Upload
hoangtuyen
View
214
Download
0
Embed Size (px)
Citation preview
1
2
Table of Contents
Core Subjects
Banking Law Ethics and Corporate Governance 4
Bank Lending and Credit Administration 15
Management of Financial Institutions 50
Practice of Banking 67
Electives
Financial Planning and Control 83
Treasury Management 102
Human Capital Management 119
Bank Regulation and Supervision 139
Principles and Practice of Risk Management 154
3
Core Subjects
4
BANKING LAW, ETHICS AND CORPORATE GOVERNANCE
5
SECTION A BANKING LAW
Question 1 (a) A banker owes a duty of secrecy to his customer as a general rule. State FOUR
exceptions to this rule. (10 marks) (b) Discuss the FOUR conditions that may lead to a bank being classified as a FAILING
BANK under S.35 (1) of the Banks and Other Financial Institutions Act (as amended). (10 marks)
(Total = 20 marks) Comment This question generated a lot of interest from the candidates as it was attempted by 152 candidates out of 162 that wrote the paper. The interest was revealed through the 116 candidates that hit the pass mark. As a matter of fact, the success level in this paper, in this diet, is due to the marks scored in Question 1. It was noted that many candidates did a lot of research on past examination questions. Answer a) The four exceptions to the rule are:
i. Where the bank is required by law to disclose; ii. Where there is a public duty to disclose, for instance, if the customer is
dealing with the country’s enemy at wartime; iii. Where the interest of the bank requires disclosure; iv. Where the customer gave express or implied consent to the bank to disclose.
b) The four circumstances under which a bank may be classified as FAILING are:
i. Where the bank is likely to become unable to meet its obligations under the Act;
ii. If it suspends payment to any extent; iii. Where the bank in insolvent; iv. Where the CBN is satisfied that the bank is in a grave situation as regards
matters revealed in a special examination of its operations.
6
Question 2 Consider the validity or otherwise of the following with regard to the provisions of the Bankruptcy Act:
(i) The High Court of Lagos State made a receiving order against Berfast Construction Company and its Managing Director, Mr. Charles Berfast.
(ii) Mr. Jackson, who was adjudged bankrupt on the 31st of December, 2005, was
elected and sworn in as a member of the Rivers State House of Assembly on the 15th of April, 2006.
(iii) Mr. Suleiman (FCA), a chartered accountant, was appointed Official Receiver in the
bankruptcy proceedings of Mrs. Shah Khan. (iv) Mr. Rahman, a customer of Hope Bank Plc, was recently adjudged bankrupt. Prior to
the adjudication, he had a credit balance of N5,000,000.00 in his account with the bank. The bank has in its possession the title documents of Mr. Rahman’s house as security. The trustee-in-bankruptcy wrote to the Bank requesting that the balance in Rahman’s account be released to him, including the title documents.
(5 marks each) (Total = 20 marks)
Comment This is a four part practical set of questions on the law of bankruptcy which attracted 124 candidates, 61 (49%) of whom passed the question. The impressive performance is attributed to the practical nature of the question. Answer (i) The proceedings before the High Court of Lagos State and the subsequent receiving
order against Berfast Construction Company are null and void for the following reasons: a. The Lagos State High Court cannot adjudicate on bankruptcy matters as the
Federal High Court is vested with such jurisdiction under S.142 of the Bankruptcy Act.
b. S.108 of the Bankruptcy Act provides that the Act will not be applicable to a
company or corporation.
7
(ii) Under S.126 of the Bankruptcy Act, any person who is adjudged a bankrupt is disqualified, amongst other disqualifications, from being effected into any legislative house in the country; hence, the elected and swearing in of Mr. Jackson is null and void.
(iii) The appointment of Mr. Sulaeman as Official Receiver cannot stand in view of S.72 (1) of the Bankruptcy Act which made the Registrar of Corporate Affairs Commission the official receiver for the purpose of bankruptcy.
(iv) One of the consequences of adjudication is the appointment of a trustee-in-bankruptcy (TIB) to oversee the affairs of the bankrupt. Under S.5(4) of the Bankruptcy Act, the trustee-in-bankruptcy is vested with the powers to receive from any person, including a banker, “all money and securities held for the benefit of the Bankrupt”. Therefore, the letter of the TIB in respect of Mr. Rahman is legal and legitimate in the circumstance.
Question 3 (a) Distinguish between “Equity of Redemption” and “Equitable Right to Redeem”.
(5 marks) (b) Distinguish between Freehold Estate and Leasehold.
(5 marks) (c) What are the precautions expected of a bank where it intends to take a “Life Policy” as
security for lending? (10 marks) (Total = 20 marks)
Comment A three part question that proved unattractive to most of the candidates. Only 42 of them attempted the question, out of which 23 (55%) passed. The question was based on Laws of Estate and Security for bankers’ lending. Very few candidates understood the (a) part while the (b) part led to a lot of confusing and contradictory answers. In respect of the (c) part, candidates were fluid, not discerning and too general Answer (a) Equity of Redemption is the right of a mortgagor to redeem his property at anytime
before the expiration of the mortgage period. It is the freedom to repay the loan and terminate his arrangement with the mortgage. On the other hand, Equitable Right to Redeem is the privilege of a mortgager to redeem his property by repayment of the
8
loan after the expiration of the mortgage period as long as a third-party interest has not been created on the property.
(b) A Freehold Estate is an interest in land where the grantee is conferred with absolute right on the land subject to statutory restrictions. The right is not limited in tenure or in context. A Leasehold confers limited, and sometimes restrictive, right in land. It is held subject to the payment of rentals and it is for a definite period and regulations. Though the lessee has physical possession ownership is vested in the lessor.
(c) The bank will be requested to clarify the following:
- The name of the insurance company that issued the policy must be taken into consideration.
- The prohibitive clause in the policy must be scrutinized. - The age of the assured must be proved and the insurance company must endorse
the declaration. - If the life assured is a woman, who subsequently contracted a marriage after the
policy was issued, the marriage certificate must be obtained and registered with the insurer.
.
SECTION B: ETHICS
Question 4 Explain the concepts “Corporate Ethics” and “Individual Ethics” stating how one impacts on the other to attain corporate objectives. (20 marks) Comment This was a question on ethics which clearly demanded an understanding of the differences between corporate ethics and individual ethics and how one impacts on the other. The response was quite laudable and acceptable as candidates demonstrated a good level of understanding the question and maturity in providing answers. The question was attempted by 95 candidates out of which 78 (82%) passed. Answer Corporate Ethics consists of the rules and policies of an organisation and the procedure and practices of achieving corporate goals and corporate ethics. It consists of deliberate policies of an organisation to ensure compliance with its own rules and the laws of its
9
society. It promotes ethical business practices and creates a platform that fosters ethical conduct. The components of a corporate ethic generally manifest in code of ethics, ethics training for employees, designing means of communicating with employees about matters of ethics, and a reporting mechanism for enabling employees to report alleged wrong-doing.
On the other hand, individual ethics expresses fundamental principles, rules, morals and values that influence a person’s behaviour. It is usually a product of beliefs, family training/background and like experiences. In order for corporate ethics to be meaningful, it must be channeled towards harmonisation with individual ethics. The level of individual ethic exhibited in the course of business will enhance real success of corporate ethics. This is because individuals play major roles towards achieving organisational goals and objectives. The performance of an organisation in forms of profitability, growth, expansion and market coverage will be based on personal relationship between the customers and the employees, viz banker-customer relationship. Consequently, a disconnect between corporate and individual ethics at the workplace will make the attainment of corporate goals impossible. Question 5 (a) What do you understand as Sexual Harassment in workplaces? (10 marks) (b) Itemise and explain what steps the board of management of a bank can put in place to
prevent sexual harassment. (10 marks) (Total = 20 marks)
Comment This was the second question on ethics attempted by 121 candidates, out of which number 45 (37%) passed. One noticeable trend was that candidates were unable to give or explain satisfactorily what sexual harassment meant. Answers were replete with over-generalisation and pedestrian answers. The (b) part was positively confronted by most of the candidates. Answer (a) Sexual harassment in workplaces has been described as any form of written or oral
statement, act, conduct or behaviour that demands, compels or requests for sexual attention as a precondition for employment favour, promotion, posting, salary increment or conceding to unacceptable conduct. It is also seen in circumstances where a superior, usually a man, uses his power to grant or deny employment benefits to exert sexual favour from a female subordinate; vice versa, it is instructive to note that a woman can also harass a man.
10
(b) The following are steps that may prevent sexual harassment in work- places.
(i) Making specific statement by the board that will convey the intention of
management to take drastic action but also describing the kind of actions that constitute sexual harassment.
(ii) Ensuring effective communication of the policy or programmes prohibiting sexual harassment to members of the organisation.
(iii) Setting up a well-publicized procedure for handling incidents of sexual
harassment with assurance of non-retaliation. (iv) Taking appropriate disciplinary action which may include reprimand, demotion,
job transfer, pay reduction, loss of bonus or termination which should aim at deterring the offender and others in the organisation.
(v) Compensating the victim for the harm done.
Question 6 Bellview Bank was recently revived and handed over to the new owners after a devastating misfortune which led to the closure of the bank for five years. Due to injection of fresh funds, the bank was able to employ young, beautiful and educated male and female staff to translate the dream of the bank into reality. The bank expended a lot of money to acquire property in Victoria Island, Lagos which serves as its only branch and head office. Recently, Mr. Richards, who is the bank’s General Manager, received a commitment from Chief Absalom, a wealthy businessman, to place a sum of N500,000.00 in a fixed deposit with the bank. Mr. Richards detailed Miss Beauty, a pretty, slim and attractive staff recently employed as External Relations Marketing Officer to Chief Absalom, with specific instructions to deploy all professional, practical and personal skills to ensure that the deal is closed. On arrival at Chief Absalom’s house, Miss Beauty was shown the draft of the money already procured. He however made sexual demand from Miss Beauty as a condition for release of the draft and eventual placement of the deposit. Miss Beauty was surprised, angry and felt insulted. She stormed out of the Chief’s house and reported the incident to her boss on arrival in the office. The General Manager was extremely angry that Miss Beauty could not perform a simple task. He stated that the bank’s staff are chosen people, well paid and motivated to achieve all tasks, and cross all hurdles to ensure the survival of
11
the bank. Miss Beauty was immediately relieved of her job on the ground of disobedience and non-performance. Examine the ethical issues involved and discuss. (20 marks) Comment This was a problem question adapted from a similar question used about six years ago. Candidates failed to achieve the demand of the question at the end of the essay. Candidates were expected to “Examine” and “Discuss” the issues. In most of the scripts, none of these was done. Rather, candidates delivered judgement as they deemed fit. The approach to the question and style of professing answers make assessment difficult as candidates strayed miles away from the marking guide. The style adopted in examiner’s answer is recommended for future candidate. A total of 106 candidates attempted the question, out of which only 42, representing 37%, passed. Answer The ethical issues in this case are:
(i) What should be the correct strategy towards repositioning the bank in the economy. (ii) Whether the morals of the workers should be completely compromised in the bid to
source for deposit for the bank. (iii) Whether the bank’s management acted ethically by terminating the employment of
Miss Beauty. (i) The strategy for the revival of the bank must be such that will not be against any
criminal law or against moral principles. It is unethical to have the mindset that all rules must be broken in order to obtain deposit to sustain a bank. There are several other strategies that may be explored without turning the bank into a platform for breeding prostitutes.
(ii) The moral of workers should not be compromised in the bid to source for deposit for
the bank. (iii) Individuals with good individual ethics need be encouraged to utilise their talent
towards the attainment of corporate objectives. Therefore, the termination of the
12
employment of Miss Beauty may be justified within the contemplation of the bank’s condition of service, it cannot withstand any test of ethics and best practices.
SECTION C: CORPORATE GOVERNANCE
Question 7 (a) What is the qualification required of a Company Secretary under the Companies and
Allied Matters Act 1990 (as amended), particularly in respect to a public company? (10 marks)
(b) State the provisions relating to the removal of the Company Secretary under the Companies and Allied Matters Act. (10 marks)
(Total = 20 marks) Comment This was one of the two questions under Section C of the examination based on Corporate Governance. It is a statute-based question, particularly S.295 and 296 of the Companies and Allied Matters Act. The (a) part requires an understanding of the statutorily prescribed qualifications of a Company Secretary of a public company. The (b) part requires the “provisions” relating to removal. In the (a) part, there were a lot of guesswork which evidenced complete lack of knowledge of CAMA as far as the provisions relating to “Secretary” are concerned. On the (b) part, rather than discuss or state the procedure for removal which is contained in the Act, candidates discussed capacity of a person to be appointed as Secretary. There was no specific reference to “Public Company”. It was the most unpopular and less-attractive question in this paper. Out of the 162 candidates that wrote the subject, only 25 attempted the question and only six barely hit the pass mark. Answer (a) S.295 of Companies and Allied Matters Act 1990 (CAMA) provides that it shall be the
duty of a director of a company to take all reasonable steps to ensure that the secretary of the company is a person who appears to have the requisite knowledge
13
and experience to discharge the function of a secretary and in the case of a public company shall be. (i) A member of the Institute of Chartered Secretaries and Administrators or. (ii) A legal practitioner within the meaning of the Legal Practitioners Act 1975, or (iii) A member of the Institute of Chartered Accountants of Nigeria (ICAN) or such
other bodies of accountants as one established from time to time by an act of the National Assembly.
(iv) Any person who has held the office of the secretary of a public company for at
least three years of the five years immediately preceding his appointment in a public company.
(b) S.296(2) provides that, where it is intended to remove the Secretary of a public
company, the Board of Directors shall give him notice: - Stating that it is intended to remove him. - Stating the grounds of the intended removal. - Giving him not less than seven working days within which to make his defence. - Giving him an option to resign his office within a period of seven working days. - Where the Secretary does not resign or make a defence within 7 days, the Board
may remove him and shall make a report to the next Annual General Meeting. Question 8 The Code of Corporate Governance for banks in Nigeria (May 16, 2014) published by the Central Bank of Nigeria contains principles and practices that promote good Corporate Governance. Mention ten (10) of the principles and practices known to you. (20 marks) Comment This was the last question in the subject and the second in Part C. it is based on the Code of Corporate Governance for Banks published by the CBN in 2014. As an optional question to the less attractive Question 7, a host of 136 candidate attempted it, out of which 62 candidates passed, representing 45%. What was very obvious from the content of the various answers received and assessed was that most of the candidates have never seen or read the code. It is hoped that the Institute will invent a channel through which such important documents are made available to students.
14
Answer
Code of Corporate Governance for Banks in Nigeria (Principles and Practices)
- External auditors of banks shall report annually to the CBN, the extent of the bank’s
compliance with the provisions of this case. - The Board is accountable and responsible for the performance and affairs of the bank. - The Board shall set limits of authority in the bank. - The Board shall ensure strict adherence to the code of conduct for bank directors.
- Size and composition of Board minimum of five and a maximum of 20. - At least 2 non-executive Directors as independent Directors. - Separation of Powers: The position of the Board Chairman and MD/CEO shall be
separate. - Executive Duality: No two members of the same extended family shall occupy the
positions of chairman/MD/CEO. - Tenure of CEO of banks: Maximum of 10 years. - Board committee shall be headed by Non-Executive Directors. - Remuneration: Every bank shall have a remuneration policy put in place by the Board
of Directors. - Board Appraisal: Annual Board appraisal shall be conducted by an independent
consultant. - Right and Functions of Shareholders: Shareholders shall have the right to obtain
relevant information. - Equity Ownership: Equity holding of 5% and above by an Investor shall be subject to
CBN’s approval. Government holding is limited to 10%. - Meetings: As prescribed by Companies and Allied Matters Act 1990 (CAMA). - Disclosure and Transparency - Whistle–Blowing: A whistle-blowing policy made known to employees and other
stakeholders. - Risk Management – Every bank shall have a risk management framework in place. - Ethics and Professionalism: Establish a code of conduct. - Conflict of Interest: Policy should be put in place.
15
BANK LENDING & CREDIT ADMINISTRATION
16
SECTION A
Question 1
In formulating lending policies, various factors are usually considered.
(a) Discuss five (5) basic/underlining factors that banks usually consider when
formulating bank lending policy. (10 marks)
(b) List five (5) specific factors that should be included in a bank lending policy.
(10 marks)
(Total = 20 marks)
Comment
Out of 134 candidates that attempted this question, only 18, representing 10.8%, passed.
Both (a) and (b) parts of the question were normal textbook questions testing candidates’
knowledge of credit policy fundamentals which requires no practical credit appraisal
experience to earn a pass mark. It is sad to observe that candidates were not
knowledgeable on the fundamentals of lending.
Answer
(a) Basic/underlining factors that banks usually consider when formulating bank lending
policy:
(i) The loans to deposit ratio adopted by the bank.
(ii) Type of loans to make.
(iii) Liquidity position of the bank.
(iv) Need for profitability.
(v) Safety of the loans.
17
(vi) Use or purpose to which the loans/funds are put.
(vii) Government policy or priority.
(viii) Competition.
(ix) The economic and political conditions in the country.
(x) New policies of the lending bank.
(xi) The capital funds available to the bank at a particular time.
(xii) Canons of good lending.
(xiii) Loan administration.
(xiv) Loan disbursement.
(xv) Appropriate monitoring mechanism.
(i) Loans to Deposit Ratio
This refers to the value of loans to lend to customers compared to the value of deposit
mobilized, i.e. how much is the loans-to-deposit ratio?
This ratio varies from bank to bank as a result of banks:
- experiences;
- size, and
- management’s aggressiveness.
How much to lend is mostly influenced by the loan demand and supply functions faced by
the bank. Thus, a bank needs to study the factors affecting the demand for its loan such as
bank’s past experience, customer’s level of credit demand, state of the economy etc; as well
as factors affecting its ability and willingness to supply credit, e.g size and structure of bank
deposit, rate of interest and the structure and CBN’s credit guidelines.
(ii) Type of Loans to Make
18
How much to lend depends mostly on the maturity of the loan, coupled with the customer’s
type of business. The level of development of the bank customers, the nature of their loan
demand and the maturity profile of the deposit resources of the bank will provide a guide in
deciding the distribution of a bank’s loan portfolio into short, medium and long-term maturity.
(iii) Liquidity Position of the Bank
An acceptable lending policy must emphasize the ability of the bank to be liquid at all times.
A bank’s lending policy on how much to lend and what kinds of loan to offer ought to
properly and appropriately accommodate the overall and overriding need for liquidity. Bank
loan should be capable of being repaid as and when due to enable the bank remain liquid.
(iv) Need for Profitability
Lending policy should emphasize the need for bank loan to generate additional income to
the bank. The need to be profitable is fundamental and essential for the continued existence
of a bank. For bank loan to be profitable the cost of borrowed funds must be less than the
income generated. Similarly, banks may be skeptical to lend to agriculture because of the
high risk involved. Lending to agriculture is both economically and socially desirable, but
represents one of the least profitable avenues for the investment of a bank’s funds, given
the high default rate of loans to the sector.
(v) Safety of the Loan
A good loan policy must meet the safety condition that a loan granted to a customer must
be capable of being repaid as at when due. This means that a loan granted should be used
for legitimate purpose and within the capability of the borrowers. For example, whilst it is
19
highly desirable to give loans to nascent industries and firms and to deliberately pronounce
this in the bank’s loan policy, the safety aspect of such positive and aggressive action must
be considered.
(vi) Use or Purpose to which the Loan/Fund are Put
Bank loans ought to be employed for purposes that are economically and socially desirable.
A bank is concerned with the use to which its monies are put because that enables it to
determine the long-term profitability of the account. A bank expects its loan to increase
volume of business with a view to generating increased demand for its services, e.g. more
loans, foreign exchange transactions, money transmission, deposit generation, etc. The
advance must not be used for illegal purpose to ensure enforcement if the customer
defaults.
(vii) Government Policy or Priority
A bank’s loan policy should not be contrary to the existing government directives or policy
guidelines. Banks should want to lend to those sectors and activities given high priorities by
the government.
Where there exist specific government directives, monetary and fiscal policy guidelines,
such are of necessity and must be taken into consideration in loan policy decisions.
(viii) Competition
A bank’s loan policy should be formulated in such a way as to enhance effective competition
with other banks in the same industry. Any policy that is not competitive is capable of
threatening the existence and survival of the bank.
20
(ix) Economic and Political Conditions in the Country
In order to be able to enunciate policies to guide the lending function of the bank, especially
where it operates under unstable economic and political conditions; a precondition is the
ability to predict reasonably well what the economic and even political policy options of the
government of the country are and to estimate the probabilities associated with these
options.
(x) New Policies of the Lending Bank
New policies adopted by the lending banker may alter significantly the orientation of a
bank’s operations. A bank that intends to change from a generalized practitioner to a
specialized one needs to give adequate attention to management skills currently available in
the organisation and new management skills required to support such programme. Where
the latter is absent, it is not advisable to introduce the new policy.
(xi) Capital Funds Available to the Bank
The size of the capital funds and their adequacy or otherwise have major influences on the
lending policies of a bank.
(xii) Canon of Good Lending
A bank loan policy must take into consideration the canons of good lending, especially the
one that says a bank loan policy must ensure adequate liquidity to the bank.
(b) Specific factors that should be included in a bank lending policy
(i) Goals of the lending function and the organisational set-up required to work for the
attainment of the goal.
21
(ii) Marketing of the fund – detailed specific strategies for the investment of
deposit mobilised.
(iii) Need for a prudently balanced portfolio.
(iv) Terms and conditions of loan.
(v) Detailed policy guidelines of managing loan account guides to lending officers on
identification of warning signals.
(vi) Specification of credit limits for ‘secured’ and ‘unsecured advances.
(vii) Rules and procedures provided in the bank’s general or loan handbook.
(viii) Various types of securities acceptable to the bank and the percentages of loans can
be granted as a proportion of the value of such security items.
