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TITLE PAGE
AN APPRAISAL OF THE ROLE OF CBN AND NDIC IN BANK SUPERVISON AND REGULATION IN NIGERIA
BYOCHULOR EZEH CHIAZAM
NAU/2008414888
BEING
A RESEARCH PROJECT PRESENTED TO THE DEPARTMENT OF BANKING AND FINANCE IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF BACHELOR OF
SCIENCE (B.SC) DEGREE IN BANKING AND FINANCE
FACULTY OF MANAGEMENT SCIENCENNAMDI AZIKIWE UNIVERSITY, AWKA
ANAMBRA STATE
SEPTEMBER, 2012APPROVAL PAGE
2
This is to certify that OCHULOR EZEH CHIAZAM has satisfactorily
completed this research work and it has been read and approved
as having met the requirement for the award of B.Sc. degree in
Banking and Finance, Nnamdi Azikiwe University, Awka, Nigeria.
………………………………… ...…………………………………….MR IFEANYI O. NWANNA DATE (PROJECT SUPERVISOR)
……………………………….. ……………………………………… MR. CLEM NWAKOBY DATE (HEAD OF DEPARTMENT)
………………………………… ……………………………………… (EXTERNAL EXAMINER) DATE
3
DEDICATION
This project is dedicated to God Almighty for his divine nature
upon my life. And also in loving memory of my beloved mum
Late. Mrs. Elizabeth U. Ochulor for her zeal and love for quality
education which inspired me up to this level in my academic
pursuit.
ACKNOWLEDGEMENTS
4
I highly acknowledge the Almighty God for making it possible for
me to start and complete my study in this great institution and
also for his strength and enabling grace to accomplish this
research project work.
My sincere gratitude goes to my project supervisor Mr. Ifeanyi .O.
Nwanna for his constructive criticism, who in spite of his tight
schedule was able to direct and guide me in this research
project.
I will not fail to acknowledge my Head of Department, Mr. Clem
Nwakoby and other lecturers Prof. F.O Okafor, Prof. Alex Mbachu,
Prof. Steve Ibenta, Mr. Cele Okaro, Mr. E.S Ekezie, Mr. V.I
Okonkwo, Mr. P.K Adigwe, Mr. F.N Echekoba, Mr. Gideon Ezu, and
Mrs. Ifeoma Amakor for their relentless effort. I also want to
acknowledge the department secretaries especially Mrs. Christy
Onyeka for their motherly advise.
I appreciate my Dad Mr. Matthias .E. Ochulor for his love,
prayers, financial and moral support for me. My uncles and aunts
Mr. Okey, Mr Nnamdi Ochiobi, Aunty Chinenye, Aunty
Beatrice ,Aunty Nkakwa, Aunty Chioma, Aunty Clara. My love and
gratitude goes to my siblings’ Obinna, Amarachi and Chidinma
for their support towards me.
5
I will not fail to appreciate my course mates Pachez , my dearie
Jenny, Nwankwo Lucy, Tonero(My boss), Collins, Sixtus, Ability,
Ebuka Umeanor ,Prosper, Jenifa bass, Mz dee, Stan, Edith, Gozie,
Kelvin, Nerissa and Okafor john.
My lodge mates Amara, Ifeoma, Charity, Prince Iyke, Ebube,
Wilson, and Emma Osinachi. My special friends Steve Eze,
Amaka Joy, Chukwuma Akaegbobi, Chike Onuoha, Daniel Chiboy,
Obi Chukwuemeka and Egbema Iyke . For those I did not
mention I love you all.
ABSTRACT
This is an empirical study of the role of Central Bank of Nigeria and the Nigerian Deposit Insurance Corporation in bank supervision and regulation in Nigeria. The study focuses also on the origin of banking supervision and regulation, laws guiding
6
banking regulation, methods employed by regulatory authorities and constraining factors to effective regulation. It evaluates the role of the CBN and NDIC to the banking sector. A questionnaire and telephone based research was adopted for the study and the data collated was tested using the chi-square analysis. The appraisal shows that the supervisory and regulatory framework of the CBN and NDIC are not sufficient enough to guarantee effective banking practices in Nigeria. Other findings from the study include the need to increase the maximum coverage per depositor for commercial banks due to the effect of inflation and the persistent fall in the value of the naira, the need to disclose the transactions continuously to ensure financial prudence through regular supervision and monitoring of the health of local banks, need to increase the awareness of banking activities within the populace. 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. Finally, the study offered suggestions as to how the problems so identified could be ameliorated.
TABLE OF CONTENTS
Title Page - - - - - - - - - i
Approval Page - - - - - - - - ii
Dedication - - - - - - - - - iii
Acknowledgements - - - - - - - iv
7
Abstract - - - - - - - - - vi
List of Tables - - - - - - - - xi
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study - - - - - 1
1.2 Statement of Problem - - - - - - 4
1.3 Objectives of the Study - - - - - - 5
1.4 Statement of Research Questions - - - - 6
1.5 Research Hypotheses - - - - - - 7
1.6 Significance of the Study - - - - - - 8
1.7 Scope and Limitations of the Study - - - - 8
1.8 Definition of Terms - - -- - - - 9
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2. I Introduction - - - - - - - 11
2.2 Theoretical Framework - - - - - - 13
2. 3 Origin of Bank Regulation/Supervision in Nigeria- - 14
2.4 Legislations guiding banking regulation - - - 23
2.4.1 Banks and other Financial Institution Act 1991 as amended - - - - - - 24
2.4.2 NDIC Act no 16, 2006 as amended - - - - 27
2.5 The Agents of Banking Supervision and Regulation- - 28
2.6 The Objectives for Banking Supervision and regulation- 30
2.7 Central Bank of Nigeria Traditional Instruments for Controlling Banks in Nigeria - - - - 31
2.8 Ways and Methods by which Regulatory Authorities
8
Carry out Supervisory Functions in Banks- - - 36
2.9 Other forms of Examination used by CBN/NDIC in Carrying out their Supervisory and Regulatory Role- - 41
2.10 Procedures and areas of banking Examination- - - 43
2.11 The Nigerian Deposit Insurance Scheme- - - - 46
2.11.1 Reasons for establishing the deposit Insurance Scheme in Nigeria - - - - - - 49
2.11.2 DIS Policy Objectives - - - - - - 52
2.11.3 Challenges of NDIC in guaranteeing Deposits - - - - - - - - 54
2.12 The Roles of CBN and NDIC in Bank Supervision And Regulation - - - - - - - 58
2.12.1 The Relationship between NDIC and the Central Bank of Nigeria - - - - - - - 62
2.13 CAMEL as CBN tool for Determining Financial Conditions Of Banks - - - - - - - - 63
2.14 Constraints to Effective Supervision - - - - 72
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Research Design - - - - - - - 74
3.2 Nature and Sources of Data - - - - - 74
3.3 Population and Sample Size - - - - - 76
3.4 Data Analysis Techniques - - - - - 78
9
CHAPTER FOUR: DATA ANALYSIS AND PRESENTATION
4.1 Introduction - - - - - - - 80
4.2 Analyses of Data - - - - - - - 80
4.3 Hypotheses Testing - - - - - - 93
4.3.1 Test of Hypothesis I - - - - - 94
4.3.2 Test of Hypothesis II - - - - - - 96
4.3.3 Test of Hypothesis III - - - - - - 97
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
5.1 Summaries of Findings - - - - - - 99
5.2 Conclusions - - - - - - - 100
5.3 Recommendations - - - - - - 101
Appendices
References
LIST OF TABLES
Table 2.1: Current Regulatory/Supervisory Framework For Nigerian Banks - - - - - 29
Table 2.2: Number of Deposit Money Banks Examined On-site by NDIC - - - - - - 39
Table 2.3 Capital Adequacy of Insured Banks- - - 65
Table2.4 Asset Quality of Insured Banks - - - 67
10
Table 2.5 Management Quality of 5 Largest Banks - - - 68
Table 2.6 Earnings and Profitability Indicators - - - 71
Table 2.7 Liquidity Ratio of Insured Banks - - - 72 Table 4.1.1 Sex Distribution of Respondents - - - 81
Table 4.1.2 Age Distribution of Respondents - - - 81
Table 4.1.3 Educational Qualification of Respondents- - - 82
Table 4.1.4 Categories of Respondents - - - - - 82
Table 4.1.5: Category of Bank Staff Respondents- - - 82
Table 4.2.1: Effectiveness of the Supervisory and Regulatory Framework of Banks - - - - - 83
Table 4.2.2: Stability in the Banking System; a Result of Effective Regulatory and Supervisory Framework - - - - - - - 83
Table 4.2.3: Performance Rating Of NDIC/CBN in Controlling Banks - - - - - 84
Table 4.2.4: CAMEL Framework Assessment for Insured Banks - - - - - - - 85
Table 4.2.5: Disclosure of Banks Annual Financial Statements - - - - - - 85
Table 4.2.6: Five Hundred Thousand Naira Maximum Coverage for DMBs per Depositor- - - - 86
Table 4.2.7: On-Site Inspection Visit to Banks - - - 87
11
Table 4.2.8: The Off-Site Supervision of Banks by the CBN/NDIC Acts - - - - - - 88
Table 4.2.9: Effective Banking Regulation Encourages Quality Service and Promotes an Efficient and Competitive Banking System- - - - - - - 88
Table 4.2.10 The CBN/NDIC Regulatory and Supervisory Roles in Nigeria - - - - - - 89
Table 4.2.11: The CBN/NDIC Off-Site Supervision as an Instrument of Regulation and Supervision- - 90
Table 4.2.12: False Returns by Banks a Major Constraining Factor for Effective Regulation and Supervision- 90
Table 4.2.13: Public Awareness of the CBN/NDIC Activities- 91
Table 4.2.14: Investors and Depositors Awareness of NDIC Activities - - - - - - 92
Table 4.3.1 A Contingency Table for Hypothesis І- - - 95
Table 4.3.1B Chi-Square Computed Decision - - - 95
Table 4.3.2A Contingency Table for Hypothesis ІІ- - - 96
Table 4.3.2B Chi-Square Computed Decision - - - 96
Table 4.3.3A Contingency Table for Hypothesis ІІІ- - - 97
Table 4.3.3B Chi-Square Computed Decision - - - - 97
12
CHAPTER ONE
INTRODUCTION
1.2 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 payment system and facilitating the
implementation of monetary policies.
13
It is not surprising therefore ,that governments all over the
world attempts 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 the protection against systemic risk
and collapse. (Somoye 2008)
Banking business is highly regulated all over the world. This is
because of the pivotal position the financial industry occupies in
most economies. An efficient banking system is 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. (Alao
2010)
Bank supervision entails not only enforcement of the rules
and regulation, but also judgment concerning the soundness of
bank assets, its capital adequacy and management. Therefore
14
effective supervision is expected to lead to a healthy banking
industry that possesses power to propel economic growth.
Regulation and supervision of banks remains 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 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 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
15
identify and diagnose emerging problems in individual banks
with a view to prescribing the efficient resolution options. 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
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
Institutions 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.
1.5 STATEMENT OF PROBLEM
16
As has been noted already, the CBN and NDIC are the main
regulators and supervisors of the banking industry in Nigeria.
These regulations and supervisions are implemented to ensure a
sound and safe financial system in the economy. The supervisors
and regulators employ a lot of instruments and measures which
they use in carrying out their functions.
