The Role Of Nigerian Deposit Insurance Corporation In The Regulation Of Nigeria Banking Sector
The Nigerian banking sector plays a major role in economic development in any country. These they do, through financial intermediation and other banking functions to encourage real sector or innovate productive activities. However, distress in banking sector cannot be totally erased because like other forms of businesses, risks are involved. In combating this, the central bank of Nigeria served as the apex in the banking sector and performs regulatory and supervisory activities to create and sustain confidence in the banking sector, in the public, government, owners and the economy. For proper supervision and monitoring regulatory activities due to various reforms in the banking sector, the Nigeria deposit insurance corporation was established to provide complimentary functions with the central bank in sanitizing the banking sector. However, their major function was to insure all deposit liabilities of banks so that confidence can be installed in the banking sector.
1.1 Background to the Study
The practice of modern banking in Nigeria dates back to 1892. The pioneer banks were understandably expatriate institutions set up to facilitate the colonial administration as well as trade with Britain. The first bank was set up in 1892 and it was called the African Banking Corporation which opened the first branch in Lagos and this was Championed by Elder Dempster and co; a shipping firm based in Liverpool but had it branches in Lagos in 1894 another bank called the British Bank for British West Africa. The bank acted as an agent of the bank received, stored and issued the west Africa silver coins in exchange for sterling coins or London drafts. This bank later changed its name to standard bank. In 1899, the Anglo-African bank was established in compete with the British bank of West Africa. The bank was established in old Calabar but because of the monopoly enjoyed by the British Bank of West Africa for the importation of silver from the royal mint in Britain, the Anglo African bank sold after it, changed its name to bank of Nigeria to BBWA. Another bank opened in 1917 called the Barclays bank DCO (Dominion Colonial and Overseas). Between 1894-1933, the British bank of west African and Barclays bank DCO dominated the banking scene. Another bank joined the banking scene in 1949. This bank was called the British and French bank. The bank became the third expatriate bank to dominate early Nigerian banking scene. The banks at this period were principally these expatriate banks, which were principally to render services in connection with international trade. So their relations at that time was chiefly with expatriate trading companies and with the government. These banks also controlled 90% of aggregate bank deposits. They largely ignored the development of local African entrepreneurship. It should be noted that these various expatriate banks changed their names. The British bank of West African changed its name to standard bank and its presently called 1st bank of Nigeria plc. The Barclays bank DCO changed its name to union bank plc. The British and French bank also changed its name to united bank for Africa Ltd (UBA). However, Nigerians did not take active part in banking ownership until 1930s. In an attempt to create a competitive environment with the expatriate banks, the first indigenous bank was established in 1929. The bank was the industrial and commercial bank. This bank was setup by patriotic Nigerians, but failed in 1930, in 1931, another indigenous bank was established and was called the Nigerian merchantile bank but liquidated in 1936 due to the same reasons like the industrial and commercial bank. The first indigenous bank to survive was established in 1933, called the national bank of Nigeria ltd. Other banks established include: the Agbonmagbe bank; a private indigenous bank founded by chief Okupe in 1945. However, the bank was taken over by the western government in 1969 and its name later changed to WEMA bank plc till date. Also established was the Nigerian penny bank in early 1940s but failed in 1946; the Nigerian farmers and commercial bank in 1947 but failed in 1953 and the merchants banks in 1952 but failed in 1960. Despite the fact that up to 185 banks were established between 1947 and 1952, only four(4) banks survived. These banks include: the National bank of Nigeria established in 1933; Agbonmagbe bank established in 1945 now WEMA bank; the African continental bank established in 1947; an expatriate bank. The British and French bank now united bank for Africa established in 1949 (G.O Nwankwo, 1980). However, this period of banking can be termed free for all because banking activities were unregulated. A committee called the patrons committee was constituted to look into the causes of bank failures. The report of this committee revealed the following; most banks were faced with under