Role And Importance Of Central Bank In The Prevention Of Bank Failure
In the intricate financial landscape, central banks play a critical role in safeguarding the stability of the banking sector, particularly in averting instances of bank failure. As the primary regulatory authority overseeing monetary policy and financial institutions, central banks employ a range of measures to mitigate the risk of bank failures and maintain confidence in the banking system. Through stringent oversight, including the establishment and enforcement of prudential regulations, such as capital adequacy requirements and liquidity standards, central banks aim to enhance the resilience of banks against potential shocks and crises. Additionally, central banks act as lenders of last resort, providing emergency liquidity assistance to troubled banks to prevent systemic disruptions and contagion effects. Moreover, central banks engage in continuous monitoring and risk assessment of the banking sector, employing sophisticated tools and analyses to identify emerging vulnerabilities and take preemptive actions. By fostering transparency and accountability in the banking industry and collaborating with other regulatory bodies, central banks contribute significantly to bolstering financial stability and mitigating the adverse effects of bank failures on the broader economy.
This study, which is, captioned the Role and Importance of the Central Bank in the Prevention of Bank Failure in Nigeria has revealed the types, causes effects recognition and prevention of bank failure in Nigeria.
Some of the findings indicated that banking failure was mainly as a result of poor portfolio management and inadequate capital basis, a majority of the population interviewed acknowledge the fact that bank failure an be prevented. The study also pointed that the Central Bank of Nigeria has not relented in it effort in this light against distress within the Nigeria financial system, illustrating the role banks have to play in the growth of the economy for the well being of the country.
Some other causes were identified which were discussed in details encompassing all other causes not mentioned as separate causes of bank failure.
These major causes include, macro-economic instability, poor portfolio management, fraudulent activities by directors, the competent and unqualified staff, last but not the least, inadequate capital base.
The study concludes its findings by commending the that the Central bank of Nigeria should ensure that banks adhere strictly to the prudential guidelines.
The tribunals that have been set-up for the purpose of debt recovery should not relevant in their effort. Workshop should be conducted from time to time to discuss changing economic issues that affect the banking industry either positively or negatively so the bank failure will be cu-tailed to a large extent without causing havoc to the nations economy.
TITLE PAGE
APPROVAL PAGE
DEDICATION
ACKNOWLEDGEMENT
ABSTRACT
TABLE OF CONTENT
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
1.2 STATEMENT OF PROBLEM
1.3 OBJECTIVE OF THE STUDY
1.4 HYPOTHESIS
1.5 SCOPE AND LIMITATION OF THE STUDY
1.6 SIGNIFICANCE OF THE STUDY
1.7 DEFINITION OF TERMS
CHAPTER TWO
2.1 WHAT IS BANK FAILURE
2.2 TYPES OF BANK FAILURE
2.3 CAUSES OF BANK FAILURE
2.4 EFFECTS OF BANK FAILURE
2.5 HOW TO RECOGNISE A DISTRESSED BANK
2.6 PREVENTION OF BANK FAILURE
2.7 THE ROLE AND IMPORTANCE OF THE CENTRAL BANK OF NIGERIA IN THE PREVENTION OF BANK FAILURE
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 INTRODUCTION
3.2 POPULATION OF THE STUDY
3.3 SAMPLE TECHNIQUE
3.4 RESEARCH INSTRUMENT
3.5 VALIDITY AND RELIABILITY OF DATA
3.6 METHOD OF DATA ANALYSIS
CHAPTER FOUR
PRESENTATION AND ANALYSIS OF DATA
4.1 INTRODUCTION
4.2 PRESENTATION OF DATA
4.3 TESTING OF HYPOTHESES
CHAPTER FIVE
FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 FINDINGS
5.2 CONCLUSION
5.3 RECOMMENDATION
BIBLIOGRAPHY
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The history of bank failure in Nigeria can be traced back to the early thirty’s when the industrial and Commercial Bank Limited which was established in 1929 and went into liquidation within a year it stored operation as a result of its generosity and liberty I extension of credit facilities especially to “managing directors” Ugwuanyi Willy (1977) pg. 33.
A series of failure followed after the first in degree bank failed in 1930. These failure were attributed tot he poor banking habit of both customers and bank staff who operated in an environment that was not guided by any appropriate authority at the time. With the advent of the Central Bank of Nigeria (CBN) in 1958 and it commencement of duty in 1958, there has been the restoration of sanity within the banking industry if not for some economic distraction, which rocked the industry for some times in recent years.
