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CHAPTER ONE

INTRODUCTION

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 overlap, 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 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. 

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