EVALUATION OF NIGERIA DEPOSIT INSURANCE CORPORATION (NDIC) ROLE IN DISTRESS MANAGEMENT OF NIGERIAN BANKS.
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EVALUATION OF NIGERIA
DEPOSIT INSURANCE CORPORATION (NDIC) ROLE IN DISTRESS MANAGEMENT OF NIGERIAN
BANKS.
ABSTRACT
This study is aimed at evaluating the role of NDIC in the
management of distressed banks in Nigeria. The study focuses on the
achievements of NDIC, its impact on the Nigerian banking system and how
effective the NDIC has been as a supervisory authority. This study uses primary
data obtained through questionnaires administered to the employees of the
Nigerian Deposit Insurance Corporation. 100 employees were selected as samples
while their opinions on the role of NDIC in the management of distressed banks formed
the basis for the outcome of this study. The findings of this study reveal that
NDIC plays a dominant role in the management of distressed banks in Nigeria.
Premised on this outcome, the study suggests that NDIC should be given more
autonomy to be able to oversee the affairs of distressed banks.
TABLE OF CONTENT
CHAPTER ONE - INTRODUCTION
1.1 Background
of the Study
1.2 Statement of
research problem
1.3 Purpose of
the study
1.4 Research
questions
1.5 Statement of
hypothesis
1.6 Significance
of study
1.7 Scope of the
Study
1.8 Limitations
of the Study
1.9 Definitions
of Terms
CHAPTER TWO - LITERATURE REVIEW
2.1
Introduction
2.1.1 Bank
Regulation
2.1.2 Bank distress
and its management
2.1.3 Symptoms of
bank distress
2.2 Empirical
Studies
2.2.1 Causes of
Banking Sector Distress
2.2.2 The Nigerian
Bank Distress Experience
2.3 Nigeria
Deposit Insurance Corporation
2.3.1 Rationale for
Establishing the NDIC
2.3.2 Functions of
NDIC
2.3.3 NDIC’s
Mandate
2.3.4 Challenges of
NDIC
2.3.5 Future
Prospects
2.4 The Role of
NDIC in Distress Management of Nigerian Banks
2.5 Regulatory
Agencies in Other Countries
2.6 Benefits and
Costs of Deposit Insurance in Nigeria
CHAPTER THREE- RESEARCH METHODOLOGY
3.1
Introduction
3.2 Restatement
of Research Questions
3.3 Restatement
of Research Hypothesis
3.4 Research
Design
3.5 Population of
the Study
3.6 Sample and
Sampling Techniques
3.7 Procedure for
Data Collection
3.8 Method of
Data Analysis
3.9 Limitation of
the Research Methodology
CHAPTER FOUR - DATA ANALYSIS AND PRESENTATION OF RESULTS
4.1
Introduction
4.2 Bio-Data
Presentation of the Questionnaire
4.3 Presentation
of the Analysis of Items in Section B of the Questionnaire
4.4 The
Statistical Test for the Study
4.5 Discussion of
Findings
CHAPTER FIVE- SUMMARY, RECOMMENDATIONS AND CONCLUSION
5.1 Summary
5.2
Conclusion
5.3
Recommendations
Bibliography
Appendix
CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND OF THE STUDY
The Banking industry is so strategic to the economy that
virtually everybody is a stakeholder. Banks act as lubricants of the economy
and the custodians of the payment system. They therefore impact on every sector
of the economy. Banks with high capital base perform their traditional role of
banking by financing capital projects that is in the oil and gas sector. Banks help in mobilizing savings through a
network of branches. By mobilizing savings, the bank channels them into
investments. Thus, they help in capital formation. Umaru (2010) opined, one of
the primary core mandates of NDIC has to do with supervision and regulation of
the licensed banks and other licensed deposit taking institutions.
Other roles performed by the banks in the economy include
financing trade, agriculture, industry, consumer activities and they help in
the implementation of monetary policies.
Despite the fact that there are so many sectors in the economy that
depend on banking, banks in Nigeria are yet to realize their full potentials.
Likewise the banking sector has a long way to go in playing its expected roles
in development and growth of the economy.
