BANK REGULATIONS AND PERFORMANCE IN NIGERIA
1.1 Background of the Study
Banking business is not a mere activity for which all decisions of the business should be surrendered to the owners or management of such companies. The nature of the banking and its accompanying risks to operators and economist system call for certain degrees of uniform operational practices. The need to regulate the activities of banks is becoming a matter of very high necessity following global trends of financial institutions collapse and maladministration. The global financial crisis following the failure of big firms like Lehman Brothers and others has highlighted the importance of adequate bank regulation and supervision. The approval of the Basel Committee on Banking Regulation to strengthen global capital and liquidity regulations in order to promote a more resilient banking sector by the G20 is a positive signal in this direction (Klomps & De Haans, 2011)
The Banking Sector serves as catalyst for growth and development and is therefore sensitive to the economy in terms of stability. The critical nature of the sector induces need for checks and regulations to minimize possible financial mishap to national and global economies. It is not surprising that government the world over are attempting to evolve 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. The degree to which governments should intervene remains an issue of international debate. Financial analyst differs on the level of intervention required per economy; particularly on regulation imposed on the financial intermediaries. Some scholars have clamoured for more stringent regulatory frameworks to authorize, oblige, supervise and control banking business so as to ensure smooth, consistent and sanitized system of banking business, while others are of the opinion that a liberal system is the most ideal given a market driven economy.
The risky nature of banking under voluntary financial markets amidst stringenent competition will only worsen the economic condition of the globe. From internal to external regulatory framework, banking business must be closely monitored by ombudsmen to minimize the possibilities of mortgaging public interest and the overall stability of economic systems. More importantly, laws are tools on which stable economies strive. They act as legal mechanisms that provide guide for the appropriate conduct within the industry. A system that exist without laws is prone to all manners of manipulations
Interestingly, banking started in Nigeria as an unregulated business. Even with the dominance of the scene at inception by foreign banks, neither the foreign nor government made any regulatory demand on the banks as the then. This partly may be due to the emergent business with little or no details of control and mainly on the fact that banking at inception had little risk and complexity compared to the present day. It may not be in Nigeria commenced as a regulation-free business and glides to a highly sophisticated and duly regulated one today.
Taking into cognizance the importance of the business of banking in Nigeria economy and the series of corporate malpractices and financial scam in the then banking institutions, the first banking legislation into Nigeria, the 1952 banking ordinance, was passed into law. By 1958, another banking ordinance was passed section 25 of which repealed the 1952 Act. Subsequent banking legislations- 1958 CBN Act, 1968 Banking Act, 1990 Banking Act, The BOH ACT of 1991, the CBN Act, 1991, CAMA 1991 and the recent 2007 CBN Act Prescribe rules, regulations and principles, which any corporate person willing to partake in banking business must observe before it is authorized to do so.
These legislations equally impose certain duties and obligation on licensed banks and equally put in place series of rules and conventions empowering the central Bank and other bodies like the Federal Ministry of Finance to supervise and control banking institutions so as to ensure smooth running of the business, avoid all the problems experienced by banking institutions prior to 1952 and to safeguard members of the public from losing their funds. The banking sector being a conspicuous and significant partner in every nation’s economy needs to be regulated for its stability, reliability, confidence and above all, tranquility.
1.2 Statement of the Problem
Bank regulation 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 regulatory 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.
1.3 Objectives of the Study
The general aim of this research work is to investigate Bank Regulation and Performance in Nigeria.
The main objective is of this study are as follows:
1. To examine thoroughly how supervisory and regulatory functions of the regulating agencies and their performances has effect on Nigerian banks.
2. To determine if the Nigerian banking industry has become safe, stable and command the confidence of the general public since the promulgation/implementation of the BOFIA/NDIC Act?
3. To determine the efficiency and effectiveness of Deposit Insurance Scheme in Nigerian banks as a means to boosting depositors’ confidence in the system.
1.4 Research Questions
The research will provide answer to the following research questions:
1. Is the supervisory and regulatory functions of the regulating agencies has effect on Nigerian banks?
2. 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?
3. How effective has NDIC guaranteed depositors’ funds through its deposit insurance scheme?
1.5 Research Hypothesis
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: The supervisory and regulatory functions of the CBN and the NDIC have not been effective in curtailing distress in the Nigerian banking system.
1.6 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 years prior to the consolidation era and thus, would be limited to the period of 2005-2015.
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.
1.7 Significance of the Study
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.
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 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.
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.
1.8 Organization of the Study
This research is structured into five chapters. Chapter one deals with the introduction and general background to the study. In this chapter, statement of the problem, research objectives and hypotheses were stated. In addition, the scope of the study, significance of the study and definition of terms were highlighted. Chapter two was set aside for review of literature dealing so on. In Chapter three methodology was presented with focus on research design, types and sources of data, methods of data collection and analysis. In Chapter four, the data collected presented, analysed and presented. Finally, the summary, conclusion, recommendation and suggested areas for further research were discussed in chapter five.
1.9 Operational 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.(Gabriel, 2008)
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 (Mark, 2011).
Bank supervision: Is the process of monitoring banks to ensure that they carry out their activities in accordance with laws, rules and regulations, and in a safe and sound manner.(Masaka, 2015)
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.(Akpan,2014)
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. (Onsachi, 2011)
Deposit insurance scheme: Is primarily intended to promote stability of the financial system and to protect depositors by minimizing the risk that depositors will suffer, lender of last resort. (Yinka, 2000).