THE EFFECTIVENESS OF CBN CONTROL MECHANISMS IN THE BANKING SYSTEM

Introduction

1.1 Background of The Study

Prior to the establishment of the Central Bank of Nigeria (CBN), the West Africa Currency Board (WACB) which was established in 1912 had the responsibility for issuing legal tender currency.

Specifically, it was charged with the issue of a West African Currency, the exchange of existing currencies and the investment of reserves. The reserves were invested in Britain and this in a way hindered development in Nigeria. However, because the WACB was linked automatically to the British system, it could not engage in monetary management, neither was Nigerians trained in the act of monetary management. In order to eliminate this deficiency and thereby promote the growth of the domestic money and capital markets, the Central Bank of Nigeria was established in 1958 and it commenced business on 1st July, 1959.

The regulatory power was conferred to CBN as the apex bank being the principal regulator and supervisor of the entire Nigeria financial system. During the pre-regulation era, there was a mass failure of indigenous banks. This was the second feature of commercial banking under the banking legislation and stabilization period. Many of the so-called indigenous banks could not provide the minimum paid up capital requirement of £12,500 (equivalent to (N 25,000). Apart from this Nwankwo (1980: 49) observed that during the free banking spree, “banks sprang up with all abuses and malpractices in banking known to man. These include share-pushing, counterfeiting, gross under-capitalization and the reckless spread of branches.

The obvious consequences of these shortcomings on the part of indigenous banks were mass failures. By 1954 virtually all the indigenous banks that sprang up during free-for-all banking period has failed. Only three of them; the National Bank of Nigeria, the Agbonmagbe Bank (now Wema Bank), and the African Continental Bank survived.

The regulatory authorities decided to streamline the regulatory framework and strengthen its supervisory capacity in order to forestall the re-emergence of systematic distress and facilitate the attainment of the vision of strong, competitive and reliable financial markets that meet the international best practices. To this end, the CBN on July 6, 2004 announced a 13 point agenda to reform and reposition the Nigerian banking industry. Some of the reform measures are;

1. Requirement that the minimum capitalization for banks should be N 25 billion with full compliance,
2. Consolidation of banking institutions through mergers and acquisitions,
3. Adoption of a risk-focused and rule-based regulatory framework,
4. Adoption of zero tolerance in the regulatory framework especially in the area of data /information rendition /reporting,

Rehabilitation and effective management of the mint to meet the security printing needs of Nigeria, including the banking system which constitutes over 90% of the mint’s businesses. In due course, there will be no need to print Bank Cheque abroad,

The automation process for rendition of returns by banks and other financial institutions through the Electronic Financial Analysis and Surveillance System (e-FASS) will be completed expeditiously.

All these reforms are part of control by which CBN can sanitize banking industry as well as building confidence in depositors.

The reform was designed to ensure a diversified, strong and reliable banking sector which will ensure the safety of depositor’s money, and play active developmental role in the Nigerian economy. The ultimate beneficiaries of the policy are the ordinary men and women who put their deposits in the banks and have a restful sleep; the entrepreneurial Nigerians who can rely on a stronger financial system to finance their business.

The reform has affected the banking sector by increasing Customer Orientation and Focus, Strategic Business Alliance, Continuous Investment in Human Capital, increased Access to Information and Communication Technology (ICT), post-consolidation integration, liquidation of the failed banks, Sound Ethical Banking Practices, improved regulatory framework, legal reform. However, as at the period, 89 banks were in operation made up of about 5-10 banks, whose capital base were already above the N 25 billion marks, another group of 11-20 banks, within the N 10 to N 20 billion mark, while the remaining 50 to 60 banks were quite below the N 10 billion mark. A period of about 12 months was given to these banks to recapitalize through new issues, mergers and acquisitions, failure to do so would mean liquidation of such banks by the monetary authority. At the end of the exercise 24 banks emerged. A total of 18 banks failed to meet the recapitalization criteria and had their licenses revoked.

