Project Abstract

<p> This research project tends to evaluate the impact of supervision and<br>control of the Central Bank on the performance of commercial banks.<br>Access Bank Nig Plc Lagos Branch was used as the case study. To aid this<br>research both primary and secondary data were collected. The<br>instruments used to collect data are questionnaires and oral interviews.<br>The respondents comprised of male and female from the bank and the<br>population put together is 150 and sample size is 109. The research<br>design used for this work is the survey research method. In the course<br>of this research the researcher found out that supervisory and control<br>functions when conducted on a timely and unbiased manner ensures capital<br>adequacy, high standard of conduct, moderation of bank charges and<br>profitability. The researcher recommends that bank inspections should<br>continue to be regular and timely enough; control measures of the CBN<br>should not be too stringent as to have long negative impact on banking<br>operations. Finally only competent, skilled and unbiased bank examiners<br>should be engaged in bank supervision. <br></p>

Project Overview

<p> </p><p>INTRODUCTION</p><p>1.1 BACKGROUND OF THE STUDY<br>The roles of commercial banks play in the process of economic<br>development in every country are crucial. They through financial<br>intermediation increase the levels of national savings and investments<br>by mobilising idle funds from surplus spending units (savers) and<br>channel them to deficit spending units(borrowers) for investments in the<br>economy . (UGBAJA 1999)<br>By playing these roles within a particular country, the independence of<br>global economics created the need for global interbanking, a trend which<br>in turn emphasizes the need for the stability of the banks involved in<br>intercontinental banking transactions.<br>Also, banking business carries a lot of risks and banking public needs<br>assurance about the safety of their confidence in the banking<br>institutions.<br>The need for supervision and control of commercial banks activities is<br>to ensure that they adhere to the stipulated monetary policies, rules<br>and regulations as well as accepted ethical conducts. However the major<br>contributing factor that has led to the failure of Nigerian banks in the<br>past can be described as moral hazard (adverse incentives)<br>Moral hazards or adverse incentives are a concept with relevance to a<br>variety of principal agent relationships characterized by asymmetric<br>information. The moral hazard concerns the adverse incentives on banks<br>chief executives to act in ways which are contrary to the interests of<br>the banks creditors (mainly depositors or the government if it<br>explicitly or implicitly insures deposits) by undertaking risky<br>investment strategies (such as lending at high interests rates to high<br>risk borrowers) which, if successful, would ` jeopardise the solvency of<br>the bank. Bank owners have incentives to undertake such strategies<br>because with limited liability, they bear only a portion of the downside<br>risk but stand to gain through higher profits, a large share of the<br>upside risk. In contrast, the depositors (or the deposit insurers) gain<br>little from the upside risk but bear most of the downside risk.<br>The inability of depositors to adequately monitor bank directors,<br>because of the asymmetric information allows the latter to adopt<br>investment strategies while entail higher levels of risks.</p><p>Moral hazard on bank executives can be exacerbated by a number of factors<br>Firstly, an increase in the interest rate may lead borrowers to choose<br>investments with higher returns when successful but with lower<br>probabilities of success (Stieglitz and Weiss 1989) hence a rise in<br>deposit rates could induce banks to adopt more risky investment<br>strategies. A rise in bank lending rates can have a similar incentive<br>effects on the banks borrowers.<br>Secondly, macroeconomic instability can also worsen adverse incentive if<br>it were to affect the variance of the profits of the bank borrowers<br>especially when there is a co-variance between borrower’s profits. (E.g.<br>if a large share of borrowers are in the same industry) or if loan port<br>folios are not well diversified among individual borrowers.(McKinnon<br>1988)<br>Thirdly, the expectation that the government will bail out a distressed<br>bank may weaken incentives on bank executives to manage their asset port<br>folio prudently and incentives on depositors to monitor banks and<br>choose only banks with a reputation of prudent management. Deposit<br>insurance also reduces incentives for depositors to monitor banks.<br>Fourthly, moral hazard is inversely related to bank capital. The owners<br>of poorly capitalized banks have little of their own money to loose from<br>risky investment strategies. By implication, financial distress in the<br>bank itself worsens moral hazard because, as the value of the bank’s<br>capital falls, the incentives on its owners to pursue strategies which<br>might preserve its solvency are reduced (Berger et al.1995 pp 398-99)<br>for similar reasons intensified competition in banking market can also<br>encourage moral hazard by reducing the franchise value of banks future<br>profits.