“Bank failure” causes and consequences” Bank failure in our banking industry
has become a peculiar household word in this country, which cannot be
overemphasized. It is a re-current issue, which caused to captivate many
individuals and banks, which has caused untold hardship to collective
individuals, individual, stakeholders. This ugly scene has paved way for losses
of staggering sum of money and investment by some banks.
As a matter of facts, Banks
distress has significantly contributed to the bank failure of some banks. This
project work examined the trend that lead to the Bank failure and moreover,
some Bank staff have lost their jobs and single benefits. The confidence the
public has on the bank is speedily warning down and many bank customers comment
bitterly about this fact or issue.
The project surveyed the literature
in the causes and consequences of bank failure, impact of bank failure, the
remedies and the measures to control the incident of bank failure in the
banking sector and the investigator concluded that the causes of bank failure
comes under the following headings. Insider’s abuse, fraud and forgeries,
inexperience staffing, poor attitude of bank management, recruitment of staff
with low level academic qualifications, and high level of dishonesty among
Specially, the objectives of the
To determine whether bank failure still exist
in the banking industry.
To determine examine the causes and
consequences of bank failure on Nigeria banking industry.
Determine to understand the degree
of concern the bank management have shown in trying to prevent failure of
To identify some of the enabling
laws by the supervisory authorities to ensure depositors funds incase of bank
To x-ray the poor accounting procedures
adopted by the bank management staff.
To accomplish these objectives, a
historical survey research design was conducted. Data were sourced only from
secondary source, without questionnaire been used as an instrument of data
Data collected were used to form
the literature review by the researcher, and upon the literature review,
findings, recommendations and conclusion was based by the researcher.
TABLE OF CONTENT
TABLE OF CONTENT
1.1.1 BACKGROUND OF THE STUDY:
GLOBAL HISTORY OF BANK FAILURES AND NIGERIA EXPERIENCE
1.1.2 HISTORICAL DEVELOPMENT OF
BANKING IN NIGERIA WITH SHORT PERIOD OF MASS FAILURE OF INDIGENOUS BANKS.
1.2 STATEMENT OF THE PROBLEM.
1.3 OBJECTIVE OF THE STUDY.
1.4 SIGNIFICANCE OF THE STUDY.
1.5 SCOPE AND LIMITATION OF THE
1.6 DEFINITION OF IMPORTANT TERMS
2.0 REVIEW OF RELATED LITERATURE-
2.1 DEFINITIONS OF BANK
2.1.1 DEFINITION BY TEXTBOOK
2.1.2 STATUTORY DEFINITION
2.1.3 VIEW EXPRESSED BY THE COURTS
2.2 CONCEPTUAL FRAMEWORK
2.3 MEANING OF BANK FAILURE/CASE
FOR BANK FAILURE
2.4 CAUSES OF BANK FAILURES IN THE
NIGERIA BANKING INDUSTRY.
2.4.1 MACROECONOMIC ENVIRONMENT
2.4.2 BAD LOANS/DECLINE IN THE
VALUE OF SECURITIES OWNED BY THE BANKS.
2.4.3 ASYMMETRIC INFORMATION
2.4.4 WEAK MANAGEMENT
2.4.5 FRAUD AND FORGERIES
INTERFERENCE/ADVERSE ECONOMIC ENVIRONMENT
2.4.7 INAPPROPRIATE CORPORATE
2.5 RECENT DEVELOPMENT IN FINANCIAL
SERVICES SECTOR AND BANK FAILURES IN NIGERIA
2.5.1 DEPOSITS IN THE BANKING
2.5.2 RENDITION OF UNRELIABLE
2.5.3 BANKING SECTOR DISTRESS.
2.6 REGULATORY AUTHORITIES EFFORTS
AT ADDRESSING ISSUES OF FINANCIAL/BANK SECTOR FAILURES.
2.7 CONSEQUENCES OF BANK FAILURES.
2.7.1 CONSEQUENCE OF BANK FAILURE
ON THE SHAREHOLDERS.
2.7.2 CONSEQUENCES OF BANK FAILURE
ON BANKING INDUSTRY.
2.7.3 CONSEQUENCES OF BANK FAILURES
ON DEPOSITORS/BANK CUSTOMERS.
