Critical Analysis Of Causes And Problem Of Financial Distress In Nigeria Banking Sector

Critical Analysis Of Causes And Problem Of Financial Distress In Nigeria Banking Sector

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

1.1 Background of the Study

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

1.2 Statement of Problem

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. Presently, a lot of banks are being criticized by many individuals, people moving their funds from one bank to the other, and people changing their bank of transaction to another. Also so many banks are faced with the concept of liquidity problem, there by not being able to meet their obligations as and when due. Most individual’s loss confidence on some banks while some do not have confidence on bank in general. Furthermore, some categories of persons prefer holding their cash (liquidity preference) while some prefer investing it rather than saving such fund with the bank as a result of lack of trust and confidence on Nigerian Banks. This make the researcher wants to investigate the cause and problem of financial distress in Nigeria banking sector

1.3 Objective of the Study

The objectives of the study are;

1. To ascertain the causes of financial distress in Nigeria banking sector
2. To ascertain the effects of financial distress on the Nigerian Banking sector
3. To ascertain the factors that contributes to distress in the banking industry.
4. To ascertain the effect of banking distress on Nigeria economy

1.4 Research Hypotheses

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

1. H0: there are no causes of financial distress in Nigeria banking sector.
   H1: there are causes of financial distress in Nigeria banking sector
2. H02: there are no factors that contribute to distress in the banking sector.
   H2: there arefactors that contribute to distress in the banking sector.

1.5 Signifcance of the Study

The significance of the study establishes the justification for carrying out my study. Therefore, banks and other numerous financial institutions will have this research work an item of reference.Banks will benefit from this work as it will reveal to them the major and other factors that militate against the concept of distress, as well as its measures to be prevented.However, this research work will be of great significance to the Nigerian Banking sector and curtail the extent of liquidity problems, bank distress as well as failures.

1.6 Scope and Limitation of the Study

The scope of the study covers critical analysis of cause and problem of financial distress in Nigeria banking sector. The researcher encounters some constrain which limited the scope of the study;

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Organizational Privacy:

Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities.

1.7 Definition of Teerms

Liquidity:

Liquidity entails the ability of the bank to meet promptly its current obligation, or ability of the bank to meet the customers demand as and when due.

Liquidity Problem:

This arisen where the bank cannot be able to meet up with its current obligations.

Bank Distress:

This implies failure that is when a bank has a negative net worth and can no longer meet up with bank examination rating or acronym known as camel; that is capital Adequate, Assets quality, Management competency earning capacity and liquidity position.

Bad Debt:

This can also be called irrloverable debt, which means debt due to creditor but which for some inherent weakness the full or partial recovery is considered not possible.

Liquidity Preference:

This means the idea of an individual holding his/her money as cash with him/her instead of investing it.

Deposit:

This is use to refer to the fund or money paid-in or lodged-in by a bank customer into an account which may be his or not.

1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

• Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
• Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
• Chapter three deals on the research design and methodology adopted in the study.
• Chapter four concentrate on the data collection and analysis and presentation of finding.
• Chapter five gives summary, conclusion, and recommendations made of the study

Chapter Five

Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to ascertain critical analysis of cause and problem of financial distress in Nigeria banking sector. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of cause and problem of financial distress in Nigeria banking sector

5.2 Summary

This study was on critical analysis of cause and problem of financial distress in Nigeria banking sector. Four objectives were raised which included:To ascertain the causes of financial distress in Nigeria banking sector, to ascertain the effects of financial distress on the Nigerian Banking sector, to ascertain the factors that contributes to distress in the banking industry, to ascertain the effect of banking distress on Nigeria economy. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of UBA in Lagos state. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made front human resource managers,marketers, accountantsand customer care officers were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies

5.3 Conclusion

From the foregoing discussions, we it is clear that a bank is said to be in distress where it cannot pay all of its depositors in full and on time. This means that such a bank can no longer play its basic role as a financial intermediary. The problem of distress can affect a single bank as well as many banks within the banking industry. Bank distress syndrome is not only peculiar to Nigeria, it cuts across the entire world both developing and developed world. Countries encounter it at one time or the other in their economic history. The causes of bank distress however, vary cutting across the following factors: political instability, economic depression, institutional factors, Undue interference of owner’s especially state government, regulatory constraints etc.

5.4 Recommendation

Based on the results and conclusions made the following recommendations are made as a way of averting the problem of distress in the Nigerian banking industry;

Effort should be made by the CBN and other regulatory agencies in the industry to domesticate the Altman’s model for a result oriented monitoring of the health of banks. The domestication of the model can be achieved through the development of interactive systems built around financial ratios as used by Altman with some adjustment index based on character of management of banks be used for on-site and off-site supervision of banks.

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