INCESSANT BANK DISTRESS AND THE POLICES
INCESSANT BANK DISTRESS AND THE POLICES OF CENTRAL
BANK OF NIGERIA
BY
ADEOSUN HUMANI ABIDEMI
MATRIC NO: 13/02AC020
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The financial sector is one of the dominant economic sectors in
Nigeria. In the financial sector, Banks are the major channel for
mobilizing saving which mobilizes financial resources from surplus
spending economic agent or allocation to the deficit spending
units {Comfort 2011}. By mobilizing savings, banks channels
themselves into investment, thus they help in capital formation, financing
trade, agriculture, industry, consumer activities. In addition, banks
serve as channels, for implementing monetary policies . Banks all
over the world have through their unique position in an economy
contributed extremely to the economic development as well as
the growth of nations. The basic economic activity of Banks is
intermediation, which is, acting as a conduit for the efficient
transfer of resources from net service to net borrowers. This
process engenders an increase in capital accumulation through
institutionalization of savings as well as investment. The gains to
real sector of the economy depend on how efficiently the financial
sector performs this basic function of financial intermediation
{Comfort 2011}.
The Nigeria banking system, which is regulated by the Central
Bank of Nigeria, is made up of Deposit money banks,
Development Finance Institutions and other financial institution
which include micro finance banks, finance companies, discount
houses and primary mortgage institutions. The Nigeria banking
which actually started in 1892 has experienced Bank Distress and
failure in the 1900s and in the early 2000s due to poor
governance and economic decay.
Bank distresses in Nigeria insinuate that there is something wrong
with the economic and monetary policies of the government that
have created rooms for the banks not to comply with them.
Distress in the banking industry was first experienced in Nigeria
between 1930 and 1950 when some Banks failed and were
liquidated. For instance, the Banking failure of the late 1940s and
early 1950s, and that of 1994-2006, had led to erosion of
confidence in the banking system. During these period banks
witnessed banking boom and banking doom. As a matter of fact
21 out of 25 indigenous banks failed due to bad management,
inadequate capital, inexperienced personnel, excessive branch
expansion, lack of acceptable prudential guidelines and lack of
right banking orientation among the operators. Between 1994 and
2006, a total of 45 Banks failed and were closed having their
licenses revoked by the Central Bank of Nigeria. The federal high
court issued orders for them to be closed and appointed the
Nigeria Deposit Insurance Corporation (NDIC) as liquidator of the
banks.
The common strategy adopted by the Central Bank of Nigeria to
prevent bank distress and strengthens their soundness is the
employment of capital regulation. The Central Bank of Nigeria
over the years resorted to shoring up the capital base of Nigerian
banks up to the year of 2005 to improve their competiveness and
soundness. The Central Bank of Nigeria further increased the
minimum capital requirement to N25 billion in the light of new
development occasioned by global financial crisis, change in
technology and globalization. After the increment in minimum
capital requirement it was noted that liquidity ratio, asset quality
have not improved tremendously and bank distress are common
phenomenon (Eferakaya, 2014).
1.2
STATEMENT OF PROBLEM
Distress in the Banking industry has become a worried-some
phenomenon to the depositors, management of the banks and
their supervisory authorities in Nigeria. A Distress Bank is one
whose performance has persistently not conformed favorably with
established parameter for gauging the financial condition of
Banks. The distress of a Bank is generally considered to be of
more importance than the distress of other types of businesses
because of the interconnectedness and fragility of banking
institutions.
In 1892, the modern Banking started when South African had
founded the African Banking Corporation (ABC), now First Bank of
Nigeria PLC with an office in Lagos. The second was Barclays Bank
(dominion colonial and overseas), which commenced operation in
Nigeria in 1917 now known as our today’s union Bank of Nigeria.
The first indigenous Bank in Nigeria was established in 1929 and
called Industrial and Commercial Bank. The bank was liquidated in
1930 and was replaced by mercantile Bank n 1951. Agbonmagbe
Bank was one of the most preferred bank decades ago but it’s
now Wema Bank. It was incorporated in 1945 but the bank failed
to meet the provision of the new banking decree and it was taken
over and renamed Wema Bank in 1970. The free Banking era
ended when Banking Ordinance of 1952 was promulgated. The
period of 1952 and 1958 saw the first round of bank failure while
another round of bank failures occurred between 1994 and 2006.
Bank failures leads to a significant loss of depositors, funds
loss of confidence by the public in the Banking industry.