Question 2
(a) In their lending operations, banks must prudently focus on liquidity, profitability,
costs and convenience. Discuss. (10 marks)
(b) Credit standards derive from credit culture. Discuss. (10 marks)
(Total = 20 marks)
Comment
A total of 148 candidates attempted this question, out of which 44 (or 29.7%) passed. The
(a) part of the question concerns the basic objectives of lending while the (b) part concerns
the fundamentals of credit. Students failed to show a good knowledge of these lending
objectives and concepts. Performance is worrisome.
22
Answer
(a) Liquidity
This refers to the ability of the bank to convert its assets into cash to meet its day to day
cash withdrawals and the credit needs of its customers.
Banks achieve this by:
(i) Investing in short-term financial instruments that can be easily converted into
cash whenever the need arises, e.g. treasury bills, commercial papers, money at
call etc.
(ii) Maintaining cash reserve ratio and liquidity ratio as prescribed by the Central
Bank of Nigeria.
(iii) Granting short-term credit facilities to customers – individuals and businesses to
produce goods and services demanded by people to enhance economic growth
and development. A bank should maintain a prudent balance between its
depositors’ funds and overall lending, such that the maturity consideration is
given prominence.
Liquidity is important to the following:
(i) Regulatory/supervisory authorities-to enhance effective control of the economy.
(ii) Customers – Depositors are capable of receiving interests on their deposits as
long as a bank remains liquid, as this guarantees a bank’s existence and
survival. Borrowers are capable of getting required credit facilities to run their
day-to-day business transactions if banks are liquid at all times.
(iii) Members of the public–Adequate supply of credit to businesses guarantees
regular supply of goods and services to people to meet their day-to-day needs in
order to maintain good living conditions.
23
(iv) Investors – Adequate liquidity ensures a bank’s good performance in terms of
high profitability, which thereby attracts investor’s capital to the bank. All these
guarantees a bank’s continuous existence and survival.
(v) Other financial institutions – Maintenance of adequate liquidity enables other
financial institutions to engage in effective financial intermediation.
Profitability
This refer is to ability of a bank to use depositors’ funds and bank capital in order to
generate enough income that would make the bank remain in business. Profitability is the
index to measure managerial performance and efficiency.
Only banks that maximise profit can ensure long-term survival. For a bank loan to be
attractive and profitable, the cost of borrowed funds must be less than the income
generated.
Lending to propositions that have a variety of income sources like foreign business or local
transfers is profitable. To ensure profit, other than from lending, banks invest their surplus
funds in short-, medium- and long-term securities.
Profitability can be measured through the following ratios:
(i) Profit (ii) Profit (iii) Profit
Total Assets Equity Earning
Bank profitability can also be measured in terms of Gross Profit and Net Profit Gross Profit-
Sales – Cost of Goods Sold
Net Profit–Gross Profit – Operating Expenses
Profitability is important to:
24
(i) Regulatory/supervisory bodies - to measure performance.
(ii) Employees – enables them to agitate for better conditions of service.
(iii) Management – to evaluate their efficiency in managing a bank’s resources to
generate income.
(iv) Shareholders/new investors – enables them to maximise earnings on capital
contributed.
(v) Suppliers – enables them enjoy regular and adequate supply of bank credits.
(vi) Society – ensures availability of goods and services needed for existence and
survival.
(vii) Government – enhance adequate generation of revenue through payment of
taxes by banks.
(iii) Cost
This refers to expenses incurred by banks in carrying out their day-to-day banking
transactions. These include the following:
(i) Cost of Borrowing:- Interests paid to depositors;
(ii) Expenses incurred in acquiring fixed and current assets;
(iii) Remuneration of employees;
(iv) Running expenses etc.
For a bank to maximise profits, it must minimise the cost of liabilities, that is, the lower the
cost of liabilities, the greater the margin of profit. It is also important that cost of loan to
customers should not be too high to encourage and create a good banking habit among the
public.
25
Convenience
This refers to ease of repaying the loan by the customer. In other words, a bank’s terms and
conditions for repayment of the loan must not be too stringent to ensure early repayment.
Repayment should be tied to cash flow from the borrower’s business. A bank should not set
an unrealistic payment schedule to enhance customer’s convenience. Similarly, customers
should do all that are required of them to ease the process of bank lending.
(b) Credit Culture
This is the unique combination of policies, practices, experience and management attitudes
that defines the lending environment and determines the lending behaviour acceptable to
the bank.
- It manifests in the shared belief as to the desirability of lending being done on
the basis of:
- prudence;
- commercial; and
- profit-oriented criteria.
A good credit culture should encompass the following:
A comprehensive approach to asset quality management;
Centralised lending policies;
Efforts to diversity risk and avoid over-concentration in particular segments, sectors or
firms;
An explicit approval system for granting loans, with clear delegation of authority and
accountability;
26
Separation of the loan marketing function from the credit function, and the
independence of the latter from the former;
The incorporation of credit quality concerns into the staff performance review process.
Credit Standards
These are guidelines issued by a lending institution that are used to determine if a
potential borrower is creditworthy.
They are applied to measure the eligibility of an individual or firm to obtain credit
facility.
The better one’s creditworthiness, the more likely it is that a bank or other financial
institution will extend credit.
They are often created after analysis of past borrower’s records and market
conditions.
Credit standards help to regulate the relationship between the various parties to a
credit arrangement and also help to distribute and minimise the risks that are always
present in any type of credit facility.
They involve qualification of a variety of factors like:
- borrower’s background;
- history of default;
- current amount of debits; and
- length of time the customer has applied for credit facilities.
The statement that credit standards derive from credit culture is true. This is because a
bank must first state its credit culture and later break it down to credit standards to effect
implementation of its credit culture.
27
Question 3
The (i) technological,
(ii) economic,
(iii) political,
(iv) regulatory, and
(v) institutional environments of banks impact decisively on their lending
operations.
Discuss succinctly but comprehensively. (4 marks)
(Total = 20 marks)
Comment
The question was attempted by 167 candidates and 111 (or 66.5%) passed. The question
asked for a simple explanation on effects or impact of basic environmental factors on
lending decisions. The answers provided were not detailed enough to earn candidates
maximum marks. By and large, a good performance was recorded.
Answer
The impact of environments on bank lending
(i) Technological Environment
This refers to the impact of technology on the lending decision of banks, i.e. the sum
total of knowledge available to ensure good lending practices. Its main influence is on
ways of doing things, how we appraise propositions, disburse loans and get back
facilities granted to customers.
A good lending decision requires adequate and availability of information on the
borrowers to facilitate credit analysis, collection and analysis of data.
28
Use of information and communication technology (ICT) has assisted bankers in
obtaining accurate, sufficient and regular information data on both existing and
potential borrowers.
The existence of credit bureau, company credit scoring agency, credit reports
agencies such as Credit Bureau Co. Augustus & Co; provide relevant data on potential
customers to banks to arrive at good lending decision.
Nowadays, computer now calculates interest, post-repayment of loans, text messages
and communication with customers, e.g. reminder alerts and use of e-mail, etc.
(ii) Economic Environment
This refers to economic factors that affect lending decision such as economic
situation-economic boom and economic depression, topography of economy,
inflation, interest rates, etc.
Economic boom facilities economic prosperity which leads to more demand for bank
loans to meet production of more goods and services demanded by people. Optimal
production encourages full employment which in turn leads to increase in earning
capacity of people, resulting in increase in demand for credit facilities from the
banks.
Increase in bank lending coupled with timely repayment of loans lead to profitability
of banks.
However, during economic depression, the reverse is the case for bank lending.
(iii) Political Environment
This refers to the effect of government action or policies on lending decisions.
29
Persistent changes in the government of a country will have a negative impact on
lending decisions as bank lending policies, credit culture and standards are bound to
change so often as well.
So also unstable government policies, fiscal and monetary policies will impact
negatively on bank lending policies and decisions. For example, constant increase in
cash and liquidity ratios will reduce the ability of banks to grant more loans to
businesses and thereby reduce productivity and increase unemployment rate.
However, constant reduction in cash and liquidity ratios will have an opposite impact.
Government restrictions, embargoes, etc., of certain businesses or sector(s) will
prevent banks from extending credit facilities to such businesses or sector(s), no
matter how profitable the business or sector is.
(iv) Regulatory Environment
- This refers to the activities of the regulatory bodies/authorities on bank lending
decisions.
- Lending decisions take a cue from the Central Bank of Nigeria’s credit guidelines
and directives.
- CBN prime lending rate dictates bank lending rates. High prime lending rate is a
disincentive to ability of banks to grant more credit facilities to their customers
and vice versa.
- Similarly, increase in cash and liquidity ratios has a similar effect as above. So
also, an increase in statutory deposit with the CBN will impact negatively on bank
lending decisions.
- However, CBN directive to increase bank capital will enable banks to lend
advances to the real sector of the economy for the rapid economic development
of Nigeria.
30
- CBN prudential guidelines impact positively on bank lending policies, especially
improved repayment of loans granted.
(v) Institutional Environment
This refers to activities of institutional bodies besides, the regulatory bodies, relating to bank
lending. Examples are: CIBN, Bankers Committee, EFCC, Consumer Associations, NDIC,
Insurance companies, etc
- The common activities of these institutions is to ensure adequate protection of the
customers and bank workers.
- Guarding against bringing the name and integrity of bankers into disrepute with a view to
enhancing/promoting good intermediation activity of banks.
- Enhancing good deposit mobilisation with a view to ensuring adequate liquidity and
profitability.
- Increased deposit base of banks facilitates improved/increased extension of credit
facilities to bank customers.
- Premiums collected by insurance companies are deposited with banks thereby
increasing banks’ ability to grant loans and advances to their customers.
- NDIC insurance covers encourage customers to deposit their money with the bank with
confidence.
SECTION B
Question 4
Engineer Sunday Okoye, the Chief Executive Officer (CEO) of Westend Metal Works
Limited, paid you a visit to discuss the possibility of transfer to your bank of his company’s
account currently with a competitor.
31
In the course of discussion, he produced the company’s audited accounts for the past two
years to 31st May, 2015 which are reproduced below. In addition, Engineer Okoye
informed you that the company is in the business of carpets and tiles and operates from
two separate locations in Nigeria. At the moment, there is an overdraft limit of N2 million
for the day-to-day working capital facilities and this is supported by a debenture over the
compnay’s assets.
Required:
(a) An assessment of the company’s creditworthiness using Balance Sheet and Profit
and Loss Account ratios and trends.
(b) Comment on any other relevant issues, including any point on which you will be
seeking further information. (5 marks)
(Total = 20 marks)
32
WESTEND METAL WORKS LIMITED
Balance Sheet as at 31st May, 2015
2014 2015
N’000 N’000
FIXED ASSETS
Land and Buildings (including Lease) 74,400 74,400
Shop Improvement 28,000 23,000
Fixtures/Fittings 22,800 29,000
Motor Vehicles 3,400 4,400
128,600
130,800
CURRENT ASSETS
Debtors 42,000 40,000
Stocks 92,000 156,000
134,000 196,000
Less Current Liabilities
Creditors 115,800 157,000
Bank 39,000 63,000
Directors’ Loan 2,000 2,000
156,800 (22,800) 222,000 (26,000)
105,800 104,000
33
FINANCED BY
Share Capital 1,000 1,000
Capital Reserve 65,000 65,000
Profit and Loss Account 39,800 38,800
105,800 104,800
2014 2015
Sales 556,000 640,000
Purchases 343,000 446,000
Gross Profit 243,000 261,000
Comment
A total of 139 candidates attempted the question, out of which 96 (or 69.1%) passed. This
is a common lending question which requires practical credit appraisal of the financial
statement provided by the customer. Some candidates could not identify basic relevant
ratios to calculate. Wrong figures were used in calculating ratios; thereby wrong answers
were given. Above all, wrong interpretations and recommendation were made by many
candidates. Hence, they failed to arrive at lending decision.
34
Students are implored to prepare well by practising similar questions before sitting for the
examination to ensure success. At this level, candidates are expected to show good
knowledge in practical credit appraisal.
Answer
(i) Current Ratio = Current Assets
Current Liabilities
2014 2015
= 134,000 196,000
156800 222,000
0.85:1 0.88:1
A poor relationship with only a small amount of margin between the bank balance and the
limit to satisfy any pressing creditors.
(ii) Acid Test = Current Assets – Stock
Current Liabilities
= 2014 2015
42,000 40,000
156,800 222,000
0.26:1 0.18:1
A poor relationship worsened in the year 2015 by the deterioration of the liquidity of the
current assets.
(iii) Stock Turnover = Sales
35
Closing Stocks X 365
Or = Cost of Sales
Average Stock
= 2014 2015
556,000 640,000
92000 156,000
= 6.04 4.10
In days = 92,000 156,00
556,000 X 365 640,00 X 365
= 60 days = 89 days
Stock turnover declined from 6.04 in 2014 to 4.10 in 2015, indicating that the stock is slow
moving.
(iv) Gross Profit Margin = Gross Profit
Sales
= 2014 2015
243,000 261,000
556000 640,000
= 43.7% 40.8%
Gross profit margin has dropped from 43.7% in 2014 to 40.78% in 2015, and emphasis
should be made as to the reason for this drop.
X 100
X 100 X 100
36
(v) Debtors’ Collection Period = Debtors X 365
Sales
2014 2015
42,000 X 365 40,000 X 365
556,000 640,000
= 28 days = 23 days
There is a decrease from 28 days in 2014 to 23 days in 2015. Whilst control over debtors is
clearly firm, in view of other factors, this might indicate that the company is pressing for
payments to alleviate a shortage of working capital.
(vi) Creditor Collection Period = Average Trade Creditors X 365
Credit Purchase
2014 2015
115800 X 365 157,000 X 365
343,000 446,000
= 123 days = 128 days
Long time of credit has not been reduced and, on the face of it, at least the company looks
susceptible to any shortening of these lines of credit.
(vii) Proprietors’ Ratio = Proprietors Fund
Total Assets X 100
2014 2015
105,800 X 100 104,800 X 100
37
262,600 326,800
40% 32%
These ratios are poor and indicate that the company finances its operations mainly from
outside sources. This may cause serious problems for the company if these external
sources are blocked.
4(b) Comment
(i) Although the terms of the existing borrowing are not known, the bank will
nevertheless have a legal charge over the fixed assets with a probability that this will
be extended to cover the debtors.
(ii) The stock will be covered under a floating charge whilst, on the surface, there must
be plenty of security to cover the existing borrowing. The situation is not as strong as
it might first appear, and the following comments are appropriate.
(iii) Leases
In times of financial difficulty, there must be a possibility of the bank facing problems
with the risk of the freeholder or head leasor reclaiming the properties if the rents are
not paid on time. Therefore, the bank should seek a list of premises unexpired with
unexpired lease and the basis of valuation.
Shop Improvement
Valuation in a break up situation of the amount spent would be difficult.
(iv) Fixtures & Fittings
In an enforced sales, the realisable amount would, in all probability, produce only a
very small fraction of the balance sheet figures.
(v) Stock
38
There is need to verify and confirm whether there is a Romalpa type of reservation
on the goods held on the stock to which the bank debenture would be subjected.
In view of the increase, the bank has to verify whether or not the valuation includes
unsaleable items.
(vi) Creditors
Are there preferential claims which would take precedence over the banks floating
charge? This must be clarified also.
Question 5
(a) Dr. Peter Johnson, a medical lecturer with a private university, is your customer and
wishes to purchase a freehold house with registered title for N9.5 million and settlement is
due on June 13.
He currently owns his house where he is living with his family, and there is an outstanding
mortgage loan of N3 million on it. This house has been sold by him for N8 million, but
settlement is due on June 30, when the buyer would have secured a mortgage loan.
Dr. Johnson asks you to bridge the period between the purchase and sale, assuring you
that he will raise another mortgage loan from Atlantic Mortgage Bank to cover the borrowing
outstanding after completion of the two transactions.
Required:
(a) Describe how you would handle the request and how you would safeguard the
bank’s position throughout. (12 marks)
(b) Listed companies usually come out with their annual reports highlighting their
position and performance to investors and other stakeholders. State four (4)
39
important pieces of information in the report that are relevant for credit appraisal.
(8 marks)
(Total = 20 marks)
Comment
A total of 135 candidates attempted this question and only 16 (or 11.9%) passed.
Candidates’ performance was too poor in the (a) part, which further revealed their lack of
knowledge in practical credit appraisal of bridging loan. Similarly, candidates were ignorant
of important information in listed companies’ annual reports that are necessary for lending
decisions which the (b) part of the question required. Candidates are advised to pay
attention to detail on relevant documents that can assist them in making good lending
decisions and have good knowledge of bridging loan financing.
Answer
(a)(i) Request for evidence that the eventual mortgage has been agreed, at least in
principle, as the bank shall not want to be left with long-term lending against house
property.
(ii) For the same reason, we need want to confirm that the contract of sale of Dr. John
son’s present house has been exchanged.
(iii) We should obtain Johnson’s authority to pay the purchase price to the solicitor
against the latter’s undertaking to hold the deeds to the order of the bank and to account to
the bank for the proceeds of the sale of the existing property after settling the mortgage loan
outstanding.
40
(iv) Enquiries should be made about the status and trustworthiness of the solicitor, if not
known to the bank; because we need his undertaking for payment.
(v) If agreed, the purchase price should be paid to the solicitor against his undertaking.
(vi) We should satisfy ourselves that adequate insurance cover is arranged.
5(b)
(i) Vision and mission statements
These reflect the values and goals of the company.
(ii) Corporate Information
This contains details of directors, bankers, auditors and registered and corporate office.
Designation of each board member and the reputation of the auditors can be verified from
their name in the report.
(iii) Chairman’s Report
This tells you what a great job the top management did during the preceding year and the
company goals and strategies for the future. It may contain apologies for problems that
occurred during the year, which may or may not have been resolved.
(iv) CEO’s Report
A brief summary of financials; explanation of the financial results, key development
in the company, i.e. operational parameters of the company, such as capacity
additions, plans executed during the year, etc.
(v) Product Overview
41
- Details of products being manufactured by a company, segment wise performance,
key raw materials consumed, etc.
(vi) Summary of Financial Results
This is where the lender will look for trends in growth (or non-growth) of revenue and
profit and other lending indicators of the company’s financial success.
Detailed information on profit and loss accounts, balance sheet, cash flow
statements and schedules of financials for five years.
(vii) Subsidiaries, brands and address
Here, you find listings of company locations – domestic and foreign – and contact
information; as well as brand names and product lines.
(viii) Stock Share Price History
This section gives a brief history of stock prices and dividends, showing upward and
downward trends over time.
(ix) Management Discussion and Analysis
This section provides information on trends in the industry, SWOT analysis of the
company, risk factors, concerns affecting the company.
(x) Auditors’ Report
Comments by auditors on the financials of the company and any qualification and
internal process are shown here.
(xi) Notes to Accounts – This shows information on accounting policy followed by the
company.
42
Question 6
(a) Your long-standing customer, Chief Mowowa Jacob, who is the Managing Director of
MOJAS Nigeria Limited, calls to tell you that he has been advised by the company’s
Finance Director that since the company is earning only modest profits, they should require
an equipment leasing facility to finance the company’s equipment.
Required:
(i) Explain to Chief Mowowa Jacob the meaning of equipment leasing and types, and
why it is recommended for the company.
(10 marks)
(ii) State four (4) characteristics of a Lease Finance. (4 marks)
(iii) State four (4) reasons why banks engage in Loan Syndication. (6 marks)
(Total = 20 marks)
Comment
This question was attempted by 170 candidates, out of which 51 (or 30%) passed. This was
a large number of attempts but poor performance was recorded. Part (a) of the question is a
common and popular one on equipment leasing. It was observed that candidates did not
demonstrate good knowledge of it as they failed to write salient points that would earn them
good marks. Many even misinterpreted the questions. The (b) part of the question tested
candidates’ knowledge on reasons why banks engage on loan syndication. Regrettably,
impressive answers were not offered, thus maximum marks were not earned by candidates
that attempted it.
43
Answer
a(i) Leasing is a commercial arrangement whereby an equipment owner (lessor)
conveys to the equipment user (lessee) the right to use the equipment in return for
payment of specified rentals over an agreed period of time.
There are two types of leasing: these are finance lease and operating lease.
Reasons for leasing
If offers cash flow benefits.
It gives room for flexible rental payments.
It gives room for available capital to be used elsewhere.
It can be speedily arranged by the company.
It is 100% debt financing.
It is an off-balance sheet financing option to the company and offers no dilution of
share ownership.
It is a sound hedge against inflation.
(ii) Characteristics
Usually of medium–term duration.
Any sort of capital asset can be financed.
Maintenance, service and insurance are normally the responsibility of the lessee.
The lessor seeks (i.e recovers) capital outlay and profit during the primary period
(useful economic life of the asset).
It is normally meant for commercial customers for the use of income-producing
assets as against consumer transactions on consumer goods.
The lessee selects the assets he needs for the lessor to purchase or manufacture.
The lessee may be allowed at the end to sell the asset on behalf of the lessor.
44
(iii) Reasons why Banks Engage in Loan Syndication
- To enable them comply with the Banks and Other Financial Institutions Act (BOFIA)
of 1991, which prescribes the maximum amount that can be lent to a single borrower
and the criteria. Where the loan being requested is in excess of these maximum and
criteria, a syndication would be undertaken to provide the entire amount.
- To enable banks comply with sectoral allocation of credit prescribed for each sector
of the economy by the monetary authorities.
- When banks are facing liquidity problems, they could embark on syndication to
provide loan for viable projects instead of declining such requests in their entirety.
- Since loans are most profitable and risky assets, banks would like to protect
themselves by sharing the risks through syndication. It is a bad lending policy for a
bank to put all its eggs in one basket, sharing the risks reduces the level of bad
debts a bank carries.
