THE IMPACT OF SUPERVISION ON MANAGEMENT EFFICIENCY IN THE BANKING INDUSTRY (A Case Study of United Bank For Africa (UBA)
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 implementation of monetary policies. It is not surprising therefore, that government 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 efficiency, competition, maintenance of public confidence in the system, stability of the system and protection against systemic risk and collapse.
Supervision of banks remains an integral part of the mechanism for ensuring safe and sound banking practice. At the apex of the 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
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.
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 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.
PROBLEM OF THE STUDY
Bank 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 acts have been promulgated as well as the introduction of different strategies all aimed at increasing the efficiency of banking 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.
OBJECTIVES OF THE STUDY
The general aim of this research work is to determine the impact of the supervision on management efficiency in banking sector.
The main objectives are:
1. To ascertain the supervision system in banking sector.
2. To ascertain the effectiveness and efficiency of the supervision procedures in the banking sector.
3. To assess the extent at which supervision has so far attained efficiency level in the banking sector for the period under review.
4. To critically evaluate the control aspect of supervision that would ensure effective management efficiency while minimizing waste and misappropriation of funds.
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:
1. What is the supervision system in banking sector?
2. How can effectiveness and efficiency of the supervision procedures in the banking sector be ascertained?
3. To what extent has supervision attained efficiency in the banking sector for the period under review?
4. What is the control aspect of supervision that would ensure effective and efficient management while minimizing waste and misappropriation of funds?
This study will therefore test the following hypotheses.
1. H1: The banking sector has a system of supervision HO: The banking sector does not have a system of
2. H1: Effectiveness and efficiency of the supervision procedures in the banking sector can be ascertained.
HO: Effectiveness and efficiency of the supervision
procedures in the banking sector cannot be ascertained.
3. H1: The control aspect of supervision would ensure effective and efficient management while minimizing waste and misappropriation of funds
HO: The control aspect of supervision would not
ensure effective and efficient management while minimizing waste and misappropriation of funds.
SIGNIFICANCE OF STUDY
This research paper is intended to examine the supervision system in the Banking sector with a view to ascertaining whether it has the potentiality of ensuring efficiency.
Therefore, the research paper will be of interest and useful to the general public, the government public officers, the depositors, undergraduate of management and related courses and potential researcher on this area.
The depositor is the general masses of citizens, who have been accusing the banks of mismanagement of resources.
It also provides a platform for the supervisory 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 through which the supervisors 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 supervision on one hand and the banking institutions on the other as well as providing a platform for promoting an efficient and effective banking practice.
SCOPE OF STUDY
For the purpose of this research study, the researcher‟s efforts will be concentrated on the impact of supervision on management efficiency in banking industry using UBA as case study. The research will covered united Bank for Africa (UBA),
with specific emphasis on the Okpara Avenue, Agbani road, and Kenyentta branches all in Enugu, Enugu state.
LIMITATIONS OF STUDY
The time given to the researcher to carry out this study was limited as the session was coming to an end.
The methods used in collecting data for this research was quite expensive. The cost of internet materials, which was the major source of collecting data for this research, has gone so high that the researcher had to get limited materials for the research.
⦁ Attitude of Respondents
Respondents were not friendly at all. They were arrogant and rude. There was lack of rapport between the researcher and the respondents so it was difficult to accurate or reliable information. So also, the employees were not willing to divulge relevant information for fear of victimization from the management of the organisation.
PROFILE OF UNITED BANK FOR AFRICA
United Bank for Africa Plc („UBA‟ or „the Bank‟) is one of Nigeria‟s oldest financial institutions. The Bank was incorporated in Nigeria in 1961 as a limited liability company, and assumed the banking business of the erstwhile British and French Bank Limited, which had been operating in Nigeria since 1949. In 2005, UBA merged with the former Standard Trust Bank Plc and acquired Continental Trust Bank Limited. Thereafter, the Bank acquired six banks under the Central Bank of Nigeria (CBN) „Purchase & Assumption Scheme‟ in 2006. Under the scheme, the Bank purchased certain assets and all the private sector liabilities of six banks namely, Trade Bank Plc, City Express Bank Plc, Afex Bank Plc, Gulf Bank Plc, Metropolitan Bank Ltd and Liberty Bank Plc.
