An Evaluation Of The Impact Of Supervision And Control Of The Central Bank On The Performance Of Commercial Banks(A Case Study Of Access Bank Nig Plc Lagos Branch)

ABSTRACT

 

This research project tends to evaluate the impact of supervision and control of the Central Bank on the performance of commercial banks. Access Bank Nig Plc Lagos Branch was used as the case study. To aid this research both primary and secondary data were collected. The instruments used to collect data are questionnaires and oral interviews. The respondents comprised of male and female from the bank and the population put together is 150 and sample size is 109. The research design used for this work is the survey research method. In the   course of this research the   researcher found out   that supervisory and control function when conducted on a timely and unbiased manner ensures capital adequacy, high standard of conduct, moderation of bank charges and profitability. The researcher recommends that bank inspections should continue to be regular and timely enough; control measures of the CBN should not be too stringent as to have long negative impact on banking operations. Finally only competent, skilled and unbiased bank examiners should be engaged in bank supervision.

 

TABLEOF CONTENT

 

 

 

Cover page…………………………………………………………………..i Title Page…………………………………………………………………….ii Certification…………………………………………………………………iii Dedication…………………………………………………………………..iv Acknowledgement……………………………………………………….v Abstract………………………………………………………………………vii Table of Content…………………………………………………………viii CHAPTERONE

INTRODUCTION

 

 

 

1.1  Backgroundof the study………………………………………..1

 

 

1.2  Statement of the problem……………………………………..6

 

 

1.4  Research questions……………………………………………….8

 

 

1.5  Significance ofthe study………………………………………..8

 

 

1.6  Scope of the study…………………………………………………9

 

 

1.7  Limitations of the study…………………………………………9

 

 

1.8  Definitions of terms………………………………………………10

 

 

Reference…………………………………………………………….11

 

 

 

CHAPTERTWO

 

 

 

REVIEW OF RELATED LITERATURE

 

 

 

2.1 Theoretical frameworkof the study………………………….12

 

 

 

2.2 Historicalbackground……………………………………………..15

 

 

 

2.3 current literatureson postulatedtheories…………………17

 

 

 

References…………………………………………………………………..31

 

 

 

RESEARCH DESIGN AND METHODOLOGY

 

 

 

3.1 Research design………………………………………………………32

 

 

 

3.2 Sourcesof data……………………………………………………….32

 

 

 

3.2.1 Primary sourcesof data…………………………………………32

 

 

 

3.2.2 Secondarysourcesofdata……………………………………..33

 

 

 

3.3 Population of the study……………………………………………33

 

 

 

3.4 Sample design and determination of sample size……….34

 

 

 

3.5 Methodof datacollection……………………………………….35

 

 

 

3.5.1  Questionnaire  design,  distribution  and  collection  of responses……………………………………………………………………35

 

3.5.2 Secondarymethodof datacollection…………………….36

 

 

 

CHAPTERFOUR:

 

 

 

DATA PRESENTATION AND ANALYSIS

 

 

 

4.1 Presentationof frequencytables……………………………38

 

 

 

4.2 Demographic characteristics………………………………….39

 

 

 

4.3 Presentationaccording to key researchquestions…….41

 

 

 

CHAPTERFIVE:

 

 

 

SUMMARY       OF       FINDINGS,       CONCLUSIONS       AND RECOMMENDATIONS

 

5.1 Summary offindings……………………………………………….48

 

 

 

5.2 conclusion of thestudy…………………………………………..48

 

 

 

5.3 Recommendation…………………………………………………..49

 

 

 

Questionnaire………………………………………………………….52

 

 

 

Bibliography…………………………………………………………….54

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

xiii

 

 

 

INTRODUCTION

1.1 BACKGROUNDOFTHESTUDY

 

 

 

Theroles ofcommercialbanksplayintheprocessofeconomicdevelopmentin every country are crucial. They through  financial intermediation increase the levelsofnationalsavingsand investmentsbymobilising idle fundsfromsurplus spendingunits(savers)andchannelthemtodeficitspendingunits(borrowers) for investmentsinthe economy.           (UGBAJA 1999)

 

Byplaying theseroleswithin aparticularcountry,theindependenceofglobal economicscreatedtheneedforglobal interbanking,atrendwhichinturn emphasizestheneedforthestabilityofthebanksinvolved inintercontinental bankingtransactions.