In line with this, various banking legislations/acts have
been promulgated as well as the introduction of different
strategies, all aimed at increasing the efficiency of the role of
CBN and NDIC in banking supervision and regulation. False
returns by banks and the inefficiency of the regulatory
authorities in carrying out their duties has been identified as a
problem.
1.6 OBJECTIVES OF THE STUDY
The general objective of this research work is to appraise the
role of CBN and NDIC in bank supervision and regulation in
Nigeria. The specific objectives of this study are:
1. To find out if the role of CBN and NDIC in bank supervision
and regulation in Nigeria has been positive.
17
2. To ascertain some of the instruments of regulation used by
CBN and NDIC.
3. To find out the constraining factors to efficient and effective
supervision and regulation in Nigeria.
1.4 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:
Has the role of CBN and NDIC been positive in bank
supervision and regulation in Nigeria?
18
Is false return by banks a major constraining factor to bank
supervision and regulation in Nigeria?
Does the CBN and NDIC use off site supervision as an
instrument of regulation and supervision in Nigeria?
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?
1.5 RESEARCH HYPOTHESES
The following hypotheses formulated for the purpose of this
study
Hypothesis 1
Ho: CBN/NDIC roles in bank supervision and regulation in
Nigerian has not been positive.
H1: CBN/NDIC roles in bank supervision and regulation in Nigeria
has been positive.
HYPOTHESIS 2
19
Ho: CBN/NDIC does not use off-site supervision as an instrument
of regulation and supervision of banks in Nigeria.
H1: CBN/NDIC does use off-site supervision as an instrument of
regulation and supervision of banks in Nigeria.
HYPOTHESIS 3
Ho: False returns by banks are not a major factor constraining
effective regulation and supervision.
H1: False returns by banks are a major factor constraining
effective regulation and supervision.
1.6 SIGNIFICANCE OF THE STUDY
This study is of importance in that it will help depositors of funds
in financial institutions to fully understand the role which
CBN/NDIC plays as bank supervisors and regulators in ensuring
that their money are safe even in a case of liquidation as it
relates to deposit insurance scheme.
It also provides a platform for the regulators and
supervisors to know what the constraining factor has been if any
and underline areas of improvement. The findings of this study
will also be of great benefit to the Nigerian banking industry and
20
other related institutions as it will make them better appreciate
the role CBN/NDIC plays as bank supervisors and regulators. The
findings will also help the banks to have an insight of what is
expected of them by the authorities.
1.7 SCOPE AND LIMITATIONS OF THE STUDY
This study will cover the origin of banking supervision and
regulation, legislations/Acts as it relates to the CBN/NDIC
banking supervision and regulation in Nigeria as amended,
methods the regulatory authorities employ in carrying out
regulation and supervision.
In this study, information gathered is limited due to the
fact that it is being sourced from the internet, aid of local
newspapers, journals, and annual reports from CBN/NDIC which
requires a lot of money to do so also, inadequate time to collect
data and gather information faced the research or coupled with
the fact the research will be carried out simultaneously with
other academic commitment such as lectures, assignments,
semester quizzes and examinations.
21
1.8 DEFINITION OF TERMS
1. Bank Regulation: Bank regulation is a body of specific rules
or agreed behavior either imposed by some government or
external agency or self-imposed by explicit or implied
agreement within the industry that limits the activities and
business operations of the institutions in the industry to
achieve a defined objective. (Llewellyn: 1988)
2. Banking Business: BOFIA as amended in 2001 defined
banking business as the business of receiving deposits on
current accounts, savings accounts and other accounts,
paying and collecting of cheques, paid in or drawn by
customers, provision of finance, consultancy and advisory
services relating to corporate and investments on behalf of
any person, insurance marketing service, capital market
business and any other business as the governor from time to
time may designate as banking business.
3. Bank Supervision: Is the process of monitoring banks to
ensure that they are carrying out their activities in
22
accordance with laws, rules and regulations and in a safe and
sound matter.
4. Financial Intermediation: Financial intermediation is the
mobilization of funds from the surplus spending units at a cost
or lending such funds to deficit spending units at a price
within and outside the shore of a country.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.1 INTRODUCTION
In view of the importance of the banking sector in the
economic development and the imperfection of the market
mechanism to mobilize and allocate financial resources to
socially desirable economic activities of any nation, governments
the world over, do regulate them more than any other in the
world.
This underscores the need for banking sector regulation.
However, in addition, the nature of banking business (being
23
highly geared and conducted with greater secrecy when
compared with other real sector business) provides added
reason for strict supervision .This is to constantly beam a search-
light on the sectors activities with a view to ensuring that
operators play by the rules of the game and imbibe sound and
safe banking practices.
Llewellyn (1988) defined Regulation of banks as a body of
specific rules or agreed behavior either imposed by explicit or
implicit agreement within the industry that limits the activities
and business operations of banks. Banking regulation has two
major components
1. The rules or agreed behavior and
2. The monitoring and scrutiny to determine the safety and
soundness and ensure compliance.
Supervision on the other hand, is the process of monitoring
banks to ensure that they are carrying out their activities in a
safe and sound manner and in accordance with rules and
regulations .it is a means of determining the financial condition
and ensuring compliance with the laid rules and regulations at
24
any given time. Bench (1993) asserts that effective supervision
of banks leads to a healthy banking industry.
According to Alao (2010) bank supervision entails not only
enforcement of rules and regulation but also concerning the
soundness of bank asset, its capital adequacy and management.
Therefore effective supervision is expected to lead to a healthy
banking industry that possesses power to propel economic
growth.
2.2 THEORETICAL FRAMEWORK
In a developing country like Nigeria banks play an important and
sensitive role hence their performance directly affects the
growth stability and efficiency of the economy. Thus for the
industry to be to be efficient it must be regulated and supervised
in view of the failure of the market system and the tendency of
the market participants to take undue risks which could impair
the stability and solvency of their institutions .( Ekpeyoung and
Dada 2007, Alao 2010)
It has become evident that one of the very completing
requirements for the success of any business in any economy is
25
the existence of favorable regulatory environment. Ekpenyong
and Dada (2007) submitted that regulations can either promote
or stifle business performance.
Iyade (2006) conducted an empirical analysis of the impact
of regulation and supervisory on the activities of Nigerian banks
with emphasis on the role of Central Bank of Nigeria and The
Nigerian Deposit Insurance Corporation .The results of the
analysis showed that the supervisory and regulatory framework
of the Central Bank of Nigeria was not sufficient to guarantee
effective banking practices in Nigeria.
Oladejo, Oladehinde and Oladipupo (2010) also conducted a
research on the regulatory authorities and the performance of
Nigerian banks_ an appraisal. The study aimed at examining the
impact of the regulatory authorities on the banking industry
performance, assess the effectiveness to which the NDIC
guaranteed depositors funds through its deposit insurance
scheme and investigate whether the Nigerian banking industry
need further recapitalization .Findings revealed that regulatory
and supervising framework of banks is effective.
26
2.3 ORIGIN OF BANK REGULATION/SUPERVISION IN NIGERIA
Banking regulation was first introduced in Nigeria in the early
1950s in response to the failure of local banks. The 1952 banking
ordinance was the first banking legislation. This was followed by
the enactment of the 1958 Central Bank Act and the Banking
ordinance of 1959, the banking legislation was further
strengthened with the enactment of the Banking decree
1969 .This consolidated previous banking legislations; raised
minimum paid up capital requirements and empowered the CBN
to specify a minimum capital deposit. (Ekundayo 1994:346)
The early banking regulation during the colonial era, in
particular, the 1952 banking ordinance, focused on the need to
address endemic bank failure which occurred during the laissez-
faire phase (1892-1952). The 1952 ordinance in essence laid the
foundation on which subsequent legislation especially the
banking decree 1969 and its amendments, most recently, the
banks and other financial institutions act, 1991 and the Central
Bank Act, were built. (Okaro 2009:10)
27
It also empowered the CBN to impose liquidity ratios and
placed restrictions on loan exposure and insider lending
(Oloyede 1994: 283). The legislation contained in the 1969 22
money at call from other banks accounted for 17.2 percent and
loans and advances from other banks (excluding the CBN) for 8.6
percent of the Commercial Banks total liabilities at the end of
1991. These fell to 11.8 percent and 4.8 percent respectively at
the end of 1992. The figures given in NDIC reports for later years
are not directly comparable but it is evident that inter-bank
funding from loans and call deposit fell to less than 6 percent of
Merchant Banks liabilities in 1993 and 1994. As a share of
Commercial banks total local currency deposits, inter-bank funds
fell from 44 percent in 1990/91.
The vulnerability of the commercial banks to the
liquidation squeeze was exacerbated by the impact of CBN
regulations which stipulated that minimum shares of their loan
portfolios has to be allocated to long term loans, leading to a
mismatch in the maturity structure of their assets and
liabilities .Their ability to mobilize deposit was also impeded
28
because regulations presented them from accepting deposits
below a specified minimum amount.
The CBN Decree of 1991 established the regulatory
framework for the prudential control of banking for the next 22
years until it was superseded by the 1991 Banks and Other
Financial Institutions Decree (BOFID). The prudential system was
ineffective in preventing mismanagement and fraud becoming
widespread in the banking system for a number of reasons. First,
although the CBN was responsible for supervising banks, it
lacked independence from the Federal Ministry of Finance
(FMOF), especially with regard to the licensing of banks (the
authority for the granting of Banking license lay with the FMOF
until this was transferred to the CBN under the 1991 BOFID), and
the enforcement of sanctions when in fractions of legislation
were discovered. Political considerations, and a lack of technical
expertise in the FMOF, impeded proper bank regulation and
supervision in particular because many of the public sector
banks were expected to follow developmental objectives
(Oloyede 1994: 314).
29
Second, the primary regulatory concern of the CBN was
with ensuring compliance with the allocate controls, such as the
sectoral lending guidelines, rather than the prudential controls.
The allocate controls weakened loan portfolio quality by diverting
loans towards non-viable borrowers (Jimoh 2004: 304)
Third, between the mid 1980s and 1991, the licensing
procedures were too lax, allowing politically connected people to
obtain licenses and operate banks despite having no obvious
qualifications or relevant experience. The CBN suspended
granting new licenses in 1991, but between 1986 and 1991, 84
new banks were established. The rapid growth in the number of
banks overwhelmed the examining capacities of the CBN/NDIC.
On-site inspections were infrequent and were confined mainly to
checking compliance with allocate requirements. This, combined
with political constraints allowed banks to flout the banking laws.
The de facto liberalizing of licensing policy before prudential
regulations and supervisory capacities were strengthened,
allowed under-capitalized and poorly managed banks to set up in
large numbers, and was therefore a significant contributory
30
factor to the financial fragility which subsequently afflicted the
banking industry.
Fourth, the banking legislation failed to ensure that loans
were properly classified, provisions made for loan losses and
unpaid interest suspended from income (Jimoh 2004: 323). This
allowed banks to conceal the true state of their balance sheets.
Despite the deficiencies of prudential regulation there were
very few overt bank failures between 1960 and the early 1990s.
It is unlikely that this was because all banks were soundly
managed in this period. Although fragility in the banking system
clearly worsened during the 1990s, the imprudent lending
policies which were the major cause of the distress probably
began soon after most of the distressed banks were set up. Bank
failures were probably averted in this period, despite the
mounting bad loans afflicting in particular, many of the state
government banks, by a number of factors.
