Working Paper 358 - The Colonial Origins of Banking Crisis in Africa

Could initial – colonial and early post-colonial – conditions explain episodes of systemic crisis in banking systems today? We exploit differences in ethnic concentration of initial ownership and management structure of Nigerian banks established during the colonial era to examine banking crisis and vulnerability of the financial system in contemporary Nigeria. Although banking institutions emerged from or were a reaction to British colonial banking structure, they pursued different practices with respect to ownership and management structure. To measure these initial conditions, we use historical data from the Nigerian banking system to construct an index of diversity in the initial ownership and management structure of each bank, where more diversity corresponds to a lower concentration of insiders, including family members, tribal affiliates, and political partners. We collected data from the “Blue Books”, British colonial banking records from 1887 to 1940, data on indigenous banks established during the colonial period from 1929 to 1960, and data on banks from 1960 to 2016. These data allow us to track the first Nigerian families, ethnic groups, and their associates who were part of the formation of the formal banking institutions in the country. We also collect individual and aggregate bank data from 2001 to 2016 collected from bank balance sheets, financial statements, annual reports, statistical bulletins, banking supervision reports, and other reports of the Central Bank of Nigeria and the Nigeria Deposit Insurance Corporation. Our estimates suggest that lower levels of diversity are associated with higher levels of risk for a bank. That is, lack of initial diversity in ownership and management of Nigerian banks may have played a role in the performance and fragility of the Nigerian banking system that lent itself to systemic crisis. Our findings are consistent with the broader recent literature that shows higher profit and stronger performance of more diverse firms relative to less diverse firms due to, for example, diversity-driven innovation and product development.