BACKGROUND OF THE STUDY
In any modern economy, the
efficient production and exchange of goods and services requires money
and bank is the instrument for affecting it. The last few years have
been both traumatic and revolutionary for the banking industry. The
industry produced the largest number of technically insolvent and under
capitalized banks. The magnitude of distress in the nation’s banking
industry reached on unprecedented level making it an issue of concern to
the government, the regulatory authority, the bankers and the general
The Nigeria banking scene was
characterized by changes designed to promote banking in the country. The
changes may be categorized into phases, but due to the nature of our
work we will consider two phases: namely, the era of laissez-fair
banking (1894-1952), the era of limited banking regulator (1952-1958).
During the first phase, banking industry was monopolized by foreign
banks, principally the African banking corporation which was the
precursor of the (BBWA) British Bank for West African the present First
Bank of Nigeria the Barclays bank DCO (Dominion Colonial and Overseas)
the present day Union banks, and the British an French Bank, the
for-runner of the present United Bank for Africa. Although
discrimination against Nigerians by these banks led to the establishment
of some indigenous banks which unfortunately offers litter or no
competition to the foreign banks essentially because of their weak
capital base or poor managerial capacity. Consequently, all but three of
the indigenous banks failed. The survived includes the National Bank of
Nigeria established in 1933, the Agbomagbe Bank (now Wema Bank)
established 1945 and the Africa Continental Bank 1947.
A commission of inquiry headed
by G.D. patron set up in 1948 to investigate the business of banking in
Nigeria. Their report led to the enactment of the first banking
legislation in Nigeria, the banking ordinance of 1952. The 1952
ordinance laid down the standard and procedure for the conduct of
banking business by prescribing the mandatory minimum capital
requirement for banks both expatiates and indigenous banks at the tune
of ?100,000 and ?12,500 respectively and it also introduced regulations
to check bank failure. However, all the indigenous bank established in
the country during this period also all failed. The bank failures of
this era were attributed largely to the monopolistic structure of the
banking industry, which allowed the foreign banks to enjoy exclusive
patronage from British firms. The indigenous banks that survived was
able to make it because of the support they got from their state
The distress phenomenon in
Nigeria banking industry is of recent origin. The manifestation became
discernable with some policy shocks starting in 1988 with the Central
Bank of Nigeria (CBN) directive to banks that naira backing for foreign
exchange application be lodged with CBN. Thus was followed in 1989 by
another directive requiring public sector deposits to be transferred to
CBN. These two directives exposed the precious liquidity position of
some banks and the distress they have subterraneous harbored. What was
thought to be a temporary liquidity problem for few banks soon caught up
with a lot more banks.
It is important to stress in this work
that banking system was already in distress by the time NDIC was
established. By them, about 7 (seven) banks were known to be technically
insolvent. The government at that time, did not embark upon a clearing
exercise that would have removed from the system that distressed
institutions because it was feared that such an action would lead to
loss of public confidence and flight of foreign capital more so there
was no deposit insurance institution to expeditiously manage such bank
closures. The NDIC was nevertheless required to insure all banks. That
means that the corporation has been involved in managing distressed
banks even before it could settle down and minister enough resources for
this important task.
The intermediating role of banks and
their relevance both in the transmission of monetary policies and in the
payment system underscore their importance as well as the problem that
bank distress at the prevailing dimension in our economy could
precipitate. Arising from their intermediation banks generate financial
resources ad put these at the disposal of deficit economic growth in the
form of increased employment of otherwise idle resources and this in
turn leads to increase output. Therefore, an industry wide insolvency
of banks, such as the one experienced in Nigeria, should be expected to
retard the economy’s rate of capital formation, reduce its level of
employment and output, and ultimately the pace of economic growth.
1.2 STATEMENT OF THE PROBLEM
A serious problem posed by
widespred distress among banks is the threat to banking habit and the
development of an efficient payment mechanism. The loss of confidence,
the after math of the distress that hit the banking sector forced
several business to take ferver risks by taking back their fund to well
established safe havens dominated by older generation banks.
This research wok is therefore
concerned with “Evaluating the impact of bank distress on the profit
growth existing of commercial banks. Using ( A vase study of selected
1.3 PURPOSE/OBJECTIVE OF THE STUDY
The main purpose/objective of
this study is to have an overview of the effect of bank distress on the
profit growth of commercial banks. Investigate into the reasons for bank
failure in Nigeria.
Other objectives include:
- To evaluate the causes of bank distress in Nigeria. To find out the impact.
- To find out the possible prevention strategies or failure resolution options of bank distress.
1.4 RESEARCH QUESTIONS
(1) What are the causes of bank distress?
(2) What is the impact of bank distress?
(3) What is the profit growth rate of existing commercial bank during distress.
(4) What are the effects of bank distress?
(5) What are the possible solution options to this phenomenon in the banking scene?
1.5 RESEARCH HYPOTHESIS
H1: Distress has no effect on the average profit of commercial
Ho: Distress has effect on the average profit of commercial
1.6 SIGNIFICANCE OF THE STUDY
This research project will be of importance of the following persons –
- New generation banks, which may wish to know the implication of
banks distress in the banking industry and how to restore the confidence
of the customers and uphold efficient payment mechanism.
- Nigeria deposit insurance corporation: The work could be of immense
help to NDIC in the area of distress management and prevention
strategies. And also in the area of failure resolution option in banking
- Students who may wish to know the extent of distress in the banking
industry and the trend of distress as it affect the modern banking will
also benefit from this work.
1.8 SCOPE, LIMITATIONS AND DELIMITATIONS:
While the banking impact
distress in Nigeria will theoretically serve as the population of study.
The project is designed to appraise the impact of bank distress on the
profit growth of Union Bank of Nigeria Plc, First Bank of Nigeria,
United Bank for Africa and Guarantee Trust Bank. It will also analyse
the trend of these banks profit within a period of 10 years (1992-2001).
1.8 DEFINITION OF TERMS
What is Distress? It
can be defined as an extreme suffering caused by lack of money or a
state of danger, calamity and misfortunate acute poverty.
What is an Evaluation? This can also be defined as form of idea or judgment of something and also to work out something in numerical value.
What is Impact? This
can be define as a strong effect or impression to bank. It is also a
situation whereby something will be to be press closely or firmly
Anyanwokoro M. (2000) Banking operation, Enugu
Ebhodane (1999) Causes and Resolution of Distress
in Nigeria Financial Institution, Lagos. Ompress Publication.
Ogundele F. (1999) “Roles of Regulatory Authority”,
Lagos, Nigeria Deposit Insurance Corporation (NDIC) Publication.
Anenlimbor, A. E (1999) “A study of Distress in the Nigeria
financial system” Lagos Nigeria Deposit Insurance Corporation publication (NDIC).