Distress In Banking, Causes, Effects And Solutions (A Case Study Of Mainstreet Bank)

Project and Seminar Topics with material for Banking and Finance

Distress In Banking, Causes, Effects And Solutions (A Case Study Of Mainstreet Bank)

Chapter One

1.0 Introduction

Finance distress in Nigeria is a problem that has recently assumed intractable dimension. The situation is such that the regulatory authorities appear to be fighting a loosing battle in their bid to sanitize the system.

The phenomenal growth of banks following the introduction of the structural adjustment programme created a false impression that banking in all corner’s business. Hence, all type of investors who have surplus to throw about the besieged the banking sector.

No-only did incompetent and inexperienced hands assumed very senior positions ins some bank-people with not very clean credential also joined the band wagon.

The entry of these categories of operations prepared ground for this virus intention of financial distress and the challenge currently facing the monetary authorities is how to curtail this virus so that it does not spread to other banks. Besides, the general macro economic instability resulting in unpredictable.

A bank classification is distress as based on the bank examination rating system with acronym “CAMEL” that is capital adequacy asset quality, management competence, earning strength and liquidity sufficiency. A bank is performance is rated from “I” to “5” in any of these are.

‘I’ for best performance it is the aggregate or composite rating of performance in the above mentioned areas that qualities a bank to be branded “healthy” or “sick”.

Banking business is unique in that, it depends mostly on public confidence and once confidences ended in some bank, it may spread to entire system and that is dangerous not only to the banking system, but also to the entire economy.

Hence, capital adequacy, which is one of the indication of the extent of solvency of the public confidence in the banking system.

The phenomenal growth and expansion in the activities of bank and other financial institution result success and failure of banks and other financial institution results in success and failure of banks and other financial institution. Deregulation also lead to privatization, commercialization, of some government owned banks, which exercise, led to board room charges which is some cases adversely affected the performance of affected banks. This process increased tremendously the temp of activities in the banking sector particularly in terms of numbers of banks (commercial and merchant) and profit margins just as banks increased their branches and deliver greater profit, provision for bad and doubtful dent and actual bad debts were increasing. But one serious mistake, which the government made, was failure to take appropriate cession in time.

1.1 Aims and Objectives of the Study

The focus of study will be examine the nature of failure of banks specially and the implication to the bank industry and economy, failure in this context means financial distress which the central bank of Nigeria defines as institutions which among other thing fails:

  1. To meet their capital requirement
  2. To have weak deposit
  3. Are affiliated by miss-management.

specifically, the objective of the study is

  1. To know the extent to which distressed in bank has affect the economy.
  2. To examine the causes of banks failure
  3. To identify the problem associated with bank failure.

1.2 Relevance of the Study

Since inception, banks are known to be financial intermediaries, collecting, saving for people who have more money than the immediate require and lending such money to people who require money than they immediately degenerate thus, match in saving requirement of depositions with the investment requirement of borrowers.

Bank failure is one of the greatest obstacle facing economic development in Nigeria, the topic also appeal to virtually every member of the society because we all have one thing or the other to do with banks.

Even in remote communities where banking habit was poorly developed the exercise of changing bank miles in 1984 forced people to travel scores of miles to change their money and also made them release that the hard banks around.

An effect of that exercise was the good call for extension of banks breach to their area. Thus, this study is very relevant in view of the important role of financial institution are expected to play in the successful implementation of government program and in realization of the macro economic objective of the nation.

1.3 Scope and Limitation of the Study

The scope of this research work is distress in Nigeria banking industries while emphasis is laid on the causes, effects and solution. However Afribank plc, Ilorin branch, which has been a victim of distress banks in Nigeria was choosen as a case study to generalize for this research work.

Meanwhile, the following are the limitation factors envisaged in the course of study:

  1. Inadequate time to thoroughly carryout study
  2. Inadequate information for personal reason from the manager in such cases the data made available to us in what we made us of.
  3. The assumption that the respondents interview express in truth objectivity.

1.4 Hypothesis

  1. That the mismanagement is the major cause of distress of bank.
  2. That inflationary pressure high and unstable exchange rate, frequent change in monetary policy, non compliance to banking regulations.
  • Is mismanagement the major causes of banks going distress in Nigeria?
  • Can distress be attribute of other causes apart from mismanagement such as fraud?
  • Does inability of banks to adapt to technological change such as computer installation causes distress?
  • Does planning, which is a pre-determined objectives if not done by banks going distress?
  • In every many instance, the adjusted capital of most distress bank is negative to the extent that eve fixed asset could be seen to have been financed from depositors funds, can these lead to distress in banks?
  • Does the ability of banks having clear investment or credit policy lead to such banks going distress?

