENrr ATION

ANALYSIS OF RELATED JIATA

4.1 IIKVTEMr OF BANKING fiRhS IN NIGI5RTA

An cm is a pcriod of timc which has a stream o f dotninan event. In assessing

the cras of co~nmercial banking in Nigcria, this study cnrvcs out ;cvcn distinct phascs

for thc purpose of analyzing telcva~il data in order to cxtrxct :nine finding:; on thc

irnpact of foreign Direct investment on the growth and devclop nent of the Nigerian

These phascs arc:

i i ) First bank FaiIurc's Phasc 1952 - 1959

iii) First Consolidation Phasc 1960 - 1.369

iv) Indi~enisation Phnsc

v) Second Consolitlation l'l~nsc

vi) Dcrcgulntinn Phase 19SG - 199:

vii) Sccond Bank FaiIurc's and Distrcss Phnsc 1986 - 199b

viii) 1Zcs tructur-ing and Rcorga~~iznl ion Pllnsc I 996 - dstt

IJREli: JlANICING PIIASE 11892 - 1952 - -- - -- - --

Early banking activilics in Nigcria clevelojml to scrvc t le primary intcrcst of

tllc colonial govcrnmcnt in distributing thc stcr-ling silvcr coil s. The extension of

Eul-opcan trading cnterpriscs ant1 Rritish Rulc to Wcsl Al'ric;~ c ncou~-agccl the usc of

currency wIiic11 fi~cilitalcd exchangc and diminislied the existint usc of bartcr. 'This

situation Icrl to the csfaI~Iisli~ncnt of h;~nking btlsincss ill Wcst A 'rica. Thus il l 1892, *

co~nniercinl banking business began in Nigeria w l m tlic African 3anking Corporation

(ABC) opencd an office in Lagos. This was taken over by EIc cr Dcnpstcr trading

company in 1893 and latcr bought i n 1894 hy the British B ~ I k of Wcst African

'I'he British Bank of West Africa (RRWA) monopolized the banking sccne until

l3arclays Bank (D.C.O.) opcncd a t~r;lrich officc in 1917. Within t iis pcriod, hank of

Nigeria - formcrly Anglo-African 1hnk forrnccl in 1905 and sold out LO thc British

Bank of Wcst Africa (BUMrA), while tllc British and French 1 mks (now UBA)

becomc thc third cxpntriate Dank to start banking business in Ni2ct.h in 194s.

43

I'hcsc banks, B;~rclr?ys, U,T3A and BRWA principally conc cntratcd attention on

scrviccs to facilitate foreig~i Im!c and catcl- for relations wi 11 cxpatriatc trading

companies and tlic colonial government with little or no att : n t h to indigenous

As a rcsult of this scenario, sevcral attclupts wcrc Inac c bctwccn 1914 and

1959 by Africans to establish loc;tIly owned and rnaliagcd bank: in order to brcak tiic

toreign dorninatiorl and monopoly in banking busirms and to s, tisfy the ~leeds of the

local husiness md the host cconot~y .

Tl~e major rcasons of fitilurc of thcse f'irst sot of indigc lous banks arc: onc of

11ic first ncgntivc impacts of fol-cigll discct invcstmcn~ on the Ni ;crian Z3anking scctor.

i > '1'11~ foreign banks dominated thc rlcposi~ bi~sc and thus cl-cdit availability .

i i ) 'I'llc opcratinn of foreign banks wcrc lailorcd lo thc IIC! .ds of cxpalri:i:cs.

l 'l~esc rcasons derived in part fro111 thc country's pt litical si~uation under

coloninl rule, thc rcl:lLivc novclty of banking brrsi~lcss in If igcria ant1 tl:c virlnril

absencc of a regulatory authority during this pl~asc.

