The Effect Of Bank Regulation On Stability Of Nigeria Banking System

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The Effect Of Bank Regulation On Stability Of Nigeria Banking System


Abstract


The banking sector in Nigeria has undergone radical changes during the 35 years since independence. Banking developed from an industry which in 1960 was dominated by a small number of foreign owned banks into one in which public sector ownership predominated in the 1970s and 1980s and in which Nigerian private investors have played an increasingly important role since the mid 1980s. Extensive government intervention characterised financial sector policies, beginning in the 1960s and intensifying in the 1970s, the objective of which was to influence resource allocation and promote indigenisation. Since 1987 financial sector reforms have been implemented, encompassing elements of liberalisation and measures to enhance prudential regulation and tackle bank distress.

The paper concentrates on the commercial and merchant banks, which together accounted for 85 per cent of the total assets of the main financial institutions in Nigeria, excluding those held by the Central Bank of Nigeria (CBN), in 1993. It explores explores two related issues. First, that government controls on financial markets, public ownership of banks and the neglect of prudential regulation, had detrimental effects on the banking sector, especially in terms of the quality of banks’ loan portfolios, efficiency and competition. Second, that the efficacy of financial liberalisation and other financial sector reforms to enhance the efficiency of intermediation in banking markets has been limited, in part because of the legacy of pre- reform intervention in banking markets, which left large sections of the banking industry in financial distress, but also because some of the reforms were inappropriately sequenced and others were not implemented in a consistent manner.


Chapter One


Introduction

1.1 Background of the Study

Even since the inception of the first three successful indigenous banks in Nigeria, the National Bank of Nigeria established on February 11th 1933, the Agbommagbe Bank (now wema Bank Nig Plc) in 1945, The African continental Bank Plc in 1947 and others subsequently established in the country during the period from 1952 when the first banking ordinance was enacted to regulate and control the activities of commercial banks in the country till present day, prand have remarried a permanent feature in our banking industry.

During the free banking era (between 1892 and 1952) there was no form of banking act or ordinance to regulate the stabilities shipment and operation of commercial bank. There are as it is presently supervised. Many bank were registered. Some of did not open their doors for business ever for a day while some simply collected customers deposits and varnished. This had resulted to the deprivation of our economy an as a whole the much needs fund for development and depriving individual the hard earned funds, this also brought about loss of faith trust on the commercial banks by Nigeria and the subsequent under developed banking habit in the country

However, with the introduction of the first banking ordinance in 1952 and the central bank of Nigeria (CBN) ordinance in 1958 to regulate and control the activities of commercial banking in the country fraud in commercial banks have rather increased in size, and method used by fraudster acquires greater sophistication day by day. Presently with the introduction or modern banking procedures ie improved communication system, automatic electronic gadgets and computers networks into our banking system coupled with various precautionary measures taken by banks. To prevent fraud in the banks fraud have rather taken unclear dimension and the six and form involved increase in a geometric progression. Other Amptiam in his articles obstacle o growth of baking industry saw that it was discovered during investigation that bank now take extra precaution before clearing a cheque because of rampant incident of fraud and forgeries the form of fraud has placed banks loss on the average of # 1m per each working day of the year in Nigeria Asimi kola in his own article “The cash economy phenomenon” also observed that fraud has become sophisticated as to make forget cheque book good the owner to confirm it as his own signature recently in the bid curb the grand fraud, CBN issued a directive to bank to increase it capital base to # 25 billion. Previously section a of the decree 1990 state that, the minimum paid up capital for bank is #50 million for commercial bank. This directive come up after several bank has been discovered to have defrauded it is customers mostly foreign investors. In this required .

Bankers in a bid to reduce the size and rapid occurrence of fraud in their bank now take adequate precautionary measure before clearing cheques drawn their customers accounts. These precautionary measures bring into focus another problem facing commercial banks,. The problem of time wastage in the banking hall. Ashimi Kola in his article also said that customer waits a minimum of about two hours in banking hall of Nigeria banks to cash their money. This is one of the most legitimate criticisms of the quality of bank services. The checking process is long and by the time a cheque is released to cashier for payment, the customer is frustrated and perhaps Rast asleep among feering crowd. This calls for an overhaul of the checking and control system. E above being the general situation of things in commercial banking fraud is there fore number one enemy to all concerned with growth and development of banks., the intention of this research work therefore aimed at identification of the fraud on Nigerian economy in general and on Afribank Nigeria plc Enugu in particular and recommend more functional measure that will help in the prevention and to reduction of fraud in commercial bank in Nigeria


1.2 Statement of the Problem

The service of banking is supposed to be hinged on the effective satisfaction of both the surplus units and the deficit units of the economy. The quality of banking is based on the manner and the environment in which such services are rendered quality service in banking must meet three basic requirements namely; competence reliability and credibility.

