Full Project - THE ROLE OF CENTRAL BANK OF NIGERIA IN THE PREVENTION OF BANK FAILURE IN NIGERIA

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Full Project – THE ROLE OF CENTRAL BANK OF NIGERIA IN THE PREVENTION OF BANK FAILURE IN NIGERIA

Click here to Get this Complete Project Chapter 1-5

CHAPTER ONE

INTRODUCTION

Background of the Study

Bank failure was first experienced in Nigeria between 1930 and 1950’s when some banks failed and were liquidated. Oloyede (1994) observe that the banking industry is highly prone to volatility and fragility either arising from exogenous or endogenous shocks and are therefore amenable to regulation and supervision. As a matter of fact about 21 banks failed and were recorded in Nigeria between 1930 and 1958 when the central bank of Nigeria was established. Examples of such banks are Industrial and Commercial Bank, Nigeria Farmer and Commercial Bank and Pan Nigerian Bank (CBN Economic and Financial Review June, 1998). Hemple and Simonson (1999) also believe that mismanagement, regulatory and legislative interference cause bank failure. By 1992 the number of banks in the Nigerian banking sector had risen from 56 to 120 in 1986 (Adebgite, 2005).

According to Wikipedia.org central banks around the world perform similar functions, some of which may include implementing monetary policies, controlling the nations entire monetary supply, the government banker and the bankers bank (lender of last resort), regulating and supervising the banking industry and manages the country’s foreign exchange rate.

Symptoms of distress in Nigerian banking system were first pointed out by the World Bank team that examined the financial sector shortly before the Nigeria Deposit Insurance Corporation (NDIC) Decree #22 of 1988 took off in February 1989.

Recall that in 2004, the Central bank of Nigeria (CBN) embarked on banking sector reform (bank consolidation) which sought, among other things, to strengthen the banking system and improve the operational efficiency of the Nigerian banks. The exercise meant to increase the capital base of the banks. Although consolidation will make the banks to be heavily capitalized, capital adequacy is just one of the measures for measuring the performance of banks. It does not guarantee quality of management, the quality and quantity of assets, the quality and character of board of directors and effective supervisory and regulatory framework of CBN and NDIC. As Shih (2003) argues, the idea of merger rests on the belief that (i) merging two weak banks create a healthier bank than both predecessor banks; (ii) merging a weak bank with a healthier one reduces the chance of a bank failure. Similarly it was believed that there might be cost saving through consolidation of overlapping functions or even an increase in combined revenues through the sharing of superior marketing skills. However as Shih (2003) argues, research has suggested that the acclaimed synergy from banks mergers is not automatic, and the bank merger seems as likely to be negative as positive. Therefore, viewed in a risk-return framework a bank would make sense only if it has potential to increase return and/or reduce risk (Iyiebuniwe, 1998).

There is no doubt that the consolidation exercise had some positive impacts on the banking sector. Bank branches grew from 2,900 in 2005 to almost 5,500 in mid-2009. Thus in mid-2008 when the global financial and economic crises set in, the domestic financial system was already engulfed by several independent factorsthat led to pre-consolidation era. It is clear therefore, that when the global crises eventually hit Nigeria, the banking sector was ill-equipped to weather the storm in spite of recapitalization. The result was a sharp deterioration in the quality of banks assets which immediately led to concerns over bank liquidity. Indeed, the Nigerian banking sector was thrown into severe crises as many of the banks became distressed.

It would be recalled that the first stress testing carried out by the CBN with the help of the International Monetary Fund (IMF) in 2009 led to the bail out of 8 of the country’s 24 banks, after Non-performing loans (NPLs) hit over a third of total loans across the banking system, the banks were found to be in one form of liquidity problem or the other. It therefore raises the question of how effective and efficient the banking industry has been regulated by the CBN to reduce Bank failure.

Finally, the current reform of the CBN at repositioning the financial system, as Sanusi (2010) stated, and based on the four pillars of enhancing the quality of banks, establishing financial stability, enabling healthy financial sector evolution and ensuring the financial sector contributes to the real economy, remains valid only to the extent that the reform process will make the operators to be accountable and face personal consequence for non-compliance. In this study, we test predictions of some causes of Bank failure using the information of CBN uniquely available in respect of Nigerian commercial banks.

