THE IMPACT OF REGULATION AND SUPERVISION ON THE
ACTIVITIES OF BANKS IN NIGERIA

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ABSTRACT
The study is an empirical analysis of the impact of regulation and supervision on the activities of
Nigerian banks with emphasis on the role of the Central Bank of Nigeria and The Nigerian
Deposit Insurance Corporation. It evaluates the roles and contributions of CBN and NDIC to the
Nigerian banking sector. Extensive field survey and library research was carried out and data
collected were subjected to thorough analysis.
The analysis shows that the supervisory and regulatory framework of the Central Bank of Nigeria
and the Nigerian Deposit Insurance Corporation are not sufficient to guarantee effective
banking practices in Nigeria.
Other findings from the study include the need to increase the maximum insurance coverage
due to the effect of inflation and the persistent fall in the value of the Naira, the need to disclose
transactions continuously to ensure financial prudence through regular supervision and
monitoring of the financial health of local banks with the aid of the ‘CAMEL’ ratings and other
supervisory framework.
There is need to also increase the awareness of banking activities within the general populace
through a deliberate integration process aimed at demystifying certain inherent perceptions of
the public with respect to distress and the role of the Nigerian deposit Insurance Corporation
(NDIC). Moreover, the public, investors and depositors were not fully aware of the activities of
NDIC and CBN in liquidating and revocation of banks’ licenses due to the ineffectiveness of the
enlightenment programmes used in carrying out the awareness.
The study focuses also on the consolidation agenda of the Central Bank of Nigeria and the
processes, prospect and the challenges of consolidation.
A questionnaire and telephone based research was adopted for the study and the data
collated was tested using the chi-square analysis and supported by fundamental evidence from
the database of the regulatory authorities.
Finally, the study offered suggestions as to how the problems so identified could be ameliorated.

CHAPTER ONE: INTRODUCTION
1.1.0 Background of the Study 11
1.2.0 Aims and Objectives of the Study 13
1.3.0 Scope and Limitations 14
1.4.0 Significance of the Study 15
1.5.0 Statement of Research Problems 16
1.6.0 Statement of Research Questions 16
1.7.0 Research Hypothesis 18
1.8.0 Definition of terms 20
CHAPTER TWO: LITERATURE REVIEW
2.0.0 Introduction 22
2.1.0 Introduction to Banking Supervision & Regulation 23
2.2.0 Development of Banking in Nigeria 30
2.3.0 The objectives for banking Supervision 33
2.4.0 Approaches to Banking Regulation and Supervision 36
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2.5.0 Banking Supervision and Regulatory Structures 38
2.6.0 Ways and Methods by which Regulatory authorities
Carry out supervisory functions in banks 41
2.7.0 Procedures and areas of banking examination 43
2.8.0 Origin of Bank regulation/Supervision in Nigeria 45
2.9.0 Conditions for effective banking supervision 47
2.10.0 The roles of Regulatory Authorities in Banking 49
2.11.0 The agents of banking Supervision Authorities and
Authorities 54
2.12.0 Challenges of Supervision 91
2.13.0 The Nigerian Deposit Insurance Corporation 114
2.14.0 The Impact of Public Policy on the Banking System in
Nigeria 135
2.15.0 Banking Sector Policies in Nigeria 137
2.16.0 The Performance of Public Sector Banks in Nigeria 140
2.17.0 The Impact of Financial Liberalisation on Banking 152
2.18.0 Recent developments in the organization of banking
Supervision 155
2.19.0 Bank consolidation in Nigeria: Processes and Prospects 162
2.20.0 Supervision of Restructured banks 184
2.21.0 Assessment of Compliance with the Basle Core Principles 186
CHAPTER THREE: RESEARCH METHODOLOGY
3.0.0 Introduction 204
3.1.0 Research Design 204
3.2.0 Sources of data & Instruments of data Collection 207
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3.3.0 Research Instruments 209
3.4.0 Research Population 211
3.5.0 Determination of Sample size 212
3.6.0 Administration of Questionnaires & Interviews 213
3.7.0 Methods of data Analysis 214
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1.0 Data presentation 216
4.2.0 Data analysis 216
4.3.0 Hypothesis Testing 238
CHAPTER FIVE: DISCUSSION OF RESULTS
5.0.0 Introduction 261
5.1.0 Findings 261
CHAPTER SIX: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION
6.0.0 Summary of Findings 264
6.1.0 Conclusion 264
6.2.0 Recommendations 266
Bibliography 267
Proposed Research Questionnaire 278
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CHAPTER ONE
INTRODUCTION
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1.1.0 BACKGROUND OF THE STUDY
The banking sector in any economy serves as a catalyst for growth and development. Banks are
able to perform this role through their crucial functions of financial intermediation, provision of
an efficient payments system and facilitating the implementation of monetary policies. It is not
surprising therefore, that governments the world over attempt to evolve an efficient banking
system, not only for the promotion of efficient intermediation, but also for the protection of
depositors, encouragement of efficient, competition, maintenance of public confidence in the
system stability of the system and protection against systemic risk and collapse.
