“EFFECTS OF BANK FAILURE IN NIGERIA”
ABSTRACT
The aim of the project is to provide information to the public on the “Effect of Bank failure in Nigeria” it is geared towards bringing to right some of the activities or services rendered by the banking industry, bank failure causes and the effects to it. The project is made up of five chapters.
The first chapter deals with the interaction, this takes about the background information about the evolution of banking system and bank failure.
The second chapter deals with review of related literature in this topic, highlighting different writing opinion concerning bank failure causes and bank depositors it also discusses the roles of banks in Nigeria economic development.
More so, the third chapter deals with the procedure and sources include background information, population and sample, construction of instrument, the statistical method used in the analysis of the various data etc.
The further chapter discusses the data analysis and interpretation. It also specified the responses of the respondents from the various research questions.
Finally, chapter five provides the summary of the whole study, recommendations, conclusions and also area of further research.
CHAPTER ONE
1.0 Introduction 1
1.1 Statement of Problem 6
1.2 Purpose of Study 7
1.3 Significance of the Study 8
1.4 Statement of Hypotheses 9
1.5 Scope of the Study 9
1.6 Limitations of the Study 10
1.7 Definition of Terms 11
CHAPTER TWO
2.0 Literature Review 13
2.1 Concept of Banking 13
2.2 The Role of Banks in Nigerian Economic Development 14
2.3 Causes of Bank Failure 16
2.4 Effects of Bank Failure 23
2.5 Regulatory Efforts in Meeting the Challenge of Bank Failure26
2.6 Conclusion 29
CHAPTER THREE
3.0 Research Design and Methodology 31
CHAPTER FOUR
4.0 Data Presentation and Analysis 36
CHAPTER FIVE
5.0 Summary of Findings, Conclusion and Recommendation 51
- Findings 51
- Conclusion 52
- Recommendations 54
Bibliography 58
Appendix: Questionnaire 61
CHAPTER ONE
1.0 INTRODUCTION
The banking sector plays a lot of vital role in the economy, example, they provide information assistance to individuals and also act as a medium by which cash flow into the individuals hands and the economy, this makes them the back bone of every economy, the banking sector is always watched by the government to ensure its efficiency and to avoid bank failure which might variably or invariably affect the economy, adversely.
Banks failure in Nigeria cannot be said to be strange, as it is to topical issue in Nigeria context, for example the first set of indigenous banks that collapsed in Nigeria can be attributed to existence of too many banks which jeopardized the central banks efficiently and other regulatory bodies in controlling these established banks. The central bank and regulatory bodies being the watch dog to the operations of these banks are ineffective, as the success of these banks would however depend to a greater extent, on the quality of management and the extent to which fraudulent acts are eliminated or controlled.
In recent past, there existed rivals compared with the structure of no competition associated with few exist banks. The governments have introduced a lot of measures to ensure sanity in the banking industries. It is against this background that this carried out to vividly identify the causes of bank failure in Nigeria.
The changes in banking sector has been attributed to resultant changes of the economy.
The origin of banking system revolves around the early London Gold Smith who accepts deposits from people for safe custody. It is on the bases of foresight and prudence of these Gold Smith that paved way for modern banking developed out of the need to serve the colonial masters of those days, there has been modern attempts in developing banking for example between 1914 and 1959 efforts were made to established self owned banks by individuals in order to break the monopoly in banking.
Among the cause of failure in banking was the foreign domination in its establishments, deposit base and credit availability, the bank serves tailored to the need of the expatriates in indigenous bank boom and failures resulting from under capitalization.
The incessant increase of bank failure have been observed, this lead to loss of customers fund and confidence on the banking sector, the activated to ensure safe custody of customers funds, this was why the banking ordinance of 1952 was promulgated, in the ordinance it was stipulated that banks should maintain a minimum of 20% of annual profits in the reserve funds until the balance of the account is equal to the paid up capital of 12,500 for indigenous banks and 100,000 for expatriate banks qualities then for licensing, but the ordinance did not make provisions for assisting banks in distress. Also the central bank as the under of last resort makes no contribution as in financial assistance to distressed banks, this has contributed to inherent collapse of the banking sector. The 1959 ordinance was enacted to supplement deficiencies in the 1952 ordinance, the major achievement of this ordinance was the establishment of central bank of Nigeria (C.B.N), as the apex bank also responsible for licensing banks. The establishment of central bank of Nigeria also mark the existence Nigeria money and capital markets, another important follow – up was the promulgating of treasury bills ordinance which form the basis for the issuance of treasury bills. Subsequently, the Lagos stock exchange was established in 1961.