The federal government appears to have had an implied
policy not to allow banks to fail, and as a result, banks facing
liquidity shortages because of non-performing loans probably
31
had recourse to support from the federal budget, CBN loans or
public sector deposits, although there is little evidence to
substantiate this. The lack of competition due t regulatory
restrictions on lending interest rates and new entry is also likely
to have assisted some of the badly managed banks to survive,
while insolvency was concealed by accounting practices which
failed to reveal the true state of asset quality and income.
There was a change in the attitude of the authorities
towards prudential regulation in 1988/89. The federal
government appears to have become less willing to
accommodate bank distress through public subsidies, possibly
because of the need to improve macroeconomic control. Instead
the emphasis changed towards imposing much stricter
prudential standards, providing limited deposit insurance and
putting in place a mechanism for dealing with distressed banks.
In 1988, the NDIC was set up to insure the deposits (up to
a maximum amount for a single deposit) of all licensed banks,
funded by a (tax deductible) levy on the insured deposits of the
banks. The NDIC was given authority to inspect banks (thus
32
providing a second supervisory agency alongside the CBN) and
also acts as the liquidator for those banks which the CBN which
the CBN decides to take over and close down. The CBN
introduced new capital adequacy requirements in 1990 under
which the banks’ minimum required capital and reserves are
based on risk weighted assets, as in the Basel accords. The
previous requirements, under which banks on minimum adjusted
capital were committed as a percentage of loans and advances
have been retained, hence banks are required to meet both
ratios. The new requirements are stringent in that they require
banks to maintain higher levels of capital to support their
operations .In 1991; the minimum paid-up share capital for
Commercial Banks was raised from 20 million to 50 million.
The prudential guidelines issued by the CBN in 1990
directed banks to classify loans according to whether then were
being serviced to make provisions for non-performing loans, to
suspend unpaid interest from income and to classify and make
appropriate provisions for off balance sheet commitments. The
1969 Banking Act was replaced in 1991 by the BOFID.
33
This strengthened the legislative powers of the CBN. It
gives the CBN the sole responsibility for licensing banks and
provided it with various powers to enforce the banking laws. E.g.
issuing ceases and desist orders, imposing penalties on bank
directors and employees and taking over the management of
distressed banks. In 1994, draconian anti-fraud legislation was
introduced with the promulgation of the failed banks (recovering
of debts) and financial malpractice’s Decree.
Since 1992, the CBN and NDIC have taken steps to deal
with bank distress. The strategy adopted involves first imposing
holding actions (preventing further lending etc) on the distressed
banks while their owners are instructed to recapitalize them,
recover debts and improve their management. If they fail to do
this satisfactorily, the CBN then appoints interim management
boards to the banks, following which it may liquidate the banks,
with the NDIC reimbursing insured depositors or acquire them for
a nominal fee for possible resale to new owners. The takeover of
many distressed banks was however delayed until well after the
problems have been identified because of the need to secure
34
presidential approval (World Bank 1994:48). In 1994 four local
banks had their licenses revoked by CBN and have been
liquidated by NDIC. As at late 1995, the CBN has taken control of
ten state government banks and a further 13 local private sector
banks, appointing interim management boards for these banks.
Six of the government banks were acquired by the CBN for a
nominal sum of N1million in 1995. While recently the CBN gave a
mandate that those banks that money was ejected (N620 billion)
should merger with a bigger bank or face liquidation process.
The reforms outlined above have addressed many of the
regulatory defects prevailing in the 1980s and put mechanisms
in place for improved prudential regulation and for dealing with
bank distress. Nevertheless, the practical difficulties involved in
both tackling the prevailing distress and in ensuring that banks
are prudently managed are enormous, probably greater than
anywhere else in Africa.
2.4 LEGISLATIONS GUIDING BANKING REGULATION
35
These decrees update the innovations in the financial
system consequent upon the deregulation of the system; they
now cover both banks and non-bank financial institutions.
2.4.1 Banks and Other Financial Institution Act 1991 as Amended
The Act, among other things, regulates banking and other
financial institution by prohibiting the carrying on of such
business in Nigeria except under license and by a company
incorporated in Nigeria. Adequate provisions have been made
regarding the proper supervision of such institutions by the
Central Bank of Nigeria.
The Act gave powers for the CBN on matters of regulation
and supervision of licensed banks especially in relation to
granting and withdrawal of banking license, resolution of the
problem of failed banks, which before now were the
responsibilities of the Minister of finance. Other reforms brought
36
by the Act include: the empowerment of the CBN to increase the
minimum paid-up capital of commercial banks as it deemed fit.
BOFIA 1991 as amended and CBN Act number 24 of 1991
(Amended in 1997, 1998, 1999 and recently in 2007) superseded
the CBN Act of 1958 and banking Act of 1969. The amendment
gave the CBN greater flexibility in regulating and supervising the
banking sector and other financial institutions with hitherto, had
operated outside its regulatory authority. It also conferred
instrument autonomy on the bank in the formulation and
implementation of monetary policy in Nigeria.
In addition, the BOFIA conferred on the governor of the
CBN and the Board of Directors of the bank, powers to revoke
the operating license of a bank granted under the principal Act. It
also reviewed upward penalties for offences and contraventions
of the Act by banks and other financial institutions and extended
the powers of the CBN to remove erring directors and principal
officers of banks. Banking license was consequently liberalized
such that by the time embargo was placed on the issuance of
new banking licenses in 1991, a total of 79 new banks had been
37
licensed, which brought the total number of banking operating in
the country to 120 with a network 2,107 branches.
Thus, against the background of the economic
deregulation policy of that era and the upsurge in the number of
licensed banks, it become imperative to restructure and beef up
the regulatory apparatus in order to prevent a reoccurrence of
massive bank failures of the early 1950s which brought untold
hardship to the banking public.
Another major reform that had a profound impact on
regulatory practice in the country was the issuance of prudential
guidelines of licensed in November 1990 by the CBN. CBN also
adopted the Basel committee report on prudential guidelines,
the harmonization of accounting practice by banks via the
issuance of SAS 10 and the directive that required public sector
deposits to be transferred to the CBN, thereby exposing the
precarious liquidity positions of some banks and distress that
was inherent in their operations. The document spelt out
objective criteria for income recognition, asset classification and
provisioning. It sought to ensure uniformity and comparability of
38
the audited financial statements of licensed banks. As a matter
of fact, it took the timely intervention of the regulatory
authorities to prevent what could have been a system failure. Of
course, banking system distress has been virtually put behind us
now, having put 31 banks in liquidation while others were offered
for sale to new investors
2.4.2 NDIC Act No 16, 2006 as Amended
In furtherance of the government objective of having a virile
banking sector, decree 22 0f of 1988 (the NDIC decree) was set
up to pave way for the establishment of an explicit deposit
insurance scheme in the country. This decree have been
amended over the years, the recent amendment is the NDIC Act
No 16, 2006 as amended. That was in consonance with the
government’s decision among other reasons to shift emphasis
from direct support of shareholders and management of banks to
the protection of depositors whose interest might be jeopardized
as the banks take up risky assets in an orchestrated attempt to
outwit one another in the name of competition.
39
2.5 THE AGENTS OF BANKING SUPERVISION AND REGULATION
1. The Central Bank of Nigeria
The principal role of a Central Bank in an economy is to nurture
an efficient financial system through the application of
appropriate instruments to influence the levels of the monetary
and credit aggregates in the pursuit of low inflation economic
growth and balance of payments viability.
In developing economies, Central Banks usually go beyond
these traditional roles to engage in developmental activities in
order to speed up the economic development process and
enhance the environment for the performance of their primary
role.
2. The Nigeria Deposit Insurance Corporation The Nigeria Deposit Insurance Corporation (NDIC) was
established by Decree No. 22 of 1988 and commenced in March,
1989. The NDIC is an autonomous body (i.e. an independent
40
agent of government) which acts as an additional supervisory
authority over licensed banks and other deposit –taking financial
institutions. For now, NDIC insures only all banks licensed as
universal banks and therefore limits its supervisory activities to
them. The NDIC not only provides financial guarantee to
depositors in case of failure but also ensures that banks comply
with regulations and practices which foster safety and soundness
in the market place.
TABLE 2.1: Current Regulation/Supervisory Framework for Nigerian Banks
Types of institution
Legal framework Licensed by
Supervised by
Examined by
Insured by
Banks CBN Act 2007 as amended, Banks and Other Financial Institution Act 1991 as amended, CAMA 1990, NDIC Act No 16, 2006 as amended, Failed Bank Act No 18 of 1994.
CBN CBN/ NDIC
CBN/ NDIC
NDIC
41
2.6 THE OBJECTIVES FOR BANKING SUPERVISION AND REGULATION
The broad objectives of banking regulation and supervision are
therefore to:
1. Prevent undue concentration of economic power and promote
healthy competition in the financial system;
2. Ensure a safe and sound financial system to safeguard the
public against the worst consequences of instability;
3. Encourage and promote a high level of operating efficiency
and innovation in the financial system;
4. Meet the needs of the public for conveniently available credit
facilities and financial services;
5. Enforce the implementation of government’s monetary and
credit policy guidelines; and
6. Promote an equitable distribution of cost and benefits among
the management, stakeholders, creditors and customers of
banks and other financial institutions.
42
2.7 CENTRAL BANK OF NIGERIA TRADITIONAL INSTRUMENTS FOR CONTROLLING BANKS IN NIGERIA
The instruments of monetary policy are those devices which are
used by monetary authorities to influence the supply, allocation
and cost of credit to the economy. These instruments are used to
influence the behavior of Commercial Banks so as to induce
particular patterns of behavior which will generate the desired
results with respect to policy objectives.
The instruments are divided into:
1. Direct instruments
2. Indirect instruments.
From 1959, when the CBN was established down to 1986 when
the system was deregulated the CBN made use of direct control.
1. Direct Instruments
These instruments include:
a) Selective Credit: It involves dividing the sectors into
priority sectors and non-priority sectors, and stating the
percentage that should go to both sectors.
43
b) Credit Ceilings: Under this, the CBN will state the
minimum credit that will be issued to the public. The banks
were classified into groups to make it effective.
2. Indirect Instruments
From 1986 till date, the CBN has been making use of indirect
instruments which involves making use of market forces. These
instruments include:
a) Open Market Operation (OMO): This involves the buying
and selling of securities from and to commercial banks in
order to increase and reduce the volume of money in
circulation. If the central bank determines that the money in
circulation in the country is too small and wants to increase it,
it will buy securities from commercial banks. By buying
securities, it will increase the volume of money in the
possession of commercial of banks and increase their ability
to give more loans to members of the public, which will help
to add more money in circulation. On the other hand, if the
Central Bank feels that the amount of money in circulation is
too much and wants to curtail it, it will sell securities to
44
commercial banks. This will attract more money from
commercial banks and at the same time reduce their lending
powers, thereby decreasing the amount of money in
circulation in the country.
b) Special Deposit: This is an instruction from the Central Bank
asking the Commercial Banks to keep with it special deposits
over and above their statutory requirements. This is a
mechanism used by the CBN to curtail credit facilities of the
Commercial Banks. By obeying this instruction, the amount of
money with the Commercial Banks will be drastically reduced
and their lending abilities also reduced to the barest
minimum. The Central Bank uses this method to restructure
the economy when it is in bad shape.
c) Discount Rate: This is the interest rate charged by the CBN
on its loan through discount window. The rate is set to reflect
the banking and credit conditions available in the market. It is
fixed by the monetary policy committee of the CBN at which
its discount first class bills or first class government securities.
