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ROLE OF DEPOSIT INSURANCE PRACTICE IN BANKING SECTOR STABILITY IN NIGERIA (2001 – 2010)

PROJECT PROPOSAL

Background of The Study

TABLE OF CONTENT:

CHAPTER ONE

INTRODUCTION

1.1    Background of the Study

1.2    Statement of the Research Problem

1.3    Objectives of the Study

1.4    Significance of the Study

1.5    Research Questions

1.6    Research Hypothesis

1.7    Conceptual and Operational Definition

1.8    Assumptions

1.9    Limitations of the Study

 

CHAPTER TWO

LITERATURE REVIEW

2.1    Sources of Literature

2.2    The Review

2.3    Summary of Literature Review

 

CHAPTER THREE

RESEARCH METHODOLOGY

3.1    Research Method

3.2    Research Design

3.3    Research Sample

3.4    Measuring Instrument

3.5    Data Collection

3.6    Data Analysis

3.7    Expected Result

CHAPTER FOUR

DATA ANALYSIS AND RESULTS

4.1    Data Analysis

4.2    Results

4.3    Discussion

 

CHAPTER FIVE

SUMMARY AND RECOMMENDATIONS

5.1    Summary

5.2    Recommendations for Further Study

Bibliography

 

CHAPTER ONE

INTRODUCTION

 

Background of the study

The role of banks and other financial institutions in economic development has been richly articulated in the literature. Pioneer contribution of Schumpeter (1934) was of the view that financial institutions are necessary condition for economic development. This view has been variously corroborated by other scholars like Goldsmith (1969), Cameron (1972) etc. In view of the importance of the financial sector in economic development, bank failures are widely regarded in all countries as more damaging to the economy than failures of other types of firms. For instance, bank failures may produce losses to depositors and other creditors, break long-standing bank – customer loan relationships, disrupt the payments system and spill over to other banks, financial institutions and markets, and even to the entire macro-economy.

 

The foregoing is often a popular justification for government – provided safety nets (Santomero, 1997). A deposit insurance scheme is one of the components of the official safety-nets. The other components of the official safety-nets are effective supervision and lender-of-last-resort facility by a central bank through the provision of temporary liquidity support to solvent depository institutions. Essentially, a bank deposit insurance scheme is a financial guarantee to depositors, particularly the small ones, in the event of a bank failure. Bank deposit insurance scheme was developed out of the need to protect depositors, especially the uninformed, from the risk of loss; and to also protect the banking system from instability occasioned by runs and loss of confidence. The practice of the Deposit Insurance Scheme in Nigeria commenced with the promulgation of Decree 22 of 1988, which established the Nigeria Deposit Insurance Corporation (NDIC), the Agency vested with the responsibility of implementing the scheme in the country.

Although, the NDIC commenced operations in March 1989, it is a a statutory body established under the NDIC Act No 16, 2006 (NDIC, 2010). The scheme was introduced to provide a further layer of protection to depositors and complement the role of prudent bank management as well as the Central Bank of Nigeria’s (CBN’s) supervisory activities in ensuring a safe and sound banking system. It was also considered as an additional framework to serve as a vehicle for addressing some of the challenges that followed the deregulation of the financial system under the Structural Adjustment Programme (SAP) which was introduced in 1986.

 

The Deposit Insurance Scheme, being implemented by the NDIC, was not designed as a Pay-box but rather as a Risk Minimiser, with powers and responsibilities to insure deposits, monitor the health of insured institutions and provide an orderly failure resolution mechanism, as clearly enunciated in the Corporation’s enabling law. It is against this background that this study is being devoted to evaluating the effectiveness of the Deposit Insurance Practice in Financial Sector Stability in Nigeria.

 

Statement of Problem

The deregulatory approach to monetary management and the resultant proliferation of banking and financial institutions in the early 1990s brought about increased number of players far beyond what could be effectively managed by the Central Bank of Nigeria (CBN). As a result, the banking industry witnessed serious waves of distress that caused crisis of confidence in the industry. Since then, the CBN and the Nigerian Deposit Insurance Corporation (NDIC) have intensified efforts towards achieving a healthy operating environment for in the banking sector. A prominent step taken by the CBN was the 2005 recapitalisation exercise during which the minimum capital base requirement of all Nigerian commercial banks was raised to N25 billion from N2 billion (Adegbaju and Olokoyo, 2008).

 

The success of the deposit insurance practice and the recapitalisation exercise in ensuring financial stability in the banking sector has been a subject of debate among analysts. Somoye (2008) analysed the published audited accounts of twenty (20) out of twenty five (25) banks that emerged from the consolidation exercise and found that the consolidation programme has not improved the overall performances of banks significantly. The joint special examination of the 24 deposit money banks conducted by the CBN and NDIC in 2009 to ascertain their true financial condition revealed serious weaknesses in corporate governance which manifested in, poor risk management; weak board and management oversight; inaccurate financial reporting; abuse and fraudulent use of subsidiaries; poor book keeping practices; non-compliance with banking laws, rules and regulations; and non-performing insider-related credits, among others.

