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Banking Industry In Nigeria Essay

Traditionally, the role of banks whether in a developed or developing economy, consists of financial intermediation, provision of an efficient payments system and serving as conduit for the implementation of monetary policies.

In view of the importance of the banking sector in economic development and the imperfections of the market mechanism to mobilize and allocate financial resources to socially desirable economic activities of our nations, challenges confronting the industry relate to operating environment, inherent weaknesses in the conduct and practices of practitioners bordering on ethics

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and integrity otherwise referred to as weak corporate governance and inadequate legal provisions.

Unethical conduct manifests itself in various ways, including insider abuse, fraudulent dealings, irregularity/inaccuracy in the rendition of statutory returns, window dressing of accounts. According to Akingbola E “The systemic distress of the early 90s in the Nigerian banking industry was induced by insider abuse, widespread malpractices, and mismanagement resulting in the liquidation of various banks and other financial institutions” .

The thrust of this study is therefore to look into Insider dealings and how it bothers on Business Ethics in the Nigerian Banking Industry. Broadly, these issues relate to the industry’s operating environment, inherent weaknesses in the conduct and practices of practitioners bordering on ethics

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and integrity. The study is with particular reference to the Nigerian Banking Industry.

This is to consciously beam a search-light on the sector’s activities with a view to ensuring that operators play by the rules of the game and imbibe sound and safe banking practices. Furthermore, such an oversight is intended to assist supervisory authorities in timely identification of deterioration in bank financial conditions before it degenerates to threaten the stability of the banking system or even the economy.

By adherence to high standard of ethics, the role of Nigerian banks in provision of an efficient and effective economic development can be successfully achieved. Banking thrives on confidence and professionalism demands that there must be single-minded adherence to the highest standards of ethics and respect for the law. Unethical practices of Nigerian banks arguably reflect the general degree of corruption in the country The most controversial and alleged consequence of unethical practices in the Nigerian banking industry is distress of the sector coupled with operational losses that could bring eventual stagnation to the economy.

These among other statements of research problems identified were addressed in this study and encapsulated into related questions. From the statement of research problems, certain research questions were encapsulated thereby: as insider dealing and problems of business ethics is prevalent in the Nigerian banking sector won’t there be operational losses? As insider dealing and the problem of business ethics is prevalent in the Nigerian banking sector won’t it bring about a distress of the banking sector?

As insider dealing and the problem of business ethics is prevalent in the Nigerian banking sector won’t it bring about an eventual stagnation of the economy? These research questions identified and stated will be addressed in the course of the study. The study tested one hypothesis to confirm whether as insider abuse and the problems of business ethics are prevalent in the Nigerian banking sector, it does not bring about reduction in gross domestic product of financial institutions at current prices.

With the current incidents of bank liquidation globally, it is timely to discuss banks safety in Nigeria hence the basis for this discourse on the need and how to ensure safe and sound banking practices in Nigeria. The crisis in general involved defaults on the part of insiders and their dealings. The Nigerian banking system was seriously undermined by this, and a host of insider workings by the banks management and directors that borders on fraud and abuse. Fortunately, the Failed Banks Act was the only serious regulation that provided a sound enabling environment to stem the erosion of confidence in the banking system.

Prior to this, there were laws that existed, but they lacked the teeth to ensure a safe and sound banking environment. The banking industry is still heavily regulated by the government and the CBN is used as an instrument for government monetary policies. These are manifesting in the rising cases of unwholesome practices being recorded. A number of banks engage in some sharp and unorthodox practices to achieve compliance with some regulatory requirements. Many banks returns provide inaccurate/misleading financial report thereby preventing timely detection of emerging problems by the supervisor.

Another dimension of the weak corporate governance issue is the managerial incompetence of the top management. Substantial losses incurred by many banks on their credit portfolio, frauds and forgeries and outright negligence have brought to the fore, the importance of sound internal control system. A similar daunting story was to flood the market recently, following the indication that some banks were being considered as “Market Makers” in view of the meltdown that hit the nation’s stock market.