- Banks like to identify themselves with the progress of viable projects. Through loan
syndication, many banks are associated with the progress and economic growth of
corporate bodies and government.
- Control, management and repayment procedures are better streamlined in a
syndicated credit than when the same customer borrows the same amount from
different banks on a participating basis.
SECTION C
Question 7
All licensed banks are required to review their credit portfolios continuously with a view to
recognising any deterioration in credit quality. Based on the perceived risks of default, credit
facilities and other loss contiguous connected with a bank’s credit risks are, therefore,
expected to be classified as either “performing” or “non-performing”.
45
Required:
(i) Define “performing and non-performing” credits in line with provision of the
Central Bank of Nigeria Prudential Guidelines, 1990. (6 marks)
(ii) Under what conditions can a credit facility already classified as “non-performing” be
re-classified as “performing “?
(4 marks)
(Total = 20 marks)
Comment
A total of 150 candidates attempted this question, out of which 111 (or 74%) passed. It is a
popular question on CBN Prudential Guidelines concerning classifications of credit. The
question was well attempted and some candidates showed a good knowledge of the topic
because good answers were given and good marks were earned by them. This shows that
many candidates are conversant with this aspect of Prudential Guidelines of the CBN.
Answer
(i) Performing
A credit facility is deemed to be performing if payments of both principal and interest
are up to date in accordance with the agreed terms.
Non-Performing
A credit facility should be deemed as non-performing when any of the following
conditions exists:
Interest or principal is due and unpaid for 90 days or more;
46
Interest payments equal to 90 days or more have been capitalised, rescheduled or
rolled over in a new loan except where facilities have been reclassified.
(ii) Classification Criteria
(a) Sub-Standard
Objective Criteria
Facility on which unpaid principal and/or interest remain outstanding for more than
90 days but less than 180 days.
Subjective Criteria
Credit facilities which display well-defined weaknesses that which could affect the
ability of borrowers to repay, such as inadequate cash flow to service the loan under
capitalisation or insufficient working capital; absence of adequate financial
information or collateral documentation; and inactive account where withdrawals
exceed repayments.
(b) Doubtful
Objective Criteria
Facilities on which unpaid principal/interest remain outstanding for at least 180 days
but less than 360 days and are not secured by legal title to leased assets of
perfected realisable collateral in the process of collection or realisation.
Subjective Criteria
Facilities, which, in addition to the weakness associated with sub-standard credit
facilities, reflect that full repayment of the debt is not certain or that realisable
collateral values will be insufficient to cover bank’s exposure.
(c) Lost
47
Facilities on which unpaid principal and/or interest remain outstanding for 360days or
more and are not secured by legal title to leased assets or perfected realisable
collateral in the course of collection or realisation
Subjective Criteria
Facilities which, in addition to the weakness or which are associated with doubtful
facilities, are considered uncollectable and are of such little value that continuation
as a bankable asset is unrealistic
A credit facility already classified as “non-performing” can be classified as
“performing” only if the borrower has effected cash payment such that outstanding
unpaid interest does not exceed 90 days.
Question 8
(a) Where the lender agrees with the customer for a longer period to pay the loan, the
bank will reschedule the debt.
What are the steps to be taken by a lender when rescheduling a debt?
(10 marks)
(b) When a bank has tried all remedial actions to reverse the fortunes of a project-
related loans fail, what actions should it take to salvage what it can from the borrower?
(10 marks)
(Total = 20 marks)
Comment
This question was not popular among candidates as only 73 of them attempted it and 20 (or
27.4%) passed. The question relates to credit control and monitoring. Part (a) deals with
48
debt rescheduling while (b) relates to remedial actions necessary to salvage a bad credit.
The few candidates who attempted the question did not demonstrate a good knowledge of
the topic as poor answers were given by them. Candidates are advised to cover the
syllabus and have a good knowledge of this vital part of the course.
Answer
(a) Steps for Rescheduling of a Debt
(i) Obtain a full list of the customer’s present commitments and income.
(ii) If a significant over-commitment is identified, the possibility of reducing it needs to be
considered.
(iii) A review of the customers’ assets should be undertaken to establish if there is any
which may be sold to reduce borrowing.
(iv) Where it is apparent that the customer is genuinely over committed and asset sales
are not possible to reduce the borrowing, consideration might be given to reducing
overall monthly repayments by amalgamating other debts.
(v) The lending should be by way of loan account, which should be subject to regular
review, so that repayments may be increased in the future.
(vi) No further overdrafts should be allowed and it should be a condition that no
borrowing should be taken elsewhere without the lender’s agreement.
(b) Remedial Steps
(i) Check any security to see that it has been properly charged and can be sold by
bank, if necessary.
(ii) Try to reach a reasonable agreement for the repayment of debts.
49
(iii) Make a last attempt to arrange a meeting, perhaps at the borrower’s home or
business premises so that information can be obtained of him or his financial status.
(iv) Formal demand should be made.
(v) If necessary, use the services of debt recovery agents.
(vi) It may be sensible to agree a settlement with the borrower where full recovery will be
achievable; this is to avoid the extra cost of legal proceedings.
50
MANAGEMENT OF FINANCIAL INSTITUTIONS
51
SECTION A
Question 1
This section contains multiple-choice questions (MCQs) and short-answer questions (SAQs). Indicate the correct alphabet as answers to MCQs and provide the answer(s) to the SAQs: Question 1 (i) Financial institutions can be broadly categorised into:
(a) Banks and non-partisan financial institutions.
(b) Banks and non-bank financial institutions.
(c) Commercial banks and investment banks.
(d) Central banks and commercial banks. (ii) Which of the following agencies is saddled with the responsibilities of regulating and supervising licensed banks in Nigeria?
(a) Central Bank of Nigeria.
(b) Asset Management Corporation of Nigeria.
(c) Securities & Exchange Commission.
(d) Nigeria Deposit Insurance Corporation. (iii) The steps involved in the planning process after the required goal has been set include the following except:
(a) Developing the planning premises.
(b) Deciding the planning period.
(c) Preparing operating plans.
(d) Control planning standard. (iv) A financial institution is in distress where the evaluation of the supervising authorities depicts the institution as deficient in all but one of the following criteria:
(a) High level of classified loans and advances.
(b) Gross under-capitalisation in relation to the level of operations.
(c) Strong board oversight functions and ditto for senior management.
(d) Challenges in meeting customers’ withdrawals.
52
(v) The decision of a bank management which relates to their actions at making positive impact within the society in which they operate can be grouped under one of the following:
(a) Risk management function.
(b) Liquidity management decision.
(c) Corporate social responsibility function.
(d) Profitability decision.
(vi) All of the following reasons account for the loss of confidence in Nigerian banks except:
(a) Increased bank distress/failure syndrome.
(b) Frauds and forgeries.
(c) High handling charges.
(d) None of the above. (vii) The total outstanding exposure by a Deposit Money Bank (DMB) to any single individual or group of related borrowers shall not, at any point in time, exceed:
(a) 33.5% of the bank’s shareholders’ fund unimpaired by losses.
(b) 33.33% of the bank’s shareholders’ fund unimpaired by losses.
(c) 20% of the bank’s shareholders’ fund unimpaired by losses.
(d) 20% of the bank’s contingent liabilities engagements. (viii) The following are the essence of public relations to a bank except:
(a) Affect social responsibility status.
(b) Positive image of bank is ensured.
(c) Coping favourably with competition.
(d) Tax evasion and avoidance. (ix) The objectives of imposing on Deposit Money Banks (DMBs) the statutory Legal Reserve requirement do not include one of the following:
(a) To provide a source of fund for credit creation.
(b) To ensure the solvency of DMBs.
(c) To control the expansion of bank credit.
(d) To compel the DMBs to invest in government securities. (x) The environmental domain listed below can influence the activities of any financial institution except:
(a) Technological.
53
(b) Economic.
(c) Pressure groups.
(d) None of the above. (xi) The act of an employee of an organisation exposing his employer’s unethical behaviour to the media, government or regulatory authorities is referred to as ____________ (xii) ____________ is usually appointed as a composition of both the shareholders and
management with the responsibilities of ascertaining whether the accounting and reporting
policies of the banks are in accordance with legal requirements and standard accounting
practices.
(xiii) Sales of short-term assets and instruments such as treasury bills/certificates
commercial papers can be used to improve ___________ of a bank.
(xiv) ____________ equals the cumulative value of assets minus the cumulative value of liabilities and represents ownership interest in a bank. (xv) ____________ is the process by which the personnel of a bank acquire technical skills and competencies required to perform technical jobs in a bank. (xvi) ____________ are behaviors that block effective communication and make it difficult and impossible to comprehend.
(xvii) Quick ratio can be used to measure ___________ in the banking industry. (xviii) ____________ is a review of operations and records, sometimes continuous, undertaken as an appraisal system within a business by specially assigned staff. (xix) ____________ acts as representatives of the owners and expectedly constitutes the powerhouse of the organisation. (xx) The use of criminal deception to obtain an unjust or illegal advantage intentionally is called ___________ (2 marks each) (Total = 40 marks)
54
Comment This question was fully attempted by all the candidates and the pass rate was high at
94.20%. However, some of the candidates in question (xiv) focused on the definition of
shareholders’ fund in general instead of defining capital on its own.
The candidates are advised to give answers to questions the way and manner those
questions asked.
Answer i. b ii. a iii. d iv. c v. c vi. d vii. c viii. d ix. a x. d xi. Whistle Blowing. xii. Audit Committee xiii. Liquidity xiv. Capital Fund xv. Training and Development xvi. Communication Barriers xvii. Liquidity xviii. Internal Audit xix. Board of Directors xx. Fraud.
55
SECTION B
PART I Question 2 Bank failure cannot be totally eliminated in a financial system; thus efforts should be made to put in place measures to minimise the impact. You are required to discuss seven (7) preventive and eight (8) curative measures for bank failure. (15 marks) Comment The question was meant to test candidates’ knowledge of the modalities for preventing bank failure and its curative measures. About 90% of the candidates who attempted the question scored pass marks, while some were merely suggesting preventive for curative and mixing curative with preventive measures. The candidates are advised to be familiar with contemporary issues in the financial industry. Answer Bank Failure: (a) Preventive Measures
(i) Identifying the problem - measuring the level of deterioration and confront it. (ii) Liberalize and deregulation of the banking industry. (iii) Disapproval of accounting practices that mask poor performance. (iv) Ensuring that bank operates with adequate capital. (v) Regular examination, both, on-site and off-site. (vi) Early imposition of withholding action. (vii) Timely provision of financial and technical support. (viii) Deliberate creation and maintenance of an enabling microeconomic environment. (ix) Elimination of political interference. (x) Strategic planning (xi) Sincere adherence to regulations, prudential guidelines, directives and moral
suasion. (b) Bank Curative Measures
(i) Removal of top management and the board. (ii) Replacement of top management with competent sole administration.
56
(iii) Formulation and implementation of policies on: - Loan management - Asset – liability management, - Profit, Planning and budgeting, - Capital planning, - Risk management, - Good internal control system, - Good management information system, - Good marketing of services.
(iv) Development of fairly implemented loan recovery policies, strategies and tactics.
(v) Implementation of training and manpower policies. (vi) Review of the bank’s accounting and information system. (vii) Review and revision of personnel administrative policy. (viii) Setting up, implementation of assets protection policies/strategies. (ix) Staff audit and rationalisation and replacement of staff with better ones. (x) Review of branch operations. (xi) Engagement in efficient and well-planned public relations. (xii) Reconstruction and recapitalisation (xiii) Merger. (xiv) Compulsory acquisition.
(15 marks) Question 3 The need to instill confidence in and to ensure survival, in a highly competitive environment, has pushed banks to actively engage in public relations activities. (a) Why do we need PR in the banking industry? (7 marks) (b) How is it carried out? (8 marks) (Total = 15 marks) Comment The question was meant to test candidates’ level of appreciation of the need for public relations (PR) in the banking industry, especially in this era of negative image of banks. The question was well attempted by candidates. About 89% of those who did passed with above - average marks. Some of the candidates, however, did not specify the actual tools of
57
carrying out PR in the banking industry. Candidates are advised to prepare for the examination in line with the syllabus. Answer Public relations, as defined by the British Institute of Public Relations, is a deliberate, planned and sustained effort to establish mutual understanding between an organisation and its publics. It is also the practice of managing the spread of information between the staff of a bank and its customers. It is a management function that identifies the interest, needs, worth and expectation of the internal and external publics of a bank and then works out a planned and systematic programme of action and communication aimed at building understanding, mutual respect, mutual recognition, peace and harmony between the bank and its publics to ensure mutual satisfaction and greater possibilities.
(a) Why do we need PR in the banking industry? i. Public relations is used to establish two-way communication, seeking a common
ground and areas of mutual interest. ii. Public relations is used to establish understanding based on true knowledge of full relationship. iii. Public relations can contribute to the successful operation of the bank iv. Public relations could be used to establish contact with important stakeholders of a
bank. v. Public relations could be used to promote bank services and products in a highly competitive world. vi. Public relations can help banks to monitor relevant environment influences and adapt
their activities accordingly. vii. Public relations plays a vital role in safeguarding the reputation of a bank and building new images. viii. Public relations can be used to create awareness of a new product. ix. Public relations adds credibility and trust to an advertising message. x. Public relations amplifies brand awareness. xi. Public relations can be used to erase negative trend regarding a bank reputation. xii. Public relation can be used by banks to serve their various constituencies through the web. xiii. It can be used to deflect rising public concern over the financial instability of the
banking industry. (7 marks)
(b) How it is Carried Out:
(i) Event management;
58
(ii) Media management/Relations; (xx) Advertisement;
(iv) Personal selling; (xx) Corporate relations;
(vi) Publicity in newspapers; (xx) Publications;
(viii) Maintaining website; (ix) Radio and Television programme/sponsorship; (x) Delivery of corporate and brand messages; (xi) Press releases; (xii) Meeting with investors and analysts; (xiii) Annual reports; (xiv) Public affairs; (xv) Product placement; (xvi) Brochures, newsmagazines, displays and exhibitions; (xvii) Seminars; (xviii) Stage events- anniversary celebrations; (xix) News releases, press conferences; (xx) Sponsorships of special events.
(8 marks) Question 4 Write short notes on the following: (a) Bank liquidity (5 marks) (b) Purposes of communication (5 marks) (c) Ethics in the banking industry (5 marks) (Total = 15 marks) Comment This is another well-attempted question recording, about 91% pass rate. However, some of the candidates could not pinpoint the main objectives of ethics and professionalism in the banking and finance industry.
59
Candidates are advised to study the syllabus and keep abreast of current issues affecting the industry from time to time. Answer a) Bank Liquidity
- Liquidity refers to the ability of a bank to meet its short-term financial obligations without recourse to the sale of its assets. Business survival and longevity depend largely on a bank’s level of liquidity. It is the heartbeat of the banking business.
- Liquidity problems may arise due to; (i) Fraud; (ii) Loss in a risky investment; (iii) Unexpected government policy like the withdrawal of government funds
from commercial banks; (iv) Holding long-term financial instruments; (v) Unexpected large withdrawals.
(5 marks) b) Purposes of Communication Effective communication is the transfer of message, followed by feedback from the receiver to the sender, indicating an understanding of the message. - The purposes of communication, among others, are to: (i) Relay information; (ii) Sell ideas; (iii) Educate the receiver; (iv) Acknowledge or give praise; (v) Convey displeasure; (vi) Review work or plans; (vii) Obtain inputs; (viii) Link people together; (ix) Express feelings; (x) Achieve goals; and (xi) Improve productivity.
(5 marks) c) Ethics in Banking Ethics have been variously described as morality of behaviour, moral principles, or principle of right or wrong. Ethics is the driving force towards good performance.
60
Banking primarily entails the handling of money deposited on trust by savers. A bank is able to attract substantial savings by presenting itself to the public as a modern bank with time-tested professionals and technological equipment to protect lodgements amidst confidentiality. The banker’s duties pose a lot of challenges that need regulation not only by law but by emphasizing issues of ethics. Professionalism in the business of banking deals with the following objectives: (i) What ethics and professionalism are and the relationship between the two; (ii) The need for professionalism in banking; (iii) The code of ethics and professionalism in the banking and finance industry; (iv) Examples of common ethical infractions in banks; (v) Suggestions for more transparent banking services.
PART II Question 5 Staff training and development is an important aspect of human resource management of today. (a) State three (3) reasons why staff training is important in banks. (3 marks)
(b) Outline five (5) goals/objectives of training in the banking industry. (5 marks)
(c) Enumerate four (4) advantages and three (3) disadvantages of training in any financial institution. (7 marks) (Total = 15 marks) Comment All the candidates who attempted the question demonstrated in–depth knowledge of it, with about 97% of them obtaining pass marks. Candidates are advised to familiarize themselves with other topics in the syllabus.
61
Answer a) Reasons for Training in Banks (i) New technologies and new work procedures which emerge everyday call for
additional and improved skills of workers. (ii) New employees require training to acquire knowledge on their new jobs. (iii) Older employees too require training and re-training. (iv) Training is also important for the banking industry because of the belief that a trained
employee is likely to be more competent in carrying out his functions. (v) Training is necessary so that employees can be motivated and be more productive.
(3 marks)
b) Goals /Objectives of Training i. Induction of new employees. ii. Enabling an old employee to learn new techniques or acquire new skills required for
his job iii. Retraining, which becomes necessary when a technique for doing a job is discarded
and those engaged on such a job become displaced, e.g. production of computer to handle cash transactions.
iv. Preparing the employee for higher responsibility, that is, training for advancement. v. For promotional purpose–Acquisition of knowledge /skills and experience required
for holding a higher position in the bank. (5 marks)
c) Advantages of Training (i) The employee usually becomes more skillful on the job. (ii) There is increase in productivity. (iii) Morale is boosted. (iv) There is a reduction in the cost of supervision. (v) Training helps to prepare for higher responsibilities; (vi) Promotion prospects are enhanced. (vii) It leads to an increase in competence and confidence of the employee.
(4 marks) Disadvantages of Training (i) Employees may fail to realise their hope of promotion. (ii) It may demoralise the employee if the training is cumbersome. (iii) It may kill initiatives on the part of the employee. (iv) It would increase the boredom associated with routine jobs.
62
(v) Cost of training at times might outweigh its benefits. (vi) It wastes time that ought to have been devoted to the job if training is organised
outside the workplace (vii) It can lead to labour turnover when the employee has acquired new skills.
(3 marks)
Question 6
The nature of financial institutions, especially banks exposes them to risks of different
forms. Some schools of thought believe and attribute the wave of bank distress in the
economy to failure of bank management to adequately identify and address risks inherent in
the business of banking.
(a) Define risk and relate your definition to the business of banking. (3 marks)
(b) Distinguish between the following, pairs of risks, relating your answers to banking institutions:
(i) Systematic and unsystematic risks. (3 marks)
(ii) Credit risks and liquidity risks. (3 marks)
(iii) Operational risks and legal risks. (3 marks) (iv) Insurable risks and Uninsurable risks. (3 marks) (Total = 15 marks) Comment The question was meant to test the candidates’ knowledge on risk exposure of banks. Some candidates ran away from the question. However, 59% of those who attempted the question scored pass marks. They seemed not to be familiar with systematic and unsystematic risks, insurable and uninsurable risks. Candidates are advised to read wide and try to cover the syllabus. Answer a) Risk Definition - Risk can be defined as the measurable uncertainties inherent in any decision-making
process.
63
- Risk essentially has to do with return viability. - Risk is also defined as the effect expressed in numeric or social terms associated
with the probability that actual result or returns of a course of action will deviate from the positive expectation.
- Risk is defined as the possibility that the actual return (cash flow or profit) from a business venture or investment will deviate from expected return.
- The greater the magnitude of deviation of actual from expected return on a business, the greater the risk on that business.
(3 marks) b i) Systematic Risk and Unsystematic Risks
- Systematic risk is associated with the overall market or the economy. - Systematic risk also refers to market risk, which is the risk of a change in the value
of assets due to systematic or broad economic factors. - Systematic risk in banking institutions may arise due to variation in the level of
interest rate and the relative value of currencies while - Unsystematic risk is related to a specific asset or firm. - It is also known as specific risk, diversifiable risk or residual risk –the type of
uncertainty that comes with the company or industry where investment is done. - Unsystematic risk can be reduced through diversification. - Examples of unsystematic risk include a new competitor, a regulatory change, a
management change, and a product recall. (3 marks)
ii) Credit Risks and Liquidity Risks
- Credit risk refers to possibility of loss of interest or principal or both when the security crystallizes.
- Credit risk is the potential that a bank borrower fails to meet the obligations on agreed terms.
- Liquidity is the ability to efficiently accommodate deposit as also reduction in liabilities and to fund the loan growth and possible funding of the off-balance-sheet claims.
- Liquidity risks are of two types: : Those that relate to specific products or market; and : Those that relate to general funding of the banks trading activities.
(3 marks)
64
iii) Operational Risks and Legal Risks
- Operational risk is that which states that deficiencies in information system or internal control will result in unexpected loss.
- It is also associated with human error, system failure and inadequate procedure and controls.
- Although operational risks are difficult to quantify, they can often be evaluated by examining a series of ‘worst case’ and ‘what if’ scenarios or through periodic review of procedures, documentation, requirement, data processing systems, contingency plans and other operational practices.
- Legal risk is the risk that contracts are not legally enforceable or documented correctly.
- A legal risk can be limited and managed through policies developed by the institutions legal department in consultation with the risk management process.
