An Examination Of The Impact Of Failed Banks On Nigeria Economy

Project and Seminar Topics with material for Banking and Finance

Abstract

This research work in failed banker is with a view to examine its impact one the Nigerian economy. The statement of problem in this research work aimed at finding if there are reductions in the flow of inventible resources that could be channeled to the productive sector of the economy.

Section II showed how the researcher made a random selection of 100 respondents from 3 selection banks arrived at a sample size of 50 which implies that 50 questionnaires were distributed and all were returned.

This is followed by identifying the forms and causes of bank failure in Nigeria banks in section III; this section was what the researcher was able to do which other researcher failed to do.

Section IV the major finding was summed up in just one sentence which is “Bank failure has almost crippled Nigerian economy and this implies that bank failure retards the economy’s rate of capital formations and ultimately the face of economic growth concluding with section V the researcher suggests that further researcher should research on the role of monetary authorities in bank failure prevention.

Chapter One

Introduction

1.1 Background of the Study

The importance of the banking section in any economy is derived from its roles of financial intermediation provision of an efficient payment system and facilitating the implantation of monetary policies. In intermediation, banks mobilize saving from the surplus limits of the economy and channel these funds to the deficit units particularly private business enterprises for the purpose of expanding their productive capacity. In operating the payment mechanism, the banking systems liabilities serve as the medium of exchange. In the execution of monetary policies, bank serve as agents through which there policies are implemented. Hence, an efficient and effective banking sector is essential not only for the promotion of efficient intermediation but also for the protection of depositors encouragement of healthy competition maintenance of confidence in, and stability of the system and protection against systematic risk and collapse. For the banking in industry of any economy to achieve there objective the industry must be stable safe and sound.

In Nigeria, there has been a rapid increase in the number of bank failure and the magnitude of the problem has reached an unprecedented level.

Currently, the problem has assumed a generalized dimension thereby making it an issue of concern to the government, the regulatory authorities the bankers the general public and the international financial institutions such as the world banks and international monetary fund (IMF).

The purpose of this research work is to evaluate the consequences of banks failure on the Nigerian economy. Bank failure means different things to different people.

To some people, a bank fails only when it ceases operation even if it has not been declared liquidated officially. In a wider bank which is unable to meet its obligations to its stakeholder as at when due arising form weakness in its financial operational and managerial conclusion which could has rendered it either illiquid and/or in solve (CBN/NDIC, 1995)

The relevant stakeholder to a bank will include the depositors, the owners of the bank and the economy at large. From the foregoing, it will be clear that failed banks will not only include the liquidated banks but also the problem banks that have exhibited some form of weakness in their financial operational and managerial conditions which have rendered them either illiquid and/or insolvent

1.2 Statement of the Problem

In Nigeria, there has been a rapid increase in the number of failed banks and the magnitude of the problem has reached an unprecedented level. Bank failures in Nigerian banking industry is a problem that has of late assumed an intractable dimension. The situation is such that regulatory authorities appear to be fighting a losing battle in their bid to sanitize the system. This has of course resulted in the erosion of public confidence in the banking system and therefore the reduction in the flow of inventible resources that could be channeled to the productive sectors of the economy.

Therefore, that is why the researcher deemed it fit to examine the impact of there failed banks on Nigerian economy.

1.3 Objective of the Study

Because of the central role which the banking system plays on the growth and development of any economy the objectives of this study are therefore.

To find out if there is loss of confidence in the banking system
To find out if there is reduction in bank deposits
To identify if there is any reduction in foreign investments.
To find out if bank failure can lead to devaluation of the Nigerian currency.
To find out if bank failure can lead to unemployment through retrenchment of workers.

1.4 Research Questions

The researcher intends to make a critical and empirical evaluation fo the impact of failed banks on Nigerian economy.

Towards this end appropriate answers to the following research questions become necessary.

Is there loss of confidence in the banking system due to bank failure?
Is there any reduction in bank deposits due to bank failure?
Does bank failure lead to reduction in foreign investment?
To what extent can bank failure lead to devaluation of Nigerian currency?
Does bank failure lead to unemployment?

1.5 Research Hypotheses

H0₁: Bank failure cannot be caused by poor portfolio management.
Ha₁: Bank failure can be caused by poor portfolio management
H0₂: Government’s debts owed to banks cannot lead to bank failure.
Ha₂: Government’s debts owed to banks can lead to bank failure.
H0₃: Monetary authorities have no significant role to play in controllingbank failure.
Ha₃: Monetary authorities have significant role to play in controllingbank failure.

