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PERCEIVED IMPACT OF PRUDENTIAL GUIDELINES ON THE
SERVICES AND PERFORMANCE OF COMMERCIAL BANKS IN
NIGERIA
BY
AIGBOGUN, USUNOBUN FRANCIS
PG/MBA/06/45601
BEING A RESEARCH PROJECT PRESENTED TO THE FACULTY OF
BUSSINESS ADMINISRATION IN PARTIAL FULFILMENT OF THE
REQUIREMENTS FOR THE AWARD OF DEGREE OF MASTER OF
BUSSINESS ADMINISTRATION (MBA) IN BANKING AND FINANCE OF
THE UNIVERSITY OF NIGERIA
SUPERVISOR: DR. J.U.J. ONWUMERE
2011
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CERTIFICATION
Aigbogun, Usunobun Francis, a postgraduate student in the Department of
Banking and Finance, with Registration number PG/MBA/06/45601, has
satisfactorily completed the requirements for project work for the Degree of Master
of Business Administration in Banking and Finance of the University of Nigeria.
The work incorporated in this project is original and has not been submitted in part
or in full for any other Diploma or Degree of this University or any other
institution of higher learning.
-------------------------------------------
AIGBOGUN, USUNOBUN FRANCIS
(STUDENT)
---------------------------------- --------------------------
DR. J.U.J ONWUMERE DR. J.U.J ONWUMERE
(SUPERVISOR)(HEAD OF DEPARTMENT)
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DEDICATION
This work is dedicated to my late father, Mr. S.A. Aigbogun, my family, my
brother-Kevin Aigbogun and to those that contributed immensely towards the
success of this project work.
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ACKNOWLEDGEMENTS
I acknowledge with thanks, the efforts of individuals and organizations for their
great contributions in actualizing the dream of this study. I must particularly thank
my project supervisor, Dr. J.U.J Onwumere, my Head of Department and
colleagues in the office. Also, my gratitude goes to the staff and management of
the Central Bank of Nigeria Research Library here in Enugu, and others too
numerous to mention. Nevertheless, I take absolute responsibility for all errors,
omissions and commission found in this project.
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ABSTRACT Within the framework of this project “Perceived impact of Prudential Guidelines
on the services and performance of Commercial Banks in Nigeria”, the researcher
has attempted to reiterate the importance of prudential guidelines in helping banks
to improve on their performance. The study set out to examine its impact on bank
safety and confidence of Nigerians especially depositors among others.
The researcher employed both primary and secondary sources of data from samples
derived from the populations of selected commercial banks. The researcher adopted
the use of structured questionnaire as the main instrument of data collection. Data
were analyzed using the Chi-Square (X2) analytical technique.
Findings from the study revealed that there is increased need for bank supervision
from the regulatory bodies. The guidelines have been welcomed as a step in the
right direction as they have helped to check the mismatch between banks’ reported
and actual profits and also checked the early detection of fraud, distress and
deterioration of banks credit portfolio.
In conclusion, prudential guidelines have also helped to check non-performing
loans and ensure proper scrutiny of loan proposals and enhanced regulatory
activities in the banking industry most especially the commercial banks. Several
recommendations were made in a bid to alleviate the difficulties banks encounter in
implementation of the provision of the prudential guidelines. These include
encouragement of management effectiveness via enlightenment programe
seminars, periodic review of the guidelines to meet prevailing national and
international banking trend. It is recommended that further research be conducted
to improve on existing ones.
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TABLE OF CONTENTS Title page---------------------------------------------------------------------------------------i
Certification-----------------------------------------------------------------------------------ii
Dedication-------------------------------------------------------------------------------------ii
Acknowledgements--------------------------------------------------------------------------IV
Abstract----------------------------------------------------------------------------------------v
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study---------------------------------------------------------------1
1.2 Statement of Problem-------------------------------------------------------------------6
1.3 Objectives of the Study-----------------------------------------------------------------8
1.4 Research Questions----------------------------------------------------------------------9
1.5 Hypotheses of the Study----------------------------------------------------------------9
1.6 Scope of the Study-----------------------------------------------------------------------9
1.7 Limitations to the Study---------------------------------------------------------------10
1.8 Significance of the Study--------------------------------------------------------------10
1.9 Operational Definition of Terms------------------------------------------------------11
References-------------------------------------------------------------------------------12
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1 Overview of Prudential Guidelines---------------------------------------------------13
2.2 Prudential Guidelines-------------------------------------------------------------------14
2.2.1 Management of Risk Assets---------------------------------------------------------15
2.2.2 Credit Portfolio Classification------------------------------------------------------16
2.2.3 Asset Classification-------------------------------------------------------------------17
2.2.4 Provision for Non-performing Facilities-------------------------------------------19
2.2.5 Credit Portfolio and Interest Accrual Disclosure Requirements----------------21
2.3 The Need for Prudential Guidelines------------------------------------------------------23
2.4 Supervision Policy on the Adequacy of Liquidity of Banks--------------------------24
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2.5 Guidelines on Capital Adequacy of Banks----------------------------------------------26
2.6 Dealings with Subsidiaries and Associates----------------------------------------------27
2.7 Impact of Prudential Guidelines on Domestic banks-----------------------------------28
2.8 Impact of Prudential Guideline on the Nigeria Economy------------------------------30
2.9 Prudential Guidelines on International Bank---------------------------------------------32
References-------------------------------------------------------------------------------------42
CHAPETR THREE: METHODOLOGY
3.0Introduction------------------------------------------------------------------------------------43
3.1 Research Design------------------------------------------------------------------------------43
3.2 Population and Sample Size-----------------------------------------------------------------43
3.3 Sampling Technique--------------------------------------------------------------------------44
3.4 Nature and Sources of Data------------------------------------------------------------------44
3.5 Techniques of Analysis-----------------------------------------------------------------------44
References--------------------------------------------------------------------------------------45
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.0 Introduction-------------------------------------------------------------------------------------46
4.1 Data Presentation------------------------------------------------------------------------------47
4.2 Test of Hypothesis----------------------------------------------------------------------------56
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND
RECOMMENDATIONS.
5.1 Summary of Findings------------------------------------------------------------------------60
5.2 Conclusion--------------------------------------------------------------------------------------63
5.3 Recommendations-----------------------------------------------------------------------------64
Appendix--------------------------------------------------------------------------------------------66
BIBLIOGRAPHY--------------------------------------------------------------------------------68
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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
All over the world, the banking industry plays a strategic role in every nation’s
economic development. The Central Bank plays a dominant role in both the
decision making and managerial process taking place in the economy while other
banks do provide the essential financial services needed for effective operation of
the economy. Bank failures do have destabilizing impact on the economy of any
nation. It is precisely the consequence of these failures that led to the enactment of
various legislations, rules and guidelines by relevant authorities to curb the
excesses the banks with a view to ensuring that banks operating in Nigeria do so in
accordance with the best practices of International banking professional standards.
Banking malpractices alternatively referred to as corruption and economic crimes
constitute the genius of what is generally known as and commonly called “Elite or
white collar crimes. Legislation governing the banking practice in Nigeria is
sourced from three major areas. They are:
Law of General Application: This is the law that is applicable across the
countries under the former British Empire. Such law because it was
bequeathed to Nigeria at the Independence is otherwise referred to as
“received English laws”.
Statute Law: These are laws specifically enacted by the nation’s legislature
known as the Parliament of the National Assembly to deal with specific
subjects or sectors. Example of such statute law are BOFIA (Banks and
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other financial institution Acts 1991), the CBN Act 1991 and CAMA
(Companies and Allied Matters Act) 1990.
Subsidiary Legislations: These are legislations made under the authorities of
existing statutes. Examples are Rules, Orders, and Regulations by laws and
ordinances.
The core legislation for this research is the Subsidiary laws and such are made by
the apex bank CBN for other banks to observe. The prudential guideline was
issued on November 7th 1990 Circular No BSD/DO/23/VOL.1/11 to all licensed
Banks addressed requirements forasset classification and disclosure, provisioning,
interest accrual and off balance sheet engagements.
In view of the importance of the circular to bank management, bank auditors and
bank examiners, the objective of these guidelines is to prescribe the prudential
treatment of restructured accounts to provide a transparent mechanism for timely
structuring of debts of viable entities facing problems, outside the purview of
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BIFR, DRT and other legal proceedings for the benefit of all concerned. The scope
of these guidelines are applicable to restructuring/rescheduling of amounts due
from all borrowers other than those eligible for restructuring under CDR
Mechanism, eligible for restructuring under the debt mechanism for SME’s and
restructured on account of Natural calamities for which Reserve Bank has issued a
separate set of guidelines.
Casting a look at the size structure, the assets structure, the deposits structure and
the volume of credits they grantto the economy, their dominant position becomes
evident. In the light of this therefore, their indispensable role of pooling together
funds from the surplus economic unit to the deficit unit fast tracks economic
activities. Effective management of banks assets and liabilities posed a great
concern to all stakeholders because of large scale financial distress. The late 1980s
and early 1990s were years of financial boom, as the number of players increased
substantially in the system. For instance, between 1986 and 1989, about 38 new
commercial and merchant banks were created. The increase in the number of banks
over stretched the existing human resources capacity of the banks which resulted
into many problems such as poor credit appraisal system, financial crimes,
accumulation of poor asset quality among
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others. The consequence was increased in the number of distress, banks and
depositors began to loose confidence on our financial institutions in managing their
fund.
