THE IMPACT OF REGULATION AND SUPERVISION ON THE ACTIVITIES OF BANKS IN NIGERIA
ABSTRACT
The study is an empirical analysis of the impact of regulation and supervision on the activities of Nigerian banks with emphasis on the role of the Central Bank of Nigeria and The Nigerian Deposit Insurance Corporation. It evaluates the roles and contributions of CBN and NDIC to the Nigerian banking sector. Extensive field survey and library research was carried out and data collected were subjected to thorough analysis. The analysis shows that the supervisory and regulatory framework of the Central Bank of Nigeria and the Nigerian Deposit Insurance Corporation are not sufficient to guarantee effective banking practices in Nigeria. Other findings from the study include the need to increase the maximum insurance coverage due to the effect of inflation and the persistent fall in the value of the Naira, the need to disclose transactions continuously to ensure financial prudence through regular supervision and monitoring of the financial health of local banks with the aid of the ‘CAMEL’ ratings and other supervisory framework. There is need to also increase the awareness of banking activities within the general populace through a deliberate integration process aimed at demystifying certain inherent perceptions of the public with respect to distress and the role of the Nigerian deposit Insurance Corporation (NDIC). Moreover, the public, investors and depositors were not fully aware of the activities of NDIC and CBN in liquidating and revocation of banks’ licenses due to the ineffectiveness of the enlightenment programmes used in carrying out the awareness. The study focuses also on the consolidation agenda of the Central Bank of Nigeria the processes, prospect and the challenges of consolidation. A questionnaire and telephone based research was adopted for the study and the data collated was tested using the chi-square analysis and supported by fundamental evidence from the database of the regulatory authorities. Finally, the study offered suggestions as to how the problems so identified could be ameliorated.
TABLE OF CONTENT
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
1.2 Aims and Objectives of the Study
1.3 Scope and Limitations
1.4 Significance of the Study
1.5 Statement of Research Problems
1.6 Statement of Research Questions
1.7 Research Hypothesis
1.8. Definition of terms
CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
2.1 Introduction to Banking Supervision & Regulation
2.2 Development of Banking in Nigeria
2.3 The objectives for banking Supervision
2.4 Approaches to Banking Regulation and Supervision
2.5 Banking Supervision and Regulatory Structures
2.6 Ways and Methods by which Regulatory authorities Carry out supervisory functions in banks.
2.7.0 Procedures and areas of banking examination
2.8.0 Origin of Bank regulation/Supervision in Nigeria
2.9.0 Conditions for effective banking supervision
2.10.0 The roles of Regulatory Authorities in Banking
2.11.0 The agents of banking Supervision Authorities and Authorities
2.12 Challenges of Supervision
2.13 The Nigerian Deposit Insurance Corporation
2.14 The Impact of Public Policy on the Banking System in Nigeria
2.15 Banking Sector Policies in Nigeria
2.16 The Performance of Public Sector Banks in Nigeria
2.17. The Impact of Financial Liberalisation on Banking
2.18 Recent developments in the organization of banking Supervision
2.19 Bank consolidation in Nigeria: Processes and Prospects
2.20 Supervision of Restructured banks
2.21 Assessment of Compliance with the Basle Core Principles
CHAPTER THREE
RESEARCH METHODOLOGY
3.0.0 Introduction
3.1.0 Research Design
3.2.0 Sources of data & Instruments of data Collection
3.3.0 Research Instruments
3.4.0 Research Population
3.5.0 Determination of Sample size
3.6.0 Administration of Questionnaires & Interviews
3.7.0 Methods of data Analysis
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.1 Data presentation
4.2 Data analysis
4.3 Hypothesis Testing
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION
5.1 Summary of Findings
5.2 Conclusion
5.3 Recommendations
5.4 Bibliography
5.5 Proposed Research Questionnaire
CHAPTER ONE
INTRODUCTION
1.1.0 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 implementation of monetary policies. It is not surprising therefore, that governments the world over attempt to evolve an efficient banking system, not only for the promotion of efficient intermediation, but also for the protection of depositors, encouragement of efficient, competition, maintenance of public confidence in the system stability of the system and protection against systemic risk and collapse.
Worldwide, the banking business is highly regulated. This is because of the pivotal position the financial industry occupies in most economies. An efficient system, it is widely accepted, and is a sine qua non for efficient functioning of a nation’s economy. Thus, for the industry to be efficient, it must be regulated and supervised in view of the failure of the market system to recognize social rationality and the tendency for market participants to take undue risks which could impair the stability and solvency of their institutions.
