and effective financial system is a necessary condition for the effective
functioning of a nation's economy.
The issue of bank distress has been a reoccurring ill in the Nigerian banking
system for some time now. This research work ‘The Impact of Bank Distress on
the Nigerian Banking Habit’ has the objective to examine the impact bank distress has on the Nigerian
banking habit as well as customers perception towards bank distress. The
methodology employed in this research is the primary data, which was obtained
through the use of questionnaires and using the Statistical Packages for
Social Sciences (SPSS,) ANOVA method
was used to analyse the data and test the hypotheses, and the secondary data
which was obtained from the CBN Annual Reports. After testing the hypotheses,
it was asserted that distress in the Nigerian banking sector has impacted negatively
on the Nigerian banking habit, non-performing risk assets contributed to
the distress in the Nigerian banking industry and some political and institutional
factors are responsible for the bank distress in the Nigerian banking industry. The recommendation
made from this project is that Nigerian banks should endeavour to present or
publish a true and fair view of their annual financial statement and audit
report as this would go a long way in restoring the confidence of the Nigerian
banking public and that regulatory bodies should be more diligent in their
assignments to prevent decadence in the banking sector.
CHAPTER ONE INTRODUCTION
Background of the Study
Statement of Research Problem
Objectives of the Study
Scope of the Study
Significance of the Study
Definition of Terms
CHAPTER TWO LITERATURE REVIEW
Brief History of Banks in the ‘80s
Major Players in the Banking Financial
Central Bank of Nigeria
Other Regulatory Bodies
Banking Today (Pre-consolidation
Banking Crises in Nigeria
Concept of Bank Distress
Overview of Bank Distress
Symptoms of Bank Distress
Causes of Bank Distress
Effect of Bank Distress in Nigeria
Effect of Bank Distress on the
Nigerian Banking Habit
Bank Regulatory Agencies
Central Bank of Nigeria (CBN)
Nigerian Deposit Insurance Corporation (NDIC)
Securities and Exchange Commission (SEC)
Economic and Financial Crimes Commission
National Drug and Law Enforcement Agency
Debt Management Office (DMO)
Banking Today (Post-consolidation Era)
Central Bank of Nigeria (CBN)
International Financial Reporting
2.13.3 Asset Management Company of Nigeria (AMCON)
CHAPTER THREE RESEARCH METHODOLOGY
Sample Size and Sampling Technique
Data Collection Method
Sources of Data
Instrument of Data Collection
Questionnaire Design and Assumptions
Method of Data Analysis
Validity and Reliability of
CHAPTER FOUR DATA ANALYSIS AND INTERPRETATION
Presentation of Primary Data
Analysis of Questionnaire Data
4.5 Reliability Statistics
Analysis of Secondary Data Collected
CHAPTER FIVE SUMMARY, FINDINGS,
CONCLUSION AND RECOMMENDATIONS
LIST OF TABLES
Table 4.1: Sex
Table 4.2: Marital status
Table 4.4: Educational qualification
Table 4.6: Working Experience
Table 4.7: I am aware of the term bank distress? 53
4.8: I have lost money to a bank or heard of
someone who has?
Table 4.9: I lost some of my confidence in banks
My dealings and activities with banks were affected? 54
Table 4.11: I have a bank account?
Table 4.12: My bank
account is mainly for transactionary purpose? 55
4.13: My bank account is mainly for
safekeeping of my money? 56
Table 4.14: I would rather
invest my money than keep it in the bank? 56
Table 4.15: If I hear that my bank is distressed, I
would attempt to withdraw all my money from the bank immediately? 57
Table 4.16: Regular payment
of claims to insured depositors in the event of bank liquidation would go a
long way to restoring public confidence? 58
Table 4.17: Non-performing credit
facilities contributed to the bank distress? 58
Table 4.18: Overdue payment of principal
and interest on term loans contributed to the bank distress?
Table 4.19: Bank distress can be caused by an 'out of order' account in respect to
overdraft and cash credit?
Table 4.20: Non-performing assets can
affect the operation of the bank? 60
Table 4.21: Too many non-performing assets can stretch a firm's reserves and deposits
making it face the risk of distress?
