ABSTRACT
Based on the presentation and analysis of data on the topic CRITICAL
ANALYSIS OF CAUSES AND PROBLEMS OF FINANCIAL DISTRESS IN NIGERIA BANKING
SECTOR” the following are the major findings.
Inefficient management
has contributed significantly to the financial distress in Nigeria
banking sector. This was approved statistically with the chi-square test
techniques.
It was also discovered that fraudulent practices are a big causes of financial distress in Nigeria banking sector.
Based
on the presentation of data and chi-square techniques conducted the
researcher was right. Furthermore, it was observed that financial
distress in Nigerian banking sector has an adverse effect on the economy
of Nigeria as a whole.
Finally, it was equally observed that loan mistnaches contributed to the financial distress in Nigeria banking sector.
CHAPTER ONE
INTRODUCTION
The importance of capital as a
necessity though not sufficient condition for economic growth is
recognized in development economy where it is believed that the position
of adequate financial resources is a pre-requisite for industrial
transformation.
Experiences in some countries notably Japan, India
and Germany have shown that banks if sufficiently in their respective
countries could serve as an engine of growth to greatly assist the
promotion of rapid economic transformation of any nation. Banks all over
the world occupy a strategic and lending position in financial sector.
Many Nigerians see banks as places nobody can mess up. Hence, their
accepting institutions as the safety place for depositing their money.
It is equally because of the confidence they have in the industry as a
whole that over the years, many of them imbedded this habit of savings,
which in turn is very necessary of positive economic development of the
nation.
Ekechi (1995) said that confidence is a pre-requisite for
economic recovery and sustained growth, but confidence is not a gift. It
must be earned through the adjustment effort or rather confidence is
rented because it is never yours and because it can be taken away
anytime. The adjustable effort has to go on each and everyday”.
One
legacy the structural adjustment programme (SAP) left on its trials is
the increase in the number of banks in the country before the
introduction of SAP in 1986. The number rose to about 127 as at August
1995. This phenomenal growth of banks was initially hailed as a healthy
development in the economy because it was to spread the resources in the
economy.
Because of the importance of banks monetary authorities
pay great attention to the banking industry. In this process, they are
sometimes faced with the problems of how best to handle financial
distress in Nigeria banking sector. Financial distress in Nigerian
banking sector date back to 1930 when the industrial and commercial
bank, (ICB) failed one year after its established.
As Hornby defined distress as “great pains, discomfort of sorrow caused by wants of money or other necessary things.
John
Ebhodaghe in explaining financial distress “two major problems are
usually of serious concern. These are liquidity and insolvency”. He went
further to explain liquidity as the inability of banks to meet its
inabilities as they mature for payment while insolvent when the value of
its realizable asset is less than the total value of liabilities.
The
reasons for early distress of banks are summarized in the following
features, which characterized the banks since during the period.
1. Foreign banks domination of deposit base, credit availability.
2. Banks services tailored to the needs of the expatriates.
3. Indigenous bank boom and failure resulting from under capitalization and poor quality management.
4. Lack of banking, control and direction.
Recently,
it was realized that the development of statistical based, early
warning system for problem banks identification would greatly assist
regulators on classifying banks into sound and unsound categories.
Worthy of notes is Decree No. 26 of August 1992 that prescribed the
following for banks to be adjusted healthy.
1. Specified cash reserve
2. Specified liquidity ration
3. Adherence to prudential guidelines
4. Statutory minimum paid up capital requirement Adequate capital ration
5. Sound management.
Any
bank, which did not satisfy any or all the listed factors, is adjudged
unhealthy. It must be expressed here that there exist a thin dividing
line between a distressed and unhealthy banks. This is because a bank,
which is unhealthy in the short-run, may become distress in the long
run. At the core of distressed bank, are twos basic problems compared to
liquidity the later could not be neglected because it is an ominous
sign of insolvency.
Therefore, in assessing the financial condition
of a bank, it is customary to use the CAMEL framework. Also ownership
structure and types of banks are important factors on explaining the
financial condition of a bank. The recent NDIC report revealed that
ownership structure was used to explain the degree of financial distress
seven out of eight banks, that were financially distressed were either
owned or controlled by the state government.
Another indicator of a
distressed bank used in most countries of the world is classified assets
that exceeds 100 percent of shareholders fund. Following from above, it
is therefore reasonable to conclude that a distressed bank is one tht
is technically insolvent the financial distress is caused by a number of
factors including macro-economic conditions, the inhibitive policy of
government capital adequacy, wide spread incidence of frauds,
non-performing loans, unbraided risk by banks and so on. The effect of
financial distress in Nigerian banking sector is a distressed economy.
The causes and problems and the ways out of this financial distress will
be discussed in details in this work.
