Evaluation Of Nigeria Deposit Insurance Corporation (NDIC)s Role In Distress Management Of Nigerian Banks

This study is aimed at evaluating the role of NDIC in the management of distressed banks in Nigeria. The study focuses on the achievements of NDIC, its impact on the Nigerian banking system and how effective the NDIC has been as a supervisory authority. This study uses primary data obtained through questionnaires administered to the employees of the Nigerian Deposit Insurance Corporation. 100 employees were selected as samples while their opinions on the role of NDIC in the management of distressed banks formed the basis for the outcome of this study. The findings of this study reveal that NDIC plays a dominant role in the management of distressed banks in Nigeria. Premised on this outcome, the study suggests that NDIC should be given more autonomy to be able to oversee the affairs of distressed banks.

Introduction

1.1 Background of the Study

The Banking industry is so strategic to the economy that virtually everybody is a stakeholder. Banks act as lubricants of the economy and the custodians of the payment system. They therefore impact on every sector of the economy. Banks with high capital base perform their traditional role of banking by financing capital projects that is in the oil and gas sector. Banks help in mobilizing savings through a network of branches. By mobilizing savings, the bank channels them into investments. Thus, they help in capital formation. Umaru (2010) opined, one of the primary core mandates of NDIC has to do with supervision and regulation of the licensed banks and other licensed deposit taking institutions.

Other roles performed by the banks in the economy include financing trade, agriculture, industry, consumer activities and they help in the implementation of monetary policies. Despite the fact that there are so many sectors in the economy that depend on banking, banks in Nigeria are yet to realize their full potentials. Likewise the banking sector has a long way to go in playing its expected roles in development and growth of the economy.

Despite the fact that the banking industry recorded a strong second fastest growing sector in the economy, the banking industry has not been performing their traditional functions. A banking system that is in crisis cannot therefore, carry out its intermediation role effectively as new lending comes to a halt, which is known as credit crunch. Two mechanisms can act; low capital adequacy ratios of banks and shortfall of liquidity. Corporate governance and poor risk management have been regarded to be the major causes of the banking crisis in Nigeria. Umaru (2010)

Distress connotes a state of being in danger or difficulty and in need of help. It is a state of "inability" or "weakness" which prevents the achievement of set goals and aspirations. Distress can also be associated with a cessation of independent operations or continuance only by virtue of financial assistance from the banking system"s safety net such as the supervisory regulatory agency or a deposit insurer. CBN / NDIC (1995) describes a distressed financial institution as "one with severe financial, operational and managerial weaknesses which have rendered it difficult for the institution to meet its obligations to its customers, owners when due.

According to Ademu (1997), the history of financial distress and bank failure in Nigeria date back to the late 1940 and early 1950s otherwise known as the free-bank era. The current experience which became more manifest since 1993 has the resemblance of the earlier one in terms of causative factors. However, each occurred in different institutional and regulatory environment. There absent was a pool of trained and experienced personnel in economic and financial matters.

However in May 1989, distress in the banking system first came to existence after the withdrawal of treasury funds forms the licensed banks e.g. National bank of Nigeria. By 1993, distress has become widespread in the Nigerian banking sector leading to the closure of four banks in early 1994, Following the grave distressed financial condition of these banks, the merchant bank limited, Alpha merchant bank limited and united commercial bank limited and their licensed revoked by the CBN.

The number of banks officially classified as problems banks especially in recent times is on the increase and have continued to be a serious concern to the government and the regulatory authorities. By December1992, the number rose to fifteen (15), and up to thirty-eight (38) as at December 1993 and fifty five (55%) as at 31st December 1994, As at December, 1995 out of about 120 banks, 60 were considered distressed, 5 had been liquidated, 5 were under interim management boards and 17 had been taken over by the CBN.

As a result of the bank failures, the Nigeria Deposit Insurance Corporation (NDIC) was formed by the Nigeria deposit Insurance Corporation decree 22 of 1988, established by the Government to protect depositors against the loss of their insured deposits placed with member institutions in the event that a member institution is unable to meet its obligations to depositors. Deposit insurance ensures that the depositor does not lose all his money in the event of a bank failure. It also engenders public confidence in, and promotes the stability of, the banking system by assuring savers of the safety of their funds. Deposit insurance makes a bank failure an isolated event; hence it eliminates the danger that unfounded rumors will start a contagious bank run.

Against the above background, there is therefore, the need to evaluate the role of NDIC in managing distressed banks.