Despite the fact that the banking industry recorded a strong
second fastest growing sector in the economy, the banking industry has not been
performing their traditional functions. A banking system that is in crisis
cannot therefore, carry out its intermediation role effectively as new lending
comes to a halt, which is known as credit crunch. Two mechanisms can act; low
capital adequacy ratios of banks and shortfall of liquidity. Corporate
governance and poor risk management have been regarded to be the major causes
of the banking crisis in Nigeria. Umaru (2010)
Distress connotes a state of being in danger or difficulty
and in need of help. It is a state of ‘inability’ or ‘weakness’ which prevents
the achievement of set goals and aspirations. Distress can also be associated
with a cessation of independent operations or continuance only by virtue of
financial assistance from the banking system’s safety net such as the
supervisory regulatory agency or a deposit insurer. CBN / NDIC (1995) describes
a distressed financial institution as ‘one with severe financial, operational
and managerial weaknesses which have rendered it difficult for the institution
to meet its obligations to its customers, owners when due.
According to Ademu (1997), the history of financial distress
and bank failure in Nigeria date back to the late 1940 and early 1950s
otherwise known as the free-bank era. The current experience which became more
manifest since 1993 has the resemblance of the earlier one in terms of
causative factors. However, each occurred in different institutional and
regulatory environment. There absent was a pool of trained and experienced
personnel in economic and financial matters.
However in May 1989, distress in the banking system first
came to existence after the withdrawal of treasury funds forms the licensed
banks e.g. National bank of Nigeria. By 1993, distress has become widespread in
the Nigerian banking sector leading to the closure of four banks in early 1994,
Following the grave distressed financial condition of these banks, the merchant
bank limited, Alpha merchant bank limited and united commercial bank limited
and their licensed revoked by the CBN.
The number of banks officially classified as problems banks
especially in recent times is on the increase and have continued to be a
serious concern to the government and the regulatory authorities. By
December1992, the number rose to fifteen (15), and up to thirty-eight (38) as
at December 1993 and fifty five (55%) as at 31st December 1994, As at December,
1995 out of about 120 banks, 60 were considered distressed, 5 had been
liquidated, 5 were under interim management boards and 17 had been taken over
by the CBN.
As a result of the bank failures, the Nigeria Deposit
Insurance Corporation (NDIC) was formed by the Nigeria deposit Insurance
Corporation decree 22 of 1988, established by the Government to protect
depositors against the loss of their insured deposits placed with member
institutions in the event that a member institution is unable to meet its
obligations to depositors. Deposit
insurance ensures that the depositor does not lose all his money in the event
of a bank failure. It also engenders
public confidence in, and promotes the stability of, the banking system by
assuring savers of the safety of their funds.
Deposit insurance makes a bank failure an isolated event; hence it
eliminates the danger that unfounded rumors will start a contagious bank run. Against
the above background, there is therefore, the need to evaluate the role of NDIC
in managing distressed banks.
1.2 STATEMENT OF RESEARCH PROBLEM
The history of bank failure in Nigeria dates back to 1930
when the Industrial and Commercial Bank failed. Thereafter, the Nigerian
Mercantile Bank failed in 1936 while the Nigerian Penny Bank failed in 1946
(Folusho, 1985). It is instructive to note that 21 out of the 25 indigenous
banks that were established collapsed in quick succession due to bad
management, inadequate capital, inexperienced personnel, excessive branch
expansion, and lack of banking regulation and unfair competition from foreign
banks (Ajayi and Ojo 1981). Others included outright fraud, lack of acceptable
prudential guideline and lack of right banking orientation among the operators.
Most of the bank failures were resolved mainly through self-liquidation. These bank failures led to a significant loss
to depositors, loss of confidence by the public in the Nigerian banking
industry, loss of confidence also in the ability of Nigerians to manage banking
business. The regulatory authorities were overstretched and distress set in, in
the banking industry. Due to the banking failures and distresses, public
confidence in the banking sector waned and governments concern for the
protection of public deposit, the restoration of confidence in the banking
sector and the financial system generally prompted government’s establishment
of the Nigeria Deposit Insurance Corporation (NDIC). In what ways has the NDIC
justified its existence- in restoring, enhancing public confidence in the
banking sector? This is the crux of this research work.
1.3 PURPOSE OF STUDY
In the light of the above, the purpose of the study are:
1.
To
evaluate the role of NDIC in distress management of Nigerian banks.
2.
To
evaluate the effectiveness of NDIC’s offsite and onsite examinations.
3.
To
examine the achievement of NDIC generally.
4.
To
evaluate the impact of the corporation on the Nigerian banking system.
1.4 RESEARCH
QUESTIONS
The pertinent questions for this research are:
1.
To
what extent has the NDIC played its role in distress management of Nigerian
banks?
2.
To
what extent has the NDIC been effective as a supervisory authority?
3.
To
what extent is the NDIC living up to expectation in preventing distress?
4.