(3 marks) Iv) insurable Risks and Uninsurable Risks
Insurable risk is a risk that meets the criteria for efficient insurance. It could also be defined as eventuality for loss or damages that is:(i) definable, (ii) fortuitous, (iii) similar to a large number of known expenses, and (iv) pays a premium that is commensurate with the loss. For a risk to be insurable, the following conditions must be satisfied. _ The insurer must be able to charge a premium high enough to cover not only
claims expenses but also to cover the insurers expenses. _ The nature of the loss must be definite and financially measurable. _ The loss should be random in nature else the insured may engage in adverse
selection. Uninsurable risk is a type of risk in which the likely future losses cannot be estimated and calculated. It holds the prospect of gain as well as loss. The risk cannot be forecasted and measured. Examples of non-insurable risk include acts of God involving natural disaster, gambling, loss of profit through competition, loss incurred as a result of bad management.
(3 marks)
65
Question 7 “The ultimate strength of a bank lies in its capital funds”. Discuss this statement in line with
the critical role played by bank capital for its safety and soundness. (15 marks)
Comment
The question was to test the candidates’ knowledge of bank capital funds, It was fairly
attempted. Candidates are advised to read wide and keep abreast of current issues in the
financial industry.
Answer
Definition of Capital
- A bank’s capital is defined in tiers or categories that include shareholders’ equity,
retained earnings, reserves, hybrid capital instruments and subordinated term debt.
- Bank capital also represents the net worth of the bank or its value to investors or
shareholders.
Importance of Bank Capital
- The health condition and the safety of a bank is determined by its level of capital
adequacy.
- Bank capital serves as an important cushion against unexpected losses from
operations.
- It creates a strong incentive to manage a bank in a prudent manner because the
shareholders ‘equity is at risk in the event of failure.
- The bank’s capital is to support the volume, type and character of the bank’s
business
- Bank capital must be sufficient to cover the cost of the bank’s capital assets and in
terms of cushioning the risk assets.
- Capital also absorbs the additional provisions required, arising from diminution of a
bank’s loans and advances portfolio.
66
- Bank capital plays a critical role in the safety and soundness of individual banks and
the banking system in general.
(15 marks)
67
PRACTICE OF BANKING
68
SECTION A
Question 1
(a) Mr. Lucky James and Mr. Goodluck John have been friends for more than three decades. Five years ago, the two friends deposited a locked box marked “Content Unknown” in their joint names for safe custody. This morning you read in one of the dailies about the death of Mr. Lucky James in an accident on his way back from a business trip. Soon after, Mr. Goodluck John calls to see you bringing along with him the death certificate of Mr. Lucky James and the bank’s receipt asking that the box be released to him. Required: Explain in detail the steps the bank should take to resolve the customer’s request.
(10 marks)
(b) Mrs. Ajinomoto, 85 years old, is a retired Principal of Ayenle Girls’ College (a private college) at Ayenle. She has been a customer of your Bank at Ayenle, a small village with a population of 5,000 adults, for several years. To cater for Mrs. Ajinomoto, she employed, twenty years ago, a middle-aged Nurse, Mrs. Ade-David. Over several years, the withdrawals by cheques payable to Mrs. Ade-David for Mrs. Ajinomoto’s maintenance have been relatively stable. However, recently, the frequency has increased. Alerted by this trend, the Branch Manager invited Mrs. Ajinomoto to the bank to call her attention to this fact. After going through her statements she agreed with the Bank Manager that she would reduce the frequency of withdrawals. However, nothing changed. This led the Branch Manager to call the attention of Mr. Ajinomoto, who was granted a power of attorney by his mother three (3) years ago to the development. After investigation, it turned out that Mrs. Ade-David had been forging Mrs. Ajinomoto’s signatures to make additional withdrawals from her account. The excess withdrawals had accumulated to N300,000.00. The Bank Manager is now faced with a claim for this excess amount. Required: What is the position of your bank as well as the position of Mrs. Ajinomoto?
(10 marks)
69
(Total = 20 marks) Comment
The (a) part of this question is about bailee/bailor relationship; particularly joint safe custody
while the (b) part is on estoppels on forgery of signature. The students displayed good
understanding of the principles tested with 67% pass rate. Out of the 174 students that
attempted the question, only 58 students failed it.
Answer
(a)
i. On the death of the joint depositors of an item for safe custody, the mandate is determined.
ii. The rule of survivor does not apply here; the bank must not release the locked box to Mr. Goodluck John.
iii. The bank will examine the death certificate of Mr. Lucky James. iv. Property held jointly should not be released to the survivor(s) alone but against the
receipt of the survivor(s) and executors/administrators of the deceased. v. If Mr. Lucky James died testate, the bank will want to know the named executor(s). vi. The named executor(s) will be asked to produce letter of probate. vii. The bank will release the locked box to both Mr. Goodluck John and the executor(s). viii. If Mr. Lucky James died intestate, the administrator(s) have to apply to the court to
be granted letter of administration. ix. The joint safe custody box will be released to the survivor and administrator(s) in the
presence of a senior bank official.
(2 marks each for any 5 points = Total 10 marks)
(b)
i. A forged signature will be wholly inoperative against the person who was purported to have signed it.
ii. Hence, a bank cannot normally debit its customer’s account on a forged cheque/ signature.
iii. But the bank can be precluded from liability that may arise on a forged cheque by invocation of the doctrine of estoppels.-Greenwood V. Martins Bank (1933).
iv. However, for the estoppels to be effective, there must exist:
A representation, or conduct amounting to a representation, intended to induce a course of conduct on the part of the person to whom the representation is made;
An act or omission resulting from representation, whether actual or by conduct, by the person to whom the representation is made;
Damage or loss suffered by that person because of the act or omission.
70
v. In the case of Mrs. Ajinomoto’s nurse, Mrs. Ade-David, the Branch manager called her attention to the withdrawals by cheques payable to Mrs. Ade-David whose frequency recently increased. By this action, the bank has exercised its normal duty of care.
vi. Mrs. Ajinomoto’s conduct by failing to reduce the frequency of withdrawals, as promised, amounts to implied representation.
vii. Mrs. Ajinomoto’s claim for the accumulated withdrawal of N300,000.00 cannot hold. viii. The Bank Manager is not liabile for the excess amount of N300,000.00 since he has
taken the necessary precautions. ix. Mrs. Ajinomoto can be advised to sue Mrs. Ade-David for the recovery of the excess
withdrawal of N300,000.00 (2 marks each for any 5 points = Total 10 marks)
Question 2 Chief Ututu Igwe is a long-standing customer who is very popular in the branch. Over time, he developed the habit of giving his sales proceeds to any teller to count and credit his account while he went away to attend to his business. This morning, he stormed into the branch to complain that N650,000 cash he paid in last week Thursday did not reflect in his account; hence, the ATM rejected his withdrawal on Sunday, when he should have travelled to take advantage of cheap products. He accused one of the tellers of collecting his bag filled with cash for counting and lodgement. The teller denied ever receiving the bag. Required: How will you, as the Operations Manager, address this problem while protecting the bank? (20 marks) Comment This question tested the liability arising from deposit of cash to a customer’s account. The performance of candidates on the principle tested was average. A total of 102 students, representing 57%, had a pass rate, out of 178 that attempted the question.
Answer
a. Lodgment must be handed over personally to the teller/cashier. b. The teller/cashier, in the full glare of the customer, counts the money, stamps
and signs the copies of the paying slip.
71
c. The stamped and signed paying slip is evidence that the money is correct and duly paid to the bank before the teller hands it over to the customer.
d. In lodgement, the bank accepts no vicarious liability on any employee who is not a teller/cashier on duty-Bisi Salawu V Union Bank of Nigeria Ltd (1986).
e. Chief Ututu Igwe had over the years been dropping his cash bag with whoever he pleased and did not see the anomaly in his actions.
f. The teller/cashier who denied receiving the money cannot be held responsible for want of evidence.
g. Except another staff was witness to the Chief giving the teller/cashier the bag, the teller cannot be held responsible.
h. That the ATM rejected his withdrawal instruction was right because he had no such money in his account.
i. Chief Ututu Igwe should be politely advised that his case is bad. j. A customer has the duty to take reasonable care and precaution and follow laid –
down procedures in effecting his transaction with the bank. k. He should be advised that subsequent lodegments should be handed over to the
teller/cashier on duty. (2 marks for any 10 points = Total 20 marks)
Question 3 Mr. Aminu Sahara maintains a current account with your bank, Open Door Bank Ltd., with a credit balance of N250,000 (two hundred and fifty thousand naira). Three weeks ago, he withdrew N20,000 (twenty thousand naira) with his ATM card. He called at your branch this morning to check his balance and it was N30,000 (thirty thousand naira) credit. He was surprised and immediately lodged his complains to the manager. The manager promised to look into the account and ascertain what was wrong. He withdrew N30,000 (thirty thousand naira) and left the bank. The following morning before the error was corrected and before the manager got back to him, he drew a cheque for N100,000 (one hundred thousand naira) in favour of his brother Mr. Joe Sahara. The cheque was dishonoured. Mr. Aminu Sahara was not happy with the development and instructed his lawyer to write to the bank claiming N5 million (five million naira) as damages for wrongfully dishonouring his cheque. Required: Explain the bank’s position and what could be the result of the customer’s action if he goes to court?
(20 marks)
72
Comment
The question tested students’ understanding of the principle guiding dishonouring of
cheques and the exceptions to the liabilities that may arise. Only a few candidates were
able to answer correctly. This shows the weakness in the understanding of negotiable
instruments. The pass recorded was just 7 out of 120 candidates, which represents 6%.
Answer
a. If a bank wrongfully dishonours a cheque the customer is entitled to damages. b. Where an individual customer is involved and not in business, special damages must
be proved; otherwise, nominal damages will be awarded by the court- Gibbons v Westminster Bank (1939).
c. Where the bank negligently denies the customer his money on demand, the bank cannot avoid liability.
d. However, in this case it is evident that there is a problem with the account and Mr. Aminu Sahara is aware.
e. The fact that the customer withdrew only N30,000 available was an indication of his willingness to let the bank investigate the problem and the report back to him.
f. However, the cheque issued by Mr. Aminu Sahara the next morning to his brother without giving the bank time to investigate was not in good faith.
g. The matter is similar to the celebrated case of Osawaye v National Bank of Nigeria Ltd (1973).
h. In this case, it was held that the customer’s action was misconceived. i. Mr. Aminu Sahara’s action was misconceived and will be estopped from disputing
the balance pending conclusion of the investigations. j. In this matter, the bank’s action is justified.
(2 marks for any 2 cases cited = 4 marks) (2 marks each for any 8 points = 16 marks)
(Total =20 marks)
SECTION B
Question 4 (a) Banks exercise maximum care in drafting debentures for obvious reasons. What are the obvious reasons?
73
(8 marks) (b)The General Manager Operations of your bank will be retiring from service in a few months’ time. He has identified a property he would like to buy in Lekki as his retirement house. He applied to the bank for a loan of N25 million to be secured on his reversionary interest.
(i) What is reversionary interest? (ii) How would the bank tie up this security, if it decides to lend the money?
(12 marks) (Total = 20 marks) Comment
Question 4(a) tested students’ understanding of the precautions bankers should take in
drafting debentures as security for bank loan, while 4(b) examined the procedure to
safeguard the interest of a bank in taking reversionary interest as security. The question
was attempted by 62 candidates, out of which 37 passed, representing 60%. Many of the
candidates understood the question.
Answer
(a) The obvious reasons for exercising maximum care when drafting debentures are as follows: i. The maximum amount the company may raise from the same class of
debentures. ii. Any restriction or prohibition of the company to create debentures. iii. The maximum discount at issue or re-issue and maximum premium at
redemption. iv. The nature of asset over which a fixed or floating charge had been created. v. Whether the fixed and floating charges are for the benefits of all or some of the
debenture holders. vi. Whether the company has the power to redeem the debentures before the due
date. vii. The date and manner the principal debenture could be paid. viii. The circumstances under which a debenture holder can realise his investment
other than the circumstances entitled to by CAMA. ix. The power of the company, trustees or debenture holders to call meetings. x. Whether the rights of debenture holders can be altered or abrogated and under
what terms. xi. Remuneration to the trustees and if payable before the principal, interest and
cost of the debenture.
74
(1 mark for any 8 points = Total 8 marks) 4b
(i) Reversionary interest is an equitable interest in an asset held and managed by a trustee in favour of a named beneficiary or beneficiaries. It could be absolute or contingent. It is absolute when the beneficiary contributes to the reversion as in staff gratuity and pension in a paid employment. The contingent reversionary interest arises in an asset where the beneficiary can only have access on the death of the donor. In the event of the beneficiary dying before the donor, the benefits do not accrue to the deceased’s estate.
(2 marks) (ii) The bank should adopt the following procedure to tie up the security:
1. Examine the reversionary interest and ensure the bank is not lending, not more than 75% of the worth.
2. The beneficiary, a staff member, must be confirmed and long–serving, at least 10 years and nearing the retirement age.
3. Appraise the purpose of the loan because purpose for conspicuous consumption should not be entertained.
4. The property should be valued by professionals. 5. Search should be conducted by the bank’s solicitors to ensure that there is no
encumbrance on the property. 6. Obtain the original title documents and confirm all current taxes on the property
have been paid. 7. The bank’s memorandum will be executed detailing the bank’s power if he
defaults. 8. Pay on behalf of the staff by electronic means or bank draft. 9. Retain the title documents on the basis of equitable mortgage and get the staff
member to issues the bank power of attorney. (2 marks for any 5 points = Total 10 marks)
Question 5 Good Favour Bank Plc has appointed Ade and Ade Partners (Insolvency Practitioners) as Receiver/Manager to undertake the management of Irewole Ltd. for failure to settle a credit facility granted to the company. The company produces roofing sheets in Giko State and has been in business for the past 10 years. Currently, the company is experiencing serious financial crisis due to the downturn in the economy. The outstanding facility is secured by a fixed and floating debenture of N50 million (fifty million naira).
75
Required: Explain the actions the Receiver/Manager will take in protecting your bank against any losses and the company from being liquidated.
(20 marks) Comment This is a direct question on realisation of fixed and floating charges (debenture) on Irewole Ltd. Only 100 students out of 232 who sat for the examination attempted it with only a 35% pass rate. The students displayed poor understanding of the question. Answer
1. The duty of a Receiver/Manager is to manage a company until the interest of the debenture holders is satisfied.
2. The Receiver/Manager has to study the terms of debenture and comply with them. 3. He must take care of the conditions of his appointment. 4. The bank must advertise the appointment of the Receiver/Manager in the
newspapers and the Gazelle. 5. His appointment must be registered with the Corporate Affairs Commission [CAC]. 6. He should notify the Directors and Management of Irewole Ltd., of his appointment. 7. The Receiver/Manager will hold meetings with the management of Irewole Ltd. 8. He will obtain a Statement of Affairs prepared by the company. 9. The Receiver/Manager will hold meetings with the creditors of Irewole Ltd. 10. The management of Irewole Ltd will be suspended and the newly appointed
Receiver/Manager will take over the control of the company. 11. All sales proceeds from the company will be banked with Good Favour Bank Plc. 12. The Receiver/Manager must render periodic returns to the bank. 13. He is expected to display competence and duty of care to the best of his ability. 14. When the exposure is fully recovered, he must prepare a detailed account and report
for Irewole Ltd. 15. The management of Irewole Ltd. will then be handed over to its owners.
(2 marks for any 10 points = Total 20 marks)
Question 6 Holly Ltd., a valued customer of your branch, has been in account relationship with your Badun branch for over eight years. The account has been well managed with high turnover from inception. The directors of the company, Mr. Ilesanmi Joy and Mr. Perfect Love, approached your bank for a credit facility of N2.5 million (two million, five hundred thousand naira) to support their recent expansion.
76
Your bank is favourably disposed to their request, if the directors are able to provide acceptable and suitable security. Mr. Perfect Love informed you of the arrangement to offer his duplex at Ijebu-Ode as security. The house is valued at N5.5 million (five million, five hundred thousand naira) and he lives there with members of his family. You have decided to take a legal mortgage on the house. Required:
(i) As the Credit Manager of your branch, how do you intend to perfect the security? (12 marks)
(ii) If the company defaults, how can the bank realise the asset and what are the obstacles, if any? (8 marks)
(Total = 20 marks) Comment
This is a direct question on the perfection of legal mortgage on land and how it can be realized when the customer defaults. The question was attempted by 225 candidates out of which 149 passed, representing 66%. Candidates displayed a good understanding of the question. Answer
(i) a. Bank to obtain the original title document from Mr. Perfect Love. b. The legal department of the bank to carry out searches at the Land Registry to
ascertain that there is no encroachments or encumbrances. Also to ensure the title document is genuine.
c. The property would be valued by a professional valuer. d. Governor’s consent to mortgage will be obtained from the customer-Savannah Bank
v Ajilo (1980). e. Mr. Perfect Love will inform his wife of the mortgage plan on their family house. f. Mr. Perfect Love to execute deed of mortgage signed, sealed and delivered. g. If the title document is in Mr. & Mrs. Perfect Love’s names, both of them will execute
the deed of mortgage h. Stamping and registration must be done within 30 days. i. Appropriate and adequate insurance cover should be taken on the property with the
bank’s interest duly noted. j. The security document must be entered in the collateral register of the bank and
safely kept. (1 mark for any 10 points = Total 10 marks)
77
(ii) The legal mortgagee can exercise the following rights to realise the asset:
1. Right to Sue for the debt; 2. Right of possession; 3. Right of sale; 4. Right of foreclosure.
(2 marks for 4 points = Total 8 marks) Obstacles to the Realisation
1. The fact the mortgagor lives in the house with his family may make realisation difficult as the court is always reluctant to alienate the owner from a house occupied.
2. Taking possession can make the bank liable for rents collected, especially if the borrower claims that the amount collected is below the market price after the mortgagor has fully paid.
(1 mark for any 2 points = Total 2 marks) Question 7
(a) Mr. Jack Rafta, a successful businessman, has been your customer for 10 years. He has maintained a satisfactory account with your bank over the years. Recently, the change in weather necessitated an increase in the production of the various flavours of juice produced by his company, Abor Drinks Ltd. He approached your bank for a loan of N2 million (two million naira) offering his life insurance policy valued at N4 million (four million naira) as security. Required: (i) What precaution must you take in accepting the life insurance policy?
(6 marks) (ii) Detail the procedure for effecting a legal assignment over the life insurance policy. (6 marks) (b) Chief Goddey is well known to the bank as a contractor of long standing. He is the Managing Director of Usefulness Construction Company Ltd. and one of the major road contractors with the Federal Government. The bank has always provided him credit facilities on the strength of assignment of the contract proceeds. Required: What are the dangers in accepting assignment of contract proceeds as security for a credit facility, especially as the client is the Federal Government? (8 marks)
(Total = 20 marks)
78
Comment Question 7(a) tested the procedure for perfecting life policy as a security to secure a bank loan while 7(b) examined the assignment of contract proceeds as security. This is a direct question that was attempted by 199 candidates, out of which 130 passed, representing 65%. Candidates displayed a good understanding of the question. Answer (a) i. The following precautions must be taken:
1. The insurer must be known. Banks generally have a list of insurance companies they patronise.
2. There must be insurable interest; otherwise the policy is of no effect. 3. All material facts must have been disclosed at inception in accordance with all
contracts uberrima fides (that is, ‘utmost good faith’). 4. Obtain the surrender value to guide the maximum facility that could be granted. 5. The type of policy must be assignable and have ascertainable maturity date.
Endowment assurance is still the best available. 6. The age of the life assured must be admitted. 7. Restrictive clause: The lending bank may want to be assured on issues like travelling
restriction, occupation or sports restriction, and so on. 8. Exclusions are contained in the life assurance policy, providing that nothing will be
payable if the death of the life assured is caused by suicide and so on. 9. Beneficiary must be specified.
(11/2 for any 4 points = Total 6 marks)
ii. The procedure for taking a legal assignment on life insurance policies is as follows: 1. Take only the life polices of first class insurance companies as advised by
management. 2. Obtain from the customer the original life policy-Spencer v Clarke (1878). 3. Give the bank’s memorandum of deposit to Mr. Jack Rafia to complete. 4. Issue Mr. Jack Rafia the bank’s standard deed of assignment on life policy to be
executed and duly witnessed by a senior bank official. 5. The deed of assignment should be stamped. 6. Give notice to the insurance company and enquire of the following:
If there is tacking arrangement; That premium is paid up to date; The surrender value; That the age has been admitted; That there is no prior charge on the policy;
7. Take up a standing order to pay the premium when due;
79
8. Diary the maturity data and monitor it.
(1 mark for any 6 points = Total 6 marks)
(b) The dangers in accepting assignment of contract proceeds as security are as follows: 1. The contract could be revoked, unknown to the bank. 2. The expected payment, even when it had been assigned, is not evidence that
the customer can successfully execute the job according to specification and time frame contracted.
3. The retention fees should be reckoned with because it could be delayed for upwards of 12 months.
4. The contractor could be adjudged bankrupt by court order by the creditors for supplies not paid for.
5. Other developments that could derail the programmed repayment are garnishee order, writ of sequestration, and so on.
(2 marks for any 4 points = Total 8 marks)
Question 8 a. Define Securitisation as a funding tool? (8 marks) b. Explain the benefits of asset securitisation to each of the major parties listed below:
i. Originator (4 marks) ii. Investors (4 marks) iii. Borrowers. (4 marks)
(Total = 20 marks)
Comment
The question is on securitisation and the benefits. It was attempted by 104 students but only 24 passed, which is 23%. The students’ understanding of securitisation is very shallow and this is reflected in their poor performance. Most of the students mistook securitisation for security that banks collect to secure credit facilities given to customers. Answer (a). Securitisation is the pooling and selling of financial instruments backed by the pool of cash flow or asset value. Under such a structure, investors share the risk and participation
80
in the benefits on a pro-rata basis. The instrument itself might be a tradeable “security or a straight participation’’.