Due to the Bank failure and Distresses, public self-assurance
in the Banking sector decline with attendant comments like:
“Why go to the Bank, I have a safe in my room”
“I can’t keep my money in the Bank again”
“I can’t afford to lose my money”
“We can’t continue like this”
These and many more comments from the public and
government concern to protect public deposit and the restoration
of confidence in the banking system prompted this researcher to
examine the Central Bank policies and their effect on the
sustenance of banks in Nigeria.
1.3 OBJECTIVE OF THE STUDY
In the light of the above the objectives of the study include:
i.
ii.
To examine the situation of the Banking system in Nigeria
prior to the establishment of CBN.
To examine the monetary policies of Central Bank of Nigeria
and evaluate their effect on the sustainability of banks in
Nigeria.
iii.
iv.
1.4
To examine the role expected of Central Bank of Nigeria in
the prevention of Bank crisis in the country.
To examine the causes and the remedies of Bank Distress.
RESEARCH QUESTION
In order to achieve the objectives of the study, the following
research questions have been raised, providing answers to them
will help achieve the aim of this work. These questions include;
i.
What are the causes of Bank Distress?
ii.
What are the expected roles of Central Bank of Nigeria in the
prevention of Bank Distress?
iii.
What are the impacts of polices of Central bank on the
sustainability of banks in Nigeria.
iv.
What are the remedies for Bank Distress?
1.5
RESEARCH HYPOTHESIS
Two hypotheses were formulated to be tested:
HO:
Central Bank of Nigeria policies do not significantly
contribute to Bank Distress in Nigeria.
HI: Central Bank of Nigeria policies do significantly contribute to
Bank Distress in Nigeria.
HO: The CBN through Nigeria Deposit Insurance Scheme has not
significantly
enhanced public confidence in the Banking
Industry.
HI: The CBN through Nigeria Deposit Insurance Scheme has
significantly enhanced public confidence in the Banking
Industry.
1.6
SIGNIFICANCE OF STUDY
This study is undertaken with a view to provide the general public,
banks and other financial institutions a clear picture of the
causes, symptoms and remedies of Bank Distress. More so, to
create awareness with a view to making them informed about the
procedures to be followed in the event of Bank Distress.
This research shall assist monetary authorities in the formulation
and implementation of banking policies so as to ensure sound
banking practice. This research will ultimately contribute to the
identification and resolution of the issues that touch on the
financial crisis in Nigeria.
1.7
SCOPE & LIMITATION OF THE STUDY
This project entitled “Incessant Bank Distress and the Policies of
Central Bank of Nigeria” scrutinizes the extent and the nature of
Bank Distress and ascertains the adequacy of the economic and
monetary policies of the government to solve the problem of
financial crisis in Nigeria. This research entails what Bank Distress
is, what constitute Bank Distress. It also discusses about the
policies of Central Bank of Nigeria.
The limitations encountered in the study are as follows:
During the course of this research work the researcher
encounter come hic-cups including:
I.
II.
III.
1.8
Uncooperative attitude of some of my respondent: Due to
the fact that some of the respondents do not fully
understand why the questions were asked, some of them
returned the questionnaires.
Financial problem: The success of any research work
depends on the finance availability.
Time: This has to do with the time-frame given for the
completion of the study and also other challenges; activities
and engagements resulting in the limitation of the time
devoted to the research work.
DEFINITION OF TERMS
BANK: An establishment authorized by a government to
accept deposits, pay interest, clear checks, make loans, act as an
intermediary in financial transactions and provide other final
services to its customers
FINANCIAL DISTRESS: This is a condition where a company
cannot meet, or has difficulty paying off, it financial obligations to
its creditors, typically due to high fixed costs, illiquid asset.
INSOLVENCY: This is a state of being unable to pay money
owned by a company on time. Those in a state of insolvency are
said to be insolvent.
LIQUIDITY:
A measure of the extent to which an
organization has cash to meet immediate and short term
obligation or assets that can be quickly converted into cash.
REFERENCES
1) Eferakaya Idowu (2014). Is increasing Bank capital the
solution to improving Bank Liquidity and preventing Bank
Distress in Nigeria?
2) Onoh J.k (2002). Dynamics of money banking and finance in
Nigeria, An emerging market. Astra merdian publishers, P.O
Box 5350, Aba, pg. 15-30.
