Abstract
In the framework of this project
“Perceived impact of Prudential Guidelines on the services and performance of
Commercial Banks in Nigeria”, the researcher has attempted to reiterate the
importance of prudential guidelines in helping banks to improve on their
performance. The study set out to examine its impact on bank safety and
confidence of Nigerians especially depositors among others. The researcher
employed both primary and secondary sources of data from samples derived from
the populations of selected commercial banks. The researcher adopted the use of
structured questionnaire as the main instrument of data collection. Data were
analyzed using the simple percentage.
CHAPTER ONE
INTRODUCTION
1.1 Background Of The Study
All over the world, the banking industry
plays a strategic role in every nation’s economic development. The Central Bank
plays a dominant role in both the decision making and managerial process taking
place in the economy while other banks do provide the essential financial
services needed for effective operation of the economy. Bank failures do have
destabilizing impact on the economy of any nation. It is precisely the
consequence of these failures that led to the enactment of various
legislations, rules and guidelines by relevant authorities to curb the excesses
the banks with a view to ensuring that banks operating in Nigeria do so in
accordance with the best practices of International banking professional
standards.
Banks are very important in the economic development of any nation. They
constitute the central part on which other sectors of the economy revolve. They
mobilize resources from the surplus sector of the economy and lend to the deficit
sectors for investment purpose. Hence they are obliged to comply with certain
regulatory requirement, which are generally not applicable to other –sectors of
the economy. Loans and advances make up a major part of the lending. A careful
look at the balance sheet of any commercial banks in Nigeria will reveal that
loan and advances are by far the longest single items in the assets structure.
Apparently, loan and advances make up the major sources of the operating income
in banks. Because they are the most profitable assets for the employment of
banks funds. Regardless of this fact, they could turn out to be bad and
doubtful debts.
In November 7, 1990 the
central bank of Nigeria issued a circular entitled “Prudential Guideline” for
licensed banks. It stipulated minimum requirements for assets
classification and disclose, provision of interest accrual and off balance
sheet engagement (CBN) circular No. BSD/20/23 Vol.1 /11. in particular, the
guideline imposed new and somewhat far-reaching requirements in the
classification of risk assets and provision for bad and doubtful debts.
(Nwankwo G.O 1990)
The guidelines also
emphasized the time recognition of determination in the quality of assets and
the classification of credit facilities into “performing s” and “
non-performing” accounts.
Furthermore, in order to
ensure the reliability of their published operating results, banks have been
directed to cease charging accruing interest on non-performing credit
facilities and interest and interest accrued on such accounts should not be
recognized as income.
The guideline made it
mandatory for all licensed banks to review their credit portfolio continuously,
at least once in three months, with a view to recognizing our determination in
their quality according to Eghodaghe (1993) more so, prior to
the issuance of the guidelines, it was common to find institutions declaring
paper profit, which resulted from interest, accrued in non-performing
facilities being taken into statement of financial position. The non-performing
assets in financial institutions were not uniformly classified; neither was
adequate provision made for such facilities. These practices not only made
compassion between institutions difficult, they also ended to hide
inefficiencies and distort performance. Banking malpractices
alternatively referred to as corruption and economic crimes constitute the
genius of what is generally known as and commonly called “Elite or white collar
crimes. Legislation governing the banking practice in Nigeria is sourced from
three major areas. They are:
·
Law of General Application: This is the law
that is applicable across the countries under the former British Empire. Such
law because it was bequeathed to Nigeria at the Independence is otherwise
referred to as “received English laws”.
·
Statute Law: These are laws specifically
enacted by the nation’s legislature known as the Parliament of the National
Assembly to deal with specific subjects or sectors. Example of such statute law
are BOFIA (Banks and 67 other financial institution Acts 1991), the CBN Act
1991 and CAMA (Companies and Allied Matters Act) 1990.
·
Subsidiary Legislations: These are
legislations made under the authorities of existing statutes. Examples are
Rules, Orders, and Regulations by laws and ordinances
The core legislation for
this research is the Subsidiary laws and such are made by the apex bank CBN for
other banks to observe. The prudential guideline was issued on November 7th
1990 Circular No BSD/DO/23/VOL.1/11 to all licensed Banks addressed requirements
for asset classification and disclosure, provisioning, interest accrual and off
balance sheet engagements. In view of the importance of the circular to bank
management, bank auditors and bank examiners, the objective of these guidelines
is to prescribe the prudential treatment of restructured accounts to provide a
transparent mechanism for timely structuring of debts of viable entities facing
problems, outside the purview of 67 BIFR, DRT and other legal proceedings for
the benefit of all concerned. The scope of these guidelines are applicable to
restructuring/rescheduling of amounts due from all borrowers other than those
eligible for restructuring under CDR Mechanism, eligible for restructuring
under the debt mechanism for SME’s and restructured on account of Natural
calamities for which Reserve Bank has issued a separate set of guidelines.
