ABSTRACT

This research project tends to evaluate the impact of supervision and
control of the Central Bank on the performance of commercial banks.
Access Bank Nig Plc Lagos Branch was used as the case study. To aid this
research both primary and secondary data were collected. The
instruments used to collect data are questionnaires and oral interviews.
The respondents comprised of male and female from the bank and the
population put together is 150 and sample size is 109. The research
design used for this work is the survey research method. In the course
of this research the researcher found out that supervisory and control
functions when conducted on a timely and unbiased manner ensures capital
adequacy, high standard of conduct, moderation of bank charges and
profitability. The researcher recommends that bank inspections should
continue to be regular and timely enough; control measures of the CBN
should not be too stringent as to have long negative impact on banking
operations. Finally only competent, skilled and unbiased bank examiners
should be engaged in bank supervision.

CHAPTER ONE
INTRODUCTION

1.1 BACKGROUND OF THE STUDY
The roles of commercial banks play in the process of economic
development in every country are crucial. They through financial
intermediation increase the levels of national savings and investments
by mobilising idle funds from surplus spending units (savers) and
channel them to deficit spending units(borrowers) for investments in the
economy . (UGBAJA 1999)
By playing these roles within a particular country, the independence of
global economics created the need for global interbanking, a trend which
in turn emphasizes the need for the stability of the banks involved in
intercontinental banking transactions.
Also, banking business carries a lot of risks and banking public needs
assurance about the safety of their confidence in the banking
institutions.
The need for supervision and control of commercial banks activities is
to ensure that they adhere to the stipulated monetary policies, rules
and regulations as well as accepted ethical conducts. However the major
contributing factor that has led to the failure of Nigerian banks in the
past can be described as moral hazard (adverse incentives)
Moral hazards or adverse incentives are a concept with relevance to a
variety of principal agent relationships characterized by asymmetric
information. The moral hazard concerns the adverse incentives on banks
chief executives to act in ways which are contrary to the interests of
the banks creditors (mainly depositors or the government if it
explicitly or implicitly insures deposits) by undertaking risky
investment strategies (such as lending at high interests rates to high
risk borrowers) which, if successful, would ` jeopardise the solvency of
the bank. Bank owners have incentives to undertake such strategies
because with limited liability, they bear only a portion of the downside
risk but stand to gain through higher profits, a large share of the
upside risk. In contrast, the depositors (or the deposit insurers) gain
little from the upside risk but bear most of the downside risk.
The inability of depositors to adequately monitor bank directors,
because of the asymmetric information allows the latter to adopt
investment strategies while entail higher levels of risks.

Moral hazard on bank executives can be exacerbated by a number of factors
Firstly, an increase in the interest rate may lead borrowers to choose
investments with higher returns when successful but with lower
probabilities of success (Stieglitz and Weiss 1989) hence a rise in
deposit rates could induce banks to adopt more risky investment
strategies. A rise in bank lending rates can have a similar incentive
effects on the banks borrowers.
Secondly, macroeconomic instability can also worsen adverse incentive if
it were to affect the variance of the profits of the bank borrowers
especially when there is a co-variance between borrower’s profits. (E.g.
if a large share of borrowers are in the same industry) or if loan port
folios are not well diversified among individual borrowers.(McKinnon
1988)
Thirdly, the expectation that the government will bail out a distressed
bank may weaken incentives on bank executives to manage their asset port
folio prudently and incentives on depositors to monitor banks and
choose only banks with a reputation of prudent management. Deposit
insurance also reduces incentives for depositors to monitor banks.
Fourthly, moral hazard is inversely related to bank capital. The owners
of poorly capitalized banks have little of their own money to loose from
risky investment strategies. By implication, financial distress in the
bank itself worsens moral hazard because, as the value of the bank’s
capital falls, the incentives on its owners to pursue strategies which
might preserve its solvency are reduced (Berger et al.1995 pp 398-99)
for similar reasons intensified competition in banking market can also
encourage moral hazard by reducing the franchise value of banks future
profits.
Moral hazard becomes even more acute when the bank lends to projects
connected to its own directors or managers (insider lending). In such
cases the incentives for imprudent and fraudulent bank management are
greatly increased in that all of the profits arising from the project
are internalized.(in the case of loans unconnected borrowers the project
returns are split between lender and borrowers)whereas that part of the
losses borne by depositors or task payers are externalised. Not
surprising, insider lending is a major cause of bank failure around the
world.
These ills going on in the commercial banks, as stated above make it
imperative for the central bank of Nigeria (CBN) to be on the watch at
all times through their supervisory and control functions so as to
protect them from going insolvent which usually impacts negatively on
the economy in general.