Thc spate of hank failurcs during tllc frcc banking plixc, tlic loss ol'cIc~usi~ors

funds and the consccluent criscs of confidc~icc gcncratcd wiclcsp ead conccrn ovcr thc

fl~ture of I~anlting of Nigeria. 'I'lins to protcct thc banking ind rstry from pi.c~l~att~rc

collapsc as wcll ns strcamlinc banking opcraticlns, a set o f ru cs ailncd at c~vrising

ordcr in thc systcm bccame ~icccssasy against this backdro,, the 1952 Ranking

Ordinance was promulgated.

l'hc spccific stipulations of tlic oidinancc can hc Sdnl117 lrizcd thus:

Unly C O I I ~ ~ ~ I I I ~ C S could I)c rcgislcrccl cngagc in tllc Ilu iincss of bn~lliing with

a minimurn capital of E12,5CO ~ n n s t he paid up. For b, 11ks rcgistercc! outside

Nigeria ie. 1;orcign banks, tlic paid up capital was &1C 1,000.

No dividcr~cl payments wcsc nllnwcd wilhout n credit I:, thc Rcscsvc rund of

at lcast 20% of an accounting period's profit and dcfe~ mcot of a l l c;!?italiscd

cxpenditurc .

No bank had authority tn nialx unsccut-cd loans aga'nst its own sllnrcs for

111or.e t11;tn ,E300 to any rliscchlr or. compa~~ics nssociatc d will1 such directors.

45

C Tlic objective o f tlmc .scl of rulcs is to clicck thc n1 dy>racticcs and abuscs

which Iccl lo [lie mi~ssivc failures of' intlicr,cnous hanks in thc 'irst phase. Inspite of'

these set of ~ulcs , real banking scgulation and surveilmce d -J not comnvxcc until

afies lIlc cstablish~~~cnl of tlic Central bank of Nigcrin in 195:.

To sun1 this phasc up thc First Ranking Ordinance of 1952 introcluccd sct of

rules which made it more difficu:t for indigenous bnnks to r pcratc thus paving ttic

way fnr LIlc foreign banks to continuc in the clornination of tl l : banking sccnc.

FIRST CONSOLIDATIGN I3IlASY< I9GO - 1369

The establish~ncnt of tlic Central 11a1ili of Nigeria in 1959 licr:~ldcd tllis phasc.

'rhc Ccnrml Bank of Nigcria was mandatcd to carry out a num x r of functions among

which are:

a) Issuance of Lcgai tender Currency in Nigeria, and Rilaintcnance of ExtcmaI

reservc to snfegunrd the Tnternational Valuc ol' thc Cu -rcncy;

b) Promotion of monetary stnl~ility and sound financial s lstcm in Nigcria;

c) I'rcscription of various rcscrvcs rcquircmcnts in the f )rm oT liquidity ratios,

minimum cash ratios and stipulation of capital/dcposi~ and capilal/lonn s a h s ;

d) Buying, sclling, d iscoutiting arid rcdiscounting of govcrnl icnt sccuritics;

e> Specification of nctivilics thxt hanks cor~ltl participate in 1 rovitling guidclincs

for allocating bank crcdit as well as loans and advances.

Apart from rllc cstablisli~ncnt of tlic Cc~ltral 13nnk oF Nigc -ia, this pcrioci also

marked the laying of thc foundations for the dcvclopnicnt of tlic r'igcrian Mo~icy and

Capital Markets with the 'Treasury Bills Ordinance, tlic Barlx~k Rcport resulting to

the establishment of rl~c Lagos Stock Exchange (LSF), and lIle ' I r vcslment Cornpany

of Nigeria (ICON).

With indcpc~~dcncc c m c shi Sts in thc tl ircclion of cconor lic nciivitics which

had liitl~erto bcen restricted o ~ l y to srcrling arca count sics.

A combination of factors togcther with rclativc political s ability i n thc early

1960's lcd to the arrival of ncw banks. But during the rest of t le 60's tu 1969 no

new indigenous banks wcse establisl~cd as Nigeriam were yet tc8 rccover froin the

frauds, rnismanage~ncnt and failures that chnractcrizcd tlic free )anking crn. This

situation was further compounded hy tlic politicxl unccrtainles ni:d eco~mnic

C disiocat ions that c h m c tcrizcd tllc sccond hat t' of Ihc sixtics.

