CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The Nigerian banking system has undergone remarkable changes over the years, in terms of the number of institutions, ownership structure , as well as depth and breadth of operations. These changes have been influenced largely by challenges posed by deregulation of the financial sector, globalization of operations, technological innovation and adoption of supervision and prudential requirements that confirm to international standards. As at the end of June, 2004, Chime (2004:8) stated that there were 89 deposit money banks operating in the country, composing institutions of various sizes and degrees of soundness. Most banks in Nigeria have capitalization of less than $10million. Even the largest bank in Nigeria has a capital base of about Us $240million compared to Us$526milion for the smallest bank in Malaysia. Apart from the smallness, they have heavy fixed cost and operating expenses leading to high average cost for the industry. This puts undue pressure on banks to engage in sharp practices, increase cost of intermediation, gap between deposit and lending rates and separate investment in soware and hardware. The prevailing situation in the industry is more or less a caricature of the system. Chime (2004:9) stated that Nigerians hold more than N4006 as currency outside of the banking system. This he opined that it ie due to large informal economy, perverse incentive to look mostly to high net-worth agents for deposits, government agencies, blue clip companies and rich individuals. According to him, a further analysis of the returns of the marginal and unsound banks reveal that they account for 19.290 of total assets of the banking system, 17.290 of total deposit liability while the industry non performing assets account for 19.5% . These ratios except that for deposits, were below the bigger point for declaring the system as distressed, they are nevertheless of major supervisory concern. Besides the significant dependence of many Nigerian banks on government deposits, with the three tiers of government and parastatals accounting for over 20% of total deposit liabilities of deposit money banking was another concern. The structures of banks promoted tendencies towards a rather strictly behaviour of deposit rates, particularly at the retail level, such that while banks’ lending rates remain high and positive in real terms, most deposit rates especially those on savings, are law and negative. The summary from the foregoing is that the Nigerian banking system faces enormous challenges just like other sectors of the economy. Consequently, the federal Government introduced the National Economic Empowerment and Development Strategy (NEEDS) with its state and Local Government ailiates. N With its state and local government ailiates. Needs is Nigerian home-grown poverty reduction strategy (Chime 2004:2) It is a medium term strategy (2003-2007), but which derives from the countries long-term goals of poverty reduction, wealth creation, employment generation and value re-orientation. The Macro-economic framework of Needs include: Reforming Government and institution (public sector reforms, privatization/Liberalization, governance, transparency and anti-corruption, service delivery). It is under this reform that Banking sector reform was entrenched. The reform code accordingly was named:
PROJECT EAGLES
, at the apex bank level (CBN) Consequently on July 06 2004, the Central Bank of Nigeria Governor announced the Minimum capital base for all banks to N25billion. This saw First Bank of Nigeria PLC merging with MBC International Banks to meet the target. It was in a bid to assess the eect of this prudential guideline on the service and performance of bank that this work is being carried out with 1st bank of Nigeria PLC Okpara Avenue Enugu as a case study.
1.2 STATEMENT OF THE PROBLEM
With the distress signal apparent at the doors of some banks, there has been dwindling confidence in the banking system. This is further aggravated by the high interest rates charged by banks, emphasis on short term lending to the neglect of manufacturing, agriculture and other capital intensive projects. The above science required drastic action if the banking system was o properly plays its role as a catalyst to development. The Governor of the Central Bank of Nigeria Prof. Charles Soludo remarked recently that it become necessary to take pre-emptive measures to avoid the cycle of boom and bust” adding that, “it now time to set up a structure that created a strong be relative to the kind of economy we are operating where banks become channels to do proper inter-mediation. Oshiomole (2004:3) criticized some of the reform polices especially monetization. Also in Chime (2004:5) noted that they advised that all discussions be initiated to clear the grey areas and agree on modalities for the implementation. The public sector especially within the National Assembly argue as to: The success and eects of the prudential and operating guideline. The eiciency and effectiveness of the existing operating system and whether it will be suitable for the policy. In some quarters, it is said that there are inadequate resources to meet the N256 capitalization compared to cost of fund generation. The general public through the NLC (2004:3) say that the likely suicing problems of the policy will be much when the available resources for implementation are viewed. Commercial Banks, insurance companies and discount houses cry out because they opined that it will have tremendous eect on the quantum of resources accruing to them. Workers also argue that it will have serious negative effect on then and is likely to be over-run by problems just like other previous macro-economic polices. As such, this work is aimed at reviewing the issues raised to find at the work-ability and effect of the banking guidelines and returns.