Regulatory non-compliance and performance of deposit money banks in Nigeria
| Pages | 425-441 |
| DOI | https://doi.org/10.1108/JFRC-04-2017-0041 |
| Date | 09 July 2018 |
| Published date | 09 July 2018 |
| Author | Ismaila Yusuf,Damola Ekundayo |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
Regulatory non-compliance and
performance of deposit money
banks in Nigeria
Ismaila Yusuf and Damola Ekundayo
Department of Accounting, Federal University Dutsin-Ma, Dutsin-Ma, Nigeria
Abstract
Purpose –The purpose of this study is to examine regulatory sanctions from an emerging economy
perspectiveand analyzing the impact of regulators imposedmonetary sanctions on banks’performance.
Design/methodology/approach –The study adopted correlational research design to examine the
effect of regulatory penalties on the performance of deposit money banks in Nigeria. This studyused panel
data from a sample of 15 deposit money banks in Nigeria for the period of 2006-2015. Multiple regression
analysiswas carried out.
Findings –Results showed that penalties imposed by regulators in the Nigerian banking industry have no
significant impact on the bottom line of the defaulters. Penalties imposed on foreign exchange and international
trade related infraction showed that the cost of penalties is below the benefits enjoyed from such infractions.
Practical implications –The insignificant impact of penalties on performance implies that deposit
money banks have consideredpenalties imposed by regulators as operational expensesand transferred such
to customers.
Originality/value –The study differs from other studies that examined regulatory penalties on
performance by focusing on financial performance and using data from an emerging economy perceived to
have weak regulatoryenvironment.
Keywords Fines, Violations, Noncompliance, Penalties, Regulatory sanctions
Paper type Research paper
Introduction
The banking industry is a highly regulated industry; regulations are primarily aimed at
ensuring discipline and discouraging misconduct. Banking regulations are required to
protect the interest of depositors, investors and creditors on one hand, while elevating the
integrity and reputation of the system on the other hand (Zeidan, 2012).Banks are expected
to comply with numerous regulations from industry regulators, government and even
international institutions.These regulations stem from the Acts of Parliaments,government
policy, regulatory policy,international accords and professional pronouncements.Violations
of these regulations are punished with either monetary or nonmonetary sanctions and in
some instances both. Following the financial crisis, regulators have turned towards a more
punitive approach in addressingregulatory noncompliance. According to Slater(2015),20of
the world’s biggest banks have paid fines and compensation to the tune of $235bn in the
past seven years, which is believed to have affected capital rebuilding efforts, dividend
payout and capacity to lend. In a research conducted by Conduct Costs Project Research
foundation using datafrom 20 global banks drawn from the UK, the USA, France, Germany,
Switzerland, Australia and The Netherlands covering the period 2011-2015 reported
£252.25bn total cost and provisions relating to fines and penalties (CCP Research
Foundation, 2016).
Deposit money
banks in
Nigeria
425
Journalof Financial Regulation
andCompliance
Vol.26 No. 3, 2018
pp. 425-441
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-04-2017-0041
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm
At the individual country level, the situation is not different. In the UK, FTSE 100
financial companies spent £12.6bn in settlement for legal and regulatory penalties in 2014
fiscal year. These penalties are for offences like manipulation of Libor, forex, Isdafix and
precious metals rates, mis-selling payment-protection insurance, money-laundering
violations and client money failings (Fortado,2015). Fines and legal settlements paid by the
US global banks since the financial crises amounted to $162.2bn (Stabe and Stanley, 2015).
The South African Reserve Bank (SARB) imposedfinancial penalties to the tune of R15m on
two banks in the 2015 financial year for non-compliance withknow-your-customer and not
reporting cash-thresholdtransactions above limits (BankingSupervision Department, 2015).
The Central Bank of Nigeria (CBN) in 2015 imposed a total of N2.978bn penalties on
deposit money banks for failure to remit public sector fund into the government Treasury
Single Account apart from other fines. These huge amounts paid as fines and penalties by
banks have been predicted to increase as the years go by, thus questioning the ability of
fines in deterring wrongdoings. The Nigerian banking industry is mainly regulated by the
CBN; however, Corporate Affairs Commission, Nigerian Deposit Insurance Corporation
(NDIC), Securities and Exchange Commission (SEC), Nigerian Stock Exchange (NSE) and
Financial ReportingCouncil of Nigeria (FRCN) have a regulatory oversight function overthe
operations of banks in Nigeria. These regulators form the bulk of enforcement agencies for
the various regulations, guidelines and principles banks in Nigeria are expected to comply
with. Over the years, these regulators have been monitoring compliance, and where non-
compliance are found banks are penalized. Penalties take the form of monetary or non-
monetary: monetary penaltiesare paid from the income generated by these banks, therefore,
expected to have an impingementon their overall profitability.
Studies have examined the effects of illegal corporate behaviour (Baucus and Baucus,
1997;Zeidan, 2012), ethics (Harris, 2007), compliance (Seuraj and Watson, 2012) and
corporate fraud (Finnerty et al., 2016)onfinancial performance. Some other studies
examined the impact of regulatory sanctions on reputational damage (Armour et al.,2011)
and regulatory sanctions on firm reputation (Kirat and Rezaee, 2015). Others have studied
SEC enforcement actions (Nourayi, 1995), penalties on financial reporting violations
(Karpoff et al.,2008) and corporate crime on stock market (Song and Han, 2015). Murphy
et al. (2009) examined corporate misconduct on changes in profitability and risk, while Xi
(2016) reviewed the impact of violation disclosureon the firm value. In Nigeria, Osaka et al.
(2004) studied the impact of regulatorysanctions for noncompliance with foreign exchange
guidelines by banks in Nigeria on performance. Most of these studies are concentrated in
developed countries and across industries. Zeidan’s (2012) study used data from the US
banking industry, while Osaka et al. (2004) studied the banking industry in an emerging
economy. Osaka et al.’s (2004) study is limitedto sanctions arising from violation of foreign
exchange guidelines.
The Nigerian banking industry has had its own fair share of corporate failures largely
because of weak or inefficient regulation and/or regulatory oversight. Several efforts were
made to strenghten the regulatory environments in the banking industryand the economy
at large; the promulgationof the 1952 Banking Ordinance, CBN Act of 1958, Banking Decree
Act of 1969, Bank and Other FinancialInstitutions Act (BOFIA) 1991, BOFIA 2004, Nigerian
Deposit Insurance Corporation Act (NDIC) 2006, CBN Act 2007 among others. This shows
that the regulatory environment in the Nigerian banking industry is somewhat complex, as
several legislations and laws regulate the activities of banks. Another challenge to
regulatory compliance is the presence of severalregulatory bodies operating independently
or sometimes with overlappingfunctions.
JFRC
26,3
426
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