THE ROLE OF THE NIGERIAN DEPOSIT INSURANCE CORPORATION IN THE REGULATION OF NIGERIA BANKING SECTOR
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ABSTRACT
The Nigerian banking sector plays a major role in economic development in any country. These they do, through financial intermediation and other banking functions to encourage real sector or innovate productive activities. However, distress in banking sector cannot be totally erased because like other forms of businesses, risks are involved. In combating this, the central bank of Nigeria served as the apex in the banking sector and performs regulatory and supervisory activities to create and sustain confidence in the banking sector, in the public, government, owners and the economy.
For proper supervision and monitoring regulatory activities due to various reforms in the banking sector, the Nigeria deposit insurance corporation was established to provide complimentary functions with the central bank in sanitizing the banking sector. However, their major function was to insure all deposit liabilities of banks so that confidence can be installed in the banking sector.
TABLE OF CONTENTS
Title page
Certification
Dedication
Acknowledgement
Abstract
Table of contents
CHAPTER ONE
1.0 Introduction 1
1.1 Background of the study 1
1.2 Justification of the study 11
1.3 Objective of the study 12
1.4 Problem of the study 14
1.5 hypothesis of the study 15
1.6 Scope of the study 16
1.7 Definition of Terms 17
1.8 Organization of the study 19
CHAPTER TWO
2.0 LITERATURE REVIEW 22
2.1 The role of banks in economic development 22
2.2 Financial distress 27
2.3 Deposit insurance scheme in Nigeria 42
2.4 The Nigerian insurance cooperation 53
2.5 Other sub- committees of financial
sector in Nigerian banking system
CHAPTER THREE
3.0 RESEARCH METHODOLOGY
3.1 Introduction
3.2 Type of data used
3.3 Sampling method
3.4 Method of data collection
3.5 Methods of data analysis
CHAPTER FOUR
4.0 DATA PRESENTATION AND ANALYSIS
4.1 Introduction
4.2 The period before the operation of NDIC (1984-1988)
4.3 Analysis of Regression Technique
4.4 Computation of correlation co-efficient showing the
degree of positive or negative relationship
CHAPTER FIVE
5.0 SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary
5.2 Conclusion
5.3 Recommendations
REFERENCES
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The practice of modern banking in Nigeria dates back to 1892. The pioneer banks were understandably expatriate institutions set up to facilitate the colonial administration as well as trade with Britain.
The first bank was set up in 1892 and it was called the African Banking Corporation which opened the first branch in Lagos and this was championed by Elder Dempster and co; a shipping firm based in Liverpool but had it branches in Lagos in 1894 another bank called the British Bank for British West Africa. The bank acted as an agent of the bank received, stored and issued the west Africa silver coins in exchange for sterling coins or London drafts. This bank later changed its name to standard bank.
In 1899, the Anglo-African bank was established in compete with the British bank of West Africa. The bank was established in old Calabar but because of the monopoly enjoyed by the British Bank of West Africa for the importation of silver from the royal mint in Britain, the Anglo African bank sold after it, changed its name to bank of Nigeria to BBWA. Another bank opened in 1917 called the Barclays bank DCO (Dominion Colonial and Overseas). Between 1894-1933, the British bank of West African and Barclays bank DCO dominated the banking scene. Another bank joined the banking scene in 1949.
This bank was called the British and French bank. The bank became the third expatriate bank to dominate early Nigerian banking scene.
The banks at this period were principally these expatriate banks, which were principally to render services in connection with international trade. So their relation at that time was chiefly with expatriate trading companies and with the government. These banks also controlled 90% of aggregate bank deposits. They largely ignored the development of local African entrepreneurship.
It should be noted that these various expatriate banks changed their names. The British bank of West African changed its name to standard bank and its presently called 1st bank of Nigeria plc. The Barclays bank DCO changed its name to union bank plc. The British and French bank also changed its name to united bank for Africa Ltd (UBA). However, Nigerians did not take active part in banking ownership until 1930s.
In an attempt to create a competitive environment with the expatriate banks, the first indigenous bank was established in 1929. The bank was the industrial and commercial bank. This bank was setup by patriotic Nigerians, but failed in 1930, in 1931; another indigenous bank was established and was called the Nigerian mercantile bank but liquidated in 1936 due to the same reasons like the industrial and commercial bank. The first indigenous bank to survive was established in 1933, called the national bank of Nigeria ltd. Other banks established include: the Agbonmagbe bank; a private indigenous bank founded by chief Okupe in 1945. However, the bank was taken over by the western government in 1969 and its name later changed to WEMA bank plc till date. Also established was the Nigerian penny bank in early 1940s but failed in 1946; the Nigerian farmers and commercial bank in 1947 but failed in 1953 and the merchants banks in 1952 but failed in 1960.
