THE IMPACT OF THE NIGERIAN DEPOSIT CORPORATION (NDIC) ON THE OPERATIONS OF THE NIGERIA BANKING INDUSTRY

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THE IMPACT OF THE NIGERIAN DEPOSIT CORPORATION (NDIC) ON THE OPERATIONS OF THE NIGERIA BANKING INDUSTRY

CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The banking sector in an economy serves as a catalyst for growth and for development. Banks are able to perform this role through their crucial functions of financial intermediation, provision of an efficient payments system and facilitating the implementation of monetary policies. It is not surprising therefore, that governments the world over attempt to evolve an efficient banking system, not only for the promotion of efficient intermediation, but also for the protection of depositors, encouragement of efficient, competition, maintenance of public confidence in the system stability and protection against systemic risks and collapse.

Worldwide, the banking business is highly regulated. This is because of the pivotal position the financial industry occupies in most economies. An efficient system, it is widely accepted, and is a sine qua non for efficient functioning of a nation’s economy. Thus, for the industry to be efficient, it must be regulated and supervised in view of the failure of the market system to recognize social rationality and the tendency for market participants to take undue risks which could impair the stability and solvency of their institutions.

According to Iwuchukwu (2013), Regulation and supervision of banks remain an integral part of the mechanism for ensuring safe and sound banking practice. At the apex of the regulatory and supervisory framework for the banking industry is the Central Bank of Nigeria (CBN). The Nigerian Deposit Insurance Corporation (NDIC) however, exercises shared responsibility with the Central Bank of Nigeria for the supervision of insured banks. Active co-operation exists between these two agencies on both the focus and modality for regulating and supervising insured banks. This is exemplified in the coordinated formulation of supervisory strategies and surveillance on the activities of the insured banks, elimination of supervisory overlap, establishment of a credible data management and information sharing system.

However, bank supervision entails on-site examination of the institutions and off-site analysis of periodically rendered prudential returns, a process called off-site surveillance. The two activities are mutually reinforcing and designed to timely identify and diagnose emerging problems in individual banks with a view to prescribing the most efficient resolution options.

In line with prevailing international standards, this agency (NDIC) has continued to emphasize risk focused bank supervision in Nigeria. Similarly, it has developed twenty-five (25) core principles for effective banking supervision as enunciated by the Basle committee on banking supervision as the pivot of the framework for bank supervision. Okafor (2011) noted that it is worthy to note that, what is currently happening in Nigeria does not differ widely from what happened in other nations. Over the years, and specifically since when the first banking ordinance was promulgated, several other statutes have also been put in place to serve as legal backbone for the actions of the monetary authorities in regulating the banking industry.

Furthermore, as part of efforts to ensure the stability of the banking industry and in response to the lingering problems of distress in the sub-sector, the regulatory/supervision authorities have been applying various failure measures since the early 2010. Hence, depending on the severity and peculiarity of the distress, NDIC In collaboration with the CBN, has over the years, successfully adopted with measures as provision of liquidity support through accommodation bill, imposition of prompt corrective actions, assumption control and management, restructuring and sale of some distressed banks as well as liquidation of the terminally distressed banks as a last but unavoidable option.

1.2 STAMENT OF THE PROBLEM

Bank regulation/supervision is implemented to ensure a sound and safe financial system in the economy. The measures are mainly concerned with the quality of risk assets in banks, compliance with key ratios such as liquidity ratio, cash reserve ratio, capital adequacy ratio amongst others, the quality of management and other corporate governance issues. The problems of the study are:

Inadequate supervisory frame-work

Lack of an effective risk asset data base

Inadequate information sharing

Poor management of consolidation policy

Inadequate governmental support

1.3 AIMS/OBJECTIVES OF THE STUDY

The general aim of this research work is to determine the impact of the Nigerian Deposit Insurance operation of Nigerian banks.

The main objective is;

To examine thoroughly how inadequate supervisory framework of the regulators (NDIC) impacts on Nigerian banks

To determine how lack of effective risk asset data affects the impacts of NDIC in banking supervision

To determine the level to which inadequate information has affected the NDIC in banking supervision

To test the effectiveness of managements on consolidation issues as it affects NDIC in banking supervision