THE EFFECT OF BANKING SECTOR REGULATION BY THE CENTRAL BANK ON THE DEPOSIT MONEY BANKS (DMBS) PERFORMANCE
CHAPTER ONE
INTRODUCTION
BACKGROUND TO THE STUDY
The banking industry in any economy all over the world functions as a catalytic agent for growth as well as development.  They are capableof accomplishing these crucial functions of financial intermediation, through the provision of an efficient payments system as well as assisting the implementation of monetary policies.  It is not astonishing that worldwide, attempts are made to develop an efficient banking system, not only for the advancement of efficient intermediation, but also for the protection of depositors, encouragement of efficient, competition, maintenance of public trust in the system, stability of the system and protection against systemic risk and collapse (Iyade 2006, Toby 2007, Soludo 2007 Somoye 2008).  As a key stakeholder of the nation financial assets, the banking sector presents the largest potential risk for financial and reputational losses in the event of corporate failure and distress.  An efficient banking system is a sine qua non for efficient functioning of a nation.  Thus, for the industry to be efficient, it must be regulated and supervised in view of the failure of the market system to recognize social rationality and the tendency for market participants to take undue risks which could impair the stability and solvency of their institutions  (Thatcher 2002, Onyido 2004), Lemo 2005 Iyade 2006, Balogun 2007, Alao 2010).
Regulation and Supervision of banks remains an integral control measure for guaranteeing safe as well as sound banking practice.  As the prime movers of economic life, banks occupy a significant place in the economy of every nation.  It is therefore not surprising that theiroperations are perhaps the most heavily regulated and supervised of all businesses (Soyibo and Adekanye 1991).  Policy makers, economists and monetary authorities recognize that the ability of banks to achieve the desired results and to continue to play the role earmarked for them depends not only on the existence of an enabling (regulatory) environment and the number of operating banks (and perhaps the spread of banks branches) but more importantly on their performance from one financial year to the other (Olugbenga and Olatunde, 1998).The experiences of many countries show that regulation and supervision are essential for stable and healthy banking system and that the need becomes greater as the number and variety of financial institutions increase (Oladejo and Oladipupo, 2011).  The efficiency of the banking institutions and the market in which they serve,depend on two key factors; degree of competition that exist among the institutions, and the nature of the regulation to which they are subject to in designing banking regulation therefore, there is need to examine ways to increase efficiency through competition and a more flexible regulatory framework (Ojo, 2010).
The need for regulation of banks first appeared with the Nigeria banking ordinance of 1952 (Oladehinde and Oladepupo, 2011).  The regulatory system that are concerned with the regulation of the Nigerian banking industry which includes; the Central Bank of Nigeria, Nigerian Deposit Insurance Corporation, the Federal Ministry of Finance and Securities and Exchange Commission (Onyido, 2004).  The establishment of the Central Bank of Nigeria (CBN) in 1959 presented a platform for the adoption of monetary management, stricter legal framework and regulation and improved institutional facilities for supervision.  In order to achieve its objective  of promoting monetary stability and soundness in the banking sector; Central Bank of Nigeria carry out the regulation, direction and examination of banks as a means of sustaining surveillance on banking activities and processes  (Adebisi 1994).  This is to ensure that bank comply with the directives stipulated by the monetary authority (Oladehinde and Oladipupo, 2011).
Over the years, apart from the 1952 banking ordinance, some other laws have been put in place to aid the legal backbone for the action of the monetary authorities in regulating the banking industry.  Currently, the key legislation includes Central Bank of Nigeria Decree No 24 of 1991, Bank and other Financial Institution Decree No 25 of 1991, Nigerian Deposit Insurance Corporation Decree No 22 of 1988, Company and Allied Matter Decree No. 1 of 1990 and lately, the Failed Bank (recovery of debt and financial malpractices) Decree No. 18 of 1994.  These enabling legislation have largely provided for sufficient and complete regulatory power as well as operational independence in bank direction, which may bring back public trust and confidence in bank industry (Ehhodaghe, 1997).
Bank supervision entails not only enforcement of rule and regulation, but also judgment concerning the soundness of bank asset, its capital adequacy and management.  Therefore, effective supervision is expected to lead to a healthy banking industry that possesses the power to propel the economic growth (Ogunleye 2001, Soludo 2007).  In Nigeria, the ability of the financial sub-sector to play its role has been periodically punctuated by its vulnerability  systemic distress and macroeconomic volatility and  policy fine turning  inevitability (Kama, 2006) consequently the financial reforms were focused on further liberalization of banking business, ensuring competition and safety of the system and proactively positioning the industry to perform the role of intermediation and playing a catalytic role in economic development (Iganiga, 2010).  This have  become evident that one of the very effective requirements for the success of any industry in any economy is the existence of favourable   regulatory environment as evidenced from Thatcher, (2002) Moran, (2002) Marcussen, (2005) and Ekpenyong and Dada (2007) submitting that regulation can either promote or stifle banks performance.
