CHAPTER ONE

INTRODUCTION

1.0BACKGROUND OF THE STUDY

Banks have a strategic role to play in the nation’s economic development. This is hinged on their basic functions as financial intermediaries, mobilizing vital savings from surplus economic units and channeling same to deficit units. Thus, it is imperative that the banking system be healthy in-order to fulfill its many expectations, chief among which is the provision of the financial catalyst for the attainment of economic progress, reduction in poverty and general improvement in the living standard of the people.

Bank Consolidation has been an on-going phenomenon around the world right from the 1980’s, but it is more intensified in recent time because of the impact of globalization which is precipitated by continuous integration of the world market and economies. According to Durojaiye (2004), consolidation is defined as a fusion of the assets and liabilities in whole or in part of two or more business establishments to form an entirely new establishment. That is, the combination of two or more banks into a newly created bank. According to Berger (2000), the proponents of bank consolidation believe that increased size could potentially increase bank returns through revenue and cost efficiency gains, it may also reduce industry risks through the elimination of weak banks and create better diversification opportunities. On the other hand, according to De Nicolo et al… (2003), the opponents argue that consolidation could increase banks propensity toward risk taking through increase in leverage and off balance sheet operations. In addition, scale economies are not unlimited as larger entities are usually more complex and costly to manage.

In 2004, a new chapter was opened in the nations banking history when the then Governor of the Central Bank of Nigeria, Professor Charles Chukwuma Soludo, in his maiden address as he resumed office, announced a 13-point reform program for the Nigeria banks. The primary objective of the reform is to guarantee an efficient and sound financial system. The reforms are designed to enable the banking system develop the required flexibility to support the economic development of the nation by efficiently performing its functions as the pivot of financial intermediation according to Lemo (2005). The introduction of the reforms in the banking industry has fundamentally altered the outlook, operation and nature of the banking system in the country. This has not only brought sanity to the industry but has equally brought into existence stronger, viable and more versatile banking institutions in Nigeria. However, the same reforms have also fundamentally affected the banker-customer relationship in the country one way or the other. According to Uchendu (2005), the reforms in the banking sector preceded against the backdrop of banking crisis due to highly undercapitalization of deposit-taking banks; weakness in the regulatory and supervisory framework; weak management practices; and the tolerance of deficiencies in the corporate governance behaviour of banks.

This research will analyze how this development has affected the relationship between the banks and their customers, especially as regards the inherent symbiotic rights that the parties enjoy. This research will also take an in-depth look at the legal implications of the mergers, acquisitions and the liquidation in the banking industry in the recent past and will conclude by proffering suggestions that will engender a better banking environment that satisfies the customers’ expectations more effectively without deviating from what the traditional banking culture should be.

1.1OBJECTIVES OF THE STUDY

The general aim of this research work is to determine the impact of the regulatory and supervisory functions of the Central Bank of Nigeria (C.B.N.) and the Nigerian Deposit Insurance Corporation (N.D.I.C.) on their activities on Nigerian banks. They are;

To examine how supervisory and regulatory functions of the regulators (CBN and NDIC) impacts on Nigerian banks.

To determine the efficiency and effectiveness of Deposit Insurance Scheme in Nigerian banks as a means to boosting depositors’ confidence in the system.

To determine the relationship between the banking supervision and the incidence of bad loan portfolio in the Nigerian banking industry.

To underscore the efficiency of the consolidation exercise presently embarked upon by the Central Bank towards effective regulatory supervision.

To determine the relationship between banks lending to the private sector and regulation on the industry.

1.2SCOPE OF THE STUDY

The study is limited to bank consolidation and corporate performance as has been implemented in Nigeria. The geographical coverage of this research would be Delta and Edo States, the population of interest would be all banks affected by consolidation while the sample size would be five (5) banks and this research will cover a period from 2000-2009.

1.3LIMITATIONS OF THE STUDY

In view of the technicalities involved, it would be assumed that all necessary facts have been gathered in the process of the study. Information gathered is limited to those gathered with the aid of local newspapers, journals annual reports from the Nigeria Stock Exchange (N.S.E.) and basically the internet. Errors made by journals and other related materials may likely be repeated since they were used for this study. However, the effect of this limitation will be reduced to the barest minimum.

