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Critical Analysis Of Causes And Problem Of Financial Distress In Nigeria Banking Sector
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CHAPTER ONE
INTRODUCTION
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 everydayâ€.
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 insolvencyâ€. 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
5. Sound management.
Any
bank, which did not satisfy any or all the listed factors, is adjudged
unhealthy. It must be expressed here that there exist a thin dividing
line between a distressed and unhealthy banks. This is because a bank,
which is unhealthy in the short-run, may become distress in the long
run. At the core of distressed bank, are twos basic problems compared to
liquidity the later could not be neglected because it is an ominous
sign of insolvency.
Therefore, in assessing the financial condition
of a bank, it is customary to use the CAMEL framework. Also ownership
structure and types of banks are important factors on explaining the
financial condition of a bank. The recent NDIC report revealed that
ownership structure was used to explain the degree of financial distress
seven out of eight banks, that were financially distressed were either
owned or controlled by the state government.
Another indicator of a
distressed bank used in most countries of the world is classified assets
that exceeds 100 percent of shareholders fund. Following from above, it
is therefore reasonable to conclude that a distressed bank is one tht
is technically insolvent the financial distress is caused by a number of
factors including macro-economic conditions, the inhibitive policy of
government capital adequacy, wide spread incidence of frauds,
non-performing loans, unbraided risk by banks and so on. The effect of
financial distress in Nigerian banking sector is a distressed economy.
The causes and problems and the ways out of this financial distress will
be discussed in details in this work.
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ABSRACT - [ Total Page(s): 1 ]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 pres ... Continue reading---