 

Also,bankingbusinesscarriesalotof risksand bankingpublic needsassurance aboutthesafetyof their confidencein the bankinginstitutions.

 

Theneedfor supervisionandcontrol ofcommercialbanksactivitiesistoensure thattheyadheretothestipulatedmonetarypolicies,rulesandregulationsaswell

 

 

tothefailureofNigerianbanksinthepastcanbedescribedasmoralhazard

 

 

(adverse incentives)

 

 

 

Moralhazardsoradverseincentivesare aconceptwithrelevancetoavarietyof principalagentrelationshipscharacterized byasymmetricinformation.Themoral hazardconcernstheadverseincentives onbankschiefexecutivesto actinways whicharecontrarytotheinterestsofthebankscreditors(mainlydepositorsor thegovernmentifit explicitly orimplicitly insures deposits)by undertakingrisky investmentstrategies(such aslendingat high interestsratestohigh risk borrowers)which,ifsuccessful,would         `jeopardisethesolvencyofthebank. Bankownershaveincentivestoundertakesuchstrategies becausewithlimited liability,they bearonlyaportion ofthe downside riskbut stand togain through higherprofits,alargeshare oftheupsiderisk.Incontrast,thedepositors(orthe depositinsurers)gainlittlefromtheupsideriskbutbearmostofthedownside risk.

 

Theinabilityofdepositorsto adequatelymonitorbankdirectors,because ofthe asymmetricinformationallowsthelattertoadopt investmentstrategieswhile entail higherlevels ofrisks.

 

 

 

Firstly,anincreasein theinterestratemayleadborrowerstochooseinvestments withhigherreturns when successfulbutwithlowerprobabilitiesofsuccess (StieglitzandWeiss1989)henceariseindepositratescouldinducebanksto adopt moreriskyinvestmentstrategies. Arisein banklending ratescan havea similarincentiveeffectsonthe banks borrowers.

 

Secondly,macroeconomicinstabilitycanalsoworsenadverseincentiveifitwere toaffectthevarianceoftheprofitsofthebankborrowersespeciallywhenthere isaco-variancebetween borrower’sprofits.(E.g.ifalargeshareofborrowersare in the same industry) or if loan port folios are not well  diversified among individual borrowers.(McKinnon1988)

 

Thirdly,theexpectationthatthegovernment willbailoutadistressed bankmay weakenincentivesonbankexecutivestomanagetheirasset portfolioprudently andincentivesondepositorstomonitorbanksandchoose onlybankswitha reputation ofprudentmanagement.Depositinsurancealso reducesincentivesfor depositors to monitor banks.

 

Fourthly,moralhazard isinverselyrelated tobank capital.The ownersofpoorly capitalizedbankshavelittleoftheirownmoneytoloosefromriskyinvestment

 

 

hazardbecause,as  thevalueofthebank’scapitalfalls,theincentivesonits owners to pursue strategies which  might  preserve its solvency are reduced (Berger et al.1995 pp 398-99) for similar reasons intensified  competition in bankingmarketcanalsoencouragemoralhazard byreducingthefranchisevalue of banksfuture profits.

 

Moralhazard becomeseven moreacutewhen thebanklendstoprojects connectedtoitsowndirectorsormanagers(insider lending).Insuchcasesthe incentivesforimprudentandfraudulentbankmanagementaregreatlyincreased inthatalloftheprofitsarisingfromthe projectare internalized.(inthecaseof loansunconnectedborrowerstheprojectreturnsaresplitbetween lenderand borrowers)whereasthatpartofthelosses bornebydepositorsortaskpayersare externalised. Not surprising, insider lending is a major cause of bank  failure aroundtheworld.

 

Theseillsgoingoninthecommercialbanks,asstatedabovemakeitimperative forthecentralbankofNigeria(CBN) tobeonthewatch atalltimesthrough their supervisoryandcontrolfunctionssoastoprotectthemfromgoinginsolvent whichusuallyimpacts negativelyontheeconomyingeneral.

 

 

implyingthatthefinancialpositionofabankhasworsened can haveanegative impact on allthe cash flowin that bank.Therefore, everybank willattempt to concealtheproblem ofinsolvency.Banksarehighlysuccessfulinthisrespectand therefore,theproblem ofinsolvencyis oftennotrecognised intimebythe governmentagencies entrustedwithbank supervision.