Confidence plays a key role in bank operations. Any information
whatsoever implying that the financial position of a bank has worsened
can have a negative impact on all the cash flow in that bank. Therefore,
every bank will attempt to conceal the problem of insolvency. Banks are
highly successful in this respect and therefore, the problem of
insolvency is often not recognised in time by the government agencies
entrusted with bank supervision.
Problems in the banking system or in the economy as a whole occur when a
number of banks become insolvent, or when a relatively large share of
the liabilities of the banking system is not covered by good assets. The
occurrence of such problems indicates that the efficient asset and
liability management is present in a significant portion of banking, if a
large part of banks asset is allocated to unprofitable projects. There
will be a reduction in investment efficiency and thereby a slowdown on
economic growth.
These could be decrease or seizure of loans grants to the public when
the problems of bank insolvency begin to be resolved. When banks attempt
to restore solvency by ceasing to grant loans to bad clients and
raising the interest speeds, there is less available loan and they are
more expensive. One consequent can be the negative selection of clients.
Enterprises that do not have alternative sources of financing will be
ready to accept higher bank interests rate independently of whether the
projects to be financed are profitable or less profitable. Such a trend
could also exert a negative impact upon investment efficiency.
If banks attempt to solve the problems of insolvency by raising
additional funds, interest’s rates will rise and there will be pressure
to conduct a softer monetary policy. Banks also seize additional
liquidity in foreign countries which affects the trends in the balance
of payments.
The right which the central bank of Nigeria has to supervise and control
the banking industry is backed by the CBN Act no 24 of 1991 now CBN ACT
2007 and the banks and other financial institution Act no 25 of 1991
(now BOFIA 2004). These laws empowers the CBN to carry out a supervisory
and control functions on all commercial banks and other banks in the
country
The powers as specified by section 39 of the CBN Act which may be
expressed by the CBN from time to time in the supervisory and
controlling functions include the powers to specify critical ration to
call for information from banks and to inspect the books of any bank to
under condition of secrecy.(Afolabi 2000: 10s)
Section 30and 7 and 8 of the banks and other financial acts no. 25 of
1991 (now BOFIA 2004) stipulates that every banks shall produce on
demand all the books, accounts documents and information as the CBN
examiners may deem fit in the exercise of his functions. It also
stipulates as punishable the wilful refusal of any bank to produce such
documents as well as negligence or wilful furnishing of false
information to CBN.
The control of the banking industry by CBN is carried out in partnership
with the federal government, which has the overall authority over the
system. Thus the CBN initiates the guiding policy measure and implements
them only as approved by the government. The CBN measures to control
the banks through a number of stages which include the identification of
the objectives and targets of policy. Policy formulation, policy
implementation and review as well as other extra measures for commercial
banks (ogwuma 2004:2).
Supervision and control by the CBN impact significantly on the
activities and performance of commercial banks between 1986 and early
2010, the supervisory and control measures of the CBN seemed ineffective
on a number of occasions and this contributed to the hitherto, distress
in the banking sector. Since 2004, there has been series of new
supervisory and control measures introduced by the CBN into the banking
system with the aim of improving the performance of the banking sector.
Against this background, however the study, however, the study is geared
towards examining the impact of supervision and control of CBN on
commercial banks in view of how their performance is affected from the
negative and the positive perspectives with concentration on the roles
that CBN played from 2004 to 2011.
1.2 STATEMENT OF THE PROBLEM
The supervision and control of commercial banks by CBN sometimes impact
adversely on the operations and performance of the former. This is as a
result of difficulties associated with the supervision and control
mechanism.
With respect to supervision, it appears that the CBN apparatus are not
effective. Banks examination are often not timely, not regularly carried
out or haphazardly done.
Secondly, some of the CBN examiners are not sufficient competent and
thirdly, they are not large enough to supervise all the commercial banks
effectively. The result is that deficiencies to the operations of these
banks are not timely discovered and adequately controlled. All these
adversely affect the commercial banks.

