1.1 BACKGROUND OF THE STUDY
The deteriorating condition of financial institutions particularly banks has remained a problem of great concern to policy makers. It is now a well know fact that there is wide spread distress in the banking system and despite the measures recently taken by the government as well as bank regulators and supervisors, there remain fear that the problem is not over yet and is being suppressed and not being suppressed and not being dealt with decisively.
Banking crisis is not limited in Nigeria, it is also present in other parts of African, latin America, Asia, Europe and North America. Infact, it is a development that has come to be associated in particular with economic in which financial liberalization is being or has been implemented.
There is wide spread belief that banks occupy unique positions in most economics, both developed and developing countries, as creators of money, the principal depository of savings, major allocators of credit, and the manager of the country’s payment mechanism. Consequently, the government often deem it necessary to formulate policies, for the soundness, efficiency and safety of the bank industry. The monetary authority has the responsibility for the supervisor of the banking system. This responsibility is discharged by undertaking both of site and on-set examination of the books of the banks. The provisions among other things cover minimum capital requirements, returns to be submitted to the CBN Central Bank of Nigeria by banks, power of the CBN to conduct routine and special examination and power of the CBN to revoke a bank’s license.
2.0 REVIEW OF RELATED LITERATURE
2.1 HISTORICAL BACKGROUND OF THE STUDY
The history of banks distress/feature in Nigeria dates back to the 1930s and 1940s for instance, between 1930 and 1959 when the Central Bank of Nigeria (CBN) was established over 21 bank failures were recorded (Soyibo and Adekanye 1992). The Nigerian banking sector had witnessed serious problem that led to mass failure of banks in the early 1950s. The failed banks constituted the many private banks that had adopted overzealous credit expansion policies in an attempt to increase what was allegedly described as restricted access to credit by existing foreign banks. The later years of the 1960s witnessed the gradual return to normalcy. Perhaps, attempts were made to forestall subsequent failures by introducing basic regulatory policies to ensure adequate capitalization and liquidity as well as moderate expansion in the credit portfolio. During this period, banks operated in a market in which prices were dictated by the regulatory authority (James Akparan Adam, 2002). The level of capital was equally low having no bearing on the changing structure of banks’ assets and by implementation, the banks’ assets were highly risky.
Banking regulations in Nigeria emerged as a result of high incidence of bank failure as experienced in the 1940s and 1050s. The era of banking legislation commenced with the opening of the CBN in 1959. The establishment of CBN presented ground for the adoption of monetary management, stricter law and regulation and improved institutional facilities for supervision. The CBN employs many tools in carrying out its supervisory role, some of which have been effective while others have not. Prior to the 1990s, the financial sector grew both in size, structure and function. Since the late 1980s, large-scale distresses have been experienced in the financial sector. These distresses apart from eroding the public confidence in the sector, its raised question marks on the CBN/NDIC’s regulatory activities especially bank examination and supervision. In fact, the CBN/NDIC’s supervisory and examination role has been said to be inadequate and a possible cause of the widespread distress in the financial sector.