For banks to be able to function effectively and maintain high efficiency level in the economy and to contribute meaningfully to the economic growth and development of a country, then the industrial sector must be safe. sound and stable, being devoid of any economic problem that can tilt it off the rail of achieving its primary duty of satisfaction, such as distress.

In all indication what we are experiencing and witnessing in this country today is a far cry from the ideal state of stability expected.

Due to inflation and the general socio-economic decline and political uncertainties around us which have taken a large toil on the banking industry. Most banks have suffered from loss of business and this has resulted to loss of income. The banks were unable to pay customers on demand due to non availability of liquid cash. The public lost confidence in the banking industry.

How sensitive is the banking industry to this problem? Also the fraudulent activities associated with insiders, large volume of unscreened loans and unauthorized loans to top bank officials are of great concern as they help to make most of these banks insolvent.

Due to these frauds and shortcomings the central bank has come up with banking reforms over the years to pad and guide the activities of the commercial banks in order to smoothen the operation of these businesses in the industry. This work is set to unravel these regulations and identify its effects on the banking sector


1.3 Objective of the Study

This research work is aimed at informing the readers on what the 1997 recapitalization policy is all about and providing a most appropriate option of raising the new minimum capital requirements to banks. It also intends to look at the relevance of the concept to the total economic development. It shall try to impact knowledge about the Nigerian banking industry in respect to business of banking, legal guides, history of banking in Nigeria, and the types and operations of banks in Nigeria. It shall shed light on the benefits of the recapitalization policy to the Nigerian banking industry and the Nigeria economy as a whole, circumstance that give rise to recapitalization and the credibility problem that pervaded the banking industry against the backdrop of the larger Nigerian macro-economic Environment. What has been the role of the regulatory bodies(CBN & NDIC) in distress resolutions. It should be pertinent to periscope issues like lending, distress and also dovetail into distress resolution.


1.4 Research Questions

  1. What are the policies made by the CBN to regulate the banking sector?
  2. What are the causes of instability in the banking sector?
  3. What are the effects of CBN banking policies on the stability of the banking sector?

1.5 Significance of the Research

The significance of the research is base on the fact that the role of financial institutions in general and banks in particular on the economic stability, well being and development of any society cannot be over looked and as such, these institutions must be stable and operating well for economic development of any society .It is in this effort that the federal government of Nigeria introduce the 1997 regulation policy in its annual budget in order to stabilise the industry and eradicate the long existing distress problems in our banking industry.

The regulation policy has a lot to offer as regards the promotion of the banking industry and the economy, but most banks are frowning at the policy because of the obstacles concerning banks implementation of the policy but if proper measures are taken this could eliminate most of the problems which looks seemingly difficult at the beginning because of the bleak out look of the Nigeria economy at present. This project among other things, will educate the readers on; what regulation is all about, how best a bank can successfully recapitalise, benefits of the 1997 policy to .both banks and the general economy, laws regulating relating banking operations in Nigeria and various happenings in the Nigeria banking industry since inception.


1.6 Scope of the Study

The time dimension within which this study covers is from 1892 to early 1999 and this has been the period of time in which banking has been existing in Nigeria.

Basically, the study covers the early banking period in Nigeria so as to relate the problem of regulation to performance of banks in this period and the period in which the first banking legislature was released, hence the introduction of minimum capital requirements of banks until date.