This has been a major concern to the regulatory authorities; this is due to the fact that the banks play a very important role in the economic advancement of nay nation that knows her worth. The absence of these duties or some of them has led to set-backs that have being experienced in the Nigeria Economy. An example of this includes efficient mobilization of savings from funds surplus units to funds investment to take place, which lend to the overall economic advancement in Nigeria.
Bank Failure is not peculiar to the Nigeria economy alone, rather, what I considered is the degree at which it occurs and its effects on the economy.
Based on the about problem, the Apex Bank, which is the Central Bank of Nigeria has intensified its efforts to control the failures of banks and has proved it through “the establishment of the Nigeria Deposit Insurance Corporation (NDIC) in 1988 by DECREE NO. 22” of that year. Ugwuanyi “its is an independent and automations institution”. This is to add weight to the existing supervisory and control capability of the monetary authorities to insure in the country, provide financial and technical assistance to them and contribute tot he guest per safe and sound banking environment in Nigeria Ugwuanyi.
To emphasis on the importance of the Nigeria Deposit Insurance Corporation, Emekakwue has the following to say about the importance of NDIC as it relates to the establishment of the Federal Deposit Insurance Corporation (FDIC) in the United State of America. “As a result of the banking crisis of 1933 where by more than seven thousand banks crashed with three thousand banks crashing in two months February to March 1933, the Federal Deposit Insurance Corporation was established”.
Despite all these measures, to prevent bank failure, there have been causes of repeated failure in the Nigerian Banking Industry.
The question now is, with all these measures in check, could it be the fault of the bank examiners or that of the banks themselves can the failure be attributed to be ups and down in the economy of some other factors beyond the control of the supervisory and regulatory authorities and that of banks directors.
This research seeks to find answers to these question and many work that will be discussed in the proceeding into what will curtail these failure from having advertise effect on the nation economy.
1.2 STATEMENT OF THE PROBLEM
The gesture of this study repots importance of banking in our national development ad the question that could possible come to mind are:
i. What are the function of these banking industries to the economy?
ii. What are really their caused and effect on the economy?
iii. Will the death of a greater number of distressed banks have serious implication on the Nigeria economy?
iv. Will the economic activities be disrupted as a result of distress in the banking sectors?
v. Is there any way wherein the play-out of distress in banking can be arrested?
These are some of the question to which the researcher won’t to find answers to.
1.3 OBJECTIVE OF THE STUDY
The main objective of the study is to verify or ascertain if actually the crash of banks of failure in banks has affected the stable economic growth in the economy. The objectives are:
i. To examine the causes of bank failure
ii. To examine the affects of bank failure, how they can be recognized and how they can be prevented
iii. To explain the role and importance of Central Bank of Nigeria in the prevention of bank failure
iv. To make recommendation on the best ways to prevent bank failure
1.4 HYPOTHESIS
1. Ho: The CBN does not play any roles in preventing bank
failure in Nigeria.
Hi: The CBN play role in preventing bank failure in Nigeria
2. Ho: The CBN does not monitor the affairs of banks in
Nigeria
Hi: The CBN monitors the affairs of banks in Nigeria
3. Ho: The CBN does not licence other banks in Nigeria
Hi: The CBN licence other banks in Nigeria.
1.5 SCOPE AND LIMITATION OF THE STUDY
This research work is aimed at explaining the role and in the prevention of bank failure in Nigeria. To achieve this aim, it will only cover recent causes of bank failure with a brief flash back of the banking environment shortly before the establishment of the banking ordinance of 1952 and before the establishment of Central Bank of Nigeria in 1958. An introduction will be made on a new cause of bank failure, which if not properly handled could bring distressed.
The research covers the effect of this failure on the economy, how the symptoms could be recognized, and how they can be prevented.
A population size of one hundred and fifty respondents was employed for the research question asked.
As a result of transportation cost, I hunted for my research the following areas. Enugu and Asaba.
Obtaining information was not easy such respondents complained of time to fill the questionnaires, which prolonged the research period and transportation cost for visitation of libraries art not exempted including cost of making copies of relevant information.