Table 4.22: All credit facilities offered by the bank should be closely
monitored from initiation to finalization to prevent them from becoming
Table 4.23: Political unrest and
turbulence affects the banking industry? 62
Table 4.24: Various policies, sanctions and standards put in place by the Central
Bank and the Nigerian Deposit and Insurance Corporation in recent times have
helped curb certain risks of distress faced by banks? 62
Table 4.25: Testing of Hypothesis 1
Table 4.26: Testing of Hypothesis 2 64
Table 4.27: Testing of Hypothesis 3
Table 4.28: CBN Annual Report (1)
Table 4.29: CBN Annual Report (2)
LIST OF FIGURES
FIG 4.1: Total Assets of
Deposit Money Banks
FIG 4.2: Growth Rate of
Total Assets of Deposit Money Banks 68
FIG 4.3: Total Deposit
Liabilities of Deposit Money Banks
FIG 4.4: Growth Rate of
Total Deposit Liabilities of Deposit Money Banks 70
1.1 BACKGROUND OF THE STUDY
The financial system of a country, which the banking
industry is part of, refers to the totality of the regulatory and participating
institutions as well as depositors and instruments involved in the process of
financial intermediation. An efficient financial system is generally
accepted as a necessary condition for an effective functioning of a nation's
addition to the intermediation role, a nation’s financial system links the
domestic economy with the rest of the world by providing the means for the
settlement of international transactions. It has also been observed that growth
in the financial industry, if transmitted well, would result in the growth of the
real sector and the opposite is possible if the financial sector is repressed
and inefficient (Cameroon, 1972). The opposite in this case is taken to mean
decline in the growth of the real sector.
Recently in Nigeria, generalized distress swept the banking sub-sector and
systemic distress gripped the finance house sub-sector. By the very nature of
banking business, banks are inextricably involved in risk-taking. For instance,
banks face the risk of not being able to meet their obligations to depositors
to whom they have issued demandable claims. This is called liquidity risk.
There is also the likelihood of borrowers failing to repay loans as agreed,
that is, risk of default or credit risk. Similarly, there is the possibility
that the mechanism, processes and controls employed by banks to carry out its
functions fail to achieve desired results that is, operational risk. Also the
unpredictable change in the value of foreign currency held by a bank which
could result in a gain or loss is known as foreign exchange rate risk. These
are just a few of the risks banks face and their complexities could be
management of these risks is one sure cause of bank distress but this is
bank-specific, that is, endogenous factor. This is in addition to other bank
specific factors which also do cause distress.
the fact that individual bank’s incompetence at managing risks is a cause of
bank distress, there are also some exogenous factors beyond banks’ control that
could precipitate bank distress. The petroleum-rich Nigerian economy,
restricted by political instability, corruption, and poor macroeconomic
management, has been undergoing substantial economic reform under the current
civilian administration. According to the CIA World Factbook (2011), Nigeria's
former rulers failed to diversify the economy away from overdependence on the
capital-intensive oil sector, which provides 95% of foreign exchange earnings,
and about 80% of budgetary revenues. The largely subsistence agricultural
sector has not kept up with rapid population growth, and Nigeria, once a large
net exporter of food, now must import food.
Since undergoing severe distress in 2004,
Nigeria's banking sector has witnessed significant growth over the last few
years as stronger banks entered the financial market after mergers and
acquisition. Some of the banks include; First Bank (formed by First Bank of Nigeria PLC, MBC
International Bank PLC, FBN (Merchant Bankers) Limited), United Bank of Africa
(formed by United Bank for Africa Plc & Standard Trust Bank Plc), Diamond
Bank (formed by Diamond Bank Limited & Lion Bank of Nigeria Plc), Access
Bank (formed by Access Bank Nigeria Plc, Marina International (Merchant
Bankers) & Capital Bank International Ltd), amongst others. Harsh
monetary policies implemented by the Central Bank of Nigeria to absorb excess
Naira liquidity in the economy has made it more difficult for banks, some of whom
engage in currency arbitrage (round-tripping) activities that generally fall
outside legal banking mechanisms.
The first bank failure in Nigeria occurred
in 1947. Between the years 1947 and 1952, before the establishment of the
Central Bank of Nigeria (CBN) in 1959, 21 banks failed. The Muslim Bank, the
Lagos Bank and the Berini Bank failed in the 1960s. Nigeria was spared more
bank failures until 1989 when failures became more frequent (Adedeji, 2009). Ebhodaghe
(1996), states that the new generation banks are characterized by boardroom
quarrels, insider abuses, frauds and forgeries, weak internal control systems
as well as occasional contravention of well intended statutory regulations.
1.2 STATEMENT OF RESEARCH PROBLEM
time now the issue of bank distress has been of great concern to the Nigerian government,
monetary and regulatory agencies, bankers and the general public. Recently, a
lot of challenges pose as threats to the Nigerian economy from the banking
industry which has resulted in the winding up of many banks. By the winding up of several banks, a lot of
people lost their hard earned money which also led to the end of numerous
businesses and further leading to loss of people’s investments. Some of these
investors have taken it up to sue the businesses in which they invested because
at winding up, lot of money buried deep under the business was lost.
words, the bank distress has affected everyone in one way or the other no
matter how little. This problem is leading the confidence of bank customers down
the drain which would eventually be completely eroded. If the challenges are
not fully attended to, it would immensely affect the economy. These problems
have been brought to the public’s notice and some measures have been taken by
the Central bank of Nigeria to curb them.
1.3 OBJECTIVES OF THE STUDY
The objective of this study is to
investigate the impact of bank distress on the Nigerian banking habit.
study shall attempt to:
1. Determine the impact of the bank distress on the
Nigerian banking habit.
2. Articulate the extent to which non-performing risk
assets of banks contributed to bank distress.
