CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Abera (2012) recommends that profit-making financial institutions are the major intermediaries for the reason that in different nations of the world, they carry out financial intermediation. Over the years, different nations have undergone an extraordinary number of failures in the commercial banks globally. These failures have triggered the need for a much more serious focus on appropriate techniques of enhancing the outcomes of national system of finance (Dang, 2011). Undoubtedly, a comprehensive literary works is now up-and-coming on the grounds and end result of banking dilemmas together with varied improvements that can help in suppressing potential crises. While the wished-for reforms differ in considerable aspects, virtually almost all these reforms embrace improvements in the already in place policies and managerial concepts. This foundation of conformity is without doubt explicable in the fiscal crises in nations, which have been traced to poor guidelines and administration (Ongore & Kusa, 2013).
Prudential guidelines are a kind of government commands that place banking sectors into some demands, precincts and guidelines as developed by their Regulatory authorities such as Central Bank in order to guarantee market transparency between banking industry and people or amongst financial institution or other corporation that they operate with (Abera, 2012). These guidelines consist of adequacy of capital, liquidity, credit risk and investment guidelines. The at hand study will be anchored on adequacy of capital, liquidity, asset quality and credit risk as they are one of the most essential elements of prudential guidelines.
The prudential guideline was released in Nigeria on November 7th 1990 Circular No BSD/DO/23/VOL.1/11 to all licensed Banks addressed requirements for asset classification and disclosure, provisioning, interest accrual and off-balance sheet involvements. In view of the significance of the circular to bank management, financial institution auditors and bank examiners, the goal of these guidelines is to recommend the prudential treatment of restructured accounts to provide a transparent system for timely structuring of debts of viable entities facing problems, outside the purview of other lawful proceedings for the benefit of all concerned.
Efficient management of banks assets and liabilities presented a fantastic concern to all stakeholders due to large scale financial distress. The late 1980s and very early 1990s were years of financial flourish, as the number of players increased significantly in the system. For example, between 1986 and 1989, about 38 new commercial and merchant banks were created. The increase in the number of banks over stretched the current human resources capability of the banks which resulted into several problems such as poor credit evaluation system, financial crimes, accumulation of poor asset quality to name a few. The effect was increased in the number of distresses, financial institutions and depositors started to lose confidence on our banks in handling their fund.
Based on these experiences, the Federal Government of Nigeria with the Central Bank of Nigeria (CBN), 1990 shown that policy and guidance are important components for steady and healthy financial system, which the need becomes greater as the number and variety of financial Institutions increased. The banking sector was singled out for a special protection due to the important role banks play in an economy. Bank supervision involves not just the enforcement of guidelines and policies, however also judgment concerning the soundness of banks assets, its capital adequacy and management (Volker, 1992). Efficient supervision brings about healthy banking industry. At this direction, the deposit insurance plan the assets quality of financial institutions, reduce bad and doubtful debt, and ensure capital adequacy and security of the system to ensure that the depositor's fund would certainly be safeguarded.
Banking is basically an international business, exclusively now that domestic financial markets are being internationalized, and therefore, there is a need to develop and consistently appraise their reporting system which gives room for a high level of comparison of banking performance across national boundaries. Such practices have been unfolded in such areas of banking system as credit portfolio division, disclosure interest accrual as well as off-balance sheet engagements. The Central Bank of Nigeria (CBN) is systematically placing banks in Nigeria to the direction of compliance with international banking systems. As a result, the Banking Supervision Department (BSD) issued no November 7, 1990, circular letter No.BSD/DO/23VOL.1/11, to every licensed bank in Nigeria and their auditors. The circular titled “Prudential guidelines for licensed Banks” treated the issue of asset classification and disclosure, provisioning interest accruals and off-balance-sheet engagements. The prudential guideline is aimed at bank auditors and the examiners as a hand book. It is the duty of the examiner to avoid bank failure by detecting bank problems at an early stage to give room for intervention and or corrective action before the situation becomes uncontrollable. It is on this foundation that this study seeks to examine the effect of prudential guidelines on the asset quality of commercial banks in Nigeria as evidenced from listed banks on the Nigeria Stock Exchange.
1.2 Statement of the Problem
Bank failure has extraordinary unfavorable impact on the economy. The frailty of the banking system limits the efficiency of the monetary policy and monetary transmission system (Toby, 2006). This implies unsound banking system can undermine the awareness of monetary and macroeconomic objectives. The disagreement on the source of financial crisis goes back to the great depression of the 1930s. To the Keynesian economists, financial crisis is the function of deficiencies in elements of aggregate demand while the monetarist criticized financial crisis on monetary shocks.
Factors that determine financial system soundness and prediction for banking system crises has well been analyzed in literature (Dardac & Boitan, 2009, Kaufman, 2004). For example, the Early Warning Signals (EWS) stressed on financial institutions particular variables as determinants and prediction for bank crises. These studies fail to incorporate the four operating environments of the financial system into the models in identifying the causes and prediction for banking industry crises and asset quality. For example, Kaufman (2004) took a look at the macroeconomic variables as determinants of bank asset quality. The above creates a knowledge gap on the impact of other bank operating variables on its asset quality. From the above, this study intends to examine the effect of prudential guidelines on the asset quality of commercial banks in Nigeria as evidenced from listed banks on the Nigeria Stock Exchange.
1.3 Objectives of the Study
The general objective of this study is to examine the effect of prudential guidelines on the asset quality of commercial banks in Nigeria as evidenced from listed banks on the Nigeria Stock Exchange. However, the specific objectives include:
i) To understand the effect of adequate capital regulation on financial performance of banks' in Nigeria.
ii) To investigate the influence of the prudential guidelines on bank safety and confidence in Nigeria
iii) To ascertain the impact of macroeconomic variables on commercial banks performance in Nigeria.
1.4 Research Questions
From the above listed specific objectives, the following research questions are generated:
i) What is the effect of adequate capital regulation on financial performance of banks' in Nigeria?
ii) What is the influence of the prudential guidelines on bank safety and confidence in Nigeria?
iii) What is the impact of macroeconomic variables on commercial banks performance in Nigeria?
1.5 Research Hypotheses
From the above specific objectives, the following hypotheses are therefore generated:
i) There is no significant correlation between adequate capital regulation and financial performance of banks' in Nigeria.
ii) There is a significant correlation between macroeconomic variables and commercial banks performance in Nigeria.
1.6 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.
It is therefore necessary to research on the effects of prudential guidelines on the asset quality of commercial banks in Nigeria 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.
It will serve as a reference point in policy making concerning bank sector soundness and predicting bank failures in the develop and the developing economy such as Nigeria. The monetary authority will find this study relevant as it will be important in guiding the regulation and the monetary policy framework for achieving banking system soundness.
1.7 Scope of the study
The conceptual scope of this study covers the effect of prudential guidelines on the asset quality of commercial banks in Nigeria. The time scope covers 2010 – 2020. The geographical scope is Nigeria and content scope covers the Nigerian banking industry with focus to some commercial banks.
1.8 Limitations of 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 redtapism 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.
