Federal Republic of Nigeria: Assessment of Community Banks

This study on community banks in Nigeria aims to:

• Assess the past and present performance of community banks, in particular, rural-based banks;
• Propose a first framework for their support.

The paper discusses:

• Deficiencies in the original legal framework that led to the poor performance of these banks;
• The decline in the number of banks;
• Closure of the banks due to malpractices;
• The resulting loss of public confidence in the community banks;
• The regulatory reforms introduced by the Central bank of Nigeria (CBN) in 2000 that led to better banking practices and performances.

The paper finds that:

• The poor performance of the community banks was due to:
  • Their poor design;
  • Unprofessional supervision by the National Board for Community Banks (NBCB);
  • Insufficient financial endowment of the NBCB;
  • Lack of attention by policy makers and low donor support.
• Community banks have enormous potential to:
  • Enhance access to financial services for the rural population;
  • Increase growth in rural areas;
  • Decrease poverty.
• Community banks have the following advantages:
  • Proximity to their clients;
  • Intimate knowledge of local habits, opportunities and constraints;
  • Concentration on simple banking functions.

The paper concludes by listing concrete measures to improve the performance of community banks in the following three areas:

• Addressing the governance problem in community banks;
• Improving lending activities;
• Improving regulation and supervision.