1.6 SIGNIFICANCE OF THE STUDY
These are as follows:
i. It is for the fulfillment of academic requirement for the award of degree.
ii. This study will serve as a source of information to future researchers.
iii. The study will also make the public to know more about the working operation of banks and possible reason for distress in the industry
iv. It will be great importance to both financial and indeed the entire economy that is down turn, facing serious problem of credibility and survival.
1.7 DEFINITION OF TERMS
CENTRAL BANK OF NIGERIA (CBN)
This is the apex bank within the Nigeria financial system, which is responsible for the regulation named supervision of the activities of the banks and other financial institutions operating within the system. It was established by the Central Bank of Nigeria ordinance of 17th March, 1958. It commenced operation on the 1st of July, 1959.
NIGERIA DEPOSIT INSURANCE CORPORATION (NBIC)
Established in 1988 by Decree NO. 22 to add weight to the existing supervisory and control capacities of the monetary authorities to insure the deposit liabilities of licensed banks in the country, provide financial and technical assistance to them.
BANKING SYSTEM
A sub-see of the Nigeria financial system, which comprises of all banks operating in Nigeria’s money and capital market.
This includes all the commercial and merchant banks.
NON – BANKING INSTITUTION (NBFI)
They are those institution that art not banks but engaged in financial intermediation within the financial system.
These include, insurance companies, financial companies, discount houses and so on.
SHARE PROJECT MATERIALS ON:
Role And Importance Of Central Bank In The Prevention Of Bank Failure:
Central banks play a critical role in preventing bank failures and maintaining financial stability within a country’s economy. Their importance in this regard cannot be overstated, as bank failures can have severe repercussions on the broader economy, including financial crises and economic downturns. Here are some key roles and the importance of central banks in the prevention of bank failure:
- Regulation and Supervision: Central banks often have the authority to regulate and supervise financial institutions, including banks. They establish and enforce prudential regulations and guidelines that banks must adhere to, such as capital adequacy requirements, risk management standards, and reporting obligations. By ensuring that banks operate within these guidelines, central banks reduce the likelihood of excessive risk-taking and financial mismanagement that can lead to bank failures.
- Lender of Last Resort: Central banks serve as lenders of last resort during times of financial distress. In situations where banks face liquidity problems and cannot meet their short-term obligations, central banks can provide emergency loans to stabilize the banking system. This prevents a liquidity crisis from turning into a solvency crisis and helps avert bank failures.
- Monetary Policy: Central banks control the money supply and interest rates through their monetary policy tools. Effective monetary policy can influence the overall health of the banking sector by managing inflation and economic growth. A well-executed monetary policy can contribute to a stable economic environment, reducing the likelihood of bank failures caused by economic downturns.
- Deposit Insurance: Many central banks oversee or work in conjunction with agencies that provide deposit insurance. This ensures that a portion of customer deposits in banks is guaranteed by the government, reducing the risk of bank runs and depositor panic. This, in turn, helps prevent bank failures caused by sudden, massive withdrawals.
- Systemic Risk Oversight: Central banks monitor and assess systemic risks in the financial system. They analyze interconnections between financial institutions and markets to identify potential sources of systemic instability. By doing so, they can take proactive measures to mitigate these risks and prevent cascading bank failures.
- Crisis Management: Central banks play a pivotal role in managing financial crises. In the event of a crisis, they can coordinate with other government agencies, such as finance ministries and regulatory bodies, to implement measures aimed at stabilizing the banking sector. This might involve recapitalizing troubled banks, facilitating mergers or acquisitions, or taking control of failing institutions.
- Market Surveillance: Central banks closely monitor financial markets to detect signs of distress or misconduct. They can take regulatory actions or impose penalties to deter risky behavior, market manipulation, or fraudulent activities that could lead to bank failures.
- Research and Analysis: Central banks conduct economic research and analysis to stay informed about emerging risks and vulnerabilities in the financial system. This information helps them make informed policy decisions and take preventive actions to address potential threats to the stability of the banking sector.
In summary, central banks are the linchpin of financial stability and play a multifaceted role in preventing bank failures. They establish regulatory frameworks, act as lenders of last resort, manage monetary policy, oversee deposit insurance, assess systemic risks, manage crises, monitor markets, and conduct research—all with the aim of ensuring the health and stability of the banking system and, by extension, the broader economy. Their proactive and reactive measures are essential for preventing and mitigating the adverse consequences of bank failures.