ABSTRACT
The study is an empirical analysis of the impact of regulation and supervision on the activities of
Nigerian banks with emphasis on the role of the Central Bank of Nigeria and The Nigerian
Deposit Insurance Corporation. It evaluates the roles and contributions of CBN and NDIC to the
Nigerian banking sector. Extensive field survey and library research was carried out and data
collected were subjected to thorough analysis.
The analysis shows that the supervisory and regulatory framework of the Central Bank of Nigeria
and the Nigerian Deposit Insurance Corporation are not sufficient to guarantee effective
banking practices in Nigeria.
Other findings from the study include the need to increase the maximum insurance coverage
due to the effect of inflation and the persistent fall in the value of the Naira, the need to disclose
transactions continuously to ensure financial prudence through regular supervision and
monitoring of the financial health of local banks with the aid of the ‘CAMEL’ ratings and other
supervisory framework.
There is need to also increase the awareness of banking activities within the general populace
through a deliberate integration process aimed at demystifying certain inherent perceptions of
the public with respect to distress and the role of the Nigerian deposit Insurance Corporation
(NDIC). Moreover, the public, investors and depositors were not fully aware of the activities of
NDIC and CBN in liquidating and revocation of banks’ licenses due to the ineffectiveness of the
enlightenment programmes used in carrying out the awareness.
The study focuses also on the consolidation agenda of the Central Bank of Nigeria and the
processes, prospect and the challenges of consolidation.
A questionnaire and telephone based research was adopted for the study and the data
collated was tested using the chi-square analysis and supported by fundamental evidence from
the database of the regulatory authorities.
Finally, the study offered suggestions as to how the problems so identified could be ameliorated.
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TABLE OF CONTENT
COVER PAGE
CERTIFICATION 1
APPROVAL 3
DEDICATION 4
ACKNOWLEDGEMENT 5
ABSTRACT 6
TABLE OF CONTENTS 7-9
CHAPTER ONE: INTRODUCTION
1.1.0 Background of the Study 11
1.2.0 Aims and Objectives of the Study 13
1.3.0 Scope and Limitations 14
1.4.0 Significance of the Study 15
1.5.0 Statement of Research Problems 16
1.6.0 Statement of Research Questions 16
1.7.0 Research Hypothesis 18
1.8.0 Definition of terms 20
CHAPTER TWO: LITERATURE REVIEW
2.0.0 Introduction 22
2.1.0 Introduction to Banking Supervision & Regulation 23
2.2.0 Development of Banking in Nigeria 30
2.3.0 The objectives for banking Supervision 33
2.4.0 Approaches to Banking Regulation and Supervision 36
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2.5.0 Banking Supervision and Regulatory Structures 38
2.6.0 Ways and Methods by which Regulatory authorities
Carry out supervisory functions in banks 41
2.7.0 Procedures and areas of banking examination 43
2.8.0 Origin of Bank regulation/Supervision in Nigeria 45
2.9.0 Conditions for effective banking supervision 47
2.10.0 The roles of Regulatory Authorities in Banking 49
2.11.0 The agents of banking Supervision Authorities and
Authorities 54
2.12.0 Challenges of Supervision 91
2.13.0 The Nigerian Deposit Insurance Corporation 114
2.14.0 The Impact of Public Policy on the Banking System in
Nigeria 135
2.15.0 Banking Sector Policies in Nigeria 137
2.16.0 The Performance of Public Sector Banks in Nigeria 140
2.17.0 The Impact of Financial Liberalisation on Banking 152
2.18.0 Recent developments in the organization of banking
Supervision 155
2.19.0 Bank consolidation in Nigeria: Processes and Prospects 162
2.20.0 Supervision of Restructured banks 184
2.21.0 Assessment of Compliance with the Basle Core Principles 186
CHAPTER THREE: RESEARCH METHODOLOGY
3.0.0 Introduction 204
3.1.0 Research Design 204
3.2.0 Sources of data & Instruments of data Collection 207
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3.3.0 Research Instruments 209
3.4.0 Research Population 211
3.5.0 Determination of Sample size 212
3.6.0 Administration of Questionnaires & Interviews 213
3.7.0 Methods of data Analysis 214
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1.0 Data presentation 216
4.2.0 Data analysis 216
4.3.0 Hypothesis Testing 238
CHAPTER FIVE: DISCUSSION OF RESULTS
5.0.0 Introduction 261
5.1.0 Findings 261
CHAPTER SIX: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION
6.0.0 Summary of Findings 264
6.1.0 Conclusion 264
6.2.0 Recommendations 266
Bibliography 267
Proposed Research Questionnaire 278
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CHAPTER ONE
INTRODUCTION
1.1.0 BACKGROUND OF THE STUDY
The banking sector in any economy serves as a catalyst for growth and development. Banks are
able to perform this role through their crucial functions of financial intermediation, provision of
an efficient payments system and facilitating the implementation of monetary policies. It is not
surprising therefore, that governments the world over attempt to evolve an efficient banking
system, not only for the promotion of efficient intermediation, but also for the protection of
depositors, encouragement of efficient, competition, maintenance of public confidence in the
system stability of the system and protection against systemic risk and collapse.