The work features structure and types of banks, business of banking, legal frame work concerning operations of banks, the regulation policy of the federal government of Nigeria as announced in its annual budget for 1997 and why government felt there is a need for this policy. Included in the work are the various options on how best banks can raise the required capital base and the benefit to be derived from having a large capital base by banks and the economy in general. This work will also look at problems existing in the Nigeria banking industry since its inception and problems faced by the banking industry within the 1990’s. Not left out is the period of banking boom in Nigeria, reasons for this boom and what problems it left behind. Finally, how regulation will help to resolve the current problems in our banking system. Since this policy concerns the whole banking system, it has been decided that no particular case study will be used in this work, but that not withstanding, some banks would be mentioned and used as example in certainsituations.


1.7 Limitation of the Study

The major constraint to this study is the difficulty in getting the relevant data for the study. The area of study (regulation policy of 1997) is a recent development in the banking sector, so that not much literature has been published on it and most banks are not ready to release needed data as they see it as an important business secret, this compounded the issue of scarcity of data.

Therefore the researcher has little option than to rely on textbooks (which were very scanty on the issue), newspapers reports, Journals, conference papers from N.O.I.C top management and C.B.N Governors. And the opinions of some staff and managers of few banks. Sources of information are quoted in the report proper where necessary and also in the reference section.

Other limiting factors include;

  • Time Constraint-: as the available time has to be shared between academic work and extra-curriculum activities.
  • Financial Constraint-: This was one of the greatest source of constraint or limitation of this work. Due to high cost of transportation to sources of primary data, photo statting relevant materials and obtaining relevant newspapers, journals and magazines.
  • And finally, the inability to get vital information from some of the banks, I went to as a result of some standing orders against the release of such information outside their corporate headquarters and by officer of a very high management level as witnessed especially at the first bank regional office and Habib Bank office in Abuja.

1.8 Definition of Terms

In a study like this it is necessary to define at the beginning those terms and concepts that will be used in the study to avoid ambiguities. For the purpose of this stli, terms like business, industry, firm, and enterprises are used inter changeably. So also is bank and financial institution. Others are distress and failure or bank-run, Capitalization and Recapitalization.

Bank:

Sec 2 and 61 of(BOFID) 1991 defines a bank as; “A duly incorporated company in Nigeria holding a valid banking license to receive deposit on current account, savings account or other similar accounts, paying or collecting cheques drawn by or paid in by customers. provision of finance or such other business as the government may order to publish in the gazette designated as banking business.

To Marquadus:

Banking is signified by certain kind of dealings in money, approved by the state accordingly by which money is deposited with the bankers for the benefit of the depositor, so that the ownership of the money passes to them, and so that the creditors (i.e. depositors) get security; and the debtors (i.e. the bankers) get advantage. The condition is however implied that the depositor may whenever he pleases demand the money he deposited. Therefore a bank can simply be said to be an establishment where money is deposited in accounts, withdrawn and borrowed.

BOFID:

Banks and other financial institution decree.

Capital:

This refers to the sum invested in a business. It is also seen or used in business by a person, corporation, government etc. Capital can also be referred to as the net worth of a business; amount by which the assets exceed the liabilities.

Capital Base:

The total sum value of amount invested in a business.

Capital Market:

The market for sale of Securities. It is also refer to as a market where investment instruments mostly in monetary forms are exchanged either through long, short or medium term agreements.

Regulation:

A principle or condition that customarily governs behavior or pattern of operation. A framework that guides the performance of a system.


Chapter Five


Conclusion and Recommendation

5.1 Conclusion

The banking system in Nigeria has experienced major changes since independence, many of which were shaped by government policies. At independence banking markets were dominated by a relatively small number of mainly foreign banks. In the following three and a half decades the number of banks expanded and the ownership structure diversified with first the public sector and then the Nigerian private sector becoming the dominant participants.

Beginning in the 1960s, the government intervened extensively in banking markets to control resource allocation and to promote the indigenisation of the economy. The policies pursued by the government were those of ’financial repression’. The CBN issued detailed guidelines to banks to control interest rates and the volume and direction of credit. The Federal Government acquired controlling equity stakes in all of the foreign banks during the 1970s while a number of banks were set up by the state governments. In the late 1970s the CBN initiated a rural banking programme under which the commercial banks were instructed to establish branches in the rural areas.

Financial repression and public sector ownership had significant consequences for banking markets. Competition was stifled, providing some degree of protection for inefficient banks, but the financial performance of the public sector banks was nevertheless poor. Policy lending-loans extended to the public sector or to priority sectors in accordance with credit guidelines – contributed to the build up of extensive non performing loans in the portfolios of the Federal Government and state government banks. Many of the state government banks were very badly managed and used for patronage and as a source of finance for their owners. State governments and other public sector agencies were among the major defaulters of the public sector banks.