With over 280,000 shareholders, UBA has a large shareholder base comprising Nigerian citizens & associations, as well as foreign institutions based on the disclosure in the annual accounts. UBA Staff Investment Trust scheme and Stanbic IBTC Nominees were the only shareholders controlling over 5% of the Bank‟s shares as at 31 December 2010 as disclosed in the annual accounts. The Bank‟s eighteen member board of directors jointly control (directly & indirectly), 6% of its shares. UBA‟s board comprises nine executive and nine non-
executive directors. During the period under review, there were a number of notable changes to the Board. In August 2010, Mr. Tony Elumelu (MFR) stepped down as the Managing Director of UBA, following CBN‟s new regulation mandating a ten-year maximum tenor for banks chief executive officers. He was replaced by Mr. Phillips Oduoza, an erstwhile Deputy Managing Director of the Bank. Three non-executive directors - Mr Willy Kroeger, Alhaji Garba Ruma and Mrs. Rose Okwechime - resigned their appointments from the board. These directors were replaced by Ambassador Joe Keshi, Alhaji Yahya Zekeri and Mrs Angela Nwabuoko who resigned from her position as Executive Director in July 2010. Also during the period, Mr Godwin Ize-lyamu resigned from his positions as an executive director, while Mr Ifeatu Onejeme and Mr Femi Olaloku were appointed executive directors in charge of the UBA‟s Corporate & International Banking and Operations & Technology directorate respectively.
By virtue of its age and geographical spread, UBA has a good domestic franchise with strengths in wholesale, corporate, public sector and retail banking. With 622 operational locations spread across both the metropolitan and
rural areas of the country, UBA has one of the largest branch networks in the industry.
Apart from Nigeria, the Bank has operations in 20 countries, including Paris, New York and London. As at 31 December 2010, UBA had deployed over 1,083 ATM machines in Nigeria. UBA offers a wide range of financial services encompassing corporate finance, current and deposit accounts, electronic banking, trade finance, foreign exchange and investment banking services. For the creation of risk assets, UBA‟s key growth sectors are telecommunications, infrastructure and most recently the power sector and oil & gas. Over the last year, the Bank financed several multimillion dollar deals in the oil & gas sector, which includes the participation in a US$375 million syndicated loan and a
US$540 facility granted to the Nigerian gas to liquid project.
Through its subsidiaries and affiliates, the Bank has offers other financial services such as registrarship, trusteeship, custodial services, stock brokering, insurance and asset management.
The Bank‟s direct subsidiaries include:
⦁ UBA Pension Custodian Ltd (100%) - Pensions Custody
⦁ UBA Asset Management Ltd (100%) - Asset Management
⦁ UBA Capital (Africa) Ltd (100%) - Investment Banking
⦁ UBA FX Mart Ltd (100%) - Bureau De Change
⦁ UBA Retail Financial Services Ltd (100%) - Consumer Banking
⦁ UBA Cote d‟Ivoire (100%) - Commercial Bank
⦁ UBA Cameroon (100%) - Commercial Bank
⦁ UBA Liberia (100%) - Commercial Bank
⦁ UBA Kenya Bank Ltd (100%) - Commercial Bank
⦁ UBA Sierra Leone (100%) - Commercial Bank
⦁ UBA Uganda (100%) - Commercial Bank
⦁ UBA Chad (100%) - Commercial Bank
⦁ UBA Senegal (100%) - Commercial Bank
⦁ UBA Congo DRC (100%) - Commercial Bank
⦁ UBA Congo Brazzaville (100%) - Commercial Bank
⦁ UBA Mozambique (100%) - Commercial Bank
⦁ UBA Zambia Ltd (100%) - Commercial Bank
⦁ UBA Tanzania Ltd (100%) - Commercial Bank
⦁ UBA Gabon Ltd (100%) - Commercial Bank
⦁ UBA Guinea Ltd (100%) - Commercial Bank
⦁ UBA Insurance Brokers Ltd (99%) - Insurance
⦁ UBA Ghana (91%) - Commercial Bank
⦁ Continental Bank Benin (76%) Commercial Bank
⦁ Banque International du Burkina Faso (57%) Commercial Bank
UBA also has the following indirect subsidiaries:
⦁ UBA Stockbrokers Ltd
⦁ UBA Registrars Ltd
⦁ UBA Trustees Ltd
During the period under review, UBA was granted an International Banking license by the Central Bank of Nigeria. In addition, the Bank has obtained an approval in principle to operate as a holding company (Hold Co) – UBA Holdings Plc. The Hold Co will have UBA Plc, UBA Capital Holdings Plc and UBA Africa Holdings as subsidiaries.
A banking group will operate under UBA Plc and will include operations in Nigeria and New York as well as UBA Pension Custodians Limited. Other banking operations outside Nigeria (18 countries) will operate under UBA Africa Holdings Limited.