Shortly after the appointment of the CBN Governor in June, 2009, Sanusi ordered the special examination of all commercial banks in the country to determine their level of exposure to margin loans and the oil and gas sector in a bid to determine their solvency and capacity to continue as going concerns.

At the end of the exercise 8 banks had serious issues which included illiquidity and capital erosion, a development which prompted CBN to remove their CEOs and executive directors and inject N 420 billion lifelines into them. Other banks with less serious issues were promptly mandated to sit tight or face the wrath of the regulatory authorities and were given up till June 30, 2010 to fully recapitalize.

The second phase of the banking reforms which is anchored on four pillars, namely; strengthening the quality of banks, establishing financial sector stability, enabling healthy financial sector, and ensuring that the financial sector contributes to the real economy. Perhaps, one important aspect of the current reforms is the issue of corporate governance, which according to the audit, was lacking in the industry before the new dispensation.

Consequently, the CBN spelt out a 10 year maximum tenure for bank chiefs. According to the policy, a bank’s Chief Executive can hold office for five years in the first instance, and renewable only once for another five years, according to the new policy. In its pursuit for risk management, the CBN has also within the past one year mandated banks to operate a common year account obviously to guard against falsification of results and other sharp practices. It also rolled out new prudential guidelines with emphasis on risk management.

In other to create room for various categories of banks, the CBN has invalidated the concept of universal banking in Nigeria. Banks are expected to develop in accordance with their core competences.

Banks are very important in the economy. Its importance in the development of any country cannot be over-emphasized. They are very vital because they constitute the central point on which the other sectors of the economy such as Administration, Agricultural, Manufacturing and others revolve. One of the functions of bank is to enhance the effective mobilization of investible funds from the surplus sectors to the deficit sectors. Because of this financial intermediation function of deposit money banks, and the unique position of CBN, deposit money banks are obliged to comply with certain regulatory requirements given to them by the regulatory authority (CBN) in conjunction with the Nigeria Deposit Insurance Corporation (NDIC) to help in achieving some economic objectives as well as restoring sanity to banking sector.

The subject matter of this study is therefore to determine with special reference to the Central Bank of Nigeria (CBN), the effectiveness of the control mechanism on the banking system by the Central Bank of Nigeria (CBN).

1.2 Statement of Problem

Central Bank of Nigeria is an apex regulatory body of all banking industry in Nigeria with the aims of regulating and controlling the banking system and non-banks financial industries. The efficiency and stability in banking industry, however depends to a large extent on the effectiveness of CBN control over the industry.

Based on the current happenings in the banking industry for the past 6 years, the main problem that was brought to bear is the constant bank reforms in the system. This may be seen as a positive measure to sanitize banking industry but most banks view it as instability in the system as banks hardly get used to one reform before another.

Constant crisis in the banking sector are areas of concern in the system. Going by the number of bank crisis experienced in Pre-regulation and after the enactment of CBN Act of 1958, which was replaced by CBN Decree No. 24 of 1991 with all its amendments, one wonders if CBN has been effective in its regulation.

A sound banking system depends on the control exercised by CBN and to a large extent on trust.

Has the CBN ever been effective in its control? If yes, why the constant bank distress and reforms?

Based on these problems, the questions that readily come to mind are:

1.3 Objective Of The Study

The objective of the banking supervision is to promote monetary stability and also a sound financial system in the country.

Effective CBN banking control must seek to ensure that the monetary and payment system of the country is not impaired. It should promote the monetization of the economy, customer’s interest and deposits, and ensure that public confidence is guaranteed in the monetary system which is the basis of the stability of the economy.

The main objective of the study is to find out;

How effective are the control instruments of CBN,

The researcher also wants to find out the views of most banks as regards the instruments of control and how it affects their operations,

The researcher will also want to assess the perception of CBN’s Examination Team, whether most of the instruments should continue to be used or dropped as regards to banking industry.