AHAM
NZENWATA
ABSTRACT
This paper is a critical evaluation
of the Nigeria banking system regulation and supervision from 1980 – 2015. For
the purpose of the paper, we explored the nature, meaning and classification of
bank regulation and supervision. The paper showed that in addition to On-site
and off-site supervision, bank supervision can also be classified as:
transaction based, consolidated and risk based supervision. On the other hand,
regulatory tools/requirements include: Capital requirement, Reserve
requirement, corporate governance, exposures restrictions and financial
reporting and disclosure requirements among other. The paper also showed that
for the period of the study, the Central Bank of Nigeria (CBN) has enacted and
pushed through numerous regulatory and supervisory reforms for controlling the
activities of banks in Nigeria including the consolidation and recapitalization
of banks, altering the structure of banks to become universal in nature
involving in all sorts non-bank financial services and back again to the
original core banking and specialized banks license. Finally, the paper showed that over time, the
supervisory and regulatory efforts of the CBN has paid off as the populace now
has more confidence in the ability of the banks to withstand economic and
financial shocks and continue operating. However, it is recommended that the
CBN must continue to actively monitoring the both the internal and external
economies and be proactive in proffering timely solutions to challenges that
may arise.
1. INTRODUCTION
According
to Barth et al., (2006), the issue of financial regulation – particularly in
relation to the banking sector – is often considered a controversial issue.
Regulation is costly and can give rise to moral hazard problems. In addition
distortions between regulated and unregulated institutions can occur.
Yet
the special role that banks play in the economic system implies that banks
should be regulated and supervised not only to protect investors and consumers
but also to ensure systemic stability. More specifically, bank regulations
exist for safeguarding the industry against systemic risk, protecting consumers
from excessive prices or opportunistic behaviour and finally to achieve some
social objectives, including stability (Llewellyn, 1999).
Bank
regulations are a form of government controls which subject banks to certain
requirements, restrictions and guidelines. This regulatory structure creates
transparency between banking institutions and the individuals and corporations
with whom they conduct business, among other things. In most cases, the
government carries out these regulatory activities through its agencies the
most important of which is the Central Bank.
In
carrying out its regulatory functions, the Central Bank is saddled with the
responsibility of issuing license to banks and supervising their activities to
ensure that the banks so licensed conduct their activities within the confines
of the law as spelt out in their license and in such a manner that contribute
positively to the growth and development of the financial system.
From
the above, we can infer that the Central Bank regulates the activities of banks
by providing both general and specific frameworks within which the banks are
expected to operate. And in order to ensure that banks operate within the set
guidelines, the Central Bank provides supervision of the activities of specific
banks.
In
Nigeria, the central Bank of Nigeria (CBN) is saddled with the responsibility
by itself and through other government agencies the responsibility of not only
regulating banking business but also supervising individual banks to ensure
they operate within the ambits of the law and in such a manner that will not be
detrimental to growth and development of the financial system and by extension
the economy.
The
purpose of this paper is to provide an appraisal of the regulatory and
supervisory functions of the central bank of Nigeria for the period 2005 to
2014 in order to determine how well the central bank has played these roles.
2. BANKING
SYSTEM REGULATION AND SUPERVISION
2.1 Concept of Bank Supervision
According
to the Nigeria Deposit Insurance Corporation (NDIC), banking supervision seeks
to reduce the potential risks of failure and ensures that unsafe and unsound
banking practices do not go unchecked. Bank supervision is a supervisory
function charged with the responsibility of ensuring the safety and soundness
of the banking system as a whole.
Books
and affairs of every licensed insured institution are examined as a means of
meeting its supervisory mandate. This function is performed through the
off-site surveillance and on-site examination of the books and affairs of the
banks, which exceptions are reported and recommendations made on how the
observed lapses can be corrected, and the implementation of such
recommendations is monitored through scheduled post examination visits to the
affected banks.
While
Off-site supervision involves the receipt and analysis of returns from insured
banks on a periodic basis to ascertain the banks’ compliance with prudential
regulations. Returns, basically, are requirements of the regulatory/supervisory
authorities from the banking institutions which are made on determined periodic
basis to assist in ensuring that the banks conform to desired operating rules.