'!'l~is period was chnracterizcd by low lcvcl of competition with the foreign

47

ixlnks dominating llic sccnc ar~c-I Lhcir ;lltcnclant rocus of I h n :ing opcralion o ! ~ o~lly

cxpatr-iate inkrests. 'Tlicsc t-arcign banks did not rcspond to 11c devclopmcri~ ncccls

of' t l~c country as Lhcy wcrc I-cstrictctl by rcgulaliorls o f Lhcir llomc officcs.

The promulgation of thc 1968 companics Dccrec No. 51. marked tllc bcginning

of thc indigenisatiu~l process of dco~ionlic activities in ,ocner 11 and of the barks in

particular. A11 companies which wcrc construed to be forcign ,wncd companics wcrc

requirod to bc i~lcorporatcd in Nigcria. In addition, the clcvasl ~ t i n g effect of thc civil

war nn the otlicr Ilnnd and (lie fosiuitous gains from thc oil sccl3r on the other markcd

the bcginning of a 11cw cconornic cra which substantially ( hanged thc course of

banking in Nigcrin.

The country managed through centraIization of its forc ign excliangc rcccipts,

to emerge from the civil war withoi~t hecorning a major intern: tional clcbtor. T h o u ~ h

it depleted its external reserves and holdings of forcign gover ~ m c n t sccurities. Thc

pcriod markcd thc beginning of accumulation of domcstic deb. becausc of thc use of

deficit financing to mcct the derbancls of the war. This result :d to a sharp incrcnsc -

ill i~lf'lation. Morcovcr all Nigerian Bmks lost srtbstanlial parts of their asscts

Aftcr thc rccoverp of thc ccoi~omy from this staLc of tl :vastation, oil y,scw in

prornir~cncc as a major forcign excl~trgc carricr ar~d the main sourcc of govcr-nmcnt

iticonic and fir~ancc for ccononiic di.vclopmcnl:

111 pursuance of the incligcnisation policy, the fedcr:i government acquircd

interest in the foreign h n k s to bsing dorncstic holtlings i I such banks to 60%.

Although this achic~~ed thc oljcc~ivc of' transferring ownershi1 of kcy segrnents of thc

ccononly to Nigerians, i t did not achicve tlic trnnsfc.r of mar ngcmcnt and con:iol of

their opesatio~is to Nigerians. So what ol~lninccl was that a I irgc part of thc banking 8

sector which was so cruciaI to L ' C O I ~ ~ I ~ C dcveloprnent was left to rnanagcrs whosc

operatic~~ial oricntntion and a l lcgia~m could lo! 11c said k tally with out n;:!ional

l)anki!ig spearhcaclecl by stalc guvcrt-r~ncllts. liowcvcr t l~c unpleasant legacy of thc

fortics and earIg Firtics wIlen a good numbcs of banks failc A, intlicting hcavy losses

on thc public hincicrecl. So in virtua!ly all ihe instances, the: 2 irldigemus banks wllich

49

wcrc p;lrochi;:l, and 1101 sufficic~ltly c i l~knv~d will1 ~ C ~ S O I I I I C I or f i ~ i ; ~ I I C ~ ; I I 1 - C S O U ~ C C S ,

to rtiakc t!mn conipek crkctivcly with : I ~ c stronger forcign banks. C nc dcvclopnicnt

however, wr:s that despitc the relativc inaticquncics of the intfigcn 711s banks, they

played significant and dccisivu soles in nurtrrring irlrtige~lous 17 lsi~~esses whcrc

expatriate hanlis wcrc rclrrctartt to lake Ihc risk. They playccl tlic rc Ie of pinncering

the expansicxi of l w k i ~ i g scrvices inlo rural arcas.