<br>Moral hazard becomes even more acute when the bank lends to projects<br>connected to its own directors or managers (insider lending). In such<br>cases the incentives for imprudent and fraudulent bank management are<br>greatly increased in that all of the profits arising from the project<br>are internalized.(in the case of loans unconnected borrowers the project<br>returns are split between lender and borrowers)whereas that part of the<br>losses borne by depositors or task payers are externalised. Not<br>surprising, insider lending is a major cause of bank failure around the<br>world.<br>These ills going on in the commercial banks, as stated above make it<br>imperative for the central bank of Nigeria (CBN) to be on the watch at<br>all times through their supervisory and control functions so as to<br>protect them from going insolvent which usually impacts negatively on<br>the economy in general.</p><p>Confidence plays a key role in bank operations. Any information<br>whatsoever implying that the financial position of a bank has worsened<br>can have a negative impact on all the cash flow in that bank. Therefore,<br>every bank will attempt to conceal the problem of insolvency. Banks are<br>highly successful in this respect and therefore, the problem of<br>insolvency is often not recognised in time by the government agencies<br>entrusted with bank supervision.<br>Problems in the banking system or in the economy as a whole occur when a<br>number of banks become insolvent, or when a relatively large share of<br>the liabilities of the banking system is not covered by good assets. The<br>occurrence of such problems indicates that the efficient asset and<br>liability management is present in a significant portion of banking, if a<br>large part of banks asset is allocated to unprofitable projects. There<br>will be a reduction in investment efficiency and thereby a slowdown on<br>economic growth.<br>These could be decrease or seizure of loans grants to the public when<br>the problems of bank insolvency begin to be resolved. When banks attempt<br>to restore solvency by ceasing to grant loans to bad clients and<br>raising the interest speeds, there is less available loan and they are<br>more expensive. One consequent can be the negative selection of clients.<br>Enterprises that do not have alternative sources of financing will be<br>ready to accept higher bank interests rate independently of whether the<br>projects to be financed are profitable or less profitable. Such a trend<br>could also exert a negative impact upon investment efficiency.<br>If banks attempt to solve the problems of insolvency by raising<br>additional funds, interest’s rates will rise and there will be pressure<br>to conduct a softer monetary policy. Banks also seize additional<br>liquidity in foreign countries which affects the trends in the balance<br>of payments.<br>The right which the central bank of Nigeria has to supervise and control<br>the banking industry is backed by the CBN Act no 24 of 1991 now CBN ACT<br>2007 and the banks and other financial institution Act no 25 of 1991<br>(now BOFIA 2004). These laws empowers the CBN to carry out a supervisory<br>and control functions on all commercial banks and other banks in the<br>country<br>The powers as specified by section 39 of the CBN Act which may be<br>expressed by the CBN from time to time in the supervisory and<br>controlling functions include the powers to specify critical ration to<br>call for information from banks and to inspect the books of any bank to<br>under condition of secrecy.(Afolabi 2000: 10s)<br>Section 30and 7 and 8 of the banks and other financial acts no. 25 of<br>1991 (now BOFIA 2004) stipulates that every banks shall produce on<br>demand all the books, accounts documents and information as the CBN<br>examiners may deem fit in the exercise of his functions. It also<br>stipulates as punishable the wilful refusal of any bank to produce such<br>documents as well as negligence or wilful furnishing of false<br>information to CBN.<br>The control of the banking industry by CBN is carried out in partnership<br>with the federal government, which has the overall authority over the<br>system. Thus the CBN initiates the guiding policy measure and implements<br>them only as approved by the government. The CBN measures to control<br>the banks through a number of stages which include the identification of<br>the objectives and targets of policy. Policy formulation, policy<br>implementation and review as well as other extra measures for commercial<br>banks (ogwuma 2004:2).<br>Supervision and control by the CBN impact significantly on the<br>activities and performance of commercial banks between 1986 and early<br>2010, the supervisory and control measures of the CBN seemed ineffective<br>on a number of occasions and this contributed to the hitherto, distress<br>in the banking sector. Since 2004, there has been series of new<br>supervisory and control measures introduced by the CBN into the banking<br>system with the aim of improving the performance of the banking sector.<br>Against this background, however the study, however, the study is geared<br>towards examining the impact of supervision and control of CBN on<br>commercial banks in view of how their performance is affected from the<br>negative and the positive perspectives with concentration on the roles<br>that CBN played from 2004 to 2011.