Regulation and supervision of banks remain an integral part of the mechanism for ensuring safe and sound banking practice. At the apex of the regulatory and supervisory framework for the banking industry is the Central Bank of Nigeria (CBN). The Nigerian Deposit Insurance Corporation (NDIC) however, exercises shared responsibility with the Central Bank of Nigeria for the supervision of insured banks. Active co-operation exists 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 over lap, establishment of a credible data management and information sharing system.
In the main, bank supervision entails on-site examination of the institutions and off-site analysis of periodically rendered prudential returns, a process called off-site 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 standards, these agencies (CBN and NDIC) have continued to emphasize risk-focused bank supervision in Nigeria. Similarly, they have developed twenty-five (25) core principles for effective banking supervision as enunciated by the Basle committee on banking supervision as the pivot of the framework for bank supervision.
It is worthy to note that what is currently happening in Nigeria does not differ widely from what happened in other nations. Over the years, and specifically since 1952 when the first banking ordinance was promulgated, several other statutes have also been put in place to serve as legal backbone for the actions of the monetary authorities in regulating the banking industry.
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 1 of 1990, the Nigeria Deposit Insurance Corporation Decree No 22 of 1988 and lately, the failed Bank (recovery of debt & 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 bank supervision, which may restore public 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/supervision authorities have been applying various failure measures since the late 1990s. Hence depending on the severity and peculiarity of the distress, 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, restructuring 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 N2.3 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 the regulators to safeguard 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 closed 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 (TwentyFive) viable banking institutions with a capital base of not less than N25 billion each.
The streamlining of these banks was because of their inability to respond to all the various regulatory/supervisory initiatives employed to resolve the banks’ problems, and the continued degeneration in their financial conditions.
1.2.0 AIMS/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 Nigerian Deposit Insurance Corporation on the activities of Nigerian banks.
The main objective is:
- To examine thoroughly how supervisory and regulatory functions of the regulators (CBN and NDIC) impacts on Nigerian banks.
- To determine the relationship between the banking supervision and the incidence of bad loan portfolio in the Nigerian banking industry
- To determine the efficiency and effectiveness of Deposit Insurance Scheme in Nigerian banks as a means to boosting depositors’ 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 CAMEL performance rating of banks and the
effect of regulation in the industry
- To determine the relationship between banks lending to the real (private) sector and regulation on the industry.
- To underscore the efficiency of the consolidation exercise presently embarked upon by the Central Bank towards effective regulatory supervision.
1.3.0 SCOPE AND LIMITATIONS OF THE STUDY
The study will cover the operation of the regulatory authorities as it relates to the banking industry in the past twelve years prior to the consolidation era and thus, would be limited to the period of 2000-2005.
Secondly, the study assumes that the banking system has remained deregulated during the period covered in our study, as most banks practice universal banking, while the CBN/ NDIC act as the regulatory authorities and supervisor of banks in the banking sector.
In view of the technicalities involved, it would be unrealistic to assume that all necessary facts have been gathered in the process of the study. Information gathered is limited to those accesses and made available by the respondents and also those gathered with the aid of local newspapers, magazines, journals and annual reports of the Central Bank of Nigeria (CBN),
Nigeria Deposit Insurance Corporation (NDIC), Chartered Institute of Bankers of Nigeria (CIBN), Agusto Industry report and basically the internet. However, the effect of this limitation will be reduced to the barest minimum.
1.4.0 SIGNIFICANCE OF STUDY
The study is significant in 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 for improvement.
It is also imperative to state that a study of this nature provides an independent platform via which the regulators can appraise fundamental tools of supervision in a bid to make reasonable adjustments where necessary.
The findings of this study will be of immense benefit not only to the Nigerian banking industry and its related institutions, but also to those interested in understanding the inter-relationship between the actions of the regulators 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 when the effect of regulation and supervision is examined against the background of the consolidation exercise of the present policies of the Central bank of Nigeria. It is worth mentioning that the present state of the nation’s financial industry precipitated out of the supervisory framework of the Central Bank, hence this study would attempt to examine what impact the present consolidation exercise would have on the regulatory framework.
1.5.0 STATEMENT OF THE RESEARCH PROBLEM
Bank regulation/supervision is implemented to ensure a sound and safe financial system in the economy. The measures 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 framework and lack of an effective risk asset database and information sharing system have contributed in no small measure in disrupting the activities of banks, thereby leading to the often distasteful incidents of banking distress and liquidation by the regulators.
In line with this problem, various banking legislation/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-site, off-site banking examination, routine examination, special examinations culled 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 directed towards ensuring continued public confidence in the banking system.
1.6.0 STATEMENT OF RESEARCH QUESTIONS
Since the promulgation of decree No 22 of 1988, the effectiveness 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 bankers and the general public forms an integral part of the research questions. These are:
Why is it mandatory for banks to be overtly regulated by Central Bank of Nigeria (CBN)?