3) Comfort Msurshima (2011). Analysis of the causes and
effects of distress bank on the agricultural sector of the
Nigerian economy.
BANK OF NIGERIA
BY
ADEOSUN HUMANI ABIDEMI
MATRIC NO: 13/02AC020
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The financial sector is one of the dominant economic sectors in
Nigeria. In the financial sector, Banks are the major channel for
mobilizing saving which mobilizes financial resources from surplus
spending economic agent or allocation to the deficit spending
units {Comfort 2011}. By mobilizing savings, banks channels
themselves into investment, thus they help in capital formation, financing
trade, agriculture, industry, consumer activities. In addition, banks
serve as channels, for implementing monetary policies . Banks all
over the world have through their unique position in an economy
contributed extremely to the economic development as well as
the growth of nations. The basic economic activity of Banks is
intermediation, which is, acting as a conduit for the efficient
transfer of resources from net service to net borrowers. This
process engenders an increase in capital accumulation through
institutionalization of savings as well as investment. The gains to
real sector of the economy depend on how efficiently the financial
sector performs this basic function of financial intermediation
{Comfort 2011}.
The Nigeria banking system, which is regulated by the Central
Bank of Nigeria, is made up of Deposit money banks,
Development Finance Institutions and other financial institution
which include micro finance banks, finance companies, discount
houses and primary mortgage institutions. The Nigeria banking
which actually started in 1892 has experienced Bank Distress and
failure in the 1900s and in the early 2000s due to poor
governance and economic decay.
Bank distresses in Nigeria insinuate that there is something wrong
with the economic and monetary policies of the government that
have created rooms for the banks not to comply with them.
Distress in the banking industry was first experienced in Nigeria
between 1930 and 1950 when some Banks failed and were
liquidated. For instance, the Banking failure of the late 1940s and
early 1950s, and that of 1994-2006, had led to erosion of
confidence in the banking system. During these period banks
witnessed banking boom and banking doom. As a matter of fact
21 out of 25 indigenous banks failed due to bad management,
inadequate capital, inexperienced personnel, excessive branch
expansion, lack of acceptable prudential guidelines and lack of
right banking orientation among the operators. Between 1994 and
2006, a total of 45 Banks failed and were closed having their
licenses revoked by the Central Bank of Nigeria. The federal high
court issued orders for them to be closed and appointed the
Nigeria Deposit Insurance Corporation (NDIC) as liquidator of the
banks.
The common strategy adopted by the Central Bank of Nigeria to
prevent bank distress and strengthens their soundness is the
employment of capital regulation. The Central Bank of Nigeria
over the years resorted to shoring up the capital base of Nigerian
banks up to the year of 2005 to improve their competiveness and
soundness. The Central Bank of Nigeria further increased the
minimum capital requirement to N25 billion in the light of new
development occasioned by global financial crisis, change in
technology and globalization. After the increment in minimum
capital requirement it was noted that liquidity ratio, asset quality
have not improved tremendously and bank distress are common
phenomenon (Eferakaya, 2014).
1.2
STATEMENT OF PROBLEM
Distress in the Banking industry has become a worried-some
phenomenon to the depositors, management of the banks and
their supervisory authorities in Nigeria. A Distress Bank is one
whose performance has persistently not conformed favorably with
established parameter for gauging the financial condition of
Banks. The distress of a Bank is generally considered to be of
more importance than the distress of other types of businesses
because of the interconnectedness and fragility of banking
institutions.
In 1892, the modern Banking started when South African had
founded the African Banking Corporation (ABC), now First Bank of
Nigeria PLC with an office in Lagos. The second was Barclays Bank
(dominion colonial and overseas), which commenced operation in
Nigeria in 1917 now known as our today’s union Bank of Nigeria.
The first indigenous Bank in Nigeria was established in 1929 and
called Industrial and Commercial Bank. The bank was liquidated in
1930 and was replaced by mercantile Bank n 1951. Agbonmagbe
Bank was one of the most preferred bank decades ago but it’s
now Wema Bank. It was incorporated in 1945 but the bank failed
to meet the provision of the new banking decree and it was taken
over and renamed Wema Bank in 1970. The free Banking era
ended when Banking Ordinance of 1952 was promulgated. The
period of 1952 and 1958 saw the first round of bank failure while
another round of bank failures occurred between 1994 and 2006.
Bank failures leads to a significant loss of depositors, funds
loss of confidence by the public in the Banking industry.