The main goal of discount operations is to provide over night
45
accommodation to banks that could not obtain funds on
unreasonable terms in the inter-bank market. The CBN
controls credit by making variation in the rate. If the need to
expand credit, the CBN lowers the bank rate (discount rate) in
that case borrowing from the CBN becomes cheap and in that
case the banks borrow more which means there will have
more money for on lending to their customers at a reasonable
low rate of interest. The monetary policy committee fixed the
current bank rate at 8%.
d) Special Directives: These are special instructions, which the
Central Bank gives to Commercial Banks and other financial
institutions as to which directions their lending policies should
follow. The Central Bank will tell them the sector of the
economy they should direct their lending policies. In this case,
if for instance, the nation is pursuing agricultural and
industrialization policies, the Central Bank will direct them to
give more loans to farmers and industrialists.
e) Reserves Requirement: Under this, will have (a) Cash
reserve requirement. (b) Liquidity ratio
46
i. Cash Reserve Requirement: Every Commercial Bank in
Nigeria is expected to maintain a minimum percentage of its
deposit with the Central Bank. The minimum amount of
reserve with the CBN may either be a percentage of its time
or demand deposit separately, or of the total deposits. From
the excess reserve the Commercial Banks extend credit to the
economy. The larger the size of the excess reserve, the
greater the ability of the banks to extend credit. The current
reserve ratio is 8% which is represented as:
CRR = Vault cash + Balance with CBN * 100 Total deposit liabilities 1
ii. Liquidity Ratio: The banks are required by law to be
adequately liquid, which means that banks are required to
hold some of their assets in cash realizable form. As a control
instrument, banks in Nigeria are required to maintain liquidity
ratio of 30%
Liquidity Ratio = Total specified Liquid Assets * 100 Total current Liabilities 1
f). Moral Suasion: It is a form of round table dialogue
between the CBN governor and the directors of the banks. The
47
CBN will invite the banks directors to dialogue on important
issues of the economy. At the end of the meeting, the directors
of the banks will append their signature on all the agreement
reached between them and the CBN. This is a binding
agreement. Then, they also agree on the penalty when there is a
default. Moral suasion has a useful role to play in all systems of
monetary management as a supplementary tool. Moral suasion
brings the CBN in close contact with the market operators. This
contact makes the CBN know the problems facing the operators
and possible solution for solving the problems. Moral suasion is
the most effective method monetary policy.
2.8 WAYS AND METHODS BY WHICH REGULATORY AUTHORITIES CARRY OUT SUPERVISORY FUNCTIONS IN BANKS
Supervisory authorities carry out their function through
bank examinations. Bank examination may be defined as the
examination of the banks and records of a bank for the purpose
of ascertaining that the affairs of the bank are being conducted
in a safe and sound manner with respect to: adequacy of capital,
asset quality, board and management, earnings, liquidity,
48
adequacy of internal controls, adequacy of accounting system
and record keeping as well as compliance with both the
individual banks internal policies and prudential regulations.
To accomplish the task of examining banks, bank
examiners use both off-site and on-site surveillance and other
forms of examinations to carry out their supervisory function.
1. On-Site Surveillance: On-site surveillance of banks
entails physical presence of regulators (CBN and NDIC) in the
financial institutions to evaluate their internal controls,
compliance with the laws and regulations governing their
operations with a view to determining their overall risk exposure.
Emphasis is place on their risk assessment, capital adequacy,
risk quality, board and management, earnings, liquidity
management, foreign exchange operations and report writing
format.
In 2009, the NDIC bank examination department jointly
conducted with the CBN Banking supervision department, special
examination of each of the 24 deposit money banks operating in
Nigeria. The NDIC also conducted fifteen (15) special
49
investigations arising from petitions and complaints from the
banking public and other stakeholders during the year. In the
year 2010, NDIC conducted 30 investigations on petitions and
complaints from customers as well as other stake holders in 15
banks. The major issues centered on excess and/or multiple bank
charges for services, unauthorized /fraudulent withdrawals from
customers account via automated teller machines (ATMs)
forgeries/fraud on customers account, illegal charges and unjust
victimization of staff.
Details of the comparable number of examinations by type,
conducted by the NDIC are presented in table 2.2
Table 2.2: Number of Deposit Money Banks Examined and Investigated On-Site by NDIC in 2009-2010.
Year Routine /RBS
Examination
Special
investigations
Joint CBN/NDIC
(TARGET) investigation
Total
2010 12 30 24 66
2009 11 15 24 50
50
Joint CBN/NDIC Special Examination
Source: Bank Examination Department NDIC
1. Off-Site Surveillance: It basically involves the analysis of
banks’ return to the CBN as statutorily required under BOFID
1991 (Sections: 24 – 29). Off-site surveillance also focus on
financial statements, banks, Branch Network, credit risk
management system (CRMS), Fraud and forgeries and
enforcing statutory requirements (liquidity ratio, capital
adequacy ratio and cash reserve requirement etc).
In 2009 and 2010, the NDIC through its Insurance and
Surveillance Department (ISD), performed its off-site monitoring
activities over the 24 universal banks in the industry specifically,
NDIC assessed the financed conditions and performance of the
insured banks on monthly bases by analyzing call reports
rendered through the electronic Financial Analysis Surveillance
System (e-FASS). The evaluation of the financial conditions
culminated in production of the Quarterly Bank and industry
reports with performance rating of each bank which formed the
51
basis for remedial supervising action and other
recommendations that could influence banking policy.
The intervention of CBN in eight (8) banks, led to the
removal of their executive managements and injection of N620
billion liquidity support fund. The CBN also directed two (2) other
banks to recapitalize by June 2010. Those measures prompted
closer-off-site supervision of the affected banks by NDIC to
ensure effective protection for the depositors of the affected
banks as well as contribute to the stability of the financial
system and to enhance transparency in financial reporting.
2.9 OTHER FORMS OF EXAMINATION USED BY CBN/NDIC IN CARRYING OUT THEIR SUPERVISORY AND REGULATORY ROLE
1) Maiden Examination: It is an examination conducted within
the first six months of the commencement of operations. The
main objective of a maiden examination is to ascertain that
the bank’s operations are conducted in a manner that is
52
consistent with the conditions stipulated in its operating
license and that the bank is guided on the right platform its
inception. A maiden examination also seeks to ascertain the
safety of a bank’s assets and soundness of its policies and
practices.
2) Routine Examination: This is the normal examination,
currently carried out in a yearly basis to review the prudential
operations; information processing systems, foreign exchange
operations and the anti-money laundering control of banks of
determine the continued conduct of banking business in a
safe and sound manner.
3) Special Examination: This is usually carried out when
serious issues of regulatory concern arise in bank. It is
conducted when:
It is in the public interest to do so.
The bank has been carrying on its business in a manner
detrimental to the interest of its depositors and creditors.
The bank has insufficient assets to cover its liabilities to the
public.
53
An application Is made by;
A director or shareholder of the bank, or
A depositor or creditor of the bank.
4) Target Examination: It is targeted at evaluating the risk
assets of a bank with a view to determining the adequacy or
otherwise of its capital. Its main objective is to guide the
banking supervision department in appraising a bank’s annual
accounts. It also seeks to trigger a warning where problems
are being anticipated.
2.10 PROCEDURES AND AREAS OF BANKING EXAMINATION
1) Pre-Examination Planning: This is a very crucial stage of
the examination process, which determines the overall quality
of an examination. It involves perusing all correspondents,
call reports, preliminary visit to the bank in some cases etc to
ascertain the intervening event since the previous
examination and hence the present condition of the bank. It
54
also involves the determination of the resources (Human,
time and material) that would be needed for the examination.
2) Field Work: This is the examination proper and involves the
review of the following issues: the level of implementation of
the recommendation in the previous examination report by
the bank. The non-implementation of some categories of the
examiners recommendations in sanctionable,
ownership/shareholding structure to ascertain effectiveness of
the board oversight, corporate government issues/ structures
and management function, internal audit and internal control
system, accounting system and records and information
technology/processing system, deposit, liquidity and funds
management, application of know-your-customer (KYC)
principles, credit administration and risk asset, asset quality,
income and expenditure, capital adequacy, foreign exchange
operation and anti money laundering control. The totality of
those reviews enables examiners to determine the bank’s
level of compliance with regulatory/prudential requirements
and its own internal controls.
55
3) Examiner’s Report: At the conclusion of the fieldwork,
which usually ends with a discussion of the examiners salient
findings with the top management staff of the bank, an
examination report is issued to the bank as the ultimate
product of the exercise following which the bank’s board is
expected to convey a special meeting within two weeks to
formally receive the report.
The bank’s external auditors are usually invited to the
presentation of the report by the examiners just as in the exit
conference, to familiarize them with the banks situation, in
the spirit of mutual examiners/auditors cooperation. Copies of
examination report are also forwarded to the banking
supervision department, the other financial institutions
department, the Nigeria Deposit Insurance Corporation, the
bank’s external auditors etc.
The highlights of the report are summarized and presented
to the financial sector surveillance committee of the CBN to
keep it members abreast of the conditions of, opportunities
and threats to the bank. It must be noted that the Examiner’s
56
Report is a highly confidential document, with restricted
circulation.
4) The Follow-Up Examination: The bank’s board is
expected to respond to the examiner’s findings within four
weeks of the presentation of the report. On the receipt of
the bank’s response, a follow-up examination is carried out
by another team of examiners to conform the bank’s claims
and ascertain the level of compliance with the
recommendations in the report thereafter penalties imposed
by examiners for infraction are given effect.
Conclusively, it should be emphasized that off-site surveillance
system are always employed as supplement to on-site
examinations but not as substitutes.
Certain information that is crucial for the supervisory
process as quality of bank’s loan portfolio or the quality of a
bank’s internal policies and procedures can only be effectively
evaluated through on-site examinations. Simply stated off-site
surveillance and on-site examination should be viewed as
57
compliments reach of which produces useful, but different
information that contribute to an effective supervisory program.
2.11 THE NIGERIAN DEPOSIT INSURANCE SCHEME
The Deposit Insurance Scheme (DIS) is a financial guarantee to
depositors, particularly the small ones, in the event of a bank
failure. The Deposit Insurance Scheme developed out of the need
to protect depositor, especially the uniformed, from the risk of
loss and to also protect the banking system from instability
occasioned by runs and loss of confidence. The banking system
has been singled out for the special protection because of the
vital role banks play in an economy, whether developed or
developing. For a DIS to be effective in achieving the above
objectives, it must be properly designed, well implemented by
the agency established to execute the scheme and well
understood by members of the public. A well designed DIS
contributes to the stability of a country’s financial system by
reducing the incentives for depositors to withdraw their insured
deposits from banks following rumors about their financial
conditions.
58
The establishment of the Nigeria Deposit Insurance
Corporation (NDIC) in 1988 heralded the introduction of an
explicit Deposit Insurance in Nigeria. The NDIC is responsible for
insuring the deposits of all banks and other deposit – taking
financial institutions and offers technical assistance, in the
interest of depositors, to banks in difficulties and in case of bank
failure, it guarantees the payment of insured deposits. The
corporation assists the CBN in the formulation and
implementation of banking policies with a view to ensuring
sound banking practices among others. The scheme is meant to
augment the existing safety net by protecting depositors,
thereby boosting confidence of the banking public. It is also
considered as an additional framework to serve as or substitute
to the government support policy (implicit insurance) hitherto in
place. Prior to the establishment of the corporation, government
was unwilling to let no bank fall no matter its financial condition
due to fear of the potential adverse effects. Consequently,
inefficient banks were given government support over the years.
