Abstract

This research works the distress in the banking system: its effects on the Nigeria economy. In Nigeria, the prominent role played by the banking sector has called for proper scrutiny of their activities as distressed banks have led to loss of public confidence. The main objective of this study is to determine the cause of bank distress in Nigeria and also to determine the political and institutional factor that contributes to bank distress in the banking system. The data collection method used is secondary data and it was collected from the Central Bank of Nigeria (CBN) Statistical bulletin. It was discovered that the institutional factors that cause bank distress are poor credit management and administration, poor loan recovery, frauds, insider abuses, shareholders interference. The study concludes that if banks have high rate of non-performing loans, it would cause distress in the banking sector, and also the liquidity position of banks have a positive implication on the Nigerian economy. The study recommends that there should be enforcement of accountability through failed banks tribunals and the use of early warning signals.

CHAPTER ONE

INTRODUCTION

1.1   Background to the Study

The last two decades have been seen as a proliferation of systematic banking problems around the world. Banking crisis has threatened macro-economic stability through their affect on capital outflows and external balance. The banking sector serves as the nerve centre of any modern economy being the repository of people’s wealth and supplier of credit which lubricates the engine of the growth of the entire economic system. For a developing country like Nigeria, the banking industry is the very vital sub-sector of the financial industry and plays a vital role in the management of the nation’s financial resources. It therefore goes without saying that the existence of an efficient banking industry is essential for the economy. it will create the necessary financial environment as well as vibrant international trade. This is why there is a great concern over the distress in the Nigerian banking sector.   

Distress in the Nigerian banking sector, as well as outright bank failure in Nigeria, dates back to the 90s. The first bank distress in Nigeria occurred in 1930 and since then it has been a regular feature of the banking industry. However, the period between 1892 when the African Banking Corporation was established and 1952 witnessed the emergence of many banks in the Nigerian financial system. Most of these banks collapsed with the same speed with which they sprang up, due to poor asset management, lack of adequate capital, inexperienced personnel, insufficient business patronage and speculative operations. Distress which was first experienced in 1930 in Nigeria happened again in the 1950s and 1990s. Nineteen (19) out of twenty three (23) indigenous banks that were established between 1930 and 1968 were distressed and went into liquidation.

Due to the state of bank, the first banking ordinance was enacted in 1962, to regulate banking in Nigeria. The main provision included requirements for the valid banking license before commencement of business, minimum capital reserve requirement and credit exposure limits. The ordinance was amended in 1953 and the Central Bank of Nigeria came into existence that same year 1958 but did not commence operations until 1st July 1959. Furthermore, a division responsible for banks examination is the Federal Ministry of Finance (NDIC) was established in 1959 and subsequently transferred to the CBN in January, 1966. The legal framework for banks supervision was further strengthened by the promulgation of the Banking Decree No 25 of 1969 and the Banks and Other Financial Institutions (BOFID). The obvious inadequacies of the Nigeria banks prompted Charles Soludo, Professor of Economic and past CBN Governor to launch the banking sector consolidation reform on July 6th, 2004 which increased the minimum capital base of banks and reduced the number of banks from eighty nine (89) in 2004 to twenty five (25) in 2005, but four (4) out of those 25 banks failed and the number of banks were further reduced to twenty one (21) banks in 2011.

1.2   Statement of Problem

This research will attempt to answer the following questions in order to achieve the desired aim; what has been the causes of banks’ distress in Nigeria? If the political and institutional factors responsible for distress in the Nigerian banking system. What is the impact of distress on the economy and the investing public? What are the factors that contribute to banks distress in Nigeria?

1.3   Research Questions         

The following research questions are hereby asked;

i.            What are the political and institutional factors that contribute to bank distress?

ii.          What is the impact of bank distress on the economy?

iii.        Have Central Bank of Nigeria and Nigeria Deposit Insurance Corporation help in reducing bank distress?

1.4   Objective of the Study

This research work set out to achieve the following objectives;

i.            To determine the political and institutional factors that contributes to bank distress in Nigeria.

ii.          To determine the impact of bank distress on the economic growth in Nigeria.

iii.        To determine if Central Bank of Nigeria and Nigeria Deposit Insurance Corporation have helped in reducing bank distress.   

1.5      Statement of Hypotheses

In order to ensure a thorough and more valid result, the following hypotheses are formulated.

Hypothesis One

HO:   There is no significant relationship between political and institutional failure and bank distress.

HI:    There is significant relationship between political and institutional failure and bank distress.

Hypothesis Two

HO:   There is no significant relationship between the effect of bank distress and economic growth in Nigeria.

HI:    There is significant relationship between the effect of bank distress and economic growth in Nigeria. 

Hypothesis Three

HO:   There is no significant relationship between regulatory agents and bank distress.

Hi:    There is significant relationship between regulatory agents and bank distress.

1.6   Significance of the Study

The significance of this study cannot be under-estimated because it is a known fact that sound financial system is a clear indication of the country’s economic strength. In the wake of the bank failures, the economy suffered severe distress, many depositors lost their life savings. However, the outcome of this study would be relevant to numerous people such as; the banks supervisory, regulatory, financial analysts, economic analysts, financial market speculators, student doing research, as well as other researchers in this area.

1.7   Scope of the Study

In carrying out this research, the financial distress in Nigeria banking sector was studied. The study is carried out to examine the level of bank distress in Nigeria. Benin Metropolis was centered in the course of carrying out this research with a time frame of 4 years (2000 – 2014).

1.8   Limitations of the Study   

This project work suffered several limitations, which vary in different stages and forms in the course of the research work. Briefly put the time allocated for the work of this magnitude was rather too short, distance was another constraint which militated against this work, and sources of information failure by some officers to keep their appointment are factors which also affected the research work.

1.9   Definition of Terms

Apex Bank: This refers to the CBN. Every country in the world has only central bank whose motive is not to make profit but to carry out major financial operations of the central government of the country.

Bankruptcy: A bank is said to be bankrupt if it is without enough money to pay for its debts.

CBN: This means Central Bank of Nigeria

Depositors: This refers to person(s) who put money into a bank account.

Distress: This is an unhealthy situation or a state of inability or weakness which prevents the achievements of set goals and objectives.

Financial Distress: This is a situation whereby a bank or an institution is unable to meet its needs.

Financial Institution: This is an institution set up purposely for providing financial services to its clients or members.

Investors: This refers to person(s) or an organization that invests money in something with the aim of making profit at the end of its environment.

NDIC: This means Nigeria Deposit Insurance Corporation.

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