EVALUATION OF CAPITAL ADEQUACY IN NIGERIA COMMERCIAL BANKS: A CASE STUDY OF SOME SELECTED BANKS

ABSTRACT
This project evaluates the level of capital adequacy of three Nigeria commercial banks including the Union Bank of Nigeria Plc, First Bank of Nigeria Plc and Oceanic Bank International Plc from year 2003 to 2007. It delves into the theoretical framework of capital adequacy by reviewing development in the international capital standards (the Basel I and Basel II accords) for banks, their controversies and prospects in line with effective banking supervision. This work employs the tier I risk-base, total risk-base, leverage capital models, correlation coefficient and regression techniques to reveal that the three evaluated banks are well capitalized and at the same time exhibited dwindling quality of earnings with increase in capital positions in general for the studied periods. Consequently, we recommend a certain percentage of different capital ratios the individual bank should strive to maintain to remain well capitalized and achieve an optimum return on assets invested; that the banks should establish assets management committee to ensure proper investment of their capital in right mix of Risk Assets; that the banks should endeavour to recover most of their problem loans & collaterals to boost the value of its assets; that the regulatory authorities such as CBN and NDIC should adopt a risk-focused and rule-based regulatory framework in setting and reviewing the minimum capital base for banks; that the regulatory authorities should adopt a zero tolerance in data and financial misreporting by banks to them; the banks should adopt a risk focused approach in raising their capital base ( through public issues, merger or acquisition) to reflect the intended or scope and character of their business; and that their should cross fertilization of information and close collaboration among the regulators of the financial system ( eg CBN, NDIC, EFFCC, Ministry of France, the National Assembly and others) to ensure sound legislation and monitoring of the banking system in Nigeria.

CHAPTER ONE
INTRODUCTION

1.1      Background of the Study
The proposed reform of the Nigeria banking system announced by the former Central Bank of Nigeria (CBN) Governor Professor Charles Soludo on July 6, 2004, may have come as a surprise to some people. However, to those who have been monitoring the health of the banks, the reform could not have come as a surprise. According to Umoh (2004), the incidence of distressed and technically insolvent banking institutions has been with us for quite some time. The unprecedented liquidation of twenty six (26) Nigerian banks in 1998, in addition to the earlier closure of five (5) banks in 1994/1995, did not put an end to the distress syndrome. Indeed, we have to admit that to have cleansed the banking system of distressed and insolvent institutions in 1998, more institutions ought to have been closed. However, that was not done because the Nigerian Deposit Insurance Corporation (NDIC) did not have adequate funds in its Deposit Insurance Funds to pay depositors. Also, government was unwilling to provide the needed funds for the exercise as had been done in other countries where government’s financial support amount to a significant proportion of the Gross Domestic Product (GDP), for example, in Argentina (early 1980-82) 55% of the GDP, Indonesia (1997 to date) about 50% of GDP, Côte d’Ivoire (1988 – 1991) about 25% of GDP, and Malaysia (1997 to date) about 16.4% of GDP.

A number of lessons had been learnt from the liquidation of thirty one (31) banks from 1994 to 1998. Worthy of mention here is the role played by inadequate capital in the failure of the banks. The 1995 collaborative study by the Central Bank of Nigeria (CBN) and NDIC had confirmed the role of inadequate capital in bank failures. The Capital levels of the closed banks were so low that they could not absorb losses occasioned by non-performing risk assets, keen competition, and management. CBN (2004) and Osho (2004) reiterated that Gross Under capitalization (Capital Inadequacy) in relation to the level and character of bank business is one of the major causes of bank failures.

To forestall the high incidence of banks failures in the country, a number of legislations historically had been put in place to mandate banks to raise their minimum paid-up capital to a certain required level. According to Adekanya (1986), the 1952 Banking Ordinance fixed the minimum capital required for indigenous banks at £12,500 and for expatriate banks at £100,000. Again, section 4 of the 1958 Banking Ordinance reviewed upward the expatriate banks minimum capital to £200,000 while that of the indigenous banks remained at £12,500. Further more, section 6(1) of the 1969 Banking Decree reviewed upward the minimum capital required for indigenous banks to £300,000 and for expatriate banks at £750,000. It was in section 9(1) of the 1991 Banks and Other Financial Institutions Act then Decree that the Central Bank of Nigeria is empowered to determine from time to time the minimum required paid up capital for banks. As at 2004, the CBN exercised this power to fix the amount of the minimum required capital for licensed banks in Nigeria to the tune of Twenty Five Billion Naira (N25, 000,000,000).

However, one thing could be deduced from this continuous upward review of banks minimum paid-up capital is that they failed to stop incessant liquidation of Banks. For instance, twenty two (22) of forty nine....

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Item Type: Postgraduate Material  |  Attribute: 114 pages  |  Chapters: 1-5
Format: MS Word  |  Price: N3,000  |  Delivery: Within 30Mins.
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