The Causes And Consequences Of Bank Failure On Nigerian Economy

Project and Seminar Material for Economics

The Causes And Consequences Of Bank Failure On Nigerian Economy


Abstract


This research project is on the causes and consequences of bank failure on Nigerian economy. The study was specifically carried out to identify the causes of bank failure in Nigeria, determine the implications f bank failure on Nigerian economy, and proffer possible strategies to prevent bank failures in Nigeria. The survey design was adopted and the simple random sampling techniques were employed in this study. The population size comprise of CBN staff in Abuja. In determining the sample size, the researcher conveniently selected 120 respondents and 100 were validated. Self-constructed and validated questionnaire was used for data collection. The collected and validated questionnaires were analyzed using frequency tables, and mean scores. While the hypotheses were tested using Chi-square statistical tool. The result of the findings reveals that the causes of bank failure in Nigeria includes; unfavourable government policies, incompetence of employees, macroeconomics instability, weak management, capital inadequacy, bad lending, and fraud. The study also revealed that the implications of bank failure on Nigerian economy includes; loss of funds by customers, disruption in credit availability, inadequate availability of finance to improve the capital capacity of manufacturing sector, unemployment of staff, and contributes to economic recessions. Therefore, it is recommended that there is need for enduring corporate governance that will bring about total separation of the post of the chairman from that of the managing director and full disclosure of all financial information to the stakeholders in the sector. The regulatory authorities must continue to beam their searchlight on this sector with a view to dealing decisively with the erring banks to avoid any contagion arising from the systemic distress which is always rearing its ugly head in the sector. To mention but a few.


Table of Content


  • Title Page
  • Certification
  • Dedication
  • Acknowledgement
  • Table of Content
  • List of Tables
  • Abstract

Chapter One:

Introduction

  • 1.1 Background of the Study
  • 1.2 Statement of the Problem
  • 1.3 Objective of the Study
  • 1.4 Research Questions
  • 1.5 Research Hypothesis
  • 1.6 Significance of the Study
  • 1.7 Scope of the Study
  • 1.8 Limitation of the Study
  • 1.9 Definition of Terms
  • 1.10 Organisations of the Study

Chapter Two:

Review of Literature

  • 2.1 Conceptual Framework
  • 2.2 Theoretical Framework
  • 2.3 Empirical Review

Chapter Three:

Research Methodology

  • 3.1 Research Design
  • 3.2 Population of the Study
  • 3.3 Sample Size Determination
  • 3.4 Sample Size Selection Technique and Procedure
  • 3.5 Research Instrument and Administration
  • 3.6 Method of Data Collection
  • 3.7 Method of Data Analysis
  • 3.8 Validity of the Study
  • 3.9 Reliability of the Study
  • 3.10 Ethical Consideration

Chapter Four:

Data Presentation and Analysis

  • 4.1 Data Presentation
  • 4.2 Analysis of Data
  • 4.3 Answering Research Questions
  • 4.4 Test of Hypotheses

Chapter Five:

Summary, Conclusion and Recommendation

  • 5.1 Summary
  • 5.2 Conclusion
  • 5.3 Recommendation
  • References
  • APPENDIX
  • QUESTIONNAIRE

Chapter One


Introduction

1.1 Background of the Study

Financial instability has been in the scene of Nigerian economy for a long time. It is obvious that the financial instability is an important topic to develop. The cost burden associated with bank failure is so disturbing that the need for continued study of causes of banking financial instability on both the practical and theoretical level cannot be overemphasized. Some years back, Nigeria witnessed numerous bank failures. Example Savannah bank, All State Trust Bank, Bank of the North, Ganji bank of Niger limited, Owena bank, Lion bank of Nigeria limited, etc.

The central bank of Nigeria (CBN) has said that the only way the nation’s consolidated banks could be insulated from failure if through adoption and enforcement of corporate governance culture. Sanusi Lamido however, pointed out that the recent failures of high profit institutions around the world such as Enron, Parmalat, World comm., Barings bank among others, have shown that no company can be too big to fail, stressing that a common trend that runs through these monumental failures was poor corporate governance culture, exemplified in poor management, fraud and insider abuse by both management and board members, poor asset and liability management and poor regulation and supervision among others.

