Cook, Lisa D. (2011). NBER Working Paper 16890, March.

The Nigerian banking reforms of 2005 tried to improve safety, soundness, and accessibility.  This paper finds that the reforms improved banks' financial soundness but did not improve bank profitability or increase access for the poor.

Due to the legacy of a sustained nationalization program in the 1970s and 1980s, by the early 2000s Nigeria's banking sector was still heavily state controlled and suffered from several textbook problems such as credit controls, interest rate controls, restricted entry, low coverage, government monopoly, and scant competition.  Nigeria's 1986 Structural Adjustment Program aimed at liberalization yet met with mixed success.  The number of banks greatly increased but they focused on arbitrage in foreign exchange and money market interest rate spreads rather than domestic lending.  Many of these banks had accumulated nonperforming loans by the early 1990s, culminating in a bank run in 1993.  Nigeria adopted universal banking in 2001 in order to promote domestic credit and development. 

Another significant reform was launched in 2004 mandating a ten-fold increase in capital requirements, withdrawal of public funds from banks, improved regulation and reporting, and better corporate governance.  These reforms led to a great deal of bank consolidation by the end of 2005, with all but four banks undergoing mergers and acquisitions. 

In this study, Cook draws on several data sources in order to analyze the impact of the banking reform, including bank-level financial statements and national level data from the Central Bank of Nigeria, International Monetary Fund, Economist Intelligence Unit, and bank surveys.  She finds that the changes in banking organization in 2005 represent a statistically significant break with past practice.

After the reforms, Nigerian banks showed signs of increased safety, soundness, efficiency, and asset quality.  However, they did not show signs of increased profitability or better access for the poor.  Small savers and borrowers have not entered the formal banking sector in significant numbers as a result of the reforms.  74% of Nigerian residents still do not have access to formal financial services, including 70% of business owners and traders.

It is also unclear whether changes in the microfinance sector benefitted the poor.  Nigerian microfinance banks' capital-to-asset ratio rose from 24% on 2003 to 30% in 2008.  They have increased their lending relative to deposits over this period, reaching 69% in 2008.  Though higher than commercial bank saturation, microfinance banks' service provision to rural residents remains low.  Only 1.1% of Nigerian adults have received a long from a microfinance bank, compared to 0.7% from commercial banks.  93% of individuals and 99% of business owners surveyed prefer cash payments to credit.  Cook concludes that despite the reforms, “most in Nigeria remain unconnected to formal means of saving and borrowing” (13).

Other studies have found Nigeria's recent round of reforms to be moderately effective, but caution that their continued effectiveness will depend on economic conditions and on public confidence in the government's commitment to reform.  The positive outcomes observed in this study are also checked by two factors: recorded distress rates were artificially low in the study period and macroeconomic growth enhanced the impact of the reforms.  Going into the future, Cook recommends that corporate governance should receive more policy attention in Nigeria.