PERCEIVED IMPACT OF PRUDENTIAL GUIDELINES ON THE SERVICES AND PERFORMANCE OF COMMERCIAL BANKS IN NIGERIA

ABSTRACT

Within the framework of this project “Perceived impact of Prudential Guidelines on the services and performance of Commercial Banks in Nigeria”, the researcher has attempted to reiterate the importance of prudential guidelines in helping banks to improve on their performance. The study set out to examine its impact on bank safety and confidence of Nigerians especially depositors among others.

The researcher employed both primary and secondary sources of data from samples derived from the populations of selected commercial banks. The researcher adopted the use of structured questionnaire as the main instrument of data collection. Data were analyzed using the Chi-Square (X2) analytical technique.

Findings from the study revealed that there is increased need for bank supervision from the regulatory bodies. The guidelines have been welcomed as a step in the right direction as they have helped to check the mismatch between banks’ reported and  actual profits and  also checked the  early detection of  fraud,  distress and deterioration of banks credit portfolio.

In conclusion, prudential guidelines have also helped to check non-performing loans and ensure proper scrutiny of loan proposals and enhanced regulatory activities in the banking industry most especially the commercial banks. Several recommendations were made in a bid to alleviate the difficulties banks encounter in implementation of the provision of the prudential guidelines. These include encouragement   of   management   effectiveness   via   enlightenment   programe seminars, periodic review of the guidelines to meet prevailing national and international banking trend. It is recommended that further research be conducted to improve on existing ones.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

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.

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 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 forasset 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 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 grantto 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

others.  The  consequence was  increased in  the  number of  distress,  banks  and depositors began to loose 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 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 PROBLEM

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. When loans/overdrafts become apparently uncollectible, how should the interest that is calculated on it be treated? While some banks credit their profit and loss account with such unearned interest, others credit their suspense account.

The deregulation of interest in the Structural Adjustment Programme (SAP)

period did not help, either interest on non-performing account were credited to

the profit and loss account of most banks to make their performance appear good to investors, the public and supervisory monetary authorities. This “window dressing” performance in  most banks shook public confidence in bank’s financial statement in the late 1980 up to 1990, when prudential guidelines was introduced.

Prior to this period, most banks believed that once loans/overdraft was secured, whether the accounts were serviced or not, interest on it should continue to be credited to their profit and loss accounts believing that they would realize the security in case of default in payment. Most often banks were not too bothered as to whether the collateral was perfected or not thereby making realizability of collaterals difficult, if not out rightly impossible.

Consequently, the prudential guidelines were expected to address the following; A.    To enhance public confidence in banking system in the country.

B.    Harmonization  of  credit  administration  in  the  country  with  what  is obtainable in other parts of the world.

C.    Timely recognition of deteriorating risk assets.

D.    To create a healthy banking environment in our economy.

E.    To create uniformity in loans/overdraft classification among banks in the country.

A. To enhance public confidence in banking system in the country.

B. Harmonization  of  credit  administration  in  the  country  with  what  is obtainable in other parts of the world.

C. Timely recognition of deteriorating risk assets.

D. To create a healthy banking environment in our economy.

E. To create uniformity in loans/overdraft classification among banks in the country.

F. Uniform provisioning for expected loans/overdrafts losses.

G. Undue importance placed on collaterals by most banks at the detriment of fund flow considerations. Since 1990 when a prudential guideline was introduced, the questions being asked regarding the prudential guidelines are;

I.  Has the guidelines solved or attempted to solve these problems?

ii. Will the guidelines be a success in the long run?

iii. Will the guidelines create more problems to the system?

In the research, a detailed appraisal of prudential guidelines is to be undertaken, and a forecast of what they have for the Nigeria Banking Industry will be discussed.

1.3     OBJECTIVES OF THE STUDY

The objectives of this study shall be as follows:

i.     To determine the impact of the prudential guidelines on bank safety and confidence in Nigeria.

ii.     To assess the reaction of depositors to the guidelines.

iii.     To find out whether there are international supervisory perspectives which affect national experience.

91.4 RESEARCH QUESTIONS

i.     To what extent has the Prudential Guidelines helped to ensure safety and confidence in Nigerian banking system?

ii.     How do depositors react to the guidelines?

iii.     Are there international supervisory perspectives to the guidelines?

1.5HYPOTHESES OF THE STUDY

The hypotheses of this study are as follows:

i.     Prudential guidelines do not enhance safety and confidence in the Nigerian banking system.

ii.     Depositors do not react favourably to the prudential guidelines.

iii.     There are no international supervisory perspectives which affect national experience.

1.6                           SCOPE OF THE STUDY

There are many banks in Nigeria banking industry. To achieve the aim of this research, the researcher has restricted himself to the study of only one- United Bank for Africa (UBA). In this regard, three branches of UBA within Enugu Metropolis are studied. The branches are UBA Main branch at station road, Okpara Avenue 2 (Marble House) and UNEC branch

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1.7                          LIMITATIONS TO THE STUDY

The limitations to this work include:

1.   The problem of meeting appropriate officials of the banks who will give the right information required for the work.

2.   The problem of getting all the necessary data became more complex and most of these officers’ do not want to volunteer their official data due to bureaucracy and  Red-tapism which  hinders  the  flow  of  information in Nigeria.

3.   Availability of fund posed a problem to the researcher as this requires adequate finance to enable the researcher visit the necessary places and collect the required data.

1.8 SIGNIFICANCE OF THE STUDY:

Prudential guidelines have been in the Nigeria Banking system since 1990. It is necessary to examine the impact it has on bank services and performance.

i.                       It is also necessary to research on the effects of the guidelines on banks to enable one access the pre-guidelines era and the present tradition it has imposed on bank practices. Such analysis will enable the supervisory authorities make a decision whether to retain, discard or modify prudential guidelines.

ii.                      The  need  for  this  research  arises  from  the  fact  it  will  be  of immense benefit to students of banking and finance in having knowledge of historical evolvement of rules and regulations and most especially in the area of management of credit portfolio in Nigerian banks.

iii.                     The duties of the Central Bank of Nigeria (CBN) and Nigeria Deposit Insurance Corporation (NDIC), Central Bank of Nigeria (CBN) and the Nigerian Deposit Insurance Corporation (NDIC).

1.9                      OPERATIONAL DEFINITION OF TERMS

–        BANK: A  Bank  is  a  financial house established for the  purpose of accepting deposits and other precious commodities from the public for safe keeping.

–         PORTFOLIO:  This is a collection of investible funds.

–        PRUDENTIAL GUIDELINES:  It is the recognition of credit risk and writing-off same to avoid false picture of balance sheet.

–        BAD DEBTS:  There are debts which is not recoverable within the time frame set for their normal recovery period.

–        DOUBTFUL DEBT: There are doubtful in case of recovery, hence they are termed doubtful debt.

–        EFFICIENT PORTFOLIO:    A group of asset that yield a maximum return for a given level of risk.

–         RISKS: An index of the variability of realized from expected returns.

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