THE IMPACT OF BANKING REGULATIONS AND POLICIES ON THE PROFITABILITY INDEX OF COMMERCIAL BANKS IN NIGERIA

THE IMPACT OF BANKING REGULATIONS AND POLICIES ON THEPROFITABILITY INDEX OF COMMERCIAL BANKS IN NIGERIA

(A STUDY OF ECO BANK PLC)

ABSTRACT

This research work was designed to find out Impact of

banking regulations and policies on the profitability

of commercial banks in Nigeria. The study looked at

the roles of commercial banks and found out that it

plays a vital role in the financial system and also

the traditional role of intermediation channelling of

funds from surplus economic units to deficit unit and

thus occupy a private position in every economy. And

that their failure may bring about a total collapse

of the economy. The sample of this study was made up

of one (1) commercial bank in Nigeria which is Eco

Bank of Nigeria plc.

The study was carried out with the experimental

research format using questionnaire to obtain primary

and secondary data which was used in the course of

this study.

Table of ContentsTitle page i

Approval……………………………………………………………………………….ii

Certification iii

Dedication iv

Acknowledgement v

Abstract vi

Table of content vii

CHAPTER ONE: INTRODUCTION

1.1 Background of the study - - - - - - -

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1.2 Statement of the problem - - - - - -

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1.3 Objective of the study - - - - - - -

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1.4 Significance of the study - - - - - -

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1.5 Research question and hypothesis - - - -

- - -

1.6 Scope and limitations of the study - - - -

- - -

1.7 Definition of terms- - - - - - - -

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CHAPTER TWO: LITERATURE REVIEW

2.1 Review of related literature - - - - - -

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2.2 Historical perspective of the banking industry - -

- - -

2.3 Overview of banking regulations and policies - -

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2.4 Nature of banking regulations - - - - -

- - -

2.5 Theories of regulations and policies - - - -

- - -

2.6 Legal background - - - - - - - -

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CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Research design - - - - - - - -

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3.2 Source of data collection - - - - - -

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3.3 Method of data collection - - - - - -

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3.4 Description of instrument used - - - -

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3.5 Method of data analysis - - - - - - -

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3.6 Population of the study - - - - - - --

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3.7 Validity and reliability of instrument - - -

- - - -

CHAPTER FOUR: ANALYSIS AND INTERPRETATION OF DATA

4.1 Introduction - - - - - - - - -

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4.2 Data analysis - - - - - - - - -

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CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND

RECOMMENDATION

5.1 Summary of findings- - - - - - - -

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5.2 Conclusion - - - - - - - - -

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5.3 Recommendation - - - - - - - -

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5.4 Suggestions for further studies - - - - -

- - -

Reference- - - - - - - - - - -

Appendix - - - - - - - - - - -

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Banking in every economy occupies a pivotal position.

This is as a result of its immense role in the

development of the economy. No wonder, among the

industrial sectors in t he country today, one can say

that banking sector arouses the most visible and

protest growing sector in the economy. The role of

banks in aiding the acceleration and expansion of the

economic development of any nation particularly in

serving as an engendering tool for political and

social engineering in developing countries.

According to Fabumi (1993) institutions which effect

the body politics of a nation is subjected to

adequate and national regulations and supervision

otherwise a collapse of the entire system will be

precipitated because of an unmanaged, unattended and

over regulation colossus. Consideration just as these

demand a determination of how low effectively

government regulations and policies have enhance this

attachment of optimum result expected from bank.

The banking sector has become the critical sector and

commanding heights of the economy with implications

on the level and direction of economic growth and

transformation and on such sensitive issues as the

rate of unemployment and inflation which directly

affect the lives of our people.

According to Gardner (1994) rightly pointed out

clearly that in virtually all developed market

economics, the banking industry is more heavily

regulated than any other commercial or industrial

sector” banking is regulated from cradle to death he

concluded.

Today in virtually all independent countries both in

developed world, banks particularly commercial banks

operate under constraints imposed on them by

government through Central bank. In a developing

country like Nigeria, the position is not different.

Pressure for banking regulation and policies grew as

people realized that the failure of a bank could mean

the loss of personal firm working capital. According

to Nwankwo (1994) a run on one bank often generates

uncertainty and panic among depositors, and the spill

over failure could in turn transmitted to more remote

part of the country.

In many countries including countries underdeveloped

or competitive domestic banking system, nationalism

has dictated regulations of banking system to nature

and prevent it from takeover or domination of foreign

banks and also tom protect the banking system which

may inclined to give commercial banks advantage or to

matter nations interest.

According to Nwankwo (1994) he stated that those

regulations which varies immensely in role, nature

and intensely from country depending on the socio

political and banking solution, especially takes four

firms.

Structural Regulations: This deal on entry exists of

operators and expansions.

Monetary Regulations Policy: These deals with money

supply; its quantity, cost distribution supply, its

quantity, cost distribution payment system.

Prudent regulation: These focuses on permissible

business and capital adequacy and liquidity.