Securitisation can be thought of as a process whereby loans and other receivables are packaged, underwritten, and sold in the form of “asset-backed” securities. In the process of securitization, illiquid assets such as loans, receivables and other financial assets are pooled and their cash flows or economic values are redirected to support payments on related securities. These securities, generally referred to as “asset-backed securities” are issued and sold to investors in the capital markets by or on behalf of issuers, who utilise securitisation to finance “their business activities. The payments on asset-backed securities are supported by financial assets such as residential and commercial mortgage loans, arid non are mortgage assets such as trade receivables, credit card receivables, consumer loans, lease receivables, automobile loans, and other consumer and business receivables. The concept of securitisation may, however, be applied to virtually any asset that has a reasonably ascertained value, or that generates a reasonably predictable future stream of revenue.
Answer
i. Benefits of Asset Securitisation to Originator 1. The issuer is able to transform relatively illiquid assets into liquid and tradable capital
market instruments through the securitisation process. 2. The originator can replenish ifs sources of funds, which can then be used for other
activities: 3. Securitisation enables the issuers to tap a more efficient and lower-cost source of
financing in comparison with other bank arid capital markets financing alternatives. This is because credit enhancement enables securities to be issued with a higher rating (and thus a lower interest rate) than the long-term credit rating of the originating institution.
4. Securitisation offers an alternative to more traditional forms of debt and equity financing and thereby allows issuers to diversify their financing sources.
5. Securitisation can remove the assets from the organisation’s balance sheet and thereby lead to an improvement of the various financial ratios of the issuer. The financial institutions can utilize capital more efficiently and ensure compliance with risk-based capital standards. The disposal of assets through the securitisation route may turn out to be more attractive than raising capital which can be quite expensive.
6. Securitisation can lead to better asset liability management by subdividing and redirecting cash flows from underlying financial assets in a manner that there is a matching of the duration of assets and liabilities.
(2 marks for any 2 points = Total 4 marks)
81
ii. Benefits of Asset Securitisation to Investors 1. The securitised instrument enables the investors to diversify their investment
portfolio and thereby reduce the portfolio risk. 2. Depending on the credit quality of the particular asset-backed security, the
securitised instruments offer better returns as compared to sovereign government issues of comparable maturities. The securitised instrument help meet investors’ demand for alternative spread-based investment product.
3. The securitised assets meet the diverse requirement of the investors and can be tailored in a manner that responds to specific and sometimes unique investors’ needs.
(2 marks for any 2 points = Total 4 marks)
iii. Benefits of Asset Securitisation to Borrowers 1. Liquid and efficient’ secondary securitisation markets increase the availability of
financing in the primary lending markets and also reduce the cost of financing. The financing needs serviced by securitisation often relate to areas that are favoured by public policy considerations, such as increasing the supply of funds for home ownership.
2. Liquid and efficient secondary securitisation markets can also reduce geographical and regional disparities in the availability and cost of credit throughout the country as the local credit extension activities are linked to national, and increasingly global, capital market systems.
3. The securitisation markets facilitate efficient allocation of capital by subjecting the credit-granting activities of individual financial institutions to the pricing and valuation discipline of the capital markets. Thus, securitisation helps to promote the allocation of scarce societal capital to its most efficient uses.
(2 marks for any 2 points = Total 4 marks) (Total = 20 marks)
82
83
FINANCIAL PLANNING & CONTROL
84
SECTION A
This section contains multiple-choice questions (MCQs) and short-answer questions
(SAQs). Indicate the correct alphabet as answer to the MCQs and provide the answer(s) to
the SAQs.
Question 1 (i) The adoption of Balanced Score Card ensures that the organisation’s strategy is
translated into objectives, operating actions and composite goals which focus on all except one of the following:
(a) Employee learning and growth. (b) Financial factors. (c) Benchmarking on competitor’s operation. (d) Internal business process.
(ii) The following information is given for Domino Plc. N Selling Price Per Unit 10
Variable Cost Per Unit 6 Total Fixed Cost 50,000 What is the breakeven sale in naira?
(a) N125,000 (b) N100,000 (c) N12,500 (d) N180,000
(iii) Assume that company ABC Ltd was operating at full capacity in 2010 with regard to
all items except fixed assets. If fixed assets were in 2010 utilised up to only 75% of installed capacity, by what percentage would 2011 sales increase over 2010 sales without the need for increase in fixed assets?
(a) 33% (b) 25% (c) 20% (d) 44%
85
(iv) A forecast is:
(a) The process by which a firm develops a scheme to accomplish set objectives. (b) The process by which financial managers decide how much debt financing to
use in a business. (c) A simplified representation of some complex phenomenon. (d) A prediction about a condition or situation at some future time.
(v) In capital budgeting, the term used to describe situations where an organisation
imposes an internal budget ceiling on the amount of capital expenditure is:
(a) Hard capital rationing. (b) Soft capital rationing. (c) Uncertainty. (d) Sensitivity analysis.
(vi) The following, EXCEPT one, are the critical tasks of Internal Auditing:
(a) Express opinion on published financial reports. (b) Detect fraud or manipulation of records. (c) Determine whether controls are adequate. (d) Suggest improvements to increase efficiency and effectiveness to lower
operating costs. (vii) In the management of working capital, cash cycle is:
(a) The period in which cash is held for transaction and contingency motive. (b) The holding period of idle cash before investing it. (c) The period it takes a firm to collect outstanding debts from creditors. (d) The period from when a firm buys raw material on credit, produces finished
goods, sells on credit, collects cash from debtors and pays for credit purchases.
(viii) To reduce shareholders’ dissonance with investment in shares, firms should:
(a) Stabilise dividend income. (b) Plead with shareholders to hold unto their investments.
86
(c) Repurchase all shares held by shareholders. (d) Increase the number of shares issued.
(ix) Stock Control, a measure under financial control, involves all of the following except:
(a) Precaution against theft, misuse and deterioration. (b) Control of stock levels. (c) Carrying out stock taking. (d) A and B only.
(x) Which of the following is not a basic principle of internal control?
(a) Internal control activities should be carried out within the framework of managerial responsibility of the administration
(b) All firm officials involved in all forms of transaction processes should carry the responsibility of internal control
(c) Internal control should cover all financial and non-financial transactions (d) The Memorandum of Association should clearly provide for internal control
measures (xi) Net working capital is calculated as _______ less _________.
(xii) The discount rate that equates net present value of total cash inflows and outflows
is called _______________.
(xiii) Increase in firm gearing level increases the risk of_________.
(xiv) ___________ ratios aid in determining the ability of a firm to meet its financial obligations as at when due.
(xv) __________ risk can be eliminated by diversification.
(xvi) Determination of tax liability independently by the tax payer and payment of ascertained amounts is called _________________.
(xvii) Capital investments in a new type of business not invested in by any investor is called _________________.
87
(xviii) Corporate Strategy is typically decided in the context of defining a firm’s ________________ and ______________ statements.
(xix) What is the full capacity sales value of a firm currently operating at 75% of capacity with current sales valued at N2,400,000.00?
(xx) A threat from the occurrence of an event or action with likely adverse effects on a firm’s ability to achieve its objectives and/or execute its strategies successfully is called _________ .
(2 marks each) (Total =40 marks)
Comment
This section is a multiple/subjective question which x-rays the syllabus to test candidates’
understanding. Sixty per cent (60 %) of the candidates secured a pass mark in this section.
Answer
Multiple Choice Questions (MCQs)
(I) c
(II) a
(III) a
(IV) d
(V) b
(VI) a
(VII) d
(VIII) a
(IX) d
(X) d
88
Short-Answer Questions (SAQs)
(I) Total current assets less total current liabilities
(II) Internal Rate of Return
(III) Liquidation and takeover of the firm
(IV) Liquidity Ratio
(V) Unsystematic Risk
(VI) Self-Assessment
(VII) Venture Capital
(VIII) Mission and Vision
(IX) =N=3,200,000
(X) Risk.
SECTION B
Question 2 (i) What is Cost-Volume-Profit (CVP) analysis? (2 marks) (ii) What are its underlying assumptions? (3 marks) (iii) A customer of your bank presented a business proposal to support his request for
loan facility. The loan is to be financed by amortised instalments from cash flows from the business.
Extracts from the financial proposal in support of the loan are: Unit Price per Product N250 Variable Cost per unit N170 Fixed Overhead N200,000 Corporate income tax rate is 30%
89
Required: You are to calculate:
(a) The number of units to produce to just cover all costs. (b) Sales value at breakeven point. (c) The contribution to sales ratio of the business.
(d) The number of units to produce and sell to generate a before-tax profit of N400,000.
(e) The number of units to produce and sell to generate an after-tax profit of N400,000.
(10 marks) All data above are annual estimates and tax rate is 30%. (Total = 15 marks)
Comment
This was a simple question on Cost Volume Profit Analysis to test candidates’ understanding of the concept and applicability of this concept. C-V-P analysis is very important to modern-day financial and planning analysts. All the candidates attempted the question and the pass rate was 100%.
Answer
i. Cost-volume- profit analysis is an application of marginal costing principle to study
the relationship between costs, volume and profits at differing activity levels. It is a useful
guide for short-term planning and decision-making. It is more relevant where the
proposed changes in activity are relatively small so that established cost patterns and
relationships are likely to hold.
ii. Assumptions of Cost-volume- profit analysis are:
All costs can be separated into fixed and variable components.
Fixed cost will remain constant and variable costs vary proportionately with level
of activities.
Over-the-activity range being considered, cost and revenue behave in a linear
fashion.
90
The only factor affecting costs and revenue is volume.
Technology, production methods and efficiency remain unchanged.
There are no stock level changes.
There is no uncertainty.
(iii) (a). The number of units to produce just to cover all costs: Breakeven point in unit
Breakeven point (units) = Fixed Costs/Contribution per units
Contribution per unit:
Selling price per unit = =N=250
Variable cost per unit = =N=170
Contribution per unit = =N=80
Breakeven Point (units) = N200,000/80 = 2,500 units
(b) Breakeven sales value = Fixed costs/contribution margin ratio
Contribution margin = Contribution per unit/selling price per unit
= =N=200,000/ (=N=80/=N=250)
= =N=200,000/0.32
=N=625,000
(C) Contribution/Sales Ratio
= Contribution per unit/selling price per unit =
=N=80/=N=250
= 0.32
(d) Units to produce and sell to generate a before tax profit of =N=400,000
= (Fixed Cost + Target profit)/Contribution per unit
91
= (=N=200,000+=N=400,000)/=N=80
= 7,500 Units
(e) Number of units to produce and sell to generate an after tax profit of N400,000
= (Fixed cost + (Target profit)/ (1-tax rate))/Contribution per unit
(=N=200,000+ (=N=400,000/ (1-0.30))/=N=80
= 9,642 units
Question 3 (a) Write short notes on the following:
(i) Internal Control (ii) Internal Check (iii) Internal Audit (iv) External Audit (4 marks)
(b) Compare and contrast internal audit and external audit functions, processes and
administration. (6 marks) (c) Internal and external audit functions are interdependent. Discuss briefly.
(5 marks)
(Total = 15 marks)
Comment
The question was a test of candidates’ understanding of internal and external audit, internal
and external auditors’ roles and responsibilities. The examiner technically tested the
candidates’ knowledge by requesting for the similarities and differences between the two
audits. In answering this question, candidates were expected to focus on the functions of
each party and emphasize the similarities and differences of both.
Though a cheap question, no candidate attempted it.
92
Answer
(a) (i) Internal Control: Systematic measures (such as reviews, checks and balances,
methods and procedures) instituted by an organisation to:
Conduct its business in an orderly and efficient manner;
Safeguard its assets and resources;
Deter and detect errors, fraud and theft;
Ensure accuracy and completeness of its accounting data;
Produce reliable and timely financial and management information;
Ensure adherence to corporate policies and plans;
(ii) Internal Check: Division of duties to ensure one individual does not carry out all
stages of a transaction. It is used to prevent fraud and check errors
(iii) Internal Audit: An independent and objective assurance activity designed to
assess the effectiveness of a control environment, add value and improve an
organisation’s operations. It is part of a firm’s internal control system.
(iv) External Audit: An independent evaluation and verification of transactions
recorded in a company’s books of account to ascertain whether the final accounts
give a true and fair view of transactions recorded in the company’s books.
(b) (i)Similarities between internal and external audit functions, processes and
administration
Both audits carry out testing routine which may involve the extermination of
records and analysis of transactions.
The work of the internal auditor and the external auditor require professional
discipline
Both rely on active co-operation between the two functions.
They are both affected by the organisation’s system of internal control.
Both are concerned with the occurrence and effect of errors and
93
misstatements that affect the final account.
Both are interested and involved in the information system within the
organisation because it affects managerial control and is fundamental to the
financial reporting process.
Both internal and external auditors produce formal audit reports on their
observations in the course of audit reviews.
Both review the financial system of the organisation in the process of planning
their audit works.
(b) (ii) Differences between internal and external audit functions, processes and
administration
External auditors are employed by the shareholders while internal auditors are
employed by the firm.
External auditors report to the shareholders while internal auditors report to the
management.
Internal audit operation is continuous throughout the year while external audit tends
to be an end-of-year assignment even though some testing may be done during the
year.
External audit seeks to test the underlying transactions that form the basis for
financial statement while internal audit seeks to advise management on whether its
major operations have a sound system of risk management and internal controls.
Overall risk management arrangement of the organisation is the main preoccupation
of an internal audit while the external audit is concerned with transparency of the
financial reporting system within an organisation.
External audit seeks to produce an opinion on the true and fair view of the published
financial statements, while internal audit forms an opinion on the system of risk
management and internal control.
(c) The external auditor tests the system of internal control in the firm (supervised by the
94
internal auditor) and, where found reliable, can use the works of the internal auditor.
(d) Audit queries raised by the external auditor are inputs into the review of existing
internal control systems by the internal auditors. Thus, both functions rely on each
other and are interdependent.
Question 4 (a) Explain the term “Working Capital”. (2 marks) (b) Identify and describe the major components of working capital. (8 marks) (c) Enumerate two consequences of overestimating or underestimating the required
levels of any five identified working capital components. (5 marks) (Total = 15 marks)
Comment
Another cheap question on working capital management. The examiner’s interest was to
test if candidates understand the concept of working capital and its importance to
organisation survival.
The attempt was 100% and the pass rate was 100% as well.
Answer
(a) Working capital is the current assets and current liabilities of an organisation. It is
called working capital because, without it, the fixed assets are useless. They make
the fixed assets useful, that is, make them work.
(b) Major components of working capital are:
(i) Cash: This is one of the most liquid and important components of working
capital. Holding cash involves cost because the worth of the cash held after a
year may be less than the value of cash held today.
(ii) Marketable Securities: These securities do not give much yield to the
business because:
They act as substitute for cash and used as temporary investments
95
They are held as a guard against possible shortage of bank credit.
(iii) Receivables: Amounts of cash owed the firm yet to be received. The most
common receivable is Trade Receivables or (debtors).
(iv) Inventory: These are stocks held by the firm, and can be by way of raw
materials, work-in-progress and finished goods.
(v) Creditors: These are the firm’s liabilities to suppliers. The most common is
Trade Creditors.
(vi) Prepayments: These are advanced payments or future receivable services.
(vii) Deposits: These are payments received in advance for supplies yet to be
delivered.
(c) Consequences of overestimating or underestimating required levels of the above-
identified working capital components
(i) Cash:-
Loss of income on cash not invested.
Inability to meet financial obligations as at when due causing
operational embarrassment.
(ii) Marketable Securities:-
Loss of income when no investment in it exists.
Financial risk when no investment in it exists.
(iii) Receivables:-
Liquidity crisis.
Increase in bad debt.
(iv) Inventory:-
Stock out and loss of customer goodwill.
Wastages, pilferage, theft, high insurance costs (if too high).
96
(v) Creditors:-
Financial crisis when unrecognised creditors ask for their funds.
Creation of unnecessary financial tension when unnecessary
creditors are created.
Question 5 Electronic Ltd. is considering the purchase of a die casting machine at a cost of N20,000. The project cash flows are estimated as follows:
Year 0 Year 1 Year 2 Year 3 Year 4 N20,000 N7,000 N5,000 N11,000 N5,000
The following may be assumed: (a) The existence of other taxable profits. (b) 25% writing down allowances (on the reducing balance method). (c) 30% company income tax rate. (d) The machine would be sold for N4,500 at the end of 4 years. (e) I year lag on all tax effects. (f) The company requires a 10% return after tax. Calculate the NPV of the project.
(15 marks)
Comment
A simple question on the calculation of net present value. This question is a bit technical.
The examiner incorporated the concept of depreciation and tax to NPV calculation.
A well-attempted question by the candidates with 100% attempted rate. It is, however,
ironical that none of the candidates was able to score up to 50%. Candidates’ pitfall was
largely due to inability to write back the impact of depreciation, as this is not considered in
calculation of NPV. Candidates also did not apply the tax impact.
97
Answer
ELECTRONIC LTD
WDA = Written-Down Allowances
Year Project Cash Flow
Tax effect of WDA
Tax on Profit
Net after Tax CF
Discount Factor @10%
Discounted CF
0 (20,000.00) (20,000.00) 1
(20,000.00)
1 7,000.00
1,500.00
8,500.00 0.909
7,726.50
2 5,000.00
1,125.00
2,550.00
3,575.00 0.826
2,952.95
3 11,000.00 843.75
1,837.50
10,006.25 0.751
7,514.69
4 5,000.00 632.81
3,553.13
2,079.68 0.683
1,420.42
4 4,500.00 548.44
1,689.84
3,358.60 0.683
2,294.92
NPV 1,908.46
The tax effects of WDA is calculated as:
=N=
Cost of Capital 20,000.00
25% of WDA 5,000.00 @30%
1,500.00
15,000.00
25% of WDA 3,750.00 @30%
1,125.00
11,250.00
25% of WDA 2,812.50 @30%
843.75
98
8,437.50
25% of WDA 2,109.38 @30%
632.81
6,329.00
Sold for 4,500.00
Balancing Allowance
1,828.12 @30%
548.44
Since the project has a positive NPV of =N=1,908.7, it should be accepted.
Question 6 (a) (i) Explain the term “Decentralisation”. (1 mark)
(ii) What are the possible problems which may arise with decentralisation?
(4 marks)
(b) Where operating divisions exist, what are the objectives of performance appraisal?
(3 marks)
(c) Distinguish between profit and investment centres. (3 marks)
(d) What factors should be considered by a firm’s management in setting target
performance levels? (4 marks)
(Total = 15 marks)
Comment
This is supposed to be a bonus question testing some principles in cost and management
control. The attempt rate was 50%, with a pass rate of 100%.
Candidates are advised to ensure that they continually familiarise themselves with principles
and concepts of the subject they are writing to avail themselves of the opportunity of scoring
cheap marks where it arises.
99
Answer
(a) (i) Decentralisation is the process of redistributing or dispersing functions, powers,
people or things away from a central location or authority. This takes decision
making from the organisation centre to the departments or divisions.
(ii) Possible problems which may arise with decentralisation are:
Suboptimal decision-making;
Duplication of certain services with inherent costs;
Need to provide sophisticated information system;
Friction between divisional managements.
(b) Objectives of performance appraisal
To promote goal congruence;
To provide relevant and regular feedback to central management;
To encourage initiative and motivation;
To encourage long-run views rather than short-term expedients.
(c) Profits Centres are units of an organisation (often called a division) responsible for
expenditures, revenue and profits.
Investment Centres are profit centres for which the designated manager is
responsible for profit in relation to capital invested in the division.
(d) Factors to be considered by a firm’s management in setting target performance
levels are:-
The company’s cost of capital which will be the minimum acceptable level of
return. Target level of return is usually higher than the cost of capital.
The returns being achieved by efficient competitors in the same industry for
inter-firm comparison.
The risk level of the industry, company and division. The higher the risk level,
100
the higher will be the target level of performance.
The nature of the industry, the degree of competition and the position of the
firm within the industry.
The general economic climate and the extent of under/over-capacity within
the industry and the firm.
Question 7 Possible levels of activity of Mallama Dije Ltd. are stated below: Up to From 150,000 units From 180,000 units 150,000 units to 180,000 units 200,000 units Selling Price/Unit: N2.00 N2.00 N1.50 Variable Unit Cost/Unit: Material N0.80 N0.70 N0.40 Labour N0.40 N0.40 N0.20 Overhead N0.20 N0.20 N0.15 Fixed Costs N60,000 N60,000 N80,000
You are required to prepare a flexible budget with a view to estimating the net profit for each level. (15 marks) Comment
The examiner tested candidates’ understanding of budgeting in this diet based on the fact
that the performance on the topic last diet was woeful.
The performance in this diet on the topic was impressive and encouraging, with 50%
attempt rate and 100% pass mark.
101
Answer
Mallama Dije Limited
Level of Activities (in units) 150,000
180,000.00
200,000.00
Selling Price per Unit =N=2.00 =N=2.00 =N=1.50
=N= =N= =N=
Estimated Sales Revenue
300,000.00
360,000.00
300,000.00
Variable Cost: Material (120,000.00)
(126,000.00)
(80,000.00)
Labour (60,000.00)
(72,000.00 )
(40,000.00 )
Overhead (30,000.00)
(36,000.00)
(30,000.00)
Contribution 90,000.00
126,000.00
150,000.00
Fixed Cost (60,000.00)
(60,000.00)
(80,000.00)
Net Profit 30,000.00
66,000.00
70,000.00
102
TREASURY MANAGEMENT
103
SECTION A
Question 1
(i) Which of the following most accurately describes a derivative security?
(a) No expiration date
(b) Increased transaction costs
(c) A pay-off based on another asset
(d) Increased risk always.
(ii) A well-structured Treasury Department would be seen to have upheld a high policy
and ethical standards when:
(a) Dealers are also in charge of trade settlements.
(b) Trade settlements are carried out independently after execution by non-
dealers.
(c) Officer that settles trade also stands in for the dealer whenever he is absent.
(d) Treasury operations activities do not pass through internal control process.
