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.
1.3PURPOSE
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. H?: The NDIC has not
played any role in the management of distressed banks in Nigeria.
H?: The NDIC has played a
role in the management of distressed banks in Nigeria.
2. H?: The NDIC has not
performed any effective role in the management of distressed banks in Nigeria.
H?: 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, 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.