However, such direct supports (implicit insurance) could not be
59
sustained under the structural adjustment programme
introduction in 1986 which among other factors deregulated the
economy towards market orientations. With the establishment of
the NDIC the pains of bank failure inevitable in a market
environment, were reduced to a minimum while moral hazard
associated with direct government support was eliminated.
2.11.1 REASONS FOR ESTABLISHING THE DEPOSIT INSURANCE SCHEME IN NIGERIA
The decision by the federal government of Nigeria to establish
the Nigeria Deposit Insurance Corporation in 1988 was informed
by a number of factors. These include the countries past bitter
experience of bank failures, the lessons of other countries
experience with deposit insurance schemes, increased
competition in the industry, the need for effective
supervision/prudential regulation and change in government
bank support policy.
60
1. Lesson of History: Bank Failure in Nigeria
The period between 1947 and 1952 witnessed a rapid
growth of indigenous bank in Nigeria. This was before the
establishment of the Central Bank of Nigeria in 1958 (though it
commenced operations in 1959). The increase in the number of
indigenous banks was followed also by a high rate of failure of
such banks. By 1954, twenty-one (21) out of Twenty-Five (25)
indigenous banks operating in Nigeria had collapsed. The failures
were attributed largely to mismanagement of assets, lack of
adequate capital and inexperienced personnel on one hand and
the lack of regulation on the other hand. Since the country had
no Central Bank at that time to regulate the operations of the
banks, market participants set their own differing standards until
the enactment of the Banking Ordinance in 1952 which came
into force in 1954. Since the mid-60’s, the federal government
had ensured through direct support of banks, that the Nigerian
banking public was no longer exposed to the hazards of bank
failures. In this respect, the Central Bank of Nigeria had
deliberately pursued certain measures to prevent bank failures.
61
These included the requirement of every licensed bank to create
and maintain a statutory non-distributable reserve fund from
yearly profits before dividend payments, stipulation of minimum
liquidity ratio and capital requirements as well as the rendition of
statutory returns. In spite of these measures, experience showed
that the capitals of some licensed banks were seriously eroded
by bad and doubtful debts due mainly to poor management.
Since the federal government of Nigeria did not want Nigerians
to relive those experiences, it was considered that the
establishment of a Deposit Insurance Schemes was urgently
needed.
2. Lesson from Other Countries
The success stories of some countries especially the United State
of America (USA) the problems associated with bank failure
through explicit DIS also informed the establishment of the
scheme in Nigeria. In fact, the Federal Deposit Insurance
Corporation (FDIC) has since provided the abiding lesson and
model for most countries which subsequently introduced explicit
deposit insurance schemes in response to anticipated changes in
62
economic and banking conditions. Since Nigeria was at the
threshold of fundamental changes in the economy and the
banking sub-sector, the authorities reckoned that the country
might benefit from the experience of the FDIC.
3. Changes in Government Bank Support Policies
Prior to the establishment of NDIC, government had been
unwilling to let any bank fall, no matter the bank’s financial
condition and/or quality of management. Government feared the
potential adverse effects on confidence in the banking system
and in the economy following a bank failure. Consequently,
government deliberately propped up a number of technically-
insolvent state-owned banks over the years.
In the new economic policy of government dictated by the
imperative of SAP, it was felt that there was the need to shift
emphasis from direct support of banks, to prevent failure, to one
of protecting the deposits of customers especially the small
depositors. It was considered that the establishment of an
explicit DIS would facilitate the change in policy.
2.11.2 DIS Policy Objectives
63
The decision to establish a DIS is usually influence by a number
of considerations. Generally, there are two main public policy
objectives for any DIS. These are:
1. Provision of Deposit Protection to Financially Unsophisticated Depositors
The less-financially sophisticated depositors are often
distinguished by the small size of their deposits. This class of
depositors is single out for protection because they do not have
the means and/or capability of carrying out the complex of
monitoring and assessing the condition of their financial
conditions. This is often not the case with financially
sophisticated depositors with large volume of deposits. A DIS is
therefore put in place to address the inequity that exists
between financially sophisticated and unsophisticated
depositors.
The current deposit insurance coverage per depositor is
fixed at Five Hundred Thousand Naira (N 500,000) for Deposit
Money Banks and Two Hundred Thousand Naira (N200,000) for
Microfinance Banks (MFBs) and Primary Mortgage Institutions
(PMIs).
64
2. Contribution to Financial Stability by Promoting Confidence and Stability of the Banking System
This objective is based on the concern that depositors may lose
confidence in an institution under certain circumstances. A well
designed DIS contributes to the stability of a country’s financial
system by reducing the incentives for depositors to withdraw
their insured deposits from banks because of loss of confidence.
Other DIS Policy objectives:
In addition to the provision of deposit protection to less
financially sophisticated depositors and contribution to financial
stability by promoting confidence in the banking system, DIS are
also designed to achieve he following other policy objectives:
Provision of a formal mechanism for dealing with financial
institutions.
Contributing to an orderly payments system.
Redistributing the cost of failures.
Promoting competition in the financial sector by reducing
competitive barriers in the deposit taking industry.
Encouraging economic growth.
65
Facilitating the transition from full guarantee limited
coverage.
2.11.3 Challenges of NDIC in Guaranteeing Deposits
The challenges facing NDIC in providing deposit guarantee
include the following:
1. Poor Public Awareness: The level of awareness of the
scheme is quite low. Despite the series of efforts made by the
NDIC to reach the public through publications, seminars,
workshops, press briefings and advertisement, the general public
seem inadequately aware of the scheme. It is still common to
find people confusing deposit insurance with the conventional
insurance business. Public ignorance cuts across all sections of
the populace including depositors, the primary beneficiary of the
scheme. For the deposit insurance to be effective, it is important
that the public is well and adequately informed of its benefits
and limitations.
2. Level Of Deposit Insurance Coverage: Ideally, the
coverage limit should be sufficient enough to protect small
depositors so as to prevent them from precipitating bank runs,
66
but not so excessive in order to maintain market discipline and
minimize moral hazard. The adequacy or otherwise of the
maximum insurance claim had continued to generate a lot of
interest and sometimes adverse comments. Coverage limits
should normally be adjusted periodically because of inflation,
depreciation of the local currency and growth of real income. It is
in this regard that the corporation had an upward review of the
insurance limit which has currently been increased from N
200,000 to N 500,000 for DMBS and (N200,000) for Microfinance
Banks (MFBs) and Primary Mortgage Institutions (PMIs).
3. Threat to Depositors Fund Arising From Possible
Political Affiliation by Operators: Chances that bankers,
particularly influential shareholders who are affiliated to political
parties, may wish to obtain loan to bank roll election expenses
abound under a democratic regime such loans are not likely to
be re-paid, especially if victory is not achieved at the end of the
election. Such risks could threaten the safety of depositors’ fund.
This phenomenon becomes an issue of serious concern to NDIC
because of its role as deposit insurer.
67
4. Clamour for Private Ownership of the Scheme:
ownership of DIS worldwide ranges between pure public and
pure private ownership. In Nigeria, the DIS was established and
fully owned by government. In line with the global movement
towards market orientation, the federal government has since
the inception of this administration put in place so many
economic programmes, including privatization programmes,
aimed at evolving a private sector led economy. Arising from this
development, some analysts and observers of the contemporary
events in the economy have been calling for the privatization of
the DIS in Nigeria.
The above development has become a challenge for the
scheme in Nigeria while private ownership of the scheme may be
the practice in some other jurisdictions, the disadvantages of
such a practice in developing economy like Nigeria may far
outweigh it merits. For instance, either full or partial ownership,
which may involve the insured institutions, may lead to conflict
of interest which may undermine the achievement of the
objectives of ensuring adequate protection of depositors as well
68
as contributing to financial stability. Besides, in periods of
generalized or systematic crisis, the privately owned scheme
might not be in a position to mobilize adequate resources for
orderly resolution of the crisis. This is in addition to the fact that
under private ownership, participation in the scheme is likely to
be voluntary with the associated problem of adverse selection.
These and many other reasons have made public ownership
quite attractive by many economies including the USA. The same
set of reasons would make privately owned schemes even more
unattractive for developing countries like Nigeria than for the
developed ones.
2.12 THE ROLES OF CBN AND NDIC IN BANK SUPERVISION AND REGULATION
I. Central Bank of Nigeria
The CBN performs a myriad of functions, which are divided into:
Traditional functions.
Non-traditional functions.
69
i. Traditional Functions: There functions are performed by the
Central Bank of both developing and developed countries. Within
this traditional functions will have:
a) Issuance of legal tender currency notes and coins in Nigeria;
b) Maintenance of Nigeria’s external reserves to safeguard the
international value of the legal currency;
c) Promote monitoring stability and sound financial system.
d) Banker and financial adviser to the federal government.
e) Acting as lender of last resort to banks.
ii. Non-Traditional Functions: These functions in Nigeria
include:
a) Promoting financial institutions and market.
b) Establishment of special financing scheme; such scheme
includes: Agricultural Guarantee Scheme Fund, Small and
Medium Industry Equity Investment Scheme etc.
c) Research and technical services.
d) Economic and financial data management and dissemination.
e) Collaborative studies with relevant agencies.
f) Sponsorship of sporting activities in the country.
70
2. Nigeria Deposit Insurance Corporation
The Nigeria deposit insurance corporation (NDIC) was
established by Decree No. 22 of 1988, which was and replaced
with the NDIC Act No. 16 of 2006. The corporation commenced
operation in March 1989. The NDIC’S key role is to provide
financial guarantee to depositors in the event of the failure of an
insured institution and to administer the deposit insurance
system in Nigeria. It has a broad mandate with powers to insure
deposit mandate of the corporation is as follows:
a. Deposit Guarantee (section 2 of the NDIC Act No. 16 of
2006)
Deposit guarantee or deposit insurance is a key and distinct role
of the corporation. The NDIC guarantees payment of depositors
of all participating institutions up to a maximum limit in
accordance with its status in the event of failure so as to
engender confidence in the nation’s banking system. The
present coverage of N500, 000 for DMBs fully covers over 96% of
depositors. Similarly, the N200, 000 coverage levels for MFBs
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and PMBs fully covers about 99% of the depositors of the sub-
sector.
B. Bank supervision (section 27-32 of the NDIC Act No. 16
of 2006)
The NDIC supervises bank to protect depositors, contribute to
monetary stability and promote an effective payment system as
well as competition in the banking system. Supervision, in
addition to other objectives, seeks to reduce the risk of failure
while ensuring that unsafe and unsound practices are minimized.
The NDIC carries out this responsibility through both on-site
examination and off-site surveillance in collaboration with the
CBN.
C. Failure resolution (section 40 of the NDIC Act No. 10 of
2006)
The NDIC may provide financial and technical assistance to
eligible insured deposit-taking financial institutions, in the
interest of depositors. The financial assistance could be in the
form of loans, guarantee, or accommodation bills. In addition,
the NDIC is empowered by section 39 of its enabling Act, to
72
establish a bridge bank to acquire the assets and assume the
liabilities of a failing bank on a temporary basis pending the time
a viable investor can be found.
D. Bank Liquidation (Section 40 of the NDIC Act No. 16 of
2006)
The NDIC is solely responsible for the orderly and efficient
closure of the failed insured institutions. The closures are done
with minimal disruption to the banking system. Since its
inception, the DNIC has successfully closed45 DMBs and 103
MFBs with minimal disruption to the nation’s financial system in
particular and to the macro-economy in general.
