Effect of CAMELS Rating on the Financial Performance of Sustainable Important Banks (SIBs) in Nigeria Listed
Chapter One
Objective of the study
The objectives of the study are;
- To ascertain the effect of CAMELS financial indicators on profitability of SIBs in Nigeria
- To find out whether SIBs are playing leading role in financial performance and soundness in the bank
CHAPTER TWO
REVIEW OF RELATED LITERATURE
Introduction
The CAMELS Rating system was developed in 1979 in the United States as a supervisory rating system with which the overall financial conditions of banks are evaluated (Federal Financial Institutions Examination Council, 1979). It is also called “Uniform Financial Institutions Rating System (UFIRS)”. Although, its root can be traced to the U.S., it has gained global adoption and acceptance among comity of bank regulators, the world over, following a recommendation by the U.S Federal Reserve Bank (Manju & Ashok, 2017). It is a system for on-site examination of banking institutions which ensures a bank’s health condition is x-rayed and reviewed using hybrid performance metrics, based on variety of information sources such as financial statement, funding sources, macro-economic data, budget and cash flow (Opez 1999; Altan, Yusufazari & Beduk 2014; Chaudhuri, 2018). Following the financial crisis of 2007-2008 and the consequent nationalisation of some banks, the Central Bank of Nigeria repealed the Universal Banking Model adopted by Nigerian banks. It is believed that this banking system, otherwise called “financial supermarket”, contributed to the banks’ loss of operational and strategic focus, exposure to greater risks that challenge the stability of the financial system and encouraged financial recklessness. Universal Banking system is a banking model that allows commercial banks to offer wide-range of non-core banking services such as asset management, insurance, nominee, pension fund administration, proprietary trading, re-insurance services, loss adjusting services amongst others, together with the banking business for which they were licenced. To give effect to the above repeal, Regulations No. 01, 2010 which centres on CBN Scope, Conditions & Minimum Standards for Commercial Banks was issued by the CBN on 7 September, 2010. Part 2 of this Regulations empowers the Governor of the Central Bank of Nigeria to issue a commercial banking licence upon such terms and conditions which authorise the operation of a Commercial Bank on a regional, national or international basis. According to the Regulation, a Commercial Bank with regional banking license is expected to carry on its banking business operations within contiguous States of the Federation, not less than six (6) but not more than twelve (12), which are within not more than two (2) Geo-Political Zones of the Federation, as well as within the Federal Capital Territory. Any bank with this licence is required to maintain a minimum paid-up share capital of Ten Billion Naira (N10,000,000,000.00) or such other amount as may be prescribed by the CBN from time to time and are also prohibited from carrying out settlement bank activities. Banks such as Suntrust Bank Nigeria Limited and Providus Bank Plc have regional banking authorisation (CBN, 2017). A Commercial Bank with national banking licence is permitted to undertake banking business operations in all the States of the Federation including the Federal Capital Territory, maintain a minimum paid-up share capital of Twenty Five Billion Naira (N25,000,000,000.00) or such other amount as may be prescribed by the CBN from time to time. Banks with national banking licence include: Citi, Ecobank, Heritage, Keystone, StanbicIBTC, Standard Chartered, Sterling, Unity and Wema. However, a Commercial Bank is deemed to hold an international banking authorisation where it is permitted to carry on its banking business operations within all the States of the Federation, as well as to establish and maintain offshore banking operations in jurisdictions of its choice, subject to the approval of the CBN and compliance with regulatory requirements of host country. Such banks are required to maintain a minimum paid-up share capital of Fifty Billion Naira (N50,000,000,000.00) or such other amount as may be prescribed by the CBN from time to time. Banks with international banking authorisation include: Access, Diamond, Fidelity, First City Monument Bank, First Bank, Guaranty Trust, Skye, Union, United Bank for Africa and Zenith. Regardless of the licence a DMB holds, it is duty-bound to comply with all prudential guidelines and regulations issued by the CBN on the required level of capital adequacy, liquidity and cash reserve. As part of the review of the Universal Banking model, CBN envisages that some banks/banking group may express preference for the retention of non-core banking businesses. For this reason, the regulator directed that it will be a requirement to evolve into a holding company model where a non-operating HoldCo holds the investments in the bank and each non-core banking operation in a subsidiary arrangement (SubCo).
