EVALUATING THE BANKING REGULATIONS IN NIGERIA FINANCIAL SECTOR WITH RESPECT TO BANK DISTRESS FROM COLONIAL ERA TILL DATE

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ABSTRACT

In  recent  times,  instability  in  the  financial  system  and  the banking sector in particular has risen from institutional failures in the past. In Nigeria, the lesson of the earlier bank failures appeared to have been forgotten as generalized distress swept the banking sub- sector and systematic distress gripped the finance house sub-sector. This research work assesses the banking regulations with respect to banking distress phenomenon and empirical analysis on the extent of failures in the baking industry as well as the major causes.

The statement of the problem identified and categorized the banking distress into two major types; the generalized nature and the systematic. Generalized nature focuses on,  when the distress has effect on the industry as a whole, while the systematic concerns only when the distress has effect on the supervisory/regulatory authorities.

Conversely,   the  researcher   was   poised   to   establishing   a research design which was instituted to meet the aim of the study. The area of the study was specifically for financial institutions and regulatory authorities within the Enugu state. The researcher did employ both primary and secondary sources of data generation, while

questionnaire   and   personal   interviews   were   also   used   as   an instrument  for  data  collection.  He  also  draw  some  comparison between the figures adopted from the field survey tabulated during data analysis and figures gotten from both Central Bank of Nigeria annual report for year 2007 and also Nigeria Deposit Insurance Corporation annual report for year 2007 respectively. The researcher also employed chi-square for hypothesis testing.

Basically, from the analysis of data, it was established that the following finding were observed.

    Even  during  regulation  and  deregulation,  bank  distress  still exists.

    Ownership  structures  and  power-tussle  among  management directors and managers contributes to bank’s failure.

  Incidence of fraud and forgeries among bankers’ staff, also is a contributing factor for bank distress

1.0    INTRODUCTION

CHAPTER ONE

1.1    BACKGROUND OF THE STUDY

Regulation is a form of intervention in any activity, ranging from explicit legal control, to peer group control. It also a restriction placed by an authority with intention of achieving a particular goal. Basically, there are major theories of regulation. Prof. Uche (2008) went on to categorize it into two:

(1)    Public Interest theory; it states that regulation is    essentially used  to  correct  inequitable  market  prices.  For  any  regulation  to sustain and strive well, it must have the support from the regulatees

(2)    Capture theory of regulation; though regulation may be  well  set out the interest of the people, but it  will then be captured by the regulatees. The industries are organized, and have all the necessary resources to influence the   policy of the government and even that of the public. Therefore, the regulation which set out to serve the interest of the general public, may end up serving the interest of the regulates.

Although, the researcher is not going into details on argument that arises among scholars on the issue of regulation. The debate is normally “on whose interest do regulation protect, is it the general public or the regulates?

Conversely, due to the nature of business bank’s operates and the prominent role they play in any given economy, Odita (2006:1) stated that it ranges from the traditional role of custodian of money; the government therefore, need to give the depositors of fund and other potential/intending investors the confidence in the affairs of financial institution (Banking Industry). This gave rise for the industry to be closely monitored, and directed as accordingly by the regulatory authorities. The objective of supervision is to promote the safety and soundness of financial institutions through on-going evaluation and monitoring, including the  assessment of  risk management  system, financial condition and compliance with laws and regulations.

Invariably, in Nigeria financial sector, there are three principal legislations that provide the legislative framework for the regulation of banks in Nigeria. These are; The Central Bank of Nigeria Act (CBNA), The Bank and other financial Institution Act (BOFIA) and The Nigeria Deposit Insurance Corporation Act (NDICA). Banking regulation, as it is  also  obtainable  in  other  countries  in  the  globe,  is  concerned primarily with the protection of depositors and the stability of financial system.  The  prudential  guidelines  to  banks  also  comprise  among

other measures for supervision of banks liquidity, capital adequacy and create exposure and concentrations.

However, banking regulations is a topical issue which covers a wide range of operation of banks in Nigeria, several banking regulations have been put in place, dating from 1952 till date. These regulations are contained in the form of ordinances. The introduction of banking ordinance in 1952, which triggered a rapid growth in the industry with the growth, also witness a disappointment where many banks there after went into distress. Other ordinances that followed the 1952 bank of ordinance are: (a) The Banking Act of 1958; (b) The Central Bank of Nigeria Act of 1958; which was later amended in

1979; (c) the Central Bank of Nigeria decree of 1991, (d) Banks and other financial institutions Decree of 1991 and other Central Banks’ of Nigeria monetary guidelines published at the commencement of every fiscal year.

Although,  in the  amidst  of  all  these  banking regulations, the Nigeria Banking industry did not cease to witness banking instability and banks’ distress Dr. Sani (2003:4) stated that between 1947 – 1952 twenty one (21) banks failed, between 1953-1945 also seventeen (17) banks also failed, in the mid 1990, thirty four (34) bank also failed too.

In Nigeria, the most recent one is that of 2006, where fourteen (14) banks’ licenses were revolved on 16th January, 2006, by the   Central Bank of Nigeria prior for the banks inability to meet up the twenty-five billion  naira  capital  base.  Invariably,  the  root-causes  of  banking failures or distresses, ranges from liquidity crises, poor lending practices and other poor risk management practices to fraud.

1.2    STATEMENT OF THE PROBLEM

Banking distress  occurs  when a bank  or some banks in the system  experience  illiquidity  or  insolvency  resulting  in  a  situation where depositors fear the loss of their deposits and a consequent break down of contractual obligations. While a bank is said to be illiquid, when it could no longer meets its liabilities as they mature for payment, it is said to be insolvent, when the value of its realize liabilities. These could lead to banks’ failure, as depositors lose confidence in the system and seek to avoid capital loss. The uncertainty generated as a result of distress in banking institutions, if left unchecked, often raises real interest rates, which creates high cost of transaction and disrupts the payment mechanism with the attendant economic consequence.