UBA Plc is to divest its interest in UBA Registrars Limited and UBA Properties Limited. UBA Capital Holdings will house all the other non‐banking subsidiaries of UBA in asset management, investment banking, trusteeship and insurance.
UBA views technology as an integral part of its business strategy. To support the Bank‟s large customer base of over seven million clients, UBA has automated most of its processes to minimize costs and enhance service delivery. The Bank core banking application is the Finacle software. The software runs on an Oracle database and is deployed on a central architecture on HP and IBM servers. Finacle solution addresses the requirements of the Bank‟s operations, interfacing with e‐delivery channels and other subsidiary systems. UBA‟s branches are linked via fibre, VSAT, DSL and radio telecommunications infrastructure.
UBA maintains correspondent banking relationships with: ABSA Bank South Africa; Fortis London; BNP Paribas Paris; Credit Suisse Zurich; UBA Capital London; UBA New York; Deutsche Bank London; FBN Bank (UK) Ltd.; HSBC; Standard Bank of South Africa; Standard Chartered Bank London; Sumitomo Mitsui Banking Corporation London; Commerzbank AG; Bank of Tokyo; UBS Switzerland; Mashreq Bank UAE; Rand Merchant Bank; Nordea Bank AB; Sven Handelson Banken; BCGE Bank; Natixis Bank; ING Belgium SA/NV
Brussels, Bank of Beirut, London, Babylos Bank, UK, Credit Agricole Geneva, BCP, Switzerland and ICICI Bank Ltd Bahrain.
UBA is one of the largest banks in Nigeria, with Tier one capital of ₦176.5 billion as at 31 December 2010. Total assets and contingents as at same date stood at ₦2.1 trillion, ranking third amongst the 24 banks operating in Nigeria. Loans and advances (gross) stood at ₦601 billion, slightly lower than the
₦612 billion in 2009. As at 31 December 2010, UBA‟s impaired loans accounted for 7% of total loans, remaining largely unchanged from the prior year. UBA‟s NPL‟s accounted for 5% of the total loan book as at Q2 2011 benefiting to a large extent from CBN‟s refinancing schemes and the sale of impaired assets to AMCON. Profitability indicators were moderate, but remain below both the Bank‟s historical trends and the peer average. In the period under review, UBA‟s pre‐tax return on average assets (ROA) and pre‐tax return on average equity (ROE) stood at 0.8% and 9.3% respectively (December 2009:
0.9% and 10.4%).
UBA‟s total assets and contingents stood at ₦2.1 trillion as at 31 December 2010. UBA‟s largest earning assets during the period were contingent assets (30%) and loans and advances (29%). During the period under review, liquid assets comprising largely government securities grew by 93% to account for 19% of total assets (2009: 10%). In 2010, most banks in Nigeria channelled excess liquidity to government securities, while focusing on loan recoveries.
Contributing to the increase in the Bank‟s portfolio of government securities, were treasury bills pledged with the CBN, on account of loans refinanced under the CBN/BOI scheme. As at year end 2010, a significant 8% of the Bank‟s total assets were balances with Nigerian banks, higher than the industry average of 5%.
About 23% of these placements were with institutions we consider to be “high risk”. Nonetheless, the banks were nationalized subsequent to year end and are thus not likely to renege on their obligations.
Furthermore, the CBN has guaranteed the inter‐bank obligations of the nationalized banks till December 31, 2011.
UBA lends to a diverse group ranging from the public sector to top tier multinationals and small enterprises in various sectors of the economy. Loan growth has been fairly aggressive; the loan book has grown at a cumulative average growth rate of 39% in the last five years. Though most recently, UBA redefined its risk appetite to more prudent levels, following the huge credit losses recorded in 2009 and 2010. Loans and advances (gross) stood at ₦601 billion slightly lower than the
₦612 billion in 2009.
Over the past year, the Bank took various strategic actions to improve the quality of its loan book. UBA stopped lending to „high risk sectors‟ such as to the capital market, while exploring opportunities in key growth sectors such as infrastructure, agriculture and oil & gas, which have recently benefited from government reforms.
Combined exposures to these sectors grew by over ₦63 billion in 2010, while capital market loans and consumer credits declined by ₦25 and ₦33 billion respectively from the prior year.
Overall, sector concentration risks remain minimal; UBA‟s loan book is fairly diversified, with the largest exposure to one sector accounting for 18% of the loan book.
DEFINITION OF TERMS
⦁ 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.
⦁ 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 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.
⦁ 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.
⦁ 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.
⦁ Stable Banking System
This 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..