The Role and Importance of the Central Bank of Nigeria in the Prevention of Bank Failure in Nigeria
Chapter One
OBJECTIVE OF THE STUDY
The study’s main objective is to verify or ascertain if the crash of banks or failure in banks has affected the stable economic growth of the economy. The objectives are:
- To examine the causes of bank failure
- To examine the effects of bank failure, how they can be recognized and how they can be prevented
- . To explain the role and importance of Central Bank of Nigeria in the prevention of bank failure
- To make recommendation on the best ways to prevent bank failure
CHAPTER TWO
REVIEW OF RELATED LITERATURE
Introduction
In the literature of finance there are evidences to show about the failure of deposit money banks in Nigeria. Ikpefan and Ojeka (2013) opined that excessive concentration, directed lending, lending to connected parties, poor credit policy, poor oversight by boards of the managing banks, absence of good corporate governance all of which reflect poor basic risk management failures are responsible for distress and failure of Nigerian banks. There were 45 failed banks which were closed as at 2009 (NDIC Report, 2009). The banking licenses of fourteen (14) banks were revoked on 16th January, 2006 by the Central Bank of Nigeria (CBN). The parameter that enabled this categorization is called (CAMEL): Capital Adequacy, Asset Quality, Management Competence, Earning Strength and Liquidity. Factors Affecting bank performance in Nigeria: The collaborative study of the CBN/NDIC (1995) submitted that most of the financial institutions surveyed attributed the distressed conditions to institutional factors. The result of their study further showed that the major institutional factors that contributed to distress in the banking industry are bad loans & advances, fraudulent practices, under capitalization, rapid changes in government policies, bad management, lack of adequate supervision and undue reliance on foreign exchange. The general institutional factors that led to the identified factors in the banking system can be attributed to insiders’ abuse, weak corporate governance, weak risk asset management and inadequacy of capital. Economic and political factors as well as regulatory and supervisory measures had also affected bank performance. Analysis of financial institutions assessment of factors responsible for their being severely distressed (percentage) are economic depression, political crisis, bad debt, under interference from board members. Ogunleye (2002) noted that the proportion of non-performing loans in the distressed banks had during the period 1989-2000, been consistently high, reaching about 80 percent of their loan portfolio and Okpara (2009) found that this ratio had significantly exceeded the prudential maximum ratio of 20 percent and a number of banks had poor credit policies because loans were granted without securities and the borrowers were not willing to pay back. Odejimi (1992) and Ajani (1992) noted that the major factors responsible for the precarious financial condition of the banks were huge uncollectible loans and advances.
Roles and Functions of Central Banks
Central Banks exist in most countries for the purpose of acting as banker to other banks thereby ensuring a smooth operation of the banking system. They also act as banker to the government. The central bank controls money supply, funding of the government’s business and the implementation of monetary policy of the government (Begg et al, 1991). In Nigeria, the CBN also plays specific roles in consumer protection (in this case, users of banking products and services) to ensure that “bank charges are reasonable and consistent with both the profit motive of the individual banks and the interest of the system” (Sanusi, 2009). Bench (1993) asserts that effective supervision of banks leads to a healthy banking industry. Dimitri (1990) also believes that good regulation and supervision will minimize the negative impact of moral hazard and price shocks in the banking system, thereby leading to a reduction in bank failures and banking system distress. Iyade (2006) opined that reforms are essential because the prudential system has proved ineffective in ensuring sound bank management, as the scale of financial distress among the state government and local banks indicates poor performance. However, according to CBN annual report (2010), “the effects of the global financial crisis”, which lingered up till 2010, passed enormous challenges to the operations and performance of banks. The objectives of banking regulation and supervision were advanced by Giddy (1984) to include amongst others: monetary policy, i.e. the ability of banks to create money through the extension of credit; credit allocation function of banks; the need to ensure competition and innovation by the prevention of cartels; and because banks are depositories of public savings and managers of payments mechanism, they are very vulnerable to collapse. On his part, Sheng (1990) stated the objectives of supervision as: promotion and development of sound and wide range of financial services to meet the needs of the economy; ensuring efficiency, security and responsiveness of banks to the needs and complaints of customers; ensuring compliance with laid-down rules and regulations which are germane to ensuring high standards of banking activities; and to achieve important developmental and social goals through their compliance with monetary and credit allocation policies. Sinkey (1989) and Dale (1986) enunciated the goals of regulation as: the protection of depositors; the protection of the economy from the vagaries of the banking system; and the protection of banks’ customers from the monopolistic power of banks. As a result of this, the World Bank (1989) noted that banks in these economies have to be regulated to ensure that they play their proper role in economic development. In a nutshell, the rationale for bank regulation and supervision can be summarized as Efficiency, Diversity of choice, Competition, Stability of banking system, Macroeconomic stability, and Developmental and social objectives.