 

Problemsinthebankingsystem orintheeconomyasawholeoccurwhena numberofbanksbecomeinsolvent,orwhenarelativelylargeshare ofthe liabilitiesofthebankingsystem isnotcoveredbygoodassets. Theoccurrenceof such  problems indicates that the efficient asset  and  liability management is present in a significant portion of banking, if a large part  of banks asset is allocatedto unprofitableprojects.Therewillbea reductionininvestment efficiencyandtherebyaslowdownoneconomicgrowth.

 

These could be decrease  or seizure  of loans grants  to the public when the problemsofbank insolvencybegin to be resolved.When banksattempttorestore solvencybyceasingtograntloanstobad clientsand raising theinterestspeeds, thereislessavailableloan and theyaremoreexpensive.Oneconsequentcan be thenegativeselectionofclients.Enterprisesthatdonothavealternativesources

 

 

whethertheprojectstobefinancedareprofitable orlessprofitable.Suchatrend couldalso exerta negativeimpact uponinvestmentefficiency.

 

Ifbanksattempttosolvetheproblems ofinsolvencyby raisingadditionalfunds, interest’srates willriseandtherewillbepressuretoconductasoftermonetary policy.Banksalso seize additionalliquidityin foreign countrieswhich affectsthe trends inthe balance of payments.

 

Theright which thecentralbankof Nigeriahasto superviseand controlthe bankingindustryisbacked bytheCBNAct no24 of1991 now CBNACT2007 and thebanksandotherfinancialinstitution Actno25of1991(nowBOFIA2004). TheselawsempowerstheCBNto carryoutasupervisoryandcontrolfunctionson all commercial banksandother banksinthe country

 

Thepowersasspecifiedbysection39oftheCBNActwhichmaybeexpressed by the CBNfrom time to time in the supervisoryand controllingfunctionsinclude the powerstospecifycriticalration tocall for informationfrombanksand toinspect the booksof any bankto underconditionof secrecy.(Afolabi 2000:10s)

 

Section30and7and8ofthebanksandotherfinancialactsno.25of1991(now

 

 

BOFIA2004)stipulatesthateverybanksshallproduceondemandallthebooks,

 

 

exerciseofhisfunctions.Italsostipulatesaspunishablethe wilfulrefusalofany banktoproducesuch documentsaswell asnegligenceor wilfulfurnishingoffalse informationto CBN.

 

ThecontrolofthebankingindustrybyCBNiscarriedoutin partnershipwiththe federalgovernment,whichhastheoverallauthorityoverthesystem.Thusthe CBNinitiatestheguidingpolicymeasureandimplementsthemonlyasapproved bythegovernment.TheCBNmeasurestocontrolthebanks through a numberof stageswhich includetheidentification oftheobjectivesandtargetsofpolicy. Policyformulation, policyimplementationandreviewaswellasotherextra measures for commercial banks (ogwuma2004:2).

 

Supervision and control bythe CBN impact significantlyon the activities  and performanceofcommercialbanksbetween 1986 and early2010,thesupervisory andcontrolmeasuresoftheCBNseemedineffectiveonanumberofoccasions and thiscontributedtothehitherto,distressinthebankingsector.Since2004, therehasbeenseriesofnewsupervisoryandcontrolmeasuresintroduced bythe CBNintothebankingsystemwiththeaimofimprovingthe performanceofthe bankingsector.

 

 

towards examiningtheimpactofsupervisionandcontrol ofCBNoncommercial banksinview ofhowtheirperformanceisaffectedfromthenegativeandthe positiveperspectiveswithconcentrationontherolesthatCBNplayedfrom2004 to 2011.

 

1.2 STATEMENTOFTHEPROBLEM

 

 

 

The supervision and controlofcommercialbanksbyCBNsometimesimpact adverselyontheoperationsandperformanceoftheformer.Thisisasaresult of difficulties associatedwiththesupervisionandcontrol mechanism.

 

With respecttosupervision, itappearsthatthe CBNapparatusarenoteffective. Banksexaminationareoftennottimely,notregularlycarried outorhaphazardly done.