Despite the fact that up to 185 banks were established between 1947 and 1952, only four (4) banks survived. These banks include: the National bank of Nigeria established in 1933; Agbonmagbe bank established in 1945 now WEMA bank; the African continental bank established in 1947; an expatriate bank. The British and French bank now united bank for Africa established in 1949 ( Nwankwo, 1980). However, this period of banking can be termed free for all because banking activities were unregulated. A committee called the patrons committee was constituted to look into the causes of bank failures. The report of this committee revealed the following; most banks were faced with under capitalization, poor and inexperienced management and competitive pressures from the well established foreign banks.
In 1952, the 1st indigenous ordinance was made. This ushered in the era of formal banking practice in Nigeria. it established standards before license is granted to operated banks. This was applicable immediately on new banks and a period of three years was given to all existing banks survived, they include; Agbonmagbe bank, African continental banks, national bank and mercantile bank. The ordinance was later replaced with 1st indigenous banking act of 1959, and has undergone series of amendments in 1972, 1975, 1979 and was fully consolidated by 1990 company and allied matters decree and currently called banks and other financial institution decree of 1991 (BOFID).
At this period, a motion was sponsored in the federal legislature for the establishment of a central bank but a complain was made that there was no developed capital market. However, there were persistent call for the establishment of a central bank. MR. J.L fisher was appointed to examine the desirability and practicability of establishing a central bank. Although Fisher recognized the contribution of a central bank towards improvement and performance of indigenous banks he however, did not see the need for a central bank. He recommended only a more use of the financial secretary’s power (finance minister). The international bank for reconstruction and development (World Bank) in 1953 also raised a motion in favour of the establishment of central bank was finally raised by MR. J.B LOYNES, the formal adviser to the bank of England. The report of Loynes committee, favoured the establishment of central bank.
On March, 17th, 1958, the central bank ordinance was made. However, the central bank did not start full operation until 1st July 1959. The ordinance of 1958 has gone through series of amendments in 1962, 1967, 1968, 1969, 1970, 1972, 1976 and 1987 law later repealed and replaced with the 1991 central bank decree. Since it’s establishment, the central bank has laid the foundation for sound financial system. It also stands ad the apex bank in the financial system and helps in the implementation of monetary control. It also acts as the apex regulatory authority in the banking industry, for the supervision and control of banks, sections 1 of BOFID 1991 states the function of central bank.
In 1972, the establishment of the banking enterprises promotion decree affected for all sensitive sectors of the Nigerian economy was restructured to 60:40 indigenes and foreigners respectively. This is a view to taking active control of the economy from the lands of foreigners. The banking sector being one of the sensitive sectors of the economy was also affected. This gave rise to the establishment of more banks by indigenes entrepreneur.
Another factor that encouraged the establishment of more banks at this period was the oil boom, which sustained an increase in capital flow in the macro economy hence, enhanced the profitability of bank ownership by Nigerian entrepreneur. Therefore, at this period more banks were licensed and established.
In 1986, followed the implementation of an economic structural adjustment programme. This led to the deregulation of the financial system in 1987. Entry into banking institutions increased such that the number of a total of 42 banks in 1986, the number of licensed banks increased to 120 at the end of 1992, giving an annual average growth rate of about 31 percent with the removal of control of interest rates, bank deposit jumped from about N20.5 billion in 1986 to N58 billion at the end of 1992, an annual growth rate of 55 percent.
Similarly, total assets of banks increased from N68 billion in 1986 to about N232 billion at the end of the year. safe and sound banking practice be restored in the banking system. Can the competitive and creative ability of banks lead to greater efficiency instead of distress?
There is no need for promote bank ethics and conduct despite various reforms and new improved banking practices.
Can confidence be restored in the banking sector.
Does the adoption of the deposit insurance scheme have any justification in fair compensation of depositors of banks during bank failure and liquidation?
The need for this study is also borned out of the fact that there is the need to make further research on the role of Nigeria deposit insurance corporation (NDIC) to increase knowledge on previous researcher made.
1.2 JUSTIFICATION OF THE STUDY
The significance of this study is to draw attention of the regulatory authority (Central bank) and NDIC to the effect of continued failure and distress in banking industry.
Further research is needed to this study to know the causes, effects, implication of failed banks on Nigerian economy as well as appraisal of the impact of NDIC on banking sector and its efficiency since inception till date in the management of distressed and failed banks.
1.3 OBJECTIVES OF THE STUDY
This study is carried out for the following 1992; an annual average growth rate of 40 percent.
In spite of these gains, continued to deteriorate in 1989, 7 banks were adjudged technically insolvent. In 1990, the number increased to 9 and in 1991, eights had become distressed while fifteen (15) were in various terms of distress.
