THE ROLE OF REGULATORY AGENCIES IN CURBING DISTRESS IN THE NIGERIAN BANKING SECTOR

THE ROLE OF REGULATORY AGENCIES IN CURBING DISTRESS IN THE NIGERIAN BANKING SECTOR

 (A CASE STUDY OF NIGERIAN DEPOSIT INSURANCE CORPORATION SECTOR (NDIC))

ABSTRACT

This study is on the role of regulatory agencies in managing distress in the Nigeria banking sector. The Nigerian deposit insurance corporation sector (NDIC) was used as a case study. The study looked at the origin of banking business in Nigeria, accompanied with distressed in the banking system. The research study also looked at the causes, aspects and criteria used in measuring distressed banks as well as banking regulation, reasons for regulating the banking sector by the regulatory authorities/agencies in Nigeria. The research study also assessed the role of Nigeria Deposit Insurance Corporation (NDIC) in the management of distress in Nigerian Banking system based on the research finding that banks could perform better stated on how to resolve distress phenomenon in our banking sector as well as making NDIC more effective in the management of distress in the Nigerian banking sector with regulations and regulatory agencies like NDIC. Recommendation were the researcher has established as an objective of this study to make recommendation on was of resolving the distress problem and on the effectiveness of NDIC in the management/curbing distress associated with banks in Nigeria .   

CHAPTER ONE

1.0     INTRODUCTION

The business of banking in Nigeria commenced with the advent of British Colonialism in to the tentacles of West Africa for colonization and exploitation of the regions vast natural resources in the name of trade, this resulted in the complexity and sophistication of the economy which further gave rise to the development of banking institution with the establishment of African Banking Corporation (ABC 1892).

According to Ademu (1997), the history of financial distribute and bank failure in Nigeria state bank to the late 1940 and early 1950s otherwise known as the free bank era the current experience which became more manifest since 1993 has the resemblance of the earlier one in terms of causative, factors.

However in May 1989, distress in the banking system first came to existence after the withdrawal of treasury funds forms the licensed, bank e.g. National bank of Nigeria. By 1993, distress has become widespread in the Nigeria banking sector leading to the closure of four bank in early 1994, following the grave distressed, financial condition of these banks, the merchant bank limited, alpha merchant bank limited and united commercial bank limited and their licensed revoked by the CBN.

It is an unbeatable part that the Nigerian banking system is in distress. While some banks have failed woefully, other are in merge of collapse. Hence some measure of intervention which goes contrary to the economic principles which favored the unfettered working of the market forces. The regulatory agencies have put in place some measure to ensure the safety of depositor fund enhance stability and indeed the banking system in particular and the economy as a whole.

1.1     BACKGROUND OF THE STUDY

The business of banking in Nigeria commenced with the advent of British Colonization and tentacles of West African for colonization and exploitation of the regions vast Natural resources in the name of trade. This resulted in the complexity and sophistication of the economy which further gave rise to the development of banking institute with the establishment of Banking Institute Corporation (BIC 1892) which to later taken over by Britain in 1894.

Probably as a result of the performance of the Africa Banking Corporation another hank open its branch office in Lagos in 1894.

The bank was the bank of British West Africa (Now known as first bank Nigeria Plc) which was registered in London in 1892 with an authorized capital of 100,000 pounds. This bank enjoyed the monopoly over banking business in Nigeria until 1916. Until this date however the bank (BBWA) was the sole agent for the custody and distribution of British Silver Currently in West Africa as issued by the West Africa currency board which was established in 1912.

The bank of British West Africa remained dominant in the field until 1916 when the colonial bank which was more aggressive in the business of banking was established. As a result of its dynamism, the bank opened fifteen braches within four years of its establishment in West Africa. In 1925, the assets and liabilities of this bank were taken over by a consortium of banks comprising Barclays bank. Anglo-Egyptian bank. And the national bank of South Africa to form a new bank named Barclays bank DCO (Dominion Colonial & Overseas).

This new bank had to change its name to Barclays bank of Nigeria limited and later to Union Bank Nigeria PLC. Other expatriate banks such as United Bank

For Africa, Arab Bank, International Bank for West African, Bank of India, Bank of America (Now Savannah Bank) and chase Manhattan Bank were later introduced into Nigeria.

It is imperative to note that the establishment of these entire above expatriates bank was encouraged by the colonial government and their entrepreneurs to have banking institutions that would render services to them in connection with international trade. Thus their relation than was chiefly with the expatriate trading companies as well as their commercial interest as Such they did not bother much about the development of Nigeria entrepreneurs in term of access to credit facilities on the other hand, those of the indigenous banks were occasioned by the desire to address the credit needs of the indigenous entrepreneur as against partaking in profit motives as well as absence of resources both human and material necessary for the smooth functioning of the indigenous banks.