1.2 Statement of Research Problem

The history of bank failure in Nigeria dates back to 1930 when the Industrial and Commercial Bank failed. Thereafter, the Nigerian Mercantile Bank failed in 1936 while the Nigerian Penny Bank failed in 1946 (Folusho, 1985). It is instructive to note that 21 out of the 25 indigenous banks that were established collapsed in quick succession due to bad management, inadequate capital, inexperienced personnel, excessive branch expansion, and lack of banking regulation and unfair competition from foreign banks (Ajayi and Ojo 1981). Others included outright fraud, lack of acceptable prudential guideline and lack of right banking orientation among the operators. Most of the bank failures were resolved mainly through self-liquidation. These bank failures led to a significant loss to depositors, loss of confidence by the public in the Nigerian banking industry, loss of confidence also in the ability of Nigerians to manage banking business. The regulatory authorities were overstretched and distress set in, in the banking industry. Due to the banking failures and distresses, public confidence in the banking sector waned and governments concern for the protection of public deposit, the restoration of confidence in the banking sector and the financial system generally prompted government"s establishment of the Nigeria Deposit Insurance Corporation (NDIC). In what ways has the NDIC justified its existence- in restoring, enhancing public confidence in the banking sector? This is the crux of this research work.

1.3 Purpose of Study

In the light of the above, the purpose of the study are:

To evaluate the role of NDIC in distress management of Nigerian banks.

To evaluate the effectiveness of NDIC"s offsite and onsite examinations.

To examine the achievement of NDIC generally.

To evaluate the impact of the corporation on the Nigerian banking system.

1.4 Research Questions

The pertinent questions for this research are:

To what extent has the NDIC played its role in distress management of Nigerian banks?

To what extent has the NDIC been effective as a supervisory authority?

To what extent is the NDIC living up to expectation in preventing distress?

In what ways has the deposit insurance scheme impacted on Nigerian commercial banks?

1.5 Statement of Hypothesis

Hypothesis is a conjectural statement about relationships that need to be tested and subsequently accepted or rejected. Taking this definition into consideration, the following hypothesis will be formulated and later tested to ascertain their validity or otherwise.

The following are the hypotheses for this work:

Hâ‚€: The NDIC has not played any role in the management of distressed banks in Nigeria.
H₁: The NDIC has played a role in the management of distressed banks in Nigeria.

Hâ‚€: The NDIC has not performed any effective role in the management of distressed banks in Nigeria.
H₁: The NDIC has performed an effective role in the management of distressed banks in Nigeria.

1.6 Significance of Study

In the wake of bank failures, the economy suffered severe stress. Many depositors lost their hard-earned money; many suffered starvation because their breadwinners lost their jobs in the process. In a number of cases, depositors who lost their life savings die because of apparent hopelessness. People from different spheres of life have commented on this seemingly topical issue as it touches the very fabric of the national economic life. This study is will be embarked upon as a way of further investigating the issue with a view of evaluating how effective it has been in rescuing and managing banks when they are in distress.

The research will be of benefit to practicing bankers, customers, bank management, monetary authorities, students of business administration and economics and other individuals seeking to know more on the NDIC"s operation, activities, and role in achieving stability in the banking sector. It will also be a reference point to other further researchers.

1.7 Scope of the Study

This study focuses on the operations, role and evaluation of the NDIC in the management of distressed banks. The study evaluates the effectiveness of the deposit insurance by appraising the performance of the NDIC in terms of deposit guarantee, bank supervision, distress resolution and bank liquidation. Crucial issues relating to the deposit insurance system in Nigeria are raised with major challenges identified, benefits and costs.

1.8 Limitations of the Study

Because of the order of the nature of this research, limitations are bound to arise. The lack of universal approach to management problems; constrains, such as inadequate financial resources, possible low respondent to the questionnaire, limited literature (since much cannot be gathered within the short period available for the research study) cost of transportation, inadequate time for travelling and combining normal academic study, could all act as limitation to this study.

As a result of the factors listed above the sensitive nature of this topic makes it quite difficult to obtain some vital information from banks as some of them are not competent to speak on such matters. Another constraint is that known banks currently under liquidation refuse to admit they are in distress so a lot of information is kept. The most telling constraint however will be the time as the time needed to effectively carry out this research is limited.

1.9 Definition of Terms.

CBN

Central Bank of Nigeria. It was established by the CBN Act of 1958. It is the apex regulatory and supervisory body of all financial institutions.

NDIC

Nigeria Deposit Insurance Corporation. Its main responsibility is to administer the deposit insurance scheme in Nigeria, with a view to protecting depositors and contributing to financial system stability in Nigeria.

Management

The group of people responsible for controlling and organizing a company or organization, especially senior executives.

