The Effect Of Banking Regulation And Reserve On The Performance Of Commercial Bank (A Case Study Of Union Bank)

Project and Seminar Material for Accountancy / Accounting

The Effect Of Banking Regulation And Reserve On The Performance Of Commercial Bank (A Case Study Of Union Bank)


It was in the year 1892 that banking activities first started in Nigeria with the opening of a branch of the African Banking corporation in Lagos. It is in the light of these that this work has attempted to showcases the effects of banking regulations and reserves on the performance of commercial banks. The objective was to access the effects of banking regulation and reserves on the performance of commercial banks in Enugu Urban. Help the aeration of commercial banking that can facilitate, mobilize and channel savings for economic growth. Use the monetary policy to regulate the operation of commercial banking. Control and management of distress and failing banks opinions were sampled through questionnaire, structure interview and primary and secondary data obtained respectively. The data gathered were analyses and hypothesis tested. Findings were made which include that.

Regulation and reserves requirements have positive impact on the Nigeria economy. The commercial banks are responding favorably to the banking regulation and reserve. Recommendation were made which include that; it is necessary to secure appropriate treatment of banking regulations reserves to enable it to be publicized and also to collaborate with other regulations of the financial system.

Chapter One

1.0 Introduction

1.1 Background of the Study

During 1892, to 1952 of the free-Banking Era, there are no laws, rules or regulation guiding the operational activities of the commercial banks. That single era produced many banks, which did not meet up the specifications and dictates of modern banking. And from 1957 to 2005, remainable changes have been provoked and witnessed in the Nigeria financial environment. It is in 1952 that the first Banking ordinance was introduces, vesting the control of banking in the financial secreting the colonialist. Consequently the Central Bank of Nigeria was established on March 17th 1958 by the central bank ordinance of that year.

The Central Bank of Nigeria in its endeavors to create enabling banking environment seeks outlet upon indirect control mechanism such as reserve requirement stabilization of securities, open market operations (0m0), and interest rate policy, periodic moral suasion and other prudent ratios, such as capital fund adequacy and legal landing limit to improvise.

The recent development in the Nigeria Commercial Banking system has added force to the CBN efforts to enhance the quality of banking operations. The “merge and Acquisition” system of 2004 propose by the CBN advances and samples the general problems inherent and also takes a giant student towards solving or reducing the anomaly to manageable proportion.

The mechanism traced the program (SAP) of 1986. It is also worthy of note that the commercial banking sector has expensed a tremendous growth pattern, since the advent of SAP, in 1986 both in terms of the number of new entrants into the industry and the volume of business transactions. The total of commercial banks and their branches offices increased from 29 to 1,367 as at December 31st, 1986. It is said to note that the geometric growth trend is lingering menace to the banking industry.

1.1 Statement of Problem

Banking laws and regulations are meant to guide the operations of banks in Nigeria. In spite of the operation of their laws banks especially commercial banks are not finding their laws feet in the economy as evidenced by recent banks failures.

The context of this study is the commercial banks in Nigeria. Regulation is costly and may impede the rapid growth of financial institutions. However, in the Nigerian market the CBN assures that there are strict regulations on commercial banks. At the same time, we have seen their rapid growth. For example, the profits before tax for equity bank for the last five years, as per the banks financial statement for the year ending 31st December 2015, have grown from 12.8 billion in 2011, 17.4 billion in 2012, 19 billion in 2013, 22.36 billion in 2014 to 23.96 billion in 2015.This has been the trend for many banks and NBFIs.

KPMG prepared a report in 2014 based on a survey that had been conducted by Forbes Insights between June and July 2013 in the United States after the financial crisis of 2008 and they observation that financial institutions were finding it very difficult to comply with new regulations that had been imposed. The survey showed that there was a reduction in profits as a result of regulations. Vianney (2013) carried out a study in Rwanda. He observed that there was no relationship between regulations and the financial performance of commercial banks in Rwanda. Chiarella et al. (2011) in a survey conducted by Mckinsey and Company observed that new regulation on corporate banking businesses in Europe had resulted in significant reductions in credit costs and profits had decreased remaining well below the 2007 peaks. Brownbridge (1996) conducted a study in Nigeria in which he investigated the effects of deregulation which had started in 1986. He concluded that it increased the financial fragility of even the most well managed banks.

