The Indigenization Boom

In 1960, Nigeria had 6 banks. By 1980, it had 26. By 1985, it had 40. By 1991, it had 125. The growth was driven by four factors: (1) The 1972 and 1977 Indigenization Decrees, which forced foreign banks to sell controlling stakes and opened the door to new entrants; (2) The oil boom, which created a flood of petrodollars that needed banking channels; (3) State governments, which established banks vehicles (by 1992, 25 of 66 commercial banks had state government majority stakes); and (4) The 1986 SAP deregulation, which liberalized interest rates and licensing, creating a 'banking bubble' where 43 new banks were licensed between 1986 and 1989 alone. By 1990, there were 151 different banking products in Nigeria — but most were simply repackaged foreign exchange arbitrage schemes.

The Nigerian Enterprises Promotion Decree of 1977 (Indigenization Decree) required that 60% of equity in all banks be held by Nigerians. Foreign banks — BBWA (First Bank), Barclays (Union Bank), BIAO (Afribank), Standard Bank (UBA), and others — were forced to sell majority stakes to Nigerian investors and the federal government. By 1980, the federal government held equity in 17 of 20 commercial banks. State governments held stakes in 10. The 'big three' (First Bank, Union Bank, UBA) became majority Nigerian-owned. But the transfer of ownership did not include transfer of management expertise. Many new Nigerian directors lacked banking experience. Corporate governance collapsed. And the CBN, under pressure from political patrons, failed to enforce prudential standards.

Before 1986, Nigerian banking was characterized as 'arm chair banking' — bankers sat in their offices and waited for customers to come to them. There was no marketing, no product innovation, no risk management. The 1986 SAP changed this by deregulating interest rates and introducing competition. But the new competition was not healthy. Banks engaged in 'interest rate wars' to attract deposits, offering rates they could not sustain. They financed speculative real estate and import licenses rather than manufacturing or agriculture. By 1989, the CBN had to impose a maximum spread of 7.5 percentage points between savings and prime lending rates to stop the predatory competition. The 'arm chair' era ended, but it was replaced by an 'aggressive banking' era that was equally destructive.