FINANCIAL STRATEGY AS SUPPORT DETERMINANT FOR THE AVOIDANCE AND RESOLUTION OF DISTRESS IN THE NIGERIAN BANKING INDUSTRY
ABSTRACT
The banking sector is the bedrock of the Nigerian economy, and this industry is known to have contributed in no small measure to the development of the economy. This industry is the enabling hub of national and global payment systems, which facilitates trade transactions within and amongst numerous national, regional and international economic units and by so doing; it enhances commerce, industry and exchange. In performing these various functions in the enabling environment provided by the government through various fiscal, and monetary policies and reforms, this industry has been experiencing a phenomenal distress whereby the banking institutions could not meet their financial obligations to their customers and stakeholders, which led to the liquidation of many banking institutions, lost of deposits by depositors, lost of investments by many investors and the crisis of confidence by the general public. Various researchers and bodies including the Central Bank of Nigeria (CBN) and Nigeria Deposit Insurance Corporation (NDIC) have done some works to solve this problem. The Central Bank of Nigeria (CBN) has introduced various reforms, yet this problem persists. The objective of this work is to evaluate financial strategy as determinant for sustainable performance growth and an antidote to distress in the Nigerian banking industry. The research method is empirical, and descriptive with the use of primary and secondary data from 1998-2007. Primary data were obtained from a sampled population through the use of a corporate questionnaire, and for the secondary, macro data were obtained from Central Bank and Nigerian Stock Exchange. Multivariate Analysis of variance method (MANOVA) was applied in analyzing the primary data. The results revealed the homogeneity, co linearity, and strong interrelationship between the dependent variables and the independent variables to solve distress in the three types of banks analyzed. With the results obtained, all the five null hypotheses were nullified. Multiple regression analysis was used to analyze the secondary data in conjunction with change in growth model. The results from the two statistical methods revealed a co-movement and correlation between Gross Domestic Product and Bank performance indices in the banking industry. A change in bank performance will have the same directional change in Gross Domestic Product as other sectors of the economy are also affected. The Bank performance indices are strong predictors of Gross Domestic Product. The work recommended a transformational financial strategy model in the work for implementation in the banking industry so that distress can be avoided and totally resolved. The model contains the following indices: sound corporate governance, good investment policy, effective capital budgeting, corporate planning, effective tax planning, effective budgetary control and economic profit of investment. An implementation of the model will give birth to sustainable performance growth which contains the following growth variables: adequate capital, quality earning assets, stable profitability, sustainable liquidity, enhanced dividend paid, and equitable tax liability. Other recommendations are: effective risk assets management, sound training of credit analyst, quality supervision from the industry regulators, and independence of EFCC for effectiveness. However, all stakeholders must be committed to the model and other recommendations.
TABLE OF CONTENTS
Chapter one: Introduction
1.1 Background to the Study
1.2 Statement of the problem
1.3 Objectives of the study
1.4 Research Questions
1.5 Statement of Hypotheses
1.6 Scope of Study
1.7 Significance of Study
1.8 Preview of Research Methodology
1.9 Operational Definition of Terms
Chapter Two
Literature Review
2.1 Introduction
2.2 The Evolution of Banking in Nigeria
2.2.1The Colonial Era (1892-1957)
2.2.2The Independence Era (1957-1970)
2.2.3The Indigenous Era (1970-1985)
2.2.4 The Privatization and Commercialization Era (1986-1992)
2.2.5Bank Rehabilitation and Restructuring Era (1992-date)
2.2.6The Nature of Bank Reforms in Nigeria
2.3 Review of Literature relating to Financial Strategy and Sustainable
Performance Growth
2.3.1 Competing for the future
2.3.2 Central Bank of Nigeria (CBN) and Nigeria Deposit Insurance
Corporation (NDIC) definition of distress and analytical framework
2.3.3 Strategic Planning and Sustainable Performance Growth
2.3.4 Financial Strategy in the Banking Industry
2.4 Review of Literature relating to Strategic Planning and Bank
Performance for Sustainability and Growth in Nigerian Banking Industry
2.4.1 Strategic planning: Financial performance relations in Banks: A causal
examination
2.4.2 Corporate Governance and Sustainable Performance Growth
Cases of Poor Corporate Governance in Banks
1. The Rumbles in Spring Bank
2. Development in Wema Bank Plc
3. CBN Replaces Five Bank MDs, Directors
2.4.3 Budgetary Control and Performance Evaluation
2.4.4 Capital Budgeting and Sustainable Performance Growth
2.4.5 Tax Planning and liquidity
2.4.6 Leadership and Sustainable Performance Growth
2.5 Review of Literature relating to Investment Policies and
Management of Assets and Liabilities in Nigeria Banking Industry
2.5.1 A case study of distress banks in Nigeria by Central Bank of Nigeria
