THE IMPACT OF BANKING REGULATION AND SUPERVISION IN NIGERIA COMMERCIAL BANKS
What is regulation: A rule or directive made and maintained by an authority.
It is also a legal norm intended to shape conduct that is a by product of imperfection. A regulation many be used to prescribe or proscribe conduct. In general, regulation are written by executive agencies as a way to enforce laws passed by the legislature. Because of the actual or potential interference in choices, the idea regulation and most issues related to regulation tend to be in controversy
Deregulation: Is the process of removing or reducing state regulations. It is therefore opposite of regulation which refers to the process of the government regulating certain activities.
Financial system: Is the system that allows the transfer of money between savers (and investors) and borrowers. A financial system can operate on a global, regional or firm specific level.
Banking Regulation: The uniqueness of banking in the economic system singles out the industry for much heavier regulations than any other activity. Historically formal regulation of banking was prompted by the fenetic experiences of the banking crises.
Liewellin D.L (1990) defines the prudential regulation of banking as a body of specific rules or agreed behaviour either imposed by some government within the industry that constrains the activities and business operations of the institutions.
Pecchioli (1993) emphasis that banking is a key sector of the economy providing the community money balances and payment arrangement control of ownership of banks should therefore be maintained to ensure concern for the national interest.
Nwankwo G.O (1990) say that after banking failures it become dear that no major country could ignore formal regulation of banking this he adds derived from the experience of the speed center were and could be transmitted to other financial centers gives the internationalization and globalization of national and international financial markets resulting from competitive pressure and developments in technology.
In Nigeria case, the massive bank failure of the 1940’s and 1950’s forced the government to promulgate the first ever banking legislation, the banking ordinance of 1952.
Nwankwo G.O (1990) is of the opinion that the rational for banking regulation does exceeds the desire to maintain confidence and protect against banks and other financial institution to prelude or unit foreign ownership in a sector which is regarded as vial to the proper functioning of the national economy and the other reason is that in many developing countries with underdeveloped and uncompetitive banking system concerns for the competitions situation of the domestic banks has followed the usual infant industry arguments.
BANKING REGULATORY FRAME WORK
In this attempt is made to examine the various approaches in trying to regulate the bank sector. These regulatory policies are broken down into phases:
The fre Banking era: this period as described because of the ease (absence of regulations) with which banks were established (which was the cause of the mass bank failures from 1959 to 1983, the legislation that were enacted dunning this period were aimed primarily at remedying identified defects in the system and closing iropholes in the previous legislation and stem the tide of bank failure that occurred on the previous period. This era began with the enactment of the central bank of Nigeria Act of 1959, which gave legal banking to the establishment of the central bank of Nigeria. during this period 1959-1970 several important legislation were enacted aimed at promoting and integrating the Nigeria financial system and became effective 1959,1961,1962,1964, amendments and the 1969 banking decree the unmediated outcome of the legislation were
* The development of money and capital market.
* Emergence of more commercial banks between 1959, 1962,17 new commercial banks were established.
The second period of this phase (1970-1985) witnessed several regulating measure taken by government. Between 1970 and 1977, the government took two important measures. The indigenization peroration decree (1972 which was amended in 1977 the acquisition of controlling interest (40%) by government in the then existing expatriate banks (first bank, union, bank, UBA) in cone with the indigenization and the establishment in 1976 of a financial system review. During this period as a means of strengthen the banking sector and accelerating its impaction economic development government established and wholly owned the Nigeria Agriculture and co-operative bank, the Nigeria bank for commerce and industry and reconstructed the Nigeria.
This period also witnessed a more intensive interception by the public sector in the financial sector which took a form of direct credit, interest rates and sustained increase in the paid up capital of new banks form.
this period upwards, although the policy objective were to ensure sound banking practice and to protect customers, the control instrument became rather restrictive for example interest rates on bank deposits and loans were administrative construed to give preferential treatment to certain priority sectors which needed a substantial amount of credit.
