PROPOSAL ON IMPACT OFCENTRAL BANK OF NIGERIA PRUDENTIAL GUIDELINE ON THE FINANCIAL STATEMENT OF LICENSED BANKS

Abstract

The prudential guidelines for licensed banks which are based on global banking standards, imposed far-reaching requirements in the classification of risk assets and provision for bad and doubtful debts. Since its introduction in November 1990 the implementation of the guidelines has had a profound impact on the operations of banks. In this project, the researcher has succeeded in identifying the features of the prudential guidelines as well as its impact on published financial statements of commercial banks in Nigeria. Published financial statement of the banks for the period of 1990 that is, the inception of prudential guidelines were examined and with that of the period 1994-1998 the prudential guidelines period. Both primary and secondary sources of data were used in the this study

INTRODUCTION

All over the world, the banking industry plays a strategic role in every nation’s economic development. The Central Bank plays a dominant role in both the decision making and managerial process taking place in the economy while other banks do provide the essential financial services needed for effective operation of the economy. Bank failures do have destabilizing impact on the economy of any nation. It is precisely the consequence of these failures that led to the enactment of various legislations, rules and guidelines by relevant authorities to curb the excesses the banks with a view to ensuring that banks operating in Nigeria do so in accordance with the best practices of International banking professional standards. Banks are very important in the economic development of any nation. They constitute the central part on which other sectors of the economy revolve. They mobilize resources from the surplus sector of the economy and lend to the deficit sectors for investment purpose. Hence they are obliged to comply with certain regulatory requirement, which are generally not applicable to other –sectors of the economy. Loans and advances make up a major part of the lending. A careful look at the balance sheet of any commercial banks in Nigeria will reveal that loan and advances are by far the longest single items in the assets structure. Apparently, loan and advances make up the major sources of the operating income in banks. Because they are the most profitable assets for the employment of banks funds. Regardless of this fact, they could turn out to be bad and doubtful debts.

In November 7, 1990 the central bank of Nigeria issued a circular entitled “Prudential Guideline” for licensed banks. It stipulated minimum   requirements for assets classification and disclose, provision of interest accrual and off balance sheet engagement (CBN) circular No. BSD/20/23 Vol.1 /11. in particular, the guideline imposed new and somewhat far-reaching requirements in the classification of risk assets and provision for bad and doubtful debts. (Nwankwo G.O 1990)

The guidelines also emphasized the time recognition of determination in the quality of assets and the classification of credit facilities into “performing s” and “ non-performing” accounts.

Furthermore, in order to ensure the reliability of their published operating results, banks have been directed to cease charging accruing interest on non-performing credit facilities and interest and interest accrued on such accounts should not be recognized as income.

The guideline made it mandatory for all licensed banks to review their credit portfolio continuously, at least once in three months, with a view to recognizing our determination in their    quality according to Eghodaghe (1993) more so, prior to the issuance of the guidelines, it was common to find institutions declaring paper profit, which resulted from interest, accrued in non-performing facilities being taken into statement of financial position. The non-performing assets in financial institutions were not uniformly classified; neither was adequate provision made for such facilities. These practices not only made compassion between institutions difficult, they also ended to hide inefficiencies and distort performance. Banking malpractices alternatively referred to as corruption and economic crimes constitute the genius of what is generally known as and commonly called “Elite or white collar crimes. Legislation governing the banking practice in Nigeria is sourced from three major areas. They are:

• Law of General Application: This is the law that is applicable across the countries under the former British Empire. Such law because it was bequeathed to Nigeria at the Independence is otherwise referred to as “received English laws”.
• Statute Law: These are laws specifically enacted by the nation’s legislature known as the Parliament of the National Assembly to deal with specific subjects or sectors. Example of such statute law are BOFIA (Banks and 67 other financial institution Acts 1991), the CBN Act 1991 and CAMA (Companies and Allied Matters Act) 1990.
• Subsidiary Legislations: These are legislations made under the authorities of existing statutes. Examples are Rules, Orders, and Regulations by laws and ordinances

