A CRITICAL APPRAISAL OF THE BANKING REGULATION IN NIGERIA FROM 1995 – 2015

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A CRITICAL APPRAISAL OF THE BANKING REGULATION IN NIGERIA FROM 1995 – 2015

ABSTRACT

The banking systems over the years have been a vital, essential and focal part in economic development and growth. This sector is surrounded and embedded with great minds, innovations and numerous activities. Therefore, regulation of banking sector is necessary to checkmate and ensure effectiveness, efficiency, productivity, stability and prudency.  Bank regulation is the formulation or establishment of rules, laws and agreement in which all financial institution must abide to.  These regulations are established to maintain and enable a sound banking system and activities as well as delivery of services. Bank regulations are almost incomplete without supervision. Hence, it is very sacrosanct to supervise the bodies or firms which these regulations are meant for to enable compliance .A research design adopted in this study falls within the paradigm of an ex-post facto design type. Data’s were collected mainly from secondary sources, records like journals and the internet and analyzed using the chi-square goodness of fit. This research work proposes to evaluate the impact of these regulations as it relates to these institutions to know if these laws are encouraging or discouraging, whether these regulations have been fair, favourable to the banking system in the last twenty (20) years.

CHAPTER ONE

1.0    INTRODUCTION

1.1    BACKGROUND OF THE STUDY

The numerous challenges of the barter system as well as the increase in financial activities led to the emergence of modern banking in Nigeria.  Banking practices dates back to the colonial era.  The continue rise in financial activities required an institution to carry out these activities.  This factor led to the emergence of African Banking Corporation established in the year 1892 but unfortunately this bank lasted for only two years due to the depression that affected Lagos State where its branch was located.  In the year 1894, the operations and administration of this bank was taken over by the Bank of British West Africa led by Elder Dempster.  The good performance of this bank led to triumph as well as monopolizing the banking system in Nigeria up on till the year 1925.  The Union Bank which was a consortium of three foreign bank (firm) started operation in 1925 making room for competition and a way for other expatriate banks to come into the developing banking system of Nigeria.

As time goes on, the country began to embrace the indigenization exercise i.e. banker completely owned and operated by Nigerians without the help of the foreign colonies.  This development gradually led to the establishment of expatriate banking in Nigeria.  It has shown in recent time that any developing in developed economy, the banking sector severs as a catalyst for growth and development.  Banks have been able to contribute immensely to the economic or perform this role through important functions like provision of a efficient and effective payment system, the implementation of monetary policies and also an essential factor in financial intermediation, etc.  The banking business is highly regulated worldwide this is because of the vital position/activities the banking sector plays in any economy.  It deals with human minds, monetary policies and delivery of essential services.  Hence, to get the best out of these institutions, it must be regulated and supervised to reduce or minimize failure in the past of the bank and unnecessary risk on the part of the depositors.

The Central Bank of Nigeria (C.B.N.) and the Nigerian Deposit Insurance Corporation are tasked with the duty of regulating and supervising the banking industry.  These bodies exercised shared responsibility for scrutinizing or directing of legal banks with a view that regulation and supervision of banks remain an integral part of the mechanism for safe, sound, prudent and effective banking practice.  In carrying out these goals and objectives, these agencies formulate rules, laws, strategies and surveillance on the activities of the insured banks, establishment of a credible data management and information sharing system.  The bank supervision also entails on life examination of the institutions and off-site analysis of these banks.  The bodies in charge or control of making laws for banks also diagnose solutions and remedies in emerging problems and challenges on individual banks with a view to prescribing the most efficient resolution options.

Over the years, specifically since 1952 when the first banking ordinance was promulgated, several other statutes have also been put in place to serve as a legal backbone for the actions of the monetary authorities in regulating the banking industry.  Presently, the major relevant statutes include Central Bank of Nigeria Decree No.24 of 1991, the Banks and other financial Decree No. 25 of 1991, the Company and Allied Matters Decree No.1 of 1990, the Nigerian Deposit Insurance Corporation Decree No.22 of 1990, lately, the failed Bank (recovery of debt and financial malpractices) Decree No.18 of 1994.  These laws have so far ensured a comprehensive supervisory power and operational autonomy in bank supervisory power which may restore public confidence in banks.

Furthermore, in a view to ensure stability and reduce the distrust, Central Bank of Nigeria (C.B.N.) have adopted measures such as restructuring and sale of some distressed banks, provision of liquidity support through accommodation bill etc. Some of these measures include the following:

1. From 1994 to 1999, thirty six (36) terminally distressed banks were closed with minimal disruption to the banking system.
2. In 2005, the number of operationally licensed banks in Nigeria numbering eighty nine (89) was streamlined through a protest of mergers and acquisition into twenty five (25) legal banking institutions with a capital base of not less than N25 billion each. These banks were streamlined because they were unable to meet the various regulatory/supervisory institutions employed to resolve the bank problems and the continued degeneration in their financial conditions.

1.2    STATEMENT OF THE PROBLEM

The economic restructuring, reconstruction and the increase in technological advancement has made the financial environment in the country vibrant, complex and competitive.  The primary motive of this work showcase the ineffectiveness of banking regulation and supervision in view of the ever changing financial environment.  Below are some problems/challenges in our banking industries.

