The Challenges of Implementing the Basel 2 Accord in Nigerian Banks.

271 Pages·2009·1.21 MB·English

THE CHALLENGES OF IMPLEMENTING THE
BASEL 2 ACCORD IN NIGERIAN BANKS.
By
Rufus Folorunso Akinyooye

A thesis submitted in partial fulfilment of the
requirements for the degree of
Doctor of Philosophy in Management
St. Clements University
2006
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THE CHALLENGES OF IMPLEMENTING THE BASEL 2
ACCORD IN NIGERIAN BANKS.
By
Rufus Folorunso Akinyooye

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DEDICATION
I dedicate this research to Divine Providence that made it possible for me as an employee of
Union Bank of Nigeria Plc to be moving from one important department to the other without
any effort on my part throughout my twenty-seven years of service with the bank.
The knowledge I gathered within the period is the bedrock of this research.
To God is the glory.

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ACKNOWLEDGMENTS
In conducting this research I received a lot of help from a number of people and various banks.
In particular I want to express my sincere gratitude to my supervisor Dr, M. E. Abolo whose
guidance made this research a success. I also want to thank Mr. Willis Ogankpa my research
assistant. Thanks are also due to all my friends and associates in the banks because they saw to
the response to my questionnaires. It was my promise to keep their names confidential because
of the very sensitive nature of this research and the fiduciary nature of their duties.

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Abstract
The Basel 2 Accord is a comprehensive framework for improving banks safety and soundness
by more closely linking regulatory capital requirements with bank risk, improving the ability
of supervisors and financial markets to assess capital adequacy, and giving banking
organizations stronger incentives to improve risk measurement and management. The
framework was laid in 1999 by the Central banks of the Group of Ten countries otherwise
known as G10 comprising Belgium, Canada, France, Germany, Italy, Japan, Netherlands,
Sweden, Switzerland, United Kingdom, United States, and Luxembourg. The aim is to regulate
the management of risks in their large internationally active banks described as banks which
insolvency could create significant distress on other banks in countries within the G10, the
Organization for Economic Cooperation and Development [OECD], and the world as a whole.
Such systemic banks are considered as ‘significant’ banks in other countries outside these two
groups none of which Nigeria belongs to. This research examines the relevance of the Accord
to the Nigerian banking industry and against the backdrop of the Basel 1 Accord that
proceeded it with a view to determining how much it fits into the situation on ground and if
not what changes will be required to make it fit so as to ensure successful implementation
given the much heralded desire of Nigeria to implement the Accord. The sample population
comprised 284 respondents randomly drawn from five major Banks in Nigeria. The sampling
technique employed the stratified sampling technique in drawing the sample population. Two
main hypotheses were formulated which were later subdivided into sixteen sub-hypotheses
and were used to guide the study. The responses received on the statements made in the study
were provided by using simple percentage and mean after constructing frequency tables for
the items addressing each of the statement. The survey design was used in gathering
information from the population under study. All the hypotheses postulated were tested at
0.05 level of significance using the Chi-square statistics. The following findings were made
from the study after testing the hypotheses formulated for the study: The technical competence
of the board and management of all the banks need to be fine-tuned before Basel 2 Accord can
be successfully implemented. This is because the challenges posed by the Basel 2 Accord
requires individual with superb technical know-how. It was recorded that there is need for
Nigerian banks to be able shoulder Nigeria’s debt rescheduling strategies before Basel 2
Accord can successfully be implemented. Further finding revealed that the high ownership
concentration of certain board of some banks needs to be decentralized in order to remove
hitches of one-man or key-man dominance before Basel 2 Accord can successfully be
implemented in Nigeria. Nigeria also needs to evolve a stable political climate for any
meaningful banking practice to take place even before Basel 2 Accord can successfully be
implemented. The finding also showed that the present merging process of aligning different
entities of mergers will need to be integrated and in line with Basel 2 Accord guidelines before
Basel 2 Accord can successfully be implemented. Nigerian banks need to go beyond their

present level of information technology systems which have to be integrated with their
accounting systems and record before Basel 2 Accord can successfully be implemented.
Similarly the present management capacity of most banks need to be overhauled and re-
invigorated with directors and managers that possess the inert qualities of good banking
experience before Basel 2 Accord can successfully be implemented. On the issue of risk
management it was observed that a robust risk management needs to be in place before Basel 2
Accord can successfully be implemented. The issue of resurgence of high-level malpractices
such as round tripping of forex, falsification of records, insider- abuses etc also need to be
addressed before Basel 2 Accord can successfully be implemented. The finding of this research
also revealed that the problems associated with rendition of false returns, continued
concealment need to be addressed before Basel 2 Accord can successfully be implemented. It
was also recorded that inadequate operational and financial control of most banks must strictly
be addressed before Basel 2 Accord can successfully be
implemented. vi
Nigerian banks need to go beyond their present transparency level and always adequately
disclose information (e.g. risk management strategies, risk concentration, performance
measures e.t.c) to the stakeholders before Basel 2 Accord can successfully be implemented.
Further result showed that Nigerian banks need to fully comply with the comprehensive risk
management framework as spelt out by the Basel 2 recommendation before Basel 2 Accord can
successfully be implemented. However it was observed that Nigerian bank’s risk management
framework need not capture all the risks the banks are likely to encounter before Basel 2 can
successfully be implemented. Finally the credit ratings of Nigerian Banks need to essentially
meet up with that of Basel’s 2 recommendations before Basel 2 Accord can successfully be
implemented. The result showed that many structural and institutional changes must take
place within the Nigerian banking industry before Basel 2 Accord can be successfully
implemented.
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TABLE OF CONTENT
CHAPTER I – Introduction
1.1 Statement of the general problem
1.2 Background of the subject matter
1.3 Rational for the study
1.4 Limitations
1.5 Definition of terms
1.6 References

CHAPTER II – Literature Review
2.1 Introduction
(a) The history of money and banking.
(b) The road to the Basel Accords.

2.2 The Basel 1 Accord
(a) Provision of the Accord.
(b) Compliance in Nigeria

2.3 The Basel 2 Accord
(a) Pillar 1 and the challenges posed
(1) Institutional
(2) Structural
2.4 (b) Pillar 2 and the challenges posed
(1) Institutional
(2) Structural
2.5 © Pillar 3 and the challenges posed
(1) Institutional
(2) Structural
2.6 Summary
2.7 References

CHAPTER III – Methodology
3.1 Research approach used and its justification
3.2 Instruments used
3.3 Research population, sampling size and sampling procedure
3.4 Justification for sample selection procedure/sample size and the particular sample.
CHAPTER IV – Presentation and analysis of Data
CHAPTER V – Discussion of the results
CHAPTER VI
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6.1 Summary of findings
6.2 Conclusion
6.3 RECOMMENDATIONS
References
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