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To facilitate off-site supervision, a set of prudential guidelines was introduced by the CBN for licensed banks to ensure a stable, safe and sound banking system.  It was meant to serve as a guide to banks to:

(i) ensure a more prudent approach in their credit portfolio classification, provisioning for non-performing facilities, credit portfolio disclosure and interest accrual on non-performing assets;
(ii) ensure uniformity of their approach
(iii) ensure the reliability of published accounting information and operating results.

The ultimate justification for prudential guidelines is the failure of the market, not only to reflect a depositor’s risk exposure but more importantly, to control such exposures.  The objectives of prudential regulations are therefore to protect the interest of depositors and the financial system as a whole. 

The change in Nigeria’s banking environment, occasioned by the economy’s new philosophy of deregulation and the introduction of a deposit insurance scheme makes the need for such guidelines more imperative.  As deregulation makes the industry more competitive, there is therefore the likelihood for depositories to get into more risky and unfamiliar undertakings.  Also, the operation of deposit insurance schemes has the potential to reduce market discipline from depositories, if experiences from other countries are anything to go by. 

The issue of overstatement of unearned profits by banks which enables them to declare dividends thereby eroding their capital base of a serious concern to the supervisory and regulatory authorities.  The acceptance of the recommendations of the Basle Committee on the need for common and effective accounting standard for global banking makes the prudential guidelines imperative.