Casting a look at the size structure, the assets structure, the deposits
structure and the volume of credits they grant to the economy, their dominant
position becomes evident. In the light of this therefore, their indispensable
role of pooling together funds from the surplus economic unit to the deficit
unit fast tracks economic activities. Effective management of banks assets and
liabilities posed a great concern to all stakeholders because of large scale
financial distress. The late 1980s and early 1990s were years of financial
boom, as the number of players increased substantially in the system. For
instance, between 1986 and 1989, about 38 new commercial and merchant banks
were created. The increase in the number of banks over stretched the existing
human resources capacity of the banks which resulted into many problems such as
poor credit appraisal system, financial crimes, accumulation of poor asset
quality among 67 others. The consequence was increased in the number of
distress, banks and depositors began to lose confidence on our financial
institutions in managing their fund. Based on these experiences, the Federal
Government of Nigeria through the Central Bank of Nigeria (CBN), 1990 indicates
that regulation and supervision are essential ingredients for stable and
healthy financial system, and that the need becomes greater as the number and
variety of financial Institutions increased. The banking sector was singled out
for a special protection because of the vital role banks play in an economy.
Bank supervision entails not only the enforcement of rules and regulations, but
also judgment concerning the soundness of banks assets, its capital adequacy
and management (Volker, 1992). Effective supervision leads to healthy banking
industry. At this direction, the deposit insurance scheme the assets quality of
banks, reduce bad and doubtful debt, and ensure capital adequacy and stability
of the system so that the depositor’s fund would be protected. Banking as
essentially an international business, especially now that domestic financial
markets are being internationalized, need to develop and continuously review
their reporting system which allow for a high degree of comparability of
banking performance across national boundaries. Such systems have been evolved
in such areas of banking practice as credit portfolio classification,
disclosure interest accrual and off balance sheet engagements. The apex
institution in Nigeria banking system, the Central Bank of Nigeria (CBN) is
continuously moving banks in the country towards compliance with international
banking practices. To this end, the Banking Supervision Department (BSD) issued
no November 7, 1990, circular letter No.BSD/DO/23VOL.1/11, to all licensed
banks and their 67 auditors. The circular titled “Prudential guidelines for
licensed Banks” addressed requirements for asset classification and disclosure,
provisioning interest accruals and off-balance-sheet engagements. The
prudential guideline is intended as a hand book for target groups such as the
bank auditors and the examiners. It is the task of the examiner to prevent bank
failure by identifying bank problems at an early stage to allow for
intervention and or corrective action before the situation gets out of hand
1.2STATEMENT OF THE PROBLEM
The Central Bank of
Nigeria (CBN) as a supervisory monetary authority had reasons for introducing
the prudential guidelines into the banking scene in order to review banks credit
portfolio at least once in a quarter with a view to recognizing any
deterioration in credit exposure based on perceived risks of default. In order
to facilitate comparability of banks classification of their credit portfolios,
the assessment of risk of default should be based on criteria which should
include, but not limited to repayment performance borrowers repayment capacity
on the basis of current financial condition and realizable value of collateral.
Interest on problem loan/over draft is another area where differences exist
among banks. When loans/overdrafts become apparently uncollectible, how should
the interest that is calculated on it be treated? While some banks credit their
profit and loss account with such unearned interest, others credit their
suspense account. The deregulation of interest in the Structural Adjustment
Programme (SAP) period did not help, either interest on non-performing account
were credited to 67 the profit and loss account of most banks to make their
performance appear good to investors, the public and supervisory monetary
authorities. This “window dressing” performance in most banks shook public
confidence in bank’s financial statement in the late 1980 up to 1990, when
prudential guidelines was introduced. Prior to this period, most banks believed
that once loans/overdraft was secured, whether the accounts were serviced or
not, interest on it should continue to be credited to their profit and loss
accounts believing that they would realize the security in case of default in
payment. Most often banks were not too bothered as to whether the collateral
was perfected or not thereby making realizability of collaterals difficult, if
not out rightly impossible. Consequently, the prudential guidelines were
expected to address the following;
A. To enhance public confidence in banking system in the country.
B. Harmonization of credit administration in the country with what
is obtainable in other parts of the world.
C. Timely recognition of deteriorating risk assets.
D. To create a healthy
banking environment in our economy.
E. To create uniformity in
loans/overdraft classification among banks in the country.
1.3 OBJECTIVES OF THE
STUDY
The objectivity of the
study is to examine measures introduced by banks and how effective that will be
in order to meet the requirement of the prudential guidelines of the central
banks in Nigeria as follows:
i. To determine the impact of the prudential
guidelines on bank safety and confidence in Nigeria.
ii.
To assess the reaction of depositors to the guidelines.
iii. To find out whether there are
international supervisory perspectives which affect national experience.
iv. To trace the history
of bad debts in the banks and how the new measures will facilitate the recovery
of the debts.
1.4 RESEARCH QUESTIONS
for the successful completion of the study,
the following research question was formulated:
i. To what extent has
the Prudential Guidelines helped to ensure safety and confidence in Nigerian
banking system?
ii. How do depositors
react to the guidelines?
iii. Are there international supervisory
perspectives to the guidelines?
