Still on Universal Banking System

The decision of the apex bank to shut down the operation of the subsidiaries of some of the nation’s deposit money banks has continued to cultivate fear not only in the mind of the banks’ stockholders, but also the employees of the various subsidiaries. The action is seen as a measure to attain specialized and sound banking culture among the banks in Nigeria.


The ongoing reforms is said that it would redraw the banking structure to ensure that commercial banks face their traditional business while depositors’ funds are not endangered as it was experienced in the past. The new arrangement would protect commercial bank activities from pressures from non-commercial banking operations, to allow them concentrate in the provision of their traditional banking activities.

The Central Bank of Nigeria (CBN) had previously raised alarm that universal banking was the main factor responsible for the 2009 banking crisis in Nigeria. The CBN governor, Sanusi Lamido Sanusi, maintained that the emergence of universal banking has helped corrupt managing directors of banks to channel funds from one subsidiary to another, thus creating the impression that there was liquidity whereas there was a big hole.

However, finance minister, Segun Aganga said it was not the adoption of universal banking that caused the regulatory deficit in the financial system. According to him “the system has helped to deepen Nigeria’s financial system and has created more job opportunities in the economy. By contributing to the rapid deepening of the financial system, universal banking has undoubtedly, assisted the monetary authorities to further enhance monetary policy transmission mechanism in the macro economy”.

The minister further recommended that “The overall global experience and the reality of Nigeria’s economy strongly recommend the requirement for a reform of the currently fragmented and overlapping regulatory regime with two overarching regulators whose mandate will be mutually exclusive, but shall encompass the entire financial system.”

The operation of banking subsidiaries in Nigeria financial sector emanated from the concept of Universal Banking System (UBS). This has resulted from the structural change in the global banking systems that embrace some options which include mergers, amalgamations, acquisitions among other recapitalization policies, among the banks and financial institutions leading to the growth in size and competitive strengths of the merged entities.

 In 1999, Central Bank of Nigeria under Joseph Sanusi, introduced the universal banking scheme. The system allowed banks to operate in all sectors without differentiation as merchants, commercial or mortgage banks. Universal Banking System to financial analysts is a banking system where banks are allowed to provide a variety of services to their customers. Through the system, commercial banks are encouraged to operate and extend their primary mandated financial functions and incorporate along other operations such as Mutual Funds, Merchant Banking, Factoring, Insurance, Credit Cards, Retail Loans, Housing Finance, Trusteeship and Allied Services, Custodial Services, Stockbroking.

Sanders and Walter (1994) describe universal banking as “the conduct of a range of financial services comprising deposit taking and lending, trading of financial instruments and foreign exchanges (and other derivatives) underwriting of new debt and equity issues, brokerage, investment management and insurance.”

The development created employment opportunities for thousands of Nigerians. Besides, under a roof, corporate can shop for loans and other services, while individual can deposit (as on usual basis) and borrow money. So far, the introduction of the Universal Banking System reported posed to nation’s discount houses negative effects, as the current liquidity injected in their operations has yield no progressive movement but financial tardiness. This is as a result of their primary functions being snatched away from them since the incorporation of such under the commercial banks by the introduced Universal Banking System.

The subsidiaries are now used as drain pipes by the management of the parent companies to siphon resources of the holding companies. Some of the organization operate merely as cost centres and tend to contribute nothing to the group’s bottom line. This is as a result of the year 2005 introduced recapitalization policies making the nation’s banks to realize more capital base more than they could coup with.

Commercial banks saw the introduction of Universal Banking System as a channel which could pave way for the establishment of subsidiaries to diversify their abundant resources. The process influenced granting of loans in absence of collaterals, resources mismanagement, non-performing loans, and unethical banking practices.

Besides, the era of Universal Banking System which encourages the commercial banks to incorporate the primary operations of discount houses is viewed by the managements of the various discount houses as a period of financial depression and inequality which could hamper the operation of their institutions. They stressed that although, the discount houses were established for liquidity management in the money market, the Central Bank has granted them no permission to operate in the capital market.

It would be logical in view of the above to consider the implication of central bank’s decision and fear of unemployment in the economy and the negative effects it could pose to the existing employees of the subsidiaries. The apex bank should strike a balance by ensuring effective and efficient financial operations in Nigeria if its ongoing reforms are targeting at create more job and stabilizing the economy.

Abubakar Jimoh
University of Abuja.
[email protected]


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