Getting Started in the Classroom

(i) Selective credit control: Directing or influencing the flow of credit to preferred sectors.

(ii) Moral suasion: Use of persuasion to get the banks to comply with government directives.

(iii) Sanctions: Use of punishments to enforce government directives.

4.0 CONCLUSION

The lead bank regulatory is the Central Bank of Nigeria (CBN) which was established by the Central Bank of Nigeria (Establishment) Act 2007 as amended. The principal objectives of CBN Act are to (Section 2, CBN Act): Ensure monetary and price stability; Issue legal tender currency;

Maintain external reserve to safeguard international value of the currency; Promote a sound financial system; and Act as banker and provide economic advice to the Federal Government.

Under the Banks and Other Financial Institutions Act (BOFIA), the CBN is responsible for granting banking licenses to carry on the business of banking and for supervising and regulating banks and other financial institutions in Nigeria.

The CBN is also responsible for the monitoring and regulation of the Autonomous Foreign Exchange Market and has the power to issue guidelines Foreign Exchange (Monitoring and Miscellaneous Provisions) Act. The CBN regularly issues circulars and guidelines in line with its oversight responsibilities over banks and other financial institutions the foreign exchange market in Nigeria.

The CBN also has powers to intervene when as a result of its various examinations and supervisory powers it considers that a bank is failing by directing that the management and control of the bank be turned over to the Nigeria Deposit Insurance Corporation (NDIC).

5.0 SUMMARY

In this unit, we have defined Central Bank of Nigeria (CBN); traced the historical evolution of CBN; enumerated the objectives of CBN; listed the functions of CBN; discussed the regulatory and supervisory framework of CBN; and listed and explained measures adopted by CBN to control Commercial Banks.

In this next unit, we shall examine the role of Nigerian Deposit Insurance Corporation (NDIC) following the same pattern as it was done in the case of CBN.

6.0 TUTOR-MARKED ASSIGNMENT (TMA)

1. How did CBN derive its powers to regulate and supervise the banks and other financial institutions in Nigeria?

2. What are the objectives of CBN?

3. List and discuss the responsibilities of CBN under the CBN and BOFI Acts.

4. What are the measures adopted by CBN to regulate the activities of commercial banks?

5. Briefly examine the regulatory activities of the regulatory agencies in the Nigerian banking sector.

6. (i) Distinguish between On-site and Off-site bank supervision. (ii) Bank failure and bank distress.

Suggested answers:

The lead bank regulatory is the Central Bank of Nigeria (CBN) which was established by the Central Bank of Nigeria (Establishment) Act 2007 as amended.

Under the Banks and Other Financial Institutions Act (BOFIA), the CBN is responsible for granting banking licenses to carry on the business of banking and for supervising and regulating banks and other financial institutions in Nigeria.

The principal objectives of CBN Act are to (Section 2, CBN Act):

 ensure monetary and price stability.

 issue legal tender currency in Nigeria.

 maintain external reserves to safeguard the international value of the legal tender currency.

 promote a sound financial system in Nigeria.

 act as banker and provide economic advice to the Federal Government of Nigeria.

The basic functions of the CBN include:

 Conduct of monetary policy through the use of appropriate instruments in order to influence the levels of monetary and credit aggregates so as to achieve moderate or low level of inflation and enhanced economic growth.

 Production, distribution and management of the legal tender currency.

 Management of foreign reserves as well as the international value of the domestic currency.

 Promotion of a sound financial system through adequate regulation and supervision.

 Banker and economic adviser to the government: The CBN not only keeps public sector deposits but also lends to the government to finance budget deficits. It also renders economic advisory functions to the government.

 Banker to other banks: Banks keep a proportion of their deposits with the CBN. They also approach the CBN for financial accommodation or bail-out when the need arises (banker of the last resort function).

 The CBN also engages in developmental activities through promotion of specialized financial institutions in order to accelerate economic growth and development.