Worldwide, the banking business is highly regulated. This is because of the pivotal position the
financial industry occupies in most economies. An efficient system, it is widely accepted, and is
a sine qua non for efficient functioning of a nation’s economy. Thus, for the industry to be
efficient, it must be regulated and supervised in view of the failure of the market system to
recognize social rationality and the tendency for market participants to take undue risks which
could impair the stability and solvency of their institutions.
Regulation and supervision of banks remain an integral part of the mechanism for ensuring safe
and sound banking practice. At the apex of the regulatory and supervisory framework for the
banking industry is the Central Bank of Nigeria (CBN). The Nigerian Deposit Insurance
Corporation (NDIC) however, exercises shared responsibility with the Central Bank of Nigeria for
the supervision of insured banks. Active co-operation exists between these two agencies on
both the focus and modality for regulating and supervising insured banks. This is exemplified in
the coordinated formulation of supervisory strategies and surveillance on the activities of the
insured banks, elimination of supervisory over lap, establishment of a credible data
management and information sharing system.
In the main, bank supervision entails on-site examination of the institutions and off-site analysis of
periodically rendered prudential returns, a process called off-site surveillance. The two activities
11
are mutually reinforcing and are designed to timely identify and diagnose emerging problems in
individual banks with a view to prescribing the most efficient resolution options.
In line with prevailing international standards, these agencies (CBN and NDIC) have continued
to emphasize risk-focused bank supervision in Nigeria. Similarly, they have developed twenty-five
(25) core principles for effective banking supervision as enunciated by the Basle committee on
banking supervision as the pivot of the framework for bank supervision.
It is worthy to note that what is currently happening in Nigeria does not differ widely from what
happened in other nations. Over the years, and specifically since 1952 when the first banking
ordinance was promulgated, several other statutes have also been put in place to serve as
legal backbone for the actions of the monetary authorities in regulating the banking industry.
Presently, the major relevant statutes, include Central Bank of Nigeria Decree No 24 of 1991, the
Banks and other financial Decree No. 25 of 1991, the Company and Allied Matters Decree No 1
of 1990, the Nigeria Deposit Insurance Corporation Decree No 22 of 1988 and lately, the failed
Bank (recovery of debt & Financial malpractices) Decree No 18 of 1994. These enabling laws
and other relevant legislation have largely provided for sufficient and comprehensive
supervisory power and operational autonomy in bank supervision, which may restore public
confidence in banks.
Furthermore, as part of efforts to ensure the stability of the banking industry and in response to
the lingering problem of distress in the sub-sector, the regulatory/supervision authorities have
been applying various failure measures since the late 1990s. Hence depending on the severity
and peculiarity of the distress, NDIC in collaboration with the CBN, has over the years,
successfully adopted such measures as provision of liquidity support through accommodation
bill, imposition of prompt corrective actions, assumption control and management, restructuring
and sale of some distressed banks as well as liquidation of the terminally distressed banks as a
last but unavoidable option.
12
In specific terms, the following measures have so far been adopted.
1) Accommodation facilities were granted to ten (10) banks with serious liquidity crises to
the tune of N2.3 billion in 1989 following the withdrawal of public sector funds from
commercial and merchant banks and the transfer to CBN during that year.
2) Holding actions were imposed on 46 banks to help stabilize their financial conditions in
the mid-90’s.
3) Twenty – four (24) banks were temporarily taken over by the regulators to safeguard
their assets between the years 1989 – 1994.
4) Seven (7) distressed banks were acquired, restructured and sold to new investors in
the late 1990’s.
5) From 1994 to 1999, thirty-six (36) terminally distressed banks were closed with minimal
disruption to the banking system.
6) In 2005, the number of operationally licensed banks in Nigeria numbering 89 (Eighty-
Nine) was streamlined through a process of Mergers and acquisition into 25 (Twenty-
Five) viable banking institutions with a capital base of not less than N25 billion each.
The streamlining of these banks was because of their inability to respond to all the various
regulatory/supervisory initiatives employed to resolve the banks’ problems, and the continued
degeneration in their financial conditions.
1.2.0 AIMS/OBJECTIVES OF THE STUDY
The general aim of this research work is to determine the impact of the regulatory and
supervisory functions of the Central Bank of Nigeria (CBN) and the Nigerian Deposit Insurance
Corporation on the activities of Nigerian banks.