(iii) A method of determining cost of funds which is based largely on the cost of
additional source of fund is called:
(a) Weighted Average Cost.
(b) Marginal Cost.
(c) Average Cost.
(d) None of the above.
(iv) Consider the following quotes: USD/N157.2955; GBP/USD1.6275 and determine
GBP/N:
(a) GBP/N255.9984
104
(b) GBP/N296.6485
(c) GBP/N258.9930
(d) None of the above.
(v) The holder of long-term fixed income security with alternative redemption dates
would prefer to redeem it at a later date if he has the right to do so and:
(a) the market price has fallen.
(b) the market price has risen.
(c) the issuer so requests.
(d) None of the above.
(vi) A practice in which banks charge their customers for the full cost or a significant
portion of the total cost of any deposit services they use is called:
(a) Transfer pricing.
(b) Cost-plus deposit pricing.
(c) Cost-plus loan pricing.
(d) Total cost pricing.
(vii) The price at which an option can be exercised is called:
(a) Option price
(b) Dirty price
(c) Long call price
(d) Striking price.
(viii) To a dealer, a bid-offer price means:
(a) Buying low and selling high. (b) Buying high and selling low.
105
(c) Buying low and selling low.
(d) Buying low and cost differential.
(ix) Arbitrage is a process which often leads to:
(a) earning a risk-free profit. (b) earning abnormal profit.
(c) earning normal profit.
(d) earning an accrued profit.
(x) When Treasurers buy and sell financial instruments on regular basis, this constitutes
trading and the portfolio where these trading positions are held is called:
(a) Portfolio transaction book.
(b) Trading book.
(c) Dealing register.
(d) Trading register.
(xi) An agreement which entails a sale of security and buying it back before maturity at a
specific date and price is called:
(a) Open-buy-back transaction.
(b) Repurchase transaction.
(c) Reverse repurchase transaction.
(d) Outright transaction.
(xii) The following are examples of repriceable assets, except:
(a) Floating rate debenture stock.
(b) Head office building of a bank.
(c) Overdrafts.
106
(d) Repos.
(xiii) A forex quote GBP/N265.5525, in the event of 10% depreciation in the value of the
Naira will become:
(a) GBP/N238.9973
(b) GBP/N292.1076
(c) GBP/N253.7725
(d) None of the above.
(xiv) A commercial paper purchased 51 days to its maturity at 9.75% per annum and re-
discountable at 11.25% per annum would have a break-even period of:
(a) 7 days.
(b) 10 days.
(c) 11 days.
(d) 12 days.
(xv) Deposits and other borrowed funds that are very interest- sensitive or will be surely
withdrawn during the current period is known as:
(a) Vulnerable funds.
(b) ‘Hot money’ liabilities.
(c) Stable funds.
(d) None of the above.
(xvi) One of the following money market instruments is NOTissued at a discount:
(a) Nigerian Treasury Bills
(b) Commercial Paper
(c) Certificate of Deposit
107
(d) None of the above.
(xvii) The benchmark rate in the financial market is:
(a) NIBOR.
(b) MPR.
(c) MRR.
(d) Prime Rate.
(xviii) The Unit of Central Bank of Nigeria which gives effect to its lender of last resort role
is called:
(a) Consumer Protection Unit.
(b) Discount Window.
(c) Financial Policy and Regulation Department.
(d) Banking and Payments System Department.
(xix) An arrangement which gives the holder the right but not the obligation, to either buy
or sell a quantity of one currency in exchange for another at a strike price is called:
(a) Currency Futures.
(b) Currency Option.
(c) Currency Swap.
(d) Currency Arbitrage.
(xx) A bank which quotes N160.9500/N161.0500 spot for USD and strikes a deal to buy
USD10 million would be required to pay:
(a) N1,610,500,000
(b) N1,609,500,000
(c) N1,610,000,000
108
(d) None of the above.
Comment
The question, as usual, required a good understanding of the subject of Treasury
Management. It was attempted by all the six (6) candidates out of whom, four (4) were able
to score the pass mark. The fact that the question is compulsory underscores the need for
candidates to be conversant with the entire syllabus, more so, that it carries 40 per cent of
the total marks.
Answer
(I) a (II) b (III) b (IV) a (V) b (VI) b (VII) d (VIII) a (IX) a (X) b (XI) c (XII) b (XIII) b (XIV) a (XV) b (XVI) c (XVII) b (XVIII) b (XIX) b (XX) b
109
SECTION B
Question 2
(a) Briefly explain the role of Monetary Policy Committee (MPC) in ensuring financial
system stability in Nigeria. (5 marks)
(b) Examine three out of the tools available to MPC in the discharge of its role and how
the outcomes of its decisions in these regards are usually of interest to Banks’
Treasurers. (15 marks)
(Total = 20 marks)
Comment
The question tested candidates’ knowledge of the role and tools at the disposal of Monetary
Policy Committee for monetary management. It also tested their understanding of the
implications of MPC decisions for banks’ treasury operations. Four (4) candidates attempted
the question out of whom three (3), or 75%, scored the pass mark. Candidates generally
demonstrated good understanding of the question; however, some of them were still
confused as regards what the anchor interest rate was. For the avoidance of doubt, anchor
rate is Monetary Policy Rate (MPR) and not Minimum Rediscount Rate (MRR).
Answer
(a) Role of MPC in ensuring financial system stability.
i. Review of quarterly basis, macroeconomic indices. ii. Monitoring the performance of the domestic economy iii. Review of the global economic outlook, in terms of output, prices, etc. iv. Appraisal of the responsiveness of the economy to previous monetary
policy. v. Setting of the MPR, liquidity ratio, cash reserve ratio and issues
relating thereto.
(b) Tools available to MPC in the discharge of its role i. Monetary Policy Rate (MPR) ii. Liquidity Ratio (LR) iii. Cash Reserve Ratio (CRR
110
MPR is the benchmark rate for interest rates in the economy. It sets the anchor or reference
point for all other rates and prices of credit. For treasurers, MPR influences income
projections of their portfolios as well as choices of re-priceable assets and liabilities.
Liquidity Ratio is the proportion of total deposit liability of banks that is required to be held in
liquid assets. These liquid assets include current account balance with the Central Bank,
current account balances with other banks, investment in treasury bills and other eligible
instruments. For bank treasurers, this tool limits their ability to invest in other assets that
would otherwise attract higher returns.
Cash Reserve Ratio is the proportion of banks’ deposit liability that must be kept with the
Central Bank. It is a policy tool aimed at further enhancing the liquidity of banks such that
obligations to customers, especially depositors, are met as and when demanded or due. For
bank treasurers, CRR limits the ability to create credit. Thus, growing of assets and income
is restricted.
Question 3
(a) Distinguish between sources and uses of funds approach and structure of funds
approach to liquidity forecasting in banks. (5 marks)
(b) The table below shows the estimates of total deposit (liquidity sources) and total loan
(uses of funds) for a six-week period spanning March and part of April 2014.
Period Estimated Total Estimated Total
Deposit Loan
N’million N’million
March, 1st week 3,000 2,000
March, 2nd week 2,750 2,125
March, 3rd week 2,500 2,375
111
March, 4th week 2,375 2,500
April, 1st week 3,125 1,875
April, 2nd week 3,000 2,250
Using the above table, you are required to:
(i) Estimate for deposit and loan changes for each week.
(6 marks)
(ii) Estimate liquidity surplus or deficit for each week.
(6 marks)
(iii) Suggest actions to be taken to address each week’s situation.
(3 marks)
(Total = 20 marks)
Comment The question tested candidates’ knowledge of two of the basic approaches to liquidity
forecasting which is very important in treasury management. It was attempted by only one
candidate who failed to score the pass mark. Candidates need to know that this aspect of
the syllabus cannot be overlooked; consequently, it is imperative that they emphasize it in
their future preparations for the examination.
Answer
a. Sources and Uses of Funds’ Approach to Liquidity Forecasting
It is an approach developed for estimating a bank’s liquidity requirements.
It examines the expected sources of liquidity, (principally deposits) and the expected uses of funds, (principally loans and advances).
It therefore estimates the net difference between the sources and the uses over a given period of time.
Liquidity planning is thus aided.
Structure of Funds Approach
Also a method of estimating liquidity requirements.
112
It depends on detailed analysis of a bank’s deposit and loan customers and how the levels of their deposits and loans are likely to change.
(b)(i)
Month Week Estimated
Deposit
Change
N’million
Estimated
Loan Change
N’million
Estimated
Surplus
or Deficit
N’million
March 1 - - -
2 -250 +125 -375
3 -250 +250 -500
4 -125 +125 -250
April 1 +750 -625 +1,375
2 -125 +375 -500
Actions that should be taken:
In view of the anticipated liquidity deficits, in weeks 2, 3 and 6, the Treasurer should prepare to raise funds from the most reliable and cheapest sources.
He should also be prepared to invest the anticipated surpluses in week 5
Question 4
(a) Describe the situations in which a bank becomes asset- sensitive and liability-
sensitive. (5 marks)
(b) Determine whether the banks stated below are asset- sensitive or liability-sensitive.
113
Name of Bank Interest-Sensitive Interest-Insensitive
Assets Liabilities
N’million N’million
ARIGBABUWO BANK PLC 14,125 9,398
EGO OPUZU BANK PLC 9,098 6,053
MAIKUDI BANK PLC 9,575 10,978
(12 marks)
(c) What effects would rising or falling interest rates have on the net interest margins of
the banks? (3 marks)
(Total = 20 marks)
Comment
The question tested basic knowledge of treasury operations in the management of a bank’s
assets and liabilities, especially in relation to price (interest rates) movements. Treasurers
are expected to be constantly watchful of interest rates movements and the effects on their
portfolio of assets and liabilities. They should also be able to determine the extent to which
each of the assets and liabilities is responsive or sensitive to rising and falling rates and
take decisions as appropriate.
The question was attempted by three (3) of the candidates, all of whom demonstrated good
understanding and passed well.
Answer
(a) A bank is said to be asset-sensitive when its interest-sensitive assets exceed its interest-sensitive liabilities. In other words, it has a positive gap. The opposite situation is a negative gap and this arises when interest-sensitive liabilities exceed interest-sensitive assets.
114
.
(b) ARIGBABUWO BANK PLC Interest-sensitive assets N14,125 million
Less: Interest-sensitive liabilities 9,398 million
4,727 million
The bank is asset sensitive.
.
EGO OPUZU BANK PLC
Interest-sensitive assets N9,098 million
Less: Interest-sensitive liabilities 6,053 million
3,045 million
The bank is also asset-sensitive.
MAIKUDI BANK PLC
Interest-sensitive assets N9,575 million
Less: Interest-sensitive liabilities 10,978 million
-1,885 million
The bank is liability-sensitive.
(c) Effects of rising or falling interest rates on net interest margins of the banks.
Rising interest rate will operate to the advantage of Arigbabuwo Bank Plc and Ego-Opuzu Bank Plc. This is because the interest revenue generated by the banks will increase more than the costs of their borrowings.
On the other hand, falling interest rate would lead to decrease in their net interest margin as interest income from their assets would fall more than the cost of their liabilities.
For Maikudi Bank Plc, reverse situations would hold.
Question 5
(a) What is the exchange profit or loss when GBP 2,500,000 is sold against USD at an
exchange rate of 1.8250 and purchased at 1.8255? (7 marks)
(b) A dealer sells GBP 5 million at USD 1.4975, GBP 7 million at USD 1.4965 and then
buys GBP 6 million at USD1.4935. What will be his net position? (7 marks)
115
(c) JUMBO BANK PLC quotes as follows:
USD N161.3775/N163.3775
GBP N259.5225/N261.5225
EURO N107.7275/N109.7275
(i) How much would the bank pay to a customer from whom it wants to buy
USD25,000; GBP 17,500, and Euro 35,500? (3 marks)
(ii) How much would it charge a customer who wants to buy GBP 12,000,
USD15,750 and Euro20,100? (3 marks)
(Total = 20 marks)
Comment
The question tested basic knowledge of exchange rate mathematics. All the four candidates
that attempted it displayed a good understanding of the question; consequently, 100% pass
rate was recorded.
Answer
(a) GBP2,500,000 sold at 1.8250 = USD4,562,500 GBP2,500,000 bought at 1.8255 = (USD4,563,750)
Gain/(loss) = (USD 1,250)
(b) Net position: Inflows - Outflows Sales = GBP 5,000,000
Sales = GBP 7,000,000 Outflows
Total sales = GBP12,000,000
Purchases = GBP 6,000,000 Inflow
Net position = (GBP 6,000,000) Short
(c) i. Payments to customers from whom the bank is buying:
116
USD25,000 x N161.3775 = N4,034,437.50
GBP17,500 x N259.5225 = N4,541,643.75
Euro35,000x N107.7275 = N3,824,326.25
ii. Receipts from customers to whom the bank is selling:
GBP12,000 x N261.5225 = N3,138,270.00
USD15,750 x N163.3775 = N2,573,195.63
Euro20,100 x N109.7275 = N2,205,522.75
SECTION C
Question 6
BANZA STATE GOVERNMENT applied for and obtained a medium- term facility from FAST
TRACK BANK PLC to finance procurement of agricultural equipment. The terms of the
facility are as follows:
Amount: N750,000,000
Tenor: 5 years
Rate of Interest: 21% per annum
Amortisation: 60 equal instalments to cater for both principal and interest.
Mode of Repayment: Monthly disbursements by the State Accountant-General.
Collateral: The Equipment
The State Government was honouring its obligations as and when due. However, in the
15th month of the facility’s life, a pending election petition was decided in favour of the
opposition party’s candidate and government changed baton.
The new State Governor has directed the Accountant-General to stop the monthly
disbursements on the following grounds:
117
(i) Agriculture is not the priority of the new government.
(ii) A deluge of irregularities existed in both the loan process and contract for the
supply of the equipment.
(iii) The State House of Assembly was not carried along in the whole affair.
Investigations carried out by FAST TRACK BANK PLC, regrettably corroborated
the last two grounds on which the new Governor stands.
Required:
(a) What are the immediate effects of the situation on liquidity and profitability of
FAST TRACK BANK PLC?
(b) What remedies are available to the bank in the circumstance?
(c) What should the bank do or put in place to prevent re-occurrence of the problems
associated with this kind of facility?
(20 marks)
Comment
The question tested candidates’ knowledge of certain risks that usually characterise public
sector exposures and their avoidance. It also tested knowledge of possible effects and
actions to take in the event of occurrence of such risks. Being a compulsory question, it was
attempted by all the candidates and good understanding of the subject was displayed as all
were able to score the pass marks.
Answer
(a) The immediate effects on the bank’s liquidity and profitability are:
Disruptions to inflow of funds;
Possibility of liquidity gaps, as the repayments must have been tied to some disbursements;
Dwindling income as the interest components are no longer flowing in;
Reduction in profit;
Possibility of litigation costs with adverse effect on income.
118
(b) Remedies
The bank should immediately explore available sources for financing the imminent liquidity gap
A meeting with the incumbent governor to resolve the issue should be proposed
The bank should also consider legal option to take over the equipment.
(c) The bank should:
Understand and follow the procedures and processes stipulated for public sector lending;
Henceforth obtain irrevocable standing payment order from the government for direct deductions to service the loan from its statutory monthly allocations; and
Consider the possibility of securitising such facilities and ensure that they qualify for eligibility at the Central Bank of Nigeria Discount Window.
(20 marks)
119
HUMAN CAPITAL MANAGEMENT
120
SECTION A
This section contains multiple choice questions (MCQ) and short answer questions (SAQ). Indicate the correct alphabet as answers to MCQ and provide the answer(s) to the SAQ: Question 1 (i) The main or core dimensional study area in organizational behavior include all of the following except: (a) Personal system (b) Social system (c) Political system (d) Cultural system (ii) Human Capital Management is about all of the following except: (a) Indicator of a company’s success (b) Design and maintenance of people of optimum business performance (c) Formalized technical manipulation of people (d) How people’s policies and practices create value (iii) Business strategies can only be realized through ____________ (a) Manipulation (b) Policies (c) Discipline (d) People
121
(iv) ____________ takes place when a human resource Manager moves from human resource planning to job analysis, to recruitment selection and placement. (a) Person specification (b) Job description (c) Employment process (d) Demand forecast (v) A manager who is low in human competence skill is likely to be ___________ (a) Poor in communication skill (b) High in participative management skill (c) High in social skill (d) High in empathy skill (vi) Job design is affected by all of the following except: (a) Organizational culture (b) Organizational structure (c) Job satisfaction (d) Leadership style (vii) The process by which an organization continuously review the activities of its staff through a formal system is called ____________
122
(viii) Human Resource Management is important to human resource managers because of all the following reasons except _____________ (a) Cause employees to do their best (b) Cause wrong person for the job not to be hired (c) Cause low turnover (d) Cause waste of time with interviews (ix) Organizational learning can be made more meaningful through all of the following ways except: (a) Organize the information concerning the learning (b) Use variety of familiar examples (c) Present points logically (d) Castigate slow learners (x) A company that defines how it will match its internal strengths and weaknesses with external opportunities and threats has developed ____________ (xi) Employees perception that his manager has the ability and resources to make reward available to whoever complies with directive is described as ___________ (a) Managerial power (b) Leadership power (c) Reward power (d) Compensatory power
123
(xii) Employee actions or activities that result into a relatively permanent change in behavior shows that ____________ (a) Discipline has taken place (b) Learning has taken place (c) Performance has taken place (d) Job involvement has taken place (xiii) In order to protect Nigerian workers in terms of salary, benefits, awards, etc., the Nigerian government enacted an Act. What is it called? (a) Factory Act (b) Labour Act (c) Company Act (d) Workmen’s compensation Act (xiv) The role of Trade Unions include all of the following except: (a) Attainment of fair treatment for workers (b) Crave for job security for members (c) Determination of members’ wages (d) Fight for member’s retirement benefits (xv) A negotiator must exhibit all of the following attributes for effective negotiation outcome except: (a) Personal aggrandisement
124
(b) Patient (c) Team approach (d) Confidence (xvi) Organizational politics require the players to do all of the following except: (a) Craft positive image (b) Courtesy (c) Political correctness (d) Develop power contacts (xvii) Employee’s health and safety can be undermined by all of the following except: (a) Worker unsuitability for the job (b) Sensitivity to environmental variables (c) Work overload leading to fatigue (d) Inadequate training for employees (xviii) Employees’ organizational motivation is provoked by all of the following except: (a) Inflation (b) Disaster (c) Training (d) Taxes
125
(xix) All of the following except ___________ are the factors which reflect the advantages of organizational diversity. (a) Creates awareness of other people’s differences (b) Increases worker’s tolerance of each other (c) Increases ones self-awareness and sharpens self-perception simultaneously (d) Diversity is measurable on the surface (xx) All of the following except ____________ are the challenges arising from globalization. (a) High pressure cost reduction (b) Cultural and language barriers are easily surmountable (c) Political and economic risks must be assessed (d) Brings in low profit not as envisaged in the original proposal
(2 marks each)
(Total = 40 marks)
Comment
This is a compulsory question to be answered by all the candidates. These are straight
forward questions testing basic concepts on Human Capital Management. Candidates are
advised to obtain necessary permission to do the examination and ensure that they
effectively cover the syllabus of Human Capital Management.
Answer
i. D
ii. B
126
iii. D
iv. C – Employment Process
v. A
vi. C
vii. Performance Management
viii. C
ix. D
x. Strategic Management
xi. C – Reward Power
xii. B – Learning has taken place
xiii. B – Labour Act
xiv. C – Determination of member’s Wages
xv. A – Personal Aggrandisement
xvi. A – Craft Positive Image
xvii. B – Sensitivity to Environmental Variables
xviii. C - Truancy
xix. D – Diversity is measurable on the surface
xx. B – cultural and language barrier are easily summontable
(2 marks each) (Total = 40 marks)
SECTION B COMPULSORY CASE STUDY
Question 2 Mr. Idris was an astute banker who through dint of hard work wrapped up in superb
strategic management skill, was able to single handedly conceive and nurture Mojere Bank
127
from a thrift level to become a reputably enviable bank. Mojere Bank enjoyed very high
competitive advantage over many banks within its operational sphere. Job candidates fell
on each other to become a staff in that bank. People of all shades struggled to become
customers and shareholders of Mojere Bank, whose integrity soared like an Eagle in the
sky.
Suddenly a disaster struck, Idris like the boxer in Animal Farm, collapsed right inside his
office and died. He simply worked himself to death because the workaholic in him would not
permit him to take a break from his solely created bank work.
After the funeral was concluded, his first son Cosmas, despite his weak banking experience,
took over as the CEO of his father’s bank. The first two (2) years after Idris’s death, Mojere
Bank managed to survive due to the good will left behind by the original owner. Even at that,
the stakeholders had noticed that a gap had already started creeping into that once upon a
time flourishing bank.
Cosmas is a spoilt brat who believes in money as an instrument of motivation, contrary to
Herzberg’s two-factor theory of motivation. He started bringing his friends and concubines
into the bank, offering them whoopingly undeserved salaries. He totally destroyed the
effective and productive incentive system left by his father. The technical power of market
and pay analysis were of no meaning to him. To cut the long story short, Mojere Bank, by
the curse of ineffective incentives system and reckless spending went under unbailably.
Required:
(a) With five (5) good reasons, explain why Cosmas’ adopted incentives system failed
woefully. (10 marks)
(b) Educate Cosmas on how to implement effective incentive plans. (10 marks)
(Total = 20 marks)
128
Comment
This is a compulsory question to be answered by all the candidates. The question test
knowledge on staff motivation in particular why incentive plans fails and how to implement
effective incentive plans in Mojere Bank. Candidates are expected to read wide so that the
knowledge acquired in human capital management can be applied in solving organisational
problems.