<br>1.2 STATEMENT OF THE PROBLEM<br>The supervision and control of commercial banks by CBN sometimes impact<br>adversely on the operations and performance of the former. This is as a<br>result of difficulties associated with the supervision and control<br>mechanism.<br>With respect to supervision, it appears that the CBN apparatus are not<br>effective. Banks examination are often not timely, not regularly carried<br>out or haphazardly done.<br>Secondly, some of the CBN examiners are not sufficient competent and<br>thirdly, they are not large enough to supervise all the commercial banks<br>effectively. The result is that deficiencies to the operations of these<br>banks are not timely discovered and adequately controlled. All these<br>adversely affect the commercial banks.</p><p>With regard to the control, often times the measures are too<br>stringent for effective operations and performance of the commercial<br>banks. Restrictive monetary control measures limit the liquidity and<br>capacity of commercial banks to grant loans or credit. Besides, direct<br>interactions in banking activities by the CBN, sometimes have adverse<br>effects too.<br>In the light of the aforementioned, attempt will be made to appraise the<br>impact of central banks supervision and control on the performance of<br>commercial banks.<br>1.3 OBJECTIVES OF THE STUDY<br>In lieu of the problems stated above, the objectives of the study are<br>1. To analyse the objectives of supervision and control of commercial<br>banks in view of the existing monetary policies of the CBN.<br>2. To examine the effectiveness of the supervisory and control<br>techniques of the CBN specifically the ability detects malpractice on<br>time.<br>3. To assess the impact of supervision and control on the performance of commercial banks with regards to liquidity.<br>4. To appraise the ongoing reforms of the CBN.</p><p>1.4 RESEARCH QUESTIONS</p><p>The following questions will be addressed in this study<br>1. To what extent do the relationship between the current monetary<br>policies of the CBN and the performance of commercials banks as it<br>affects granting loans/credit?<br>2. To what extent do the supervisory and control techniques effectives enough to detect misconduct on time?<br>3. How can these functions of the CBN have any effect on the liquidity of commercial banks?<br>4. To what extent do the ongoing reforms by the CBN affect the performance of the commercial banks?<br>1.5 SIGNIFICANCE OF THE STUDY<br>The significance of the study derives its usefulness from many respects.<br>Firstly, the monetary authorities (CBN) and federal government will<br>find the study very useful. This is because the study will examine the<br>various techniques of supervision and control of commercial banks and<br>identify their deficiencies and constraints. This information will then<br>enable the government and the CBN to take remedial measures which will<br>be suggested in this study.</p><p>This study will also be useful to the banking and non banking<br>financial institutions. It will provide information on why many of them<br>operate and perform dismally under the CBN supervisory and control<br>functions. This will give these institutions an understanding of their<br>weakness and the information will enable them to take corrective actions<br>which again will be suggested in this study.<br>Again, investors and banking public will appreciate this study because<br>of the information it contains. The study will enable them to understand<br>the role of the CBN in ensuring safety of their funds in the banks and<br>this will help in sustaining their confidence in the banking industry.<br>Finally the study will be useful to students who will carry out related studies; it will serve as a relevant material to them.<br>1.6 SCOPE OF THE STUDY<br>The study focuses on the importance of the CBN supervision and control<br>on the performance of the commercial banks. Thus, its scope covers the<br>need for supervision and control as well as goals, techniques and<br>effects of these exercises on commercial banks operations and<br>performances<br>1.7 LIMITATIONS OF THE STUDY.<br>The limitations of the study may include.<br>1. The difficulty of obtaining primary information from CBN and some<br>commercial bank staff their uncooperative attitude may adversely affect<br>primary data collection.<br>2. Inadequate finance which may pose a restriction with regards to<br>travelling outside Enugu to include many more commercial banks for an<br>extensive study. Therefore the study may be restricted to Enugu<br>metropolis only.<br>3. The difficulty of combining the research with other academic works in the school.<br>1.8 DEFINITION OF TERM<br>1. BOFIA- Bank and other financial institution act<br>2. NDIC- National deposit insurance corporation.<br>3. AMCON- Asset management corporation of Nigeria<br>4. CBN- Central bank of Nigeria.<br>5. NSE- Nigerian stock exchange.<br>13<br>REFERENCES<br>Alhanasogbu pp Brissmis, S.N and Delis, M.D (2005) Bank specific,<br>industry specific and macro Economic Determinants of Banking<br>profitability Bank of Greece, working paper, no 25<br>Ayodele Thompson and Olusegun Sotala: AMCON Is CBN Intervention in public interest Opinion columnist August 18, 2010.<br>Bankers and other financial institution Act No 25 of 1991, section 30</p> <br><p></p>