Thus, this involves deposit money banks taking their records to the supervisory
authorities for assessment.
To
complement the off-site supervision, on-site
examinations are usually undertaken to determine the reliability of the banks’
returns sent to the regulators, determine banks’ adherence to laws and
regulations as well as verify the quality of their assets. The type of examination
to undertake usually depends on the initial objectives of the exercise. Thus, On-site supervision involves a visit to
the bank by officials saddled with the responsibility of supervising their
activities.
2.2 Types of Bank Supervision
Transaction Based
Supervision: This supervisory approach focuses on
individual/group entities. Individual entities are supervised on a solo basis
according to the capital requirements of their respective regulators. The
Transaction’s Based Type of Supervision of individual entities is complemented
by a general qualitative assessment of the group as a whole and, usually, by a
quantitative group-wide assessment of the adequacy of capital.
Consolidated supervision: Consolidated
supervision is a group-wide approach to supervision whereby all the risks
undertaken by a group of companies are taken into account in the supervisory
process. This will entail the identification of the risks to which the
components of the group are exposed to and the impact of such risks on the group
operational activities. Consolidated supervision entails the process whereby
the supervisor can satisfy himself about the health of the entire group’s
activities which may include bank and non bank companies, financial affiliates
as well as branches and subsidiary companies.
Risk Based Supervision: Risk
Based Supervision assesses the efficacy of a bank’s ability to identify,
measure, monitor and control risks. It designs a customized supervisory program
for each bank and focuses more attention on banks that are considered to have
potentially high systemic impact. By the very nature of banking business, banks
are inextricably involved in risk-taking.
The
major risks banks face in the course of business include, but not limited to,
credit, market, liquidity, operational, legal and reputational risks. In
practice, a bank’s business activities present various combinations of these
risks, depending on the nature and scope of the particular activity. To the
financial sector regulatory and supervisory authorities, what constitute risks
are those factors that pose threat or portend danger to the achievement of
statutory objectives.
2.3 Instruments and Requirements of Bank Regulation
Capital requirement: The
capital requirement sets a framework on how banks must handle their capital in
relation to their assets. Internationally, the Bank for International
Settlements' Basel Committee on Banking Supervision influences each country's
capital requirements. In 1988, the Committee decided to introduce a capital
measurement system commonly referred to as the Basel Capital Accords (BIS,
2005).
Reserve requirement: The
reserve requirement sets the minimum reserves each bank must hold to demand
deposits and banknotes. This type of regulation has lost the role it once had,
as the emphasis has moved toward capital adequacy, and in many countries there
is no minimum reserve ratio. The purpose of minimum reserve ratios is liquidity
rather than safety (Wikipedia, 2014).
Corporate governance: Corporate
governance requirements are intended to encourage the bank to be well managed,
and is an indirect way of achieving other objectives. As many banks are
relatively large, with many divisions, it is important for management to
maintain a close watch on all operations. Investors and clients will often hold
higher management accountable for missteps, as these individuals are expected
to be aware of all activities of the institution.
Large exposures restrictions: Banks
may be restricted from having imprudently large exposures to individual
counterparties or groups of connected counterparties. Such limitation may be
expressed as a proportion of the bank's assets or equity, and different limits
may apply based on the security held and/or the credit rating of the
counterparty. Restricting disproportionate exposure to high-risk investment
prevents financial institutions from placing equity holders' (as well as the
firm's) capital at an unnecessary risk.
Financial reporting and disclosure
requirements: Among the most important regulations
that are placed on banking institutions is the requirement for disclosure of
the bank's finances. Particularly for banks that trade on the public market, in
the Nigeria for example the Securities and Exchange Commission (SEC) requires
management to prepare annual financial statements according to a financial
reporting standard, have them audited, and to register or publish them.
2.4 REVIEW OF RELATED LITERATURE
Bank Regulatory and Supervisory
Reforms
In
view of the importance of the banking sector in economic development and the
imperfection of the market mechanism to mobilize and allocate financial
resources to socially desirable economic activities of any nation, governments
all over the world provide extensive regulation of the sector more than any
other sector in the economy. The justification for regulation is to prevent
bank failures which may have destabilizing effect on the rest of the economy
and also to ensure that they carry out their activities in accordance with
economic and social objectives of the country (Uche,2001).