Answer
(a)
i. Performance pay cannot replace good management. Pay is supposed to
motivate workers but it has been discovered that pay is not always the culprit but
things like unclear and clumsy goal, absence of training and many others.
ii. He got what he paid for. He employed mediocrity and got in return mediocre
services.
iii. According to Frederick Herzberg pay is not a motivator. Therefore Cosmas used
a wrong motivator and got in return demotivator.
iv. Reward and punishment are not two sides of a coin, reward says do this and you
get that, whereas punishment says do this or you won’t get that, therefore they
are the same.
v. Rewards capture relationships. Incentive plans have the potential for
encouraging individual to pursue self-interest at the expense of team.
Immediately subordinates noticed Cosmas technical incompetence they acted in
self-interest at the expense of Mojere Bank.
129
vi. Reward can have unintended consequences. That the employees received
undeserved jumbo pay attracted them to things different to Mojere Bank’s
interest.
vii. Reward may undermine responsiveness. In the case of Mojere Bank the
reward/incentives undermined employees’ response. Employee will cut corner
when they discovered that their CEO was grossly incompetent.
viii. Reward undermined intrinsic motivation especially to the reward is extrinsic such
as the jumbo pay offered workers in Mojere Bank.
ix. There cannot be a different outcome from failure because Cosmas did not know
what he was doing.
(Any 5 x 2= 10 marks)
(b) A bail out for the Cosmases of this world is to do the following:
i. Cosmas should have asked crucial and relevant questions and ensured he got
answers to them. Such questions could include: is the incentive/motivation
producing expected results etc.
ii. He should have linked the incentive with his strategy, will the incentive system
assist the implementation of the bank’s strategy.
iii. Make sure the program is truly motivational. That is there is congruency between
employees input and incentive, based on employees’ perception.
iv. He should have made the plan easier for the employees to understand.
v. He should have set self-effective standards.
130
vi. View the standard as a contract or agreement with the employees
vii. Secure employees support for and acceptance of the plan.
viii. Use good measurement system.
ix. He should have used set standards, complete one at that.
x. Make the incentive plan part of a comprehensives commitment approach.
(Any 5 x 2= 10 marks)
SECTION C
Question 3
Organisations thrive on group system. The members of a group do not just drop; rather,
they are built and they must be dynamic to be effective.
(a) Discuss the formation of groups in organisations. (5 marks)
(b) Why do people belong to or join groups? (10 marks)
(c) What are the characteristics of an effective or dynamic work group? (5 marks)
(Total = 20 marks)
Comment
This is a direct and straightforward question on group formation. It was attempted by
13(22.81%) out of 57 candidates. Candidates are advised to prepare well in advance for the
examination and they should cover the syllabus effectively. Total reliance on shadow
knowledge or notes from tutorial centres would not suffice.
Answer
(a) Stages of group formation
131
Stage 1: The Forming Stage
Stage 2: The Storming Stage
Stage 3: The Norming Stage
Stage 4: The Performing Stage
Stage 5: The Adjourning Stage
(5 marks)
(b) People join groups for the following reasons:
i. Certain tasks can only be performed through the combined efforts of a number of
people;
ii. Collusion between members that promote likeness;
iii. Companionship;
iv. For mutual understanding and support;
v. Provision of a sense of belonging;
vi. Guidelines on generally acceptable behaviour;
vii. Protection for its members’ needs.
(Any 5x2 = 10 marks)
(c) Characteristics of effective/dynamic work group include:
i. A belief in shared aims and objectives;
ii. A sense of commitment to the group;
iii. Acceptance of group values and norms;
iv. A feeling of mutual trust and dependency;
v. Full participation by all members;
vi. Decision-making by consensus;
132
vii. A free flow of information and communication;
viii. Open expression of feelings and disagreements;
ix. Resolution of conflict by the members themselves;
x. A lower level of staff turnover, absenteeism, accident, errors and complaints.
(Any 5x1 = 5 marks)
(Total = 5 + 10 + 5 = 20 marks)
Question 4
The health and safety of workers are crucial factors in the efficiency and effectiveness of
organisations. List and explain the stakeholders’ roles in health and safety of organisational
members. (20 marks)
Comments
This is a textbook and direct question asking for the stakeholders’ roles in health and safety
of organisational members. Only 16 (28.07%) attempted the question out of 57 candidates.
Candidates sitting for the examination should not use residual knowledge but should study
hard and well in advance so as to excel in the various examinations of the institute.
Answer
The stakeholders in employee health and safety are:
i. The employees;
ii. The organisation;
iii. The social environment (government);
iv. The psychological environment.
i. The Employees
Employees must be technically competent.
133
Employees must have self-confidence.
Employees must avoid the use of faculty equipment.
Employees must avoid the use of drugs with sedative effects during work period.
Employees must avoid a georgette smoking close to inflammable materials.
Employees must properly cover their body when handling chemicals.
(5 marks)
ii. The Organisation
Ventilated and well-illuminated offices and factories
Safety equipment for firefighting
Distraction-free and noise-free environment
Enough space for office layout
Toilets, bathrooms, kitchenette must be provided
First aid boxes in clinics manned by qualified personnel
(5 marks)
iii. Social / Government Environment
Facilitate social interaction among the workforce
Do not blur individuals’ culture
All interdepartmental and intersectional free passage/ movement
Have rooms or clots for relaxation
Organise programmes that will compel gathering and coming together of the
workforce.
(5 marks)
iv. The Psychological Environment
Individual recognition;
Sense of belonging;
134
Development of high self-esteem;
Sense of security;
Job involvement;
Organisational commitment. (5 marks)
(Total = 20 marks)
Question 5
The beneficiaries of employee motivation are the employees themselves and the
organisation. Explain why they are beneficiaries? (20 marks)
Comment
This is a direct, well familiar and straightforward question on employee motivation. It was
attempted by 33 (57.89%) out of 57 candidates, of which majority passed. Candidates are
advised to prepare well in advance for the examination and they should cover the syllabus
effectively.
Answer
Employees as beneficiaries of employee motivation:
i. Employee motivation supplements employees’ wages and salaries.
ii. It increases employees’ standards of living.
iii. It allows employees to build their careers.
iv. It enhances employee competence and professionalism.
v. It boosts employees’ ego and strengthens their self-confidence.
vi. It increases employees’ social status.
vii. It bestows on employees organisational commitment and job involvement which in
turn increase productivity.
viii. It frees employees from fraudulent practices.
ix. It makes employees socially responsible.
(Any 5 x 2 = 10 marks)
135
The Organisation
i. It enhances the organisation’s positive corporate image.
ii. It reduces employee turnover.
iii. It keeps down cost of replacement and re-training.
iv. It ensures corporate stability and industrial peace.
v. It instils integrity and high ethical standard in organisations.
vi. It promotes total quality management culture.
vii. It allows organisations to accept and discharge moral and social responsibilities
viii. It leads to high productivity for organisations. (Any 5 x 2 = 10 marks)
(Total = 10 + 10 = 20 marks)
Question 6
(a) Discuss the factors that trigger training needs in organisations (10 marks)
(b) Enumerate and briefly discuss five (5) conditions that are required for learning to be
effective in an organisation. (10 marks)
(Total = 20 marks)
Comment
This is a textbook and direct question asking for the factors that trigger training needs in
organisations. All those who attempted the question (41 in all) did well as they scored
between 7 and 16 marks. This is a reflection of effective coverage of the syllabus and what
they are used to in their various places of work.
Answer
(a) The factors which trigger training needs in organisations include:
i. High rate of accident among the workforce;
ii. Increased labour turnover among the workforce;
iii. High rate of absenteeism;
136
iv. Decline in productivity;
v. Poor job performance;
vi. Purchase of new machines;
vii. New technology;
viii. Increased complaint from customers;
ix. Reduced patronage;
x. Diminishing corporate image;
xi. Visible negative work attitude;
xii. Increased work distraction;
xiii. Decrease in profit;
xiv. Decrease in competitive advantage. (Any 10 x 1 = 10 marks)
(b) The requisite conditions for effective learning in an organisation steps in designing
training programme are
i. Motivation to learn;
ii. Self-direction towards learning;
iii. Goal direction and feedback;
iv. Learning methods;
v. Level of training;
vi. Management support for training;
vii. Availability of training materials;
viii. Conducive environment to learn;
ix. Identification of training needs;
x. Allocation of sufficient time for training, which paves the way for better
learning;
xi. Availability of good trainers who impart knowledge.
(Any 5 logically explained points attract 5 x 2 = 10 marks) (Total 10 + 10 = 20 marks)
137
Question 7
(a) Realistically discuss any five appraisal methods. (10 marks)
(b) Discuss any five (5) problems confronting performance appraisal system in
organisations. (5 marks)
(c) Proffer realistic solutions to the problems enumerated. (5 marks)
(Total = 20 marks)
Comment
This is a direct and straightforward question on appraisal methods, problems confronting
performance appraisal system in organisations and solutions to the problems enumerated. It
was attempted by nine (15.89%) out of fifty-seven candidates. Candidates are strongly
advised to prepare well in advance for the examination and they should cover the syllabus
effectively. More so performance appraisal is an exercise often carried out in various
organisations.
Answer
(a) The appraisal methods are as listed below
i. Pasted-focused appraisal method:
Rating scale;
Forced choice method;
Weighted performance checklist;
Critical incident method;
Comparative evaluation method;
Work standard test method;
ii. Future – focused appraisal method
Self-appraisal;
Management by objective;
Psychological appraisal.
138
(Any 5 well-explained methods attract 2 marks each) (Total = 20 marks)
(b) Problems that render performance appraisal ineffective in organisations include:
Stereotype;
Halo-effect;
Leniency bias;
Strictness bias;
Primary effect;
Recency prejudice;
Error of central tendency.
(Any 5 explained x 1 = 5 marks)
(c) The problems stated above can be overcome by doing the following:
Appraise on the basis of represented information.
Appraise on the basis of sufficient information.
Appraise on the basis of relevant information.
Make honest appraisal.
Keep written and oral appraisals consistent.
Present appraisal as opinion so that others can contribute.
Properly train rates.
Do not allow raters to bring theirs persons into the exercise, for example their
religion.
Prevent raters from giving appraisal feedback to the rates.
(Any 5 well-explained solutions x 1 = 5 marks) (Total = 20 marks)
139
BANKING REGULATION & SUPERVISION
140
SECTION A
Indicate the correct alphabet as answer to the multiple-choice questions in the following:
Question 1
(i) What do you understand by the term “regulatory capital”? (a) Operational Capital. (b) Paid-up Capital. (c) Capital funds equal to or more than 10% of a bank’s total risk weighted assets. (d) Shareholders’ fund of a bank.
(ii) Within the context of Nigeria’s regulatory environment, what is the full meaning of FSRCC? (a) Financial Sector Regulation and Co-ordination Committee (b) Financial Services Regulation and Co-ordination Committee (c) Funding Sector Reform Co-ordination Council (d) Financial Swap Rates Certified as Certain.
(iii) Which of the following is not a pillar of Basle 2?
(a) Minimum Regulatory Capital. (b) Supervisory Review. (c) Consumer Protection. (d) Market Discipline.
(iv) What do you understand by the phrase “financial holding company”?
(a) A non-bank financial institution that owns controlling equity interest in, at least,
a bank and other regulated institutions in the financial sector. (b) A conglomerate that holds equity interest in key sectors of the economy. (c) A multi-bank holding company with investments in the financial sector. (d) A holding company with investments in other financial institutions.
(v) What is the single obligor limit for deposit money banks in Nigeria in terms of
shareholders’ funds unimpaired by losses? (a) 54%. (b) 20%.
141
(c) 25%. (d) 15%.
(vi) A supervisory arrangement where both the host and home regulators carry out the
examination of a subsidiary bank overseas which is owned by a Nigerian parent bank is referred to as_______________________ (a) Cross-border supervision. (b) Joint examination. (c) Special examination. (d) College of supervisors’ meeting.
(vii) When Bank Examiners carry out a desk review of a bank’s call reports and conclude
their findings, they are said to have carried out________________ (a) Consolidated Supervision. (b) Compliance Supervision. (c) Off-site Supervision. (d) All of the above.
(viii) What is the meaning of FATF?
(a) Financial Authority Training Fund. (b) Financial Autonomy and Technical Fund. (c) First African Trust Fund. (d) Financial Action Task Force.
(ix) The principal responsibility of NDIC is to protect depositors through its deposit
insurance scheme. The insured limits for each depositor of ________________ and __________________ are _____________ and _________________ respectively. (a) DMBs and PMBs, N250,000 and N150,000 (b) MFBs and PMBs, DMBs, N500,000 and N200,000 (c) PMBs and MFBs, N400,000 and N100,000 (d) DMBs and MFBs/PMBs, N500,000 and N200,000
(x) When a bank is classified as technically insolvent, and the financial authorities take
measures to liquidate the bank, which among the under-listed institutions is the official liquidator for the banks?
142
(a) CBN. (b) SEC. (c) AMCON. (d) NDIC.
(xi) Which of the following is not an early warning signal for bank failure?
(a) Persistent failure to meet prescribed liquidity ratio. (b) Declining capital adequacy ratio. (c) Increase in share premium. (d) Protracted board squabbles.
(xii) Banking regulation refers to the enforcement of banking rules and regulations, while
banking supervision refers to written rules defining acceptable bank’s conduct. (a) True? (b) False?
(xiii) Which of these is a critical feature of Risk Based Supervision?
(a) It is rule-or principle based. (b) It is provided for under Section 31 of BOFIA (2004). (c) It does not essentially place reliance on external auditors. (d) It is based on the risk profiling of banks.
(xiv) The Basel Committee was formed by the Central Bank Governors of the
________________
(a) G12 Countries. (b) G20 Countries. (c) G10 Countries. (d) G7 Countries.
(xv) The minimum regulatory capital for non-interest banks with national authorisation in
Nigeria is________________________ (a) N25 billion (b) N50 billion (c) N15 billion
143
(d) N10 billion
(xvi) Principle 13 (Home-host country relationships) of the Basel Core Principles provides guidelines in the following areas EXCEPT: (a) Effective handling of crisis situations (b) Cross-border supervision (c) Review and analysis of prudential ratios (d) Supervision of internationally active banks.
(xvii) The authorized capital of the Central Bank is __________________ and fully subscribed to by ____________________________ (a) N50 billion; Federal Government (b) N100 billion; Federal Government (c) N150 billion; Federal and State Government (d) N100 billion; Federal and State Government
(xviii) One of the following is not a problem of electronic statutory returns in Nigeria:
(a) Downtime (b) Data integrity (c) Skills (d) Political instability
(xix) One of the major objectives of consolidated supervision is to:
(a) Ensure that banks do not operate subsidiaries. (b) Limit the operations of the supervised institutions. (c) Reduce regulatory arbitrage. (d) Increase contagion risk.
(xx) Which of the under-listed is not a consumer protection entity?
(a) Sub-committee on Ethics and Professionalism. (b) Consumer Protection Council. (c) Consumer Protection Department of the CBN. (d) The Committee of Chief Compliance Officers of Banks.
(2 marks each) (Total 40Marks)
144
Comment
The compulsory question was attempted by all candidates and about 90% secured pass
mark. in fact, 57% of those that passed the question got distinction.
Answer
i. c ii. b iii. c iv. a v. b
vi. a vii. c viii. d ix. d x. d
xi. c xii. False(b) xiii. d . xiv. c xv. d
xvi. c xvii. b xviii. d xix. c xx. d
Question 2 (a) What do you understand by the term ‘capital adequacy ratio’? (5 marks)
(b) A bank has a capital structure and risk assets as follows:
Capital Structure: N’000 (i) Paid-Up Capital 20,000 (ii) Reserves 50,000 (iii) 5% Preference Shares 90,000
Total Capital 160,000
RISK ASSETS N’000 N’000 ITEMS AMOUNT RISK WEIGHTS TOTAL - Cash 25,000 0 0 - Treasury Bills 40,000 0 0 - Current Account Balances
With Other Banks 50,000 0.2 10,000 - Placement with Other Banks 100,000 0.5 50,000 - Commercial Paper 150,000 1.0 150,000 - Bankers’ Acceptance 200,000 0.5 100,000 - Loans and Advances 250,000 0.5 125,000 - Equity Investments 200,000 1.0 200,000 - Other Investments 100,000 1.0 100,000
145
735,000 Required: Calculate the bank’s capital adequacy ratio using Basel I Standard. (15 marks) (Total = 20 marks)
Comment
This was the second least popular question attempted by only 33% of the candidates and
only 31% of those who attempted it secured a pass mark. The question was simplified with
the provision of computed risk-weighted assets for the candidates.
Answer
(a) Capital adequacy ratio is the relationship between a bank's capital resources and its risk
assets.
It is expressed as a ratio, and the threshold for Nigerian banks is 10% for national banks,
though the global standard remains at 8% as specified in Basle 1 accord.
The capital is sub-divided into tier 1 and tier II with tier I comprising paid-up capital and
reserves while tier II comprises debt capital which must not exceed tier I capital.
The addition of both capitals is referred to as the total qualifying capital. This is then related
to the total risk weighted assets to compute the Capital Adequacy Ratio (CAR).
(5 marks)
b) The CAR formula = Total Qualifying Capital X 100
Total Risk Weighted Assets 1
Tier I= Paid-up Capital + Reserves
=N=20,000 + =N= 50,000 = =N=70,000
Tier II= 5% Preference Shares= =N=90,000
(This is limited to 100% of Tier I) = =N=70,000
Total Qualifying Capital= Tier I+ Tier II
==N=70,000 + =N=70,000 = =N=140,000
146
Total Risk Weighted Assets = =N=735,000
CAR= 140,000 X 100 =19.05%
735,000 1
(15 marks)
Question 3 (a) List the three elements of a sound financial safety net arrangement. (6 marks)
(b) When a bank fails, the CBN revokes the licence and hands the bank over to NDIC.
Itemise and discuss the failure resolution options available to NDIC. (14 marks)
(Total = 20 marks)
Comment
This is the second most popular question attempted by 33 out of the total 39 candidates.
About 64% of the candidates that attempted the question were able to secure pass marks.
In spite of the success rate, some candidates were unable to list the three elements of
sound safety net arrangement while skeletal answers that showed lack of an in-depth
knowledge were provided on failure resolution options.
Answer
a) The three elements of a sound safety net arrangement are:
i. Prudential Regulation and Supervision;
ii. Lender of Last Resort; and
iii. Deposit Insurance.
b) When a bank's licence is revoked by the CBN, the bank is transferred to NDIC for
winding up and liquidation. The NDIC proceeds to get a high court order to wind up
the affairs of the bank.
The failure resolution options by the NDIC include:
Deposit Payout;
Purchase and Assumption;
Bridge Bank.
147
Deposit Payout
Under this option, when the licence of the bank is revoked, the NDIC moves in and takes
over the management of the bank for winding up and liquidation. It creates:
- Deposit Register which captures the list of all depositors of the bank and the
balances on their respective deposit accounts
- A register each for all classes of assets, their locations and liabilities.
- It takes effective custody of all important documents of the bank.
- NDIC proceeds to pay all depositors of the failed bank up to the insured amount and
begins the process of winding up and liquidation which includes:
- Sale of all the assets of the bank;
- Recovery of debts/loans;
- Use of the proceeds to pay liquidation dividends to all insured depositors;
- Pay other claimants.
Purchase and Assumption
When a bank's licence is revoked, the NDIC moves into the bank to take effective
possession, create all the registers and take effective custody of all documents as in a
deposit pay-out.
Thereafter, it invites existing banks to bid for the closed bank’s deposits and assets.
Under this option, each of the bidding banks would be required to take over all the deposit
liabilities of the failed bank and select any asset- properties, loans, chattels, etc., that it
would like to take over from the failed bank to reimburse itself for the deposit it is assuming.
When the value of the selected assets is agreed upon-
The assets are deemed to be purchased by the successful bidding bank;
The value of the assets is deducted from the total deposit assumed by the bank;
The balance is paid to the deposit assuming bank;
The NDIC thereafter proceeds to sell the remaining assets, recover debts/loans and use the
proceeds to settle other claimants;
The depositors of the failed bank are transferred to the assuming bank and they do not lose
any money and resume banking transactions in the assuming bank once documentation is
concluded.
148
Bridge Bank
When a bank is distressed, the regulatory authorities could, in the best interest of the
banking system, the economy and indeed the depositors, opt for the bridge bank option.
The CBN, having agreed with the NDIC, the NDIC incorporates a shell company. The CBN
revokes the licence of the failed bank and simultaneously issues a new banking licence to
the shell company to start a new bank. The new bank-the bridge bank assumes all the
assets and liabilities of the failed bank. The bridge bank is nurtured and managed to good
health and sold to new investors by the regulatory authorities.
With the sale of the bridge bank to new investors, the bridge is broken as it is no longer
owned by the regulator. If a bridge bank after 18 months or 2 years fails to improve its
condition, it would be liquidated. If it does improve, there will be willing buyers.
The bridge bank option is the fastest and most effective failure resolution option if done
timely as banking transactions would continue seamlessly without any break and the
general public may not even know that it happened.
Question 4 (a) In recent times, the EFCC has been in the news on matters pertaining to money
laundering. What is the role of EFCC in the fight against money laundering and other financial crimes? (10 marks)
(b) As an employee of a bank, what is your role in the prevention of money laundering? Mention five things that you should do. (10 marks) (Total = 20 marks)
Comment
This was the third most popular question attempted by 31 (or 79%) of the candidates.
Majority (or 61%) of the candidates that attempted the question were able to secure pass
marks with more than 50% at distinction level.