Based on these experiences, the Federal Government of Nigeria through the
Central Bank of Nigeria (CBN), 1990 indicates that regulation and supervision are
essential ingredients for stable and healthy financial system, and that the need
becomes greater as the number and variety of financial
Institutions increased. The banking sector was singled out for a special protection
because of the vital role banks play in an economy. Bank supervision entails not
only the enforcement of rules and regulations, but also judgment concerning the
soundness of banks assets, its capital adequacy and management (Volker, 1992).
Effective supervision leads to healthy banking industry. At this direction, the
deposit insurance scheme the assets quality of banks, reduce bad and doubtful debt,
and ensure capital adequacy and stability of the system so that the depositor’s fund
would be protected.
Banking as essentially an international business, especially now that domestic
financial markets are being internationalized, need to develop and continuously
review their reporting system which allow for a high degree of comparability of
banking performance across national boundaries. Such systems have been evolved
in such areas of banking practice as credit portfolio classification, disclosure
interest accrual and off balance sheet engagements. The apex institution in Nigeria
banking system, the Central Bank of Nigeria (CBN) is continuously moving banks
in the country towards compliance with international banking practices.
To this end, the Banking Supervision Department (BSD) issued no November 7,
1990, circular letter No.BSD/DO/23VOL.1/11, to all licensed banks and their
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auditors. The circular titled “Prudential guidelines for licensed Banks” addressed
requirements for asset classification and disclosure, provisioning interest accruals
and off-balance-sheet engagements. The prudential guideline is intended as a hand
book for target groups such as the bank auditors and the examiners. It is the task of
the examiner to prevent bank failure by identifying bank problems at an early stage
to allow for intervention and or corrective action before the situation gets out of
hand.
1.2 STATEMENT OF PROBLEM
The Central Bank of Nigeria (CBN) as a supervisory monetary authority had
reasons for introducing the prudential guidelines into the banking scene in order
to review banks credit portfolio at least once in a quarter with a view to
recognizing any deterioration in credit exposure based on perceived risks of
default. In order to facilitate comparability of banks classification of their credit
portfolios, the assessment of risk of default should be based on criteria which
should include, but not limited to repayment performance borrowers repayment
capacity on the basis of current financial condition and realizable value of
collateral.
Interest on problem loan/over draft is another area where differences exist
among banks. When loans/overdrafts become apparently uncollectible, how
should the interest that is calculated on it be treated? While some banks credit
their profit and loss account with such unearned interest, others credit their
suspense account.
The deregulation of interest in the Structural Adjustment Programme (SAP)
period did not help, either interest on non-performing account were credited to
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the profit and loss account of most banks to make their performance appear
good to investors, the public and supervisory monetary authorities. This
“window dressing” performance in most banks shook public confidence in
bank’s financial statement in the late 1980 up to 1990, when prudential
guidelines was introduced.
Prior to this period, most banks believed that once loans/overdraft was secured,
whether the accounts were serviced or not, interest on it should continue to be
credited to their profit and loss accounts believing that they would realize the
security in case of default in payment. Most often banks were not too bothered
as to whether the collateral was perfected or not thereby making realizability of
collaterals difficult, if not out rightly impossible.
Consequently, the prudential guidelines were expected to address the following;
A. To enhance public confidence in banking system in the country.
B. Harmonization of credit administration in the country with what is
obtainable in other parts of the world.
C. Timely recognition of deteriorating risk assets.
D. To create a healthy banking environment in our economy.
E. To create uniformity in loans/overdraft classification among banks in the
country.
A. To enhance public confidence in banking system in the country.
B. Harmonization of credit administration in the country with what is
obtainable in other parts of the world.
C. Timely recognition of deteriorating risk assets.
D. To create a healthy banking environment in our economy.
E. To create uniformity in loans/overdraft classification among banks in the
country.
F. Uniform provisioning for expected loans/overdrafts losses.
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G. Undue importance placed on collaterals by most banks at the detriment of
fund flow considerations. Since 1990 when a prudential guideline was
introduced, the questions being asked regarding the prudential guidelines are;
I. Has the guidelines solved or attempted to solve these problems?
ii. Will the guidelines be a success in the long run?
iii. Will the guidelines create more problems to the system?
In the research, a detailed appraisal of prudential guidelines is to be undertaken,
and a forecast of what they have for the Nigeria Banking Industry will be
discussed.
1.3 OBJECTIVES OF THE STUDY
The objectives of this study shall be as follows: i. To determine the impact of the prudential guidelines on bank safety and
confidence in Nigeria. ii. To assess the reaction of depositors to the guidelines.
iii. To find out whether there are international supervisory perspectives which
affect national experience.
91.4 RESEARCH QUESTIONS
i. To what extent has the Prudential Guidelines helped to ensure safety and
confidence in Nigerian banking system?
ii. How do depositors react to the guidelines?
iii. Are there international supervisory perspectives to the guidelines?
1.5 HYPOTHESES OF THE STUDY
The hypotheses of this study are as follows:
i. Prudential guidelines do not enhance safety and confidence in the Nigerian
banking system.
ii. Depositors do not react favourably to the prudential guidelines.
67
iii. There are no international supervisory perspectives which affect national
experience.
1.6 SCOPE OF THE STUDY
There are many banks in Nigeria banking industry. To achieve the aim of this
research, the researcher has restricted himself to the study of only one- United
Bank for Africa (UBA). In this regard, three branches of UBA within Enugu
Metropolis are studied. The branches are UBA Main branch at station road, Okpara
Avenue 2 (Marble House) and UNEC branch
10
1.7 LIMITATIONS TO THE STUDY
The limitations to this work include:
1. The problem of meeting appropriate officials of the banks who will give the
right information required for the work.
2. 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 Red-tapism which hinders the flow of information in
Nigeria.
3. 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.
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1.8 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.
i. It is also necessary to research on the effects of the guidelines on
banks 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.
ii. 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.
iii. The duties of the Central Bank of Nigeria (CBN) and Nigeria
Deposit Insurance Corporation (NDIC), Central Bank of Nigeria (CBN) and
the Nigerian Deposit Insurance Corporation (NDIC).
1.9 OPERATIONAL DEFINITION OF TERMS
- BANK: A Bank is a financial house established for the purpose of
accepting deposits and other precious commodities from the public for
safe keeping.
- PORTFOLIO: This is a collection of investible funds.
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- PRUDENTIAL GUIDELINES: It is the recognition of credit risk and
writing-off same to avoid false picture of balance sheet.
- BAD DEBTS: There are debts which is not recoverable within the time
frame set for their normal recovery period.
- DOUBTFUL DEBT: There are doubtful in case of recovery, hence they
are termed doubtful debt.
- EFFICIENT PORTFOLIO: A group of asset that yield a maximum
return for a given level of risk.
- RISKS: An index of the variability of realized from expected returns.
12
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REFERENCES
Adekanhe .F (1983); APratical Guide to Bank Borrowing, U.K Graham
Burn,Bedfordshire.
Adeniyi .O.A (1988); “Employment Credit Scoring as an Aid to personal
lending Decision in Nigeria Commercial Banks ”The University
Banker, vol. 11.
Ajie .H.A (1997); “ Credit Administration and Control in a Deregulated
Economy. Port Harcourt: Osia International Press Ltd.
Ikeagwu .E.K (1998); Groundwork of Research Methods andProcedures
Enugu: Institute of Development Studies, University of Nigeria.
Kama, U (2006) “Recent Reforms in the Nigerian Banking Industry: Issues
and Challenges” CBN Bullion. 30(3),
Oseyemeh, R.K.O (1986); “ Practice of Banking ” Lending and Finance.
Lagos.
67
CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.1 OVERVIEW OF PRUDENTIAL GUIDELINES
Theorigin of a work does not necessarily imply coming out with something
new and extra ordinary but drawing implications and consequences from
already existing marks. Based on this, the research is being done by way of
reviewing the existing literature on the subject and then coming out with
something new at the end of the overall exercise.
Banking is essentially an international business, especially now that domestic
financial markets in many countries are being internationalized, one
implication of international banking is the necessity to develop and
continuously review the reporting systems which allow for a high degree of
comparability of banking performance across national borders. Such systems
have been evolved in such areas of banking practice as credit portfolio
classification anddisclosure, interest accruals and off-balance sheet
engagements. Thus, the apex institution in the Nigeria banking system, the
Central Bank of Nigeria is consciously moving bank in the country towards
compliance with international banking practices. To this end the Banking
supervision of CBN issued on November 7th, 1990 the circular titled
prudential guidelines for license banks addressed requirements for asset
classification and disclosure, provision, interest accruals and off balance sheet
engagements. In view of the importance of the circular to bank management,
bank auditors and bank examiners, it becomes very important to have a
critical look at the prudential guidelines. One of the deficiencies in Nigeria
Banking system was the failure of many banks to recognize the problem of
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Asset Classification, provision and writing off and this led to the prudential
guidelines of November 7th 1990 NO>BSD/DO23/VOL.1/11 to all licensed
Banks.