Have the regulatory authorities helped in controlling the monetary and fiscal inefficiencies of government policies?
How effective has NDIC guaranteed depositors’ funds through its deposit insurance scheme?
Has the Nigerian banking industry become safe, stable and command the confidence of the general public since the promulgation/implementation of the BOFIA/NDIC Act?
Have the activities of banking supervisions brought about normal banking practice, professionalism and ethical conduct in the Nigerian banking system?
As a liquidator, how effectively did NDIC ensure orderly and efficient closure of failed banks with minimum disruption to the banking system?
Was proper screening of person(s) allowed to own and manage banks carried out by the regulators and if so how far has it fare in minimizing the incidence of abusive ownership
and management?
What is the performance rating of regulatory authorities in preventing financial distress in
Nigeria?
Is the CAMEL framework useful in assessing performance of financial institutions in
Nigeria?
Is Universal banking the key to Nigerian economic development and evolution of sound and healthy financial system?
Have banks and other financial institution (BOFIA) brought about high standard of financial practice in Nigerian banks?
1.7.0 RESEARCH HYPOTHESIS
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 prudent management of banks’ assets and liabilities and thereby guarantee the safety of depositors’ 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 malpractices as well as ensure the stability and engendering of public confidence in the system.
This study will therefore test the following eight hypotheses.
1
| Ho: | The supervisory and regulatory functions of the Central Bank (CBN) and the NDIC have been effective in curtailing distress in the Nigeria banking system. |
| H1:2 | The supervisory and regulatory functions of the CBN and the NDIC have not beeneffective in curtailing distress in the Nigerian banking system. |
| HO: | The Regulatory and Supervisory activities of the CBN and the NDIC have boosted depositors’ confidence in the Banking System. |
| H1:3 | The Regulatory and Supervisory activities of the CBN and the NDIC have not boosted depositors’ confidence in the Banking System. |
| Ho: | The Supervisory and Regulatory activities of the CBN and the NDIC have impacted positively on the pricing of banks’ products to their external customers. |
| H1: | The Supervisory and Regulatory activities of the CBN and the NDIC have not impacted |
positively on the pricing of banks’ products to their external customers.
4
| Ho: | The Supervisory and Regulatory functions of the Central Bank and the NDIC have been effective in improving corporate governance issues in the Banking Industry. |
| H1:5 | The Supervisory and Regulatory functions of the Central Bank and the NDIC have not been effective in improving corporate governance issues in the banking industry. |
| Ho: | Effective regulations and supervisions of the CBN and the NDIC would boost the volume and the value of transactions witnessed in the Nigerian banking industry. |
| H1:6 | Effective regulations and supervisions of the CBN and the NDIC would not boost the volume and the value of transactions witnessed in the Nigerian banking industry. |
| Ho: | The Regulatory and Supervisory functions of the CBN and the NDIC have stemmed the incidence of widespread bad loan portfolio in the Nigerian banking system. |
| H1:7 | The Regulatory and Supervisory functions of the CBN and the NDIC have not stemmed the incidence of widespread bad loan portfolio the in Nigerian banking system. |
| Ho: | The Regulatory and Supervisory functions of the CBN and the NDIC have stemmed the distress syndrome in the Nigerian banking industry. |
| H1:8 | The Regulatory and Supervisory functions of the CBN and the NDIC have not stemmed the distress syndrome in the Nigerian banking industry. |
| Ho: | The Insurance premium of N50, 000 payable by the NDIC to bank customers in the light of distress is sufficient to boost customers’ confidence in the banking system. |
| H1: | The Insurance premium of N50, 000 payable by the NDIC to bank customers in the light of |
distress is not sufficient to boost customers’ confidence in the banking system.
1.8.0 DEFINITION OF TERMS
Financial Intermediation: Financial Intermediation is the mobilization of funds from the surplus spending units at a cost or lending of such funds to the deficit spending units at a price both within and outside the shore of a country.
Bank regulation: a body of specific rules or agreed behaviour 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 institutions e.g. CBN/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 a safe and sound manner.
Stable banking system: A stable banking system means that banks have the ability and capacity to meet maturing obligations as they fall due, and are making adequate profits from authorized banking business to justify their investment while at the same time keeping banking failures at a minimum within the country.
Prudential guidelines: Is a body of specific rules imposed by government through the Central bank aimed at ensuring prudent management and administration of banks’ funds so that reports of financial institutions are correct and reflective of their true portfolio.
Deposit insurance scheme: Is primarily intended to promote stability of the financial system and 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 supported by strong prudential regulation and supervision, sound accounting and the enforcement of effective law.
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