Answer
a) The role of EFCC in the fight against money laundering and other financial crimes
includes the following:
149
i. Investigation and prosecution of all financial and economic crimes including
advance fee fraud (a.k.a. ‘419’), money laundering, counterfeiting, fraud, etc.
ii. Co-ordination and enforcement of all economic and financial crimes laws
and enforcement function conferred on any other person or authority. The
EFCC is the co-ordinating agency for the enforcement of the provisions of :
Money Laundering Act,
Advance Fee Fraud and other related offences Act,
Failed Bank (Recovery of Debts and Financial Malpractices in Banks)
Act,
Banks and Other Financial Institutions Act
Miscellaneous Offences Act, and
Any other law or regulation relating to economic and financial crimes
including the criminal code and penal code.
iii. Adoption of measures to identify, trace, freeze, confiscate, or seize
proceeds derived from terrorist activities, economic and financial crime-
related offences or the properties, the value of which corresponds to such
proceeds.
b) Role of Bank Employees in the prevention of Money Laundering include the
following:
i. Seek to understand the Anti-Money Laundering structure and guidelines applicable
in the bank and ensure strict compliance.
ii. At account opening stage:
Interview the prospective customers to understand who they are and what
they do;
Ensure complete documentation of customer's identity, including location;
Evaluate the risk attendant to the customer before taking him or her on.
iii. Monitor customer transactions for unusual patterns:
Identify risks associated with different classes of customers and locations;
Constantly put high risk accounts under surveillance.
iv. Generally apply common sense and good judgment.
v. Report suspicious transactions promptly.
vi. An employee should not lend himself or herself to abuse by being over-
familiar with customers. Professional decency should be maintained.
150
vii. Document the true identity of a principal account owner if an agent or proxy
purports to act on his behalf and ensure that the agent is duly authorised.
viii. Always obtain senior management approval before establishing or transacting
any business with a politically exposed person.
ix Do not tip off customers on any regulatory institution’s investigative action on
their accounts.
Question 5 (a) What is Risk-Based Supervision? (5 marks) (b) List the steps involved in Risk-Based Examination. (6 marks)
(c) What are the six management central functions in Risk-Based Supervision? (9 marks)
(Total = 20 marks)
Comment
The question was the least popular, as it was attempted by only nine (or 23%) of the
candidates. Approximately 33% of the candidates that attempted the question secured a
pass mark. The relatively poor performance in the question was largely due to use of
"remote" knowledge by candidates which resulted in vague and abstract solutions.
Answer
(a) Risk-Based Supervision is a structured process aimed at identifying the most critical
risks that face each bank and assessing through a focused review by the supervisor,
the bank's management of the risks and its vulnerability to potential adverse
experience.
It can also be defined as a systematic identification of significant risks inherent in a
bank's operation and evaluation of the risk management framework put in place by
the bank to mitigate the risks.
(b) The steps involved in Risk Based Examination are:
- Knowledge of the business;
- Identification of significant activities of the bank;
- Determination of materiality of the significant activity;
- Identification of inherent risks;
151
- Examination of the effectiveness of management control functions to mitigate the
risks;
- Determination of the net risk.
- c) Management Control Functions are:
- Board;
- Senior Management;
- Risk Management;
- Internal Audit;
- Compliance;
- Financial Analysis.
Question 6
Write short notes on the following: (a) Credit Risk Management System (5 marks) (b) Differentiate Banking Regulation from Supervision (5 marks)
(c) Cash Reserve Requirement (5 marks)
(d) Credit Bureau or Credit Reference Agency (5 marks) (Total = 20 marks)
Comment
Another well-attempted question sharing the same statistics, in some respects, with
Question 4; i.e. the question was attempted by 31 (or 79%) of the candidates while only 13
(or 42%) of them passed with 6 (or 46%) at distinction level.
The relatively poor performance in the question can again be attributed to attempt by
majority of the candidates to give "common sense definitions" to specific technical terms
mentioned in the question.
152
Answer
a) Credit Risk Management System (CRMS)
The CRMS was established by the CBN to provide information to banks on every borrower with over one million naira outstanding debit balance. Banks are expected to forward the schedule of debtors with such outstanding debit balances to the CRMS and update the information regularly. Banks are expected to refer to the system before lending to determine the credit- worthiness of intending borrowers. The CRMS is designed to achieve the following objectives:
- Strengthening the credit appraisal procedure of banks; - Storage and dissemination of credit data; - Monitoring of over exposure to borrowers; - Facilitating consistent classification of credits; - Enabling the regulator to have firsthand information on a customer's global credit or
debt profile, thereby eliminating erroneous classification of a customer’s loan as performing in one bank and doubtful or lost in another.
b) Differentiate Banking Regulation from Supervision Regulation is a body of specific rules or agreed behaviour either imposed by government, statute or other external agency or self-imposed by explicit or implicit agreement within the banking industry which limits the activities and business operation of banks. In a nutshell, it is a codification of public policy towards banks to achieve a defined objective and /or act prudently. Examples are BOFIA-Banks and Other Financial Institutions Act, 1991; Prudential Guidelines and the various circulars of the CBN guiding the business of banking in Nigeria. On the other hand, Supervision is the process of monitoring banks to ensure that they are carrying on their activities in a safe and sound manner and in accordance with banking laws, rules and regulations. Supervision is carried out through on-site and off-site methodologies. On-site supervision of banks entails physical presence of bank supervisors or examiners in the banks to review their books and affairs and to evaluate their compliance with laws, rules and regulations as well as to ascertain whether or not a bank is being managed in a safe and sound manner. The off-site surveillance involves the review of periodic statutory returns forwarded to the CBN for the same purpose.- determine the financial condition of the bank being supervised on an on-going basis since the on-site examiners cannot be left permanently in the banks.
153
c) Cash Reserve Requirement (CRR) This is a Central Bank regulation that sets a minimum fraction of bank deposit liabilities that each bank (DMB) must keep with it as reserves. The CBN determines the CRR from time to time, depending on its monetary policy thrust. Where the CRR is in pursuit of a tight monetary policy, that is, reducing liquidity in the banking system, a high CRR is imposed; and where the policy is expansionary, the CRR is usually lowered. In the recent past, CRR had fluctuated between 20% and 75% for different categories of deposits, especially government-related deposits. CRR is a prudential instrument as well as a monetary policy tool. it is used to control the supply of money. The higher the CRR, the lower the money available to banks to give out as loans. Conversely, the lower the CRR, the higher the volume of funds available for lending. The CRR can be maintained in two ways:
i. Reserve Averaging which entails that average end-of-day balances with the CBN over a given period of time must be equal to or above the required CRR level. The implication is that the reserve can be lower than the prescribed level on some days as long as the average is higher than the minimum prescribed during the period. The advantage is that banks have access to their funds with the CBN.
ii. Daily Maintenance. Here, the reserve requirement is determined and removed from the current account of the bank with the CBN to a CRR account which banks do not have access to except when the bank is in dire need of liquidity.
d) Credit Bureau or Credit Reference Agency
A credit bureau or credit reference agency is an independent organisation authorized by law to collect, process and sell credit information to banks and other lenders who use the information as input in lending decision-making processes. A credit bureau holds information, in its data base, about consumers and businesses and provides the Information to organisations involved in lending to enable them decide whether or not to grant them credit. It also influences the pricing of such credits. Credit Report from Credit Bureau captures the entire credit picture of an individual or organisation in one reporting format. In Nigeria, we have four credit bureaus- one established by the CBN-CRMS, and three privately owned-XDS,CR Services and CRC.
154
PRINCIPLE & PRACTICE OF RISK MANAGEMENT
155
SECTION A
This section contains multiple choice questions (MCQs) and short answer questions
(SAQs). Indicate the correct alphabet as answer to the MCQs and provide the answer (s) to
the SAQs.
Question 1
(i) Answer TRUE or FALSE.
Risk avoidance seeks to eliminate any possibility of risk by an organisation
through discontinuation of an activity or line of business that entails a level of risk
above organisation risk limit.
(ii) Answer TRUE or FALSE.
Risk reduction is all about assessing risk in an organisation and determines
which ones will support the goals of the organisation simply put as takeable risks
(iii) Answer TRUE or FALSE.
Risk transfer is a management control strategy that allows the pure risk of an
organisation to be lessened when the burden of that risk is borne by another
entity through contractual relationship.
(iv) Answer TRUE or FALSE.
Residual risk is risk that does not have significant impact on the operations of
the organisation and as such management would not waste their resources to
deal with the risk.
(v) Interest rate risk is a type of:
(a) Credit risk.
(b) Market risk.
156
(c) Operational risk.
(d) All of the above.
(vi) In an inflationary trend, pricing of the bank’s products is:
(a) Decreasing trend.
(b) Constant trend.
(c) Increasing trend.
(d) No relevance.
(vii) A risk management technique is effective if it enables an organisation to:
(a) Accurately predict future losses.
(b) Avoid catastrophic losses.
(c) Achieve desired organisational goal.
(d) Measure the cost of risk.
(viii) Enterprise risks management is an approach that:
(a) Manages all risk together as a portfolio.
(b) Focuses on operational and liquidity risks that directly affect an organisation
(c) Does not view risk from different angles.
(d) Focuses on pure risks that directly affect the organisation to an extent.
(ix) All of the following are benefits of ERM to an organisation except:
(a) Creation of a more risk-focused culture for the organization.
(b) Standardised risk reporting.
(c) Efficient use of resources.
(d) Competing priorities for risk prioritisation.
(x) Which of the following is not a function of the Chief Risk Officer?
(a) Managing the implementation of all aspects of the organisation’s risk function.
(b) Monitoring major and critical risk issues.
(c) Establishing an early warning or triggering the system for branches of the
bank’s risk appetite or limit.
157
(d) Making sure that the bank’s dividend policy encourages the in order to
provide capital structure that is adequate for bank
(xi) Objective of the Basel Accords does not include:
(a) Strengthening the soundness and stability of the international banking
system.
(b) Diminishing sources of competitive inequality among international banks.
(c) Preventing internationally active banks from building business volume without
adequate capital backing.
(d) Promoting universal banking law for implementation by all member banking
institutions.
(xii) This, among others, is the limitation of Basel Accord:
(a) The accord did not take into consideration the operational risk of bankers
which was on the increase due to complexities of banking activities.
(b) Instituting a basis for defining capital adequacy ratio that was universally
recognized.
(c) Setting up a minimum risk-based capital adequacy ratio applying to all banks
universally.
(d) All of the above.
(xiii) Which of the following is the result of a poorly managed environmental and
social risk framework?
(a) Decline in financial institution’s reputational image.
(b) Costly litigation.
(c) Loss revenue.
(d) All of the above.
(xiv) One of the following is not an approach to credit risk competition
(a) Standardised approach.
(b) Basic indicator approach.
158
(c) Foundation IRB approach.
(d) Advanced IRB approach.
(xv) Market risk measurement is important to an organisation for the following
reasons:
(a) Provision of management with information on the risk exposure taken by
traders.
(b) Setting of limits for the risk to be taken
(c) Determination of price for the various products of the organization.
(d) Resource allocation.
(xvi) The first step to take in implementing an enterprise-wide risk management
framework is
(a) Resource control.
(b) Reporting and monitoring performance.
(c) Identification or recognition of all risks facing the organization.
(d) None of the above.
(xvii) Protecting the reputation of an organisation is the responsibility of:
(a) The Managing Director/Chief Executive.
(b) The Executive Director Administration.
(c) The Enterprise Risk Manager.
(d) All of the above.
(xviii) What do you understand by the concept of stress testing, with particular
reference to banking institutions?
(xix) What is the proper reporting line of the Chief Risk Officer in a well-organised
Enterprise Risk Management Environment?
(a) Report directly to the MD/CEO with dotted line to the board risk management
committee.
159
(b) Report to all board risk management committee with dotted line to the
MD/CEO.
(c) Report to all Board Committee members.
(d) All of the above
(xx) Briefly define value at risk.
Answers
i. True
ii. False
iii. True
iv. False
v. b
vi. c
vii. c
viii.a
ix. d
x. d
xi. b
xii. a
xiii. d
xiv. b
xv. d
xvi. c
xvii. d
xviii. Stress testing is an important risk managerial tool that is used by banks as part of
their internal risk management skills. It alerts management to adverse and
unexpected outcomes related to a variety of risks and provides an indication of
160
how much resources would be needed to absorb losses in the case of large
shocks. Therefore, management will deliberately expose the organisation to a
level of risk at a confidence level for testing.
xix. b
xx. Value at risk is the predicted loss at a specific confidence level over a given period of
time. It does not provide the worst case loss but instead uses confidence level.
SECTION B
Question 2
The table below shows the annual gross income of the various business lines for the past
three years.
G1 - Annual Gross Income
B1-8 - The fixed percentage for the business lines indicated in the table
KTSA - Capital Charge under TSA
BUSINESS LINE B1-8% ANNUAL GROSS INCOME
Corporate Finance 18 20.000 22,000 25,000
Trading & Sales 18 10,000 15,000 18,000
Retail Banking 12 25,000 30,000 35,000
Commercial Banking 15 10.000 16,000 18,000
Payment & Settlement
18 5,000 10,000 15,000
Advisory Services 15 15,000 10,000 14,000
Asset Management 12 8,000 12,000 15,000
Brokerage Services 12 15,000 17,000 20,000
Year 2013 2014 2015
161
(a) List and discuss briefly the various approaches recommended by the Basel Committee
for its determination of operational risk capital charge (10 marks)
(b) Using the table above, calculate the bank’s capital charge for operational risk for the
year 2016, assuming this is the accurate report of your bank.
Comment
This question tested the numerical ability of candidates, and it is the first quantitative
question on the subject. Many students, however, shunned it. Although a good number of
those that attempted it recorded good marks. The question was a direct one from the
syllabus. It is expected that candidates should be able to do well in such questions in the
future.
Answer
a. The approaches to calculate credit risk capital charge, as recommended by The
Basel Committee, are:
(i) The Standardised Approach: This is the simple, fixed risk weighting, i.e. a
percentage that reflects the risk of a certain asset. Basel I and Ii recognise
that risk weightings for certain asset types, specifically loans to sovereign
countries, corporations, etc, need to be more flexible and therefore that risk
ratings be determined by the external credit ratings.
(ii) The Foundation IRB Approach: This requires a bank to estimate only the
borrower’s probability of default. The bank must use at least five years of
relevant loan performance data from various borrowers.
(iii) The Advanced IRB Approach: In this approach, banks estimate all
components of the model it uses. At least seven years of historical data are
used for verification purposes and the bank must estimate all credit risk model
components, including data collections, management and model techniques.
162
(b)
BUSINESS LINE ANNUAL GROSS INCOME BY BUSINESS LINE
B FACTOR %
CALCULATION
#’000 Yr1 Yr2 Yr3
#’000 Yr1 Yr2 Yr3
Corporate Finance 20,000 22,000 25000 18 3,600 3,960 4,500
Trading and Sales 10,000 15,000 18000 18 1,800 2,700 3,240
Retail Banking 25,000 30,000 35000 12 3,000 3,600 4,200
Commercial Banking
10,000 16,000 18000 15 1,500 2,400 2,700
Payment/Settlement 5,000 10,000 15000 18 900 1,800 2,700
Advisory Services 15,000 10,000 14000 15 2,250 1,500 2,100
Asset Management 8,000 12,000 15000 12 960 1,440 1,800
Brokerage Services 15,000 17,000 20000 12 1,800 2,040 2,400
15,810 19,440 23,640
KTSA= E years 1-3max [E(GI 1-8x 1-8)0]
3
KTSA= 15810+19440+23440 = 58890 =#19,630,000
3 3
Question 3
(a) What is Corporate Governance? (5 marks)
163
(b) Effective corporate governance encourages a bank to use its resources more
effectively. Enumerate and discuss the key elements of a sound corporate governance
in the banking institution
Comment
The question was well attempted and brought a good result. It is a question from the
syllabus and a common knowledge in the industry.
Answer
(a) Corporate Governance refers to a framework of rules, relationships, systems and
processes within and by which authority is exercised and controlled in an
organisation. Corporate governance influences how the objectives of an institution
are assessed and achieved; how risks are monitored and assessed; and how
resources and performance are optimised.
(b) The Key Elements of a Sound Corporate Governance
(I) A well-articulated corporate strategy against which the overall success and
the contributions of individuals can be achieved.
(II) Setting and enforcing clear assignment of responsibilities, decision-making,
authority and accountabilities that are appropriate for banking risk profile. A
strong financial risk management function that is independent of business
lines, adequate internal control system and functional process that are
designed with the necessary checks and balances.
(III) Corporate values, code of conduct and other standards of appropriate
behaviour and effective system used to enforce compliance.
(IV) Financial and managerial incentives to act in an appropriate manner offered
to the board, management and employees, and which include
compensations, promotions and effective sanctions.
(V) Transparency and appropriate information flowing internally and to the public.
164
Question 4
(a) Explain the concept of regulatory arbitrage (5 marks)
(b) Discuss the role of the board of directors in ERM environment/risk governance
(15 marks)
Comment
The attempts at this question were relatively low compared with others, although pass rate
was encouraging. The question tested candidates knowledge of risk management in banks’
activities and their readiness to face the challenges of risk management. It is a question
from the syllabus on Enterprise-Wide Risk Management which should normally attract the
interest of candidates.
Answer
(a) Regulatory Arbitrage is the practice whereby a financial institution takes advantage
of the regulatory difference between two or more markets. The financial scheme of
arrangement is driven by the desire to avoid or profit from regulatory differences
under different rational authorities, e.g. back-to-back loan.
(5 marks)
(b) The board of directors plays a crucial role in overseeing the enterprise-wide
approach to risk management.
i. The board reviews from time to time the organisation’s risk portfolio and
considers it against the risk appetite.
ii. The board, from time to time, enquires from management about the existing
risk management process and its effectiveness.
165
iii. It often carries out certain risk oversight duties by setting up board risk
management committees.
(15 marks)
Question 5
(a) Discuss the minimum capital adequacy ratio that a bank must attain under Basel iii
and its components.
(b) Briefly discuss the primary objectives of Basel Accords.
Comment
The question tested candidates’ knowledge of Basel Accord as a global regulatory body on
banking which also manages risk assets in the industry. A student of risk management
should definitely get acquainted with Basel Accord regulations. Those that attempted the
question did well. It is a straight forward and direct question that should not pose any
problem to candidates.
Answer
(a) Under Basel iii, the minimum capital adequacy ratio that a bank is to achieve when
the capital meets or exceeds the minimum capital standard is 8% of the risk
weighted assets to the regulatory capital. Capital adequacy promotes financial
stability and efficiency in the economic system. The components include the
following:
(i) Tier 1 Capital;
(ii) Tier 2 Capital; and
(iii) Tier 3 Capital.
(b) The primary objectives of Basel Accords are:
(i) To provide recommendations on how banks should be regulated with regard
to capital risk, market risk and operational risk;
(ii) To provide a forum for regulatory co-operation among member countries on
banking supervision;
(iii) To provide stability in the banks;
(iv) To instill guiding regulatory principles without attempting to micro-manage
member countries’ supervisory approach.
166
(v) To close the gaps in international supervisory coverage in pursuit of the basic
principle
(vi) To provide an approach to capital adequacy that is appropriately sensitive to
the degree of risks taken by banks; and
(vii) To enhance competitive equality among banks.
Question 6
Mr. Olowolayemo, a customer of Kowope Bank, is a major distributor of Nigerian Breweries
Plc. He was advised by the Nigerian Breweries station manager in Ilorin of a payment of
N250,000.00 into the business account and a copy of the payment slip was scanned to him.
The payment made up the amount he needed to take a consignment for distribution in the
south-west. He issued his cheque to Nigerian Breweries for the supply but, unfortunately,
the cheque was returned on the ground of insufficient balance. Nigerian Breweries Plc
viewed this as an attempt to play smart by Mr. Olowolayemo, and for this reason he was
delisted from the list of distributors of Nigerian Breweries Plc. After a thorough investigation,
it was found that the payment of N250,000.00 at Ilorin was hanging in the computer and did
not hit the account of Mr. Olowolayemo. He is now angry with the bank.
(a) Identify and discuss any potential risk in this case. (6 marks)
(b) Can the risks identified be mitigated against future occurrence? (6 marks)
(c) What remedial measures can the bank take to pacify Mr. Olowolayemo? (8 marks)
Comment
This is a case study question that tested candidates’ ability to apply the knowledge acquired
in risk management to proffer solutions on issues in banks. This question also contains
certain potential risks on its own. The good news is that all the candidates who attempted it
did not fall into the risk. Section A mentioned ANY and six (6) marks were allotted. It will
definitely be a risk for any candidate to identify and discuss just one risk, knowing the marks
167
so allotted. All the candidates discussed more than one risk. The question recorded high
success; only three candidates did not pass the question.
Answer
(a) The key risk issues in this case are:
(i) Systemic risk;
(ii) People risk; and
(iii) Internal process risk.
Systemic risk occurred when the computer did not perform well, and so hung the payment
slip that was posted.
People risk occurred when the officer assigned to post the payment did not verify the
efficiency of his job; otherwise, he would have known that the posting made by him was
hanging without value to the account. Secondly, when the cheque was returned, the officer
in charge should have kept Mr. Olowolayemo informed and this would have averted the
problem being faced by the customer.
Internal process risk occurred because there was no control process in place to ensure
efficiency. Another officer different from the posting officer should have detected the error.
(b) Mitigating Measures
Yes, the risks identified can be mitigated against future occurrence as follows:
(i) All systems and equipment must always be monitored and serviced regularly
to ensure efficiency.
(ii) The return of cheques must be handled by competent officers who would
inform customers before returning such cheques.
(iii) There should be control measures in place to confirm efficiency of all
transactions.
168
(c) The basic remedial measure that can be taken by the bank to pacify Mr.
Olowolayemo is to take responsibility for the returned cheque and resolve the issue
with The Nigerian Breweries Plc with a visit by a high-powered top management
delegation of the bank to be led by the MD. The team would meet with the
management of Nigeria Breweries Plc for the purpose of getting it to reinstate the
dealership of Mr. Olowolayemo.
There should be an apology to Mr. Olowolayemo himself for the embarrassment
caused him by the return of the cheque and thereafter confirm the credit of the
cheque to his account.