The core legislation for this research is the Subsidiary laws and such are made by the apex bank CBN for other banks to observe. The prudential guideline was issued on November 7th 1990 Circular No BSD/DO/23/VOL.1/11 to all licensed Banks addressed requirements for asset classification and disclosure, provisioning, interest accrual and off balance sheet engagements. In view of the importance of the circular to bank management, bank auditors and bank examiners, the objective of these guidelines is to prescribe the prudential treatment of restructured accounts to provide a transparent mechanism for timely structuring of debts of viable entities facing problems, outside the purview of 67 BIFR, DRT and other legal proceedings for the benefit of all concerned. The scope of these guidelines are applicable to restructuring/rescheduling of amounts due from all borrowers other than those eligible for restructuring under CDR Mechanism, eligible for restructuring under the debt mechanism for SME’s and restructured on account of Natural calamities for which Reserve Bank has issued a separate set of guidelines. Casting a look at the size structure, the assets structure, the deposits structure and the volume of credits they grant to the economy, their dominant position becomes evident. In the light of this therefore, their indispensable role of pooling together funds from the surplus economic unit to the deficit unit fast tracks economic activities. Effective management of banks assets and liabilities posed a great concern to all stakeholders because of large scale financial distress. The late 1980s and early 1990s were years of financial boom, as the number of players increased substantially in the system. For instance, between 1986 and 1989, about 38 new commercial and merchant banks were created. The increase in the number of banks over stretched the existing human resources capacity of the banks which resulted into many problems such as poor credit appraisal system, financial crimes, accumulation of poor asset quality among 67 others. The consequence was increased in the number of distress, banks and depositors began to lose confidence on our financial institutions in managing their fund. Based on these experiences, the Federal Government of Nigeria through the Central Bank of Nigeria (CBN), 1990 indicates that regulation and supervision are essential ingredients for stable and healthy financial system, and that the need becomes greater as the number and variety of financial Institutions increased. The banking sector was singled out for a special protection because of the vital role banks play in an economy. Bank supervision entails not only the enforcement of rules and regulations, but also judgment concerning the soundness of banks assets, its capital adequacy and management (Volker, 1992). Effective supervision leads to healthy banking industry. At this direction, the deposit insurance scheme the assets quality of banks, reduce bad and doubtful debt, and ensure capital adequacy and stability of the system so that the depositor’s fund would be protected. Banking as essentially an international business, especially now that domestic financial markets are being internationalized, need to develop and continuously review their reporting system which allow for a high degree of comparability of banking performance across national boundaries. Such systems have been evolved in such areas of banking practice as credit portfolio classification, disclosure interest accrual and off balance sheet engagements. The apex institution in Nigeria banking system, the Central Bank of Nigeria (CBN) is continuously moving banks in the country towards compliance with international banking practices. To this end, the Banking Supervision Department (BSD) issued no November 7, 1990, circular letter No.BSD/DO/23VOL.1/11, to all licensed banks and their 67 auditors. The circular titled “Prudential guidelines for licensed Banks” addressed requirements for asset classification and disclosure, provisioning interest accruals and off-balance-sheet engagements. The prudential guideline is intended as a hand book for target groups such as the bank auditors and the examiners. It is the task of the examiner to prevent bank failure by identifying bank problems at an early stage to allow for intervention and or corrective action before the situation gets out of hand

1.2 STATEMENT OF PROBLEMS

Before the introduction of the prudential guidelines, according to CBN circular (1990) some banks were used to declaring huge but unrealized profit, otherwise referred to as “paper profit” The Central Bank of Nigeria (CBN) as a supervisory monetary authority had reasons for introducing the prudential guidelines into the banking scene in order to review banks credit portfolio at least once in a quarter with a view to recognizing any deterioration in credit exposure based on perceived risks of default. In order to facilitate comparability of banks classification of their credit portfolios, the assessment of risk of default should be based on criteria which should include, but not limited to repayment performance borrowers repayment capacity on the basis of current financial condition and realizable value of collateral. Interest on problem loan/over draft is another area where differences exist among banks.

The following problems will be investigated in this study:

(a)  Did profit figures of the selected commercial banks decrease significantly post prudential guidelines?

(b) Did provision for bad and doubtful debts increase significantly under prudential guidelines

Related Project Topics :