2.7.4 CONSEQUENCES OF BANK FAILURES
ON THE ECONOMY
2.7.5 CONSEQUENCES OF BANK FAILURE
2.8 CONTROL MEASURES OF BANK
3.0 RESEARCH DESIGN AND METHODOLOGY
3.2 SOURCES OF DATA
3.3 SECONDARY SOURCES OF DATA
5.1 CONCLUSION AND RECOMMENDATIONS.
If there is anything that all well-meaning stakeholders
in the Nigeria banking industry look forward to, it is a banking sector that is
healthy and stable. A banking sector where investors, depositors, operators,
regulators, etc can after a hard day’s work, go to steep with all eyes closed
and without the anxiety that before dawn something amiss will happens.
To a large extent that was the nature of Nigeria’s
banking industry from independence in 1960 to the deregulation and liberalization
of the industry, which started in the mid 1980s. Situations have drastically
changed since the manifestation of rounds of bank failures that subsequently
claimed the life of 37 banks from 1994 to 2003. Since then, the banking
industry and its environment have been anything but sound and stable. And the
consequences have been very grave from the economy, especially in the areas of
loss of wealth, public confidence in the system and of course a monetary
management that has become more challenging with large amount of currency in
circulation outside the banking system.
The bulk of the funds required by the investing sectors
of most developed economy or business economics of the world is provided by the
banking industry. In the main, the services of mobilizing funds from the saving
sector to investment sector, is provided by the banking system, accounts for
high status the banking industry is placed in development of any economy. The
rate of economic development of nation has, hence, been very closely associated
with the effectiveness and efficiency of the banking system of this nation.
The banking industry in Nigeria comprises of the
commercial banks, the merchant banks and the development bank. At the apex of
the industry is the central bank of Nigeria (CBN).
The commercial banks provides services like acceptance of
deposits, granting of short and (very recently) medium term loans to customers,
safe-keeping of valuables, offering of pieces of advice to investors ect. The
merchant bank on the other hand provide medium and long-term loans etc.
The development banks services the development activities
by making available about medium and long-term finances for this purpose.
The central bank functions regulate the activities of
Easily, we can point at a member of factors that may be
contributing to the unhealthiness and instability in the banking sector. Such
factors as unstable macro-economic and fiscal policies, unethical and
unprofessional practices, as well as inadequate supervisory activities, rank
high on the scale.
The search for appropriate initiatives should no doubt
commence from a clear identification and classification of all factors
responsible for the problems in the industry. Each factor should be critically
evaluated to ascertain the degree of its contribution to weakness. It is
equally imperative that efficacious remedial actions should be developed,
prioritized and sequenced for effective implementation, which must be supported
1.1 BACKGROUND OF THE STUDY
HISTORY OF BANK FAILURES AND NIGERIA EXPERIENCES
According to Hempel and Simonson (1999:16), from 1985 to
1992 there were 1304 failures per year. In an earlier period, from 1934 to
1984, the nation (U.S.A) had experienced only 756-bank failure or about 15 per
As at December 31st, 1996, they identified
9528 entities as ensured commercial banks, down from a post-world war 11 peak
of close to 15380 in 1983. The cause of the failures was the banks’ poorly
conceived lending programs in an industry that generally had relaxed credit
standards and compromised in the quality of lending.
The collapse of oil prices in 1982 dried up the oil
exporting nations cash flows and their ability to pay their huge bank loans.
These difficulties were signaled by the Mexican government’s default on its
huge bank debts, which servely impacted on numerous large banks in the United
States and Europe. Developments in the Nigerian political economy since the mid
80s have greatly led to changes in the structure and art of banking. The period
witnessed the proliferation of banks and other financial institutions. From CBN
annual report (1994), there were 66 (sixty-six) commercial banks and 54
fifty-four) Merchant banks in Nigeria. According to the CBN diary 2003, as at
June 2002, we had the following licensed financial institution 89 (eighty-nine)
commercial and Merchant banks, 6 (six) development finance institutions, 97
(ninety-seven), finance companies and 125 (one hundred and twenty five) Bureau
de change companies in Nigeria.
These new and old institutions were all introduced with
little control over their proliferations, in the name of a deregulated economy.
The banks had to source for the raw materials of the
industry (depositors if funds) in a depressed economy. The competition
generated by these changes in the industry led to high interest rates, dearth
of long term funds, and unprecedented cases of default in the interbank money
The inability of the supervisory authorities to control
the nature of the competition and the unscrupulous activities of the management
of some institutions led to failures in the industry and the erosion of
confidence of the banking public. Furthermore, the depressed economy, the high
rate of inflation and the supply side policies of the monetary authorities
which were designed to control money supply and hence influence exchange rate
through reduction of excess liquidity, inconfunction with earlier developments
listed changed the art of banking, and hence, the process of fund mobilization.
