1.1 Background to the Study
The relevance of banks in the economy of any nation cannot be overemphasized. They are the cornerstones of the economy of a country. Banks play the important role of promoting economic growth and development through the process of financial intermediation; in this process, banks facilitate capital formation and lubricate the production process. This intermediation is important because in the absence of banks, the savings would have been fragmented and put in small packet here and there. By pooling together such savings, banks are able to achieve economic of scale with beneficial effects for their borrowing customers.
For banks to function effectively, it is imperative that they are visible and healthy and that the entire industry is stable and sound. It is in appreciation of this, that the industry worldwide is usually heavily regulated and supervised a major objective of regulation and supervision, therefore, is to ensure that the industry is sound and stable, thereby encouraging public confidence in the system. The need for banking sector regulation is further underscored by the fact that shareholders’ funds are usually only a small proportion of the financial resources available to a bank. The bulk of the funds available to a bank are depositors’ monies. These deposits usually constitute not less than 70% of a typical banks liability. It is therefore crucial that the interest of these depositors is protected, especially those of them who are not well informed.