1;rom March 1972, foreign br~n!;s wcrc scquircd to commcncc the

' Nigcrianizntinn of thcir 1laar.d of Dircclnrs, Mann~ymctit ant! Staff. To enhxice this,

the govcrnmznl promulgakd dccrccs in 1972, 1977 and 1979 and in cach of tlicse

dccsces govcrnmcnt clcarly spclt out lhc cconcmic activilics i I which foscign

SECONI) CC',NSC)LIDATIC)N I"TTASF, -- 11981 - 1 PSS

During tl~is phase, the rgvcsnulcnf. clclil~crakly stoppcd 1111 csta1)lisl:rncnt of

. new banks to cnahlc csisting I)anks to cvnstrlidatv. Attcrlips wcr 3 madc t3 furlher

dcvclop thc fina~lciitl ir)lrastructurc through thc introduction of banT s, and thc Second

Tier Securities MarMs.

The phase wilncssed a Iot of aggressivc~~css in banking iinovation md thc

Ccntral bnnh nT Nigeria pursocd rlic policy ol' rurill banking V ~ ~ O I ously.

Anothcr important progranwic whic11 aKcctccl thc structure of banking in Ihc

country during this pllasc undcr rcview was tlic rural banking scha ,1e. Its ovcrnll

impact was t l ~ i t t Ihc nurnbcr of liccliscd banks incrcascd from 14 at hc closc of thc

indepcndcncc crn in 1970 to 45 in 1985. 'Tllc rapid risc in t l x numkx of b;i:lks was ?

attributed to many factors, espccialiy high returns on ilivcstment and confcre;xnt of

automatic rorcign excllange clealcsship status 011 ncwly cstablishr :I balks; lowcr

minimu~n early capital 1-equil-cnlcnt, lowcr operating costs, and exe nption f1~11-1 the

i-ural banking schcnic.

I t will bc recallccl that bcc;iuse tIlc den-rand rrunagcnmt policies pursued

bctwccn 1981 and 1985 did not rcstrnclurc production and cnnsumpt on pattcrm in tlic

national econamy. It became tlcccssary ia introduce a Sti-uctural Acl r~stmcnt T';.ogran

S A P in 1 'I'hc psograwnc wx; inrroducctl among o t l w ruasol s, to intcr7sify thc

growth potcnti:tI of tI~c privalc scclor. 'The need for cnrtn ling govcrnmcnt

participation in thosc cconoinic activities which coulcl I)c crfcctivc y IrandlccI by thc

private scclor rcsultcd in the int~mluction of the privaliznlion ant! ( omrncrci:~liznlion

prngranmc othcrwisc dcscrilxrl ;IS llic rlcrc~:irl:~licm p1i:lsc wliicl~ I( ok oI'S in 1989. J

As a conscqucncc of this, thcrc was an upsurgc, similar to I ~ n t during thc frce

banking era, in the establishniie~lt of new banks in thc second half of thc 19t-;O's.

Thc period was charactcsizcd by thc establishrncnt of two pccializcd banks ,

thc Peoplcs L3;1:il; of Nigeria (PBN} and tlic Conmunily Rankirig ;ystcnl.

'I'l~csc banks wcrc cstnblisl~cd to addrcss t l~c rcquircm:nts of tlic undcr

privilcgcd Nigcsians who could 1101 mcct the stringent rcquireni~ nt of' thc orthodox

In crmsonnncc with tile liberal hank ticensin~g policy dur'rtg thc pcriixl u d c r

120 in 1992. During this cra, lhcBig three banks First Bank r f Nigcria Pic, URA

Plc ant! Union Ij:ink of Ni!;eria Plc characteristically ctctcrmi~letl hc banking ificlustry .

They cullcclivcly contn)llcd a11 avcsage i,f 39.8 pcrccnl of tllc i i dustry's asscrs, 60%

of deposits ant1 44.5% of loans and aclvnnces. A good numbl-I- of thc othcs banks

were catcgosixed as mcdium s i x or s~nnll sizc ~ v h o opcratcc at the fringr of the

industry, fccding on what thcy could imstcr fro111 llic big thr:c in thcir in!cr- bank

placements.