The
1952 Banking Ordinance laid the groundwork for future regulation of the banking
industry in Nigeria. It imposed minimum requirements for paid up capital and
the establishment of reserve funds. This was followed by the enactment of the
1958 Central Bank Act and the Banking Ordinance of 1959. The banking
legislation was further strengthened with the enactment of the Banking Decree
of 1969. This consolidated previous banking legislation; raised minimum paid-up
capital requirements and empowered the CBN to specify a minimum capital/deposit
ratio. It also empowered the CBN to impose liquidity ratios and placed
restrictions on loan exposure and insider lending (Nwankwo 2011, Adedipe,
2010).
With
the introduction of the Structural Adjustment Program (SAP) in 1989, banks and
other financial institutions mushroomed as a result of the relaxation of
regulation, licensing and other market controls. The increased number of banks
as result of deregulation of the markets led to serious problems in bank
supervision as the necessary manpower and technical know-how was inadequate to
handle the increased number of banks. The direct consequence of this state of
affairs was a large number of very weak and small banks lacking in capacity to
provide the necessary financial backbone to grow the economy.
In
2004, Charles Soludo was appointed the Governor of the CBN and his primary
focus was the strengthening the banking system which was achieved by mandating
that banks increase their capital base to N25 billion. Given the small size of
most of the banks operating at the time, most of the banks opted for either mergers
or acquisition. This led to a reduction in the number of banks from 89 to 25 in
2005. The banks that emerged as a result of the recapitalization program were
bigger, stronger and less vulnerable to failure and also reduced the
supervision workload.
Notwithstanding
the consolidation reforms, a number of problemss plagued banking institutions
in the post-consolidation era, including but not limited to
· The
global financial crisis
· Macro-economic
instability arising from large and sudden cash flows,
· Failure
in corporate governance by the banks
· Dearth
of investor and consumer sophistication
· Inadequate
disclosure and exposure about the financial position of banks
· Gaps
in the regulatory framework and regulation of banks,
· Uneven
supervision and enforcement
· Unstructured
governance and management processes at the CBN, and a
· Weak
business environment, leaving the banking institutions in dire straits and
setting the tone for the next wave of regulatory measures in the sector
(Abayomi,2014).
According
to Sanusi (2010) the next phase of bank reforms were predicated on achieving
the following objectives:
i.
Enhancing the quality of banks;
ii.
Establishing financial stability;
iii.
Enabling healthy financial sector
evolution; and
iv.
Ensuring the financial sector
contributes to the real economy.
Given
the above objectives, stringent examinations were conducted by the CBN in 2009,
culminating in the interventionist steps and the adoption of a risk-based
supervision model by the regulator, and the institution of regulatory reforms
aimed at resolving the crisis, some of which are succinctly highlighted below:
· Removal
of the chief executives and other executive management personnel of five (5)
banks and the capital injection by the CBN of N620bn (US$3,974,280) in Tier 2
capital into the nine (9) distressed banks.
· The
establishment of the Asset Management Corporation of Nigeria (AMCON) with the
statutory mandate of purchasing impaired assets, and targeted recapitalization
of the distressed banks. AMCON has till date purchased over US$16.5bn of distressed
assets and recapitalized three banks.
· The
review of the universal banking model conceived under the consolidation
reforms, and the creation of a new licensing regime aimed principally at
ring-fencing core banking from non-core banking business. The new licensing
regime conceived led to the discontinuance of universal banking licenses and
creation of specialized banking licenses.
· The
adoption of a common accounting year for all banks, in a bid to stop different
reporting year ends for Nigerian banks, which made comparison amongst banks
difficult and cast doubts on the accuracy of banks’ financial results. The
purpose of the policy change was to further enhance the level playing field in
the banking sector post-consolidation.
· Prudential
Guidelines for Deposit Money Banks in Nigeria 2010 (Prudential Guidelines
2010), and the Guidelines for the Tenure of Managing Directors of Deposit Money
Banks and Related Matters, heralded the mandatory cap on CEOs’ tenure of banks
to a maximum of ten years.