1.4SIGNIFICANCE OF THE STUDY

The study is significant in that it will help depositors of funds in financial institutions to fully understand the mechanism of banking supervision and the provision of the law as it relates to the deposit insurance scheme. It also provides a platform for the regulatory authorities to appreciate the impact of their activities on the banking industry and underscores areas for improvement.

It is also imperative to state that a study of this nature provides an independent platform via which the regulators can appraise fundamental tools of supervision in a bid to make reasonable adjustments where necessary.

The findings of this study will be of immense benefit not only to the Nigerian banking industry and its related institutions, but also to those interested in understanding the inter-relationship between the actions of the regulators on one hand and the banking institutions on the other as well as providing a platform for promoting an efficient and effective banking practice.

The significance becomes more prominent when the effect of regulation and supervision is examined against the background of the consolidation exercise of the present policies of the Central Bank of Nigeria. It is worth mentioning that the present state of the nation’s financial industry precipitated out of the supervisory framework of the Central Bank, hence this study would attempt to examine what impact the present consolidation exercise would have on the regulatory framework.

1.5RESEARCH PROBLEM

Bank regulation/supervision is implemented to ensure a sound and safe financial system in the economy. The measures are mainly concerned with the quality of risk asset in banks, compliance with key ratios such as liquidity ratio, cash reserve ratio, capital adequacy ratio amongst others, the quality of management and other corporate government issues.

However, inadequate supervisory framework and lack of an effective risk asset database and information sharing system have contributed in no small measure in disrupting the activities of banks, thereby leading to the often distasteful incidents of banking distress and liquidation by the regulators.

In line with this problem, various banking legislation/acts have been promulgated as well as the introduction of different strategies all aimed at increasing the efficiency of banking regulatory supervision. Among them are on-site and off-site banking examination, routine examination culled at the instance of the regulators as well as other methods of surveillance to be discussed in subsequent chapters. These measures are mutually reinforcing and are designed to timely identify and diagnose emerging problems in individual banks with a view to presenting most efficient resolution directed towards ensuring continued public confidence in the banking system.

1.6RESEARCH QUESTIONS 

Since the establishment of NDIC and CBN, the effectiveness of their operations has been a source of controversy and comments by key monitors of the banking industry. The generated controversy among bankers and the general public forms an integral part of the research questions. These are;

How effective has NDIC guaranteed depositors funds through its deposit insurance scheme?

Has the Nigerian banking industry become safe, stable and command the confidence of the general public since the promulgation/implementation of the BOFIA/NDIC Act?

Have the activities of banking supervisions brought about normal banking practice, professionalism and ethical conduct in the Nigerian banking system?

Have Banks and Other Financial Institutions (BOFIA) brought about high standard of financial practice in Nigerian banks?

What is the performance rating of the regulatory authorities in preventing financial distress in Nigeria?

1.7RESEARCH HYPOTHESIS

The supervisory and regulatory authorities play a significant role in the financial system of any economy through the promulgation of policies aimed at ensuring the prudent management of banks assets and liabilities and thereby guarantee the safety of depositors’ funds. They also promote compliance to safe and sound banking practices, encourage the institution of an efficient internal control system in individual money deposit banks in order to prevent the incidence of frauds, forgeries and other financial malpractices as well as ensure the stability and engendering of public confidence in the system. This study will therefore test the following hypothesis;

H0: The regulatory and supervisory activities of the CBN and the NDIC have not boosted depositors’ confidence in the banking system.

H1: The regulatory and supervisory activities of the CBN and the NDIC have boosted depositors’ confidence in the banking system.

H0: The supervisory and regulatory functions of the CBN and the NDIC have not been effective in curtailing distress in the Nigerian banking system.

H1: The supervisory and regulatory functions of the CBN and the NDIC have been effective in curtailing distress in the Nigerian banking system.

H0: The supervisory and regulatory functions of the CBN and the NDIC have not been effective in improving corporate performance issues in the banking industry.

H1: The supervisory and regulatory functions of the CBN and the NDIC have been effective in improving corporate performance issues in the banking industry.