Supervision and Examination: usually to ensure

compliance. There is no doubt that the banking

industry is entrusted with a lot of responsibility

with the direct and indirect influence in the overall

performance of the whole economic system to thrive,

there must be regulations while some regulation have

been made to help in the process of economic and

financial development banking laws were made in this

country to regulate banking industry, prevent

unhealthy proliferations, prevent bank failure and

thus, help to build up confidence of the public in

banking sector. Looking to the business of banking,

although not just like every other business. The main

purpose or objective of the investors is to maximize

profit. Banks are commercial banks firm. And in

recent years, banks profits and profitability

especially now that profit are no longer looking

after themselves as they did during the 1970s exports

created favourable economic conditions which

benefited the Nigerian banking system very much.

Besides, the recent deregulation of the banking

system under structural adjustment programme (SAP) in

July, 1986 has put pressure on banks management to

work for satisfactory profit.

Also, with this programme, the economy has been

opened up for commercial banks to take advantage of

the policy incentives to encourage the efficiency use

of scare resources. It is against these backgrounds

that protect the work that would thrive into the

profit maximization assumption of these commercial

banks.

1.2 STATEMENT OF THE PROBLEM

The commercial banks profitability have been under

threats in recent times. The various banking laws in

Nigeria starting from banking Ordinance 1852. Banking

Act 1958, banking Act 1960, make strict regulations

of banking thus threatening the profitability of

banks/. For instance, the statutory reserve

requirement and also dividends payments regulation to

be made before such dividend can be paid.

The implication of these is that non compliance could

lead to revocation of license such as banks strive to

comply. But compliance in most cases leads to

reduction in the profits of the bank. Also the

implication of the prudential guideline, which

provides for income recognition and asset

classification, has increased the need for loan

losses from bank earned capital or more earnings.

These reduced the amount of profit earned by banks.

The central bank fixing of the interest on deposits

and lending before SAP has lead to low profitability

of Nigeria commercial banks. This is because the

pegging of the interest rate then was considered to

be too small. These heavy regulations and policy have

effect on the profit which commercial banks made on

this study before, would fine out the through and

policies have on the profitability of commercial bank

in Nigeria.

1.3 OBJECTIVES OF THE STUDY

The research objectives are as follows;

1.To determine the extent of banking laws and

regulations and the effect on the profitability

of commercial banks.

2.To determine the impact of prudential guidelines

on commercial banks profitability.

3.To discover whether or not the focus on interest

rate by central bank of Nigeria reduces the

profitability of commercial banks.

4.To make recommendations on how best to manage

commercial banks profit in the face of the

dynamic banking environment.

1.4 SIGNIFICANCE OF THE STUDY

This study will be significant in many respect of

which are;

i. This study will be useful to bank management in

planning of commercial banks investment

portfolio that would maximize profit.

ii. It will also help those who went into further

research on the impact of policies and

regulation on banks port folio, the impact of

policies and regulations on banks port folio

within the period under review.

1.5 RESEARCH QUESTION AND HYPOTHESIS

In view of the problems identified and to meet some

of the objectives of this study, the

In view of the problems identified and to meet some

of the objective of the study, the following

hypothesis was formulated.

H0: The level of banking laws/regulations is not

significantly related to the profitability of

commercial banks in Nigeria.

H1: The level of banking laws/regulations is

significantly related to the profitability of

commercial banks in Nigeria.

H0: The prudential guidelines have no significant

impact on the profitability of the Nigerian

commercial banks.

H1: The pegging of interest rate on lending by CBN

reduces the profitability of commercial banks on

their lending activities.

1.6 SCOPE AND LIMITATION OF THE STUDY

This research focuses on commercial banks in Nigeria

and covers the period of 1980 – 1994, 1980 - 1986

representing the era of import licensing which is the

pre SAP era, where as 1986 – 1994 post SAP era, each

period will reflect a different trend in the banking

industry.

The research is carried out alongside other academic

work in school. Therefore, one of the highest

constraints was time. As the emphasis of this

research work was on the recent policies and

regulations on the banking industry. Some data were

lacking in this particular areas. again, the relevant

annual report and statement of the account from the

resources of vital base on the date to test the

effect of the regulation and policies was not easy to

come by. In the first place, most of the banks

visited could not release their report, it is

classified paper. At least some understood my mission

and were not very helpful.

The next constraints were cost, with high cost of

everything in the environment, one constrained to

work within the limited resources available.

1.7 DEFINITION OF TERMS

BANK: it is a financial institution where goods and

other valuables (money) are kept for safe custody.

BANKING REGULATIONS: These are rules and regulations

imposed on commercial banks by the government.

PROFITABILITY: this is the income generated by bank,

through rendering of banking services which is

dependent on the type of service rendered to

different customers at different time.

INVESTMENT: This is a venture at which customers and

the general public can partake in, with regards to

the growth of the economy and is determined by the

banks.

INTEREST RATE: This is the rate at which interest are

charged on a particular transaction by a customer and

is dependent on the pegging by which the central

bank.

INFLATION: It is the persistent increase in price of

goods and services.

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