 

All the observed weaknesses culminated in huge non-performing loans and insolvency of varying degrees in many of the banks. The development led to the removal of the executive managements of 8 out of the existing 24 banks (Oceanic bank, Intercontinental bank, Union bank, Finbank, Afribank, Bank PHB, Equitorial Trust Bank, and Spring Bank) and the injection of a bail-out sum of N620 billion by the CBN as liquidity support to the problem banks (NDIC, 2009). In August, 2011, The Federal Government through the NDIC assumed ownership of three of the problem banks: Afribank, Bank PHB and Spring Bank via the “Bridge Bank” mechanism following the revocation of their licences by the Central Bank of Nigeria (Komolafe and Kolawole, 2011).

 

Due to these developments, the NDIC has been under pressure to perform its responsibility of restoring stability to the banking sector. The question of the effectiveness of the deposit insurance practice in ensuring stability in the banking sector remains an open one both from a theoretical and from an empirical perspective. This study seeks to evaluate the effectiveness of the deposit insurance practice in Nigeria.

Objectives of The Study

Specifically, the study aims to:

(i) review the public policy objectives of the Deposit Insurance Scheme in Nigeria;

(ii) evaluate the effectiveness of the deposit insurance practice in maintaining stability in the Nigeria banking sector;

(iii) examine the issues pertaining to the establishment and maintenance of an effective deposit insurance system in Nigeria;

(iv) identify the challenges facing the scheme as well as the prospects for the scheme in Nigeria.

Research Questions

This study shall be guided by the following research questions:

(i) What are the public policy objectives that necessitated the deposit insurance practice in Nigeria?

(ii) Does deposit insurance practice enhance financial stability in Nigeria?

(iii) What are the issues that are pertinent to the effective maintenance of deposit insurance system in Nigeria?

(iv) What are the challenges facing the deposit insurance practice and how could they be tackled in Nigeria.

Research Methodology and Sources of Data

The method of data analysis to be adopted in this study is descriptive statistics. Secondary data shall be used in this study and they shall be sourced from Nigerian Deposit Insurance Corporation (NDIC) and Central Bank of Nigeria (CBN) publications obtained from their respective offices and official websites. Relevant data and information that depict the operational activities of the in Nigeria over the years are presented analysed using tables, ratios and percentages in order to have a better picture of deposit insurance practice in Nigeria.

Scope of The Study

This study shall focus on the operations of the Nigeria Deposit Insurance Corporation (NDIC). The study shall evaluate the effectiveness of the deposit insurance practice in maintaining financial stability in Nigeria by appraising the performance of the NDIC in terms of deposit guarantee, bank supervision, distress resolution and bank liquidation. Crucial issues relating to the deposit insurance system in Nigeria shall be raised with major challenges identified. The effectiveness of the deposit insurance practice would be investigate empirically with the data spanning from 2001 to 2010 due to non-availability of data.

Significance of The Study

In the wake of bank failures, the economy suffered severe stress. Many depositors lost their hard-earned money; many suffered starvation because their breadwinners lost their jobs in the process. In a number of cases, depositors who lost their life savings die because of apparent hopelessness. People from different spheres of life have commented on this seemingly topical issue as it touches the very fabric of the national economic life. This study is being embarked upon as a way of further investigating the issue with a view to evaluating the effectiveness of the Deposit Insurance Practice in achieving stability in the banking sector.

 

The research will be of benefit to practicing bankers, students of Economics and Business Studies and other individuals seeking to know more on deposit insurance practice in Nigeria as a crucial factor in achieving stability in the financial sector.

Plan of The Study

This project is divided into five chapters. The first chapter provides the background of the subject matter justifying the need for the study. Chapter two shall present related literature concerning deposit insurance practice. The chapter also discusses the theoretical framework for the study. The research methodology, which includes the research design, sources of data, method of data analysis etc are stated in chapter three while data presentation and analysis shall be made in chapter four. Concluding comments in chapter five shall reflect on the summary, conclusion and recommendations based on the findings of the study.

 

TABLE OF CONTENT:

 

CHAPTER ONE

INTRODUCTION

1.1     Background of the Study

1.2     Statement of the Research Problem

1.3     Objectives of the Study

1.4     Significance of the Study

1.5     Research Questions

1.6     Research Hypothesis

1.7     Conceptual and Operational Definition

1.8     Assumptions

1.9     Limitations of the Study

 

CHAPTER TWO

LITERATURE REVIEW

2.1     Sources of Literature

2.2     The Review

2.3     Summary of Literature Review

 

CHAPTER THREE

RESEARCH METHODOLOGY

3.1     Research Method

3.2     Research Design

3.3     Research Sample

3.4     Measuring Instrument

3.5     Data Collection

3.6     Data Analysis

3.7     Expected Result

CHAPTER FOUR

DATA ANALYSIS AND RESULTS

4.1     Data Analysis

4.2     Results

4.3     Discussion

CHAPTER FIVE

SUMMARY AND RECOMMENDATIONS

5.1     Summary

5.2     Recommendations for Further Study

Bibliography

 

 

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