3. Find out if some political and institutional
factors were responsible for distress in the banking system.
following research questions are examined in the course of the study:
is the impact of bank distress on: the banking habit of Nigerians, the bank and
economy of the nation as a whole?
what extent did non-performing risk assets of banks contribute to distress in
the banking industry?
3. Were some political and institutional factors
responsible for distress in the Nigerian banking system?
1.5 RESEARCH HYPOTHESIS
research is carried out to test the following hypothesis:
The distress in the Nigerian banking industry does not have any impact on the
Nigerian banking habit.
H1: The distress in the Nigerian banking
industry has an impact on the Nigerian banking habit.
Non-performing risk assets of banks did not contribute to the distress in the
Nigerian banking industry.
Non-performing risk assets contributed to the distress in the Nigerian banking
Political and institutional factors are not responsible for the bank distress
in the Nigerian banking industry.
Political and institutional factors are responsible for the bank distress in
the Nigerian banking industry.
1.6 SCOPE OF THE STUDY
carrying out this research, attention was focused commercial banks and various
bank customers in Nigeria. Due to the problem of reliability of information,
the research had been limited to staff and customers of commercial banks. The
time frame of the study carried out on the Nigeria bank distress is between the
years 2001 and 2011 as this period covers era of the bank distress. The
research has been restricted to Lagos State geographically.
1.7 SIGNIFICANCE OF THE STUDY
research aims at providing relevant information about and solutions to
identified problems on bank distress and its impact on the Nigerian banking
habit. In the wake of bank failures, the economy suffered severe stress. Many
depositors lost their hard-earned money; many suffered starvation because their
breadwinners lost their jobs in the process while others lost some sort of
investment. In a number of cases, depositors who lost their life savings died
because of apparent hopelessness. People from different spheres of life have
commented on this seemingly topical issue as it touches the very fabric of the
national economic life.
All the major factors causing distress namely
institutional, economic, and political contributed in varying degrees to the
distress, rating institutional factors which include poor management, credit
policy, ineffective machinery for debt recovery, insider dealings, abuses,
fraud and poor credit administration highest thus, significant to the
depositors, government, banks and economy as a whole. The study therefore assesses the distress in the
Nigerian banking industry as well as the major causes and its impact on the
Nigerian banking habit.
1.8 RESEARCH METHODOLOGY
research methodology employed in sourcing information includes primary and
secondary sources of data. The information from the primary source of data is
obtained from the distribution of questionnaires. The questionnaire is used as
the major instrument of data collection. It contains carefully selected
questions which reflects the intensity of the response the respondents. It was
administered on the employees and customers of three commercial banks which
include but is not limited to United Bank of Africa (UBA), First Bank and
Guarantee Trust Bank (GTB). The method of data analysis adopted for this
research is the Statistical Packages for Social Sciences (SPSS) and the type of
statistics employed in testing the hypothesis will be a parametric statistic
called Analysis of Variance (ANOVA).
information from the secondary source of data includes relevant tables from the
annual report of the CBN textbooks, internet, newspapers, past projects,
abstracts, index, thesis, encyclopedia and journals.
1.9 DEFINITION OF TERMS
Central Bank of Nigeria.
Central Bank of Nigeria which was established by the CBN Act of Parliament 1958
and commenced operations on July 1, 1959.is the apex bank in charge of the overall control and
administration of the monetary and financial sector policies of the Federal
Deposit Insurance Corporation. This
is a financial regulatory body established on 15 June 1988 to strengthen the
safety net for the newly liberalized banking sector, following the
recommendation of former Central Bank of Nigeria governor Ola Vincent.
bank is a financial institution which renders services such as acceptance of
deposits, granting of loans and advances, underwriting and brokerage, answering
status enquiries and provision of foreign exchange services, investment advice,
safe custody for valuables, insurance services and equipment leasing amongst
others to corporate and personal customers (Omolumo, 2005).
Financial distress: A
condition where a company cannot meet or has difficulty paying off its
financial obligations to its creditors. The chance of financial distress
increases when a firm has high fixed costs, illiquid assets, or
revenues that are sensitive to economic downturns.
Donli (2004) claims that without necessarily implying the degree or nature of
the problem, a bank is said to be distressed when it is either illiquid and/or
insolvent to the extent that its ability to discharge its obligations as at
when due is impaired”.
without enough cash
is one of the major
failure because a firm can survive without profit
for a while but not without cash. Even firms rich in fixed assets
machinery) become insolvent
of cash because it takes
time to convert
into cash, and that too usually at a loss
According to Donli (2004) illiquidity is a state of inability to meet payment
obligations to customers as at when due while insolvency is a situation in
which the value of the firm’s liabilities is in excess of its assets value,
that is, negative net worth.
money in a bank account.
A depositor sometimes is the bank’s customer.
Account holder: Individual
which is authorized to perform
on behalf of
such as a bank account.
is provided through signatures
placed on file
with the bank
managing the account.