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CREDIT POLICY OF CBN IN CREDIT ADMINISTRATION IN NIGERIA DEPOSIT BANK

CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

The backbone of every developed and developing economy across the globe is an efficient financial system, to enhance the financial system efficiencies the Central Bank which serve as the major regulator and supervisor adopts various measures and policies aimed at achieving this goal (Osazevbaru and Yomere. 2015). The efficient flow of capital in the financial sector serves as a stimulant for economic growth; this is because financial institutions which are the intermediaries in the financial sector serve the main purpose of mobilizing capital from the savings or surplus sector to the borrowing or deficit sector (Solomon, 2016).

According to Adesoye and Atanda (2012), in both developed and developing countries, the need for efficient financial institutions in facilitating financial intermediation as a growth channel in the economy has been recognized in literature in recent years. An efficient and robust financial system acts as a powerful engine of economic development by mobilising resources and allocating the same to their productive uses. Central banks around the world play similar functions some of which may include- implementing monetary policies, determining Interest rates, controlling the nation's entire money supply, the Government's banker and the bankers' bank ("lender of last resort"), regulating and supervising the banking industry, setting the official interest rate – used to manage both inflation and the country's exchange rate – and ensuring that this rate takes effect via a variety of policy mechanisms and managing the country's foreign exchange and gold reserves and the Government's stock register (Wikipedia.org).

According to Abaenewe, Ogbulu and Ndugbu (2013), the banking sector stands out in the financial sector as of prime importance because in many developing countries of the world the sector is virtually the only financial means of attracting private savings on a large scale. Regulation of banks has been defined as a body of specific rules or agreed behavior either imposed by some government or other external agency or self-imposed by explicit or implicit agreement within the industry that limits the activities and business operation of financial institutions. In a nutshell, it is the codification of public policy towards banks (Ogunleye, 2010). The importance of bank regulation is therefore to regulate the credit activities of financials as rising loan losses causing bank failures (distress) in the late 1980s and early 1990s in the country have been attributed to laxity in banks’ credit policy policies, amongst other reasons. Furthermore, the credit environment during the 1980s and 1990s can be summed up as having too many high-risk loans, few worthy customers, historically high loan losses and aggressive pricing producing low risk adjusted returns.

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