Nigeria - Regulator-driven mock compliance

Author: Florence Dafe


While Nigeria’s banking regulators have gradually adopted Basel I, II and III, implementation and enforcement have been slow. The impetus for Basel adoption has come primarily from regulators, who are internationally oriented. They consider Basel II and III the most appropriate set of regulatory standards to stabilise and manage risk in Nigeria’s large, internationalised banking sector. While Basel adoption was not a salient issue among Nigeria’s domestically oriented politicians, Nigeria’s internationally oriented banks welcomed the implementation of Basel II as an important means to enhance their competitiveness and signal soundness to markets.

Implementation and enforcement have been slow, as regulators have conflicting preferences; while promoting Basel II adoption, they are reluctant to move faster on implementation and enforcement because it might trigger regulatory interventions in several fragile domestic banks. These banks play an important role in providing employment and access to finance for the private sector, and their resolution would meet with resistance from politicians and lead to a loss of confidence in Nigeria’s banking sector.

Political economy background

Nigeria is classified by the World Bank as a lower-middle income country, but in 2012 Nigeria overtook South Africa as Africa’s largest economy. Oil has been at the centre of the Nigerian economy since the 1970s, and the state has access to significant of oil revenues. The IMF and the World Bank have had little influence on regulatory preferences because oil revenues have limited the susceptibility of the Nigerian state to their advice. Nigeria’s banking sector has grown fast in recent years and expanded abroad. Today, Nigerian banks control a significant market share in many countries in the region.

GDP per capita (current USD) 1969
Bank assets (current USD) 81.7bn
Bank assets (% of GDP) 20.2
Stock market capitalisation (% of GDP) 8.8
Credit allocation to private sector (% of GDP) 15.7
Credit allocation to government (% of GDP) 5.8
Polity IV score (2017) 7

Note: All data is from 2016 unless otherwise indicated

Source: FSI Database, IMF (2018); GDI Database, World Bank (2017a); Polity IV (2014)

Basel implementation to date

Basel I was adopted in the 1990s, and the extent to which it was enforced in the 1990s and 2000s varied over time. Conflicted preferences and weak enforcement played an important role in the run-up to Nigeria’s banking crisis that began in 2009. Between 2004 and 2009, regulators focused on overseeing a consolidation process in Nigeria’s banking sector rather than the implementation of Basel II. When Nigeria’s consolidated banking sector experienced a systemic crisis in 2009/2010, regulators first resolved the crisis and then intensified efforts to implement Basel II. Basel II implementation was formally announced in a circular in 2013, and the rules came into effect in 2014. The 2013 circular also announced the future implementation of Basel III, but a draft regulation has not yet been issued. Even though Nigerian regulators broadly supported Basel II adoption, they were also aware of the challenges of transplanting the standard to Nigeria’s environment.

Mock compliance has become an evident feature of the regulatory process, and banks vary widely in their capacity and willingness to provide adequate data to supervisors. Nigeria was judged to be compliant or largely compliant with 14 out of 25 Basel Core Principles in the 2002 FSAP, and by the 2012 FSAP this had increased to 18 out of 25 Core Principles.

Politics of Basel implementation

The adoption and implementation of Basel II has primarily been driven by internationally oriented regulators who believed this would enhance financial stability and the competitiveness of Nigerian banks abroad. Nigeria’s internationally oriented banks welcomed the implementation of Basel II, which began in 2013. These international banks consider Basel II an important means to enhance their competitiveness and signal soundness to markets, regulators and their peers in the international and domestic arenas.

Nigerian regulators have conflicting preferences: they promote Basel II adoption, but if they move too quickly on implementation, interventions in several fragile banks would become necessary, potentially limiting the ability of these banks to play their envisaged role in supporting economic development. The stability of the banking sector and the commitment of the central bank to implement international best practices combined to support the implementation of Basel II from 2013 onwards. But when oil prices declined in 2014 and Nigeria experienced a recession in 2016, domestic policy began to exert greater influence on regulators, slowing down the implementation and enforcement of the Basel standards.