2.2 PRUDENTIAL GUIDELINES
Without prejudice to the requirement of the Statement of Accounting
Standard on Accounting by Banks and Non-Banking financial institutions, all
banks prudential guidelines as confirmed in the circular for reviewing and
reporting their performances with immediate effect.
According to ChuideOjiakor in his handout on Banking laws regulations,
prudential guidelines deals with the Management of Risk Assets,
classification of credit facilities, interest and provisions, licensed banks are
required by the guideline to manage their credit portfolio continuously at least
every quarter with a view to recognizing any deterioration in credit quality.
2.2.1 MANAGEMENT OF RISK ASSETS
A realistic valuation of assets and prudent recognition of income and
expenses are critical factors for evaluating the financial condition and
performance of financial institutions. Majority of Banks assets are loans and
advances; thus the process of assessing the quality of credit and its impact on
solvency is absolutely important.
In many developing economy, the failure of Banks to identify problem assets
is one of the most serious deficiencies and as a result, balance sheets often do
not reflect their true financial condition and income statements show over
stated profit upon which dividends are paid. The banks are expected to have
in place a portfolio review system that ensures the evaluation of credit
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policies and identification and monitoring of existing or potential problem
loans. The system should help ensure that timely and adequate provisions are
taken to maintain the quality of the loan portfolio and that adequate provision
for losses are set-up and maintained. It is one of the reserves. Bank objectives
to ensure that financial institutions adopt a prudent risk management and
credit policies to minimize the extent and likely impact of such losses are:-
The objectives of management of Risk assets are to establish a prudent base
for:
(i) Classification of assets quality.
(ii) Determination of adequate level of loan loss and their valuation reserves.
(iii) Accounting treatment of accrued but un-collected interest on non-performing
loans.
2.2.2 CREDIT PORTFOLIO CLASSIFICATION
Generally, financial institutions should classify all direct and indirect extension of
credit including loans and advances, accounts receivable, properties acquired by
the banks in settlement of loans, equity investment participation contingent items
in the nature of direct substitutions and miscellaneous assets account. A credit
facility is deemed to be performing or none performing as the case may be. A
credit facility is deemed performing if payment of both principal and interest are
up to date in accordance with the agreed terms but credit facility is deemed none
performing when any of the following conditions exists.
(i) Interest or principal is due and unpaid for 90 days or more.
(ii) Interest payment equal to 90 days interest or more has been capitalized,
rescheduled or rolled over into a new loan. The practice whereby some
licensed banks merely renew, rescheduled or roll-over non performing
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credit facilities without taking into account the repayment capacity of the
borrower is objectionable. There, before a credit facility already
classified as none performing can be reclassified as performing, the
borrower must effect cash payment such that outstanding unpaid interest
does not exceed 90 days.
2.2.3ASSET CLASSIFICATION
Assets will be classified in the following categories.
(a). STANDARD” Assets in this category are not subject to criticism. In general,
Performing loans and other assets which are fully and formally collaterised both as
to principal and interest, by cash or by deposits with the lending institution or by
security issued by government or by the Reserve Bank and full repayment of
interest and principal is not in doubt are included in this category regardless of
arrears or other adverse credit factors.
(b) SUBSTANDARD” Assets that are not protected by the current financial
soundness and paying capacity of the obligator. In essence, substandard assets are
those whose primary source of payment may be insufficient to fully service the
debt; the lending institution may need to rely on secondary sources for the
repayment of the loan.
Therefore, objective criteria defines substandard facility as that on which unpaid
principal and/or interest remain outstanding for more than 90 days but less than
180 days the subjective criteria sees substandard facility as
that which repay such as inadequate cash flow to service debt, under capitalization
or insufficient working capital, absence of adequate financial information or
collateral documentation irregular payment of principal and/or interest and inactive
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accounts where withdrawals exceeds repayments or where repayments can hardly
cover interest charges.
DOUBTFUL” Assets that exhibit all the weakness inherent in the assets classified
as sub-standard with the added characteristics that the assets are not well secured.
These weaknesses make collection in full on the basis of currently existing facts,
conditions and values improbable. The probability of some loss is expected but
because of certain reasonably specific factors which may strengthen the assets,
classification as loss is not warranted at this stage. Non-performing assets that have
been past due for more than 90 days are usually classified as doubtful unless they
are well secured, legal action has actually commenced and timely realizable of the
collateral or successful enforcement of the guarantees can reasonably be expected.
Objectively, facility remains outstanding for at least 180 days but less than 360
days with unpaid principal and/or interest.
LOSS” Assets that are considered to be uncollectible, or have minimal recovery
value, or are unable to be collected within a reasonable time after
commencement of legal proceedings for recovery. This classification does not
mean that the asset has no recovery or salvage value. Rather that it is neither
practical nor desirable to defer writing off the asset even though it is possible that
partial recovery may be affected in the future. Such assets should not be retained in
the books while attempting long term recoveries. Loss should be taken in the
period in which they are identified as uncollectible. Non-performing assets which
have been past due for at least 90 days or more should also be classified as loss
unless such assets are well secured, legal action have actually commenced and
timely realization of collateral or successful enforcement of the guarantees can be
expected, there is of course, no objection to a more conservation classification if
such is warranted, based upon the analysis of the borrower’s financial condition,
ability and willingness to repay.
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2.2.4PROVISION FOR NON PERFORMING FACILITIES
Licensed banks are required to make adequate provision for perceived losses on
the credit portfolio classification system prescribed in paragraph 2 in order to
reflect their true financial condition. Two types of provisions are considered
adequate to achieve the objective. Specific provisions are made
on the basis of perceived risk of default on specific credit facilities while general
provisions are made in recognition of the fact that even performing credit facility
harbors some risk of loss no matter how small.
Consequently, all licensed banks shall be required to make specific provision for
non-performing credit as specified here.
(a) For facilities classification as substandard, doubtful or lost.
(i) Interest overdue by 90 days should be suspended and recognized on cash basis
only.
(ii) Principal repayments that are overdue by more than 90 days should be fully
provided for and recognized on cash basis only.
(b) For principal repayments not yet due on non performing facilities provision
should be made as follows:-
Sub-standard facilities: 10% of the outstanding balance.
Doubtful credit facilities: 50% of the outstanding balance.
Lost credit facilities: 100% of the outstanding balance.
For prudential purpose, provisioning as prescribed above should only take
cognizance of realizable tangible security in the course of collection or realization
therefore, collateral values be recognized on the following basis.
a. For credit exposure where the principal repayment is in arrears
by more than six months, the outstanding un-provided principal should not
67
exceed 50% of the estimated net realizable value of the collateral security.
b. For credit exposure where the principal repayment is in arrears
by more than one year, there should be no outstanding un-provided portion
of the credit facility irrespective of the estimated net realizable value of the
security held.
c. For credit exposure secured by a floating charge or by an
unperfected or equitable charge over tangible security, it should be treated as
an unsecured credit and no account should be taken of such security held in
determining the provision for loss to be made. Each licensed bank is
required to make a general provision of at least 1% risk assets not
specifically provided for.
2.2.5CREDIT PORTFOLIO AND INTEREST ACCRUAL DISCLOSURE
REQUIREMENTS.
Every licensed bank is required to provide in its audited financial statements an
analysis of its credit portfolio into “performing” and “non-performing” as defined
in the prudential guidelines paragraphs 2.2 and 2.4.
The amount of provision for deterioration in credit quality (i.e. losses) should be
segregated between principal and interest and then the maturity profile of credit
facilities based on contracted repayment programmed should be provided along
with the maturity profile of deposit liabilities in the financial statement.
On interest accrual, it is the responsibility of bank management to recognize
revenues when they are earned or realized and make provision for all losses as
soon as they can be reasonably estimated, however, experience revealed a wide
diversity amongst licensed banks on income recognition, while a few banks cease
accruing interest on non performing credit facilities after three months, some after
six months or a year some do not appreciate the need to suspend interest on such
67
facilities.
In order to ensure the reliability of published operating results the following
criteria should be adopted by all licensed banks for the treatment of interest on
non-performing loans.
(a) All categories of non performing credit facilities should automatically be
placed on non-accrual status i.e. interest due thereon should not be
recognized as income.
(b) All interest accrual and uncollected but taken into revenue should be
reversed and credited into suspense account specifically created for this
purpose which should be called “interest on suspense Accounts” unless
paid in cash by borrower. Future interest charges should also be credited
into same account until such facilities begins to perform.
(c) Once the facilities begin to perform, interest previously suspended and
provisions previously made against principal debts should be recognized
on the basis of cash only.
2.3THE NEED FOR PRUDENTIAL GUIDELINES
Prudential Guidelines were issued by the Banking supervision Department of
Central Bank of Nigeria through circular letter NO.BSD/DO/23/VOL.1/11 dated
November 7th 1990 to all licensed Banks and their auditors. The guideline
addressed the requirements for asset classification, provisioning, interest accruals
and of balance sheet engagement and banks are expected to be guided by this
circular in the management of their assets, the need for these guideline were to
ensure high degree of comparability of banking performance across the National
borders. Secondly, these guidelines are part of the minimum rules that are being set
out by the reserve Bank for the conduct of banking business in a safe and sound
manner.