It is significant to state also that the role of banks in the economic life of any nation cannot be over emphasized. Banks occupy a strategic position within the setting of any nation’s economy and are indispensably linked in the economic development process of any country. Bank create money by accepting deposits and granting of credit as well as channel funds from the surplus to the deficit spending regions of productive activities thus increasing the national wealth of the nation.

There is an emerging consensus that for banks to perform and execute their function effectively and efficiently as well as contributing meaningfully and assumed their unique position as the life wire of any nation’s economy, the banking system as a whole must be sound, safe and stable but what we have presently in Nigeria as a nation contract with the above.

It is an unbeatable part that the Nigerian banking system is in distress while some bank have failed woefully, other are in the merge of collapse. Hence governments response to the distress problem has been some measure of intervention which goes contrary to the economic principle which favored the unfettered working of the market forces, regulatory agencies have been put in place to ensure safety of depositor funds enhance stability and indeed the confidence of the enera1 public in the banking system in particular and the economy as a whole.

1.2 STATEMENT OF RESEARCH PROBLEM

Distress in the Nigeria banking system is as old as the system itself and could be traced to the period of 1930, when industries and commercial bank established in 1929 become distressed. An available record has it that between 1930 to 1954 about twenty-four indigenous banks were established out of which only national bank African continental bank (now Weman Bank) survived all others failed woefully factor such as.

1. Under capitalization
2. Absence of regulation and regulating agencies
3. Poor management
4. Excessive competition with well nurtured and development expatriate bank and

So on were all attributed to the massive failure of the indigenous bank in the way and manner they were established, thus necessitated the establishment of central bank (CBN) in 1959 to check the incidence and regulate banking practice in Nigeria. Between 1986 to date a lot has happened within the banking scene which in one way or the other have contributed to the present situation prominent among

Which is the proliferation in the number of both commercial and microfinance bank that were only trading in foreign exchange which was considered which was considered detriment of the bank major activities and government directive in 1989 to all its minister parastatals etc. to withdrew there deposit from commercial and merchant bank and lodge some with CBN? This reveals the bank weak financial position and their reliance on few major depositors for large deposits thus necessitating the granting of accommodation facility by CBN and NDIC to some number of banks to the tune of N 25 billion in order to salvage them from imminent collapse.

Since then, the distress phenomenon has accelerated as report in the NDIC Annual report and Statement of account (2003) that the number of distressed and potential once has rose to (36) as at the end of 2003.

This compelled the regulatory agencies (CBN/NDIC) to take a decisive step by taking over of control and management of(19) nineteen banks. In addition to those taken the CBN annual report and the statement of account (2003) confirmed that the licenses of (5) five other banks was revoked. This incidence of bank distress has attracted a lot of comment as well as loss of confidence by the banking public among others.

Also, if is no longer news that come September 30, 2012 the license of any rescued bank that fails recapitalization will be revoked by the CBN and subsequently handed over to the Nigerian Deposit Corporation, NDIC for liquidation. That new policy twist by Lamido Sanusi, Governor of CBN is causing rumpus in the financial sector Sanusi verdict is that despite the fact that some of the rescued banks have recorded milestone in their merger and acquisition procedures some were still very far away from recapitalization. Such banks now

Run the risk of being liquidated, in view of the above the need to assess regulatory agencies role in curbing distressed is imperative.

1.3 OBJECTIVE OF THE STUDY

This study is armed at evaluating the role of regulatory agencies in curbing           distressed banks. Thus the specific objective of this study is an attempt to           determine among others the following:

1. Brief overview of the origin in Nigerian Banking system and its relevance to the economic development of the nation.
2. To look at the phenomenon of distress in the Nigerian banking system, its origin cause and effect as well as the criteria used in assessing distressed banks.
3. To view the concept of banking regulation and examine the reasons for regulating the banking system as wellas overview the various agencies in the banking system with particular reference to NDIC
4. To provide an insight in to the reasons

Functions and role of NDIC in the banking system and in curbing distressed banks in Nigerian.

1. The objective to determine the category of individual who hav contributed to the di stress syndrome.
2. To make recommendation on the basis of the finding of this study on how the distress problem can be resolved and on the effectiveness of NDIC in the management / curbing distressed banking in Nigerian banking scene

1.4     RESEARCH QUESTIONS

The following question will be evaluated in the course of this study.

1. What are the cause and effects of distress in the banking system?
2. How can the distress phenomenon be resolved?
3. What are the reasons for regulating the banking system?
4. Who are the individual /person that contributed to distress?
5. Can banks perform better without regulation and regulatory agencies?
6. What are the functions, reason and role of Nigerian deposits insurance corporation (NDIC) in banking system and in curbing distressed banks?
7. What is the relationship of NDIC! EBN in the regulatory system’?
8. Is NDIC effective in the management curbing of bank distress?
9. Can the quality of management be attributed to bank distress?
10. Why NDIC did insured only commercial and microfinance banks deposits’?