But for the vigilance and government’s patience this time, a wave of panicky withdrawals would have hit some banks and would have got them derailed. Thus, with the insider information, some banks were able to cut the deals that ensured that they scaled the hurdle. The elastic effect of the consolidation exercise was brought through the determination of the government to adopt the liquidation option rather than the bail out option that has become the fad around the world.

The issue of insider dealing is of great magnitude, and cannot be overemphasized in the context of the study. It includes failure to disclose the interest of borrower or customer in his business dealings with the institution; diverting assets and income for insider own use: misuse of position by approving questionable transactions for relatives, friends and business associates: abuse of expense account: acceptance of bribe and gratifications and other questionable dealings related to their position at their institution. ndulging in such dealings usually undermines laid down guidelines and regulation resulting in non-performing credit and untimely bank failure which generally has adverse effects on the nations economy as a whole. The impact of Insider Dealing related to the Nigerian banking industry system, can best be appreciated if we cast or minds back to the late 1980s and early 90s when the NDIC and CBN examiners observed that the bane of most of the banks had their licenses revoked by the CBN for Insider Dealings and Abuses.

It became obvious that most of the insider credit was not performing and remedial action was taken by the affected banks to stop this malpractice. It was unfortunate therefore, that the root cause of bank failure in the late 1980s and early 90s was traced to the board and management of the banks rather than to third party causes. Weak Corporate Governance Another manifestation of weak corporate governance is the trend in deficiencies in banks earning assets especially loans and advances, arising from instances such as insiders abuse.

This is an indication of managerial problems earlier referred to, shows worrisome increases in both the amount of non-performing credits and insiders credits. It is on record that there were widespread violations of insiders lending regulations even when the rules have inadvertently been made generous by amendments occasioned by the introduction of universal banking policy which increased the single obligor limit from 20 to 35 per cent of shareholders fund unimpaired by losses. Distress in the Nigerian Banking Industry

A bank that is illiquid or insolvent or both is distressed. If many banks in a country are therefore distressed to the extent that it becomes a systemic, the country can be said to be having banking crisis and ditto for a region/continent as witnessed in the South East Asia. It therefore implies that distress can be in a bank, a country or a region. Distress becomes severe when a bank reveals most or all of the following conditions:

• Gross undercapitalization in relation to level and character of business • High level of non performing loans to total loans Illiquidity reflected in the inability to meet customers cash withdrawals • Low earnings resulting in huge operational losses • Weak management as reflected by poor Asset quality, Insider abuse, inadequate internal controls, Frauds including Unethical and Unprofessional Conducts. According to Reinhart (1999), distress is marked, by an event that indicate either bank runs lead to closure, merger or take over of public sector or one or more financial institution.

The systemic distress of the early 90s in the Nigerian banking industry was induced by insider abuse, widespread malpractices, and mismanagement resulting in the liquidation of various banks and other financial institutions. In Nigeria, insider dealings contributed significantly to the failure of banks and is one of the serious economic crimes being perpetrated in our banking industry today. Frauds result in huge financial losses to banks and their customers, the depletion of shareholders funds and banks capital base as well as loss of confidence in the sector.

It is therefore of special concern to the regulatory authorities who are saddled with the responsibility of ensuring the safety and soundness of the entire banking system. The incidence of insider dealings in the Nigerian banking system should be of serious concern to all stakeholders. Furthermore, it was observed that credit granted to major shareholders and directors of the banks, as well as their related interests, accounted for over 80% of the distressed banks non-performing facilities.

Most bank directors usually feel entitled to special benefits, especially preferential borrowing privileges and thereby force the banks to grant them unlimited access to their funds either in their personal capacity or to their related companies. In the Nigerian Banking Industry, years revealed the problem in our banking industry as evident in the banking crisis and Distress that gripped the country which led to the advent of the Failed Banks Decree. The crisis in general involved defaults on the part of insiders and their dealings.

