THE STRATEGIES FOR AVOIDANCE OF DISTRESS IN NIGERIA COMMERCIAL BANK (A CASE STUDY OF FIRST BANK PLC ENUGU)

ABSTRACT

This project gives a description of the practical knowledge and working experience acquired by me, during my staying in school, and some research made so far.

In that case, I started this project with a brief description of the introduction/background, statement of problems, and objectives of the study and its significance etc.

Furthermore, my special achievement is that I gained some practical experience that can help and forward work in any bank.  The project covered for the 2 years duration of my course in Ordinary National Diploma (OND) in Business Administration and Management dealt more on the effect of distress in commercial banks which comprises of 1,2, and 3.     

TABLE OF CONTENTS

CHAPTER ONE

1.1              INTRODUCTION

1.2              Background of the subject matter

1.2              Problem associated with the subject matter

1.3              Problems that the study will be concerned with

1.4              The importance of study

1.5              Definition of important terms

1.6              Reference

CHAPTER TWO

2.0       Literature review

2.1       The origin of the subject area

2.2              Schools of thought within the subject area

2.3              The school of thought relevant to the subject matter

2.4              Different methods of studying the problem

2.5              Summary

References

CHAPTER THREE

3.0       Conclusion

3.1       Data presentation

3.2              Analysis of the data

3.3              Recommendation

3.4              Conclusions

References

CHAPTER ONE

1.1              INTRODUCTION

Given the events of the past and the anxieties being experienced by most people in the society as to likely effects of renewed regulation within the banking industry, especially in relation to interest rate, I consider the topic “A strategy for avoidance of distress in Nigerian commercial banks” to be really current.

The distress which reared its head in the banks on the early minutes, has no doubt had negative impact on the sector for one, banks are no longer regarded as the most sacred institution.  Trust and confidence – the basic attributes that sustains management and customers relationship have disappeared the implication that less Nigerian today’s belief that banks still remain that safe vault for money and valuables.

These phenomenal changes brought by the distress – paved way for the collapse of many banks.  The failed banks at present cannot meet their obligation owed to both new sector, indicate that N47.9 million, representing about 25% of the entire banking deposits was lost through the financially distressed banks.

Yet banks play vital role in the development of the economy.  It is the pivot of sectional advancement through the provision of loan and credit facilities for investment.  Essentially the intermediation between savers and investors, and mobilization and centralization of the scattered ideal funds of workers etc. for investors to borrow for their operation, constitute the major plan for sustainable banking development and culture.

It is not surprising that the current distress has seriously eroded the confidence of an average depositor on banks.  Against this background bankers are eager to utilize every forum to discuss the operations in the sector, the way of improving their services and restoring the sector to its traditional position and role.

1.2       BACKGROUND OF THE STUDY

Financial distress in the Nigerian financial system is problem that has of recent assumed in intractable dimension.  The situation is such that the regulatory authorities appear to be fighting a losing battle in their bid to sanitize the system.  The study becomes more imperative when we realize the important role such institution play in an economy, and on economy can survive nor progress without a sound and dependable banking system.

In any economy, commercial banks serve as vehicle through which credits are transferred from the surplus to the deficit sectors.  They finance both private and public sector investments.  Essentially, banks are financial intermediaries, collecting savings of people who have more money than they can immediately require and lending such money to people who require more money than they can.

They can immediately generate thus matching the savings requirement of depositors with the investments requirements of borrowers.  Even though this is the primary thrust of banks.  The passage of time and development of commerce have given way to other services and the function of banks to day could be grouped as follows:

i)                    Deposit collection:           Current account fixed, short-term deposit, saving account, night safe etc.

ii)                  Money transmission services:     Cheques card, cash card, gift cheque, credit card, credit transfer, direct debit, standing order, bank draft, certified cheques, mail transfer, telegraphy transfer etc.

iii)                Financial general services:          Tax administration unit trust, stock exchange services, investment advice, status enquirer, safe-custody services etc.

iv)                Foreign services:  Travelers cheques, foreign currency, foreign draft, mail transfer, telegraphic transfer, letter of credit, bills collection and settlement etc.

The first and paramount concern of any bank, especially commercial banks, is the need to mobilize deposit, which constitute the vast pool of laonable funds from which the lending business of the bank can be conducted. 

            This deposit generation ability will depend among other things, on what has now been popularly adopted as the three C’s of banking.

Confidence Convenience, and Cost

Confidence, refers to the people’s faith in the i.e. the extent to which people generally believe that their money is safe and that the possibility of loss remote.  This is in fact synonymous with the overall rating of the bank in the market.

Convenience refers to the case with which business could be transacted, the rigours of formalities, waiting time, the environment within the banking hall etc. while cost refers to what customers pays to enjoy banks services.

