CHAPTER ONE
- INTRODUCTION
- BACKGROUND OF THE STUDY
The banking sector in any economy serves as a catalyst for growth and development. Banks are able to perform this role through their crucial functions of financial intermediation, provision of an efficient payments system and facilitating the implementations of monetary policies. It is not surprising therefore, that governments of the world over attempt is evolve an efficient banking system, not only for the promotion of efficient intermediation, but also for the protection of deposit, encouragement of efficient, competition, maintenance of public confidence in the system stability of the system and protection against systematic risk and collapse.
Regulation and supervision of banks remain and integral parts of the mechanism for ensuring safe and sound banking practice. At the apex of the regulatory and supervision frame work of the banking industry is the central bank of Nigeria (CBN). The Nigeria Deposit Insurance Corporation (NDIC), however, exercise shared responsibility with the central bank of Nigeria for the Supervision of insured banks. Active co-operation exist between these two agencies on both the focus and modality for regulating and supervising insured banks. This is exemplified in the coordinated formulation of supervisory strategies and surveillance on the activities of the insured banks, elimination of supervisory overlap, establishment of a credible data management and information sharing system.
In the main, bank supervision entails on-site examination of the institution and off-site analysis of periodically rendered prudential returns, a process called off-sit surveillance. The two activities are mutually reinforcing and are designed to timely identify and diagnose emerging problems in individual banks with a view to prescribing the most efficient resolution options.
In line with prevailing international standard in Nigeria. Similarly, they have developed twenty five (25) core principles for effective banking supervision as enuriciated by the Basle committee on banking supervision as the pivot of the frame work for bank supervision.
Presently, the major relevant statutes include central bank of Nigeria Decree No. 24 of 1991, the banks and other financial Decree No. 25 of 1991, the company and allied matters Decree No. 1988 and lately, the failed bank (recovery of debts and financial malpractices). Decree No. 18 of 1994. These enabling laws and other relevant legislation have largely provided for sufficient and comprehensive supervisory power and operational autonomy in the bank supervision confidence in banks.
Furthermore, as part of efforts to ensure the stability of the banking industry and in response to the lingering problem of distress in the sub-sector, the regulatory and supervision authorities have been applying various failure measures since the late 1990s. hence depending on the severity and peculiarity of the discreet, NDIC in collaboration with the CBN, has over the years, successfully adopted such measures as provision of liquidity support through accommodation bill, imposition of prompt corrective actions, assumption control and management, restricting and sale of some distressed banks as well as liquidation of the terminally distressed banks as a last but unavoidable option.
In specific terms, the following measures have so far been adopted.
- Accommodation facilities were granted to ten (10) banks with serious liquidity crises to the tune of #2.3 billion in 1989 following the withdrawal of public sector funds from commercial and merchant banks and the transfer to CBN during that year.
- Holding actions were imposed on 46 banks to help stabilize their financial conditions in the mid 90’s.
- Twenty-four (24) banks were temporarily taken over by their assets between the years 1989-1994.
- Seven (7) distressed banks were acquired, restructured and sold to new investors in the late 1990’s.
- From 1994 to 1999, thirty-six (36) terminally distressed banks were disclosed with minimal disruption to the banking system.
- In 2005, the number of operationally licensed banks in Nigeria numbering 89(Eighty-nine) was streamlined through a process of mergers and acquisition into 25 (twenty five) viable banking institutions with a capital base of not less than #25 billion each.
The streamlining of these banks was because of their inability to respond to all the various regulatory and supervisory initiative employed to resolve the banks problems and the continued degeneration in their financial conditions.
1.2 STATEMENT OF THE RESEARCH PROBLEM
Bank regulation and supervision is implemented to ensure a sound and safe financial system in the economy, The measure are mainly concerned with the quality of risk asset in banks, compliance with key ratios such as liquidity ratio, cash reserve ratio, capital adequacy ratio amongst others, the quality of management and other corporate governance issues.
However, inadequate supervisory frame work and lack of an effective risk asset data contributed in no small measure in disrupting the activities of banks, and liquidation by the regulators.
In line with this problem, various banking legistration and acts have been promulgated as well as the introduction of different strategies all aimed at increasing the efficiency of banking regulatory supervision. Among them are on-set, off-site banking examination, routine examination, special examinations called at the instance of the regulators as well as other methods of surveillance to be discussed in subsequent chapters. These measures are mutually reinforcing and are designed to timely identify and diagnose emerging problems in individual banks with a view to presenting most efficient resolution direction ensuring continued confidence in banking system.
Lack of supervision and regulatory functions of the regulators (CBN) and (NDIC) impacts on Nigeria banks.
There is no good relationship between the banking supervision and the incidence of bad loan portfolio in banking industry.
There is no efficiency and effectiveness of deposit insurance scheme in Nigeria banks as a mean to boosting depositor’s confidence in the system.
The regulation of pricing of banks products and services offered to their customers is not effective.
There is no relationship between CAMA (Company and Allied Matter Act) performance rating of banks and the effect of regulation in the industry.
1.3 OBJECTIVES OF THE STUDY
The general aim of this research work is to determine the impact of the regulatory and supervisory functions of the central bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation on the activities of Nigeria banks.
