The History of Nigerian Banking System - Blessing Uweja

The existence of banks in Nigeria dates back as far as 1862 when the first Nigerian bank came into being. There was no banking legislation until 1952; at that time, Nigeria had three foreign banks and two indigenous banks with a collective total of forty branches. Despite the set standards by the 1952 ordinance, the growth of demand deposits was slowed down by the Nigerian propensity to prefer cash and distrust checks for debt settlements. 1912 experienced the establishment of the West African currency board which was to help in financing the export trade of foreign firms in West Africa and to issue a West African currency which could be converted to British pound sterling. The colonial policies barred the local investment of reserves, discouraged deposit expansion, precluded discretion for monetary management and did nothing to educate Africans in developing indigenous financial institutions.  

Types of Banks

A bank is a profit making business providing financial services which includes receiving deposits of money, lending money and processing transactions. There are different types of banks and so do their functions differ.

Commercial Banks

Commercial banks are authorized institutions providing retail banking services to the public. They accept deposits from customers and in turn make loans based on those deposits. They are noted for providing services which includes savings, current and term/fixed deposit accounts, lending, payment and transfer of money which is now facilitated by the recently introduced online banking. They also facilitate the transformation of rural areas by extending banking services. They offer professional advice to their clients on viable businesses and international trade. They are the channel for the implementation of the monetary policies from the central bank and act as authorized foreign exchange dealers in providing such facilities. They are collectors on behalf of other government and non government agencies. They buy and sell securities on behalf of their customers and boost the securities in the capital market and also sponsor companies seeking quotation on the Nigerian Stock Exchange.

Universal Banks

Before the introduction of the universal banking concept by the federal government, operators of merchant banks had complained that their poor performances over the years were due to a banking system that they claimed favoured commercial banks. The clamour for one­-stop-­supermarket bank became noticed in the mid 1990's when the financial system was swept by the distress in the banking sector. This virtually wrecked havoc on the economy. Many people have observed that the distinction between commercial and merchant banking is outdated and no longer fashionable in other developed countries. The harmonized banking service is seen as cost-effective for providing a level playing field, where a customer can open an account and engage in all banking and insurance transactions from one bank to the other.  

Merchant Banks

They started operations in 1961 with the establishment of Philip Hill (Nigeria) Limited which later merged with Nigerian Acceptances Limited in 1969. Other merchant banks later came along. As a result of the non recognition of universal banking then, merchant banks in Nigeria operate wholesale banking, which involves loan syndication, equity and debt issues, ventures capital and equipment leasing. They play important roles in pooling a consortium of banks, where the borrowing required exceeds availability of funds from commercial or any other bank. They also introduce their big clients to the Nigerian Stock Exchange and handle international transactions through a global network of affiliated banks. The banks are usually sited at urban areas and provide services to large organisations and extremely wealthy individuals. Development Banks Development banks were established by the government, to promote national economic development. They tend to address issues of low income, insufficient savings and inadequate investment. The government and multilateral agencies sponsor the banks. The first development finance institution is the Nigerian Local Development Board, which was established in 1946 and charged with the responsibility of giving loans and grants to native authorities, cooperative societies and other public bodies for prescribed development projects (Agene 1990). Notable development banks include, Nigerian Industrial Development Bank, Federal Mortgage Bank of Nigeria, Nigerian Bank for Commerce and Industry, Nigerian Agricultural and Cooperative Bank, Peoples Bank of Nigeria and Nigerian Educational Bank. Others include, National Economic Recovery Fund (NERFUND), Community Banks, etc. In a nutshell, for the long term survival of a bank, they would have to make money in their operation so as to be able to meet up with their expenses. They accept deposits from customers and pay interest which can only be realized from the exchange of money between two parties. One of the ways in which they make money is by charging interest on loans. The money deposited by customers is lent out to creditors. They charge higher interest on money they lend out and pay lower on the deposits. The difference then serves as own realization from the transaction.   Bank Charges Incurred When Using The Nigerian Banking System Different bank charges are: 1.) COT. 2.) Monthly Account Charges. 3.) ATM Charges (Monthly and per withdrawal) 4.) Charges for Specific Transactions : Phone and online transactions. 5.) Interest in Respect of Overdraft.

COT –­ Commission On Turnover

C.O.T is a commonly used abbreviation for Commission on Turnover. It is a charge levied on customer withdrawals by their banks. C.O.T charges are typically calculated at “5 per mille” (5 for every 1000). Thus for every N1000 withdrawn your C.O.T will be N5, which is an equivalent of 0.5% (5/1000). It is always calculated at the end of every month applying the percentage on your aggregate withdrawals from the 1st day of the month to the last day of the month. The C.O.T is a guaranteed income and as such is a very important source of bank revenue since customers mostly make withdrawals on their deposit. This gives the banks a two way source of revenue as they charge interest on customer deposits lent to other people and consequently charge on amount withdrawn by the customers themselves. The Central Bank of Nigeria (CBN) Revised Guide to Bank Charges, dated March 27, 2013 prescribes a maximum COT charge of 1 Naira per Mille (NGN1 per NGN1,000) for 2015 and phases out COT charges on current accounts by 2016 . However there have been incidences of Banks charging higher than the prescribed limit, the CBN has directed a refund of all such charges.