Due to the Bank failure and Distresses, public self-assurance
in the Banking sector decline with attendant comments like:
“Why go to the Bank, I have a safe in my room”
“I can’t keep my money in the Bank again”
“I can’t afford to lose my money”
“We can’t continue like this”
These and many more comments from the public and
government concern to protect public deposit and the restoration
of confidence in the banking system prompted this researcher to
examine the Central Bank policies and their effect on the
sustenance of banks in Nigeria.
1.3 OBJECTIVE OF THE STUDY
In the light of the above the objectives of the study include:
i.
ii.
To examine the situation of the Banking system in Nigeria
prior to the establishment of CBN.
To examine the monetary policies of Central Bank of Nigeria
and evaluate their effect on the sustainability of banks in
Nigeria.
iii.
iv.
1.4
To examine the role expected of Central Bank of Nigeria in
the prevention of Bank crisis in the country.
To examine the causes and the remedies of Bank Distress.
RESEARCH QUESTION
In order to achieve the objectives of the study, the following
research questions have been raised, providing answers to them
will help achieve the aim of this work. These questions include;
i.
What are the causes of Bank Distress?
ii.
What are the expected roles of Central Bank of Nigeria in the
prevention of Bank Distress?
iii.
What are the impacts of polices of Central bank on the
sustainability of banks in Nigeria.
iv.
What are the remedies for Bank Distress?
1.5
RESEARCH HYPOTHESIS
Two hypotheses were formulated to be tested:
HO:
Central Bank of Nigeria policies do not significantly
contribute to Bank Distress in Nigeria.
HI: Central Bank of Nigeria policies do significantly contribute to
Bank Distress in Nigeria.
HO: The CBN through Nigeria Deposit Insurance Scheme has not
significantly
enhanced public confidence in the Banking
Industry.
HI: The CBN through Nigeria Deposit Insurance Scheme has
significantly enhanced public confidence in the Banking
Industry.
1.6
SIGNIFICANCE OF STUDY
This study is undertaken with a view to provide the general public,
banks and other financial institutions a clear picture of the
causes, symptoms and remedies of Bank Distress. More so, to
create awareness with a view to making them informed about the
procedures to be followed in the event of Bank Distress.
This research shall assist monetary authorities in the formulation
and implementation of banking policies so as to ensure sound
banking practice. This research will ultimately contribute to the
identification and resolution of the issues that touch on the
financial crisis in Nigeria.
1.7
SCOPE & LIMITATION OF THE STUDY
This project entitled “Incessant Bank Distress and the Policies of
Central Bank of Nigeria” scrutinizes the extent and the nature of
Bank Distress and ascertains the adequacy of the economic and
monetary policies of the government to solve the problem of
financial crisis in Nigeria. This research entails what Bank Distress
is, what constitute Bank Distress. It also discusses about the
policies of Central Bank of Nigeria.
The limitations encountered in the study are as follows:
During the course of this research work the researcher
encounter come hic-cups including:
I.
II.
III.
1.8
Uncooperative attitude of some of my respondent: Due to
the fact that some of the respondents do not fully
understand why the questions were asked, some of them
returned the questionnaires.
Financial problem: The success of any research work
depends on the finance availability.
Time: This has to do with the time-frame given for the
completion of the study and also other challenges; activities
and engagements resulting in the limitation of the time
devoted to the research work.
DEFINITION OF TERMS
BANK: An establishment authorized by a government to
accept deposits, pay interest, clear checks, make loans, act as an
intermediary in financial transactions and provide other final
services to its customers
FINANCIAL DISTRESS: This is a condition where a company
cannot meet, or has difficulty paying off, it financial obligations to
its creditors, typically due to high fixed costs, illiquid asset.
INSOLVENCY: This is a state of being unable to pay money
owned by a company on time. Those in a state of insolvency are
said to be insolvent.
LIQUIDITY:
A measure of the extent to which an
organization has cash to meet immediate and short term
obligation or assets that can be quickly converted into cash.
REFERENCES
1) Eferakaya Idowu (2014). Is increasing Bank capital the
solution to improving Bank Liquidity and preventing Bank
Distress in Nigeria?
2) Onoh J.k (2002). Dynamics of money banking and finance in
Nigeria, An emerging market. Astra merdian publishers, P.O
Box 5350, Aba, pg. 15-30.
3) Comfort Msurshima (2011). Analysis of the causes and
effects of distress bank on the agricultural sector of the
Nigerian economy.