research project by ochulor ezeh

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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

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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

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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

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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.

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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

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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

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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

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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

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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

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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

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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

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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.

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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

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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

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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

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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.

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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?

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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

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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

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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.

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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

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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

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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

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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

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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.

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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)

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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

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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).

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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

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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

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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

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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.

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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

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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

71

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

78


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


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

82

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


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


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


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


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


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



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



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


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


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


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


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


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


Table 4.2.10 The CBN/NDIC Regulatory and Supervisory Roles in Nigeria Has Been Positive

99



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



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


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


Table 4.2.14: Investors and Depositors Are Aware Of The NDIC Activities Especially In The Areas Of Premium Charge And Insurance Limit.



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 ( )

BIBLIOGRAPHY

Adebisi, Oloyede (1994). Banking Regulation in Nigeria: An Analytical Perspective. Lagos: CBN Economic and Financial Review, vol. 32. No 3.

Alao, Rasheed Olajide (2010). Mergers and Acquisition (M&As) in the Nigerian Banking Industry. An Advocate of three Mega banks, European Journal of social sciences- volume 15, Number 4554.

Asika, S. (2004) Research Methodology in Behavioral Sciences. Longman.

Bench, Robert R. (1993) Development in International Financial Regulation: Some Observations. Salt Lake City, Utah; Paper presented at the Gain Institute of Finance Annual Conference.

Central Bank of Nigeria (2009). Banking Supervision Report 2009

Central Bank of Nigeria (2010). Banking Supervision Report

2010

Central Bank of Nigeria (2004). Guideline and Incentives on Consolidation in the Nigeria Banking System; Abuja: CBN Publishing

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Ebhodaghe, J.U. (2007). Deposit Insurance: The Nigerian and Future Perspectives, Lagos: Paper Presented at a Seminar on Issues in Central Banking and Bank Distress in sub Saharan African Countries, At CBN Training Centre.

Ekundayo, J.O (1994). “The Future of the Banking Industry in Nigeria”. Lagos: Central Bank of Nigeria Economic and Financial Review. Vol 32 (3): 344-355.

Federal Government of Nigeria (1988). Lagos: NDIC Decree No. 22.

Federal Government of Nigeria (1991) Lagos: Banks and Other Financial Institutions Decree.

Iyade, A.I (2006). The Impact of Regulation and Supervision on the Activities of Banks in Nigeria (An Assessment of the CBN and NDIC).Electronic Version

Jimoh, Ayodele (1994). Regulation of the Banking Industry in Nigeria: an operator’s Viewpoint, Lagos: Central Bank of Nigeria Economic and Financial Review Vol. 32, pp3.

Llewellyn, D.I. (1988). The Regulation and Supervision of

Financial Institution, London: the Institute of Bankers.

Lemo, T. (2005). Regulatory Oversight and Stakeholder Protection, Eko Hotel and Suites VI A Paper Presented at the BGL Merger and Acquisitions Interactive Seminar, June 14.

Nigerian Deposit Insurance Corporation (2009) .NDIC Annual Report and Statement of Account 2009.

Nigerian Deposit Insurance Corporation (2010) .NDIC Annual Report and Statement of Account 2010.

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Nigerian Deposit Insurance Corporation (2011) “ Highlights of the Major Activities and Achievements of the Nigeria Deposit Insurance Corporation(NDIC) from January – December 2011 and the Plan for 2012” Retrieved August 15,2012 from www.ndic.org.ng

Nwana, O.C (1981) . Introduction to educational research. Ibadan: Heinamann Educational Books Limited.

Obasi I.N. (1999). Research methodology in political science. Enugu: Academic Publishing Company.

Okaro, C.S (2009).Banking Laws and Regulations ABIMAC Publications

Oladejo, Oladehinde and Oladipupo. (2010). Regulatory Authorities and the Performance of Nigerian Banks: An Appraisal. Journal of Business and Organizational Development. Vol. 2, Dec 2010.

Somoye, R.O.C (2008). The Performance of Commercial Banks in Post Consolidation Period in NIGERIA: An Empirical Review. European Journal of Economics, Finance and Administrative Sciences, Issue 14.

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World Bank (1994). World Bank Development Report, 1994. World Bank Washington.

http://www.ndic.org.ng/

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