The research was carried out to take An Appraisal of Central Bank of Nigeria in the Prevention of Bank Failure in Nigeria: A Study of selected Deposit Money Bank in Nigeria. The research was conducted using commercial banks within Awka metropolis. Three research questions and three null hypotheses were raised. The survey research method was adopted and a sample size of 109 bank staffs drawn from 10 banks found within Awka metropolis was used for the study. Frequency tables, percentages, and weighted mean were used to analyse the data. Z-test was used for testing the hypothesis. The findings revealed among others the critical causes of bank failure in Nigeria were; macro-economic instability of which change of government is a good example has been one of the major causes of failure of banks in Nigeria, Environmental constrains such as high inflation rate, depreciating exchange, environmental constrains such as high inflation rate, depreciating exchange, fraudulent activities by directors and staffs has been a major cause bank failure in Nigeria, Incompetent and unqualified members of the banking staff is one of the major reasons of bank failure in Nigeria, Poor portfolio management is one of the reasons for banking, bad loans to corporate bodies and individuals have also been a major cause of bank failure in Nigeria, poor regulatory policies by the CBN has contributed to the failure of banks in Nigeria. That CBN has help prevent undue concentration of economic power and promote healthy competition in the financial system, ensure a safe and sound financial system to safeguard the public against the worst consequences of instability, encourage and promote a high level of operating efficiency and innovation in the financial system, enforce the implementation of government’s monetary and credit policy guidelines, in prevention of bank failure; and that among other the 25 billion Naira capital base has helped to strengthen Nigerian banks, keeping of 40% of assets in liquid form at all times as directed by the CBN ha helped to strengthen Nigerian banks policies of the CBN have helped towards prevention of bank failure. The researcher recommended that CBN must continue to emphasise and enforce prudential regulations among other to consolidate the stability of commercial banks in Nigeria.
TABLE OF CONTENTS
Title Page i
Approval Page ii
Table of Contents v
List of Table vii
1.1 Background of the Study 1
1.2 Statement of the Problem 2
1.3 Research Questions 3
1.4 Objectives of the Study 3
1.5 Research Hypothesis 3
1.6 Scope and Limitation of the Study 3
1.7 Significance of the Study 4
1.8 Definition of Terms 5
CHAPTER TWO: LITERATURE REVIEW
2.1 Theoretical Framework 6
2.2 The Supervisory Framework of Banks in Nigeria 10
2.3 Bank failure in Nigeria 14
2.3.1 Types of Bank Failure in Nigeria 15
2.4 Causes of Bank Failure in Nigeria 16
2.4.1 Macro – Economic Instability 16
2.4.2 Environmental Constraints 16
2.4.3 Fraudulent Activities by Directors and Staff 16
2.4.4 The Crippling hold on the CBN’S Autonomy 18
2.4.5 Incompetent and Unqualified Staff 19
2.4.6 Poor Portfolio Management 19
2.4.7 Inadequate Capital Base 21
2.4.8 Economic Depression 21
2.4.9 Weak Internal Control 22
2.4.10 Insider Abuse 22
2.5 Effects Of Bank Failure In Nigeria – Nigeria Economy Loss Of Public Confidence
In The Banking Sector 22
2.5.1 Capital Flight 23
2.5.2 Unemployment 23
2.5.3 Foreign Investment Would Be Hindered 24
2.5.4 Additional Burden to Regulatory Authorities 24
2.6 How to Recognize a Distresses Bank 25
2.7 Prevention of Bank Failure in Nigeria 26
2.8 The role of the Central Bank of Nigeria in the Prevention of Bank
Failure in Nigeria 27
2.8.1 Bureaucracy and Corruption 28
2.8.2 The CBN Banking Consolidation 30
2.8.3 Overall Benefit for Customers 32
2.8.4 Adequacy of Capital 32
2.8.5 Disclosure and Transparency 33
2.8.6 Prohibition of Huge non-performing Loans 35
2.8.7 The Deregulation of the Financial System. 36
2.8.9 Setting up of Prudential Guidelines 36
2.8.10 Provision of Non-Performing Facilities 37
2.8.11 The Contingency Planning Framework for Systematic Distress 37
2.8.12 Credit Bureau 37
2.8.13 Strength Licensing Requirements 37
2.9 To What Extent Has CBN Prevented Bank Failure In Nigeria? 38
2.10 Empirical Review 42
CHAPTER THREE RESEARCH DESIGN AND METHODOLOGY
3.1 Research Design 45