The Nigerian banking system was seriously undermined by this, and a host of insider workings by the banks management and directors that borders on fraud and abuse. Fortunately, the Failed banks Act was the only serious regulation that provided a sound enabling environment to stem the erosion of confidence in the banking system. Prior to this, there were laws that existed, but they lacked the teeth to ensure a safe and sound banking environment. The banking industry is still heavily regulated by the government and the CBN is used as an instrument for government monetary policies.

The applicable laws include the Companies and Allied Matters Act of 1990, CBN Act No 24 of 1991, the BOFI Act No 25 of 1991 and to some extent the NDIC Act No 22 of 1988. The BOFI Act is the most relevant for ensuring safe and sound banking practices in Nigeria. It is this law that was changed in 1997 to increase the minimum paid up capital that was increased to 500 Million from 50 million naira in the 1997 budget which was raised to 25Billion Minimum Regulatory Capital in the year 2005. It also deals with other issues like disclosure of interest by insiders, and the system of CBN off-site surveillance and the on-site audits of banks.

A notable feature of the industry is low ethical standard and transparency. These are manifesting in the rising cases of unwholesome practices being recorded. A number of banks engage in some sharp and unorthodox practices to achieve compliance with some regulatory requirements. Many banks returns provide inaccurate/misleading financial report thereby preventing timely detection of emerging problems by the supervisor. Another dimension of the weak corporate governance issue is the managerial incompetence of the top management.

Substantial losses incurred by many banks on their credit portfolio, frauds and forgeries and outright negligence have brought to the fore, the importance of sound internal control system. Remedial Actions by the CBN The CBN however continued to intensify surveillance activities to monitor and curb those unhealthy practices. The CBN put in several measures as obtainable in the Bank and Other Financial Institution Act (BOFIA) No 25 of 1991 Section 18(3) which states certain actions about insider abuses some of which among others include the director’s declaration of his/her interest in any credit being granted by the bank.

Section 20(2) also states that total exposure of bank to a single individual (including directors) should not exceed 20% of its shareholder fund and even with the introduction of universal banking review of required single obligator limit to 35%. Also, a circular was issued by the CBN 13th November 2001and stipulated that where a debtor / creditor is a shareholder, his shareholding will be defrayed of immediately to defray the debt. Section 18 (1) (a) of BOFIA also requires that bank should ensure that adequate security is obtained prior to the ranting of a facility. Problem of Business Ethics A banker ideally is more than a regular professional.

He is the custodian of individual, group, corporate and national wealth. He manages valuables including the financial savings of the economy and ought therefore to be the first choice for the position of trust. The quintessence of professionalism in banking is the ability and competence to give the customer basis for complete trust as well as faultless service. Banking thrives on confidence. The bank that lacks public confidence is a dead bank.

Professionalism demands that there must be single-minded adherence to the highest standards of ethics and respect for the law. It is the underlying basis for a resilient, efficient, safe and sound banking system. Professionalism in banking is violated when ethical or legal fundamentals are breached or blatantly disregarded. Unethical conduct manifests itself in various ways, including insider abuse, fraudulent dealings, irregularity/inaccuracy in the rendition of statutory returns, window dressing of accounts.

The consequences can be disastrous and include loss of confidence and trust in the industry, loss of business for the institutions, shareholders, board/management disputes, operational losses, distress of the sector, and liquidation of institutions, capital flight, and stagnation of the economy. The systemic distress of the early 90s in the Nigerian banking industry was induced by insider abuse, widespread malpractices, and mismanagement resulting in the liquidation of various banks and other financial institutions.

In the thick of the distress, the government was compelled to enact the Failed Banks (Recovery of Debts) And Financial Malpractices in Banks Act of 1994 with accompanying tribunals. By 1995, about 60 of the 120 banks in Nigeria were in various stages of severe distress and within three years, 31 banks were closed down. The Failed Banks Decree was set up to recover classified assets of the failed banks and to try identified cases of malpractices.

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