Distressed Banks

These are banks that are illiquid, unprofitable and have large non-performing assets. At the extreme, they are insolvent, a situation where a bank"s liabilities exceed its assets. (Oke, 2008)

Bank

This is a federally regulated financial institution that, in general, engages in the business of taking deposits, lending, and providing of other financial services. (Oke, 2008)

Banking

In general terms, banking is the activity of accepting and safeguarding money owned by other individuals and entities, and then lending out this money in order to earn profit. (Oke, 2008).

Savings

This is forgone consumption. It is the difference between current income and current consumption. (Oke, 2008)

Stakeholder

Stakeholder refers to all parties that have an interest, financial or otherwise, in a company. That is, shareholders, creditors, bondholders, employees, customers, management, the community, and the government. (Oke, 2008)

Financing

It is a means of obtaining or providing funding for a transaction or undertaking; to back; to support.

Deposit ­

This is the amount of money placed with a bank for safekeeping, convenience, and/or to earn. (Oke, 2008)

Deposit insurance

Deposit insurance is a system established to protect depositors against the loss of their deposits in the event of an insured institution"s inability to meet its obligations to depositors. (NDIC DIS glossary, 2012)

Commercial Bank

This is a financial institution that provides a wide range of banking services, including accepting deposits and extending loans to individuals and businesses. (Oke, 2008)

Bank Liquidation

This is the process by which a bank is brought to an end, and the assets and property of the bank are redistributed.

Summary, Conclusion and Recommendations

5.1 Summary

This research work has attempted to assess the role of NDIC in the distress management of Nigerian banks. The study employs primary data and questionnaires were administered to the employees of NDIC in order to obtain their opinions on the subject matter. As a matter of fact, this work reviews different literatures on the role of NDIC in distress management in Nigeria banks. The period between 1947 and 1952 witnessed rapid growth of indigenous banks in Nigeria. This increase was followed also by a high rate of failures of the indigenous banks. By 1954, twenty-one (21) out of the twenty-five (25) remaining indigenous banks operating in Nigeria as at that time had closed doors. The failures could be traced largely to the following reasons summarized below, as mismanagement of the banks, lack of adequate capital and inexperienced personnel. And most especially, there was no central bank (Apex bank) as at that time to monitor the operations of the banks. There were no adequate regulations and/or legislations for the banking industry until the promulgation of the 1952 banking ordinance, which came into force in 1954. The experience of bank failure was a sad affair for bank officials, depositors and regulations.

After the establishment of the CBN in 1959, the federal government had since the mid-1960s ensured through direct support of banks that the Nigerian banking sector was no longer exposed to the hazard of bank failures, and as a result to achieving these purposes, CBN pursued certain methods to prevent bank failures. These include the requirement that every licensed bank should create and maintain a yearly profit before dividend payments, stipulation of minimum liquidity ratio and capital requirement as well as the rendition of statutory returns to the CBN.

Despite all these measures to reduce the high rate of bank failure in Nigeria, some banks were still distressed and it was as a result of this that an urgent request for the establishment of the Nigerian Deposit Insurance Corporation was highly made. Such a scheme, it was envisaged, would serve as a means of protecting depositors and guarantee the settlement of insured amount when a deposit- taking financial institution is unable to meet its obligations to depositors, thereby sustaining public confidence as well as maintaining financial system stability.

Furthermore, it would be erroneous to say that, this research work has served mainly as a means of evaluating the role, which the establishment of the NDIC has played in the management of distressed banks in Nigeria. It could also be ascertained that the corporation was established due to some approaches, which they learnt from other countries, who in one time or the other also experienced bank failures and later stabilizes their banking sector through the Deposit Insurance Scheme (DIS). For example, the United States of America who adopted it in 1933 due a massive bank failure between 1930 and 1933.

The corporation has achieved a lot of its purposes duly, since the establishment of the corporation is to check the Nigerian banking sector and protect depositors by guaranteeing the settlement of insured amounts. These achievements could be attributed to its functions which can be summarized as, insuring all deposit liabilities of licensed banks and such other financial institutions operating in Nigeria, giving assistance in the interest of depositors, in case of imminent or actual financial difficulties of banks, particularly where suspension of payments is threatened and avoiding damage to public confidence in the banking system, guaranteeing of payment to depositors, and assisting monetary authorities in the formulation and implementation of banking practice and fair competition among banks in Nigeria.

5.2 Conclusion

This study has evaluated the role of the Nigerian Deposit Insurance Corporation in the management of bank distress. Relevant and pertinent literatures have been reviewed. The study shows the NDIC in the light of corporation capable of preventing bank failure and managing bank distress. The outcomes of the study are quite reliable premised on the fact that it is an objective independent research. In the same vein, the recommendations made in the study are practicable and can enhance the performance of the NDIC if religiously adhered to.