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Thirdly, Banks are particularly vulnerable to sudden and unexpected demands on
them for funds. Since liquidity problems in one bank have significant implications
for other banks and for the financial system as a whole liquidity management is
pivotal to banks operation. Therefore, the need for these guidelines is to ensure that
all banks have sufficient liquidity to meet their financial obligations as it falls due
across a wide range of operating circumstances. The maintenance of an assured
capacity to meet promptly all obligations as they fall due is fundamental to
banking.
Fourthly, these guidelines focus on credit risk. Other factors need to be considered
as a separate matter in assessing the overall capital adequacy of the bank. These
factors include the quality of its assets, profitability, liquidity, and market risk,
credit risk concentration adequacy of provisioning and effectiveness of the bank
management system for monitoring and controlling risks. The Reserve Bank
attached great importance to ensuring that the capital resources of individual bank
are adequate for the size, quality and type of their business.
2.4 SUPERVISION POLICY ON THE ADEQUACY OF LIQUIDITY
OF BANKS
The aim of this guideline is to ensure that banks have sufficient liquidity to
meet their financial obligations as they fall due across a wide range of
operating circumstances. It is the responsibility of bank management to ensure
resources are available to cover potential fund outflows. The board of Directors
and management of a bank shall implement and maintain a liquidity management
strategy that is appropriate for the operations of the banks to ensure that it has
sufficient liquidity to meet its obligation. Therefore, banks shall adhere to its
liquidity management strategy at all times and review it regularly to take account
of changing operating circumstances, bank shall inform reserve bank immediately
67
of any concerns it has about its current or future liquidity as well as plans to
address these concerns. The banks liquidity management strategy shall include the
following elements:
- A liquidity management policy statement approved by the board of
directors or a board committee.
- A system for measuring assessing and reporting liquidity.
- Procedure for managing liquidity.
- Clearly defined managerial responsibility and control.
- A formal contingency plan for dealing with a liquidity crisis.
This liquidity management strategy shall cover both domestic and overseas
operation of the bank as well as related entities which have impact on the
bank’s liquidity. For measuring, assessing and reporting liquidity on a regular
basis as appropriate for the operation of the bank. Such system must produce
timely, accurate and relevant information for managing and monitoring the
liquidity positions of a bank in all operating circumstances at a minimum, such
system must be able to.
- Report the composition and market value of bank’s liquid holdings.
- Construct maturating profiles of banks cash flows to identify cumulative
net funding positions at selected maturity dates.
Finally, a bank should document in its liquidity management policy statement,
the underlying assumption used in constructing the maturity profiles of its cash
flows as well as the reasoning behind them. There should also be provision to
review these assumptions regularly to take account of available statistical
evidence or changes in business profile.
2.5GUIDELINES ON CAPITAL ADEQUACY OF BANKS
The focus of these guidelines is on banks holding adequate capital to meet their
67
credit risk (i.e. the potential default by borrowers); and as an aspect of that
country transfer risk. Account is taken in a limited way of collateral and
guarantees. The higher the risk, the greater is the capital backing required, the
sum of risk weighted assets and risk weighted off balance sheet business is
related to banks capital and the resulting risk ration is used as a measure of
capital adequacy.
Risk weightings seek to take account on a portfolio basis, of the relative
likelihood of counter parties being unable to meet their obligations to banks it is
the responsibility of each bank to individually assess the credit risk associated
in dealing with a counterparty to allocate the appropriate amount of capital to
cover that risk and to suitably price the transactions to reflect the risk.
Capital is the cornerstone of banks’ strength the presence of substantial capital
reassures creditors and engenders confidence in the bank. For supervisory
purpose, capital is considered in two Tiers. Tier 1 or core capital and Tier 2 or
supplementary capital which represent other elements which do not satisfy all
the characteristics of Tier 1 capital but which contribute to the overall strength
of a bank as a going concern therefore, a bank capital base is the sum of its tier
1 and tier 2 capitals less deductions.
Tier 1 capital includes paid up ordinary shares, non-cumulative irredeemable
preference and any non-repayment premium arising from the issue of such
shares partly paid shares qualify only for the value of funds actually received.
General Reserves and retained Earnings although distributable in some
circumstances meet the attributes of tier 1 capital.
Tier 2 capital includes other capital elements that impact strength to a bank’s
position but to a varying degree fall short of the qualities of tier 1 capital
instruments. These may include in a bank’s capital base as tier 2 they are made
up of goodwill, other intangible assets and the future income tax benefits.
67
2.6DEALINGS WITH SUBSIDIARIES AND ASSOCIATES
This policy aim is to clarify aspects of the financial institutions Act in relation
to bank’s dealing with subsidiaries and associates. In terms of section 34 of the
Act, banks must obtain the prior approval of the Reserve Bank before
establishing a subsidiary. Such bank must ensure that its subsidiaries and
associates have sound and prudent management responsibility for achieving the
viability of these entities from their own capital and recourses and that they do
not give any impression that the banks resources stand behind or could be called
upon to, stand behind operation: thus the bank should not give a general
guarantee of the obligation of the subsidiary or associate. In terms of risk
exposures arising from the financial dealing with subsidiaries and associates,
the bank should address it as strictly as it would to unrelated entities and then
establish prudent limits on exposure to these entities at both individual and
aggregate level and such should not exceed 25% of the bank’s stand-alone
capital base.
2.7IMPACT OF PRUDENTIAL GUIDELINES ON DOMESTIC BANKS.
- Prudential guideline for banks addresses the requirements for assets
classification disclosure; provisioning, interest accruals and off balance
sheet engagements; therefore, they are based on practices endorsed by
reputable international institutions and regulatory authorities.
- Prudential guidelines are part of the minimum rules that are being set out
by the Reserve Bank for the conduct of banking business in a safe and
sound manner, thus banks have to abide by these minimum standards.
- Banks are particularly vulnerable to sudden unexpected demands on
them for funds and liquidity management is pivotal to bank operations.
67
The aim of the guideline is to ensure that all banks have sufficient
liquidity to meet its financial obligations as they fall due across a wide
range of operating circumstances. It is the responsibility of banks
management to ensure resources are available to cover potential fund
outflows.
- The focus of this guideline also is on banks holding adequate
- Capital to meet their credit risk (i.e. the potential risk of default by a
borrower) and as an aspect of that country transfer risk.
Risk-weightings seek to take into account on a portfolio basis, the relative
likelihood of counterparties being unable to meet their obligations to bank.
- Banks are to inform their external auditors fully of the Reserve Banks
requirements as outlined in the various prudential guidelines on their
financial statements to enhance the credibility of the information
provided.
- Finally, the impact of the guidelines on Banks is to clarify aspects of the
financial institution’s Act in relation to bank’s dealings with its
subsidiaries and associates. Banks must ensure that it subsidiaries and
associates have a sound and prudent management responsible for
achieving the viability of these entities from their own capital resources
and that they do not give impression that the banks resources are behind
their operation.
2.8IMPACT OF PRUDENTIAL GUIDELINES ON THE NIGERIA
ECONOMY.
Banking as already mentioned is essentially an International business and one
implication of international banking is the necessity to develop and continuously
review the reporting systems which allows for high degree of comparability of
67
banking performance across national borders. “Therefore, one of the impacts of
prudential guidelines is that Nigerian Banks can now be compared with other
Banks in other Nations. This is because, systems have been evolved in such areas
of banking practices as credit portfolio classification and disclosure, interest
accruals and off-balance sheet engagement and as such many loopholes have been
checked and sanity has been restored in the banking sector.
There is confidence in the Banking Sector because all the twenty five banks in the
country have to strictly observe and adhere to the minimum standard which falls in
line with the international banking standards. Prudential guidelines have built the
level of confidence in the country’s Banking system as the level of credit default
has been reduced to the barest minimum.
There is uniformity in the banking system with the advent of prudential guidelines
information on credit income and its recognition, interest accrual are taken care of
and the banking accounting system is streamlined. The effect of the guidelines has
led to the issue of accountability in the system. Each person is held responsible for
his/her actions and is punished or regarded accordingly, because of the guidelines
management of Banks have put a system of control capable of detecting any defect
in the facilities as soon as they start to occur.
Due to the confidence the international committee has in the banking system in
Nigeria now, some Nigeria Banks – UBA PLC, Zenith Bank PLC. Intercontinental
Bank PLC, Oceanic Bank PLC etc. have all gone international since the full
implementation of the circular of prudential guidelines, the Nation’s banks
financial statement can be place side by side with those from other countries for
comparability. This has brought confidence and acceptability of Nigeria banks in
international circle. With the implementation of the guidelines, it has been agreed
67
by the Bankers committee meeting of 28th January 2008 that all banks should adopt
a common accounting year end which should take effect from 2008. Therefore,
directors of all banks are advised to pass a resolution to effect and inform relevant
agencies in line with section 334(4) of CAMA 1990.
2.9PRUDENTIAL GUIDELINE ON INTERNATIONAL BANK
The document sets out minimum policies and procedures that each foreign bank
needs to have in place and apply within its credit risk, management programme,
and the minimum criteria it should use to prudently manage and control its credit
risk.
