CHAPTER ONE

INTRODUCTION

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 credit.

          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 industry adversely.

          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 characteristics:-

(1)             Compute sweeping away of shareholders funds are due to operating loss of its assets.

(2)             High ratio of non-performing loans, relative to total loans.

(3)             Weak internal control system.

(4)             Poor management information system

(5)             Liquidity-where they could no longer meet customers demand for cash.

(6)             Very low or negative net income as a result of poor asset and liability management.

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 monetary authorities.

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;

(1)             To examine the distress in the banking industry.

(2)             To determine the causes of the bank distress

(3)             To determine the remedies to the distress in the banking industry.

(4)             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.

(1)             Why is there distress in the banking industry

(2)             What are the causes of bank distress?

(3)             How does it affect the banking industry?

(4)             What are the remedies for bank distress?

1.5     RESEARCH HYPOTHESIS

The research work is based on the hypothesis that;

Ho:    Banks are not the engine for growth and development in modern economy

Hi:     Banks are the engine for growth and development in modern economy

Ho:    Distress in banks has no serious consequences for the banking industry.

H1:    Distress in banks has serious consequences for the banking industry.

Ho:    Control of bank distress is not a compulsory task and should not be undertaken by the bank management.

H1:    Control of bank distress is not a compulsory task and should be undertaken by the bank management.

1.6     SCOPE AND LIMITATION OF THE STUDY

The research work on bank distress in licneced commercial and merchant banks in Nigeria was conducted through Nigeria Deposit Insurance Corporation (NDIC) because officers of the affected banks did not answer question on their affairs and none agreed to reveal any information relating to their bank.  The major limitations of the research work is time constraints as the research combines the research work with the other lecturers required for the award of Higher National Diploma (HND), that little or not time is left especially with the short direction of the semester.

          Another limitation is the alarming degree of bank distress has reached since it started.  The regulatory authorities do not seem to have a picture of the practical ways of resolving the problems. Based on this foreign consultant have several time been limited to give their profession advice on this persistent menace to ensure that total eradication is ensured.

          This research work will also highlight the experiences of some foreign countries who have had similar experience. The measure so far taken by the regulatory authorities in Nigeria will be commended in terms of the degree of success achieved.

1.7     SIGNIFICANCE OF THE STUDY  

          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.

REFERENCES

Nwaigwe K. O. (1995)   Managing Distress in Nigeria Banking

Olufdie E. O. (1994)      Fraud in the Nigerian Economy and Its Implication for Banks and Financial Institution, Ibadan 

Okechukwu F. C. (2000) Consolidated Profit & Loss Account, Enugu, Immaculate Publishers.

Ebodaghe J. U. (1995) Boardroom/Management Practice and Distress Journal on Nigeria Banking System.

PAYNE P. B. Prevention of Frauds and Forgeries in Banks Seminar Paper p. 1.

NDIC Quarterly Report Vol. 3 No. 1, June 1993 p.1

The News, a Monthly Magazine Vol. 19 No. 94 March 2002

NDIC Quarterly Report- September, 1995, Vol. 5 p. 3

The News, A Monthly Magazine, Vol. 18 No. 94 March 2002