In
what ways has the deposit insurance scheme impacted on Nigerian commercial
banks?
1.5
STATEMENT OF HYPOTHESIS
Hypothesis is a conjectural statement about relationships
that need to be tested and subsequently accepted or rejected. Taking this
definition into consideration, the following hypothesis will be formulated and
later tested to ascertain their validity or otherwise.
The following are the hypotheses for this work:
1. H₀: The NDIC
has not played any role in the management of distressed banks in Nigeria.
H₁: The NDIC has played a role in the management of
distressed banks in Nigeria.
2. H₀: The NDIC
has not performed any effective role in the management of distressed banks in Nigeria.
H₁: The NDIC has performed an effective role in the
management of distressed banks in Nigeria.
1.6
SIGNIFICANCE OF STUDY
In the wake of bank failures, the economy suffered severe
stress. Many depositors lost their hard-earned money; many suffered starvation
because their breadwinners lost their jobs in the process. In a number of
cases, depositors who lost their life savings die because of apparent
hopelessness. People from different spheres of life have commented on this
seemingly topical issue as it touches the very fabric of the national economic
life. This study is will be embarked upon as a way of further investigating the
issue with a view of evaluating how effective it has been in rescuing and
managing banks when they are in distress.
The research will be of benefit to practicing bankers,
customers, bank management, monetary authorities, students of business
administration and economics and other individuals seeking to know more on the
NDIC’s operation, activities, and role in achieving stability in the banking
sector. It will also be a reference point to other further researchers.
1.7 SCOPE
OF THE STUDY
This study focuses on the operations, role and evaluation of
the NDIC in the management of distressed banks. The study evaluates the
effectiveness of the deposit insurance by appraising the performance of the
NDIC in terms of deposit guarantee, bank supervision, and distress resolution
and bank liquidation. Crucial issues relating to the deposit insurance system
in Nigeria are raised with major challenges identified, benefits and costs.
1.8 LIMITATIONS OF THE STUDY
Because of the order of the nature of this research,
limitations are bound to arise. The lack of universal approach to management
problems; constrains, such as inadequate financial resources, possible low
respondent to the questionnaire, limited literature (since much cannot be
gathered within the short period available for the research study) cost of transportation, inadequate time for
travelling and combining normal academic study, could all act as limitation to
this study.
As a result of the factors listed above the sensitive nature
of this topic makes it quite difficult to obtain some vital information from
banks as some of them are not competent to speak on such matters. Another
constraint is that known banks currently under liquidation refuse to admit they
are in distress so a lot of information is kept. The most telling constraint
however will be the time as the time needed to effectively carry out this
research is limited.
1.9 DEFINITION OF
TERMS.
CBN – Central Bank of Nigeria. It was established by the CBN
Act of 1958. It is the apex regulatory and supervisory body of all financial
institutions.
NDIC – Nigeria Deposit Insurance Corporation. Its main
responsibility is to administer the deposit insurance scheme in Nigeria, with a
view to protecting depositors and contributing to financial system stability in
Nigeria.
Management – The group of people responsible for controlling
and organizing a company or organization, especially senior executives.
Distressed banks – These are banks that are illiquid,
unprofitable and have large non-performing assets. At the extreme, they are
insolvent, a situation where a bank’s liabilities exceed its assets. (Oke,
2008)
Bank – This is a federally regulated financial institution
that, in general, engages in the business of taking deposits, lending, and
providing of other financial services. (Oke, 2008)
Banking – In general terms, banking is the activity of
accepting and safeguarding money owned by other individuals and entities, and
then lending out this money in order to earn profit. (Oke, 2008).
Savings – This is forgone consumption. It is the difference
between current income and current consumption. (Oke, 2008)
Stakeholder – Stakeholder refers to all parties that have an
interest, financial or otherwise, in a company. That is, shareholders, creditors,
bondholders, employees, customers, management, the community, and the
government. (Oke, 2008)
Financing – It is a means of obtaining or providing funding
for a transaction or undertaking; to back; to support.
Deposit – This is the amount of money placed with a bank for
safekeeping, convenience, and/or to earn. (Oke, 2008)
Deposit insurance - Deposit insurance is a system established
to protect depositors against the loss of their deposits in the event of an
insured institution’s inability to meet its obligations to depositors. (NDIC
DIS glossary, 2012)
Commercial bank – This is a financial institution that
provides a wide range of banking services, including accepting deposits and
extending loans to individuals and businesses. (Oke, 2008)
Bank liquidation - This is the process by which a bank is
brought to an end, and the assets and property of the bank are redistributed
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