Experience indicates that credit quality is often a sign of problems in the bank;
therefore, the major risk accompanying a weakening credit portfolio is the
impairment of capital or liquidity level.
Thus, credit management should be conducted within the context of a
comprehensive business plan. Although, the document focuses on a foreign bank’s
responsibility for managing and controlling its credit portfolio and risk exposure to
credit risk, it is not meant to imply that credit risk can be managed in isolation
from asset/liability management consideration.
CREDIT: This is the provision of, or a commitment to provide funds
or substitutes for funds (both on and off-balance sheet) on a secured or unsecured
basis to a debtor who is obliged to repay on demand or at a fixed or determinable
future time, the amount borrowed together with fees and/or interest thereon credit
risk is therefore the risk of financial loss resulting from the failure of a debtor, for
any reason to fully honor its financial or contractual obligations to the institution.
Managing credit risk is a fundamental component in the safe and sound
management of all international Banks. Sound credit risk management involves
67
prudently managing the risk/reward relationship and controlling and minimizing
credit risk across a variety of dimensions such as quality, concentration, currency,
maturity and security.
This requires the following programmes;
- Identifying existing or potential credit risk to which the international
bank is exposed in conducting its business activities and developing and
implementing sound and prudent credit policies to effectively manage
and control these risks.
- Developing and implementing effective credit granting, documentation
and processes.
- Developing and implementing comprehensive procedures to effectively
monitor and control the nature, characteristics and quality of the credit
portfolio. Credit Policies establish the framework for lending and reflect
the international bank’s credit culture and ethical standards. To be
effective, policies must be communicated in a timely fashion and
implemented through all levels of the organization by appropriate
procedures and revised periodically in light of changing circumstances.
Such credit policies need to contain at minimum.
- Credit risk philosophy, governing the extent to which the institution is
willing to assume credit risk.
- General area of credit in which the institution is prepared to engage or is
restricted from engaging.
- Clearly defined and appropriate levels of delegation of approval and
provision or write off authorities.
- Sound and prudent portfolio concentration limits. These policies need to
be developed and developed and implemented within the context of a
credit risk management environment that ensures that all dealings are
67
conducted in the highest possible standard of ethical behavior.
CREDIT RISK PHILOSOPHY:
This is the statement of principles and objectives that outlines the international
banks willingness to assume credit risk and will vary the nature and complexity of
its businesses the extent of other risks assumed, its ability to absorb losses and the
minimum expected return acceptable for specific level of risk.
GENERAL AREAS OF CREDIT:
The general areas of credit in which international bank is prepared to engage
usually specify-product lines, types of credit facilities, types of borrowers or
industries in which an international bank focus its marketing efforts.
APPROVAL AUTHORITIES:
Clearly defined and appropriate levels of authorities for credit approval, provisions
or write-offs help ensure that credit decisions are prudent and acceptable, that the
integrity and credibility of the credit process is protected by fair, consistent and
objective credit decisions and that the risk is acceptable given the expected returns.
CONCENTRATION LIMITS FOR THE PORTFOLIO:
This occurs when an international bank’s portfolio contains an excessive level of
credits to single counter parties a group of associated counter parties, an
international Bank’s vulnerable to adverse charges in the area in which the credit is
concentrated and to security impairment sound and prudent portfolio management
and control involves the minimization of concentration risk by developing and
implementing policies and procedures to ensure the div versification of the credit
67
portfolio.
CREDIT GRANTING, DOCUMENTATION AND COLLECTION
PROCESS.
The most significant risk that an international bank faces in the credit granting and
collection process is default. Default occurs if counterparty does not perform its
obligation according to the terms of the credit arrangement. To minimize its
exposures to loss through defaults, each international bank must give proper
consideration to and conduct an assessment of each credit and the credit prior to
the approval or the disbursement of funds, and ensure that credit are appropriately
documented; these procedures to evaluate and document each credit proposal need
to be accompanied by clearly defined procedure for collection and regular
monitoring.
To developing and maintaining a sound Inadequate, incomplete or unenforcement
documentation could lead to non-recovery of funds particularly in instances where
lenders are obliged to resort to litigation for credit recovery.
For an international bank to conduct meaningful credit reviews and ensure that
assets are soundly and conservatively valued, it must maintain credit files
supporting the credit granting and review process. All international banks need to
have in place procedures governing the collection of principal, interest and fees to
ensure that such payment are received on a firmly basis in accordance with the
terms of repayment and are appropriately recorded.
Although most credits are ultimately repaid in full, it is recognized that all
international banks are exposed to risk of default and therefore, some credit write-
off may be expected. A reduction in credit quality needs to be recognized in early
stage when there are still a number of strategic options open to the internal bank in
67
managing its default risk. These options include referral to an internal credit
workout group, where values suggest the need for renegotiation of the terms of the
credit, reorganization of liquidation of the borrower in order to minimize potential
loss of the bank. Recovery efforts require a well-conceived strategy.
ROLE PLAYED BY MONETARY AUTHORITY IN ENSURING
COMPLIANCE WITH THE PROVISION OF THE GUIDELINES.
The Nigeria Deposit Insurance Corporation (NDIC) was established by decree No.
22 of 1988 as a Federal government agency designated to insure the deposit
liabilities of licensed banks and other deposit falling financial institutions operating
in Nigeria. The corporation commenced operations in 1989.
The establishment of NDIC was informed by economic and environmental factors
among.
- Economic Reforms and changes in government policy-the structural
adjustment programme.
- Stiff competition in banking industry-the deregulation of the
Nigeria financial system led to liberalization in the approval and
issuance of banking licenses.
- Bank failures the Nigeria economy witnessed quite a number of bank
failures in the first half of twentieth century especially among indigenous
banks.
- Lessons from other countries. The government towed the line of other
countries that have benefited from the scheme in their economy.
Examples of such countries are Czechoslovakia in 1924, United States of
America with Federal Deposit Insurance Corporation 1933 etc.
67
FUNCTIONS OF NDIC AS SUPERVISORY AUTHORITY.
Sections of the 1988 NDIC decree spells out the following functions of the
corporation.
- Insuring the depositor’s liabilities of licensed Banks the corporation is
mandated by the decree to insure the deposit liabilities of licensed banks.
This basic function confers regulatory responsibilities on NDIC over the
insured financial institution so as to avert possible failures.
- Rendering liquidity support to Banks. In the interest of the depositors and
to help arrest the deteriorating financial condition in the banking system
towards engendering confidence in the industry. For Example,
NDIC/CBC accommodation facility was made available to 10 banks in
1989 to a tune of =N=2.3 billion to bail them out of the serious liquidity
problems.
- Guaranteeing payment to Depositors: Like most deposit insurance
scheme, the NDIC maintains a cut-off point for insurance coverage it
guarantees payments to depositors up to a minimum amount of
=N=50,000.00 to depositor in case of imminent failure.
- Assisting monetary authorities in the formulation and implementation of
banking policies. The Corporation helps the monetary authorities in the
formulation and implementation of banking policies so as to ensure safe
and sound banking practices. Both CBN and NDIC were instrumental in
getting the CBN decree No 24 of 1991 and banks and other financial
instructions decree No 25 of 1991 promulgated. These two decrees have
strengthened the regulatory authorities in ensuring safe and sound
banking practices.
- Promoting Competitive equality and efficiency among Banks. To achieve
67
this, the corporation ensures that all the licensed banks are treated equally
in the payment of Insurance premium.
- Have access to any accounts returns and information in respect to any
licensed bank. The central Bank of Nigeria was established in 1958
through the ordinance promulgated on 17th March 1958 and then started
operation on 1st July 1959. The CBN serves as the main supervisory
authority of Nigerian financial system.
The prudential guidelines of 1990 were the brain child of CBN and were
enacted in a bid forwards maintenance of safe, sound and stability in our
banking system. Joint CBN/NDIC examinations were carried out on the
activities of all licensed banks and it observed that a good number of Banks
were not observing proper operational and accounting practices; thus
appropriate recommendations based on the basis prudential and sound practices
were made which later gave birth to what is today known as the prudential
guidelines since then, CBN/NDIC have carried out series of routine and special
examination of the banks to ascertain their level of compliance with the policy
guidelines as these improve the quality of the bank Assets.
Also, examinations revealed that good number of banks had poor management,
poor internal control, inadequate capital, inadequate liquidity and provisioning
for loan but since after the consolidation of banks in 2005 and then a careful
articulated implementation of the guidelines the twenty five banks that emerged
have been on sound footing and could compete internationally with other
foreign banks. Monetary authorities increased supervisory activities in a bid to
strengthen the banking system and thus the banks were required to send their
quarterly financial statement so as to quickly recognize early signals of distress
and insolvency in the banks.
67
The supervisory activities by the CBN and NDIC continue to increase in the
scope thus since after consideration of twenty five banks to capitalization of
twenty five billion Naira. Those that were unable to meet the requirement
witnessed liquidation thereby meaning that guidelines have come of age and
that the supervisory authorities are up to the expectation of banks reformation.
