The Causes Of Financial Distress And Bank Failure In Nigeria (A Case Study Of First Bank Nigeria Plc, Aduwawa Branch)

Project and Seminar Topics with material for Banking and Finance

The Causes Of Financial Distress And Bank Failure In Nigeria (A Case Study Of First Bank Nigeria Plc, Aduwawa Branch)


Abstract


This study examined the influence of apparent financial distress and bank failure in banking sector in Nigeria.
The study concluded that perceived financial distress and bank failures have significant negative influence on the banking sector.

The first chapter is concerned with the background of the study, statement of the problem, objective of the study, significance of the study, hypothesis, scope of the study, definition of terms etc.

The second chapter examines the literature review which gives a detailed explanation of the causes of financial distress and bank failure.

The third chapter laid emphasis on research methodology, research design, population of the study, sample size, method of data collection, and instrument of data collection and techniques of data analysis.

The fourth chapter focuses on data presentation and data analysis while the fifth chapter highlighted on the summary of findings, conclusion and recommendation.


Chapter One


Introduction

1.1 Background of Study

Recapitalization is the most recent trend haunting the financial sector of the Nigerian economy. It was introduced in the form of an official order by the Central Bank of Nigeria (CBN) and was issued to banks to consolidate their capital bases to the tune of a minimum of N 25 billion to be raised by each bank before 31st December 2005 thus causing many banks incapable of raising such fund to merge with other bank (Johnson, P.F.)

Recapitalization involves a fundamental change in the ownership position of shareholders. Through a large stock offering or merger into another bank or withdrawal of shares to reduce shareholders’ equity, a bank in difficulties is recapitalized. Liquidation represents a final recapitalization of a bank.

Aside that the minimum capital requirement fixed by CBN seemed very impressive for majority of the banks that had been meddling with quite meager capital bases, the banks also consider time space allowed within which to meet the requirement as too short, though the order was seen to have come at a bad time due to the economic condition, the existing atmosphere of inflation and reduction in general savings and investments. Even the so called first generational banks that had more solid capital base found it difficult to meet the requirement of the recapitalization policy.


1.2 Statement of the Problem

  1. What are the structural implications of financial distress and bank failure?
  2. What are the causes of financial distress for commercial banks?
  3. To what extent these are unique or similar to those identified for the conventional banks?
  4. What lessons can be learned by the stakeholders of commercial banking from the episodes of financial distress?

1.3 Objectives of the Study

  1. To investigate the issue the causes of financial distress and bank failure in Nigerian banking sector.
  2. To examine the effect of financial distress and bank failure in Nigerian banks.
  3. To examine the effect of financial distress and bank failure and the “cost of financial distress.
  4. To examine the relationship between financial distress and bank failure

1.4 Significance of the Study

The significance of this study relates to the assessment of the activities of commercial banks in Nigeria, and tries to observe which of the activities are liable to financial distress and bank failure.

To know the causes of financial distress and provide a way of avoiding it.


1.5 Scope of the Study

This research work tends to cover mainly the financial distress in commercial banks and how it leads to bank failure. For the purpose of this study, attention will be on First Bank Nigeria Plc, how stable a bank can be to overcome financial distress.


1.6 Limitations of the Study

One limitation is the inability of some top managers of banks to reveal or tender data or information useful for the issues of financial distress

It is important to note here that the system of government inherited from the colonial masters has cropped into the operational set of Nigerian banking system, which has denied the release of vital information needed for this study is also a major limitation.

The lack of figures to measure specifically the performance of bank is another limitation to this work.


1.7 Definition of Terms

Bank:

Banks perform very important functions in any modern economy. They provide a variety of financial services with lubricate transactions between business enterprises and their customers or suppliers. They also provide advisory and technical support services which help business enterprises to solve their operational problems (Inegbenebor: 2006).

A bank is an establishment for keeping money and valuables safely, the money being paid out on customers’ order. It acts as an agent of payment and settlement of debts on behalf of its customers.(Adams,2005:86)

Recapitalization:

It involves a fundamental change in the ownership position of shareholders (Machiraju: 131-132).

Bank performance:

Bank performance is the measurement or rating how well a bank is doing, its liquidity ratio ability to meet long and short term obligations and how it is able to aid the wealth of the nation.

Distress:

A tight and difficult situation that limit ones ability to achieve a particular goal or objective

Failure:

Inability to meet up a predetermined goal or objective.


Chapter Five


Summary, Conclusion and Recommendation

5.1 Summary

In Nigeria, modern banking started in 1892 when South African had founded the African Banking Corporation (ABC), now First Bank of Nigeria PLC with an office in Lagos. The free banking era ended when the Banking Ordinance of 1952 was promulgated.

In spite of the 1952 Banking Ordinance, Nigeria experienced series of bank failures between the periods of 1952-1958. Uzoaga (1981) observes that only 4 out of 25 indigenous banks established during this period survived while 21 others went under. The Pre-CBN bank failures were attributed to absence of regulation and control while the post- CBN bank failure was caused by the factors to be discussed here under. With the promulgation of the Central Bank Act of 1958, the banking business came under the regulation and control of the CBN.

Symptoms of distress in Nigeria financial system was first officially pointed out by the World Bank team that examined the financial sector shortly before the NDIC (Nigeria Deposit Insurance Corporation) Decree #22 of 1988 took off in February 1989.


5.2 Conclusion

The study was carried out with a view to assessing the extent to which inadequate capital, lack of transparency and huge non-performing loans are accountable for bank failure in Nigeria. It was observed that these three variables combined dealt a serious blow to the banking sector in Nigeria thus leading to the demise of some of these banks. It was also observed that aside from these factors, there are other factors that may be accountable for bank distress and bank failure in Nigeria. Survey research design through the use of structured questionnaire was adopted and chi-square was used to test the hypotheses formulated for the study. Simple percentages were also used to determine the ratio of non-performing loans and advance especially the ones granted to the owners and directors to total loans.


5.3 Recommendation

Base the findings of this research, I therefore recommend that:

  1. To arrest the issue of capital inadequacy, banks must ensure that they maintain reasonable and acceptable amount of money and avoid capital erosion.
  2. The regulatory authorities on the other hand should engage themselves in capacity building to enable them perform their regulatory functions as effectively as possible.
  3. In the final analysis, I, the researcher therefore, recommend that further research should be carried out in the kingdom of the consequences of bank failure in Nigeria and the preventive measures.

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