1.5 HYPOTHESES OF THE STUDY
The hypotheses of this study are as follows:
H0: Prudential guidelines
do not enhance safety and confidence in the Nigerian banking system.
H0: Depositors do not react favorably to the prudential guidelines.
H0: There are no international supervisory perspectives which affect
national experience.
1.6 SCOPE OF THE STUDY
There are many banks in Nigeria banking
industry. To achieve the aim of this research, the researcher has restricted
himself to the study of only First Bank Of Nigeria plc (FBN). In this regard,
three branches of UBA within Enugu Metropolis are studied. The branches are FBN
Main branch at Aka road, 2 Oron road and Banking avenue 2lane uyo
1.7 LIMITATIONS TO THE
STUDY
The limitations to this work include:
1. The problem of
meeting appropriate officials of the banks who will give the right information
required for the work.
2. The problem of getting all the necessary
data became more complex and most of these officers’ do not want to volunteer
their official data due to bureaucracy and Red-tapism which hinders the flow of
information in Nigeria. 3. Availability of fund posed a problem to the
researcher as this requires adequate finance to enable the researcher visit the
necessary places and collect the required data.
1.8 SIGNIFICANCE OF THE
STUDY:
Prudential guidelines
have been in the Nigeria Banking system since 1990. It is necessary to examine
the impact it has on bank services and performance:
i.
It is also necessary to research on the effects of the guidelines
on banks to enable one access the pre-guidelines era and the present tradition
it has imposed on bank practices. Such analysis will enable the supervisory
authorities make a decision whether to retain, discard or modify prudential
guidelines.
ii.
The need for this research arises from the fact it will be of
immense benefit to students of banking and finance in having knowledge of
historical evolvement of rules and regulations and most especially in the area
of management of credit portfolio in Nigerian banks.
iii.
The duties of the Central Bank of Nigeria (CBN) and Nigeria
Deposit Insurance Corporation (NDIC), Central Bank of Nigeria (CBN) and the
Nigerian Deposit Insurance Corporation (NDIC).
1.9 OPERATIONAL DEFINITION OF TERMS
BANK: A Bank is a financial house established for the
purpose of accepting deposits and other precious commodities from the public
for safe keeping.
PORTFOLIO:
This is a collection of investible funds.
PRUDENTIAL
GUIDELINES: It is the recognition of credit risk and writing-off same to
avoid false picture of balance sheet.
BAD DEBTS: There are debts which is not recoverable within
the time frame set for their normal recovery period.
DOUBTFUL
DEBT: There are doubtful in case of recovery, hence they are termed
doubtful debt.
EFFICIENT PORTFOLIO: A group of asset that
yield a maximum return for a given level of risk.
RISKS: An index of the
variability of realized from expected returns.
ANALYSIS OF THE
FINANCIAL STATEMENT: This refers to the interpretation, anticipation and translation of
fact and data contained in the financial statements with the purpose of drawing
relevant conclusions, therefore, making interference’s as to business
operations financial position and future prospects.
STATEMENT OF
COMPREHENSIVE INCOME: is a statement of assets, liabilities and the net worth or
the owner’s interest in the business. Net worth or shareholders equity is made
up of ordinary share capital, reserve and returned earnings.
SOURCES AND APPLICATION
OF FUND: this is a statement that shows the source from which funds have
flowed into the company and the is which that have been used.
1.10 BRIEF HISTORY OF
THE BANK
For more than a century,
First Bank of Nigeria Plc has distinguished itself as a leading banking
institution and a major contributor to the economic development of Nigeria.
Founded in 1894 by Sir Alfred Jones, a shipping magnate from Liverpool, the
Bank started out as a small operation in the office of Elder Dempster &
Company in Lagos. The Bank was incorporated as a Limited Liability Company on
31st March 1894, with a head office in Liverpool. It began trading under the
corporate name of the Bank for British West Africa (BBWA) with a paid—up
capital of £12,000, after absorbing its predecessor, the African Banking
Corporation, which had been established earlier, in 1892. BBWA went on to
establish a leading position in the banking industry in West Africa, recording
impressive growth and working closely with the Colonial Government in its role
as a Central Bank.
Marking the creation of
the Bank’s international banking operations, a branch was opened in Accra, Gold
Coast (now Ghana) in 1896, and another in Freetown, Sierra Leone in 1898. A
second Nigerian branch was opened in the old Calabar in 1900, and two years
later services were extended to Northern Nigeria.
To respond successfully
to changing conditions over the years, the Bank has restructured several times.
In 1957, it changed its name from Bank for British West Africa to Bank of West
Africa, and in 1969 it was incorporated locally as the Standard Bank of Nigeria
Limited, in line with the Companies’ Decree of 1968. In March 1971, the Bank
obtained a listing on the Nigerian Stock Exchange.
Further name changes
took place in 1979 and 1991 — to First Bank of Nigeria Limited, then First Bank
of Nigeria Plc. In 1985, the Bank introduced a decentralized structure with
five regional administrations, and this was reconfigured in 1992 to enhance
operational efficiency.