            The business of banking is very intricate, in that money is the main commodity of trade and the obligation to repay depositions funds must be fulfilled.  It is essential to bear this in mind at all time and it is the inability of banks to see this as a guiding principle that may actually lead to failure.

            In view of the above, effort has to be made to save the Nigerian commercial banks from its current state of distress and total collapse.  Thus, the need for a study of this type.

1.2       PROBLEMS ASSOCIATED WITH THE SUBJECT MATTER

The rapid growth in the number of commercial banks in Nigeria generated much public interest and debate such that people advocate for either out-right ban on new entrance or the raising of the entry conditions.

It is important to mention that the needs of deficit economic units should prompt financial system.  And one way in which a financial system may be considered inadequate is where financial innovation has failed to be sufficiently responsive to the needs of deficit economic units (by making less efficient financial facilities available to surplus economic units, either as a result of the personal qualities of the financiers (preoccupied with short rent project) or as a result of the conservative behaviour of financial intermediaries.

            In such case, some form of government intervention might be necessary in order to restructure the financial system and make it tend towards the optimum.  It was this line of thinking that informed government decision to liberalize the banking sub sector.  The question are what are the causes of these failure or collapse.  What are the remedies if any?  These questions are to be answered in the next chapter.

1.3       PROBLEMS THAT THE STUDY WILL BE CONCERNED WITH

In the early 1980’s was what boom in the banking industry.  There was a great increased in the rate by which commercial banks were established in different parts of the country.

The rapid growth in the number of commercial banks, however, generated much public interest and debate such that people advocated for either out-right ban on new entrance or the raising of the entry conditions.

The commercial banks grant ban to investors both those that are in the private and public sectors, overdraft facilities to the customers, foreign exchange, advance and all the other forms of credit.  Commercial banks was also seen as a safety place where one can deposit his or her money with any fear of theft; also other valuable properties such as jewelries, well and other important documents were deposited in commercial banks for safety purposes.

            Not with standing the rapid increase, commercial banks started experiencing some problems in the early 1990’s the primary objective of the study are:-

a)                  To determine the causes of distress in Nigeria commercial banks;

b)                  The strategies for avoiding further distress in the industry;

c)                  Why first bank Ltd remained profitable not withstanding the distress in the industry.

1.4       THE IMPORTANCE OF STUDY

It is an obvious fact that finance is the main prior of development.  Thus without finance, business cannot flourish.  It is a major input in any procedure process, without it a businessman cannot survive in the country.

Many financial institutions have been frustrated due to lack of finance.

The researcher work will be important to the following categories of persons.

1.                  To the government:         This will assist in the making of policies and guidelines as it relates to commercial banks in Nigeria and to help in continued survival of commercial bank.

2.                  To the organization under study and financial institutions: This will assist in helping them evaluate their survival strategies and to make improvements where necessary.

3.                  To the researcher:           It impact on her the knowledge of banking and will be of a greater use of her in future if she is opportune to be in the industry.

4.                        This will provide them with a foundation of banks survival during periods of economic depression.  This is to avoid failure if adverse external economic environment occurs.

1.5       DEFINITION OF IMPORTANT TERMS

Distress:          In danger and needing helps suffering unhappiness rates are determined by forces of demand and supply not by fixing regulation of government.

Demand Deposit:       Current amount deposited prior notice to the bank.

COT (Commission On Turnover) (Bank Charges on Account).

VAT (Value Added Tax): Government Tax for all services rendered to any body by corporate body like banks, hotels departmental stores etc.

Liquidity:       Level of cash and short term discountable financial instruments with a bank, a company or even individuals etc.

Withholding:  A tax on  interest earned on saving deposits N50,000.00 and above.

This is decided by the banks and remitted to government.

Deposit Receipts:       Certificate of deposits issued by a bank acknowledging a fixed deposit by a customer.

Legitimate income/Business:-           Income legally earned or legal business.

Judgment debt:         A court ruling ordering a convict to pay a particular amount to plaintiff.

Overdraft, Revolving Credit/Terms Loan:             Are bank loan with various characteristics.

Prime Lending Rate (PLR): The maximum official lending rate allowed on bank loan by CBN.

Aggregate lending:    Total lending             

Collateral:        Security against lending

Non-Performing/Substandard Credit:        Loan, which repayment of either principal or interest.

Perfected:       Legally passed the title of document i.e certificate of occupancy to a lender i.e. a bank as security for loan.

Bad and Doubtful Loan:      Loans which the borrower had abandoned repayment of interest and principal.

Development Loans Stock:   Federal government long term borrowing instrument with maturity of about five (5) years.

Economic Stabilization Act: An act or decree out lining measures to address the economy or ensures stability.

“Lease Income”         Income from leasing or renting equipment.

Standing Order:        To collect or make regular payment by a bank of behalf of its customers.