3.2 Area of the Study 45
3.3 Population of the Study 45
3.4 Sampling Technique/Size 45
3.5 Instrument for Data Collection 46
3.5.1 Validity of the Instrument 47
3.5.2 Procedure for Data Collection 47
3.6 Method of Data Analysis 47
CHAPTER FOUR PRESENTATION AND ANALYSIS OF DATA
4.1 Bio Data of Respondents 49
4.2 Critical Causes of Bank Failure in Nigeria 51
4.3 Roles of CBN in Preventing Bank Failure in Nigeria 53
4.4 Policies of the CBN geared towards preventing bank failure in Nigeria54
4.5. Testing of Hypothesis 56
4.6 Discussion of Findings 59
CHAPTER FIVE SUMMARY OF FINDINGS, CONCLUSION, AND RECOMMENDATIONS
5.1 Summary of Findings 61
5.2 Conclusion 61
5.3 Recommendations 62
LIST OF TABLES
Table Description Page
2.1 Banking Groups 31
2.2 Financial institutions assessment of the cause of distress in the industry (percentages) 43
2.3 Analysis of financial institutions assessment of factor responsible for their being severely distressed (percentage) 43
4.1 Distribution and Return Rate of Questionnaire 49
4.2 Demographic Distribution of the Respondents 50
4.3 Mean score responses on the critical causes of bank failure in Nigeria 52
4.4 Responses on the roles of CBN in preventing bank failure in Nigeria 53
4.5 Mean score responses on the efforts of CBN geared towards preventing bank failure in Nigeria 55
4.6 z-test on hypothesis one 57
4.7 z-test on hypothesis two 58
4.8 z-test on hypothesis three 59
1.1 Background of the Study
The Central Bank of Nigeria (hereinafter referred to as CBN) was established by the CBN Act of 1958. According to the Act, the CBN had the principal objects of issuing legal tender currency in Nigeria, managing of the country’s external reserves and safeguarding the international value of the currency. In addition to being the banker and advisor to the Federal Government of Nigeria, CBN was responsible for promoting monetary stability and a sound financial structure in Nigeria. In the exercise of this role, they monitor and supervise banks and financial institutions in Nigeria. For ease of reference, Nigeria is located in West Africa and has a population of over 120 million people.
Prior to 1952, banking in Nigeria was rudimentary and there was no legislative regulation (Onyeakagbu, 1997). He explained that the Bank of British West Africa (which eventually metamorphosed to the present day First Bank Plc) was the first to commence business in 1892. Two other banks were established in 1947 namely African Continental Bank Limited and the British and French Bank (the present day United Bank for Africa Plc). Corporate governance ethics were selectively implemented resulting in the mismanagement and failures of the banks. Many of the banks that were set up during this period up to the late 1997 failed possibly as a result of weak supervision by the regulatory authorities and ignorance or unwillingness of the banks to implement corporate governance principles.
The Nigerian Government began the process of regulating Nigerian banks with the promulgation of the Bank Act of 1952. With increased development, growth and complexity of the banking sector, the Act has been amended several times leading to itsrepeal and replacement by the Banks and Other Financial Institutions Act of 1999. The Central Bank of Nigeria in the exercise of its oversight function of ensuring a sound financial structure developed a code of corporate governance for Nigerian banks (CBN2006). Prior to then both the Securities and Exchange Commission (hereinafter referred to as SEC) and the Bankers Committee (a committee made up of all the Chief Executive Officers of banks in Nigeria and the representatives of CBN) had set up similar codes in 2003. The code published by the SEC was meant to guide corporate governance in publicly quoted companies in Nigeria.
1.2 Statement of the Problem
In the light of the vital role which banks play in the development, the national economy in their capacity as vectors of fund for saving, investment and employment opportunities. It will be expedient to point out that Nigeria banking system in all its advancement and sophistications has not succeeded yet in effectively archiving this mission. The reason is not just the fact that some banks have failed, but some factor continues to militate against the successful performance of banks.