All the banks in the country have been observing the letters of the prudential
guidelines as contained in the circular. 1-10 for domestic bank and 1-1- for
international banks thereby leading to a safe and sound banking system as we
can now see in Nigeria.
42
67
REFERENCES
Augustus N. Gbosi (1993), Monetary Economics and The Nigeria
Financial System. Pam Unique Publishing Co. Ltd. Port
Harcourt. Nigeria.
Central Bank of Nigeria (1990), “Prudential guidelines for
LicensedBank.”BankingSupervision.CBN
Central Bank of Nigeria (2004), Annual Report And Statement of Accounts,
Abuja: CBN
Deposit InsuranceCorporation; Annual Reports for 1992, 1993, 2003.
Ebhodaghe J.I.J, (1991), “An Effect and implications of new CBNGuidelines on
Banking Industry.” Lagos, Nigeria
Fabio B., “Approach to prudential supervision of InternationalLending.”Nigeria
Lee H. W., “Rethinking the Regulatory Repose to RiskLicensed Bank.”
Taking Banking.”China
Udenwa J.A. (1997), “The Nigerian financial system.”
Jeson Publishing. Port Harcourt. Nigeria
67
43
CHAPTER THREE
METHODOLOGY
3.0: INTRODUCTION
Thechapter focuses on the methodology that is adopted in the study. It includes among other things the research design, population size, sample size, sampling technique, model specification, nature and sources of data and the analytical techniques that will be applied.
3.1 RESEARCH DESIGN
This study employs both the survey and comparative research designs. These are suitable and advantageous for assessing large and small populations especially where a small population is to be derived from a large one.
3.2 POPULATION AND SAMPLE SIZE
The population of this study is the entire staff of United Bank For Africa in Nigeria. A sample of seventy (70) staff with cognate experience in banking from three (3) braches of the bank in Enugu will form the sample size. The three branches and their staff strength are UBA main branch at station road – 69 staff, Okpara Avenue 2 (Marble House) – 30 staff and UNEC branch – 25 staff. Hence, the total number of staff in these branches is 124. Applying the general formula of determining sample size by Yamani (1964): n = N/1+(Ne2)
Where;
n = Sample size = ?
67
N = Population Size = 124 e = error = 0.08 Therefore; n = 69.13470116 which is approximately 70 staff.
3.3 SAMPLING TECHNIQUE
The simple probability sampling technique is to be used in this study. This is
because the technique is suitable for gathering primary data. The relevant
respondents from the groups are to be got using the stratified random method.
3.4 NATURE AND SOURCES OF DATA
Data will be both secondary and primary. The primary data sources are the
questionnaire and personal interview. Secondary data will be got from published
materials of the relevant banks as well as collated data in their relevant
departments.
3.5 TECHNIQUES OF ANALYSIS
The technique of analysis will be both content and statistical. With regard to
content, it will express the available information on purely descriptive,
comparative and analytical grounds. The analytical technique to be employed in
testing the three hypotheses is the Chi-square (X2).
67
REFERENCES
Anake, .O.E. (1998), “An Introduction to Academic Research method,”
Gostak Publishers Co Ltd, Enugu.
First Bank of Nigeria Plc (2002-2007), “Annual Report and Statement
of Account.”
John, O. (2001), Financial Management. Splashmedia Publishers.
Enugu.
Loveday, R., (1979), “Statistics” Cambridge University press, 2nd Edition,
2ndCourse.Pp 150-155.
Onwumere, J.U.J., (2005), Business And Economic Research Methods.
Don-Vinton Limited. Lagos.
Union Bank of Nigeria Plc (2002-2007), “ Annual Report and Statement
ofAccount.”
United Bank for Africa Plc. (2002-2007), “Annual Report and Statement
ofAccount.”
67
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.0 INTRODUCTION
This chapter deals with the presentation and analysis of data collected during the
course of this study. More so, we tried to find out the impact of prudential
guidelines on the performance and services of commercial banks by administering
carefully planned questionnaire on some members of staff who are directly
involved in the practical application of these guidelines in the management of bank
assets and also to assess the effectiveness of prudential guidelines towards proper
implementation of the guidelines in enhancing and appraising credit portfolio of
banks.
Therefore, the researcher employed survey Research approach in analyzing the
effectiveness of prudential guidelines in the appraisal of credit portfolio of banks.
This survey research involves the study of a large population known as sample to
generalize on the large population. The data as the representation is collected and
analyzed so as to draw an inference on the entire population.
67
Table 4.1.1: What was the reason for the introduction of prudential guidelines by
the regulatory Authority in financial and non-financial institutions? OPTION RESPONSES PERCENTAGE %
Because of failure of financial institutions
In late 1980’s
13 18.6
To control facilities of the banks and their
Lending ability.
53 75.7
No idea of the reason why it was introduced.
4 05.7
TOTAL
70 100
Findings from table 4.1.1: From the above table it was observed that 13
respondents or 18.6% said that the introduction of prudential guidelines was due to
Bank failure in late 1980’s. Also observed was that 53 respondents or 75.7% were
of the view that it was to control the credit facilities of banks and their lending
ability. Finally, 4 persons or 5.7% said that they had no idea of the reason why
prudential guidelines was introduced.
Table 4.1.2: What are the effects of prudential guidelines on the bank’s lending
ability?
OPTION RESPPONSES PERCENTAGE
%
It has helped to raise the standard of lending 13 19
67
Ability of all the banks.
Banks are now more prudent in Credit
Administration.
15 21
All of the above. 42 60
TOTAL 70 100
Findings from table 4.1.2: It was observed that 13 respondents or 19% were of the
view that it has helped to raise the standard of lending ability of all the banks while
15 respondents or 21% said that banks are now more prudent in their credit
administration, 42 respondents or 60% said that the options by the first and second
group were all the reasons for the introduce.
Table 4.1.3: Do depositors react favourably to the introduction of these guidelines
by the regulatory authority?
Yes, they reacted favourably to the
introduction of the guidelines.
50 71.4
No, they did not react favourably to
the introduction of the guidelines.
7 10
No idea. 13 18.6
TOTAL 70 100
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Findings from table 4.1.3: From the above table, 50 respondents or 71.4% reacted
favourably to the introduction of the guidelines while only 7 respondents or 10%
reacted unfavourably. 13 persons or 18.6% said they had no vivid idea why it was
introduced.
Table 4.1.4: How can you access the performance of the banks since the
introduction of the guidelines?
OPTION RESPONSES PERCENTAGE %
Favourable 57 81.4
Unfavourable 9 12.9
No idea 4 5.7
TOTAL 70 100
Findings from Question 4.1.4: From the table, it was observed that 57 respondents
or 81.4% reacted favourably to the introduction of prudential guidelines, 9 persons
or 12.9% did not favour the introduction of the guidelines while only 4
persons/respondents or 5.7% said they had no idea why it was introduced.
Table 4.1.5: Do the prudential guidelines introduced by the regulatory authority
meet the international financial institutions and regulatory authorities’ standard?
67
OPTION RESPONSES PERCENTAGE %
Yes, it is in line with the International financial
institutions Regulatory authority’s standard.
58 82.9
No, it is not in line with the International financial
Institutions regulatory authorities’ standard.
5 7.1
None of the above. 5 7.1
None of the above 2 2.9
TOTAL
70 100
Findings from question 4.1.5: Observation from the table above showed that 58
respondents or 82.9% agreed that the guidelines met the international standard,
while 5 respondents each or 7.1% said that it did not meet the international
standard and 2 persons or 2.9% said non of the above reasons.
Table 4.1.6: How many times in a year should your Bank review their credit
portfolio?
OPTION RESPONSES PERCENTAGE %
Once a year. 4 5.7
Bi-Annually 15 21.4
Quarterly 42 60
Monthly 9 12.9
TOTAL 70 100
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Findings from question 4.1.6: From the table above , 4 persons or 5.7% said that
banks should review their credit portfolio once a year while 15 persons or 21.4%
said that such exercise should be twice a year. A careful observation of the table
reveals that 42 persons or 60% said the review should be quarterly while only 9
persons or 12.9% said it should be monthly.
Table 4.1.7: Before the introduction of prudential guidelines, how often do your
Bank review its credit portfolio?
OPTION RESPONSES PERCENTAGE %
Monthly 13 19
Quarterly 17 24
Bi-Annual 40 57
Yearly - -
TOTAL 70 100
Findings from table/question 4.1.7: From the table, 13 respondents or 19% said
that before the introduction of the guidelines, banks reviewed their credit portfolios
quarterly while 17 persons or 25% said it was bi-Annual. A closer look at the table
showed that 40 persons or 57% said that before the advent of the guidelines banks
reviewed the portfolio once a year.
Table 4.1.8: Has the guidelines positively influenced the performance of the banks
in assessing their credit portfolio?
OPTION RESPONSES PERCENTAGE
%
67
Yes, the guidelines has positively influenced
the
Performance of banks in assessing their credit
portfolio.
52 74.3
No, it has not in any way influenced the
performance
Of Banks in assessing their credit portfolios.
