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Impact Of Prudential Guidelines On The Services And Performances Of Banks

(A Case Study Of First Bank Of Nigeria Plc Okpara Avenue Enugu)

5 Chapters
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64 Pages
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9,825 Words

Prudential guidelines, aimed at ensuring stability and safeguarding the interests of depositors and the broader financial system, have a substantial impact on the services and performances of banks. These guidelines typically dictate capital adequacy ratios, liquidity requirements, risk management protocols, and governance standards. While compliance with such regulations can impose additional costs and constraints on banks, they also serve to enhance the resilience and credibility of the financial sector. Adherence to prudential guidelines mitigates systemic risks, fosters trust among depositors and investors, and promotes sustainable growth by encouraging prudent lending practices. Moreover, the implementation of these guidelines often leads to improvements in operational efficiencies, risk management frameworks, and overall governance structures within banks, ultimately contributing to their long-term viability and competitiveness in the market.

ABSTRACT

The banking industry in Nigeria is still highly regulated despite the increasing wave de –regulatory measles is sneeping across all facts of the life .The reason for this regulatory tendencies, are however, not far fetched for in the history of banking and economic of many nation ,banks have been the most widely regulated of all business
The prudential of licensed banks could be seen as one myriads of regulatory measure of the apex financial authority (the central bank of Nigeria) on banks .
In this work the impact of this guidelines on this operation of bank had been looked into.
The introductory part of the research work examines the need of prudential guidelines on the services and performances of banks.
Chapter one dealt with the definition of problem banks are having which includes inadequate resources to net the N 256,had debts and poor management.
Chapter two reviewed some literature that has direct bearing on the topic, with a view of giving the work a proper background.
This literature to the topic in question is made up of a review of different text books, journals, magazines and newspapers publications here various authors have discuses the framework or better understanding of the study.
Chapter three covers he research design and methodology, indicating primary and second data sources and the instruments used and sample size determination where covered here.
A number of hypothesis were also propounded by the researcher which were tested in chapter four of the work using data collected from first bank of Nigeria Okpara Avenue Enugu. This was followed by answering the research questions.
The study was concluded with chapter five, where the research findings were summarized.
Based on the findings, conclusions were drawn from the study and recommendation made towards the removal of the distress stigma in the banking industry.
Impact of prudential guidelines on the services and performances of Banks.
A case study of first Bank of Nigeria Limited Okpara Avenue Enugu.

CHAPTER ONE

INTRODUCTION
BACKGROUND OF THE STUDY
The Nigerian banking system has undergone remarkable changes over the years, in terms of the number of institutions, ownership structure , as well as depth and breadth of operations. These changes have been influenced largely by challenges posed by deregulation of the financial sector, globalization of operations, technological innovation and adoption of supervision and prudential requirements that confirm to international standards.
As at the end of June, 2004, Chime (2004:8) stated that there were 89 deposit money banks operating in the country, composing institutions of various sizes and degrees of soundness. Most banks in Nigeria have capitalization of less than $10million. Even the largest bank in Nigeria has a capital base of about Us $240million compared to Us$526milion for the smallest bank in Malaysia. Apart from the smallness, they have heavy fixed cost and operating expenses leading to high average cost for the industry. This puts undue pressure on banks to engage in sharp practices, increase cost of intermediation, gap between deposit and lending rates and separate investment in software and hardware. The prevailing situation in the industry is more or less a caricature of the system. Chime (2004:9) stated that Nigerians hold more than N4006 as currency outside of the banking system. This he opined that it ie due to large informal economy, perverse incentive to look mostly to high net-worth agents for deposits, government agencies, blue clip companies and rich individuals. According to him, a further analysis of the returns of the marginal and unsound banks reveal that they account for 19.290 of total assets of the banking system, 17.290 of total deposit liability while the industry non performing assets account for 19.5% . These ratios except that for deposits, were below the bigger point for declaring the system as distressed, they are nevertheless of major supervisory concern. Besides the significant dependence of many Nigerian banks on government deposits, with the three tiers of government and parastatals accounting for over 20% of total deposit liabilities of deposit money banking was another concern. The structures of banks promoted tendencies towards a rather strictly behaviour of deposit rates, particularly at the retail level, such that while banks’ lending rates remain high and positive in real terms, most deposit rates especially those on savings, are law and negative.
The summary from the foregoing is that the Nigerian banking system faces enormous challenges just like other sectors of the economy.
Consequently, the federal Government introduced the National Economic Empowerment and Development Strategy (NEEDS) with its state and Local Government affiliates. N
With its state and local government affiliates. Needs is Nigerian home-grown poverty reduction strategy (Chime 2004:2) It is a medium term strategy (2003-2007), but which derives from the countries long-term goals of poverty reduction, wealth creation, employment generation and value re-orientation. The Macro-economic framework of Needs include: Reforming Government and institution (public sector reforms, privatization/Liberalization, governance, transparency and anti-corruption, service delivery). It is under this reform that
Banking sector reform was entrenched. The reform code accordingly was named: PROJECT EAGLES, at the apex bank level (CBN)
Consequently on July 06 2004, the Central Bank of Nigeria Governor announced the Minimum capital base for all banks to N25billion. This saw First Bank of Nigeria PLC merging with MBC International Banks to meet the target.
It was in a bid to assess the effect of this prudential guideline on the service and performance of bank that this work is being carried out with 1st bank of Nigeria PLC Okpara Avenue Enugu as a case study.