The main objective is:
- To examine thoroughly how supervisory and regulatory functions of the regulators (CBN) and (NDIC) impacts on Nigeria banks.
- To determine the relationship between the banking supervision and the incidence of bad loan portfolio in banking industry.
- To determine the efficiency and effectiveness of deposit insurance scheme in Nigeria banks as a means to boosting depositor’s confidence in the system.
- To test the effectiveness of regulation on the pricing of banks products and services offered to their customers.
- To determine the relationship between the CAMA performance rating of banks and the effect of regulation in the industry.
- STATEMENT OF RESEARCH QUESTIONS
Since the promulgation of decree No.22 of 1988, the effective of the operations of NDIC and CBN has been a source of controversy and comments by key monitors in the banking industry.
The generated controversy among and the general public forms an integral part of the research question, these are:
- What is the impact of supervisory and regulatory function of the regulators (CBN) and (NDIC) on Nigeria banks?
- What is the relationship between the banking supervisor and the incidence of bad loan portfolio in banking industry?
- Does the efficiency and effectiveness of deposit insurance scheme in Nigeria bank a means to boost depositor confidence in the system?
- Is there any effectiveness of regulation on the pricing of banks products and services offered to their customers?
- What is the relationship between CAMEL performance, rating banks and the effects of regulation in the industry?
- RESEARCH HYPOTHESES
The supervisory and regulatory authorities play a significant role in the financial system of any economy through the promulgation of policies aimed at ensuring the product management of banks assets and liabilities and thereby guarantee the safety of depositor’s funds. They also promote compliance to safe and sound banking practices encourage the institution of an efficient internal control system in individual money deposit banks in order to prevent the incidence of frauds; forgeries and other financial malpractice as well as ensure the stability and engendering of public confidence in the system.
This study will therefore test the following four hypotheses:
- Ho: The supervisory and regulatory functions of the CBN and the NDIC have not been effective in curtailing distress in the Nigeria banking system.
Hi: The supervisory and regulatory functions of the CBN and NDIC have been effective in curtailing distress in the Nigeria banking system.
- Ho: There is a relationship between the banking supervision and the incidence of bad loan portfolio in banking industry.
Hi: There is a relationship between the banking supervision and the incidence of bad loan portfolio in banking industry.
- Ho: The efficiency and effectiveness of deposit insurance scheme in Nigeria banks is not a means to boosting depositor’s confidence in the system.
Hi: The efficiency and effectiveness of deposit insurance scheme in Nigeria banks is a means to boosting depositor’s confidence in the system.
- Ho: The supervisory and regulatory activities of the CBN and NDIC have not impacted positively on the pricing of banks products to their external customers.
Hi: The supervisory and regulatory activities of the CBN and NDIC have impacted positively on the pricing of banks products to their external customers.
- SIGNIFICANCE OF THE STUDY
The study is significant that it will help depositors of funds in financial institutions to fully understand the mechanism of banking supervision and the provisions of the law as it relates to the deposit insurance scheme. It also provides a platform for the regulatory authorities to appreciate the impact of their activities on the banking industry and underscores areas improvement.
It is also imperative to state that a study of this nature provides an independence platform via which the regulators can appraise fundamental tools of supervision in a bid to make reason adjustments where necessary.
The findings of the study will be of immense benefits not only to the Nigeria banking industry and its related institution, but also those interested in understanding the inter-relationship between the actions of the regulator on one hand and the banking institutions on the other as well as providing a platform for promoting an efficient and effective banking practice.
The significance becomes more prominent.
- SCOPE OF THE STUDY
The study will cover the operation of the regulatory authorities as it relates to the banking industry in the past twelve (12) years prior to the consoliditation era and thus, would be limited to the period of 2005-2013. During the period covered in the study. Most banks practice Universal banking; while the CBN and NDIC act as the regulatory authorities and supervisor of banks in banking sectors.
- DEFINITION OF TERMS
Financial Intermediation: Financial intermediation is the mobilization of funds from the surplus spending unit at a cost or lending of such funds to deficit spending units at a price both within and outside the shore of a country.
Bank Regulation: A body of specific rules or agreed behavior either imposed by some government or other external agency; or self imposed by explicit or implicit agreement within the industry that limits the activities and business operations of financial institution e.g. CBN and NDIC.
Bank Supervision: Is the process of monitoring banks to ensure that they are carrying out their activities in accordance with laws, rules and regulations and in safe an sound manners.
Stable Banking System: A stable banking system means that banks have the ability and capacity to meet maturity obligations as they fall due, and are making adequate profit from authorized banking business to justify their investment while at the same time keeping banking failures at a minimum within the capacity.
Prudential Guidelines: Is a body of specific rules imposed by government through the central bank aimed at ensuring prudent management and administration of bank funds so that reports of financial institutions are correct and reflective of their true portfolio.
Deposit Insurance Scheme: Is primary intended to put more stability of the financial system as to protect the less financially sophisticated depositor by minimizing the risk that depositors will suffer, lender of last resort effective bank regulation and supervision and efficient payment system.
Financial Stability Form (FSF): This state that a deposit insurance system needs to be support accounting system and the enforcement of effective law.
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