The trade union became seriously involved in the issue of
failed banks and on 21st May 1993 CBN classified five commercial
banks as failed banks. The generation of failed bank is mostly owned by state
governments, examples of which were the merchantile bank, pan African bank,
National bank, New Nigerian bank, African continental bank. A careful
examination of each of these banks would reveal that one of the managerial
problems of the banks was frequency with which the state government that owned
them changed their boards. Indeed, there is a strong relationship between the
change in government and change in the boards of these banks.
For the second generation of failed banks, back of
corporate culture and values are the attributable causes. For instance,
employees of most banks and finance institutions are aware of the fraudulent
past of their organizations and the way things have been done at that time and carried
on long that line of culture and established months. According to THIS DAY
Newspaper 5th march, 2003, financial failures in Nigeria’s banking
systems dates back to 1994, 1995 and 1998 when the operating licenses of four
banks, one bank and twenty-six banks were revoked respectively. Three years
later (2001) the banking license of three other banks were withdraw before that
of savannah bank was withdraw in (2002) in addition to the most recent, peak
merchant bank; This brings to the total number of banks whose operating
licenses have been withdraw to thirty-six.
1.1.2(B) HISTORICAL DEVELOPMENT OF BANKING IN NIGERIA
WITH SHORT PERIOD OF MASS FAILURE OF INDIGENOUS BANKS
Nigerian commercial banking system dates back to 1892
with the establishment of African banking corporation (ABC). This British bank
for West Africa took this over in 1894. This today is known as First bank of
Nigeria plc. The second was Barclays bank (Dominion colonial and Overseas),
which commenced operation in Nigeria in 1917. This is today’s union bank of
Nigeria plc. According to Uche (1997), “these institutions were registered in,
had their head offices in and were controlled from London and consequently fell
under the regulatory Jurisdiction of London thereby having little need for host
There was strong accusation among Nigerians that these
expatriate banks (British banks) were discriminating against Nigeria and their
business. At this period bank services were eluding most Nigerians. As a result
of this, there was wide agitation for establishment of indigenous banks.
Hence, the period between 1892 and 1954 witnessed
emergence of many banks in Nigeria. Most of these banks collapsed with the
speed with which they were established. These collapsed because some of them
were established with selfish motives and their nurturing was fraught with
As already pointed out, one of the consequences of the
1952-banking ordinance was the mass failure of indigenous banks.
This was the second feature of commercial banking under
the banking legislation and stabilization period. Many of the so-called
indigenous banks could not provide the minimum paid-up capital requirement of
12,500 (equivalent of
N25, ooo) Apart
from this Nwankwo (1980:49) observed that during the free banking spree, “banks
sprang-up with all abuses and malpractices in banking known to man. These
include share-pushing, counterfeiting, gross under capitalization, and reckless
spread of branches” Apart from these, many of the promoters and their associate
did not have even a rudimentary idea of banking. Some of them went into banking
out of the zeal of nationalism.
The obvious consequences of these shortcomings on the
part of the indigenous banks were mass failures. By 1954 virtually all the
indigenous banks that sprang-up during the free for all banking period has
failed. Only three of them, the National Bank of Nigeria, the Agbonmagbe bank
(now wena Bank), and the African Continental Bank survived. Those of them that
survived were able to do so because of the support they got from state
1.2 STATEMENT OF
Bank failure in the banking
industry has become a worried-some phenomenon to the depositors, management of
the banks and the supervisory
authorities of these banks in the country Nigeria. Report of bank failure in
the banking sector have become so re-current headlines in our daily papers that
they have ceased to captivate many people. Nevertheless, this problem of bank
failure continued to increase unabated, which has resulted to cause untold
hardship to the government, individual and more so, to the entire economy. For
instance, Bank failure has accounted for the loss, by some banks, of staggering
sum of money and investment etc. Some bank staff have been denied or deprived
of some of their single benefits and, in liquidation situations, total loss of
their jobs, the public confidence in the banks is speedily wearing down and
some customers of banks comment very bitterly about this fact.