Mwega (2014) carried out a study in the Nigerian financial sector. He states that Nigeria does not have very strict regulations. He concluded that regulations in the financial sector have strengthened the banking sector over the last ten years, in terms of customer service, products offered, profitability and stability. Gudmundsson, Kisinguh & Odongo (2013) conducted a survey to investigate the role capital requirements play on competition and stability of banks. They found that there is a positive relationship between capital regulation and the improved performance of banks and financial stability. Mureithi (2012) carried out a study on the effect of financial regulation on financial performance of Deposit-Taking Microfinance institutions in Nigeria. She concluded that regulations on DTMs have led to the improvement in their financial performance. There was an increase in the value of loans outstanding, total assets, profit and shareholders’ equity of DTMs. Otieno (2012) carried out a study to evaluate the effect corporate governance has had on the financial performance of commercial banks in Nigeria. He found that corporate governance does indeed play a role in the stability and good performance of a bank.

As per the international studies, regulations have resulted in a decline in the financial performance of financial institutions except for Rwanda where there seems not to be any relationship between the two variables. In the local studies, regulations have resulted in an increase in the profitability of financial institutions even though the regulations are not as strict in Nigeria as they are in the developed countries like USA. The various studies show that there is a lack of clarity on what the true impact of regulations is and this has led to the research question: What is the effect of regulations on the financial performance of commercial banks in Nigeria?

1.3 Research Objective

The objective of this study is to establish the effect of regulations on the financial performance of commercial banks in Nigeria.

1.4 Significance of the Study

This study will contribute to proving theory right or wrong. The findings will enable us to test the correctness of the micro prudential regulation theory and the macro prudential regulation theory. By establishing the effect regulation has had on the growth of commercial banks it will help policy makers in formulating new policies in that they will be informed about the effect their policies will have on the banking sector and the economy as a whole. They will be able to ascertain which aspects of regulation can be geared towards the accomplishment of development goals without compromising on prudent regulation and the stability of the financial sector, Sinha et al. (2011). They will also know how they can supplement development objectives with other well designed financial sector policies. In practice commercial banks will be well informed on the effect of regulations on their growth. It will inform their individual policy formulation in light of new regulations that will enable them to align the two in order to achieve their financial objectives.

1.5 Hypothesis of the study

  • Ho: that there is no relationship between regulations and financial performance of commercial banks in Nigeria.
  • Hi: that there is a relationship between regulations and financial performance of commercial banks in Nigeria.

1.6 Scope of the Study

This study will cover the effect of banking regulation and reserve on the performance of commercial bank. This study will cover all the commercial banks in Nigeria using their bank statement

Chapter Five:

Summary, Conclusion and Recommendations

5.1 Introduction

This chapter presents a summary of the findings of this study and draws a conclusion based on those findings. It also provides recommendations as well as explains the limitations of this study. It also offers suggestions for further study.

5.2 Summary of Findings

The purpose of this study was to establish the relationship between regulations and the financial performance of commercial banks in Nigeria. Finance ratios were carried out to measure the financial performance between 2010 and 2015. A chi square test of independence was carried out to determine the relationship between the two variables. Eight out of the nine ratios analyzed yield P values that cause us to accept the null hypothesis that there is no relationship between regulations and financial performance of commercial banks in Nigeria. After evaluating capital adequacy, the same conclusion was arrived at since the levels of capital in the banking sectors has been increasing steadily over the 6 years that were being studied.

5.3 Conclusion

This study is important because it enables stakeholders know the effect regulations have on the financial performance of the banks which is important for decision making by the banks themselves, shareholders and the government. Understanding the relationship between the variables also helps the government in policy formulation as they will be able

to anticipate the effect new policy will have on banks. This study also shows that every market is different. In most western countries regulations have adversely affected the financial performance of banks. They have found it very difficult to comply with regulations and maintain high levels of profitability.

5.4 Recommendations

It is recommended that banks comply fully to the stipulated regulations and the Central Bank must ensure that all banks comply. This will have the effect of ensuring a stable banking sector which plays a big role in the economy. If this sector is stable the economy will thrive and financial crisis will be avoided in the country. Implementing strict regulations will also enable the regulator to discover banks that are struggling and provide remedial measures before they collapse and depositors lose their money.

5.5 Limitations of the Study

This study has had some limitations. The first is the fact that it was not possible for me to carry out a chi square test on capital adequacy. It yielded a P value of zero. Therefore, the conclusions drawn from it are based on my personal judgement and analyzing the pattern on the graph generated. Secondly the P value of zero obtained in capital adequacy and interest coverage ratio has not been useful in drawing a conclusion in this study. The P value has the limitation of not being able to tell the strength or size of an effect in a relationship between variables.

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