capitalization, poor and inexperienced management and competitive pressures from the well established foreign banks. In 1952, the 1st indigenous ordinance was made.this ushered in the era of formal banking practice in Nigeria. it established standards before license is granted to operated banks. This was applicable immediately on new banks and a period of three years was given to all existing banks survived, they include; Agbonmagbe bank, African continental banks, national bank and merchantile bank. The ordinance was later replaced with 1st indigenous banking act of 1959, and has undergone series of amendments in 1972, 1975, 1979 and was fully consolidated by 1990 company and allied matters decree and currently called banks and other financial institution decree of 1991 (BOFID). At this period, a motion was sponsored in the federal legislature for the establishment of a central bank but a complain was made that there was no developed capital market. However, there were persistent call for the establishment of a central bank. MR. J.L fisher was appointed to examine the desirability and practicability of establishing a central bank. Although Fisher recognized the contribution of a central bank towards improvement and performance of indigenous banks he however, did not see the need for a central bank. He recommended only a more use of the financial secretary’s power (finance minister). The international bank for reconstruction and development (World bank) in 1953 also raised a motion in favour of the establishment of central bank was finally raised by MR. J.B LOYNES, the formal adviser to the bank of England. The report of Loynes committee, favoured the establishment of central bank. On March, 17th, 1958, the central bank ordinance was made. However, the central bank did not start full operation until 1st July 1959. The ordinance of 1958 has gone through series of amendments in 1962, 1967, 1968, 1969, 1970, 1972, 1976 and 1987 law later repealed and replaced with the 1991 central bank decree. Since it’s establishment, the central bank has laid the foundation for sound financial system. It also stands ad the apex bank in the financial system and helps in the implementation of monetary control. It also acts as the apex regulatory authority in the banking industry, for the supervision and control of banks, sections 1 of BOFID 1991 states the function of central bank. In 1972, the establishment of the banking enterprises promotion decree affected for all sensitive sectors of the Nigerian economy was restructured to 60:40 indigenes and foreigners respectively. This is a view to taking active control of the economy from the lands of foreigners. The banking sector being one of the sensitive sector of the economy was also affected. This gave rise to the establishment of more banks by indigenes entrepreneur. Another factor that encouraged the establishment of more banks at this period was the oil boom, which sustained an increase in capital flow in the macro economy hence, enhanced the profitability of bank ownership by Nigerian entrepreneur. Therefore, at this period more banks were licensed and established. In 1986, followed the implementation of an economic structural adjustment programme. This led to the deregulation of the financial system in 1987. Entry into banking institutions increased such that the number of a total of 42 banks in 1986, the number of licensed banks increased to 120 at the end of 1992, giving an annual average growth rate of about 31 percent with the removal of control of interest rates, bank deposit jumped from about 20.5 billion in 1986 to N58 billion at the end of 1992, an annual growth rate of 55 percent. Similarly, total assets of banks increased from N68 billion in 1986 to about N232 billion at the end of can safe and sound banking practice be restored in the banking system. Can the competitive and creative ability of banks lead to greater efficiency instead of distress.
1.3 Statement of the Problem
There is no need for promote bank ethics and conduct despite various reforms and new improved banking practices. Can confidence be restored in the banking sector. Does the adoption of the deposit insurance scheme have any justification in fair compensation of depositors of banks during bank failure and liquidation? The need for this study is also borned out of the fact that there is the need to make further research on the role of Nigeria deposit insurance corporation (NDIC) to increase knowledge on previous researcher made.
1.3 Justification of the Study
The significance of this study is to draw attention of the regulatory authority (Central bank) and NDIC to the effect of continued failure and distress in banking industry. Further research is needed to this study to know the causes, effects, implication of failed banks on Nigerian economy as well as appraisal of the impact of NDIC on banking sector and its efficiency since inception till date in the management of distressed and failed banks.
