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THE IMPACT OF THE NIGERIAN DEPOSIT CORPORATION (NDIC) ON THE OPERATIONS OF THE NIGERIA BANKING INDUSTRY

Format: MS WORD  |  Chapter: 1-5  |  Pages: 69  |  752 Users found this project useful  |  Price NGN5,000

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CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND TO THE STUDY                      

The banking sector in an economy serves as a catalyst for growth and for development. Banks are able to perform this role through their crucial functions of financial intermediation, provision of an efficient payments system and facilitating the implementation of monetary policies. It is not surprising therefore, that governments the world over attempt to evolve an efficient banking system, not only for the promotion of efficient intermediation, but also for the protection of depositors, encouragement of efficient, competition, maintenance of public confidence in the system stability and protection against systemic risks and collapse.

Worldwide, the banking business is highly regulated. This is because of the pivotal position the financial industry occupies in most economies. An efficient system, it is widely accepted, and is a sine qua non for efficient functioning of a nation’s economy. Thus, for the industry to be efficient, it must be regulated and supervised in view of the failure of the market system to recognize social rationality and the tendency for market participants to take undue risks which could impair the stability and solvency of their institutions.

According to Iwuchukwu (2013), Regulation and supervision of banks remain an integral part of the mechanism for ensuring safe and sound banking practice. At the apex of the regulatory and supervisory framework for the banking industry is the Central Bank of Nigeria (CBN). The Nigerian Deposit Insurance Corporation (NDIC) however, exercises shared responsibility with the Central Bank of Nigeria for the supervision of insured banks. Active co-operation exists between these two agencies on both the focus and modality for regulating and supervising insured banks. This is exemplified in the coordinated formulation of supervisory strategies and surveillance on the activities of the insured banks, elimination of supervisory overlap, establishment of a credible data management and information sharing system. However, bank supervision entails on-site examination of the institutions and off-site analysis of periodically rendered prudential returns, a process called off-site surveillance. The two activities are mutually reinforcing and designed to timely identify and diagnose emerging problems in individual banks with a view to prescribing the most efficient resolution options.

In line with prevailing international standards, this agency (NDIC) has continued to emphasize risk focused bank supervision in Nigeria. Similarly, it has developed twenty-five (25) core principles for effective banking supervision as enunciated by the Basle committee on banking supervision as the pivot of the framework for bank supervision. Okafor (2011) noted that it is worthy to note that, what is currently happening in Nigeria does not differ widely from what happened in other nations. Over the years, and specifically since when the first banking ordinance was promulgated, several other statutes have also been put in place to serve as legal backbone for the actions of the monetary authorities in regulating the banking industry.

Furthermore, as part of efforts to ensure the stability of the banking industry and in response to the lingering problems of distress in the sub-sector, the regulatory/supervision authorities have been applying various failure measures since the early 2010. Hence, depending on the severity and peculiarity of the distress, NDIC In collaboration with the CBN, has over the years, successfully adopted with measures as provision of liquidity support through accommodation bill, imposition of prompt corrective actions, assumption control and management, restructuring and sale of some distressed banks as well as liquidation of the terminally distressed banks as a last but unavoidable option.

1.2  STAMENT OF THE 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 assets 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 governance issues. The problems of the study are:

· Inadequate supervisory frame-work

· Lack of an effective risk asset data base

· Inadequate information sharing

· Poor management of consolidation policy

· Inadequate governmental support

1.3  AIMS/OBJECTIVES OF THE STUDY

The general aim of this research work is to determine the impact of the Nigerian Deposit Insurance operation of Nigerian banks.

The main objective is;

· To examine thoroughly how inadequate supervisory framework of the regulators (NDIC) impacts on Nigerian banks

· To determine how lack of effective risk asset data affects the impacts of NDIC in banking supervision

· To determine the level to which inadequate information has affected the NDIC in banking supervision

· To test the effectiveness of managements on consolidation issues as it affects NDIC in banking supervision

· To determine how inadequate governmental support has impacted on NDIC in banking supervision

1.4  RESEARCH QUESTIONS

1. Does inadequate supervisory framework have effect on the NDIC?

2. Does lack of an effective risk asset have any impact on the NDIC?

3.Does inadequate information sharing affect the NDIC in banking supervision?

4. How does poor management of consolidation policy affect the NDIC?

5. Does inadequate governmental support have any effect on the NDIC?

1.5  SIGNIFICANCE 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 provisions 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 underscore 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 had and the banking institutions on the other as well as providing a platform for promoting an efficient 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 NDIC, hence this study would attempt to examine what impact the present consolidation exercise would have on the regulatory framework.

1.6  SCOPE OF THE STUDY

The study will cover the operation of the regulatory authorities as it relates to the banking industry in the past four years prior to the E-banking era and thus, would be limited to the period of 2010-2015. Secondly, the study assumes that the banking system has remained deregulated during the period covered in this study, as most banks practice universal banking, while the NDIC act as the regulatory authority and supervisor of banks in the banking sector.

1.7  DEFINITION OF TERMS

FINANCIAL INTERMEDIATION: Financial intermediation is the mobilization of funds from the surplus spending units at a cost or lending of such funds to the deficit spending units at a price both within and outside the shores of the country.

BANK REGULATION: A body of specific rules or agreed behavior either imposed by some governmental or other external agency, or self imposed by explicit or implicit agreement within the industry that limits the activities and business operations of financial institutions e.g. the CBN and NDIC.

BANK SUPERVISION: Is the process of monitoring banks to ensure that they are carrying out their activities in accordance with laws, rules and regulations, and in a safe and sound manner.

STABLE BANKING SYSTEM: A stable banking system means that banks have the ability and capacity to meet maturing obligations as they fall due, and are making adequate profits from authorized banking business to justify their investments while at the same time keeping banking failures at a minimum within the country.

PRUDENTIAL GUIDELINES: Is a body of specific rules imposed by government through the central bank, aimed at ensuring prudent management and administration of banks’ funds so that reports of financial institutions are correct and reflective of their true portfolio.

DEPOSIT INSURANCE SCHEME: Is primarily intended to promote stability of the financial system and to protect the less financially sophisticated depositor by minimizing the risks that depositors will suffer, lender of last resort, effective bank regulation and supervision and efficient payment system.

FINANCIAL STABILITY FORM (FSF): This states that a deposit insurance system needs to be supported by strong prudential regulations and supervision, sound accounting and the enforcement of effective laws.

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THE IMPACT OF THE NIGERIAN DEPOSIT CORPORATION (NDIC) ON THE OPERATIONS OF THE NIGERIA BANKING INDUSTRY

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