1. The extensive explanation and definition of the objective of banking regulation and supervision.
2. The need for consultations of potential operators in formulation process.
3. Discomfort in Nigeria commercial banks
4. Shortcoming in the enhancement and implementation of the regulatory supervisory measures.

1.3    OBJECTIVES OF THE STUDY

The general motive or goal for the course of this research is to determine the functions of the bodies or authorities charged with the regulatory and supervision of the activities on the Nigerian banks considering the competition among banks, technological advancement as well as the effects on the general public.  Again, the increase of distressed banks simply spells anxiety for the supervisory authorities and therefore more responsive actions are required.  The research shall also consider the following:

1. Identification of various policies measures or documented in the regulatory decrease and shows the need for current account.
2. Supervision of banking regulation and Nigerian commercial bank to get a better view.

• To cross check thoroughly how supervisory and regulatory functions of the regulation impact on Nigerian banks.

1. To determine the efficiency and effectiveness of deposit insurance scheme in Nigerian banks as a means of boosting depositors confidence in the system.

1.4    RESEARCH QUESTIONS

The research questions are meant for commercial banks, Central Bank staffs and general public as there have been controversies and comments on acts governing the banking sector.  the questions are as follows:

1. The relationship between the authority and operators. What do you opine to that?
2. Do the Central Bank of Nigeria in particular uses the regulatory power vested on them to stabilize or destabilize efforts of some banking operations or activities?

• Is it compulsory for banker to be regulated by the Central Bank of Nigeria?

1. Have the shortcomings or challenges faced in controlling the monetary and fixed policies of the government been dealt with or combated by the regulatory authorities?
2. What is your take on the safety, stability and command in confidence in the general public since the implementation of the C.B.N. BIFIA and NDIC Act?
3. How would you rate the regulatory bodies in their fight to combat and prevent financial distrust in Nigeria?

1.5    RESEARCH HYPOTHESIS

The regulation exercise is aimed at providing a stable and prudent financial system throughout the country.  This exercise is effected through the promulgation of policies with the hope of guaranteeing the safety of depositors’ funds. They are also tasked to ensure compliance for safe and sound banking practices to prevent forgeries, fraud and financial malpractices.

        The research work will look into the following hypotheses:

Ho:   The regulatory functions of the Central Bank and Nigerian Deposit Insurance Scheme have been pro-active in combating and reducing distrust in the banking system.

Hi:    The regulatory functions of the Central Bank and Nigerian Deposit Insurance Scheme have not been pro-active in combating and reducing distrust in the banking system.

Ho:   The activities of these regulatory bodies have gingered or increase the morale of depositor confidence in the banking system.

Hi:    The activities of these regulatory bodies have not gingered or increase the morale of depositor confidence in the banking system.

Ho:   The banking regulation and supervision of Nigeria commercial banks have been effective and efficient in improving these banks.

Hi:    The banking regulation and supervision of Nigeria commercial banks have not been effective and efficient in improving these banks.

Ho:   Effective regulation and supervision will increase the value and virtue of financial transaction in the Nigerian banking industry.

Hi:    Effective regulation and supervision would not increase the value and virtue of financial transaction in the Nigerian banking industry.

1.6    SIGNIFICANCE OF THE STUDY

A comprehensive banking regulation in commercial banks revise the confidence in the banking sector considering the competitive and perplexity of the economic and commercial banks as well as multiplicity of branches. The significance or importance of the study rests on the shoulder of the regulatory bodies particularly the Central Bank of Nigeria in coming up with the policies, strategies and solution for the increasing and ever challenging factors in the development of banking industry in the country.

Itsede (2002) suggested the existence of a single legislation that stipulates the capital adequacy of financial supermarkets, taking cognizance of the scope of activities and production mix of the institution.  He further stressed the need for a composite license that would distinguish the need for sector specific licensing.  The practice of universal banking should be carried out in a such a way that financial institutions are not tempted to engage in ultra-risky activities sequel to opportunities presented by the business combination

Eatwall (1998), argued that in view of the emergence of financial supermarkets and internationalization of the financial system, regulations should be conceived in conjunction with micro-economic policy, as the consequences of unstable micro economic instability would unsettle the financial system.  The analytical link between micro-economic risk taking by the financial institutions and the associated microeconomic externalities has it or counterpart in regulatory practice.  In what flows, an attempt is made to situate the practice of universal banking within the context of the second monetary zone in West Africa.

It is also important to know that the findings of this study will be of great benefit for Nigerian banking sector and other rabled institutions as well as those who are interested in the inter-relationship between the actions of the regulators and the banking institutions in providing a platform for conducive banking exercise.

1.7    SCOPE OF THE STUDY

This research work will cover the operations of the regulatory bodies as it relates to the favourability or unfavourability of the banking industry in the past twenty years.  Thus, would be limited to the period of 1995-2015.

1.8    LIMITATION OF THE STUDY

Considering the loophole or constraint involved in this research, it will be quixotic or impossible to conclude that all essential, necessary data have been gathered in the course of the study.  Information gained are those accessible and made available by the respondents as well as those gotten from journals, financial magazines, annual report or publications of regulatory bodies and primarily the internet.

REFERENCES

Eatwell, J. (1998):       The Challenges Facing International Financial Regulation.

Itsede C.O. (2002):    Legislative and Regulatory Importance for a Financial Supermarket. A paper presented at workshop organized by Monat Associates, Sheraton Hotel, Lagos.

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