The larger Federal Government banks were able to avoid serious financial difficulties, despite their bad debts and high overheads. They retained experienced management, the cost of their deposit base was low and their size enabled them to be well diversified. But extensive bad debts rendered some of the smaller Federal Government banks and many of the state government banks insolvent. Their financial fragility was concealed by a combination of public subsidy and improper accounting until the late 1980s. Since then stricter prudential standards and a less accommodating stance towards liquidity support by the authorities have exposed the widespread distress among these banks.

Financial liberalisation began in 1986/87 after the government had adopted a SAP. The deregulation of banking markets was partial and, especially with regard to interest rates, inconsistent. Entry requirements (in terms of the granting of banking licenses) were relaxed in the mid 1980s and this facilitated a dramatic expansion in the number of commercial and merchant banks owned by the Nigerian private sector. Some of these banks have attracted a significant share of banking markets and have brought benefits for customers in terms of greater competition and improved services, albeit mainly confined to urban areas. In contrast many others were set up largely to take advantage of arbitrage opportunities in foreign exchange markets rather than to undertake more conventional banking business. Bad management and fraud, including insider lending, has been endemic among these banks and has led to widespread distress.

The introduction of more liberal economic policies in the second half of the 1980s, together with the emergence of extensive bank distress, necessitated reform to the system of prudential regulation and supervision. The deficiencies of the prudential system had included a lack of political independence for the supervisors, inadequate banking legislation and the priority given to ensuring that banks complied with allocative rather than prudential regulations. Banking legislation was strengthened in 1990 and 1991, with the CBN given greater powers to enforce compliance with the banking laws and to intervene in distressed banks. In addition the NDIC was set up in 1988 to insure bank deposits and to assist the CBN to restructure or liquidate distressed banks.

The reforms to the financial system implemented since the mid 1980s – liberalisation and privatisation, strengthening the prudential system and the take-over of some of the distressed banks – are an important step towards reshaping banking markets in the direction of efficiency, competition and prudent management. Nevertheless the banking system in Nigeria is still a long way from attaining these objectives. Effective reform of the banking system faces a number of obstacles. The implementation of the reforms has been problematic: there is strong domestic opposition to the dismantling of controls over financial markets, as evidenced by the reimposition of lending rate ceilings. The efficacy of liberalisation has also been undermined by the scale of bank distress, which is partly a legacy of pre-reform policies of public ownership and inadequate prudential supervision but also partly the consequence of inappropriate sequencing of reforms.

The inconsistency of deregulation has been a serious drawback in the implementation of financial sector reforms. Some allocative controls, such as the credit guidelines, have not been removed, while lending rate ceilings have been removed twice and reimposed twice. Nine of the Federal Government banks were privatised in 1992/93 but the Government’s commitment to a private sector led banking system is in doubt following its threat to retake control of the four largest banks, while four smaller Federal Government banks and the state government banks have not been divested. There are clearly political constraints on the degree to which government is prepared to disengage from banking markets and confine its role to that of prudential regulation.

The second deficiency in the implementation of reforms relates to their sequencing. Entry into banking markets was liberalised several years before banking legislation had been upgraded and supervisory capacities strengthened. Consequently a large number of local banks were set up whose owners and managers lacked the necessary competence or probity to compete in banking markets. Their main source of earnings was itself a product of the inconsistency of the reform process which allowed large differentials to prevail between official and parallel foreign exchange markets. The distress afflicting many of the local banks threatens widespread repercussions, not only in terms of the costs of reimbursing depositors, but also because it may undermine depositor confidence in some of the well managed local banks which have an important contribution to make to the development of banking markets.

A major impediment to the efficacy of financial reforms was the failure to maintain macroeconomic stability because of the large budget deficits accumulated by the Federal Government and financed mainly by the CBN. Deficit financing crowded out private sector borrowers from credit markets while its inflationary impact has impeded efforts to attain positive real deposit and lending rates. Macroeconomic instability also exacerbated the distress in the banking system by jeopardising the viability of banks’ borrowers in the real sector and hence their ability to service their loans.