BANKING SUPERVISORY ROLE
EVOLUTION OF SUPERVISORY PRACTICE
One of the principal objective central bank is to promote monetary stability and soundness on the financial system. To achieve this, the central bank of Nigeria (CBN) conducts regular supervision and examination of banks as a means of maintaining surveillance on banking activities and operations to ensure that banks comply with the banking laws and other directives stipulated by the monetary authorities.
The two important elements of banking supervision on Nigeria are on side examination of the books and affairs on banks and off site supervision which involves the secreting, and review of bank statistical returns. The procedure enable the supervisor to monitor the bank position from time to time through physical examination of books and operations and analysis of prudential rectums for instance contact with management enable the supervision to access the competence of management and present an appropriate form to discuss present problems and remedial measures. In addition, the opportunities enable the supervisor to keep in touch with the market to learn of new products and ideas.
THE IMPACT OF THE REGULATION OF THE FINANCIAL SYSTEM ON THE NIGERIA ECONOMY
The regulatory and supervisory framework is necessary to prevent financial crisis on the economy. The aim of all financial legislation has been to restore financial stability on a global scale and build a financial system that serves the economy.
Bank failures have a ripple effect on the entire economy murder to minimize frond and ensure that banks do not engage in activities inimical to the economy. Internal control is indeed in the financial system. These help to insure that asset are safeguard and that commitment and payments are duly authorized. The CBN is responsible for approving the board of directors and any change in the control of commercial and merchant Banks.
Problem Institutions: Whenever a banking/financial institution regulated by the CBN proves unable to meet its objectives and indicates, its desire to suspend payment or admit insolvency problem anise the CBN conducts a special examination to such bank/institution and it convinced that the bank situation may take numerous action ranging from the prohibition of the bank from further credit activities to the removal of its director from office. This is aimed at dealing with defaults and distress in the system in order to entrance public confidence, the most effective option. Including takeovers restructuring and act right liquidation of terminally distressed banks may be applied.
Liquidity Ratio Banks are required to have a minimum liquid ratio of 49 percent out of which to percentage points should be in treasury securities. (Treasury Bills and certificate). However, only with bank placements which fully recurred by eligible instruments re-discountable at the CBN, shall count as part of a bank liquid asset.
Loan concentration: It is advisable for a bank to concentrate its lending operation on a single sector or borrower, hence guidelines are provided to ensure lending atonalities are diversified since the assets of a bank are mainly the loan it grants, banking supervision also aim at limiting shareholder risk through placing limits on loans and granted to a single borrower.
DEREGULATION IMPACT ON THE NIGERIA ECONOMY
Financial sector deregulation is a policy which allows market forces to determine the allocation of credit, rather than government fiat. it includes the liberalization of credit controls, foreign exchange control licensing of banks and interest rates and other institutional reforms. The efficacy of money and capital market is enhanced under financial sector deregulation within which competition is allowed and market forces are unfettered. It is argued that financial deregulation improves the efficiency of resource allocation this is because it increases savings. The improved efficiency, with which resources are allocated among alterative investment projects, raises the rate of economic growth. Thus it offers the opportunity for many diversified financial instruments to be at play it ensures that capital is mobilized from several avenues other than the traditional banking sectors. The policy raises investor confidence and serves as an incentive for the flow of capital and investment. Thus, financial sector deregulation has been perceived to foster development and increase growth in the long run it has also been seen in developing counties, to stimulate domestic savings and growth and reduce excessive dependence on foreign capital flow. It seems these benefits of deregulation could not be appointed by the Nigerian economy before 1986. This is because monetary policy before that period. Was regulated by government through different Decrees and Acts.
Fry MI 1982. Models of Financially Repressed Developing Economics. Canada: World Development Report
Ike DM 1984. A Financial Appraisal of the Nigerian capital Market. Nigerian Journal of Financial Management, 3:2.
Kama U 2006. Recent Reforms in the Nigerian Banking Industry: Issues and Challenges. CBN Bullion, 30:3.
Lemo T 2005: Regulatory Oversight and Stakeholder Protection. A paper presented at the BGL Mergers and Acquisitions Interactive seminar held at Eko Hotels and Suites, Victoria Island, June 24.
Mckinnon R. 1973. Money and Capital in Economic Development. Washington D.C: The Bookings Institution.