Worldwide, the banking business is highly regulated. This is because of the pivotal position the
financial industry occupies in most economies. An efficient system, it is widely accepted, and is
a sine qua non for efficient functioning of a nation’s economy. Thus, for the industry to be
efficient, it must be regulated and supervised in view of the failure of the market system to
recognize social rationality and the tendency for market participants to take undue risks which
could impair the stability and solvency of their institutions.
Regulation and supervision of banks remain an integral part of the mechanism for ensuring safe
and sound banking practice. At the apex of the regulatory and supervisory framework for the
banking industry is the Central Bank of Nigeria (CBN). The Nigerian Deposit Insurance
Corporation (NDIC) however, exercises shared responsibility with the Central Bank of Nigeria for
the supervision of insured banks. Active co-operation exists between these two agencies on
both the focus and modality for regulating and supervising insured banks. This is exemplified in
the coordinated formulation of supervisory strategies and surveillance on the activities of the
insured banks, elimination of supervisory over lap, establishment of a credible data
management and information sharing system.
In the main, bank supervision entails on-site examination of the institutions and off-site analysis of
periodically rendered prudential returns, a process called off-site surveillance. The two activities
11
are mutually reinforcing and are designed to timely identify and diagnose emerging problems in
individual banks with a view to prescribing the most efficient resolution options.
In line with prevailing international standards, these agencies (CBN and NDIC) have continued
to emphasize risk-focused bank supervision in Nigeria. Similarly, they have developed twenty-five
(25) core principles for effective banking supervision as enunciated by the Basle committee on
banking supervision as the pivot of the framework for bank supervision.
It is worthy to note that what is currently happening in Nigeria does not differ widely from what
happened in other nations. Over the years, and specifically since 1952 when the first banking
ordinance was promulgated, several other statutes have also been put in place to serve as
legal backbone for the actions of the monetary authorities in regulating the banking industry.
Presently, the major relevant statutes, include Central Bank of Nigeria Decree No 24 of 1991, the
Banks and other financial Decree No. 25 of 1991, the Company and Allied Matters Decree No 1
of 1990, the Nigeria Deposit Insurance Corporation Decree No 22 of 1988 and lately, the failed
Bank (recovery of debt & Financial malpractices) Decree No 18 of 1994. These enabling laws
and other relevant legislation have largely provided for sufficient and comprehensive
supervisory power and operational autonomy in bank supervision, which may restore public
confidence in banks.
Furthermore, as part of efforts to ensure the stability of the banking industry and in response to
the lingering problem of distress in the sub-sector, the regulatory/supervision authorities have
been applying various failure measures since the late 1990s. Hence depending on the severity
and peculiarity of the distress, NDIC in collaboration with the CBN, has over the years,
successfully adopted such measures as provision of liquidity support through accommodation
bill, imposition of prompt corrective actions, assumption control and management, restructuring
and sale of some distressed banks as well as liquidation of the terminally distressed banks as a
last but unavoidable option.
12
In specific terms, the following measures have so far been adopted.
1) Accommodation facilities were granted to ten (10) banks with serious liquidity crises to
the tune of N2.3 billion in 1989 following the withdrawal of public sector funds from
commercial and merchant banks and the transfer to CBN during that year.
2) Holding actions were imposed on 46 banks to help stabilize their financial conditions in
the mid-90’s.
3) Twenty – four (24) banks were temporarily taken over by the regulators to safeguard
their assets between the years 1989 – 1994.
4) Seven (7) distressed banks were acquired, restructured and sold to new investors in
the late 1990’s.
5) From 1994 to 1999, thirty-six (36) terminally distressed banks were closed with minimal
disruption to the banking system.
6) In 2005, the number of operationally licensed banks in Nigeria numbering 89 (Eighty-
Nine) was streamlined through a process of Mergers and acquisition into 25 (Twenty-
Five) viable banking institutions with a capital base of not less than N25 billion each.
The streamlining of these banks was because of their inability to respond to all the various
regulatory/supervisory initiatives employed to resolve the banks’ problems, and the continued
degeneration in their financial conditions.
1.2.0 AIMS/OBJECTIVES OF THE STUDY
The general aim of this research work is to determine the impact of the regulatory and
supervisory functions of the Central Bank of Nigeria (CBN) and the Nigerian Deposit Insurance
Corporation on the activities of Nigerian banks.