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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