Still, the extent and depth of banking distress can be generalized nature and systematic. Generalized nature distress exists when its occurrence is spreading fast and cuts across in terms of the ratio of the industry.   While a problem may become systematic and serious concern to the relevant supervision/regulatory authorities when its prevalence and contagious effect becomes endemic and pose threats to   the stability of entire system, savings mobilization, financial intermediation process and depositors’ confidence.

Besides, regulations should never in any form pose threat to an industry; rather, it should help in streaming the activities of the said industry. The disagreement among scholars many often culminated into a serious debate. This debate is on conflict interest of regulation. This is whether the regulation protect that it is the interest of the public that the regulations are been protected,  whom then do bank give support to these regulations, since general interest and profitability tend to run in the opposite direction. Above all, why is it that  the price of regulated products are too high? Besides, under normal situation, if the regulation is on the side of the public, the prices of the regulated products should be cheap.

On the other hand, if you are of the view that the regulations protect the interests of the regulatees, then, why is that many banks went into distress in the    past years? Emphatically, to unmask the root-causes of this situation, this is a big problem and challenge to this research work.

1.3    OBJECTIVES OF THE STUDY

It will be pertinent that this research should have a layout of set objectives to guide the researcher in the cause of his work. Below are these objectives:

i.       To  evaluate  the  banking  regulations  in  Nigeria  during  the period under review.

ii.      To also, evaluate the operations of Nigerian financial sector within the limits of available data.

iii.     To also ascertain the client (customers) perception about the nature, extent and causes of distress as well as the assessment of the roles of the regulatory/supervisory agencies.

iv.     To appraise the banking regulations, in-relation to financial sector diseases.

1.4  RESEARCH HYPOTHESIS

Below,   are   the   following   hypotheses   that   are   therefore formulated by researcher for test in this research work?

1.   H0:        Unpaid loans/overdraft granted to individual, group of individuals corporate bodies and government agencies do not contribute to bank distress.

Hi:                 Unpaid loans/overdraft granted to individual, group of in individuals corporate bodies and government agencies do contribute to bank distress.

2.   Ho:        Fraudulent practices and reckless life style of some management staff of various distressed banks was not responsible for banks’ failure in    Nigeria

Hi:    Fraudulent practices and reckless life style of some management staff of various distressed banks was also responsible for banks’ failure in    Nigeria.

3.     Ho:   Withdrawal of public fund from the banks and the  use     of stabilization of securities, and special treasury bill to

control excess liquidity in the system, did not trigger bank distress.

Hi:           Withdrawal of public fund from the banks and the  use     of stabilization of securities, and special treasury bills to control excess liquidity in the system,   Triggered bank distress.

1.5          RESEARCH QUESTIONS

The aim of every research work is to find out, evaluate and make necessary recommendation(s) on what has been a contending issue in the society or any given environment. The researcher, therefore, employ the following research questions to enable him achieve the aforementioned set objectives of this research work.

1.      What is the regulatory approach adopted by government        in administering banking jurisdiction/policies to the    banking industry?

2.      What      is      the      level      of      awareness      of      banking regulations/deregulatory reforms in the banking?

3.      Does government inconsistency in policies, has any       negative impact on  the Nigerian financial sector?

4.      Does proliferation of banks during SAP era, has any      negative effect in the banking industry?

1.6     SIGNIFICANCE OF THE STUDY

The significance of the study is to enable any party who is wholly interested and also some groups or governmental bodies or agencies to have an in-depth knowledge of banking regulations with respect to banking  distress.  This  is  a  vital issue that  usually  raises  a  lot  of comments and concern by the general public.

Besides, due to the nature of business and roles banks do play, people  will  be  interested  in  knowing  whether  regulations  actually assist banks in any form or do regulations destabilize their work. The litany of distressed banks in Nigeria, and major causes of such banks will be a reference guide to other existing banks in the country.

Also,  the  Nigerian  government  under  the  tutelage  of  Central Bank of Nigeria will also know that stringent policies, regulations have never or will ever do Nigerian banks a favour in any way.

Generally, this research work will be an immeasurable aid to the future researchers and any individual who is interested in banking regulations will see it as a reference point.

1.7     SCOPE OF THE STUDY

It is pertinent to note that, this study is restricted in scope, to a survey of the view, opinion of the following groups:

a. Staff of Central Bank of Nigeria, Enugu Branch

b. Staff of Nigeria deposit insurance corporation, Enugu Branch. c. Staff of Eco Bank of Nigeria Plc, Enugu Branches

d. Management  and staff  of  Union  Bank  of  Nigeria  Plc,  Enugu

Branches.

1.8  LIMITATION OF THE STUDY

In  the  course  of  carrying  out  this  research,  the  researcher encountered a lot of problems which include the following:

Time-frame: The duration of time ear-marked for this project was not all that sufficient for the researcher. For the researcher to have hand- full information, it requires a lot time, therefore, time constraints was the major limitation, the researcher encountered while executing this project.

Limited Financial Resources: The nature of this research work makes it unavoidable that the researcher must take several tips to Enugu urban city and some other states that surrounds Enugu metropolis, to source for the needed materials for the research. This placed serious challenge  on  the  availability  of  resources,  on  the  part  of  the researcher.



This material content is developed to serve as a GUIDE for students to conduct academic research


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