The basic functions of the CBN under CBN and BOFI Acts include:

 Conduct of monetary policy through the use of appropriate instruments in order to influence the levels of monetary and credit aggregates so as to achieve moderate or low level of inflation and enhanced economic growth.

 Production, distribution and management of the legal tender currency.

 Management of foreign reserves as well as the international value of the domestic currency.

 Promotion of a sound financial system through adequate regulation and supervision.

 Banker and economic adviser to the government: The CBN not only keeps public sector deposits but also lends to the government to finance budget deficits. It also renders economic advisory functions to the government.

 Banker to other banks: Banks keep a proportion of their deposits with the CBN. They also approach the CBN for financial accommodation or bail-out when the need arises (banker of the last resort function).

 The CBN also engages in developmental activities through promotion of specialized financial institutions in order to accelerate economic growth and development.

Measures adopted by CBN to control Commercial Banks

1. Quantitative Tools:

(v) Bank Rate: Interest rate charged by the CBN on the re-discounting of Bills of exchange.

(vi) Open Market Operation: Sale or purchase of treasury bills by the CBN to control money supply (money in circulation).

(vii) Reserve requirements: Aimed at the controlling the credit creation capacity of deposit money banks as well as enhancing safety.

(viii) Credit ceiling: Credit control policy that specifies maximum credit exposure to specific sectors.

2. Qualitative Tools:

(i) Selective credit control: Directing or influencing the flow of credit to preferred sectors.

(ii) Moral suasion: Use of persuasion to get the banks to comply with government directives.

(iii) Sanctions: Use of punishments to enforce government directives.

The regulatory agencies in the Nigerian banking sector which is the money market segment of the nation’s financial system are:

The Central Bank of Nigeria (CBN): This is the apex regulatory agency in the money market where the banking sector is a dominant player. It is charged with the responsibility of formulating, implementing, supervising and monitoring the performance of regulatory systems in the money market as well as revision of same where necessary.

The Nigeria Deposit Insurance Corporation (NDIC): The NDIC seeks to promote stability in the banking sector through provision of insurance facility for customers (depositors) of licensed deposit money banks in the country. The NDIC guarantees customer deposits up to a specified maximum.

The Financial Services Regulatory Coordination Committee (FSRCC): This agency coordinates the regulatory activities of all the regulatory agencies in the nation’s financial system in order to promote synergy.

On-site examination involves independent on-site assessment of banks’ corporate governance, internal control system, reliability of information supplied by the banks, etc. Such examinations may be carried out within six months of commencement of operation (maiden) for new banks. It may also be a routine or regular examination targeted at specific areas of operation of a bank (like credit) and accordance with section 32 of BOFIA 1991. It entails unannounced visits to banks in orderto form an independent opinion on their performance. Off-site supervision involves the review and analysis of the financial condition of banks based on information contained in prudential reports, statutory returns and other relevant documents provided by the banks.

7.0 REFERENCES/FURTHER READINGS

CBN Act (2007). Establishment Act of Central Bank of Nigeria. Law of the Federation of Nigeria.

Mishkin, F.S. and Eakins, S.G. (2009), Financial Markets and Institutions (6^th Ed), Boston MA:

Pearson Education, Inc.

Nnanna, O.J.; Englama, A. and Odoko, F.O. (2004), Financial Markets in Nigeria, Abuja:

Central Bank of Nigeria.

Nwakoby, C.I.N. (2004), Banking Practice and Operations in Nigeria (Principles, Issues and Practice), Enugu-Nigeria: Ojiemeka Associates in Association with New Generation Books.

Okafor, F. O. (2011) Fifty Years of Banking Sector Reforms in Nigeria (1960-2010): -Past Lessons: Future Imperative, First Bank of Nigeria Research Chair Report, Banking and Finance, Nnamdi Azikwe University, Awka, Enugu: Ezu Books Limited.

UNIT 3 REGULATORY AGENCIES II – NIGERIAN DEPOSIT INSURANCE