With regard to the control, often times the measures are too
stringent for effective operations and performance of the commercial
banks. Restrictive monetary control measures limit the liquidity and
capacity of commercial banks to grant loans or credit. Besides, direct
interactions in banking activities by the CBN, sometimes have adverse
effects too.
In the light of the aforementioned, attempt will be made to appraise the
impact of central banks supervision and control on the performance of
commercial banks.
1.3 OBJECTIVES OF THE STUDY
In lieu of the problems stated above, the objectives of the study are
1. To analyse the objectives of supervision and control of commercial
banks in view of the existing monetary policies of the CBN.
2. To examine the effectiveness of the supervisory and control
techniques of the CBN specifically the ability detects malpractice on
time.
3. To assess the impact of supervision and control on the performance of commercial banks with regards to liquidity.
4. To appraise the ongoing reforms of the CBN.

1.4 RESEARCH QUESTIONS

The following questions will be addressed in this study
1. To what extent do the relationship between the current monetary
policies of the CBN and the performance of commercials banks as it
affects granting loans/credit?
2. To what extent do the supervisory and control techniques effectives enough to detect misconduct on time?
3. How can these functions of the CBN have any effect on the liquidity of commercial banks?
4. To what extent do the ongoing reforms by the CBN affect the performance of the commercial banks?
1.5 SIGNIFICANCE OF THE STUDY
The significance of the study derives its usefulness from many respects.
Firstly, the monetary authorities (CBN) and federal government will
find the study very useful. This is because the study will examine the
various techniques of supervision and control of commercial banks and
identify their deficiencies and constraints. This information will then
enable the government and the CBN to take remedial measures which will
be suggested in this study.

This study will also be useful to the banking and non banking
financial institutions. It will provide information on why many of them
operate and perform dismally under the CBN supervisory and control
functions. This will give these institutions an understanding of their
weakness and the information will enable them to take corrective actions
which again will be suggested in this study.
Again, investors and banking public will appreciate this study because
of the information it contains. The study will enable them to understand
the role of the CBN in ensuring safety of their funds in the banks and
this will help in sustaining their confidence in the banking industry.
Finally the study will be useful to students who will carry out related studies; it will serve as a relevant material to them.
1.6 SCOPE OF THE STUDY
The study focuses on the importance of the CBN supervision and control
on the performance of the commercial banks. Thus, its scope covers the
need for supervision and control as well as goals, techniques and
effects of these exercises on commercial banks operations and
performances
1.7 LIMITATIONS OF THE STUDY.
The limitations of the study may include.
1. The difficulty of obtaining primary information from CBN and some
commercial bank staff their uncooperative attitude may adversely affect
primary data collection.
2. Inadequate finance which may pose a restriction with regards to
travelling outside Enugu to include many more commercial banks for an
extensive study. Therefore the study may be restricted to Enugu
metropolis only.
3. The difficulty of combining the research with other academic works in the school.
1.8 DEFINITION OF TERM
1. BOFIA- Bank and other financial institution act
2. NDIC- National deposit insurance corporation.
3. AMCON- Asset management corporation of Nigeria
4. CBN- Central bank of Nigeria.
5. NSE- Nigerian stock exchange.
13
REFERENCES
Alhanasogbu pp Brissmis, S.N and Delis, M.D (2005) Bank specific,
industry specific and macro Economic Determinants of Banking
profitability Bank of Greece, working paper, no 25
Ayodele Thompson and Olusegun Sotala: AMCON Is CBN Intervention in public interest Opinion columnist August 18, 2010.
Bankers and other financial institution Act No 25 of 1991, section 30

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