 1.5     RESEARCH HYPOTHESIS.

The hypothesis statement below is postulated for validation in the course of the study Hypothesis:-

H0: Bank could perform better with regulation and regulatory agencies.

Hi: Bank could perform better without regulation and regulatory agencies.

  

1.6     SCOPE OF THE STUDY

The study is on the role of regulatory agencies in curbing distressed Banks in Nigerian with particular reference of NDIC, a body charged with the task of insuring depositor fund and instilling confidence in the banking system In a nut shell, the scope of the examine is restricted to the overall objective of the study.

It is natural and human to encounter some constraints in carrying out a research of this nature. This could be either time due to other pressing academic Endeavour, inadequate fund to carry out the research in a more wider perspective as well as un-co-operative attitude of officials responsible for dishing out relevant or required materials for fear of exposing what they termed as “confidential couple with the nature of the topic which is to broad and considered a no go area. Despite this limiting factor, the research examined the recent Soludo banking sector reforms at strengthening the financial system through banking sector consolidation foreign exchanged market stabilization, interest rate restoring and the pursuit of stabilization as against structural Adjustment policies.

Also, the research looked at how special examination of bank balance sheets under Sanusi CBN and NDIC were launched to examine and verify, assets quality and examine related party transaction.

Again on august 5, 2011 CBN intervened in the banking sector by revoking the license of three commercial banks. The government handed the commercial bank to NDIC which created three bridge bank to assume their assets and liabilities. These three banks were among the eight banks that were declared insolvent tow year ago by CBN. This approach called bridge banking permits the NDIC to take over the failed banks and keep them in business until it hands them a new buyers. This was necessary because of the inability of these three banks to beat the September 30 recapitalization deadline given to the eight insolvent banks to shore up the capital based according to Sanusi.

1.7     LIMITATION OF THE STUDY

The study is on the role of regulatory agencies in curbing distressed bank in Nigeria with particular reference of NDIC a body charged with the task of insuring depositors fund and instilling confidence in the banking system. In a nutshell, the limitation of the examine is restricted to the overall objective of the study.

It is natural and human to encounter some constraints in carrying out a research of this nature. This could be either time due to other pressing academic endeavors, inadequate fund to carry out the research in a ore wider perspective as well as un- corporative attitude of officials responsible for dishing out relevant materials for fear of exposing what they termed as “confidential” couple with the nature of topic which is too broad and considered a no go area.

1.8     SIGNIFICANCE OF THE STUDY

It is an obvious part that this study will add to the existing literature in the subject matter, so that it could be referred to a person who may embark on similar study in future. Furthermore, the recommendations that will be offered could be of relevance to government, regulatory agencies and participants in the banking system as it will aid in the formulation of a comprehensive and effective policy package that would ensure the resolution   of the distress problem and also of the effectiveness of the NDIC in curbing distress in the banking sector.

1.9 OPERATIONAL DEFINATION OF TERMS

It is important to clarify vague and ambiguous concept terms used in this          research work so as to convey the idea which the researcher want to put      across. The terms are:

1. The Bank Literally: is an organization or firm that provides financial services to the public and its customers with due procedures
2. Failed Bank: a failed bank in this context is perceived as bank which is unable to meet its obligation to its shareholders as at when due arising from weakness in its financial operation and managerial condition which could rendered either illiquid and or insolvent. (CBN NDJC 1995)
3. Distress: in ordinary parlance, the word distress implies unhealthy situation or a state of inability which prevent the achievement of set goals and aspiration(Smith & Wall 1992 Olugun 1994). Benson et all (1986) view. Distress as a situation of complete or near complete loss of shareholders’ funds

1. Insolvent: this refers to a condition in which the sum of assets of an institution is less than the sum of its liabilities. (Ebhodragbe 1993)
2. Illiquidity: This describes the problematic cash flows position of a firm. That is in financial term inability to meet customer’s cash withdrawals.

REFERENCES

Agege. E.A (2001), Regulation and the banking industry, A paper presented On Foreign Banking Lagos.

CBN/NDIC (2000) Distress in the Nigeria financial services industry. Page publisher service ltd. Ikeja-Lagos

Ebhodaghe J.U (2005) Distress management and prevention strategies for Nigeria banking system.

Ologun I.A. (1994) Principles and practice of Edition T.K publisher Ikeja Lagos.
OlufonO.(2000) Bank and credit management in Nigeria, Enoh publisher Lagos Nigeria.