1.2 STATEMENT OF THE PROBLEM
With the distress signal apparent at the doors of some banks, there has been dwindling confidence in the banking system. This is further aggravated by the high interest rates charged by banks, emphasis on short term lending to the neglect of manufacturing, agriculture and other capital intensive projects.
The above science required drastic action if the banking system was o properly plays its role as a catalyst to development. The Governor of the Central Bank of Nigeria Prof. Charles Soludo remarked recently that it become necessary to take pre-emptive measures to avoid the cycle of boom and bust” adding that, “it now time to set up a structure that created a strong be relative to the kind of economy we are operating where banks become channels to do proper intermediation.
Oshiomole (2004:3) criticized some of the reform polices especially monetization. Also in Chime (2004:5) noted that they advised that all discussions be initiated to clear the grey areas and agree on modalities for the implementation.
The public sector especially within the National Assembly argue as to:
The success and effects of the prudential and operating guideline.
The efficiency and effectiveness of the existing operating system and whether it will be suitable for the policy.
In some quarters, it is said that there are inadequate resources to meet the N256 capitalization compared to cost of fund generation.
The general public through the NLC (2004:3) say that the likely sufficing problems of the policy will be much when the available resources for implementation are viewed.
Commercial Banks, insurance companies and discount houses cry out because they opined that it will have tremendous effect on the quantum of resources accruing to them.
Workers also argue that it will have serious negative effect on then and is likely to be over-run by problems just like other previous macro-economic polices.
As such, this work is aimed at reviewing the issues raised to find at the workability and effect of the banking guidelines and returns.

1.3 OBJECTIVE OF RESEARCH
The issues raised by the public sector participate above suspected to be from the micro economic and macro economic policies and guidelines are what this work is aimed at redressing with a view as to ascertain the current level of effect of the new guidelines as well as
(1) To examine the extent to which poor inadequate capital; effects the ethics of prudential guidelines in internal accounting practices in first bank of Nigeria Enugu.
(2) To find it the extent to which bad debtor occurs in the bank
(3) To ascertain the extent to which poor management quality affects the application of prudential guidelines in First Bank Enugu.
(4) To find at the extent to which inhabitant policy environment affects banking operations in first bank plc Enugu.

1.4 DELIMINATION OF STUDY
This work titled “Impact of prudential guidelines on the services and performance of banks “a case of FBN Plc Okpara Avenue Enugu was carried out at FBN Plc Okpara Avenue, Enugu.
This is because it is the “East bank operations Headquarters” that oversees all transaction in eastern part of the consolidated firm of two Banks i.e. MDC International Bank and First Bank of Nigeria.

1.5 RESEARCH QUESTIONS
For an in-depth study of the impact of prudential guidelines on the services and performance of Banks, a case of FBN, the following research questions were formulated.
(1) How does inadequate capital effect the ethnics of the prudential guidelines on the operations of the banks.
(2) To what extent has a bad debt occur in first bank of Nigeria Plc Okpara Avenue?
(3) What are the extents to which poor management qualities effect the applications of the strict prudential guidelines in first bank Okpara Avenue.
(4) To what extent has the inhibitive policy environment affected the banking operation of FBN Plc, Okpara Avenue.