1.5 Organization and Plan of the Study

The paper is divided into five chapters,

  • The first chapter deals with introduction and statement of the problems, the aims and objectives of study, and statement of the study, scope and limitation of the study.
  • Chapter two deals with historical background of banks with emphasis on commercial banks, the Nigeria financial system and its structure causes and effect of bank failure in Nigeria.
  • Chapter three deals with research approach, sources design a methodology, such as research approach, source of data, research instrument and method of investigation.
  • Chapter four deals with summary of result and decision on result findings.
  • Chapter five deals with the suggestion and recommendation on better banking transaction including the role of central bank of Nigeria and Nigeria deposit insurance corporation.

1.6 Definition of Terms


Nigeria Deposit Insurance Corporation Independent body acts as additional regulatory authority, in the supervision of banks to ensuring bank solvency decree 22 of 1988 establishes it.


Deposit in these content means monies lodge by the general public with an insured bank or financial institution whether or not its keeping is for the purpose and earning or dividend, whether or not such money are payable upon demand, upon a given period of notice or upon a fixed date.


An asset is said to be liquid if it can easily be converted into cash within a short period of time and without appreciate loss of value. The liquid assets is bank notes and coin (i.e. cash) however, it is barren because it is not capable of yielding any income unless it is invested.

Chapter Five

Summary, Conclusion and Recommendation

5.1 Summary

  1. Mismanagement of banks by executive is the major causes of distress.
  2. Inflation pressure high and unstable exchange rate, frequent change in monetary policy, non-compliance with stabilization security and fraud are other factors that contribute to distress.
  3. Setting of debt credit policy and strict adherence to this by bank management and staff would prevent distress in banks.
  4. Adequate regulatory supervision if exercised by CBN and NDIC in area of reserved management supervision and prudent requirement would help prevent bank failure.
  5. Insufficient capital base and improportional asset and liabilities of major banking sector also contributes to being distress.
  6. Adequate regulation government law and supervision through the NDIC on banking education are remedies, which can forestall bank distress.
  7. The banking committee meeting are not being fully utilize for cross fertilization on idea has in most cases CBN must have decided on central issues concerning banking sector. Most distress does not comply with the credit growth guideline of the bank and CBN respectively and loans are granted in related party basis.
  8. Finally, loans are granted without adequate collateral security.

5.1 Conclusion

The CBN should at all time strike a balance between soft voice and the big stick between persuasion and the rigor of law, between flexibility and sound base, supervisory role, so that banks contribute to run their business with self-discipline, prudence expertise and innovative skill for the aversion of bank failure and for the benefit of their customers and the community at large.

The failed bank decree should be reviewed periodically and the failed bank tribunal adjusted by the federal government is the welcome step in the right direction and should be given more power to try and discipline erring distress bank official to serve as deferent to others.

Distress banks should be revamped and sold out. The credit control and guidential of the banks and prudential guideline of the CBN should be strictly adhered to.

5.2 Recommendations

The banking and other financial decree is known, we believe however, that the system of supervision now operating is perceived as not having changed greatly in philosophy on style from the earlier years.

We have supervisory system with authority deriving from status law but as for now, the running of the system still depend to a large extent on normal suasion, power exists to reinforce the system but not so draconian as to leave no room for debate, reasons , discussion and persuasion of bankers by supervision vice-versa.

The banker’s committee meeting should be fully utilized and cross fertilization of ideas.

The CBN needs to set up its supervisory and examination machinery and ensure regular examination of banks so that problems could be detected earlier before the situation gets out of hand, the NDIC also has this responsibility.

There appear to be the need for more belts tighten in the licensing of banks cannot exercise adequate turnover banks because banking business is still intricate for them. In most cases, the exercise judgment on credit arbitrary rather than objective criteria.

In most cases, the management of the banks from repressive and different to carry along to achieve the objective of the bank.

In supervision and administration arbitrates should be avoided while it is necessary to apply broad criteria to all authorized banks on an individual basis to take account of particular on circumstances, there is always the need for peer group analysis and to avoid competitive inequality. The CBN and the NDIC should take decisive step on banks that have been on the distress list for years as hope are dying as they have been doing in the past.

The banks should understand that there is identity or interest between them and the regulatory authorities in ensuring that individual business are conducted with integrity soundness and prompt, while the CBN will expect that gentle manly approach and exhortation to observe prudent practice will on their own always produce the desire result, it must not fail to invoke its power to deal decisively with recalcitrant without contemplating a supervisory regime in which compulsion becomes the order of the day, the rigors pursues without excessive refinement of the system.

Distress In Banking, Causes, Effects And Solutions (A Case Study Of Mainstreet Bank)

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