Somc Innks cspccially state govcr'nmcnt owncd I~aliks have liown signs of

distress sincc tllc lale 1980's bul govcrnmcnt's posture thal banks sl~oulti not 1)c

allowcd to l i t i t postporlctl thc don~ns dgy for si~ch banks. l'hc sapid upsusgc i n illc

numbcr of licc~lsed banks bctwcen 1987 and 1991 Ivightcnccl comp :tition for both

respect of credits backcd by fore iy coIInterals and tllc transfer' c F govcrn!ncnts

deposits away from the licenscd bnnks to thc Ccntral Rank of Nigeria in 1989 cnuscd

failure in tlic banking systcm. This necessitated a joint NDICICBN I C C O I ~ ~ I I ~ O C ~ ~ ~ ~ O I I

faciIily to t11c tune of N2.3 billion for 13 banks and siiicc then t h e 1 ns bcen a study

rise i l l tllc nutnl~cr of fin:incially dislrcss I~anks. 'l'hc majority undl ding causcs or

financial dislrcss in (lie banking industry during this pcriocl has bccn idcnlificc! as:

- Large overhaul of tion-pcrfon?iing loans and ;~dv;mccs.

- Political Intc~fcrcnce and Jnstabi[ity

- Macro-cconolnic instability

Poor M;ulagcmcnt

Tnsidcr Abuses

- I;saud and conflict of intcrcst

- Tnndcq~~nlc supervision of thc opcsaticw of banks- cspcci~lly thc inability of

thc supervisory agencies to contluct on-silc cxmination of individual bk~ilks n l

frcqucnt intervals duc lo serious manpowcr cons~s;~ints.

- Political stalcrnntc arising from thc June 12, 1993 prcsidcntiai :lections causcd

flccing banks customers to dcrrland lasgc amount of cash wit1 drawals.

- Central Bank of Nigeria's automatic del~it of some bank. in rcspcct of

contraclurt! obligations uirdcs NEXIM NERIWND and ST4E as wcIl as

statutory dcbits in respect of cash reserve rcquiscnlent.

- ShostTalIs i n sectorial allocahn of crcdits and NDTC ins^ rancc prcnliunl

- IJncollapse of the intcrhnnk ~narkct as a rcsult of n~assivc dchults i~rnong

banks in honourir~g financial obligations.

Thcsc con~bination of factors lcatl to thc cullapsc of' a good r m b c r ui' banks

mainly lhc wholly irldigenous banks.

Aftcr thc t~.awna of disrrcss that ravi@ llic industry hcLwecn 1992 and IC/9G,

It became glarillg that for banks to survive and convicnicntly remain stable or Inilvc

nho;ici, tl~er'c was grcnt nccd for a rcorgmization, rcs~n~cturing and -coricntatiorl or

cornpictc ovcrlinul of thcir appsoach to doin_s banking business.

A number of cornmerci:~l banks startcti contt-acting thcir rc ;tiucturing and

reorganization to consultrrnls like the Arthur Andcrson Consulting C roup cg. LiDA

Plc. Thc fcdcral govcr~imcnt through such repdalory ngcncics as tl.2 Central Xank

of Nigcria and the NDIC introdticcd mcasurcs aimed at cr couraging the

recapitalization and rcstructuririg of banks for t l~c c2idlcngcs allcad

' 4.2 OtlrNEIWllP STRUCTURE OF TI-TE I1ANIWiG INDIJSr'RY AND TTS

EFFECT ON TIIE - ISCONOMY -- .-

A review of Nigerian banking history will bc uncornplctccl wit ~ o u t a mcn:ion

of the struclurc nf o~vnersllip of inst itu tioris that constitnlc the industr , . The owllcrship sl~-ucturc in lhc industry beginning I'mm 1592 1 3 datu fits into

.I

the following:

- 1 3 ~ 1 01' tilo~lopoly ol' Sorcigri h u k s

- Era of inrl igcnous banks

- Era or regional government banking

- Era of fcclcsnl government dominance

Era of p~ i v a k ownership

Thc Era of monopoly ol' forcign bmks wit11 tfomin;\ntfy l'orcign c p i t y capital

covers from 1594 to 1952. The pcriocl was d l ~ ~ i ~ t ~ r i ~ c d by commcrce n ; thc lcading

growth sector wilh t l w i~npor-tahm v f r n n r n ~ L t ~ ~ u r c d c~ \~w. t r~?c : <I\\\\,!< ?.$i A,;: .:t:.,,ta,t,

of agricullur;il n:ld other prirnary producl. This banks focusccl thcir ~pcrat iws to

meet thc necds of srich aetivitics which wcrc n~ostly hnncllcd by erpritriat : cornmcscial

enterprises. Local business entelxc~:uzuss and aciivitics as wc have cai licr ob,;crvccI

were discri~ninatcd against as far as banking facilities were concerncd.