1.6 HYPOTHESIS FORMULATION
This research is geared towards testing hypothesis below:-
Ho1: There is no significant difference <P<0.5 between the mean perception of the effect oif inadequate capital in banks on the operation of bank.
Ho2: There is no significant difference <P> 0.05 between the mean perception of the effect of bad debts on the overall operations of first bank of Nigeria Plc, Okpara Avenue.
HO3: There is no significant difference <P.> 0.05 between the mean envisaged effect of poor management quality as it concerns the operation of banks.
Ho4: There is no significant difference <P>0.05 between the mean perception of effect of inhibition policy environments an operation of FBN, Okpara Avenue Enugu.

1.7 SIGNIFICANCE OF THE STUDY
The is of significance in that it will reveal the inherent problems with the Nigerian economy in terms of prudential practices within the banking sectors.
The Nigerian banking system is faced with enormous challenges distress and ultimate closure due to violation of existing prudential guidelines or inability of some banks to fully cope up with such guidelines. As such this work with x-ray some of the internet problems, efficiency or inefficiency with the organizational banking sector. Besides the likely effects of the new banking prudential guidelines will be see at the end of the work.

1.8 DEFINITION OF TERMS
(a) Capital Base: Paid-up capital and reserves unimpaired by losses.
(b) Reserves: all reserves including general reserves / but excluding asset revaluation surpluses
(c) Paid-up capital – ordering shares plus non – redeemable preference shares
(d) Consolidation: A proposal to make banks make up deficiencies in the authorized capital of banks
(e) NDIC: Nigeria deposit insurance corporation responsible to work with the CBN to ensure probability in the international sector
(f) NEEDS: National economic empowerment and development strategy. This is a project under which the current reform on banks was entrenched.
(g) PROJECT EAGLES: A programme of consolidation introduced as a consolidating slogan at the Apex Bank (CBN)
(h) IIL: Investors international (London Limited an investing company FBN for a telecom deal in the country.

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Impact Of Prudential Guidelines On The Services And Performances Of Banks:

Prudential guidelines are regulations and standards set by regulatory authorities to ensure the stability and soundness of the financial system, particularly the banking sector. These guidelines are designed to mitigate risks and prevent financial crises by imposing certain requirements and restrictions on banks’ operations. The impact of prudential guidelines on the services and performances of banks can be both positive and challenging. Here’s an overview of their effects:

Positive Impacts:

  1. Financial Stability: Prudential guidelines are primarily aimed at enhancing the stability of the financial system. By imposing capital adequacy requirements and other risk management practices, banks are better prepared to withstand economic downturns and financial shocks.
  2. Risk Management: These guidelines encourage banks to adopt robust risk management practices. Banks are required to assess, monitor, and manage various types of risks, such as credit risk, market risk, liquidity risk, and operational risk. This leads to a more disciplined approach to banking operations.
  3. Investor Confidence: Stricter regulatory standards can enhance investor confidence in the banking system. When customers and investors trust that banks are following prudential guidelines, they are more likely to deposit funds and invest in these institutions.
  4. Customer Protection: Many prudential guidelines are focused on protecting customers’ interests. For instance, guidelines related to transparency, customer data protection, and fair lending practices ensure that customers are treated fairly and their rights are safeguarded.
  5. Innovation with Safety: While guidelines impose certain restrictions, they also encourage banks to innovate within a safe framework. Banks must find ways to remain competitive while adhering to regulatory standards, which can lead to the development of new and safer financial products and services.

Challenges:

  1. Compliance Costs: Implementing prudential guidelines can be costly for banks. They may need to invest in new technology, staff training, and systems to ensure compliance, which can impact their profitability, especially for smaller banks.
  2. Reduced Profitability: Some guidelines, such as capital adequacy requirements, might restrict the amount of leverage banks can use to generate profits. This can potentially lead to lower returns on equity and reduced profitability.
  3. Restrictions on Activities: Prudential guidelines can limit certain high-risk activities that banks engage in, such as proprietary trading. While this contributes to stability, it might reduce the revenue streams available to banks.
  4. Innovation Constraints: While guidelines encourage innovation, they also pose constraints. Banks might be hesitant to explore new technologies and business models due to concerns about regulatory compliance and potential penalties.
  5. One-Size-Fits-All Approach: Prudential guidelines are often applied uniformly across the banking industry. However, what works for one bank might not work for another, given differences in size, business model, and risk profile. This can create challenges for some banks in meeting the guidelines effectively.

In conclusion, prudential guidelines have a significant impact on the services and performances of banks. They contribute to financial stability, risk management, and customer protection, but they also come with challenges related to compliance costs, profitability, and innovation. Striking the right balance between regulation and allowing banks to operate competitively is crucial for a healthy and stable financial system.