THE EFFECTIVENESS OF NIGERIAN DEPOSIT INSURANCE CO-OPERATION (ND1C) IN STABILIZING THE NIGERIAN BANKING SECTOR

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ABSTRACT

The purpose of this research is to investigate the effectiveness of Nigerian Deposit insurance co-operation NDIC in stabilizing the Nigerian Banking Sector. The study is aimed to Determine the post rescue operational Stability of the seven Nigerian Banks rescued from an outright liquidation. To assess the relative impact of NDIC Supervisory efforts on the Banks provisions and arrangement for risk. This study was intended to facilitate the stability of the Nigerian banking sector as it seeks to address the effectiveness of one of the key supervisory agent of the banks in the country. The study recommends that there is a clear cut Demarcation of job function between the central bank of Nigeria and the Nigerian Deposit insurance cooperation for effective Banking Supervision.

TABLE OF CONTENTS

Title Page
Abstract
Table of Contents

CHAPTER ONE
Introduction
1.1 Background of the Study
1.2 statement of the Problem
1.3 Objective of Study
1.4 Research Questions
1.5 Research Hypotheses
1.6 Significance of the Study
1.7 Scope of the Study

CHAPTER TWO
Literature Review
2.1 Overview of the Nigerian Banking system
2.2 The Nigeria Deposit Insurance Co-operation (NDIC) and the Nigeria Finaneral Satety-Net
2.3 Bank Consolidation Induced Challenges of NDIC
2.3.1 Pre consolidation Challenges
2.3.2 Post consolidation Challenges
2.4 Bank regulatory framwork in Nigeria
2.5 function of NDIC and the Designed features of is in Nigeria
2.6.1 Deposit Guarantee
2.6.2 Ensuring Financial System Stability in Nigeria
2.6.3 Distress resolution
2.6.4 Bank Liguidation
2.6.5 Challenges Facing NDIC as Liguidator
2.7 Existing Studies of Banking! Finanal System Stability Measurment
2.8 Monitoring the Financial Health of Nigerian Bank
References

CHAPTER THREE
Reseacrh Methodology
3.1 Reseacrh Design
3.2 population of Study and Sample Size
3.3 Sources of Data
3.4 Model Specification

CHAPTER FOUR
Data Analysis and Presentations
4.0 Introduction
4.1 The post Rescue Operational Stability of the Rescued Nigerian Banks
4.2 The Relative Impact of NDIC Supervisory Efforts on the rescued Banks Provisions and Arrangement for Risk

CHAPTER FIVE
Summary of Findings, Conclusions and Recommendations
5.1 Summary of the Major Finding
5.2 Conclusions
5.3 Recommendations