With
the post-consolidation crisis stabilized and significant regulatory reforms
underway, the banking sector witnessed further reduction in respect of a number
of participants. Nonetheless, the spate of regulations and supervision
increased investor confidence, fostered financial stability and strengthened
the sector’s growth potential. The recent experience from the global financial
crisis further underscored the imperatives of the CBN to embark on banking
regulatory reforms.
With
the intervention of the CBN and the various reforms targeted at stabilizing the
financial system, trust and confidence have been restored, and the macro effect
of these reforms is evidenced in appreciation of banking shares on the stock
exchange, and the emergence of four new banks.
3 DISCUSSION,
CONCLUSION AND RECOMMENDATION
This
paper is a critical evaluation of the Nigeria banking system regulation and
supervision from 1980 – 2015. For the purpose of the paper, we explored the
nature, meaning and classification of bank regulation and supervision. The
paper showed that in addition to On-site and off-site supervision, bank
supervision can also be classified as: transaction based, consolidated and risk
based supervision. On the other hand, regulatory tools/requirements include:
Capital requirement, Reserve requirement, corporate governance, exposures
restrictions and Financial reporting and disclosure requirements among other.
The
paper also showed that for the period of the study, the Central Bank of Nigeria
(CBN) has enacted and pushed through numerous regulatory and supervisory
reforms for controlling the activities of banks in Nigeria including the
consolidation and recapitalization of banks, altering the structure of banks to
become universal in nature involving in all sorts non-bank financial services
and back again to the original core banking and specialized banks license. The
spate of regulatory reforms also witnessed the establishment of the \asset
Management Company of Nigeria (AMCON) and increasing the deposit insurance scheme
from N50, 000 to N250,000. Core supervision was also not left out as more
attention was paid to risk based supervision.
Finally,
the paper showed that over time, the supervisory and regulatory efforts of the
CBN has paid off as the populace now has more confidence in the ability of the
banks to withstand economic and financial shocks and continue operating.
However, it is recommended that the CBN must continue to actively monitoring
the both the internal and external economies and be proactive in proffering
timely solutions to challenges that may arise
REFERENCES
Abayomi, A. Oluwaseye, A.J., & Etti, E. (2014) Banking
Regulation, Published and reproduced with kind permission by Global Legal Group
Ltd, London, www.globallegalinsights.com
Adedipe, B. (2010). Reforming the Nigerian Banking sector:
Emerging Issues, Bullion Publication of CBN 34(3), 6-11
Barth,
J.R., Caprio, G. and R. Levine, (2006), Rethinking Bank Regulation: Till Angels
Govern, Cambridge: Cambridge University Press.
BIS
(2005) "Basel II Comprehensive version part 2: The First Pillar – Minimum
Capital Requirements" (pdf). November 2005. p.86.
Llewellyn,
D., (1999), “The Economic Rational for Financial Regulation”, FSA Occasional
Papers in Financial Regulation, Occasional Paper Series 1.
Nwankwo G.O. (1990). Prudential Regulation of Nigerian
Banking. The Nigerian Banker, .9 (1), 35-38.
Ologun, S.O. (1994). Bank Failure in Nigeria: Genesis,
Effects and Remedies. Lagos: Central Bank of Nigeria Economic and Financial
Review, 32 (3): 312-322.
Sanusi Lamido (2010) “Global Financial Meltdown and the
Reforms in the Nigerian Banking Sector” Being a full text of a public lecture
delivered at the Convocation Square, Abubakar Tafawa Balewa University, Bauchi,
December 10, 2010).
Sanusi Lamido (2012) “Banking Reform and its Impact on the
Nigerian Economy” (Being a Lecture delivered at the University of Warwick’s
Economic Summit, UK February 17, 2012).
Uche, C.U. (2001). The theory of regulation: A review
article, Journal of Financial Regulation and compliance, 9(1), 67-80.
For comments, observation or other
feedback or if you need assistance with your research projects/papers, you can
contact the author via E-mail: researchmidas@gmail.com or call/Whatsapp
(+234)0803-544-6622
No comments:
Post a Comment