ABSTRACT
The problem of distress in the Nigerian banking
industry has been of huge concern to all stakeholders of the economy and the
world business community at large. This paper focused on the causes, effects
and strategies for solution. It sought to address the following questions: What
is distress? What factors bring about distress? What should be done to solve
the problem of distress? Data for the research was gathered through questionnaire
administered to bank staff respondents spread over commercial banks in Nigeria.
In our analysis, the result indicates that both political uncertainty and
institutional factors constitute 64.6% of the factors that causes bank
distress. This goes to suggest that distress in banking industry would not have
occurred at the level it did but for these two factors. Aside fraud and
embezzlement as noted in the research, the lingering effect of crisis associated
with religion or tribal crisis has also affected Nigerian banks. Based on the
findings recommendations were made.
CHAPTER
ONE
INTRODUCTION
1.1 BACKGROUND OF
THE STUDY
In
the Nigerian Banking system considering the last decade the Commercial Banking
to be precise had under gone a rapid expansion both in terms of the number of
Institution and the scope of Financial services rendered. As bank
licensing was liberalized so was the seed of instability sown in these banking
system at the same time.
As
these expansion trend continuous, a sign of lacked vision among the investors
and the directors motive of quick returns to satisfy the liquidity
operation. The word distress has been in existence but increased
promptly as these institutions increased due to acute shortage of resources and
the massive withdrawal of deposit by government agencies and other public
sectors from these bank.
Bank
distresses are usually followed by unfavourable consequences on stake-holders
outside the failed banks themselves. Sometimes the consequences are felt by the
Non- banking system as a whole. A failure can result in much harm to
employment, earnings, financial development and other associated public
interest, some related cases in Nigeria. Distress in the Banking Industry was
first experienced in Nigeria between 1930 and 1950’s when some banks failed and
were liquidated. As a matter of fact about 21 banks failed and were recorded in
Nigeria between 1930 and 1958 when the central bank of Nigeria (CBN) was established.
Examples of such banks are Alpha Merchant Bank, Financial Merchant Bank and
Republic Bank (CBN statistical Bulletin, 1988). Smith and Walter (1997) noted
that the failure of a bank has great adverse effect on the economy and so is
considered very important.
The
number of failing banks has been on the increase as reported around the world.
Many important industrial nations have experienced upsetting bank failures such
as the following: Hersalt Bank in Germany and Credit Lyonnais in France
reported in Smith and Walter (1997), Barings Bank in the United Kingdom
reported in Gray (2001) and, Heffernan, (1996). The failure of banks and the
related cost have also been emphasized that banking crisis generates loses to
stakeholders by disturbing the settlement system, and ever has a systemic
effect on the entire economy.
Caprio
and Klingebiel (1999) also present information of 114 episodes of banking
crisis in 46 countries, with a focus on Nigerian Bank. The cost of the failure
of banks differs from country to country. Different costs are included in total
cost differently by each country. Examples of such cost are those related to
corporate restructuring/re-capitalization of the banking system. As regards the
commercial banks, according to the official liquidator (CBN statistical
bulletin 2000), the Nigerian government established a special method to ease
the distress of depositors and affected employees of commercial banks. It cost
the government 20 billion naira to respond to the interest of depositors and
employees (CBN Bulletin, September 2001).
The
concern about financial stability has been news worthy for a long-time, Hooks
(1994). It is obvious that financial stability is an important topic to both
developed and emerging market economies. The cost burden associated with bank
failures is so disturbing that the need for continued study of the causes of
banking in stability, on both the practical and theoretical levels cannot be
over-emphasized. There are many competing theories explaining the causes of bank
failure. One theory attributes the failure to government intervention while
another says it is due to some endogenous instability. A study by Kindleberger
(1989, 1994) showed bank failure result from rapid expansion of bank credit.
Some other causes of bank crisis include legislation, deposit “insurance, lack
of skills, mismanagement, non-performing risk asset and lack of regulation
Palubinskar and Stough (1999).
Hemple
and Simonson (1999) also believe that mismanagement, regulatory and legislative
interference causes a bank failure. Chu (1996) identified free banking as a
cause to bank failure. In this study we test predictions of some causes of bank
failure using information uniquely available in respect of Nigerian commercial
banks. The mission of some commercial banks is to provide full commercial
banking services and play a savings mobilization role. There corporate plan is
to attract more institutions to do business with, to ensure maximum customer
satisfaction and to become more competitive. The business objectives of
commercial bank are export financing, business advisory services, support
services.
The
past two decades have witnessed an extraordinary increase in the number of
financial distress episodes, both in developed and developing nations. Apparently,
the term ―financial distress‖ and failure are used in the negative connotation
to imply the financial situation of a company confronted with a temporary lack
of liquidity and with the difficulties that ensure a company to fulfil its
financial obligations on a maturity date (Gordon, 1971, p. 349 and Davydenko,
2012). In other words, Beaver (1966) defined financial distress as the
inability of a company to pay its financial obligations as they become due. In
the same vein, Beaver et al.