Besides, the great role, the banking industry play which is being
challenged by bank failure through loss of fraud by, and liquidations of banks)
the Nigerian business economy suffers under he burden of banks being failed
from poor financial services and other related services nourishment. If this
situation is allowed to continue, our future economy is bound to fail.
1.3 OBJECTIVE OF THE STUDY
The objective of this study include:
To examine factors responsible for bank failure in Nigerian banks and to
x-ray their impact on the Nigerian banking system.
Determine /to find out whether bank failure still exist in the banking
industry of Nigeria.
To examine the causes and effects of bank failure on Nigerian banking
Determine to understand the degree of concern the bank management has
shown in trying to prevent failure of banks and also the amount of interest
they have put in handling cases of bank failure.
To identify some of the enabling laws by the supervisory authorities to
ensure depositors funds incase of bank failure.
To identify or to x-ray the poor accounting procedures adopted by the
bank management staff.
To examine whether bank failure still exist in the Nigerian banking
Recommend or suggest if applicable the best strategies banks should adopt
to improve in their ways of operations as to prevent bank failure.
1.4 SIGNIFICANCE OF THE STUDY
This work will be in part, to immense help to all the banks in Nigeria,
and on the whole, to all other organizations (both private and public) that may
have a need for assistance in remedy and prevent the ugly trend of bank failure
incidence in the Nigerian banking industry.
The recommendations and suggestion made in this study, if improved by
banks, will help them to modify and replace most of their cumbersome and
effective internal control checks with more effective and less rigorous ones.
This will improve the banks efficiency and no doubt go along way to
restore almost lost glory of the banks.
Furthermore, this will be of great assistance to all those who may wish
to carry further study on bank failure in Nigerian banking industry or in way
other related field.
1.5 SCOPE AND LIMITATION OF THE STUDY
The scope of the study covers Enugu, the Enugu state capital and concern
was on banks failure: cases and consequences in the economy. Every human polity
has its inherent weakness and strengths. As a result every researcher need to
make inferences with caution.
This study is not, without limitations nor is it without some inherent
pitfalls caused by some extraneous variables. A major constraint on the
researcher is that the study limited the scope to Enugu and the literature
review was also limited to the inception of banking meaning and banks failure.
However, an effort was made to ensure an equitable representation of
banks in Enugu metropolis which was chosen by the unbiased selection method and
this constitute a limitation since not all banks could be covered in this study
considering the time and financial resources available at the researchers disposal.
Also the researcher in the course of this study encountered problem of
textbooks and other secondary data used in carrying out the research to that
extent, therefore, the researcher has some limitations but none is considered
so serious as to affect its validity.
1.6 DEFINITION OF IMPORTANT TERMS
1.BANK: The term “Bank” in
its proudest sense may be applied to any organization engaged in any or all of
the various function of “banking” that is receiving, collecting, transferring
payment lending, investing, dealing exchange and servicing (safe deposit,
custodianship, agency, trusteeship) money and claims money, both domestically
and internationally (Encyclopedia of banking and finance 64) or the institution
providing deposit facilities for the general public.
2. BANK FAILURE: Is the use
of funds for the personal gains of some individuals, reckless deposit expansion
by some banks and the state government who have controlling shares siphoning
out funds from the banks with careless abandon.
3. C.B.N (CENTRAL BANK OF NIGERIA): This is the apex bank which regulate and supervises the activities of all
commercial banks business activities in economy.
4.N.D.I.C: (NATIONAL DEPOSIT INSURANCE CORPORATION): This is a financial guarantee institution,
which ensures that depositors do not suffer financial loss or lose all their
money in the event of a bank failure.
5 DEPOSITORS: This means
customer of any commercial bank who operates a current, savings and fixed
deposits account with the bank.
6. CHEQUES: Is a bill of
exchange, drawn on a banker payable on demand according to the bill of exchange
act of 1882.
Anyanwuokoro .M. (2001) “Element,
practice and processes of banking.
Enugu, Hosanna Publishing
NDIC. (2003) “
Peak merchant bank limited
Was not one of the approved revenue?
banks for Federal Inland
services” This Day, June 5 p35.
NDIC Annual Report, 1991.
Sansui .J.O (2003), “Ensuring
And financial sector stability
Challenges for the Nigerian
The Nigerian Banker, October- Dec. 2003
Ailemen .1.0 (2003) “Bank
Causes and magnitude, role o
Trade union and
Nigerian Banker Oct-Dec 2003.