Another idea of the structural adjustment programme was the introduction of deposit protection scheme. The need of this was to avoid less of confidence on banks and adverse effect on macro economic resultant in bank failures. The deposit insurance scheme was established by the Nigerian deposit insurance corporation (NDIC) Decree no 22 of 1988. The institution was principally meant to insure all deposits fund so that adequate compensation will be given to depositors on account of bank failures, more so, the reason why the deposit insurance scheme was established, was due to the experience of prior bank failures, economic reforms and increased competitions among banks, reduction in the risk of systematic crisis involving failed and unsound bank practices that are capable of causing breakdown in payment system, the need to ensure safe competition and creativity as well as fair play amongst financial institutions.
1.4 PROBLEMS OF THE STUDY
Some of the problems that led to the study of the role of the Nigerian deposit insurance corporation (NDIC) in the regulation of Nigeria banking system include;
Reasons:
To know what role the Nigerian deposit insurance corporation has played till date on the Nigerian banking industry.
To know what positive impact the Nigerian deposit insurance corporation has made in sanitation and reformation of the Nigerian banking system.
To what extent has the NDIC met liquidation and pay off of insured banks during liquidation.
To know the extent to which NDIC has helped to reduced bank distress through their supervisory activities.
To know the justification and reaction of banks to the deposit insurance scheme.
1.5 HYPOTHESIS OF THE STUDY
In an attempt to achieve a through analysis of this study, hypothesis are needed to give focus and direction to the study.
A hypothesis is a specific declarative statement of a tentative nature whose validity is to be established by recourse to empirical findings.
For proper analysis of the study, the following hypothesis have been formulated to assist in giving focus and direction to the research work.
H0: represents the null hypothesis
H1: represents the alternative hypothesis
H0: the Nigerian deposit insurance corporation does not have any impact in the regulation of Nigeria banking sector.
H1: the Nigerian deposit insurance corporation has a positive impact in the regulation of Nigeria banking sector.
1.6 SCOPE OF THE STUDY
This research work is aimed at increasing knowledge on previous research works done by researchers in the past on this topic. However, in-depth analysis will be carried out in the role of NDIC in the regulation of the banking sector in Nigeria. Considering various reforms that have occurred in the system.
This study is intended to deal with critical analysis such as; reasons for the adoption of the scheme, justification for its adoption, its impact so far and to what extent has it restored confidence in the banking sector and its impact on the economy.
However, the study is limited to the operations of the Nigerian deposit insurance corporation since its establishment in 1988 till 2011; also, the limitation of this study will includes:
Time constraint to make adequate findings
Inadequacy of funds to collect extensive data.
Inadequacy of relevant and more recent data due to the constraints mentioned in (i) and (ii) above (iii) Reluctant attitude of institutions to reveal and release information necessary for the study.
1.7 DEFINITION OF TERMS
FINANCIAL DISTRESS: This is when a fairly reason able proportions of banks in the system are unable to meet their obligations to their customers,
INSOLVENCY: When there is an obstacle to prompt action by banks in performing their obligations.
UNDERCAPITALIZATION: this is situation where banks operate with very little capital.
PAY-OFF: This involves the payment of insured deposit up to the insurable limit to the depositors of liquidated banks.
FRAUD: The wilful misappropriation of funds or eve manipulation of figures done to obtain an unjust or illegal financial advantage through dubious means.
LIQUIDATION : This is the winding up of a business by converting its assets into cash to pay off its creditors in order of preference and its owners as well.
LIQUIDITY: this is when a bank has enough assets which are in cash and other convertible assets which can be easily converted to cash. They are called near cash or liquid assets. DEPOSIT: Amount lodged in the bank by a person or business which withdrawal is on demand by cheque or without cheque and provides a base or ability to create money through loans and advances by banks. BANK FAILURES: banks closed temporarily or permanently on account of financial difficulties and including banks whose deposit liabilities were consumed by other banks of the time of closing, with the aid of loans of purchase of assets. DEREGULATION: removal of regulations, regulatory authorities and or interference’s of market forces to allow for free autonomy. 1.8 ORGANIZATION OF THE STUDY Chapter one of this project focuses on how modern banking were practiced in Nigeria dates back to 1892. It also studies the problems that led to the study of the role of the Nigerian deposit insurance corporation (NDIC) in the regulation of Nigeria banking system. Chapter two of this project centres on the role of banks in economic system. It also studies the causes of financial distress in Nigerian banking system. It also studies the reason for the establishment of the deposit insurance scheme in Nigeria and their benefits. Chapter three is aims at giving a description of tools, instruments and method that are caused in presenting and analyzing data and information. In this project work, secondary data has been employed. It also studies method of data analysis in which historical and descriptive method is used and also simple regression method of statistical analysis were used to explained the impact of the NDIC in the regulation of the Nigeria banking sector. Chapter four focuses on the data presentation and analysis. It studies the period before the operation of NDIC. It also shows the computation of correlation coefficient showing the degree of positive and negative relationship. Chapter five focuses on the summary, conclusion and recommendations of this project work.
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