In ordcs to redress this situitti~)n, indigenous entcrprcurs bcgan t< 1 make rorays

into thc banking scctor by i n c r ~ q r i ~ i g nnd cstnblishi~~g fnrmal I>ar~ki ~ g , and in [he

proccss rlilutirlg : m ~ c l i o w lllc i m l w ~ y's equity 1x1s~. Many of thcs banks hilcd

leaving just rtbon: four wlto had I-cgional, stntc owncrsliip support.

between foseigncrs and regional governments. Ranks wcre citlicr rn lolly, foreign

owned or ow~lcrl by Ihc Rcgionnl gnvcsnmcnts.

The crn of fcdcral govcsn~rxnt dominance coincidtd will1 rhc: i?trotl;uction of

the ir~digcnizaticm degree 197211 977 when banking was klassificd uncle schcdulc 2 of

the Dccrcc undcr which at least GO% of the cqr~ily ivcrc to hc Nigerian ~wncrl. Tlicrc

wcre 23 banks opcraling in Nigcri;~ as at 1977 ~vhcn tllc Dccrcc tva: promulgntcd. Z

Of these, 11 west wlivlly indigenous owned by state govcsrimcnts a ~d coopcrativc

societies. Thc remaining 12 uresc operatcd as subsidiaries of forcis i banks. Thc

fcdcral govertlmcr;; following tllc indigcnization programme acquirccl c quitics in their

banks to cnsurc 60 O/o indigenous ownership.

Thc cra o f privalc uwncrship r-cfcrrcd lo individual in i l i a t iv s ~ o w ~ \ I - ~ s thc

cstnblishmcnt of I~anks in t l~c country and this nccountcd for Ihc ~nai 1 Insis for Ihc

recent increasc i n the number of In:lks cstablishcd i n thc country. Un Icr thc prescnt

inititivcs 8 1 hanks Ilnvc hccn cs~ablislicrl since 1986.

Thc Nigeria11 banking sector which (iv over a good Icng~h of its hislnry has

been clominalcd I)y forcign banks has grown and dcvclopctl a grcat dea in the ! x t 100

5 7

ycars but i ts con~ril~ution Ins bccn Icss pclsilivc t l m it sh(~uld llavc bt cn bcc;!use of

the unilnngirlnblc i~~strlbility of ils 11lili11 y~rodiict moncy. Something d -aslic nceds to

bc donc to cnsurc that the financial base alr-cady crcatcd, play its rc Ic as a spring

board for non-inflationary growlli. 'I'l~is is a critical irigrcdient fo providing an

enabling environment for invcstmcnt, grcnter productivity, pricc slal-ility, exchange

rate stability.

Cll hPTJSR I W E

SURZR4ARY OF' PINDINC --I___T34-2- '3 R~COnJMENDArl'JONS AND - COP CLUSIC,NS ,

examine thc rcal impact of foreign discct investment ofl thc growth an I dcve!opment

of the Nigerim banking system or scclor and to critically analyst th : njan:~~cn~cnt

policies and cipcrations of the foreign bank against tllc hackg~~ouncl of our cconomic

policies andlor moncta1y policies in tlic biuilii~lg scctos, tllc authltr has lxicfly

sum~nariscd thr: findings both as a rcsult o f annlysis ol' scco~~!ary data ~ n d intcrvicws

conducted at r ! : ~ sesearch dcpartrncnt of the Ccntml Rank of Nigcria,

5.1 SURrMAItJ' Of FINIITNGS

An cxmination of thc owncrsllip stsucturc, lcga! a~ld rcgl~lilto y frameworks

classification and general operations of the banking syslcrn in Nigcria 11, s bccn carried

out. tlie sourccs of research data has bccn t l~c sccondnry data wliicl co~nprises of

records obtaincd from the ai-chievcs of thc Icey banks in thc banlcing i idustry.