Banking Regulation and Supervisory Agencies The Central Bank of Nigeria (CBN)
The CBN was established by the Central Bank Act 1958 (as amended) and commenced operation in July 1959. In 1969, the Banking Decree was also enacted giving full authority regarding banking business in the country. The mandate of CBN was as follows
- Issuance of legal tender
- Maintain the external reserves of the country
- Promote monetary stability and a sound financial environment
- Lender of last resort
- Financial Adviser to the Government
In 1991, the Banking Act of 1959 and the Banking Decree of 1969 were repealed and replaced with the Banks and other Financial Institutions (BOFI) Decrees 24 and 25 to strengthen CBN‟s position in its oversight of enacting monetary policy, banking regulation and supervision of all financial institutions in the country. The new decree brought non-bank financial intermediaries under the supervision of CBN. CBN lost its limited autonomy in 1997 with the enactment of the CBN Amendment Decree No.3 and BOFI (Amended) Decree No. 4. With the enactments of these laws, the CBN was effectively brought back under the control of the Ministry of Finance with regards to bank supervision and regulation. Under this regime the CBN played a relatively ineffective role in bank supervision and lacked any powers to carry out its duties judiciously. In 1998, the 1997 Decrees were repealed by the CBN Amendment Decree No. 37 and Bank and other Financial Institutions Decree No. 38 of 1998. These new decrees restored some measure of autonomy to the CBN. Specifically, they empowered the CBN to review or revoke banking licenses. In 1999 a further amendment to the BOFI decree was made – Bank and other Financial Institutions Decree No. 40 of 1999 allowing CBN to remove the officers of any financial institution and apply the rules applicable to failed banks to other non-bank financial institutions. A major change was the enactment of the CBN Act 2007 which repealed the CBN Act of 1991 and all its amendments. The consequence of the Act was that CBN became a fully autonomous body as regulator and its remit was enlarged to include serving as economic advisor to the Federal Government.
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 constitute of individuals or elements that are homogeneous in description.
This study was carried to examine the role and importance of central bank of Nigeria in the prevention of bank failure in Nigeria. CBN, Enugu state form 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 the role and importance of central bank of Nigeria in the prevention of bank failure in Nigeria. 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 the role and importance of central bank of Nigeria in the prevention of bank failure in Nigeria
Summary
This study was on the role and importance of central bank of Nigeria in the prevention of bank failure in Nigeria. Four objectives were raised which included; To examine the causes of bank failure, to examine the effects of bank failure, how they can be recognized and how they can be prevented, to explain the role and importance of Central Bank of Nigeria in the prevention of bank failure and to make recommendation on the best ways to prevent bank failure. A total of 77 responses were received and validated from the enrolled participants where all respondents were drawn from CBN, Enugu state. Hypothesis was tested using Chi-Square statistical tool (SPSS).
Conclusion
From the explanation given so far and having reviewed various literatures, it can be said that the regulatory/supervisory efforts of the central banks in conjunction with the Nigerian deposit insurance corporation (NDIC) should be articulated more on the undue interference from board members, political crises, undercapitalization and fraudulent practices of the insiders. These factors are the most critical factors deterring efficient performance of the Nigerian financial institutions particularly the banking sector and where they can be simultaneously prevented; the problem of bank failure will be put to a stop. The twenty five (N25) billion recapitalization exercise of the central bank was a necessary but not a sufficient measure in the right direction. The sufficient measure must be one that controls all the identified critical factors at the same time.
Recommendation
- Bank loans have associated risk which if not properly managed and structured can turn to non-performing loan which can lead to the bank failure.
- Strict supervision and enforcement of effective monitoring of bank operations and returns. Efficient performance by banks increases the bank’s assets and deposit base which in turn restore customers’ confidence.
- Regular routine examination should be carried out by CBN to determine the performance level of the banks so as to easily identify and immediately tackle any symptom of bank distress.
- Loan policy of banks should be properly structured and an acceptable policy for lending should be put in place in order to ensure repayment of loans and prevent loan defaults.
- Sufficient measures serving as CBN role in the prevention of bank failure must be one that controls all the identified critical factors of the causes of bank failure and not the recapitalization measure directed to a particular cause
References
- Ajani, F.O. (1992): “Credit Policy, Procedure, Administration Control and Recovery”. A Seminar Paper Presented at the Branch Managers’ Conference.
- Banks and Other Financial Institution Act (BOFIA) of 1991.
- Babawale, T. (2007): “Good governance, Democracy and Democratic Best Practices: Prescription for Nigeria”. Lagos: Centre for Black and African Arts and Civilization Publications Monograph Series, pp 7-16
- Begg D., Fischer S., and Dornbusch R. (1991): Economics 3rd edition, McGraw-Hill Book Company London.(Chapter 24 Central Banking &the Monetary System) pp. 417 436.
- Bench, Robert R. (1993): “Development in International Financial Regulation: Some Observations”, Salt Lake City, Utah: Paper Presented at the Gain Institute of Finance Annual Conference.
- CBN/NDIC (1995): Distress in the Nigerian Financial Service Industry; A CBN/NDIC Collaborative Study: Page publishers, Services Ltd, Lagos, Nigeria.
- Central Bank of Nigeria (2010): “Banking Supervision Annual Report”, 2010.
- Central Bank of Nigeria (CBN) Briefs (1999) Special Edition Research Department.
- Central Bank of Nigeria (Economic Review, 1994) Sept: Vol.32, No.3, pp.89-102.
- Dale, Richard (1986): The Regulation of International Banking. Cambridge: Wood head Faulkner, Cambridge University Press.