4 5.7
Not quite. 12 17.1
No idea. 2 2.9
TOTAL 70 100
Findings from table 4.1.8: From the above table, 52 respondents or 74.3% said that
the guidelines has positively influence the performance of banks in assessing their
credit portfolio while 4 persons or 5.7% said it has not impacted positively. 12
persons or 17.1% said that it has not quite impacted positively while 2 persons or
2.9% said they have no idea of what it is all about.
Table 4.1.9: The practice whereby Banks merely renew, reschedule or roll over
non-performing credit facilities without taking into consideration the repayment
capacity of the borrower acceptable?
OPTION RESPONSES PERCENTAGE
%
Yes, it is acceptable
6 8.6
67
No, it is not acceptable
62 88.6
No idea
1 1.4
None of the above.
1 1.4
TOTAL 70 100
Findings from table 4.1.9: From the table, 62 respondents or 88.6 said it was
unacceptable practice whereby banks merely renew, reschedule or roll over non
performing credit facilities, 6 persons or 8.6% said it was acceptable and finally 1
person or 1.4% said they have no idea respectively.
Table 4.1.10: What is the standard/level of management quality in the Banks with
the advent of the prudential guidelines?
OPTION RESPONSES PERCENTAGE %
High management quality 55 79
Low management quality 12 17
None of the above - -
No idea. 3 4
TOTAL 70 100
Findings from table above showed that 55 persons or 79% said that standard of
management in the banks is high with the advent of the guidelines, 12 persons
Said that the management level has not improved and 3 persons said that they have
no idea.
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Table 4.1.11: How do you know when credit facility advanced to a customer is not
performing?
OPTION RESPONSES PERCENTAGE
%
When Interest/principal is due and unpaid for
a
Period of 90 days or more.
2 2.9
When Interest equal 90 days or more have
been
Capitalized, rescheduled or rolled over.
12 17.1
A and B
56 80
None of the above.
- -
TOTAL 70 100
Findings from table 4.1.11: From the table above, 2 persons or 2.9% said when
interest/principal is due and unpaid for a period of 90 day or more, 12 persons or
17.1% said that when interest/principal equals 90 days or more have been
capitalized, rescheduled or roll over while 56% persons or 80% said that when the
conditions mentioned above exist.
Table 4.1.12: How would you disclose the credit portfolio requirement in your
financial statement of accounts?
67
OPTION RESPONSES PERCENTAGE
%
Each licensed bank is required to provide in its
audited financial statements an analysis of its
credit
Portfolio into performing and non performing.
11 15.7
Amount of provision for deterioration in credit
quality should be segregated between principal
and interest.
20 28.6
Maturity profile of credit facilities based on
contracted repayment programme should be
provided along the maturity profile of deposit
liabilities.
- -
All of the above. 39 55.7
TOTAL 70 100
Findings from table 4.1.12: From the table 11 persons or 15.7% said that banks are
required to provide in its audited financial statements the analysis of its credits; 20
person or 28.6% said that amount of provision for deterioration in credit quality
should be segregated between principal and interest while 39 persons/respondents
or 55.7% said that both conditions are required to be present in the account
including its maturity profile base on contracted repayment.
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55
Table 4.1.13: Are the various percentage provision stipulated in the guidelines for
different classes of non performing credit facilities adequate?
Findings from table 4.1.13: Observation from the table showed that 41
persons/respondents or 58.6% said that the various percentages provided in the
guidelines are in order. 15 persons or 21.4% are of the view that the percentages
are not enough while 10 persons or 14.3% said no idea and 4 persons or 5.7% said
none of the above reasons.
Table 4.1.14: How would you rate the introduction of prudential guidelines in
Nigeria financial institution? OPTION RESPONSES PERCENTAGE %
Very Good 44 62.9
Good 21 30
Fair 4 5.7
Poor 1 1.4
TOTAL 70 100
OPTION RESPONSES PERCENTAGE %
Yes 41 58.6
No 15 21.4
No idea 10 14.3
None of the above. 4 5.7
TOTAL 70 100
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Findings from table 4.1.14: From the table 44 persons or 62.9% were of the view
that the advent of the guidelines was a very welcome idea in Nigerian financial
system; 21 persons or 30% said it was good, 4 persons or 5.7% said it was fair but
1 person or 1.4% said it was a poor venure.
4.2 TEST OF HYPOTHESIS
Totest the hypothesis, data from the tables were grouped in order to make it
testable using Chi-Square statistics. The questions are set in rows and response to
them recorded under columns as “favourable and adverse”. Those entered in the
column favourable are those that responded in affirmation while those who
answered adverse are entered in adverse column.
Hypothesis 1
This is restated into null and alternative forms as follows:
Ho:Prudential guidelines do not enhance safety and confidence in the Nigerian
banking system.
Hi: Prudential guidelines enhance safety and confidence in the Nigerian banking
system.
Response for these is got from the question whether prudential guidelines enhance
safety and confidence in the Nigerian banking system. RESPONSE UBA MAIN
BRANCH
UBA OPARA
AVENUE 2
UBA UNEC BRANCH TOTAL
Favourable 69 28 24 121
Unfavourable - 2 1 3
Total 69 30 25 124
(1) 69 x 121 = 67.33 (1v) 3 x 69 = 1.67
124 124
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(ii) 30 x 121 = 29.27 (V) 3 x 30 = 0.73
124 124
(iii) 25 x 121 24.40 (vi) 3 x 25 = 0.60
124 124
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Sample Distribution. Oi Ei Oi - ei (Oi – ei)2 (O –ei)2/ei
69 67.33 1.67 2.79 0.04
28 29.27 -1.27 1.61 0.06
24 24.40 -0.4 0.16 0.007
0 1.67 -1.67 2.79 1.67
2 0.73 1.27 1.61 2.21
1 0.60 0.4 0.16 0.27
Total 9.12 4.26
Critical Value
df ( r – 1 ) ( r – 1 )
= ( 2 – 1 )( 3 - 1 )
1 x 2
= 2
The Critical value of 0.05 level of significance and 2 degree of freedom is
5.991
Hence decision rule.
df ∑(Oi – ei )2 ≥ 5, then the hypothesis is rejected.
Decision:
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Since the critical value of 5.991 is greater than the calculated value of 4.26, then
the hypothesis is accepted and the Ho hypothesis accordingly rejected. We
therefore conclude that Prudential guidelines enhance safety and confidence in
Nigeria banking system.
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HYPOTHESIS 11:
Ho: Depositors do not react favourably to the introduction of prudential guidelines.
Hi: Depositors reacted favourably to the introduction of Prudential guidelines.
RESPONSE U.B.A. MAIN BRANCH
U.B.A. OPARA A VENUE 2
U.B.A. UNEC BRANCH
TOTAL
Favourable 64 28 24 116 unfavourable 5 2 1 8 Total 69 30 25 124
Calculation:
(1) 69 x 116 = 64.55 (1v) 8 x 69 = 4.45 124 124
(11) 30 x 116 = 28.07 (v) 8 x 30 = 1.94
124 124
(iii) 25 x 116 = 23.39 (vi) 8 x 25 = 1.61
124 124
Sample Distribution:
oi ei Oi – ei (oi – ei)2 (oi – esi)2/ei 64 64.55 -0.55 0.30 0.005 28 28.07 -0.07 0.005 0.0002 24 23.39 0.61 0.37 0.02 5 4.45 0.55 0.30 0.07 2 1.94 0.06 0.004 0.002 1 1.61 -0.61 0.37 0.23s
Total 0.33
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CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS.
5.1 SUMMARY OF FINDINGS
The summary of findings emanating from this study is as follows:
(1) The guidelines were introduced and imposed by the Apex bank (CBN) on
other banks to curtail their excesses in the area of asset management
especially as it pertains to credit portfolio management.
(2) Prudential guidelines makes adequate provisions for risky assets and non-
performing credits and then regularly reviewing their credit portfolio with
view to recognizing deterioration in credit qualities.
(3) The guidelines were meant to improve banks asset qualities and maintain
high degree of lending and investments standard.
(4) Banks were grossly undercapitalized; there were many portfolios of
uncollectable debts and unrealistic profit declaration by banks.
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(5) The guidelines has also helped banks to upgrade their operations and thus
reveals the increasing need of banking supervision in order to ensure
compliance with the guidelines.
(6) It has also helped to spot signs of distress in banking system; hence the
authorities are being urged to step up supervision and examine efforts by
conducting more frequently routine and special examination of banks
activities as well as seeing the need for maintaining high liquidity by banks
to ensure confidence in the system.
(7) Prudential guidelines has also helped to check the mismatch between
reported and actual profit. This height is achieved through stipulation that
forces banks to provide for classification of loan into performing and non
performing Assets.
Despite the benefits of the guidelines, there exist some disagreement over it’s been
comparatively equal to the caliber of knowledge devices utilized as a regulatory
instrument by develop banking Nations. This means that while it has helped to
upgrade the standard of Nigerian commercial banks lending ability, it has to be
operated in line with other regulatory devices/instruments to achieve the desired
standard. Also, the management quality and awareness programme has been
created as a result of the challenges brought about by the introduction of prudential
guidelines.
On the problems of smooth implementation of the guidelines, external factors as
well as internal were identified. These internal problems as well as external
problems are:-
(a) Over regulation of the system.
(b) Adverse interest rate fluctuation
(c) Excessive competition amongst commercial banks.