Banks play very crucial roles in the process of economic development of any country, by mobilizing funds from the surplus units of the economy and the lending of these funds to deficit units for investment. There has been a growing consensus among economists on the proposition that financial institutions and particular commercial banks contribute the real development of the economy. The process of expansion might occur due to the improvement in the financial system as potential savings is matched with investment. This reasoning which is supported by both the Keynesian and the classical models of economic development implies the need for adequate financial intermediation. Therefore, an efficient banking system implies availability of credit for capital formulation and investment.
Bank failures are usually followed by unfavourable consequences on stock-holder outside then failed banks themselves. Sometimes, consequences are felt by the non-banking system as a whole. A failure can result in much harms to employment earnings, financial development and other associated public interests, Smiths and Walter (1997: 158). According to Hooks, (1994: 99) and Beston and Kaufman (1996: 105), the failure of a bank has a great adverse effect on the economy and so it is considered very important.

Bank failure means different things to some people. To some people, a bank fails only when it ceases operation even if it has not been liquidated. In a wider context, a bank is said to have failed if it has not succeeded in achieving any objectives for which it was established.
A bank is considered a failure not only when it ceases operation but also when it cannot meet any of its objectives or obligations. The cessation of operation may constitute a serious mild or negligible bank failure depending on the circumstance. The cessation of independent operation or continuance without the assistance of relevant authorities such as deposit insurance institutions can be associated with distress. Bank failure therefore will occur when a fairly reasonable proportion of banks in the economy as a whole lack capital assets. As Selgin concludes that regulation in respect of branching limited contribute to the possibilities of bank failure by supporting bank risky operation. According to him, the worst regulation is branch restriction. The lower a bank’s capital, the higher the probability of its failure. Goodhart et al (1998: 49) agree with the statements and adds that as bank’s capital decreases, the higher its motivation for action towards survival. This leads to more dangerous taking operations. Therefore the risk of failure rises with the decline in equity.

Moreso, bank failure is seen as a declaration of insolvency by the chattering agency or as a reorganization to avoid dejure. Failed banks tend to be less efficient and make fewer investments (grant more loans especially bad loans) than non-failed banks. Thus, bank failure occurs when net cash is greater than the bank’s capital funds. This implies that a problem bank is one that in the eyes of the federal banking authorities has violated a law or regulation or engaged in an unsafe or unsound banking practice to such an extent that the present or future solvency of the bank is in question (Sinkye, 1975).

There is no evidence that bank failure is the thing of the past in Nigeria because it is still on the economic scene. Bank distress has become a common lexicon in Nigeria, given many bank failures till date. Ebhodaghe (2001) states that when a firm which is either a bank or not is liquidated for its inability to meet its obligation to creditors, it can be described as having failed. Thus we could use bank failure to describe a situation where, as a result of irremediable bank distress, a bank’s license is revoked and the bank subsequently liquidated. Liquidation is thus, an aftermath of bank failure. In fact, if revocation of license is seen as the death of a bank, liquidation is its burial.

Bank distress is the fore runner of bank failure. Whereas a bank in distress could have chances of regaining health, a failed bank loses every chance of life. Its final destination is the mortuary of Nigerian deposit insurance corporation (NDIC) from where it will proceed to its final resting place – liquidation – courtesy of the undertakers. Bank failure also is when the bank system fails, which means when all the bank ATMs and the bank eft pos machine fails to work. When the banks have to shut for a while because the machines that are inside the bank are broken. Corruption in the banking sector, so-called rich men making deals with bank managing directors (MDs) and taking loans without paying back. See what is happening to some commercial banks and micro-finance banks in Nigeria. Banks that lent money to people with little or no credit and those people cannot afford what was purchased, then they file bankrupt.