T!IC data obtaincd througl~ thcse sources crlablecl rhc aulkor to ; rrivc at useful

conclusions in so!utiun idand in rcalizntion nf tlrc irlitial ~sroblclns of ihc study and

5 9

objectives rcxpectivcly. In thc process of analysing llic sclcvant ~-,:scarch data a

numbcr of' uscf'ul findings werc m d c and thcsc constituk Ihc I ~llowin;; sub-

paragraplls .

1 1 - ITorcig - - - I h n ~ i t ~ a t - ion ol' kwl&ig AcI i~~i t ics in Nigcri:~ k t w c c l i 1802

And 1 9 3

In 1892 commercial banking activities began in Nipr ia w h a thc 14 L F-' I I C ~

Ranking Corporation opcncd officc in L~gos . This was scplaccd by :he I3;r11k for

B r i M Wcst Africa (I3DIYA) in 1894 which ~nonopolizcd thc banking scenc up t i l l

1917 w l m thc Barclays Uank (DCO) opened a branch off'icc in Nigc~ ia. I3ank of

Nigeria-fonnerIy known as Anglo-African bank which was fos~ncd in 1105 sold out

to the Bank for Brilish Wcst Africa (BJ3Wh) wllilc the British and Frcl~cl Ban!< (now

UBA) became thc third Expatriate bank to start banking busincss in Nigcria in 1918.

Thcsc cxpatriatc banks which havc today mctmorphoscd into thc First Bank

of Nigeria Plc, Union Bank of Nigcria Pic i ? ~ ~ d Unikcl bank 01' Africa Plc dmr.inatcd

the banking sccilc for thc bcttcr part oC thc Tree banking era ic 1892 - 1552

2) 3m1c Scrviccs Tailored to the Ncccls of thc I?,smtriatc~

Host of thc banks that cxistcd at this period were forcigll brancl~ ( fficcs who ?

had thcir head officcs Iocatcd outside the country and thus thcir operational affiliation

was tied rn lhc inkrest of tlleir hcacl offices which wcr-e in nos! cascs not i n

consonarlco with that or nut. dcvclolmcn~ nccds. TIlcsc cxpatriatc ha111. s concc!~tratcs

attention on scrvices to facilitnlc forcipn lraclc and catcr for rclat ons with thc

expatriate trading companies and thc colonial sovcrnmcnt with liltle r r no a!tclition

to indigcnous busincsscs.

In reaction to Ihc attitudc O F thc cxpalriatc banks towards final cing of only

expatriatc interests and neglecl of indigcnous cntreprcneurs; some local 1 ntrcpreneuss

made effort to cstabiish locally owned and managed banks to dilute the c ' m i n ~ ? t i o n of

banking scc~lc by foreign investors and satisfy the dc~nnnds of local bus~ness~ncn. A e

good numbcr of thcse hanks were establishcc1 hut thcy failed almost imn ecliatcly due

ill-equippcd officcs, hostilc awl u n h i r competition from alicn banks a ~d lack o f a

regulatory aulI~ority.

tIlc rorcigi~ banks have ninde grcatct. contribution to tot31 Ionns and , l d v n r u x to thc

, cntisc ecoIlomy, And since tl~cir iriccption the forcign ha111is havc wc; (hcrcd through

all tlic turlmlcncc in the indi~stsy bcc~usc of tlicir cspcricncc, c;i i l n l bnsc ant1 '

internation:d management style.

the bmkinl: scctvr can be made from our analysis so far.