(d) Inadequate debt recovery mechanism.
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(e) Poor staff remuneration
(f) Capital inadequacy
(g) Fraudulent practices like insider abuse
(h) Difficulty in classifying assets held.
(i) Managerial incompetence.
The above factors notwithstanding, prudential guidelines has proved a useful tool
in making sure that credit portfolio is being classified properly and their reporting
pattern appropriately documented in the financial statements.
5.2 CONCLUSIONS
The prudential guidelines have checked the performance of non performing credit
facilities and hence have improved asset qualities of commercial banks.
Greater and better security of loan proposals are now experienced due to the
demands of prudential guidelines; thus banks are now more loan shy and demand
heavier/bigger collateral backing the loans.
The monetary authorities have increase their supervisory activities in a bid to
strengthen the banking industry and these banks are required to send their quarterly
financial statements so as to quickly recognized early sign of
distress in the industry; thus banks have been witnessing increase in liquidity
which shows that the instrument has come to stay and therefore, a new era in
banking services. The mismatch between the declared and actual profits in the year
prior to the operation of the guideline has so far been checked; the guidelines have
warded off any new entrant to the banking business in the country with the belief
that banking is all about profit making and not prudence.
Since the introduction of Banks consolidation in 2005, the era of failed banks has
been a thing of the past.
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5.3 RECOMMENDATIONS
The Central Bank of Nigeria as a matter of fact should ensure that all International
laws, rules and regulations guiding the banking industry is also practice here in the
country so as to meet the world banking standard. Such laws, rules and regulations
should be interpreted in simple form and there should be sensitization exercise on
the players.
The guidelines should include the mechanism by which slow loans are retrieved to
banks and where there is connivance of insiders such officer should be made to
face the law squarely.
Judging from, and based on the findings in this research, it would be pertinent to
proffer that monetary authorities takes steps to monitor trends in interest rates in
the deregulated economy.
Also regulatory bodies should refrain from promulgating laws which are
counterproductive i.e. adversely affecting the industry.
Concerted efforts should be made to discover sickly banks, by imposing stricter
penalties for default of any provision. The Central Bank of Nigeria (CBN) as the
apex bank should be encouraged as a means of encouraging effectiveness in
management and thus avoid distress, this will help curb over competition. In
management quality, seminars and special enlightenment program should be
encouraged.
The problem of asset classification by banks can be curbed if the regulatory
authorities CBN and NDIC subject the prudential guidelines to fit current macro-
economic and monetary trends in the country and world all over. Also, the
prevalent debt recovery laws should be subject to review, so as to enable banks
who are owed the opportunity to effectively enforced collection of debt from their
debtors.
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Efforts should be made to instill discipline into the banking system in general by
continuing the policies of the Abaca’s regime, which saw a lot of liquidation of
ailing banks and the trials of fraudsters.
If these recommendations are met, this writer is of a firm belief that the prudential
guidelines will not only operate smoothly to achieve its objectives but also in its
efforts improve the efficiency of all commercial bank in Nigeria.
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BIBLIOGRAPHY
Adekanhe, F. (1983); A Practical Guide to Bank Borrowing,
U.K: Grahan Burn, Bedfordshire, U.K.
Adeniyi, O.A (1988); Employment Credit Scoring as an Aid to personal
lending Decision in Nigeria Commercial Banks: The University Banker,
Vol.11
Ajie, H.A (1997); Credit Administration and Control in a Deregulated
Economy,Port Harcourt: Osia International Press Ltd.
Anake, O.E. (1998), An Introduction to Academic Research Method; Gostak
Publishers Co. Ltd, Enugu.
Augustus,N.Gbosi. (1993), Monetary Economics and the Nigeria
Financial system.Port Harcourt: Pam Unique Publishing co. Ltd.
Ebhodaghe, J.I.J (1991), An Effect and implications of new CBN Guidelines on
Banking Industry
Fabio, B. ( ) Approach to Prudential Supervision of International Lending.’’ Central Bank of Nigeria Plc. (1990), “Prudential guidelines for licensed Bank.”Banking Supervision. Central Bank of Nigeria (2004), Annual Report And Statement of Account, Abuja: Government Printer. Deposit Insurance Corporation; Annual Reports for 1992, 1993, 2003. Ikeagwu, E.K. (1998); “Groundwork of Research Methods and Procedures” Enugu Institute of Development Studies, University of Nigeria.
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Orji, John. (2001), Financial Management.Splashmedia Publishers Enugu. United Bank for Africa Ltd. (2002-2007), Annual Report and Statement of Account. First Bank of Nigeria Plc (2002-2007), “Annual Report and Statement Of Account.” Kama, U. (2006) “Recent Reforms in the Nigerian Banking Industry: Issues And Challenges” Bullion. 30(3), July-Sept: 65-74. Lee Hoskins, W. ( ) “Rethinking the Regulatory Repose to Risk Taking Banking.” Loveday, Robert (1979), “Statistics” Cambridge University press, 2nd
Course.Pp 150-155. Onwumere, J.U.J. (2005), Business And Economic Research Methods. Don-Vinton Limited. Lagos. Oseyemeh, R.K.O. (1986); “Practical of Banking” volk. 11, Lending and Finance. Lagos. Udenwa, J.A. (1997), “The Nigerian financial system”. Port Harcourt:Jeson Publishing. United Bank for Africa ltd. (2002-2007), “Annual Report and Statement Of Account”.
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APPENDIX QUESTIONAIRE
Department of Banking and Finance Faculty of Business Administration
University of Nigeria, Enugu Campus Enugu State,Nigeria.
Dear Respondent, Topic: Impact Of Prudential Guidelines On The Services And Performance of Commercial Banks In Nigeria. You have been selected to participate in the study on: Impact of Prudential Guidelines on the Services and Performance of Commercial Banks in Nigeria. Your participation will contribute to the greater understanding of the guidelines in our banking industry. Please, kindly complete the questions. Your contribution is vital to the success of this project and your responses are completely anonymous. Thanks in anticipation to your response to this important research. Yours faithfully, AigbogunUsunobun Francis.
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RESEARCH TOPIC: IMPACT OF PRUDENTIAL GUIDELINES ON
THE SERVICES AND PERFORMANCE OF COMMERCIAL BANKS IN
NIGERIA.
Please Tick where appropriate
1. What position do you hold in your Bank?
A. Manager B. Accountant C. Supervisor
2. How long have you worked in the banking industry?
A. 1 – 5 yrs B. 6 – 10 yrs. C. 10 yrs. And above.
3. What was the reason for the introduction of prudential guidelines by the
regulatory authority in financial and non financial institutions?
A. Because of failure of financial institutions in late 1980s
B. To control credit facilities of the banks and their lending ability.
C. No idea of the reason why it was introduced.
4. What are the effects of prudential guidelines on the banks lending ability?
A. The guidelines has helped banks in determining performing and
non performing credits.
B. It has helped to raise the standard of lending ability of all the
banks.
C. Banks are now more prudent in credit administration.
D. Al None of the above.
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5. Do depositors react favourably to the introduction of these guidelines by
the regulatory authority?
A. Yes B. No C.No idea .
6.. How can you assess the performance of the banks since the introduction of
the guidelines?
A. Favourable B. Unfavourable C. No idea.
7. Do the prudential guidelines introduced by the regulatory authority meet the
international financial institutions and regulatory authorities standard?
A. Yes B . No. C. None of the above D. No idea.
8. How many times in a year should your Bank review their credit portfolio?
A. Once a year. B. Bi-Annually C . Quarterly D.
Monthly.
9. Before the introduction of prudential guidelines, how often do your Bank
review its credit portfolio.
A. Monthly B . Quarterly C. Bi-annual D. Yearly.
10. Has the guidelines positively influenced the performance of the banks in
assessing their credit portfolios?
A. Yes B . No C. Not quit D. No idea.
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11. The practice whereby Banks merely renew, reschedule or roll over non
performing credit facilities without taking into consideration the repayment
capacity of the borrower acceptable?
A. Acceptable B. Unacceptable C. No idea D. None of the
above.
12. What is the standard/level of management quality in the Banks with the
advent of the prudential guidelines?
A. High quality. B. Low quality C. None of the above D. No
idea.
13. How do you know when credit facility advanced to a customer is not
performing?
A. Interest/principal is due and unpaid for a period of 90 days
or more.
B. Interest payments equal 90 days or more have been
capitalized rescheduled or rolled over into a new loan.
C. A and B
D. None of the above.
14. How would you disclose the credit portfolio requirement in your financial
statement of accounts.
A. Each licensed bank is required to provide in its audited
financial statements an analysis of its credit portfolio into
performing and non performing.
B. Amount of provision for deterioration in credit quality
should be segregated between principal and interest.
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C. Maturity profile of credit facilities based on contracted
repayment programme should be provided along the maturity
profile of deposit liabilities in the financial statement.
D. All of the above.
15. Are the various percentage provision stipulated in the guidelines for
different classes of Non performing credit facilities adequate?
A. Yes B. No C. No idea D. None of the above.
16. How would you rate the introduction of prudential guidelines in Nigeria
financial institution.
A. Very good. B. Good C. Fair. D. Poor.