13
The main objective is:
1 To examine thoroughly how supervisory and regulatory functions of the regulators (CBN
and NDIC) impacts on Nigerian banks.
2 To determine the relationship between the banking supervision and the incidence of bad
loan portfolio in the Nigerian banking industry
3 To determine the efficiency and effectiveness of Deposit Insurance Scheme in Nigerian
banks as a means to boosting depositors’ confidence in the system.
4 To test the effectiveness of regulation on the pricing of banks products and services
offered to their customers.
5 To determine the relationship between the CAMEL performance rating of banks and the
effect of regulation in the industry
6 To determine the relationship between banks lending to the real (private) sector and
regulation on the industry.
7 To underscore the efficiency of the consolidation exercise presently embarked upon by
the Central Bank towards effective regulatory supervision.
1.3.0 SCOPE AND LIMITATIONS OF THE STUDY
The study will cover the operation of the regulatory authorities as it relates to the banking
industry in the past twelve years prior to the consolidation era and thus, would be limited to the
period of 2000-2005.
Secondly, the study assumes that the banking system has remained deregulated during the
period covered in our study, as most banks practice universal banking, while the CBN/
NDIC act as the regulatory authorities and supervisor of banks in the banking sector.
In view of the technicalities involved, it would be unrealistic to assume that all necessary facts
have been gathered in the process of the study. Information gathered is limited to those
accesses and made available by the respondents and also those gathered with the aid of local
14
newspapers, magazines, journals and annual reports of the Central Bank of Nigeria (CBN),
Nigeria Deposit Insurance Corporation (NDIC), Chartered Institute of Bankers of Nigeria (CIBN),
Agusto Industry report and basically the internet. However, the effect of this limitation will be
reduced to the barest minimum.
1.4.0 SIGNIFICANCE OF STUDY
The study is significant in that it will help depositors of funds in financial institutions to fully
understand the mechanism of banking supervision and the provisions of the law as it relates to
the deposit insurance scheme. It also provides a platform for the regulatory authorities to
appreciate the impact of their activities on the banking industry, and underscores areas for
improvement.
It is also imperative to state that a study of this nature provides an independent platform via
which the regulators can appraise fundamental tools of supervision in a bid to make reasonable
adjustments where necessary.
The findings of this study will be of immense benefit not only to the Nigerian banking industry and
its related institutions, but also to those interested in understanding the inter-relationship
between the actions of the regulators on one hand and the banking institutions on the other as
well as providing a platform for promoting an efficient and effective banking practice.
The significance becomes more prominent when the effect of regulation and supervision is
examined against the background of the consolidation exercise of the present policies of the
Central bank of Nigeria. It is worth mentioning that the present state of the nation’s financial
industry precipitated out of the supervisory framework of the Central Bank, hence this study
would attempt to examine what impact the present consolidation exercise would have on the
regulatory framework.
15
1.5.0 STATEMENT OF THE RESEARCH PROBLEM
Bank regulation/supervision is implemented to ensure a sound and safe financial system in the
economy. The measures are mainly concerned with the quality of risk asset in banks,
compliance with key ratios such as liquidity ratio, cash reserve ratio, capital adequacy ratio
amongst others, the quality of management and other corporate governance issues.
However, inadequate supervisory framework and lack of an effective risk asset database and
information sharing system have contributed in no small measure in disrupting the activities of
banks, thereby leading to the often distasteful incidents of banking distress and liquidation by
the regulators.
In line with this problem, various banking legislation/acts have been promulgated as well as the
introduction of different strategies all aimed at increasing the efficiency of banking regulatory
supervision. Among them are on-site, off-site banking examination, routine examination, special
examinations culled at the instance of the regulators as well as other methods of surveillance to
be discussed in subsequent chapters. These measures are mutually reinforcing and are
designed to timely identify and diagnose emerging problems in individual banks with a view to
presenting most efficient resolution directed towards ensuring continued public confidence in
the banking system.
1.6.0 STATEMENT OF RESEARCH QUESTIONS
Since the promulgation of decree No 22 of 1988, the effectiveness of the operations of NDIC
and CBN has been a source of controversy and comments by key monitors in the banking
industry.
The generated controversy among bankers and the general public forms an integral part of the
research questions. These are:
16
Why is it mandatory for banks to be overtly regulated by Central Bank of Nigeria (CBN)?
Have the regulatory authorities helped in controlling the monetary and fiscal
inefficiencies of government policies?
How effective has NDIC guaranteed depositors’ funds through its deposit insurance
scheme?
Has the Nigerian banking industry become safe, stable and command the confidence of
the general public since the promulgation/implementation of the BOFIA/NDIC Act?
Have the activities of banking supervisions brought about normal banking practice,
professionalism and ethical conduct in the Nigerian banking system?
As a liquidator, how effectively did NDIC ensure orderly and efficient closure of failed
banks with minimum disruption to the banking system?