allows gr-cater forcign ow:tcrship dcntcrpriscs in thc country is vclconlcd and

comn~cnded Ilowevel-, Lhis slucly's rwmmcndation is that the ownership of t

thcsc banks, marlagcmcnt xid control should bc divorced in su :I1 a way that

cllsurc that thc banks oper-dtions are tailored to thc needs of our inc!igcnc?us

6 3

I)usincssnlcn, this will also help to inr,tlcratc lhc nnturc of colnyctilion that t11c

forcign banks will introdiicc to [hc Imking systcm in the intc cst of national

economic growth and development.

i i ) Reduction of Fedcral Govcrnmcnt Ownership

Thc study recomnlcnds that [he Fcdc~A Govcrnmcnt sIio 11d con~plctcly

divcst its holdings in any ol'thcsc banks in orclcr to give them I IX opportunities

of dcvcloping compctilivc tcndencics and policies thal will cnnl- 'c susvivcd as

othcr organizations in the private sector of thc cconorny.

Ihcouraging Inc~~cascd Forcign

lnvcstmc~lt through Exchange rate stability, The study als ) I-ccolnmcnd

the cnomous benefits of foreign irwcstnmlts especially in tl~c b; *kin: sector,

the Fcdcral Government should cnsurc that thcrc is slabilily in hc Ilxchngc

IZatc oT tlic Nigeria so that Sorcign investorb can mnkc their iorcik n inwslment

plans morc prcciscly with rcgarcls to Ihc val~rc or thu naira.

State Goverrirtlcnt Ownccsllip

It may bc difficult [or state goverrlnlents to divcst thcmscIv s completed

from the oivnersl~ip of their banks but thc prcscnt ~cndcncy to di utc their

iii)

sllarclioldings h y inviting priv:ttc pal-ticipatioll i n a step in hc right dirccticm

m d this study rccomn~cncls that thc Fcdcral Govcsninent : IiouId promulgate

Icgislation that will ~t iakc it compulsory for any state owns tl bank to hnvc a

ccrlain pcrccntagc nf priv;~\c owucrsl~ip.

5.3 CONCLUSION

'1'Iiis study has attcnlptcd a historicill review of tllc Nigcri; n banking sector

with thc sole objcctivc of examining the csact impr~cts of foreign lil-ect in~mtrncnl

through foreign banlcs on the gt-owth and dcvclnpnlent nf thc Nigeria I bankin;:#, sector.

The study shows that before the indigcnkation era, thc banking scer e was dominated

hy cspatrintc banks whosc ol~crational focus was nn thc promot 3n of cspatriatc

intei-csts and clcvelo~~mcnt of colonial governmwt to Ihc detrin~cnl ( f thc indigcnaus

busincssmcn and the host/local cconorny.

t

Government in 1977, the banks w r c con~pelled to indigenise their o\vncrship

structusc, their m;lnagcrncnt and control as \vcII as operational allegia ncc. A11d sincc

G5

then these hanks have bcen making positive contributions to the ba ]king syskm in thc

country . 'I'hcy I w c remained in the forci'ront OF good and sound bank man3gcmcnt

style and have on a member of occasions served as training grounds for other

rcnowncrl young banks opcning up i r r thc country.

Adckanyc, 1:. (1 986): -- Tllc Elcmcnis of B a n I c i t ~ ~ in Ni~cria: L q o s , F. & A Publisllcrs

Agcnc, C.G. (1095): -- Tllc PI-incil-1cs of Rl_r!Ln 73mk 3; Abuja, Geve

Publications Ltd. a

Dickie, P.B. ct a1 (1958): Forciw invcstnlents and Govr rnmcnt pn!icy in !IIC Third Mroj:I_rl:-'~rein~ C ynmon Inf z r q & in in do^^ and Beyond London: The -

Macmilliail Press Ltd.

b IIallkins, Y. (1976): J3usiness _-AL Cit?tistics: _ -_ Jmdon; Pitman I'nblisliing Co. I,td

Ndckwu, 1I.C. (1994):

Nwankwo, G.0. (1980):

St:~tistics ST Nlttr-ic Edition: -- ';clinum's ( k ~ ~ l i n c

Scrics, Ncw Yorli: McGraw I- i l l Dooks Co.

Tldit ion

WosId Rank; World I)c\rclopnent I<cporl 1985 I3