FAILED BANKS LIQUIDATION ACTIVITIES OF THE NIGERIAN DEPOSIT INSURANCE CORPORATION (NDIC) AN EMPIRICAL ANALYSIS

CHAPTER ONE

1.0 & 1.1    INTRODUCTION AND BACKGROUND OF THE STUDY

The importance of a banking sector in any economy derives from its role of financial intermediation; provision of an efficient payment system and facilitating the implementation of monetary policies.  Hence, an efficient and effective banking sector is essential not only for the promotion of efficient intermediation but also for the protection of depositors, encouragement of healthy competition, maintenance and protection against systematic risk.

The banking system as noted by Schempeter (1934) is regarded as a key agent in the process of development, because all other industries rely on it for working capital.  But, the Nigerian banking system in caught in systematic turmoil, there has been a rapid increase in the number of bank failures and the magnitude of the problem has reached an unprecedented level; the problem has assumed a generalized dimension thereby making it an issue of concern to the government, the regulatory authorities, the bankers, the general public and the international financial institutions such as the World Bank and the International Monetary Fund (IMF).

Distress in the Nigerian banking system dates back to the 1950’s when about 51 banks were forced out of the system following the introduction of the very first banking law in Nigeria.  The Banking Ordinance of 1952, the above ordained and the Central Bank of Nigeria Act of 1958 brought some element of sanity into the system.  The second phase of distress was experienced in the system after the era of Structural Adjustment Programme (SAP), which deregulated the economy; as a result led to the influx of the system with both efficient and inefficient banks, owing to the fact that banks licensing was liberalized.  Thus increasing the number of banks in the country from 42 in December 1991 (Oleyemi 1995:50) when SAP was put to an end following the enactment of Bank and Other Financial Institutions (BOFI) Decree N0. 25 of 1991.  The above represents an increase by about 186 percent in less than a decade.

In order to cushion the effect of further bank failure, the Nigeria Deposit Insurance Corporation (NDIC) was established under the NDIC Decree N0. 22 1988.