2.12.1 THE RELATIONSHIP BETWEEN NDIC AND THE CENTRAL BANK OF NIGERIA
The NDIC is wholly owned by the federal Government through
the central bank of Nigeria (CBN) and the feral ministry of
Finance (FMF) in the ratio of 60:40 shareholding structures. That
73
the CBN partly owns the NDIC with the FMF and it is in fact the
majority shareholder of the corporation.
Operationally, the NDIC’s major partner has the CBN right from
the inception of the corporation. The supervision of the insured
financial institutions has the joint responsibility of the CBN and
the NDIC in a manner devoid of needless overlap of
responsibility. Based on the shared supervisory responsibility,
both the NDIC and CBN jointly carried out special Examination of
banks in 2009 that revealed distress in the system.
In the area of distress resolution the NDIC over the years has
effectively collaborated with the CBN to proffer solutions to
problem banks. Recently the corporation collaborated with the
CBN in the resolution of the 8 intervened banks whose grave
financial condition was revealed in 2009 special Audit. It would
be recalled that the NDIC, after due consultation with the CBN
and federal ministry of finance, adopted the bridge bank failure
resolution option to deal with the distress condition of 3banks in
2011 in order to guarantee the continuity of critical banking
74
functions of the affected banks, including uninterrupted access
to funds by depositors.
2.13 CAMEL AS CBN TOOL FOR DETERMINING FINANCIAL CONDITIONS OF BANKS
The objective of supervision is to promote the safety and
soundness of financial institution through on-going evaluation
and monitoring, including the assessment of risk management
systems, financial conditions and compliance with laws and
regulations. The supervising agencies cannot effectively deal
with systematic banking crises without an in-depth knowledge of
the condition of the bank they supervise.
The main focuses in determining the conditions of banks
prior to a crises situation are to enable supervisor promptly
distinguish between banks which have good chances of
emerging from crises and those that are terminally distressed.
An analysis of individual rating elements is given below:
1. Capital Adequacy Requirement
During the year 2009, industry shareholders’ fund declined
considerably by 84.30 percent from N2.80trillion recorded as at
75
31st December, 2008 to N448.99 billion as at 31st December
2009. Similarly, the qualify capital to total risk-weighted assets
ratio in the system decreased from 10.24 percent to 4.32
percent during the same period. The industry capital adequacy
ratio of 10.24 percent was marginally above the prudential
minimum of 10 percent. The declines were attributable to the
significant increase in the loans loss provision by banks sequel to
the joint CBN/NDIC Special Examination of banks in 2009 and the
requirement of enhanced disclosure.
The deterioration in the banks’ CAR was due to the
adjustment in the acquired provisions made for non-performing
loans as recommended during the joint CBN/NDIC special
examination.
TABLE 2.3 Presents Some Statistics on Insured Banks Capital Adequacy as At December 31, 2010 with Comparative Figures for the Previous Year
INSURED BANKS CAPITAL ADEQUACY
Capital Adequacy Indicators Year
2009 2010
Total Qualifying Capital (N Billion) 2,201.84 429.60
Adjusted Shareholders Funds(N’ billion) 448.99 312.36
Capital to Total Risk Weighted Assets Ratio (%) 10.24 4.32
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Number of Banks 24 24
Source: Bank Returns
The CAR indicator is derived by comparing the ratio of an entity’s
equity to it asset at risk.
Capital adequacy ratio (%) =
(Paid in capital + reserves funds + net profit) X 100
Total assets – loan provision – risk free assets.
Note: Risk free assets should include:
Cash on hand, due from banks, inter-bank loans, government
guaranteed loans, investment in government securities, etc
2. Asset Quality
During the period under review, the banking industry witnessed
a substantial improvement in the quality of assets. This could be
attributable to events sequel to the reforms in the industry.
These included the purchase of toxic assets and margin loans in
the first phase of the transactions of the recently established
AMCON; the exercise of greater caution in the advancement and
monitoring of loans and credits by banks; as well as successful
recovery efforts on some of the loans from previous financial
77
years by some of the banks in the period immediately following
the reforms.
During the year 2010, the industry’s total loans declined by
19.58% from N 8,912.14 in Dec.2009 to 7,166.75 billion as at
Dec 2010. The industry’s non-performing loans reduced
drastically from 2,922.80 billion to 1,077.66 billion between Dec.
2009 and Dec 2010 largely as a result of AMCONs activities.
Summarily, the industry’s asset quality improved as the
ratio of non-performing loans to total loans, declined from
32.80% in Dec.2009 to 15.04% in December 2010.
Table2.4 Shows the Quality of Assets of the Industry as at 31st December, 2010 Relative to what Obtained as at the end of December, 2009.
ASSET QUALITY OF INSURED BANKS
Item Year
2009 2010
Total loans (N’ billion) 8,912.14 7,166.76
Non-performing loans (Nbillion) 2,922.80 1,077.66
Ratio of Non-performing loans to Total Loan (%) 32.8 15.04
Ratio of Non-performing loans to Shareholders
Funds (%)
135.7 250.85
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Source: Bank Returns
Loan loss provision ratio (%) =
Loan loss provisionAverage performance assets
This indicates provision requirements in loans portfolio for the
current period.
3. Management Quality
A good management should have a robust and perfect
information system. Again, the management of banks comprise
of highly qualified personnel with banking experience and
academic qualifications, as sound management is crucial for the
success of any institution.
Management quality is generally accorded greater weight
in the assessment of the overall CAMEL composite rating. For the
purpose of this study, the researcher used the profit before for
2008 of five (5) insured banks to assess their management.
Table 2.5 Management Quality of 5 Largest Banks as At 31st December 2010
S/NO BANK
79
1. First Bank of Nigeria Plc
2. Zenith Bank Plc
3. United Bank for Africa plc
4 Guaranty Trust Bank Plc
5. Access Bank Plc
Sources: Banking supervision Annual Report 2010.
4. Earnings and Profitability
There was a slight improvement in the earnings in the banking
industry in the period under review due partly to the intervention
of AMCON with the purchase of N2.16 trillion toxic assets and
margin loans from the banking industry at a discounted value of
N770.54 billion. Presented in Table 5 are the earnings and
profitability indicators of insured banks in 2010, with
comparative figures of 2009.
As indicated in Table 5, though the industry witnessed a slight
decline in net interest Margin and yield on Earning Assets,
improvements were recorded in the Return on Assets and Equity.
Interest income component declined by 32.21% from N2,125.56
billion to N1,440.93 billion between December 2009 and
December 2010, while interest expense also followed the same
80
trend with a 47.04% fall from N1,163.71 billion to N616.31
billion. The resultant Net Income therefore amounted to N824.62
billion in 2010as against N961.87 recorded in 2009. Non Interest
income as at December, 2010 amounted to N462.76 billion,
representing a 22.52 % drop from N597.28 billion of the previous
years. The Total Operating Expenses of the industry dropped by
69.39% from N3, 046.75 billion to N932.53 billion between
December 2009 and December 2010. Consequently the Profit
before Tax (PBT) recorded a favorable position of N607.34 billion
as at December 2010, compared to the loss position of N1,
373.33 billion recorded as at December 2009.
The banking industry Return on Assets (ROA) improved from -
9.28% in December 2009 to 3.91% in 2010 while Return on
Equity (ROE) improved significantly from -64.72% to 162.98%
during the same periods. The yield on earning assets however
dropped to 11.24% as at December 2010 from 22.87% as at
December 2009.
81
Table 2.6 Earnings and Profitability Indicators
Indicators Year
2009 2010
Profit before tax (N’ billion) -1377.33 607.34
Interest income (Net) (N’ billion) 961.87 824.62
Non-interest income (N’ billion) 597.28 462.76
Interest expenses (N’ billion) 1,163.71 616.31
Operating earning assets (%) 3046.75 932.53
Yield on earning assets (%) 22.87 11.24
Return on equity (%) -64.72 162.92
Return on assets (%) -9.28 3.91
Source: Bank Returns
5. LIQUIDITY RATIO REQUIREMENT
A Bank must always be liquid to meet depositors and creditors
demands in order to maintain public confidence.
Table 7 presents the liquidity profile insured banks in 2009
and 2010. As evidenced in the table, the industry’s average
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liquidity ratio rose marginally from 44.45 percent as at the end
of 2009 to 51.77 percent as at the end of 2010. However, loans
to deposit ratio declined significantly from 89.21 percent to
66.13 percent in 2010.
Table 2.7 Liquidity Ratio of Insured Banks as At December
31st, 2010
Item Year
2009 2010
Average Liquidity Ratio (%) 44.45 51.77
Loans And Advances to deposits Ratio (%) 89.21 66.13
No of Banks with less than the 25%
minimum Liquidity Ratio
4 1
Source: Bank Returns
2.14 CONSTRAINTS TO EFFECTIVE SUPERVISION
Banks and financial institutions regulators/supervisors have been
facing a lot of challenges in monitoring the institutions under
their purview.
Despite several actions already taken by the regulatory
authorities to lay a solid foundation and engender credibility in
the Nigerian financial system, apprehensions have been
83
expressed at different levels by concerned individuals and
groups about the soundness and safety of the financial sector.
The apprehensions are attributable to the lack of proper
understanding of what regulation is all about and lack of
adequate information on the part of the customers on the
institutions they are dealing with some factors have however
been identified as constraints to effective supervision. They
include, but not limited to the following:
Poor corporate governance on the part of the operator;
Inability of regulators and some operators to cope with the
pace of technological innovations;
Unprofessional and unethical practices among the
management and staff of banks and other financial
institutions;
Lack of transparency in dealing with regulators often reflected
on the rendition of false or unreliable returns and non-
compliance with existing laws/guidelines/circular;
Inadequate legal framework; and
The problem of supervising financial conglomerates.
84
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 RESEARCH DESIGN
Design as it used in purely research context refers to the total
constructional plan or structure of the research framework.
Research design therefore means the structure and planning of
the entire approach to the problem that generated the research.
According to Asika (2004) research design is a blueprint
information gathering. It is an outline or scheme that serves as
useful guide to the research in an effort to gather data for the
research work.
The survey research design will be adopted in the appraisal of
the role of CBN and NDIC in bank supervision and regulation in
Nigeria.
3.2 NATURE AND SOURCES OF DATA
85
In carrying out this research, data were collected both primary
and secondary sources were used to articulate the research
problem and produce finding
I. Primary Sources of Data
The primary source of data will be collected through the use of
questionnaire and personal interviews. This method of data
collection will help to enhance the objectivity and validity of the
analysis of the findings of this research work.
The research questionnaires was of a structured nature
that restricted the respondent to the response of “Strongly
Agree”, “Agree”, “Disagree”, “Strongly Disagree” and
“undecided” which will help produce suitable answers to the
questions.
II. Secondary Sources of Data
The secondary data used in this study were sourced from
e-journals, internet websites, newspapers, relevant textbooks,
and publications from governmental and non-governmental
agencies. These documents were used extensively and carefully
reviewed to avoid any bias arising from the fact that the data
86
was not directly collected by the researcher and hence would not
be in the most suitable form. The reliability of the data is based
on the belief that persons that expressed their ideas are experts
in their profession.
Administration of Questionnaire
To enable the respondents provide adequate information for the
research, the questions were structured in a way that it will be
compatible with the respondent. The researcher was personally
involved in the distribution of the questionnaire and made use of
drop-and-pick approach
3.3 POPULATION AND SAMPLE SIZE
The population of this study will cover the staff and management
of the banking industry, staff of CBN/NDIC, academia, students in
the university and also shareholders in banks. The researcher
will make use of an infinite population.