2.5.2 Banking crisis: causes, early warning signals and resolutions
2.5.3 The causes of financial distress in local banks in Africa and
Prudential policy
2.5.4 Incentives and Resolution of Bank Distress
2.6 Review of Literature relating to Bank Performance and Gross Domestic
Product to Determine their Co-movement
2. 6.1 Economic Profit and Performance Measurement in the Banking Industry
2.6.2 Banking practice and the Nigerian economy
2.6.3 Micro and Macro Determinant of bank fragility in North Cyprus
Economy
2.7 Justification of study
2.8 Theoretical Framework
2.9.Framework Proposal:Causal Link between Model and Research Work
Chapter Three
Research Methodology
3.1 Introduction
3.2 Study Area
3.3 Research Design
3.4 Population, Sample Representatives and Sampling Techniques
3.5 Performance Indices
3.6 Restatement of Hypotheses
3.7 Data Collection Techniques
3.8 Reliability and Validity Test
3.9 Data Administration
3.10 Method of Data Analysis
3.11 Expected Results
3.13 Chapterization
Chapter Four
Analysis and Interpretation of Data
4.1 Introduction
4.2.Response to Questionnaire
4.3 Frequency Analysis of response to Questionnaire items
4.3.1 Section1 Relationship between Financial strategy and Sustainable
Performance
4.3.2 Section2 Relationship between Strategic Planning and Performance
For Sustainability of Growth of Business
4.3.3 Section 3Assessment of Investment Policy for Better Management of
Assets and Liabilities in banks
4.3.4 Section 4Evaluation of Relationship between Bank Performance and Gross
Domestic Product (GDP)
4:4 Descriptive Analysis of response to Questionnaire items
4.4.1Evaluation of the relationship between Financial Strategy and Sustainable
Performance Growth
4.4.2 Evaluation of the relationship between Strategic Planning and Performance
For Sustainability of Business Growth
4.4.3 Assessment of the relationship Investment Policy and Management of Assets
and Liabilities for Sustainable Performance Growth in the Banking Industry
4.4.4 Evaluating the relationship between Bank Performance and GDP
4.5.0 Statistical Testing Model
4.5.1 Testing of Hypothesis 1
4.5.2 Testing of Hypothesis 2
4.5.3 Testing of Hypothesis 3
4.5.4 Testing of Hypothesis 4
4.5.5 Testing of Hypothesis 5
4.6 Analysis of Secondary Data
4.6.1 Multiple Regression
4.6.2 Analysis and Comparison of Growth Change in GDP and Bank
Performance Indices
Chapter Five
Summary of Findings, Conclusion and Recommendations
5.1 Research Findings: Empirical Findings
5.2 Conclusion
5.3 Recommendations
5.4 Suggestions for Further Studies
5.5 Contribution to knowledge
References
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
In the ordinary parlance, the word distress connotes unhealthy situation or state of inability or weakness which prevents the achievement of a set goals and aspirations. A financial institution will be described as unhealthy; when it exhibits severe financial, operational and managerial weaknesses where sustainability and stability are missing in business. A business is any activity that seeks to make profit by providing goods and services to the society by using inputs from the environment and transform them into outputs that add meaning to human existence. A business can be one’s regular employment, profession, occupation and can be an organization established through the pooling together of resources by various investors with the aim of providing products or services to the economy, contribute to the development of the economy and earn returns on their investments. Nigerian businesses can be classified into three major segments viz: Private enterprises, Private limited Liability Companies and publicly quoted companies. The banking sector belongs to the private limited liability companies and the publicly quoted companies. While some banking institutions are privately owned by investors, some are publicly quoted on the Nigerian Stock Exchange. The banking sector is part of Nigerian financial system, and financial system refers to the totality of the regulatory and participating institutions, including financial markets and instruments, involved in the process of financial intermediation. The major objectives of investing in the banking sector are to provide financial services to the economy and earn compensatory returns on capital employed.
The Bills of Exchange Acts Cap 21, Laws of the Federation of Nigeria 1958 states that a ‘banker’ includes a body of persons whether incorporated or not who carry on the business of banking. By S.2 Coins Act Cap 34, laws of the Federation of Nigeria, 1958, bank and banker mean any persons, partnerships or company carrying on the business of bankers and also any saving bank established under the Saving Bank Ordinance, and also any banking company incorporated under any ordinance heretofore or hereafter passed relating to such incorporation. S.21 (1) Nigerian Evidence Act, Cap.62, laws of Federation of Nigeria, 1958, also provides in like manner. (Olulana, 1999:16). The Banks and other Financial Institutions Act No 25 of 1991 defines bank as one licensed under the Act and banking business as the business of receiving deposits on current, saving or other similar account, and paying or collecting cheques-S.62 BOFIA. The industry is the enabling hub of national and global payments system by facilitating trade transactions within and amongst numerous national, regional and int
