THE POTENCY OF CAMEL AS A TOOL FOR ENGAGING THE HEALTH OF BANKS IN NIGERIA

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CHAPTER ONE

INTRODUCTION

  • Background To The Study

Over the years, there is no doubt saying, Nigeria banking industry has undergone various phases of reforms both in structure, policies, rules and regulations with the objective of achieving sound banking system and financial system stability. The regulatory and the supervisory policy framework are aimed at achieving prudential and financial system stability. The banking sector consolidation and recapitalization reforms programme of 2005 has been noted in the history of the Nigerian Banking sector as the most proactive measure to ensure sound banking system and leverage the industry of the inability to withstand monetary and macroeconomic shocks within the operating environment. The reforms was designed to enable the banking system develop the require resilience as the fulcrum of financial intermediation (Lemo, 2005).

CAMELS area acronyms for Capital Adequacy, Assets Quality, Management Quality, Earnings Capacity, Liquidity and Sensitivity to risks operations in the operating environment is a product of the Uniform Financial Institutions Rating System (UFIRS) adopted by the Financial Institutions Examination Council (FIEC) and was first used in United State in 1979 (Nimalathasan, 2008). It is a ratio-based model to evaluate the performance of banks and rank the banks according to the rating criteria. The regulatory authorities’ argued that bank supervisor uses the CAMELS to access and evaluate the performance and financial soundness of the banking activities and provide a measurement of a bank current, overall financial, managerial, operational and compliance performance (Sanni, 2009). In light of the Nigerian Banking sector crisis in the last forty years, CAMELS is a useful tool to examine the safety and soundness of banks and help mitigate the potential risks which may lead to bank failures (Ajaro and Emmanuel, 2013).

The consolidation reforms Nigeria in 2005 mandated Commercial banks to adhered strictly to the norms of capital adequacy, assets quality, provision for non- performing loans, prudential management and corporate governance, disclosure requirements, acceleration of pace and reach of latest technology, effective risk management mechanism, streamlining the procedures and complying with accounting standards by making financial transparent (Kolade, 2012).

The uncertainties that characterize the bank operating environment, the frequent banking sector crisis and its effect on the financial market as well as the ideas of low CAMELS rating model relates to other similar model like stress test is relevant in the modern banking environment (Gunsel,2007),CAMELS rating ranges from 1 – 5.CAMELS’ model reflect excellently the conditions and performance of banks over years as well as enriches the on-site and off-site examination to bring better assessments toward banks conditions. Mohammed (2009) claims that the strength of these factors would determine the overall strength of the bank.

The quality of each component further underlines the inner strength and how far it can take care of itself against the market risk. Providing a general framework in evaluating overall performance of banks is of great importance due to the increasing integration of banking and the financial market notwithstanding, however, the Nigerian Banking Industry has undergone various stages of reforms which include the pre and the post consolidation era.

 

The role of banks in any economy is so enormous and therefore economic growth and financial sector development are interdependent. The financial intermediation of banks has placed the banking sector in a very key position in the economy. It can therefore be rightly said that failure of this sector may result in the failure of the whole economy and this is the reason why the sector is so regulated. However, inspite of the various regulations, rules and principles of sound practices put in place, banks have been failing since 1930 and the situation is been aggravated decade by decade. The spate of failure in the banking sector is so alarming and must therefore attract the attention of every stakeholder if government must achieve its macro economic objectives and vision 2020.

Daily Times(1996),Tribune(1999),Thisday(2002) captured the extent of operational failure of Nigeria banks from 1989, 1995,2000 to 2002. The report showed that the number of failed banks increased from 9 in 1989, to 60 in 1995 and from 60 in 1995 to 91 in 1998 and from 91 in 1998 to 95 in 2002 and to 100 in 2009 thereby necessitating the need to monitor the activities of bank because it is not an exaggeration to conclude that bank failure is a national disaster which should be averted by all means because of its negative effects on the nation. Over the years, numerous authors have attempted to predict corporate failure using various methodologies.

 

1.2 Statement of the Problems

Despite the long application of CAMELS in examining and rating of Banks in the developed financial markets, the application in the developing financial market like Nigeria is still at rudimentary stage as studies to examine the soundness of Nigerian banks focused on profitability indicators such as Return on Assets, Return on Investment, Return on Equity, Net Profit Margin and Earnings per share (Aburime, 2008), (Nnana, 2008), (Prasad, 2011). Similar study by Sanni (2013) using CAMELS does not include sensitivity to risk which is relevant in ascertain banks ability to withstand both internal and external shocks. From the above, this study intends to examine the potency of CAMEL as a tool for engaging the health of banks in Nigeria.

 

1.3 Objectives of the Study

  1. To determine whether the potential of bank failure could have been predicted, accurately or inaccurately using CAMEL
  2. To examine the extent of operation failure in Nigerian banks.

1.4 Justification for the study

The spill-over effect of bank failure in Nigerian economy has called for a need to analyze the financial condition of Nigerian banks with a view to identifying the bank(s) that are prone to systematic risk or that failed the CAMEL testing or rating. The study was conducted to see the potency of CAMEL in engaging the health of Banks in Nigeria.

1.5 Scope and Limitations

The  scope of this work was restricted to CAMEL tool adopted by financial regulators in Nigeria to check the ratings of financial institutions. Nevertheless, the researcher encountered some challenges in the course of carrying out this work. These include paucity of financial resources, difficulty in accessing the required materials for the completion of this work, the time frame within which the work was expected to be completed, among others. In spite of all these, the level of enthusiasm necessary to accomplish the stated objectives and hypotheses was not diminished

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