5.3 Recommendations

This study has examined the role of the NDIC in the management of distressed banks and presented NDIC as a key player in the success or failure of the financial sector. In the event of the outcomes of this study, the following recommendations are hereby suggested:

Firstly, the study reveals that NDIC helps banks" customers to secure a part of their deposits in the situation of bank failure. However, it is a public knowledge that the amounts refunded are too insignificant compared to the volume of the customers" deposits in the banks. It is therefore suggested that the premium paid by the banks should be increased. Increase in the premium paid by the banks will enable the NDIC to help bank customers to secure higher percentages of their deposits in the event of bank failure.

Secondly, the study reveals that NDIC is a key player in the financial sector. For effective operation and performance of its roles, it is hereby suggested that the NDIC should be given more autonomy, particularly from the influence of the Central Bank of Nigeria. The autonomy will ensure that the establishment is free from any form of political interference and power tussle. Without any gainsaying, political interference hampers efficiency of government corporations. However, with the autonomy, the NDIC will be more effective in monitoring the operations of the commercial banks and have firsthand information about the financial strength of each bank in Nigeria. In the light of poor performance, it will be easy for the corporation to wield its power of influence on the affected bank.

Also, the nucleus of this study is the role of NDIC in the management of distressed banks. Bank distress can be forestalled through close monitoring. The study hereby suggests that the NDIC should independently monitor the financial activities of the commercial banks at shorter intervals than before. Monitoring the financial operations of the commercial banks at short intervals will prevent catastrophic financial messes from surfacing. It will help the NDIC to nip in the bud any tendency of bank failure before it matures. Hence efforts should be geared towards preventions of bank failure, not cure. Once the monitoring leash is imposed on the bank, bank failure will be kept at bay. In the same vein, NDIC should endeavour to employ more supervisory staff. This is necessary because of the complexity of the job of supervision and the need to do it more regularly. If this is not done, billions of depositor"s funds could be lost in just a day or two due to inadequate supervision.

Notably, the Nigeria Deposit Insurance Corporation should engage in more vigorous awareness campaign. It should let all depositors and banks know and be fully aware of its roles, mission and objectives within the nation"s financial industry

Lastly, the study furthers found out that NDIC demands for premium payment from commercial banks in Nigeria. This act is impressive in the sense that it makes funds available to salvage a threatening financial situation in any bank. In the view of this, the premium received from the commercial banks should be divested into profitable investments. By so doing, the premium paid will not be idle and it will be able to yield more funds that can be used to salvage banks in the future.

Preliminary Page(s)

Title Page

Declaration

Approval

Dedication

Acknowledgement

Abstract

Table of Content

Chapter One

Introduction

1.1 Background of the Study

1.2 Statement of research problem

1.3 Purpose of the study

1.4 Research questions

1.5 Statement of hypothesis

1.6 Significance of study

1.7 Scope of the Study

1.8 Limitations of the Study

1.9 Definitions of Terms

Chapter Two

Literature Review

2.1 Introduction

2.1.1 Bank Regulation

2.1.2 Bank distress and its management

2.1.3 Symptoms of bank distress

2.2 Empirical Studies

2.2.1 Causes of Banking Sector Distress

2.2.2 The Nigerian Bank Distress Experience

2.3 Nigeria Deposit Insurance Corporation

2.3.1 Rationale for Establishing the NDIC

2.3.2 Functions of NDIC

2.3.3 NDIC"s Mandate

2.3.4 Challenges of NDIC

2.3.5 Future Prospects

2.4 The Role of NDIC in Distress Management of Nigerian Banks

2.5 Regulatory Agencies in Other Countries

2.6 Benefits and Costs of Deposit Insurance in Nigeria

Chapter Three

Research Methodology

3.1 Introduction

3.2 Restatement of Research Questions

3.3 Restatement of Research Hypothesis

3.4 Research Design

3.5 Population of the Study

3.6 Sample and Sampling Techniques

3.7 Procedure for Data Collection

3.8 Method of Data Analysis

3.9 Limitation of the Research Methodology

Chapter Four

Data Analysis and Presentation of Results

4.1 Introduction

4.2 Bio-Data Presentation of the Questionnaire

4.3 Presentation of the Analysis of Items in Section B of the Questionnaire

4.4 The Statistical Test for the Study

4.5 Discussion of Findings

Chapter Five

Summary, Recommendations and Conclusion

5.1 Summary

5.2 Conclusion

5.3 Recommendations

Bibliography

Appendix

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• Evaluation Of The Impact Of Commercial Bank Lending On Small Scale Industries In Nigeria
• Health Insurance – An Evaluation Of The Effect Of Health Maintenance Organisation In The Nigeria Economy
• Evaluation Of Merger And Acquisition On The Insurance Company On The Nigerian Economy

• Banking and Finance Project Topics and Materials