1.4 Objectives of the Study
This study is carried out for the following 1992; an annual average growth rate of 40 percent. In spite of these gains, continued to deteriorate in 1989, 7 banks were adjudged technically insolvent. In 1990, the number increased to 9 and in 1991, eights had become distressed while fifteen (15) were in various terms of distress. Another idea of the structural adjustment programme was the introduction of deposit protection scheme. The need of this was to avoid less of confidence on banks and adverse effect on macro economic resultant in bank failures. The deposit insurance scheme was established by the Nigerian deposit insurance corporation (NDIC) Decree no 22 of 1988. The institution was principally meant to insure all deposits fund so that adequate compensation will be given to depositors on account of bank failures, more so, the reason why the deposit insurance scheme was established, was due to the experience of prior bank failures, more so, the reason why the deposit insurance scheme was established, was due to the experience of prior bank failures, economic reforms and increased competitions among banks, reduction in the risk of systematic crisis involving failed and unsound bank practices that are capable of causing breakdown in payment system, the need to ensure safe competition and creativity as well as fair play amongst financial institutions.
1.4 Problems of the Study
Some of the problems that led to the study of the role of the Nigerian deposit insurance corporation (NDIC) in the regulation of Nigeria banking system includes; Reasons:
- To know what role the Nigerian deposit insurance corporation has played till date on the Nigerian banking industry.
- To know what positive impact the Nigerian deposit insurance corporation has made in sanitation and reformation of the Nigerian banking system.
- To what extent has the NDIC met liquidation and pay off of insured banks during liquidation.
- To know the extent to which NDIC has helped to reduced bank distress through their supervisory activities.
- To know the justification and reaction of banks to the deposit insurance scheme.
1.5 Hypothesis of the Study
In an attempt to achieve a through analysis of this study, hypothesis are needed to give focus and direction to the study. A hypothesis is a specific declarative statement of a tentative nature whose validity is to be established by recourse to empirical findings. For proper analysis of the study, the following hypothesis have been formulated to assist in giving focus and direction to the research work.
H0: represents the null hypothesis
H1: represents the alternative hypothesis
- H0: the Nigerian deposit insurance corporation does not have any impact in the regulation of Nigeria banking sector.
- H1: the Nigerian deposit insurance corporation has a positive impact in the regulation of Nigeria banking sector.
1.6 Scope of the Study
This research work is aimed at increasing knowledge on previous research works done by researchers in the past on this topic. However, in-depth analysis will be carried out in the role of NDIC in the regulation of the banking sector in Nigeria. considering various reforms that has occurred in the system.
This study is intended to deal with critical analysis such as; reasons for the adoption of the scheme, justification for its adoption, its impact so far and to what extent has it restored confidence in the banking sector and its impact on the economy. However, the study is limited to the operations of the Nigerian deposit insurance corporation since its establishment in 1988 till 2002, also, the limitation of this study will includes:
(i) Time constraint to make adequate findings
(ii) Inadequacy of funds to collect extensive data.
Inadequacy of relevant and more recent data due to the constraints mentioned in (i) and (ii) above
(iii) Reluctant attitude of institutions to reveal and release information necessary for the study.
1.7 Definition of Terms
This is when a fairly reason able proportion of banks in the system are unable to meet their obligations to their customers,
When there is an obstacle to prompt action by banks in performing their obligations.
This is situation where banks operate with very little capital.
This involves the payment of insured deposit up to the insurable limit to the depositors of liquidated banks.
The willful misappropriation of funds or eve manipulation of figures done to obtain an unjust or illegal financial advantage through dubious means.
Amount lodged in the bank by a person or business which withdrawal is on demand by cheque or without cheque and provides a base or ability to create money through loans and advances by banks.
Banks closed temporarily or permanently on account of financial difficulties and including banks whose deposit liabilities were consumed by other banks of the time of closing, with the aid of loans of purchase of assets.
Removal of regulations, regulatory authorities and or interference’s of market forces to allow for free autonomy.
1.8 Organization of the Study
- Chapter one of this project focuses on how modern banking were practiced in Nigeria dates back to 1892. it also studies the problems that led to the study of the role of he Nigerian deposit insurance corporation (NDIC) in the regulation of Nigeria banking system.