The problem of economic under – development in Nigeria can arguably be traced to the fact that banks has been as efficient as they ought to be. But then a number of factors have been responsible for the conditions in which banks have found themselves in today. The effect of bank failure ranges from lose of depositors fund to loose of confidence (which is the spicing board in the business of banking) to a total lack of effective financial intermediation such as to reduce rending to priority sector of the economy and an unusual increase of distress in other sub – sector. Then the problem of bank failure is not peculiar to Nigeria neither is it peculiar to this third world countries, it is universal and the cause are generally in the same district categories. The only different lies in the different way through which the situation can be remedied.
Incompetent management (both shear holders and management executives), capital inadequacy, poor internal control, poor asset quality compilation and such factors as economic environment, socio – political environment and government
1.3 Objectives of the Study
The main objective of the study is to ascertain the role CBN has played to prevent bank failure in Nigeria.
The specific objectives were to;
i. Examine the causes of bank failure in Nigeria.
ii. Analyse the dominant roles of central bank of Nigeria in the prevention of bank failure.
iii. investigate how central bank of Nigeria has helped in the prevention of bank failure in Nigeria
1.4 Research Questions
i. What are the causes of bank failure in Nigeria?
ii. What are the dominant roles of the central bank of Nigeria aimed at preventing bank failure?
iii. To what extent has the central bank of Nigeria prevented the failure of banks in Nigeria?
1.5 Research Hypothesis
Ho: There are no critical causes of bank failure in Nigeria
Ho: Central bank of Nigeria does not play any role in preventing bank failure in Nigeria
Ho: There are no statements/policies of CBN geared towards preventing bank failure in Nigeria.
1.6 Scope and Limitation of the Study
This study investigates the role of Central Bank of Nigeria in the Prevention of Bank Failure. The choice of this sector is based on the fact that the banking sector’s stability has a large positive impact on the economy that is essential for the stability of the financial sector. Financial sector stability, in turn has a profound externality on the economy as a whole. To this end, the study basically covers the commercial banks. This study covers the causes, effects, and prevention of bank failure in Nigeria.
Furthermore, the researcher focused only on banking industry because corporate governance problems and transparency issues are important in the banking sector due to the crucial role in providing loans to non-financial firms, in transmitting the effects of monetary policy and in providing stability to the economy as a whole.
Finance was the fundamental problem that the researcher encountered it is an unarguable fact that any worthy research is capital intensive. In fact for the researcher to accomplish this work she invested a lot of money on the purchase of various texts which could not be found in the library. Much money was also needed for browsing and printing of valuable internet materials in fact some essential articles, books and internet materials which should have been essentially useful in shaping the research were ignored due to inadequate finance.
Insufficient time also impacted adversely on the work. This was as a result of the rush in the academic calendar as such the researcher has to limit this study to only commercial banks.
1.7 Significance of the Study
This research is aimed at assessing the role of the CBN in preventing bank failure in Nigeria. The result of the research will help in bringing to light the causes of bank failure and make the necessary recommendations that will help in preventing such failure. Thus the importance of the work includes;
i. This study will serve as a source of information to the future researchers.
ii. The study will also make the reading public to know more about the working operation of banks and possible reason for distress in the industry.
iii. It will be of great importance of both financial and indeed the entire economy that is downturn, facing serious problem of creativity and survival.
1.8 Definition of Terms
A sub-sector of the Nigeria financial system, which comprises of all banks operating in Nigeria’s money and capital market.
Central Bank of Nigeria (CBN)
This is the apex bank within the Nigeria financial system, which is responsible for the regulation named supervision of the activities of the banks and other financial institutions operating within Nigeria. It was established by the Central Bank of Nigeria Ordinance on 17th March, 1958. It commenced operation on the 1st of July, 1959.
Nigerian Deposit Insurance Corporation (NDIC)
Established in 1998 by decree no. 22 to add weight to the existing supervisory and control capacities of the monetary authorities to insure the deposit liabilities of licensed banks in the country, provide financial and technical assistance to them.
Non-Banking Institutions (NBI)
They are those institutions that are not banks but engaged in financial intermediation within the financial system. These include; insurance companies, financial companies, discount houses and so on.