 

Secondly,some oftheCBNexaminersarenotsufficientcompetentandthirdly, theyarenotlargeenough tosuperviseallthecommercialbankseffectively.The result isthat deficienciesto the operations ofthese banks are not timely discoveredand adequatelycontrolled. Alltheseadverselyaffectthecommercial banks.

 

 

effectiveoperationsandperformanceofthecommercial banks.Restrictive monetarycontrolmeasureslimittheliquidityandcapacityofcommercialbanks togrant loansorcredit.Besides,direct interactionsin bankingactivitiesbythe CBN,sometimes haveadverse effectstoo.

 

Inthelightoftheaforementioned,attemptwillbemadetoappraisetheimpact of central  banks supervision and  control  on the performance of commercial banks.

 

1.3  OBJECTIVESOFTHESTUDY

 

 

 

Inlieuof the problems statedabove,the objectives of thestudyare

 

 

 

1. 1. Toanalysetheobjectivesofsupervisionandcontrolofcommercialbanksin view of theexisting monetary policies ofthe CBN.
2. 2. Toexaminetheeffectivenessofthesupervisoryandcontroltechniquesof the CBN specifically theability detectsmalpracticeontim
3. 3. Toassesstheimpactofsupervisionandcontrolontheperformanceof commercial bankswithregards to liquidit
4. 4. To appraisetheongoingreformsof the CBN.

 

 

Thefollowing questions will beaddressedinthis study

 

 

 

1. 1. Towhatextentdotherelationshipbetweenthecurrentmonetarypolicies oftheCBNand theperformanceofcommercialsbanksas itaffectsgranting loans/credit?
2. 2. To what extent do the supervisory and control techniques effectives enoughto detect misconductontime?
3. 3. HowcanthesefunctionsoftheCBNhaveanyeffectontheliquidityof commercial banks?
4. 4. TowhatextentdotheongoingreformsbytheCBNaffecttheperformance of the commercial banks?

 

1.5  SIGNIFICANCEOFTHESTUDY

 

 

 

Thesignificanceofthestudyderivesitsusefulnessfrommanyrespects.Firstly, themonetaryauthorities(CBN) and federalgovernmentwillfind thestudyvery useful. This is because the  study will examine  the  various techniques of supervisionand control ofcommercialbanksand identifytheirdeficienciesand constraints.ThisinformationwillthenenablethegovernmentandtheCBNto takeremedial measures whichwill besuggestedinthis study.

 

 

Itwillprovide informationonwhymanyofthemoperateandperformdismally undertheCBNsupervisoryandcontrolfunctions.Thiswillgivetheseinstitutions anunderstandingoftheirweaknessandtheinformation willenablethemtotake correctiveactionswhichagainwill besuggestedinthis study.

 

Again,  investors andbankingpublicwill appreciatethis studybecauseof the informationitcontains.Thestudywillenablethem tounderstand theroleofthe CBNin ensuring safetyoftheirfundsin the banksandthiswillhelp in sustaining their confidencein the bankingindustry.

 

Finallythestudywillbeusefultostudentswhowillcarryoutrelatedstudies;it will serve as arelevant material tothem.

 

1.6  SCOPEOFTHESTUDY

 

 

 

ThestudyfocusesontheimportanceoftheCBNsupervision andcontrolonthe performanceofthe commercialbanks.Thus,itsscopecoverstheneedfor supervisionandcontrolaswellasgoals,techniquesandeffectsofthese exercises on commercial banksoperations andperformances

 

1.7 LIMITATIONSOFTHESTUDY.

 

 

 

1. 1. ThedifficultyofobtainingprimaryinformationfromCBNandsome commercialbankstafftheir uncooperativeattitudemayadversely affect primary data collec
2. 2. Inadequate financewhich maypose arestriction with regardstotravelling outsideEnugutoincludemanymorecommercialbanksfor anextensive stud Thereforethestudy may be restrictedto Enugumetropolis only.
3. 3. Thedifficultyofcombiningtheresearchwith otheracademicworksinthe schoo

 

1.8 DEFINITIONOFTERM

 

 

 

1. 1. BOFIA- Bankandother financial institutionact

 

 

2. 2. NDIC-National deposit insurance corpora

 

 

3. 3. AMCON- Assetmanagement corporationof Nigeria

 

 

4. 4. CBN- Central bankof Nigeri

 

 

5. 5. NSE-Nigerianstockexchange.