- Chapter two of this project centres on the role of banks in economic system. It also studies the causes of financial distress in Nigerian banking system. It also studies the reason for the establishment of the deposit insurance scheme in Nigeria and their benefits.
- Chapter three is aimes at giving a description of tools, instruments and method that are caused in presenting and analyzing data and information. In this project work, secondary data has been employed. It also studies method of data analysis in which historical and descriptive method is used and also simple regression method of statistical analysis were used to explained the impact of the NDIC in the regulation of the Nigeria banking sector.
- Chapter four focuses on the data presentation and analysis. It studies the period before the operation of NDIC. It also shows the computation of correlation coefficient showing the degree of positive and negative relationship.
- Chapter five focuses on the summary, conclusion and recommendations of this project work.
5.0 Summary, Conclusion and Recommendations
The massive failure of banks in the 1950s is one of the factors that made it necessary to promulgate bank legislation and establish the central bank of Nigeria as the Apex bank in the monetary system. More so, the adoption the structural adjustment programme (SAP) in 1986 accelerate the growth rate of banks. various sharp bank practices which arose as a result of keen competition (due to deregulation in the system) in the banking system made it mandatory to protect the bank deposits which constitute the largest liabilities on a bank’s balance sheet used as loans and advances to the deficit or productive or real sector of the economy. therefore, the NDIC was established.
The Nigerian deposit insurance corporation was established for reasons which includes: country’s past experience of bank failures, the lessons or success of such institution in other countries, the needs to protect small savers and uninformed during bank failures and the economic reform and change in government’s bank support policy.
The relevance of the corporation in the banking system are: protection of bank depositors particular the small savers, protection of the banking system against destruction and destruction on deposit habit, giving assistance in developing banking habit, ensuring save and sound banking practice. However, the corporation is faced with the following constrain, insufficient funds in arresting deteriorating condition in banking system, manipulation of the assessment base of insured banks, various criticism from the bank on types of deposits taking institution from the NDIC coverage (for example, microfinance banks), nevertheless, the prospect of the corporation anchor on its ability to repose public confidence in the banking system.
Based on the data analyzed, some the major findings includes:
- There has been growth in deposit liability of the banking system of both commercial and merchant banks except in 1989 where a negative was recorded due to the fresh introduction and commencement of the operation.
- There has been a continious increase in sectoral distribution of commercial and merchant banks as loans and advances, both in value and percentage. This shows that there has been a positive growth in giving to the real sector hence, growth in the economy.
- The strong positive correlation co-efficient suggests that the relationship between the insured deposits and insured deposit paid is real and direct one, therefore, the effort of the government in setting up NDIC is worthwhile.
In the context of an objective and critical evaluation of the relevance of NDIC in the banking system, taking into account the complex and peculiar nature of the Nigeria financial system environment in which the corporation find itself, one can say that the corporation has relatively achieved something. This is because some depositors now perceive the bank as riskless asset.
This can easily be known from the stock market reports revealing the banking sector as the most profitable sector.
However, the growing trend and continuous distress in the banking system should not be completely attributed to the ineffective of NDIC, in containing the banking crisis and repose confidence in the system. This is because other factors which were earlier discussed also contribute to distress in the system.
Finally, the corporation should seize every available opportunity that will add to its skill in improving the image of the banking system. This is because the banking sector has continued to witness and improve banking practices, for example the adoption of universal banking since 1st January 2001.
Some of the recommendations in the light of my findings to enhance the quality effectiveness of the Nigerian deposit insurance corporation in the banking system includes the following:
- The total coverage of NDIC which was increased from N100 000 to N500, 000 maximum. This should be further increased to some realistic extends, so as the reflect the rate of inflation and the depreciating value of the naira in the economy.
- The decree establishing the corporation need to be modified to give NDIC power and authority to intervene in the deteriorating banking system without seeking approval from central bank. As at now, if not given go ahead by the central bank to intervene in failing banks, it cannot do so.
- For the purpose of ensuring entire confidence in the entire financial system, other deposit taking institutions such as finance houses, mortgage banks and micro finance banks needs to be covered by the corporation.
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