CHAPTER ONE   INTRODUCTION                   1.1.0 BACKGROUND OF THE STUDY The banking sector in any economy serves as a catalyst for growth and 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 of the system and protection against systemic risk 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. 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 over lap, establishment of a credible data management and information sharing system. In the main, 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 are 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, these agencies (CBN and NDIC) have continued to emphasize risk-focused bank supervision in Nigeria. Similarly, they have 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. 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 1952 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. 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 Nigeria Deposit Insurance Corporation Decree No 22 of 1988 and lately, the failed Bank (recovery of debt & Financial malpractices) Decree No 18 of 1994. These enabling laws and other relevant legislation have largely provided for sufficient and comprehensive supervisory power and operational autonomy in bank supervision, which may restore public confidence in banks.   Furthermore, as part of efforts to ensure the stability of the banking industry and in response to the lingering problem of distress in the sub-sector, the regulatory/supervision authorities have been applying various failure measures since the late 1990s. Hence depending on the severity and peculiarity of the distress, NDIC in collaboration with the CBN, has over the years, successfully adopted such 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.   In specific terms, the following measures have so far been adopted.   1)            Accommodation facilities were granted to ten (10) banks with serious liquidity crises to the tune of N2.3 billion in 1989 following the withdrawal of public sector funds from commercial and merchant banks and the transfer to CBN during that year. 2)            Holding actions were imposed on 46 banks to help stabilize their financial conditions in the mid-90’s. 3)            Twenty – four (24) banks were temporarily taken over by the regulators to safeguard their assets between the years 1989 – 1994. 4)            Seven (7) distressed banks were acquired, restructured and sold to new investors in the late 1990’s. 5)            From 1994 to 1999, thirty-six (36) terminally distressed banks were closed with minimal disruption to the banking system. 6)            In 2005, the number of operationally licensed banks in Nigeria numbering 89 (Eighty- Nine) was streamlined through a process of Mergers and acquisition into 25 (TwentyFive) viable banking institutions with a capital base of not less than N25 billion each.   The streamlining of these banks was because of their inability to respond to all the various regulatory/supervisory initiatives employed to resolve the banks’ problems, and the continued degeneration in their financial conditions.   1.2.0 AIMS/OBJECTIVES 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 (CBN) and the Nigerian Deposit Insurance Corporation on the activities of Nigerian banks.   The main objective is: 1             To examine thoroughly how supervisory and regulatory functions of the regulators (CBN and NDIC) impacts on Nigerian banks. 2             To determine the relationship between the banking supervision and the incidence of bad loan portfolio in the Nigerian banking industry 3             To determine the efficiency and effectiveness of Deposit Insurance Scheme in Nigerian banks as a means to boosting depositors’ confidence in the system. 4             To test the effectiveness of regulation on the pricing of banks products and services offered to their customers. 5             To determine the relationship between the CAMEL performance rating of banks and the effect of regulation in the industry 6             To determine the relationship between banks lending to the real (private) sector and regulation on the industry. 7             To underscore the efficiency of the consolidation exercise presently embarked upon by the Central Bank towards effective regulatory supervision.  1.3.0 SCOPE AND LIMITATIONS OF THE STUDY The study will cover the operation of the regulatory authorities as it relates to the banking industry in the past twelve years prior to the consolidation era and thus, would be limited to the period of 2000-2005.  Secondly, the study assumes that the banking system has remained deregulated during the period covered in our study, as most banks practice universal banking, while the CBN/ NDIC act as the regulatory authorities and supervisor of banks in the banking sector. In view of the technicalities involved, it would be unrealistic to assume that all necessary facts have been gathered in the process of the study. Information gathered is limited to those accesses and made available by the respondents and also those gathered with the aid of local newspapers, magazines, journals and annual reports of the Central Bank of Nigeria (CBN), Nigeria Deposit Insurance Corporation (NDIC), Chartered Institute of Bankers of Nigeria (CIBN), Agusto Industry report and basically the internet. However, the effect of this limitation will be reduced to the barest minimum.  1.4.0 SIGNIFICANCE OF 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 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.     

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