Also, reserve requirement is a position of cash to total deposit which banks are obliged to maintain. This ensures prudential and fiscal control of activities of banks. White (1999: 11) adds that government obliges banks to reserve funds in order to improve the actual need for base money. Friedman (1960: 122) stated that bank failure arises because banks do not keep all their deposit in a statutory reserve fund. Hempel and Simonson (1999: 18) noted that some regulatory bodies exercise forbearance. This action contributes to banks crises by permitting distressed banks to continue their operations instead of liquidating them. This action aims at assisting banks in  making profits. Its effect is rather disadvantageous to banks because usually when banks lack adequate funds and remain in operation, their capital situation deteriorates. The government uses the lender of last resort mechanism to help some stakeholders of banks which are falling.

The adverse effect of bank failure on the economy of any nation is not a respecter of the level of development. Ebhodaghe (1997: 100) whether a country is industrialized, developed, big or small, underdeveloped, bank failure affects the economy if not well managed. When a bank is distressed, many are unemployed and people’s money is tied down. Financial distress/failure reduces the number of qualified borrowers, the contraction in bank’s net worth forced reduction in the supply of bank loans to qualified borrowers, even those with a strong balance sheet. The bank failures of 2009 led to an expansion of the discount window and 420 billion naira bail out fund which would have been channeled to other critical needs of the economy.


1.2 Statement of the Problem

Available literature has identified a long list of potential causes of failure in a financial system to include weak management, inadequate capital base, fraudulent and corrupt practices of owners and managers, poor assets and liability management, macroeconomic instability, political instability/ interference and inadequate legal framework and structure (CBN/NDIC).

Adewunmi (1991: 2) states that bank failure emanates from a number of exogenous and endogenous factors. Exogenous factors which include adverse economic condition, inhibition policy, environmental management interference, impact of deregulation, inadequate supervision and regulation. Endogenous factors include undercapitalization, manpower problem, mismanagement, fraud, etc. hooks, (1994:5) points out that deteriorating local economic condition, inflation, interest rate and exchange rate may cause bank failure. He further stated that macroeconomics such as adverse movement in a country’s term of trade, sharp fluctuation in the world interest rate, real exchange rate and inflation worsened by regulations that are imposed on the banks result in bank failure. He stated further that a limit on deposit interest rate motivate banks to make risky investment. This is because banks often try to overrule ceiling imposed by the regulatory authority in higher transaction costs andx lower income. Instead of decreasing the prospect of bank failure, the ceiling on deposit and bank interest rate therefore is argued to cause bank failure.

White (1999:84) states that the government uses the lender of last resort mechanism to help some banks that are failing or sometimes debt cancellation  as experienced when the Central Bank of Nigeria governor cancelled the debt of Bank of the North. Sometime in August 2009, the governor of CBN noticed some inadequacies in the banking sector, which was traced to years of consistent manipulation, irregularities and sharp malpractices in the banking sector. It was revealed that dirty business deals, short-sighted investments and lack of respect for basic banking procedures were some of the reasons the apex used to hang five chief executive officers and their boards to dry on Friday, August 15, 2009. One of such instances was a case where one of the banks gave an unsecured loan to the turns of N17 billion to a notable business mogul, a practice that is not only supposed to involve just the decision of the CEO.

Major reasons for bank failure include economic, political and institutional factors. Economic factors arise from negative economic conditions in the macro-economy. Such adverse economic conditions include; high and rising inflation rate, high and increasing foreign exchange rate, subsisiting huge foreign debts, huge and expanding fiscal deficits, inadequacy of foreign exchange, monetary policy changes, inconsistent or unstable economic policies, unguided economic reform programmes e.g deregulation, low capacity utilization in the industries, low per capita income, high domestic debts, dwindling national income. For example, the combination of high inflation and exchange rates reduce the capacity of bank customers to save. Thus, deposit mobilization becomes a subject of intense competition with consequences for higher operational and financial costs. On the other hand, low capacity utilization and low income per capita reduce the ability of borrowers to repay their financial obligations. Thus, bad debts develop with serious consequences for increased provisions, which lead to reduced profits or increased losses.