Was proper screening of person(s) allowed to own and manage banks carried out by the
regulators and if so how far has it fare in minimizing the incidence of abusive ownership
and management?
What is the performance rating of regulatory authorities in preventing financial distress in
Nigeria?
Is the CAMEL framework useful in assessing performance of financial institutions in
Nigeria?
Is Universal banking the key to Nigerian economic development and evolution of sound
and healthy financial system?
Have banks and other financial institution (BOFIA) brought about high standard of
financial practice in Nigerian banks?
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1.7.0 RESEARCH HYPOTHESIS
The supervisory and regulatory authorities play a significant role in the financial system of any
economy through the promulgation of policies aimed at ensuring the prudent management of
banks’ assets and liabilities and thereby guarantee the safety of depositors’ funds. They also
promote compliance to safe and sound banking practices, encourage the institution of an
efficient internal control system in individual money deposit banks in order to prevent the
incidence of frauds, forgeries and other financial malpractices as well as ensure the stability and
engendering of public confidence in the system.
This study will therefore test the following eight hypotheses.
1
Ho: The supervisory and regulatory functions of the Central Bank (CBN) and the NDIC have
been effective in curtailing distress in the Nigeria banking system.
H1: The supervisory and regulatory functions of the CBN and the NDIC have not been
effective in curtailing distress in the Nigerian banking system.
2
HO: The Regulatory and Supervisory activities of the CBN and the NDIC have boosted
depositors’ confidence in the Banking System.
H1: The Regulatory and Supervisory activities of the CBN and the NDIC have not boosted
depositors’ confidence in the Banking System.
3
Ho: The Supervisory and Regulatory activities of the CBN and the NDIC have impacted
positively on the pricing of banks’ products to their external customers.
H1: The Supervisory and Regulatory activities of the CBN and the NDIC have not impacted
positively on the pricing of banks’ products to their external customers.
18
4
Ho: The Supervisory and Regulatory functions of the Central Bank and the NDIC have been
effective in improving corporate governance issues in the Banking Industry.
H1: The Supervisory and Regulatory functions of the Central Bank and the NDIC have not
been effective in improving corporate governance issues in the banking industry.
5
Ho: Effective regulations and supervisions of the CBN and the NDIC would boost the volume
and the value of transactions witnessed in the Nigerian banking industry.
H1: Effective regulations and supervisions of the CBN and the NDIC would not boost the
volume and the value of transactions witnessed in the Nigerian banking industry.
6
Ho: The Regulatory and Supervisory functions of the CBN and the NDIC have stemmed the
incidence of widespread bad loan portfolio in the Nigerian banking system.
H1: The Regulatory and Supervisory functions of the CBN and the NDIC have not stemmed
the incidence of widespread bad loan portfolio the in Nigerian banking system.
7
Ho: The Regulatory and Supervisory functions of the CBN and the NDIC have stemmed the
distress syndrome in the Nigerian banking industry.
H1: The Regulatory and Supervisory functions of the CBN and the NDIC have not stemmed
the distress syndrome in the Nigerian banking industry.
8
Ho: The Insurance premium of N50, 000 payable by the NDIC to bank customers in the light of
distress is sufficient to boost customers’ confidence in the banking system.
H1: The Insurance premium of N50, 000 payable by the NDIC to bank customers in the light of
distress is not sufficient to boost customers’ confidence in the banking system.
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1.8.0 DEFINITION OF TERMS
Financial Intermediation: Financial Intermediation is the mobilization of funds from the surplus
spending units at a cost or lending of such funds to the deficit spending units at a price both
within and outside the shore of a country.
Bank regulation: a body of specific rules or agreed behaviour either imposed by some
government or other external agency, or self-imposed by explicit or implicit agreement within
the industry that limits the activities and business operations of financial institutions e.g.
CBN/NDIC.
Bank supervision: Is the process of monitoring banks to ensure that they are carrying out their
activities in accordance with laws, rules and regulations, and in a safe and sound manner.
Stable banking system: A stable banking system means that banks have the ability and
capacity to meet maturing obligations as they fall due, and are making adequate profits from
authorized banking business to justify their investment while at the same time keeping banking
failures at a minimum within the country.
Prudential guidelines: Is a body of specific rules imposed by government through the Central
bank aimed at ensuring prudent management and administration of banks’ funds so that
reports of financial institutions are correct and reflective of their true portfolio.
Deposit insurance scheme: Is primarily intended to promote stability of the financial system and
to protect the less financially sophisticated depositor by minimizing the risk that depositors will
suffer, lender of last resort, effective bank regulation and supervision and efficient payment
system.
Financial stability form (FSF): This state that a deposit insurance system needs to be supported by
strong prudential regulation and supervision, sound accounting and the enforcement of
effective law.
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