(2006)
identified a company with large overdraft funds, in which the overdraft is not
to pay dividends or corporate debt, as the company experiences financial
distress. So, the query to analyse the impact of the financial distress on
banking performance has become increasingly important for economies, academics
and other practitioners. Financial regulators have aimed at developing schemes,
policies and tools to prevent failure or distress from happening; since
investors and depositors aim to protect themselves from losing their money in
the event of bank failure. Consequently, constant evaluation of financial
performance is one of the most vital domestic activities in every enterprise as
well in the banking sector (Jasevičienė et al., 2013, p. 190).
In
general, the banking sector is the backbone of economic development for most
countries. Being the primary sector of providing liquidity to individuals,
entrepreneurs and other houses, the banking sector is the most affected sector
during a financial crisis in a nation. This is probably because banks lend to
other banks more freely, lack of trust among them and high rate of leverage or
debt ratios in their Balance Sheet, in the light of the on-going global
financial crisis of 2007-2008, which is considered by scholars to be the worst
since the Great Depression of the 1930s (Reinhart and Rogoff, 2013).
The
effects of the recent crisis cannot be overemphasized, because it led to
prolonged unemployment, housing foreclosures and significant decline in
business investments and customer spending (Reinhart and Rogoff, 2009; Amalia
and Ionut, 2009). Cecchetti (2009) confirmed that the banking sector was the
most affected when the financial crisis erupted. In addition, the on-going
global financial crisis has posed great challenges to financial systems and
governments around the globe, including the United Kingdom. Between late 2007
and early 2010, the UK government’s rescue package pumped in over a trillion
pounds to protect the British financial sector. For example, in 2009 the
government purchased shares in banks and direct loans to banks amounted to £117
billion, representing a liability of £5,530 for every household living in the
country (Kirkup and Conway, 2009).
The
development threatened the Financial structure, expose and undermine the
economic system which impede development of the economy. Therefore, distress
places a great burden on regulatory authority, depress the economy, undermine
the payment system and discourage savings.
1.2 STATEMENT
OF THE PROBLEM
Some
Commercial Banks have been diverted to assist in loans and advances to various
sectors of the economy. And the Commercial Banking is known as
refall banking which accept deposit and make payment to his
customers. But the Financial condition of some of these Commercial
Banking due to the political instability/electoral campaign that is
on. Political analyst describes this on coming election to be one of
the brutal crisis that is to come. Therefore, there is panic
withdrawal of fund by these bank customers. This institution is now
bogged down by distress, insolvency, poor liquidity due to decline in deposit,
and loss of confidence. The crisis has to be averted and the urgency
prompted the study. This research work is designed to describe the
financial distress in some Commercial Banking system in Nigeria.
1.3 OBJECTIVE
OF THE STUDY
The objectives
of the study are:
i. to describe
the nature and type of Financial distress facing some Commercial Banks in
Nigeria;
ii. to identify
some of the Commercial Banks involved in distress in Nigeria and if the distress
is caused by poor management; and,
iii. to identify
the causes of financial distress in Nigeria and determine the level of distress
in these Commercial Banks.
1.4 THE RESEARCH QUESTIONS
i. What is the
nature and type of Financial distress facing some Commercial Banks in Nigeria?
ii. What are the
Commercial Banks involved in distress in Nigeria and if the distress is caused
by poor management?
iii. What are
the causes of financial distress in Nigeria and determine the level of distress
in these Commercial Banks.
1.5 THE SIGNIFICANCE OF
THE STUDY
The
importance of a health banking system cannot be over emphasized for so many
reasons, ranging from the vital economic importance of the longer deposit at
state to public confidence jobs and career of people and the key role these
banks plays in economic development.
Also the benefit of finding solution of how to get a solution of the crisis
will be found useful to invest or customers of these banks, the regulatory and
supervisory authority and even the Government. The solution will also be useful
to the managers in general of these banks.
1.6 SCOPE,
LIMITATIONS AND DELIMITATIONS
While the banking impact distress in Nigeria will
theoretically serve as the population of study. The project is designed to
appraise the impact of bank distress on the profit growth of First Bank of
Nigeria. It will also analyze the trend of this bank profit within a period of
3 years (2011 – 2013).
1.7 DEFINITION
OF TERMS
DISTRESS: It can be defined as an extreme suffering caused by
lack of money or a state of danger, calamity and misfortunate acute poverty.
EVALUATION: This can also be defined as form of idea or judgment
of something and also to work out something in numerical value.
IMPACT: This can be defined as a strong effect or impression
to bank. It is also a situation whereby something will be to be press closely
or firmly together.
COMMERCIAL
BANK: Commercial bank or business
bank is a type of bank that provides services, such as accepting deposits,
giving business loans and basic investment products. Commercial bank can also
refer to a bank or a division of a bank that mostly deals with deposit and
loans from corporations or large businesses, as opposed to individual members
of the public (retail banking).