Political factors are politically induced issues, which turn out to have adverse consequences on the effective management of banks. For instance, political instability and indeed uncertainty associated with the annulled June 12, 1993 presidential election, engendered fear in the populace. That led to unanticipated massive withdrawal of funds from the bank. More so, many debtors either neglected or refused to repay their borrowings while fraud and forgeries became the order of the day. Again, on political interference on the management of banks is that most government owned banks were politically influenced to grant loans and overdrafts, which soon after became hard core and remained unpaid. Furthermore, appointment of board and management members of such banks were mainly politically influenced, many a time resulting to using unqualified and / or inexperienced person to manage banks.

Institutionally, there are numerous internal causative factors of bank failure. These include; boardroom squabbles arising from ownership structure, insider abuse, frauds and forgers, weak / ineffective internal control systems, poor asset quality, lack of adherence to CBN prudential guidelines, inadequate capital, poor management and other internal factors. For this reason, consolidation and increase in bank capital base with the view to strengthening Nigerian banks, and also making them more reliable was the idea of Professor Charles Chukwuma Soludo (the then CBN governor).


1.3 Objectives of the Study

The main objective of this study is to examine the causes and consequences of bank failure on Nigerian economy, specifically the study intends to:

  1. To know the causes of bank failure in Nigeria.
  2. To determine the implications f bank failure on Nigerian economy.
  3. To proffer possible strategies to prevent bank failures in Nigeria.

1.4 Research Questions

In order to effectively investigate the problem of this research, the researcher formulated the following research questions:

  1. What are the causes of bank failure in Nigeria?
  2. What are the implications of bank failure on Nigerian economy?
  3. What are the possible strategies to prevent bank failures in Nigeria?

1.5 Research Hypothesis

The following hypothesis are tested on this study;

  • H0: Bank failures do not have any negative impact on Nigerian economy.
  • H1: Bank failures have a negative impact on Nigerian economy.

1.6 Significance of the Study

The relevance of the study is moved by the fact that most banks fail to perform to the expected standard thereby contributing low to economic growth and development. This means that bank failure causes crystallization of risks.

The usefulness of this research is highlighted in the following ways:

  1. It will highlight to the nation as a whole on how best to manage banks.
  2. It will state categorically the major causes of bank failure and their impacts on the economy thereby providing solution to such problems.
  3. It will give the appropriate authorities an overview of the key to economic growth.
  4. It will suggest useful measures by which funds can be managed or handled in banks.
  5. It will help various authorities in providing adequate policies which will guide the operation of banks in Nigeria.

1.7 Scope of the Study

The scope of this stud borders on the causes and consequences of bank failure on Nigerian economy hence the study will be delimited to CBN, Abuja.


1.8 Limitations of the Study

In the course of carrying out this study, the researcher experienced some constraints, which included time constraints, financial constraints, language barriers, and the attitude of the respondents, the inadequate finance has also limited the researcher from studying the activities of all the banks in Nigeria and also limits the volume of data collected, Time constraint has limited the researcher in arriving at more balanced conclusion, the research was carried out under a short period, inability to get access to some banks’ library to get more about the records and some other useful information about the work also limit the researcher form data collected. However, the researcher were able to manage these just to ensure the success of this study.

Moreover, the case study method utilized in the study posed some challenges to the investigator including the possibility of biases and poor judgment of issues. However, the investigator relied on respect for the general principles of procedures, justice, fairness, objectivity in observation and recording, and weighing of evidence to overcome the challenges.


1.9 Definition of Terms

Banking Industry: This is financial intermediaries are party to a transfer of funds from the ultimate saver to the ultimate user of funds.