CHAPTER THREE
RESEARCH METHODOLOGY
INTRODUCTION
In this chapter, we described the research procedure for this study. A research methodology is a research process adopted or employed to systematically and scientifically present the results of a study to the research audience viz. a vis, the study beneficiaries.
RESEARCH DESIGN
Research designs are perceived to be an overall strategy adopted by the researcher whereby different components of the study are integrated in a logical manner to effectively address a research problem. In this study, the researcher employed the survey research design. This is due to the nature of the study whereby the opinion and views of people are sampled. According to Singleton & Straits, (2009), Survey research can use quantitative research strategies (e.g., using questionnaires with numerically rated items), qualitative research strategies (e.g., using open-ended questions), or both strategies (i.e., mixed methods). As it is often used to describe and explore human behaviour, surveys are therefore frequently used in social and psychological research.
POPULATION OF THE STUDY
According to Udoyen (2019), a study population is a group of elements or individuals as the case may be, who share similar characteristics. These similar features can include location, gender, age, sex or specific interest. The emphasis on study population is that it constitutes of individuals or elements that are homogeneous in description.
This study was carried to examine effect of CAMELS rating on the financial performance of sustainable important bank. Selected listed bank in Nigeria forms the population of the study.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
INTRODUCTION
This chapter presents the analysis of data derived through the questionnaire and key informant interview administered on the respondents in the study area. The analysis and interpretation were derived from the findings of the study. The data analysis depicts the simple frequency and percentage of the respondents as well as interpretation of the information gathered. A total of eighty (80) questionnaires were administered to respondents of which only seventy-seven (77) were returned and validated. This was due to irregular, incomplete and inappropriate responses to some questionnaire. For this study a total of 77 was validated for the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to ascertain effect of CAMELS rating on the financial performance of sustainable important bank. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of CAMELS rating on the financial performance of sustainable important bank
Summary
This study was on effect of CAMELS rating on the financial performance of sustainable important bank. Two objectives were raised which included: To ascertain the effect of CAMELS financial indicators on profitability of SIBs in Nigeria and to find out whether SIBs are playing leading role in financial performance and soundness in the bank. A total of 77 responses were received and validated from the enrolled participants where all respondents were drawn from selected listed bank. Hypothesis was tested using Chi-Square statistical tool (SPSS).
Conclusion
In spite of the preponderance of literature on the evaluation of the financial soundness of banks using the CAMELS Rating Model, very scanty pieces of evidence exist on the banking paradigm’s application in DMBs based on bank characteristics such type of operating licence, type of operating structure and whether or not the banks are systemically important. Based on the above characteristics, this study, therefore, attempts to contribute to existing body of literature by assessing the financial health of these banks using secondary data gleaned from the annual reports of the banks, Findings indicates that no significant difference exists between the Financial Health of International and National Licenced DMBs in Nigeria. Further evidence shows that there is a significant difference between the Financial Health of Domestic-Systemically Important and Domestic Non-Systemically Important DMBs in Nigeria. Premised on these results, this study concludes that the financial health of DMBs do not differ based on type of operating licence and structure. However, their financial health only differ based on whether or not they are systemically important. The findings of this study have implications for all the stakeholders of DMBs in Nigeria, especially the regulator. For the regulator, it complements the information that CBN may have by furnishing it with evidence-based information on the set of banks that are financially sound and healthy and the ones that are not, for an effective and proactive discharge of its regulatory responsibilities in order to ensure a sound financial system. For the managers of the DMBs that are ranked low, the findings are expected to galvanise them to evolve measures that will result in improved performance on all the six components of the CAMEL model.
Recommendation
Central Bank of Nigeria should relentlessly monitor capital adequacy ratio and established liquidity and leverage ratio ceiling that will restrain the quest for management‘s profit maximization and incentives for banks to game the regulatory framework.
Central Bank of Nigeria should constantly review and monitors the asset portfolio management of Nigeria deposit money banks, so that, excessive asset risk portfolio can be avoided, so that, depositors‘ funds will be safeguarded and the entire financial system will not experience another financial crunch.
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