The reform process faces a number of challenges if a market oriented and soundly managed banking system is to develop in Nigeria. The most pressing challenge will be to deal with bank distress. There is however a core of solvent banks in Nigeria – the large formerly Federal Government banks plus some of the state government and local banks – on which a market oriented banking system can be built. What is required is a much more comprehensive and consistent deregulation of controls over financial markets, a significant reduction in deficit financing and inflation and very tight prudential regulation. As with much else in Nigeria the major obstacles are likely to be political.


5.2 Recommendation

In the light of the problems being encountered in the Regulation programme by some banks and the need to eliminate distress in our economy, the following measures would help to address or reduce the problem and also help the already Capitalized banks to consolidate their position in the money market and banking sector as a whole.

  1. The customer must play his role in reducing the problem of distress in banks. He must understand that financial institutions are for profit and not charitable organizations or philanthropic institutions or a channel for sharing the “National Cake”. Therefore, customers must show that they are credit worthy, financially trustworthy and able to repay loans as agreed.
  2. Commercial banks should have a code of conduct and a powerful disciplinary board should be set up to tackle staff misdemeanor. They should put a total stop to unauthorized lending of money to managers and top management officials.
  3. A policy should be put in place for future purpose, so that banks will not have to go headlong into once and for all Regulation, rather there should be a programme that allows for the amount to be broken down within a longer period and the banks therefore would make efforts to raise the amount allocated for a specific period and the sum total of the periods would make up the total amount required. This will help to eliminate the idea of abrupt liquidation as was experienced in 1997 when the Twenty Six banks (Thirteen Commercial and Thirteen Merchant banks) were liquidated because they were believed to be too deeply down into the distress tunnel. This banks I believe if they had been given the chance to recapitalized over a given period on installmental basis, will have been able to get back on their feet and compete favourably with the so called giants in the industry today.
  4. Banks should put off selfish interest like their unwillingness to easily allow new shareholders to take up majority shares and thereby share more in the dividends accruing to shareholders. Most banks always drag their feet to come up with this decision and it really affected them during the last Regulation exercise.
  5. Banks who are already fully recapitalised, should seize the opportunity now open to them by the central bank to return back all the Federal government parastatals and ministries account to the commercial banks (which has already started with the release of N100 million at the end of April 1999) to build up the capital reserves and embark on high interest yielding short term investments to boost their capital base so as to be prepared to meet any future challenges from further regulation.
  6. The need for improved banking services, the introduction of Electronics and Computerize facilities and the training of highly skilled personnel cannot be over emphasized here, as banks needs very much to win back the confidence of their customers.
  7. There should be an extended network of branches especially to the rural areas so as to imbibe the banking culture into individuals which will in turn increase the funds available to the banks at any particular time, there by helping to eliminate illiquidity problems.
  8. With the autonomy granted to the central bank of Nigeria (CBN), the time has come when both the CBN and other monetary authorities should come together to formulate an appropriate banking structure for the Economy.
  9. There should be an improvement on the present system used by banks inspectors in which accounts of the banks.
  10. A solid capital base, which will be constantly reviewed in line with the trend of global requirement of N500,000,000 should be made to undergo a three yearly upward review say up to N1 billion by the year2003.
  11. Operational procedures should be reviewed and made speedy and flexible to meet the customer’s taste. Banks ethical and moral behaviours in their dealingswithcustomersmustbeimproveupon.Becauseinthenextmillennium strategic focus of banks to customer will be very critical.
  12. Re-engineering and staff restructuring should be made the watchword to have highly skilled staff on hand for disposition of bank products and services. Base on this, there is a need for harmonizing the salaries and other benefits received by bankers through out the country. After all, it is said that, a hungry worker is an angry contributor (if he ever contributes at all and if he does not contribute negatively). Here, there is a need to provide functional infrastructure.
  13. Finally, the regulatory authority (CBN) should be made to understand the need to regulate the banker=s and the customer=s operations rather than the present situation where by regulation and control is only concerned on the banks which is not fool proof or adequate to check mismanagement, fraud and other forms of internal practices that could lead to large scale distress as just experienced in the last few years gone by.

The Effect Of Bank Regulation On Stability Of Nigeria Banking System


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