In determining the sample size of this study, an infinite
population was used. The Sample size was determined using the
Topmans formula which is stated thus:
87
n = Z 2 (P) (Q) e2
Where n = sample size
Z = standard deviation given a corresponding confidence level.
P = the estimated proportion of incidence of cases in the
population or assumed success rate with the instrument.
Q = (1 – P) or assumed failure rate.
e = proportion of sampling error or error margin in a given
situation.
n = sample size (to be determined)
Z = at 95 percent confidence level is 1.96 (read from a standard
normal distribution table).
P = 95% (0.95) is assumed.
q = 1 – 0.95 = 0.05
e = 0.05 since we have chosen 95 percent as our confidence
limit.
Z = 1 – X (α = 0.95) 2
= 1 – 0.95 2
88
= 0.05 2Z = 0.025
Z = 0.05 – 0.025
Z = 0.475
= 1.96 (standard normal distribution table)
n = (1.96) 2 (0.95) (0.05) (0.05)2
= 72.99
= 73.
For this research work, the sample size will be 73 and as such 73
copies of the questionnaire was distributed.
3.4 DATA ANALYSIS TECHNIQUES
In an effort to offer a justified and critical analysis of the
research, descriptive statistical tool were used to present the
data collected for this research and also to test the hypothesis
formulated. The responses from the respondents were presented
in percentages using frequency table. The statistical tool used in
testing the hypothesis formulated was the Chi-square Test. The
formula is stated below
89
X2= Σ (Oi –Ei ) 2 Ei
Oi = The observed frequency
Ei =The Expected frequency
X2= The value of random variables.
Σ= summation of all variables
90
CHAPTER FOUR
DATA ANALYSIS AND PRESENTATION
4.2 INTRODUCTION
This chapter is concerned with the presentation of data
collected. It contains the analysis, interrelation of the data and
testing of hypothesis
To accomplish the objectives of this research and to validate the
conclusion researched in the study. It is important that data
analysis to be adequate and precise to avoid wrong conclusion.
4.2 Analyses of Data
This section contains presentation of analysis and the responses
of the respondents to the questionnaire 73 copies of the
questionnaire were administered and 70 were completed and
returned to the researcher. The degree o respondents’ opinion
was measured using a five point liker scale statement Strongly
Agree, Agree, Strongly Disagree, Disagree and Undecided.
91
Section A
Table 4.1.1 Sex Distribution of Respondents
Sex Number Percentag
e
Male 30 42.9
Femal
e
40 57.1
Total 70 100
Source: Field survey 2012
The above table shows 30 respondents representing 42.9% of
the total sample were males, while 40 respondents representing
57.1% of the total same were females. It therefore follows that
we had more responses from females than males.
Table 4.1.2 Age Distribution of Respondents
Age Number Percentage
Below 30yrs 10 14.3
31-40 yrs 20 28.6
41-50yrs 25 35.7
51 and above 15 21.4
Total 70 100
Source: Field survey 2012
92
The above table shows that 10 numbers of the respondents are
below 30years, 20 are from 31-40 years, 25 are from 41-50 years
and 15 are from 51 and above
Table 4.1.3 Educational Qualification of Respondents
Qualification Number
Percentage
WASC/SSCE 15 21.4OND/NCE 8 11.4HND/B.A/B.SC 36 51.4M/.A/M.SC/BA 11 15.7Total 70 100
Source: field survey 2012
Table 4.1.4 Categories of Respondents
Category Number Percentage Bank staff 35 50Depositors 15 21.4CBN Staff 10 14.3NDIC Staff 10 14.3Total 70 100
Source: field survey 2012
Table 4.1.5: Category of Bank Staff Respondents
Bank staff Number Percentage
Junior 5 14.3Middle Management
20 57.1
Top 10 28.6
93
managementTotal 70 100
Section B
Table 4.2.1: The Supervisory and Regulatory Framework of Banks Is Very Effective In Nigerian Banking System
VARIABLES RESPONSES PERCENTAGE%Strongly Agree 20 28.6Agree 25 35.7Strongly Disagree 10 14.3Disagree 10 14.3Undecided 5 7.1Total 70 100
Source: Field survey 2012
The table above shows that 28.6% strongly agrees that the
regulatory and supervisory framework of banks is very effective
35.7% agrees to this, 14.3% strongly disagrees, 14.3% disagrees
and 7.1% is undecided.
Table 4.2.2: The Stability in the Banking System Was As A Result Of Sound and Effective Regulatory and Supervisory Framework
VARIABLES RESPONSES PERCENTAGE%
Strongly Agree 10 14.3Agree 20 28.6Strongly Disagree 17 24.3Disagree 13 18.6Undecided 10 14.3Total 70 100
94
Source: field survey 2012
The above table shows that 14.3% strongly agrees that the
stability in the banking system was as a result of sound and
effectives supervisory and regularity framework, 28.6% strongly
agrees, 24.3% strongly disagrees, 18.6% disagrees and 14.3% is
undecided
Table 4.2.3: The Performance Rating Of NDIC/CBN In Controlling Banks Activities Is Very High
VARIABLES RESPONSES PERCENTAGE%Strongly Agree 25 35.7Agree 23 32.9Strongly Disagree 8 11.4Disagree 12 17.1Undecided 2 2.9Total 70 100
Source: Field survey 2012
The responses in the above table tries to affirm whether the
performance rating of NDIC/CBN in controlling banks activities is
very high from the responses 25 (35.7%) of the respondents
strongly agree, 32.9% Agree, 11.4% strongly disagree, 17.1%
disagree and 2.9% is undecided. The breakdown indicates that
most respondents believe that the performance rating of
NDIC/CBN in controlling banks is very high.
95
Table 4.2.4: CAMEL Framework is Useful for Assessing Performance of Insured Banks
VARIABLES RESPONSES PERCENTAGE%Strongly Agree 30 42.9Agree 15 21.4Strongly Disagree 4 5.7Disagree 11 15.7Undecided 10 14.3Total 70 100
Source: Field survey 2012
The above table shows that 42.9% strongly agrees that CAMEL
framework is useful for assessing performance of insurance
banks, 21.4% agree, 5.7% strongly disagree, 15.7% disagree and
14.3% undecided.
Table 4.2.5: Disclosure of Banks Annual Financial Statements to Depositors and General Public Will Help In Enhancing Public Confidence
Variables Frequency Percentage %Strongly agree 40 57.1Agree 28 40
Strongly disagree 0 0Disagree 0 0Undecided 2 2.9Total 70 100
Source: Field survey 2012
The above table shows that 57.1% of respondents strongly
agree that disclosure of banks financial statement to public will
96
boost public confidence, 40% agree, 0% strongly disagree and
disagree and 2.9% is undecided.
The breakdown indicates that most of the respondents believe
that the disclosure of banks annual financial statement will
enhance public confidence.
Table 4.2.6: The Five Hundred Thousand Naira Maximum Coverage for DMBs per Depositor Is Satisfactory
Variables Frequency Percentage %Strongly agree 4 5.7Agree 14 20Strongly disagree 30 42.9disagree 12 17.1Undecided 10 14.3Total 70 100
Source: Field survey 2012
The responses in the above table shows that 5.7% of the
respondents strongly agree, 20% agree, 42.9 strongly disagree,
17.1% disagree and 14.3 undecided.
The breakdown indicates that most of the respondents believe
that the five hundred thousand naira coverage per depositor is
not satisfactory.
Table 4.2.7: The Regular On-Site Inspection Visit to Banks Has Helped In Identifying Problem Areas in Banks
97
Variables Frequency Percentage%Strongly agree 31 44.3Agree 29 41.4Strongly disagree 2 2.9Disagree 6 8.6Undecided 2 2.9Total 70 100
Source: Field survey 2012
The response in the table tries to affirm whether the regular on-
site inspection visit to banks helped in identification of problem
areas in areas in banks. From the responses in the above table,
44.3% strongly agree, 41.4% agree, 2.9% strongly disagree,
8.6% disagree and 2.9 are undecided.
Table 4.2.8: The Off-Site Supervision of Banks By The CBN/NDIC Acts Has Helped To Check And Analyze Prudential Returns From Banks
Variables Frequency Percentage %Strongly agree 27 38.6Agree 34 48.6Strongly disagree 1 1.4Disagree 5 7.1Undecided 3 4.3Total 70 100
98
Source: Field survey 2012
The response from the above table tries to affirm whether the
off-site supervision of banks by the CBN/NDIC acts has helped to
check and analyze prudential returns from banks. From the
responses, 38.6% strongly agree, 48.6% agree, 1.4% strongly
disagree, 7.1% disagree and 4.3% undecided.
Table 4.2.9: Effective Banking Regulation Encourages Quality Service and Promotes an Efficient and Competitive Banking System
Variables Frequency Percentage %Strongly agree 37 52.9Agree 28 40Strongly disagree 0 0Disagree 1 1.4Undecided 4 5.7Total 70 100
Source: Field survey 2012
The responses in the above table tries to affirm whether
effective banking regulation encourages quality services and
promote an efficient and competitive banking system. From the
above responses 52.9% strongly agree, 40% agree, 0% strongly
disagree, 1.4% disagree and 5.7% undecided.
Table 4.2.10 The CBN/NDIC Regulatory and Supervisory Roles in Nigeria Has Been Positive
99
Variables Frequency Percentage %Strongly agree 15 21.4Agree 20 28.5Strongly disagree 12 17.1Disagree 13 18.6Undecided 10 14.3Total 70 100
Source: field survey 2012
The response in the above table tries to affirm whether the
CBN/NDIC regulatory and supervisory roles in Nigeria have been
positive. From the responses 21.4% strongly agree, 28.5% agree,
17.1% strongly disagree, 18.6 disagrees and 14.3 undecided.
Table 4.2.11: The CBN/NDIC Uses Off-Site Supervision as an Instrument of Regulation and Supervision in Nigeria
Variables Frequency Percentage %Strongly agree 25 35.7Agree 20 28.6Strongly disagree 9 12.8Disagree 6 8.6Undecided 10 14.3Total 70 100
Source: Field survey 2012
The response in the above table tries to affirm whether the CBN
and NDIC use off-site supervision as an instrument of regulation
and supervision. From the responses 35.7% of the respondents
100
strongly agree, 28.6% agree, 12.8% strongly disagree, 8.6%
disagree and 14.3% is undecided.
Table 4.2.12: False Returns by Banks Are a Major Constraining Factor for Effective Regulation and Supervision Variables Frequency Percentage %Strongly agree 31 44.3Agree 16 22.9Strongly disagree 8 11.4Disagree 15 21.4Undecided 0 0Total 70 100
Source: Field survey 2012
From the responses in the above table 44.3% of the respondents
strongly agree that false returns by banks are a major
constraining factor for effective regulation and supervision ,
22.9% agree, 11.4% strongly disagree , 21.4% disagree and 0%
undecided.
Table 4.2.13: The Public Awareness of the Activities of the CBN/NDIC Such As Liquidity and Revocation of Bank License Is High
Variables Frequency Percentage %Strongly agree 9 12.9Agree 11 15.7Strongly disagree 17 24.3Disagree 20 28.6Undecided 13 18.6
101
Total 70 100Source: Field survey 2012
The responses in the above table shows that 12.9% of the
respondents strongly agree, 15.7% agree, 24.3% strongly
disagree, 28.6% disagree and 18.6% undecided.
Table 4.2.14: Investors and Depositors Are Aware Of The NDIC Activities Especially In The Areas Of Premium Charge And Insurance Limit.