STATEMENT OF THE RESEARCH PROBLEM
The monetary authority in Nigeria over the years have established numerous monetary policies to control and advance the financial industry in order to achieve the main macro-economic objectives but in spite of this, the Nigerian banking sector has experienced a number of bank failures /distress.  Apart from previous bank failures that rocked the Nigerian banking sector, the period of 1993 to 2004 also witnessed a wave of systemic distress leading to another round of bank failure.  These ugly and recurring trends have negative impact on the banking sector. Thus, the reoccurrence of bank failure in the country therefore becomes a matter of an utmost concern not only to the regulators of the banking sector but to all researchers, the academia and of course the entire nation.
The motivation for this study arises from the recent financial problem which prompts that monetary shocks are not in smooth process.  In this regard, an appropriate analysis of monetary shock transmission mechanism is of vital for Central Banks.  This is to regulate the process through which monetary policy affect the whole economy within the financial industry structure.  In the of the above, this study intends to investigate the effect of various monetary policy mechanisms on deposit money banks (DMBs) return on asset as measure of performance in Nigeria.
Based on the incidence of financial distress in the Nigerian banking industry, this study intends to find answers to the resulting research specific questions:
1.3    RESEARCH QUESTIONS
The study will provide answers to the following research questions:
What is the relationship between bank rate and return on asset of deposit money banks in Nigeria?
Does cash reserve ratio have significant impact on return on asset in deposit money banks in Nigeria
Is there a significant relationship between exchange rate and return on asset of deposit money banksin Nigeria?
To what extent does total deposit contribute to return on asset of deposit money banks in Nigeria?
1.4    OBJECTIVES OF THE STUDY
The broad objective of this study is to investigate the relationship between banking regulation and the performance of banks in Nigeria.The specific objectives are to;
Examine the relationship between bank rate and return on asset of deposit money banks in Nigeria.
Ascertain if cash reserve ratio has a significant impact on return on asset of deposit money banks in Nigeria.
Ascertain if there is a significant relationship between exchange rate and return on asset of deposit money banks in Nigeria.     
4    Determine the extent to which total deposit has contributed to return on asset of deposit money banks in Nigeria.    
1.5    RESEARCH HYPOTHESIS
Based on the aforementioned specific objectives of this study, the following hypotheses stated in null form:
Ho1:    There is no significant relationship between bank rate and return on asset of deposit money banks in Nigeria.
Ho2:    Cash reserve ratio does not have significant impact on return on asset of deposit money banks in Nigeria.
Ho3:    There is no significant relationship between exchange rate and return on asset of deposit money banks in Nigeria.
Ho4:    Total deposit does not contribute to return on asset of deposit money banks in Nigeria.
1.6    SCOPE OF THE STUDY
The study focuses on five deposit money banks in Nigeria such as Guarantee Trust Bank Plc, United Bank for Africa Plc, First Bank of Nigeria Plc, Access Bank Plc and Zenith Bank Plc and covers a period of eleven years (2004-2014). The reason for this scope is to ascertain the effect of some of the reforms experienced during the period on the performance of the deposit money banks in Nigeria.
1.7    SIGNIFICANCE OF THE STUDY
The role of the banking sector in economic growth and development cannot be overemphasized.  It is therefore expected that the findings of this study will be of immense benefit to the country and in particular to the following:
Regulatory Authorities:  This study is expected to provide to the regulatory authorities – central bank ofNigeria, Nigeria deposit Insurance Corporation and the federal ministry of finance in formulating and implementing policies and strategies aimed at increasing the efficiency of banking regulation and banks performance in Nigeria.
Government:  A proper understanding of regulation and the performance of banks in the Nigerian banking system will provide a better basis for monetary policy formulation by the government.  Besides, the findings from this study will enable the government to know the impact of other policy measures on the financial sector, particularly the banking sector.  If such findings are accepted and implemented by the government, they will pave way for more constructive banking reforms and this will help in eliminating impediments to the growth and development of the Nigeria banking sector.  This can lead to the improvement of the overall investment condition in the economy.
Local and Foreign Investors:  This study will provide this group comprehensive information about the Nigerian banking system.  It will also assist them to identify problem areas facing the banking sector and seek way to overcome them.
Banking industry:  this study will be of immense benefit to the Nigerian banking sector and its related institutions in understanding the interrelationship between the regulatory authorities and the banking sector as well as providing a platform for promoting an effective and efficient banking practice.
Customers:This study will bring enlightenment  to bank customers which will in turn restore public confidence and improve banking habits
Researchers:  The findings of this study will lay the foundation for other academic and research students to carry out further research on regulation and the performance of banks in Nigeria,
The major relevance of this study would be to add to the stock of knowledge on bank regulation and performance in Nigeria.
1.8    LIMITATION OF THE STUDY
The major constraint is the reliance on secondary data.  It was difficult to obtain data directly from each of the bank.  However, the study lies on data extracted from the Central Bank of Nigeria (CBN) statistical bulletin as well as annual report of some selected banks in Nigeria.  Therefore, we have assumed that such data obtained from these sources to be largely accurate enough to significantly reduce the problem of adequacy and reliability of data in our present study.