Bank distress in Nigeria has
reached a crisis point that it has become a key issue for discussion of all
within and outside the banking industry.
It is undoubtedly one of the
biggest and most serious issues facing our society today.
In 1993, it was discovered and
reported that out of 116 (one hundred and sixteen) banks in Nigeria 57 (fifty
seven) of them were distressed on average of 48%. This has affected the
depositions, the industry, that is the banking industry, government and staff
of the affected banks adversely.
The researcher understand that the
distress in the Nigerian banking industry and the increasing wave of financial
malpractice in banks if not arrested will lead to the collapse of the Nigerian
economy. In this regard, an attempt have been made to identify the
possible pills for the total eradication of at least control of these distress
in order to reduced the negative impact on the economy.
The method of investigation used by the
researcher is based on the analyses the experience of the Nigeria regulatory
authorities that is the Central Bank of Nigeria (CBN) and the Nigeria Deposit
Insurance Corporation (NDIC) and success so far achieved like questionnaire and
No study known to the researcher has been
conducted which directly focuses on control of banks distress in Nigeria.
Probably that is because it is a new phenomena in the Nigeria banking industry.
However, banks found and other financial malpractices have become so pervasive
that both the government supervisory authorities and the law enforcement
agencies have galvanized efforts to forestall the menace.
The feelings generally expressed have been
for decisive steps to be taken to salvage the banking industry. Bank
distress has to be reduced to the bearest minimum for a healthy economy to
thrive in Nigeria.
These steps are discussed in this research work.
TABLE OF CONTENTS
Background of the
Statement of the Problem
Objective of the
Significance of the
Review of Related
Causes of Bank Distress
Techniques for Identifying
Common Features Used in Identifying
Common Features Used in Identifying
Technically Insolvent or
Control of Bank Distressed in
Research Design and
Sample and Sampling
Instruments of Data
Methods of Data
Methods of Data
Data Presentation and
Test of Hypothesis
Recommendations and Conclusion
Findings and Summary
1.1 BACKGROUND OF THE STUDY
In the past financial report of commercial
and merchant bank showed that they usually carried out excess liquidity.
But by the end of 1993, the huge excess liquidity disappeared. The minimum
required liquidity ratio was 30%s Nwaigwe K. O. (1995).
In later years, the ratio deteriorated, it was claimed that the issuance of
stabilization securities contributed to the above.
Also another development which the researcher was informed about is the fact
that a good number of issued bank were grossly under capitalized. To worsen the
case, non-performing loan and advances eroded the inadequate capital base since
the banks were compelled to make adequate provision for the non-performing
The indemnity also experienced poor management which eventually opened the
floodgate for distress to surface in the system. Poor management of the
assets and liabilities of the bank was one of the major causes of the distress
in banking industry today. The jungle politics also helped to deteriorate the
economy because survey shows a consistent down-turn and the effect the banking
Also, given excessive risk taking by some banks management in a competitive
environment and the prevalence of frauds and forgeries in the system, the evil
seed for bank distress was sown awaiting germination and harvesting.
However, in 1998, the federal government of Nigeria (FGN) as if in anticipation
of the above ugly development had created a Deposit Insurance Scheme managed by
Nigeria Deposit Insurance Corporation was created by Sec. 39 and 40 of Dec. 22
of 1998 to restore confidence and security of the public in the banking system
to control and manage the distress banks thereby ensure a safe and sound
banking system in Nigeria.
It was against background that the researcher resolved to carryout an appraisal
of attempting the proffer workable solutions to the problems of the distress.
1.2 STATEMENT OF THE PROBLEM
A distress bank is one whose performance
has persistently not confirmed favourably with established parameter for
gauging the financial conditions of banks and also when the bank becomes
illiquid or insolvent Nwaigwe K. O. (1995).
Insolvent means when the bank can not meet its current obligation as at when
due. On the other hand, a bank is confided insolvent when the total value
of its realization assets is less than the banks total liabilities. And also it
has a negative net worth.
However, the rate of distress varies from one bank to another and that is based
on the degree of insolvency and liquidity. At this juncture, it is
important to note that the regulatory authority (NDIC) use the composite rating
“CAMEL” parameters to assess the performance and financial position of banks.
Base on this rating, the banks that are classified unsound has the following
Compute sweeping away of shareholders funds are due to operating loss of its
High ratio of non-performing loans, relative to total loans.
Weak internal control system.
Poor management information system
Liquidity-where they could no longer meet customers demand for cash.
Very low or negative net income as a result of poor asset and liability
Based on the above
characteristics it was possible for the Central Bank of Nigeria (CBN) to take
over the board and management of five distressed banks in 1993. These
banks were adjudged distressed because of the alarming deterioration in their
financial condition and the inability to recapitalize them as called for by the
These take over came as a
surprise and an Interim Management Board (IMB) was constituted to handle the
affairs of these distressed banks until they revived. The (IMB) was charged
with responsibility of seeing to early survival of the distressed banks through
ensuring compliance of the bank with the regulations to ensure safe and sound
banking practices. This also had the power and duty to recovering loans.
1.3 OBJECTIVES OF THE STUDY
The objectives of this research work is;
To examine the distress in the banking industry.
To determine the causes of the bank distress
To determine the remedies to the distress in the banking industry.
Banking industries attempts at evolving possible strategies for it eradication.
1.4 RESEARCH QUESTIONS
For the purpose of this study, the
following research question are posed and answered to them will provide a guide
to the research investigation.
Why is there distress in the banking industry
What are the causes of bank distress?
How does it affect the banking industry?
What are the remedies for bank distress?
1.5 RESEARCH HYPOTHESIS
The research work is based on the
Banks are not the engine for growth and development in modern economy
Banks are the engine for growth and development in modern economy
Distress in banks has no serious consequences for the banking industry.
Distress in banks has serious consequences for the banking industry.
Control of bank distress is not a compulsory task and should not be undertaken
by the bank management.
Control of bank distress is not a compulsory task and should be undertaken by
the bank management.
1.7 SIGNIFICANCE OF THE
Banking being the “engine” for growth and development in any economy has made
this study significance. This has necessitated the need and urgency of
controlling distressed in banks to avoid economic collapse.
This research becomes more significance because of the increasing determination
in the financial conditions of banks in Nigeria today due to the menace of
distress and the possible economic chaos if uncontrolled. The facts given
in this research work will be of immense help to economic planners, investors
in banking industry industrialists that need banks for growth and development.
1.8 DEFINITION OF TERMS
LIQUIDITY RATIO: This is the
ratio of liquid assets to current liabilities. In short it is the ability of a
bank to sue its liquid assets to meet its current obligations for licenced
banks in Nigeria, the required liquidity ration is 30%.
FRAUD AND FORGERIES:
According to Longman dictionary of contemporary English, fraud is defined as a
deceitful behaviour for the purpose of gain.
INSOLVENT: This means that the
value of a bank realizable asset is less it total liability.
TERMS AND CONDITIONS APPLY
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