Statement of the Problem

The problem of distress in the banking sector including outright failure of banks has been observed in Nigeria as far back as 1930. Indeed, between 1930 and 1958 over 21 banks failed. Also between 1994 and 1998, about 31 banks’ licenses were revoked for failure to meet the statutory minimum capital requirement for banking operations. There was serious over-dependence on public sector funds and CBN credits as well as income from foreign exchange trading on part of banks. As at the end of 2004 bank indebtedness to CBN was about #71.36 billion. In 2009, the CBN hinged the removal of five banks chief executive officers on distress occasioned by high concentration of non-performing loans on the board. The distress syndrome has caused a down turn in the economy and made negative impact on virtually every segment of the Nigerian economy.

In Nigeria, CBN (2010) report reveals a large volume of commercial banks total credit goes to the government rather than the private sector which are the major corporate organizations that makeup the economy. In the past two decades, the country also witnessed an atmosphere of crisis and disappointment. The nation’s situation was in many ways dramatic which resulted in enormous and fast growing deficits.

This is because firms find it difficult to raise funds to engage in new investment or expansion. Commercial banks have abandoned their traditional services and engage in speculative businesses such as trading in stock and oil business.

In the past, and perhaps till now, most banks in Nigeria do not have clearly defined and adherently implemented credit lending policies. What exist is more or less “discretion orgood judgment lending”a practice which has fuelled unacceptable incidence of bad debt stock, leading to stresses and depletion on liquidity position of the banks. However, The Central Bank of Nigeria (CBN) has continued to issue Prudential Guidelines to banks on time interval basis. The recent guidelines, which became effective from May 1, 2010, addresses various aspects of banks’ operations, such as risk management, corporate governance, know your customer (KYC), anti-money laundering, counter financing of terrorism, loan loss provisioning, peculiarities of different loan types and financing different sectors of the economy, among others.

Despite the various past guidelines, the banking industry has continued to witness various form of distress and liquidity problem, which has been caused by high investment in speculative businesses, mismanagement, high toxic assets, poor loan repayment supervision, fraud and corruption among bank staff, dynamic nature of the Nigerian economy etc.

This therefore raises the question of how effective CBN guidelines. Supervision and monitoring have been ensuring the Nigerian banks adoption of efficient credit management policy. From the fore-going, it shows that bank management have not taken seriously the issue of creating quality loans and have not respected the bank credit policies especially the five “C’S” thus the causes of Bank failure.Based on the above identified problems the study seeks to examine the role of CBN in preventing Bank failure in Nigeria.

Research Questions

The following research questions are set to guide the conduct of these research findings.

What are the trends of CBN policies in the development of the banking industry?
To what extent do CBN policies prevent Bank failure in Nigeria?

Will the death of a greater number of failed banks have serious implications on the Nigeria economy?

Is there a way wherein distress in the banking sector can be arrested?
- Objective of the Study

The primary aim of the study is to verify and examine the role of CBN in preventing Bank failure in Nigeria. In order to achieve this aim, the study specifically seeks:

To review the trend of CBN policies in the development of the banking industry.
To evaluate the impact of CBN policies in preventing Bank failure in Nigeria.

To examine if the dearth of a greater number of failed banks have serious implication on the Nigerian economy.

To know if there is any way wherein distress in the banking sector can be reduced or eradicated.
- Hypothesis of the Study

For the purpose of the study, the researcher will be testing the following hypothesis.

Hypothesis 1

H_o:CBN policies do not significantly prevent Bank failure in Nigeria.

Hypothesis 2

H_o: There is no way wherein distress in banking sector can be eradicated

Significance of the Study

The findings and recommendations of this study will be of great contribution to academic works, as it is a contribution to the body of knowledge on the various implications of the topical issue of role of CBN in preventing Bank failure in Nigeria. This research work serves as a source of reference to the banking and non-banking public and will also aid other researchers to carry out more studious research on areas not covered by this study.

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Full Project – THE ROLE OF CENTRAL BANK OF NIGERIA IN THE PREVENTION OF BANK FAILURE IN NIGERIA

Click here to Get The Complete Research Project Chapter 1-5

Full Project – THE ROLE OF CENTRAL BANK OF NIGERIA IN THE PREVENTION OF BANK FAILURE IN NIGERIA

Full Project – THE ROLE OF CENTRAL BANK OF NIGERIA IN THE PREVENTION OF BANK FAILURE IN NIGERIA

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