Variables Frequency Percentage %Strongly agree 6 8.6Agree 10 14.3Strongly disagree 20 28.6Disagree 19 27.1Undecided 15 21.4Total 70 100
Source: Field survey 2012
The responses in the above table shows that 8.6%of the
respondents strongly agree, 14.3% agree, 28.6% strongly
disagree, 27.1% disagree and 21.4 undecided.
102
It indicates that investors and depositors are not aware of NDIC
activities especially in the areas of premium charge and
insurance limit.
4.3 HYPOTHESES TESTING
From the analysis obtained from the questionnaire
administration, the hypothesis stated in chapter one will be
subjected to test using chi square analysis with the aim of either
accepting or rejecting the hypothesis.
The test will be carried out using this formula
X2=Σ(Oi-Ei) Ei
Where Oi =the observed frequency
Ei= the expected frequency
X2= the value of the random variable
Σ= Summation of all items
103
The sample data was collected at 5% level of significance and
the number of degree of freedom of X2 is determined by using
the formula below
Df=(r-1) (c-1)
Where DF=degree of freedom
r=number of rows in a contingency table
c=number of columns in a contingency table
Df = (5-1) (2-1) = 4*1=4
Critical value at 0.05 level of significance at degree of freedom4
Df4=9.48
Decision Rule
The principle rule guiding the test of chi-square in hypothesis
testing is as follows.
If the computed value of the chi-square (X2) is greater than the
critical value, the null hypothesis Ho is rejected and the
alternative accepted but if the computed value of chi-square is
less than the critical value, the null hypothesis is accepted while
the alternative is rejected.
4.3.1 Test of Hypothesis I
104
Ho: CBN/NDIC role in bank supervision and regulation has not
been positive.
H1: A CBN/NDIC role in bank supervision and regulation has
been positive.
The expected frequency for each of the options is an equal
fraction or probability of the total sample size. That is 70/5=14
Table 4.3.1 A CONTINGENCY TABLE FOR HYPOTHESIS І
Option Oi Ei (Oi-Ei) (Oi-Ei )2 (Oi-Ei )2 /Ei Strongly agree 15 14 1 1 0.07Agree 20 14 6 36 2.57Strongly disagree 12 14 -2 4 0.29Disagree 13 14 -1 1 0.07Undecided 10 14 -4 16 1.14Total 70 70 X2=4.14
Source: Extracted from table 4.2.10 above
Table 4.3.1B Chi-Square Computed Decision
Degree of freedom
Chi square value
Critical value Decision
4 4.14 9.48 Accept HoReject H1
Source: Extracted from table 4.3.1A
Decision: Since the computation of chi-square (X2) 4.14 is less
than the critical value of 9.48 (4.14<9.48) .the null hypothesis is
accepted and the alternative is rejected. Thus the role of
105
CBN/NDIC in bank supervision and regulation has not been
positive.
4.3.2 Test of Hypothesis ІІ
Ho: CBN/NDIC does not use off-site supervision as an instrument
of regulation and supervision of banks in Nigeria.
H1: CBN/NDIC do use off-site supervision as an instrument of
regulation and supervision in Nigeria
Table 4.3.2A Contingency Table for Hypothesis ІІ
Option Oi Ei Oi-Ei (Oi-Ei)2 (Oi-Ei)2 /EiStrongly agree 25 14 11 121 8.64Agree 20 14 6 36 2.57Disagree 9 14 -5 25 1.78Strongly disagree 6 14 -8 64 4.57Undecided 10 14 -4 16 1.14Total 70 70 X2=18.7
Source: extracted from table 4.2.11 above
Table 4.3.2B Chi-Square Computed Decision.
Degree of freedom
Chi-square Critical value
Decision
106
4 18.7 9.48 Reject Ho Accept H1
Source: extracted from table 4.3.2A
Decision: the computation of chi square 18.7 which is greater
than the critical value of 9.48 (18.7>9.48) thus the null
hypothesis is rejected and the alternative is accepted. Thus
CBN/NDIC does use off-site supervision as an instrument of
regulation and supervision.
4.3.3 Test of Hypothesis ІІІ
Ho: False returns by banks are not a major factor constraining
effective regulation and supervision in Nigeria
H1: False returns by banks are a major factor constraining
effective regulation and supervision in Nigeria.
Table 4.3.3A Contingency Table for Hypothesis ІІІ
Option Oi Ei Oi -Ei (Oi-Ei)2 (Oi-Ei)2 /Ei
Strongly agree 31 14 289 289 20.64Agree 16 14 4 4 0.29Strongly disagree 8 14 36 36 2.57Disagree 15 14 1 1 0.07Undecided 0 14 196 196 14Total 70 70 X2=37.57
Source: Extracted from table 4.2.12 above
107
Table 4.3.3B Chi-Square Computed Decision
Degree of freedom
Chi-square Critical value Decision
4 35.57 9.48 Reject Ho Accept H1
Source: Extracted from table 4.3.3.A
Decision: the computation of X2 chi-square 37.57 which is
greater than the critical value of 9.48 (37.57>9.48) .thus the null
hypothesis is Ho is rejected and the alternative hypothesis is
accepted .thus the false returns by banks are a major factor
constraining effective regulation and supervision in Nigeria.
108
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
5.1 SUMMARY OF FINDINGS
After analysis of data collected from the different respondents,
the researcher came up with the following findings. They are as
follows
The supervisory and regulatory framework of banks is
effective in the Nigerian banking system.
It was discovered by the researcher that the stability in the
banking system was not as a result of sound and effective
regulatory and supervisory framework.
The five hundred thousand naira maximum deposit coverage
for commercial banks per depositor is not satisfactory.
109
A large percentage of the sample strongly feels that regular
on-site inspection to banks has helped in identifying problem
areas in banks.
Disclosure of banks annual financial statement to depositors
and general public will help in enhancing public confidence.
It was found out that the CBN and NDIC supervisory roles in
Nigeria have not been positive.
Effective banking regulation encourages quality service and
promotes an efficient and competitive banking system.
The public awareness and activities of the CBN and NDIC such
as liquidity, revocation of bank license, premium charge and
insurance limit.
False returns by banks is a major constraining factor that
affect effective supervision of banks
5.2 CONCLUSIONS
The experience of many countries shows that regulation and
supervision are essential for stable and healthy financial system
and the need becomes greater as the number and variety of
financial institutions increase.
110
The relevance of banks in an economy cannot be over-
emphasized because they are cornerstones, the linchpin of the
economy. In a developing country like Nigeria, banks play an
important and sensitive role hence they must be efficiently
regulated and supervised as their performance directly affects
the growth, efficiency and stability of the economy.
From the research findings it can be concluded that the role of
CBN and NDIC in bank supervision and regulation in Nigeria has
not been very effective in recent times.
5.3 RECOMMENDATIONS
From the research findings, the following measures are
recommended by the researcher.
1. The CBN and NDIC should ensure effective monitoring of bank
returns in order to identify ailing banks.
2. Adequate public awareness and update on their activities
especially in the areas of premium charge, insurance limit,
liquidity and revocation of bank license.
111
3. There should be revision and updating of relevant laws and
drafting of new ones related to effective regulation of the
banking system.
4. Regular on-site and off-site supervision of banks should be
embarked upon by the CBN and NDIC to help boost the
performance of banks.
5. The Central Bank of Nigeria should ensure that banks comply
with the mandate of publishing their annual financial
statement to depositors and the general public as this will
help in enhancing public confidence in the banking system.
112
APPENDICES
Department of Banking and Finance,Nnamdi Azikiwe University,Awka.25th August, 2012.
Dear Sir/Madam,
Questionnaire
Kindly respond to the following questions in the questionnaire as honestly and objectively as possible. The questionnaire is purely a research tool designed for a B.sc project to be submitted to the above department.
The information supplied by you will be treated in strict confidence and your name is not required.
The regard work is on ‘’An Appraisal of the role of CBN and NDIC in Bank Supervision and Regulation in Nigeria’’
Thanks
Yours Faithfully
Ochulor Ezeh.C
113
Section A. 1. Sex: Male ( ) Female ( )2. Age: below 30yrs ( ) ; 30-40yrs ( ) ; 41- 50yrs ( ) ; 51 and above ( )3. Qualification: WASC/SSCE ( ) ; OND/NEC ( ) ; HND/B.A/B.sc ( ) ;
M.A,M.sc/MBA and above4. Category of respondent
Bank staff ( ) Depositors ( ) NDIC staff ( ) CBN staff ( )5. Category of Bank staff (for bank staff)
A. junior ( ) B. middle management ( ) Top management
Section B1. The supervisory and regulatory framework of the banks is very effective in
the Nigerian banking system.Strongly agree ( ) Agree ( ) strongly disagree ( ) Disagree ( ) Undecided ( )
2. The stability in the banking system was as a result of sound and effective supervisory and regulatory framework.Strongly agree ( ) Agree ( ) strongly disagree ( ) Disagree ( ) Undecided ( )
3. The performance rating of CBN/NDIC in controlling banks activities is very high.Strongly agree ( ) Agree ( ) strongly disagree ( ) Disagree ( ) Undecided ( )
4. BOFIA 1991 is adequate for supervision of financial institutions in Nigeria.Strongly agree ( ) Agree ( ) strongly disagree ( ) Disagree ( ) Undecided ( )
5. CAMEL framework is useful for assessing performance of insured banks.Strongly agree ( ) Agree ( ) strongly disagree ( ) Disagree ( ) Undecided ( )
114
6. Disclosure of banks annual financial statements to depositors, investors and the general public will help in enhancing the general public will help in enhancing the public confidence.Strongly agree ( ) Agree ( ) strongly disagree ( ) Disagree ( ) Undecided ( )
7. The five hundred thousand naira (N500, 000) maximum coverage for commercial banks per depositor is satisfactory.Strongly agree ( ) Agree ( ) strongly disagree ( ) Disagree ( ) Undecided ( )
8. The regular on-site inspection visit to banks has helped in identifying problem areas in banks.Strongly agree ( ) Agree ( ) strongly disagree ( ) Disagree ( ) Undecided ( )
9. The off-site supervision of banks by the CBN/NDIC Acts has helped to check and analyze prudential returns from banks.Strongly agree ( ) Agree ( ) strongly disagree ( ) Disagree ( ) Undecided ( )
10. Effective banking regulation encourages quality services and promotes an efficient and competitive banking system.Strongly agree ( ) Agree ( ) strongly disagree ( ) Disagree ( ) Undecided ( )
11. The CBN/NDIC regulatory and supervisory role in Nigeria has not been positive.Strongly agree ( ) Agree ( ) strongly disagree ( ) Disagree ( ) Undecided ( )
12. The CBN and NDIC use off-site supervision as an instrument of regulation and supervision in Nigeria.Strongly agree ( ) Agree ( ) strongly disagree ( ) Disagree ( ) Undecided ( )
13. False returns by banks are a major constraining factor for effective regulation and supervision.Strongly agree ( ) Agree ( ) strongly disagree ( ) Disagree ( ) Undecided ( )
14. The public awareness for the activities of the NDIC and the CBN such as liquidation and revocation of bank license is high.Strongly agree ( ) Agree ( ) strongly disagree ( ) Disagree ( ) Undecided ( )
115
15. Investors and depositors are aware of the NDIC activities especially in the areas of premium charge and insurance limit.Strongly agree ( ) Agree ( ) strongly disagree ( ) Disagree ( ) Undecided ( )
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