1.10 Organization of the Studies

The study is categorized into five chapters. The first chapter presents the background of the study, statement of the problem, objective of the study, research questions and hypothesis, the significance of the study, scope/limitations of the study, and definition of terms. The chapter two covers the review of literature with emphasis on conceptual framework, theoretical framework, and empirical review. Likewise, the chapter three which is the research methodology, specifically covers the research design, population of the study, sample size determination, sample size, and selection technique and procedure, research instrument and administration, method of data collection, method of data analysis, validity and reliability of the study, and ethical consideration. The second to last chapter being the chapter four presents the data presentation and analysis, while the last chapter(chapter five) contains the summary, conclusion and recommendation.


Chapter Five


Summary, Conclusions and Recommendations:

5.1 Introduction

This chapter summarizes the findings on the causes and consequences of bank failure on Nigerian economy. The chapter consists of summary of the study, conclusions, and recommendations.


5.2 Summary of the Study

In this study, our focus was to examine the causes and consequences of bank failure on Nigerian economy. The study was specifically carried out to identify the causes of bank failure in Nigeria, determine the implications f bank failure on Nigerian economy, and proffer possible strategies to prevent bank failures in Nigeria.

The study adopted the survey research design and randomly enrolled participants in the study. A total of 50 responses were validated from the enrolled participants where all respondent were CBN staff in Abuja.


5.3 Conclusions

Based on the findings of this study, the researcher concluded that;

  1. The causes of bank failure in Nigeria includes; unfavourable government policies, incompetence of employees, macroeconomics instability, weak management, capital inadequacy, bad lending, and fraud.
  2. The implications of bank failure on Nigerian economy includes; loss of funds by customers, disruption in credit availability, inadequate availability of finance to improve the capital capacity of manufacturing sector, unemployment of staff, and contributes to economic recessions.
  3. The possible strategies to prevent bank failures in Nigeria includes; maintaining adequate level of liquidity, adherence to lending limits, establishment of special courts for debt recovery, effective control of cost of funds, and establishment sound management team.

5.4 Recommendations

  1. There is need for enduring corporate governance that will bring about total separation of the post of the chairman from that of the managing director and full disclosure of all financial information to the stakeholders in the sector. The regulatory authorities must continue to beam their searchlight on this sector with a view to dealing decisively with the erring banks to avoid any contagion arising from the systemic distress which is always rearing its ugly head in the sector.
  2. Banks must ensure they maintain reasonable and acceptable shareholders’ fund unimpaired by losses at all times and avoid capital erosion. They must endeavour to develop maturity profile that can accommodate the matching of their assets and liabilities. Every loan granted by each of the banks has to be adequately collateralized and the incidence of insider related credits must be emphasized to avoid loan losses or huge non-performing loans.
  3. The regulatory authorities on the other hand should engage themselves in capacity building to enable them perform their supervisory and regulatory functions as effectively as possible.
  4. The CBN must continue to emphasize and enforce the prudential regulation. They must ensure strict compliance of banks with not only the monetary measures but also the provisions of the Banks and Other Financial Institutions Act 1991 (as amended) and the CBN Act 1991 (as amended).

Get Complete Project Material

5,000 5000

The Complete Material Will Be Sent to You in Just 2 Steps

Quick & Simple…


Step One Purchase

Make Payment (Through Transfer) of ₦5,000 to the Account Below

Zenith BankAcc No: 1225513212
Samphina Academy
Current Account

Or CLICK HERE To Pay With Debit Card


FOR STUDENTS OUTSIDE NIGERIA
CLICK HERE To Purchase Material ($15)

Step Two Purchase

Send the Following Details on WhatsApp ( 08143831497) After Payment

  1. Payment Details

  2. TOPIC: The Causes And Consequences Of Bank Failure On Nigerian Economy

The Complete Material Will Be Sent To You On WhatsApp After Receiving Your Details
T & C Apply


  Contact Our Help Desk


Need a Different Topic? Perform a Quick Search



List of Related Works

Click on Any Topic to Preview the Content

samphina.academy

Samphina Academy

Samphina Academy is an Online Educational Resource Center that is aimed at providing students with quality information and materials to aid them in succeeding in their academic pursuit.