1.2 STATEMENT OF PROBLEM
Financial distress in
Nigerian banking sector dates back to colonial era. One of the early
Nigerian indigenous banks, the industrial and commercial banks, the
industrial and commercial banks (ICB) failed in the early 1930’s and
between 1992 – 1994, the central bank of Nigeria (CBN) and Nigerian
Deposit Insurance Corporation (NDIC) were face with the problems on how
best to prevent the financial distress in the banking sector. Within
this period, more than thirty banks had been adjudged financially
distressed.
The question remains what are the causes of these
financial distresses in the banking sector? According to Charles worth,
research arises when there is problem to solve, peculiarities or puzzle
about a phenomena or the question to attaching meaning to identify and
examine the causes and problems of financial distress in Nigerian
banking sector.
1.3 OBJECTIVES OF THE STUDY
in writing this
project, the researcher had certain objectives in mind. In line wit this
following are the objectives of this write up.
1. To identify the extent to which low capital base has contributed to the financial distress in Nigerian, banking sector.
2. To identify to the extent to which multiplicity of banks has contributed to the financial distress in Nigerian baking sector.
3. To ascertain how inefficient management has contributed to financial distress in Nigerian banking sector.
4. To identify to a large extent how fraudulent practices has contributed to the financial distress in Nigerian banking sector.
5. To identify the effects of financial distress in Nigerian banking sector.
6. To recommend possible ways of preventing financial distress in Nigerian banking sector.
1.4 SIGNIFICANCE OF THE STUDY
This study will be
immense benefits to the Nigerian banking sector. This will enable them
to know the causes of financial distress in Nigerian banking sector, and
based on the recommendation of this study, they will know how to
prevent financial distress.
Government will also benefit. As the
operators of the economy, they will know the causes and effects of
financial distress in the economy. Likewise, the depositors and
potential investors will also benefits. There is a need for a
development conscious country like Nigeria, to evaluate the performance
of her financial sectors so as not to jeopardize her development
efforts. It is helped that these findings will add to existing
literature on causes and problems of financial distress in Nigerian
banking sector.
1.5 STATEMENT OF HYPOTHESIS
To come out with a reliable result, the following hypothesis were formulated and tested statistically.
1. Ho: Low capital base has not contributed to the financial distress in Nigerian banking sector.
Hi: Low capital base has contributed to the financial distress in Nigerian banking sector.
2. Ho: Inefficient management has not contributed to the financial distress in Nigerian banking sector.
Hi: Inefficient management has contributed to the financial distress in Nigerian banking sector.
3. Ho: Fraudulent practices have not contributed to the financial distress in Nigerian banking sector.
Hi: Fraudulent practices have contributed to the financial distress in Nigerian banking sector.
1.6 SCOPE AND LIMITATIONS OF THE STUDY
This
research work covers the causes and problems of financial distress in
Nigerian banking sector with reference to AFEX Bank Plc. In the cause of
this study, the researcher could not carry out the work extensively due
to the following constraints.
TIME CONSTRAINTS: Time was my
greatest enemy as I had to cope with my class work, assignments, home
work, and the project work at the same time, and more over, most of the
materials for the project work are not located in one place.
FINANCIAL
CONSTRAINTS: Finance was my major constraints since I don’t have enough
fund for running around and this hindered the full coverage of the
work.
1.7 DEFINITION OF TERMS
BANKS: Banks are
financial institutions, which hold themselves out to the public
(individuals, firms, organization, and governments) by accepting
deposits and giving out advances as well as performing other customers.
FRAUDS:
Fraud is intentional distorting twisting or changing of financial
statement or using criminal deception to deceive someone in order to
achieve illegal advantage
LIQUIDITY: Liquidity is inability of a bank to meet its liabilities as they mature for payment.
INSOLVENCY: Insolvency is when the value of realizable assets of a bank is less than the total value of its liabilities.
CAPITAL
ADEQUACY: Capital adequacy is when banks through proper fund management
has enough capital to serve as a fall back and at course, shock
absorber in the event of losses resulting from business transactions.
SHAREHOLDERS:
shareholders are the owners of the bank, whose names were described to
the memorandum of the bank when the bank is registered. This is done
through the purchase of the bank’s shares.
PAID UP CAPITAL: This refers to that part of the issued capital, which has been paid-up.
DISTRESS: This means great pains; discomfort or sorrow caused by wants money or other necessary things.
REFERENCES
CharlesWorth, J.C (1967), contemporary political Analysis New York Free Press, P. 281
Ebhodaghe, J.A (1999), Agenda for the prevention of bank distress, Ibadan; African FEB publication Ltd, P. 153.
Ekechi,
A. (1995), Implication of the declining market share of banks in
business times (Lagos, daily times of Nigeria Limited October 26, 1995
P.9
Hancombe. H.M. (1976) Bankers management Handbook United Kingdom, McGraw – Hillbook co; P. 51
Ughamadu N.I (1999) importance of Ban king, Abeokuta spectrum books Ltd, P. 12.