1.1 Background of the Study
Banking business is not a mere activity for which all decisions of the business should be surrendered to the owners or management of such companies. The nature of the banking and its accompanying risks to operators and economist system call for certain degrees of uniform operational practices. The need to regulate the activities of banks is becoming a matter of very high necessity following global trends of financial institutions collapse and maladministration. The global financial crisis following the failure of big firms like Lehman Brothers and others has highlighted the importance of adequate bank regulation and supervision. The approval of the Basel Committee on Banking Regulation to strengthen global capital and liquidity regulations in order to promote a more resilient banking sector by the G20 is a positive signal in this direction (Klomps & De Haans, 2011)
The Banking Sector serves as catalyst for growth and development and is therefore sensitive to the economy in terms of stability. The critical nature of the sector induces need for checks and regulations to minimize possible financial mishap to national and global economies. It is not surprising that government the world over are attempting to evolve 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. The degree to which governments should intervene remains an issue of international debate. Financial analyst differs on the level of intervention required per economy; particularly on regulation imposed on the financial intermediaries. Some scholars have clamoured for more stringent regulatory frameworks to authorize, oblige, supervise and control banking business so as to ensure smooth, consistent and sanitized system of banking business, while others are of the opinion that a liberal system is the most ideal given a market driven economy.
The risky nature of banking under voluntary financial markets amidst stringenent competition will only worsen the economic condition of the globe. From internal to external regulatory framework, banking business must be closely monitored by ombudsmen to minimize the possibilities of mortgaging public interest and the overall stability of economic systems. More importantly, laws are tools on which stable economies strive. They act as legal mechanisms that provide guide for the appropriate conduct within the industry. A system that exist without laws is prone to all manners of manipulations
Interestingly, banking started in Nigeria as an unregulated business. Even with the dominance of the scene at inception by foreign banks, neither the foreign nor government made any regulatory demand on the banks as the then. This partly may be due to the emergent business with little or no details of control and mainly on the fact that banking at inception had little risk and complexity compared to the present day. It may not be in Nigeria commenced as a regulation-free business and glides to a highly sophisticated and duly regulated one today.
Taking into cognizance the importance of the business of banking in Nigeria economy and the series of corporate malpractices and financial scam in the then banking institutions, the first banking legislation into Nigeria, the 1952 banking ordinance, was passed into law. By 1958, another banking ordinance was passed section 25 of which repealed the 1952 Act. Subsequent banking legislations- 1958 CBN Act, 1968 Banking Act, 1990 Banking Act, The BOH ACT of 1991, the CBN Act, 1991, CAMA 1991 and the recent 2007 CBN Act Prescribe rules, regulations and principles, which any corporate person willing to partake in banking business must observe before it is authorized to do so.
These legislations equally impose certain duties and obligation on licensed banks and equally put in place series of rules and conventions empowering the central Bank and other bodies like the Federal Ministry of Finance to supervise and control banking institutions so as to ensure smooth running of the business, avoid all the problems experienced by banking institutions prior to 1952 and to safeguard members of the public from losing their funds. The banking sector being a conspicuous and significant partner in every nation’s economy needs to be regulated for its stability, reliability, confidence and above all, tranquility.
1.2 Statement of the Problem
Bank regulation is implemented to ensure a sound and safe financial system in the economy. The measures are mainly concerned with the quality of risk asset in banks, compliance with key ratios such as liquidity ratio, cash reserve ratio, capital adequacy ratio amongst others, the quality of management and other corporate governance issues.
However, inadequate regulatory framework and lack of an effective risk asset database and information sharing system have contributed in no small measure in disrupting the activities of banks, thereby leading to the often distasteful incidents of banking distress and liquidation by the regulators.
In line with this problem, various banking legislation/acts have been promulgated as well as the introduction of different strategies all aimed at increasing the efficiency of banking regulatory supervision. Among them are on-site, off-site banking examination, routine examination, special examinations culled at the instance of the regulators as well as other methods of surveillance to be discussed in subsequent chapters. These measures are mutually reinforcing and are designed to timely identify and diagnose emerging problems in individual banks with a view to presenting most efficient resolution directed towards ensuring continued public confidence in the banking system.