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.
TABLE OF CONTENTS
Title
Page i
Certification
ii
Dedication
iii
Acknowledgements
iv
Abstract
v
Table
of Contents vi
Chapter One:
Introduction 1
1.1
Background to the Study 1
1.2
Statement of Problem 4
1.3
Research Questions 4
1.4
Objective of the Study 5
1.5
Statement of Hypotheses 5
1.6
Significance of the Study 6
1.7
Scope of the Study 6
1.8
Limitations of the Study 7
1.9
Definition of Terms 7
Chapter
Two: Review of Related
Literature 9
2.1 Introduction
9
2.2 Evolution of Banking in Nigeria 12
2.3 Definition
of Bank Distress 15
2.4 Overview of Financial Distress in the
Nigerian
Banking Sector 18
2.5 Features
of Bank Distress 23
2.6 Classes
of Distress 26
2.7 Causes of Bank Distress 26
2.8 Role of
Banks in Economic Development 33
2.9 Effects
of Distress on the Nigerian Banking
System and the Economy 35
Chapter
Three: Research Method and Design 39
3.1
Introduction 39
3.2
Research Design 39
3.3
Description of Population of the Study 39
3.4
Sample Size 40
3.5
Sampling Techniques 40
3.6
Sources of Data Collection 41
3.7
Method of Data Presentation 41
3.8
Method of Data Analysis 41
Chapter
Four: Data Presentation, Analysis and
Interpretation
44
4.1 Introduction 44
4.2 Data Presentation 44
4.3 Data Analysis 46
Chapter
Five: Summary of Findings, Conclusion and
Recommendations
50
5.1
Introduction 50
5.2 Summary of Findings 50
5.3
Conclusion 51
5.4
Recommendations 52
References
54
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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