1.6 Scope of the Study

This research work is limited to Nigeria economy only. One to time, financial constraints and others, the researcher was unable to cover much ground.

1.7 Operational Definition of Terms

Bank:

A bank is a financial intermediary that accepts deposits and channels those deposits into lending activities either directly or through capital markets.

Banking Industry:

In general term, it is the business activity of accepting and safeguarding money owned by other individual and entities and then lending out these money in order to earn a profit.

Bank Regulation:

A body of specific rules or agreed behaviour either imposed by some government or other external agency, or self-imposed by explicit or implicit agreement within the industry that limits the activities and business operations of financial institutions e.g. CBN/NDIC.

Bank Supervision:

Is the process of monitoring banks to ensure that they are carrying out their activities in accordance with laws, rules and regulations, and in a safe and sound manner.

Credit:

A credit is a sum of money that is paid into your account increasing your account balance credit.

Discount Rate:

The rate which member banks may borrow short term funds directly from a reserve bank.

Financial Intermediation:

Financial Intermediation is the mobilization of funds from the surplus spending units at a cost or lending of such funds to the deficit spending units at a price both within and outside the shore of a country.

Investment:

Can therefore be defined as the amount of current output that ads or replaces the national stock of real production assets

Liquidity:

This ability of a bank or business to meet its current obligations, the quality that makes an asset quickly and readily convertible into cash, the ease with which people can get their money bank from and investment the ability of an asset to the converted into cash quickly and without any price discount.

Prudential Guidelines:

Is a body of specific rules imposed by government through the Central bank aimed at ensuring prudent management and administration of banks’ funds so that reports of financial institutions are correct and reflective of their true portfolio.

Risk:

Exposure to damage or financial loss.

1.7 Organization of the Study

The study was done in chapter and consists of five chapters.

Chapter one introduces the study showing the background to the study, statement of the problem, research objectives, question, hypothesis, significance and scope.
Chapter two take a look at the literature works of others on the subject matter of the study.
Chapter three dealt with the methodology used in carrying out the study.
Chapter four provides the presentation, analysis and interpretation of data.
Chapter five concluded the study with summary of findings and recommendations.

Chapter Five

Summary, Conclusion and Recommendation

5.1 Introduction

It is important to reiterate that the objective of this study was to examine the impact of failed banks on the Nigeria economy. 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 examining the impact of failed banks on Nigeria economy.

5.2 Summary

This study was undertaken to examine the impact of failed banks on the Nigeria economy. The study opened with chapter one where the statement of the problem was clearly defined. The study objectives and research hypotheses were defined and formulated respectively. The study reviewed related and relevant literatures. The chapter two gave the conceptual framework, empirical and theoretical studies. The third chapter described the methodology employed by the researcher in collecting both the primary and the secondary data. The research method employed here is the descriptive survey method. The study analyzed and presented the data collected in tables and the hypotheses were tested using the T-test statistical tool. While the fifth chapter gives the study summary and conclusion.

5.3 Conclusion and Recommendation

Bank failures are part of the banking business and operational risk but due to the significance of the banking system in a country and systemic risk which is caused by such failures, it is important that failures are cut to the barest minimum. Considering historical occurrences, it is very likely that there will be more bank failures in the future; therefore the banking industry should continue to be highly regulated. Bank failures can never be entirely prevented. Certainly, it should not be, because in an entirely competitive environment there should be room for natural selection. Most times regulatory and supervisory bodies try to curtail the process of failure so failure of such a bank seems like as an orderly closure and not bank crises.Internal control measures should also be enforced in banks, these measures will help to encourage operational competence and efficacy, provide useful and reliable financial information for decision making, safeguard assets and promote adherence to policies set by regulatory agencies.The Supervisory and regulatory aspect is another factor which needs to be strengthened. According to Goodhart et al. (1998) regulators have a supervisory duty to banks; however failures could be avoided when managers make efforts to address risks efficiently.Customer protection should also be an essential part of the improvement program. The Central Bank of Nigeria (CBN) should also ensure that customers are treated fairly in all their dealings with the banking industry; this will be done by setting standards of customer service for the industry and ensuring such standards are kept.