PERCEIVED IMPACT OF PRUDENTIAL GUIDELINES ON THE SERVICES AND PERFORMANCE OF COMMERCIAL BANKS IN NIGERIA
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 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 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 , 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 reliability of collaterals difficult, if not out rightly impossible.
Consequently, the prudential guidelines were expected to address the following;
- To enhance public confidence in banking system in the country.
- Harmonization of credit administration in the country with what is obtainable in other parts of the world.
- Timely recognition of deteriorating risk assets.
- To create a healthy banking environment in our economy.
- To create uniformity in loans/overdraft classification among banks in the country.
- Uniform provisioning for expected loans/overdrafts losses.
- 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;
- Has the guidelines solved or attempted to solve these problems?
- 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:
- To determine the impact of the prudential guidelines on bank safety and confidence in Nigeria.
- To assess the reaction of depositors to the guidelines.
- To find out whether there are international supervisory perspectives which affect national experience.
1.4 RESEARCH QUESTIONS
- To what extent has the Prudential Guidelines helped to ensure safety and confidence in Nigerian banking system?
- How do depositors react to the guidelines?
- Are there international supervisory perspectives to the guidelines?
1.5 HYPOTHESES OF THE STUDY
The hypotheses of this study are as follows:
- Prudential guidelines do not enhance safety and confidence in the Nigerian banking system.
- Depositors do not react favourably to the prudential guidelines.
- 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
1.7 LIMITATIONS TO THE STUDY
The limitations to this work include:
- The problem of meeting appropriate officials of the banks who will give the right information required for the work.
- 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.
- 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.
- 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.
- 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.