CHAPTER ONE

INTRODUCTION
1.1 Background of the Study
Banks are growth engines of every nations economy. They facilitate and lubricate economic growth in a variety of ways but most revealingly a.s financial intermediaries between the surplus generating units and the deficit spending ones in all parts of the nation (Cihak, 2007; Diamond and Dybvig, 2003; Hartmann et aL, 2005). In the absence of banks, every person or business seeking credit facility would have to individually look for those with such funds and negotiate with them directly and this would not only be cumbersome and time-consuming hut, also be a process of double coincidence of wants. By matching the preferences of savers with those of borrowers, banks crucially help in overcoming such difficulties. Thus, the capacity of the banking industry to perform these functions effectively is, to a large extent, determined by the financial health of the individual institutions (the banks) themselves and soundness and viability of the industry as a whole (Hartniann et aL, 2005; Ellis and Fiannery. 2002). For instance, where majority of the banks are adjudged to be weak and unhealthy, this will impair the ability of the industry to lubricate economic growth and vice versa.
Financial institutions differ from most industrial and commercial enterprises in that they depend mainly on deposits mobilized from the public for their working capital and are highly leveraged, If a bank is unable to meet its obligation to depositors due to some operational problems or business failure, anxious depositors may cause a run on the batik as well as on other healthy banks or financial institutions (Diamond and Dybvig, 2003; Flannery and Sorin, 2006; Hannan and Hanweck, 2008). Therefore, the stabililv of the financial system and social order of the country in general would be at risk (Hannan and Hanweck, 2008). Meanwhile, most depositors are small depositors, having small deposit amounts with the banks and potentially, they cannot cost-effectively collect required material information on the financial institutions or banks which they do business with (Gorton and Pennacchi, 2010). Because of this, most governments across countries in the world now establish a Deposit Insurance mechanism, an example of which is the Nigerian Deposit Insurance Corporation [NDTCJ empowered to provide protection for these small depositors and to contribute to the financial and social order of the country (Alashi, 1993). The regular financial stability assessment and identification of macro-prudential leading indicators which signal coming risks to the banking system are of major importance for central banks, the NDIC and other banks’ supervisory authorities. A safe and sound banking system ensures optimal allocation of capital resources, arid regulators therefore aiming to prevent costly banking system crises and their associated adverse feedback effects on the real economy (Cihak, 2007).
Prior to the establishment of the Nigeria Deposit Insurance Corporation, there were only two major formalized Government-provided Safety Nets for the Nigerian banking industry. These were: the lender of last resort facility by the Central Bank (through the provision of temporary liquidity support to solvent depository institutions) and bank supervision. Government provided implicit guarantee to depositors and, by extension, to other stakeholders by bailing out troubled banks. Thus, there was no explicit deposit insurance scheme. The government used its discretionary powers to prop up some failing deposit-taking financial institutions which were mainly state-owned banks. Under such implicit insurance, the government provided protection to depositors, creditors and shareholder alike — a form of blanket insurance (Ogunleye, 1997). There was also no formal arrangement regarding how the implicit protection could be fended. Funding was largely provided through government budget. Thus, the scheme was a contingent liability on the Federal Government budget and was characterized by uncertainties about the level and scope of coverage. The implicit scheme could not therefore provide the required public confidence. Other problems associated with the implicit scheme included slow response to crisis due to debate on required budgetary provision and government’s sole burden to resolve banking distress.
In 1986, The Nigerian Government commenced the implementation of a Structural Adjustment Programme (SAP) which entailed liberalization and deregulation of the Nigerian economy. As a result, the number of banks increased phenomenally from 48 in 1988 to 120 in 1990 (Ebhodaghe, 1997). The development triggered keen competition as well as increase in the risks to which banks and consequently depositors were exposed. An explicit Deposit Insurance System (DIS) was therefore considered necessary to protect the depositors, particularly the small ones, from the adverse consequences of risks being taken by banks in the process of the competition. The phenomenal growth in the number of banks over-taxed the available managerial capacity in the banking system.
The fore-going necessitated the introduction of an explicit DIS in Nigeria through the enactment of Act 22 of 1988, which established the Nigeria Deposit Insurance Corporation (NDIC), the Agency vested with the responsibility of implementing the system in the country. The NDIC commenced operations in March [989. The scheme was introduced to provide a further layer of protection to depositors and complement the Central Bank of Nigeria’s (CBN’s) supervisory activities in ensuring a safe arid sound banking system. The DIS in Nigeria like most other explicit schemes has specified maximum insured sum, a clearly defined ex-ante funding arrangement. and a specified administrative structure. Participation in the scheme is compulsory for all licensed deposit-taking financial institutions while the implementing agency is owned by government. The implementing agency, NDIC also has responsibilities for monitoring the health of insured institutions as well as the risk exposure of the Deposit Insurance Fund (DIF) and providing an orderly failure resolution mechanism, as clearly enunciated in the Corporation’s enabling law. In effect, the NDTC was designed as a risk minimizer (Ebhodaghe, 1 997). Against tile basis for which the NDIC was established, it is however pertinent to address the scheme’s effectiveness in stabilizing the Nigerian banking sector here in this current study.

1.2 Statement of the Problem
A review of the developments in the Nigerian banking and financial system indicates that the sector has undergone remarkable changes over the years in terms of the number of institutions (banks), ownership structure, as well as the scale of operations driven largely by the deregulation of the financial sector in line with the global trend. As at the end of 2004, insured Nigerian banks stood at 89 with 3300 branch networks, all of which were of various sizes and degrees of soundness (Soludo. 2004). The sector generally suffered from an unstable operating environment until the July 6, 2004 announcement of the CBN which introduced a major policy initiative of N25billion minimum capital base. Although, incidences of bank distresses in Nigeria could he traced as far back as I 930s. According to Soyibo and Adekanye (1992), between 1930 and 1958, over 21 bank..... 

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