Furthermore, between 1964 and 1986 an intensive regulation of the banking system was witnessed, with also a lot of improvements in the banking industry following the in digitization policy.
Also within this period twenty six banking institutions, though they were not strong enough to competes federal government and acquired part ownership despite their inadequacies, these banks still played a lot of vital role in economics developments of Nigeria, example, they nurtured indigenous businesses and pioneered the expansion of banking services into rural areas.
The 1970 to 1986 could be regarded as dynamic and yet, highly regulated era of banking. Apart from setting qualifications for opening heerises the authorities specified the range of products and serviced that banks offered their clients and the prices for such products and services. They specified geographical expansion of banks activities as well as the sectional allocation of credit and availability of foreign exchange resources. These regulations intended to encourage orderly development of sector, but contrary to this, it introduced some distortions into the sector, thus reduced its effectiveness.
The general profile of banking system has been transformed in various dimension, since the introduction of the structural adjustment programme in 1986. These has been the liberalization of entry condition into banking sector which resulted in upsurge in the number of company with banking licenses, for example, before 1986 the number of licensed banks were less than fifty (50) but at the end of 1992, it has risen to one hundred and twenty (120) banks. There was a tremendous growth in the number of specialized banks, like peoples bank, community bank, urban development Banks etc. The over all result of these development is overheating competitions which required banks to adopt highly sophisticated methods of management in order to stay afloat.
The complex nature created by the Apex regulatory bodies to raise the standard of banking in Nigeria to conform the international standard has made the banking environment a little difficult. Among the measures are, introduction of prudential guide lines, uniform accounting standard, promulgation of banks and other financial institution decree 24 and 25 of 1991, establishment of the Nigeria deposit insurance corporation (NDIC) Equity participation of banks in the business of their customers.
These measures have significant impacts, helping banks to cope with realities of present, exposing the fragility and ailment of others. It will be pertinent to note that the prevent nature of banks failure in Nigeria could be traced to the deregulation of the financial system that resulted into poor management, fraud, boardroom squabbles bad debts etc.
1.1 STATEMENT OF PROBLEM
The prevalent nature of bank failures in Nigeria is very alarming this was brought about by the staff competition due to development of deregulation exercise. The resulted in the upsurge in the number of banks which led in most cases to bad management team, incessant ware of frauds, poor liquidity management, boardroom crises and so on, just to mention a few of the causes. It is against these foregoing background that an explicit research is carried out to identify the causes and extent of banks failure in Nigeria regarded as dynamic and yet, highly regulated era of banking. Apart from setting qualifications for opening licenses the authorities specified the range of products and serviced that banks offered their clients and the prices for such products and services. They specified geographical expansion of banks activities as well as the sectional allocation of credit and availability of foreign exchange resources. These regulations intended to encourage orderly development of sector, but contrary to this, it introduced some distortions into the sector, thus reduced its effectiveness.
The general profile of banking system has been transformed in various dimension, since the introduction of the structural adjustment programme in 1986. These has been the liberalization of entry conclusion into banking sector which resulted in upsurge in the number of company with banking licenses, for example, before 1986 the number of licensed banks were less than fifty (50) but at the end of 1992, it has risen to one hundred and twenty (120) banks. There was a tremendous growth in the number of specialized banks.
1.2 THE PURPOSE OF STUDY
The purpose of the study is
- To diagnose the causes of failure in Nigeria
- To know the extent of relevant effectiveness of the effort of the regulatory body in preventing such causes of failure
- To know the roles which banks play in the overall development of the economy with reference to Nigeria.
- To provide a blue print which would serve as a reference for bankers and customers.
- To know the effect of bank failure
- To recommend policy options necessary for the survival and revalizing these banks.
1.3 SIGNIFICANCE OF THE STUDY
In view of the wide range of banks failure and some consequently liquidated by the central bank, that is the regulatory body the research becomes necessary as an opener and also the causes of failure to ensure prudence and effective management.
The public is also enlightened on the inefficiency and mismanagement that characterized the banking sector with to altering solutions to ensure viability of these banks.
1.4 STATEMENT OF HYPOTHESIS
Hypothesis is a proposition put forward as a basis for reasoning a supposition formulated from proved data and presented as temporary explanation of occurance as in science, in order to establish a basis for future research. Osuala E.C. defined Hypothesis as “a conjectural statement of the relationship between two or more variables.
In order to determine the effects of bank failure in Nigeria the following hypothesis are formulated.
Ho: Bank failure in Nigeria has created negative effects in economic development in Nigeria.
Hi: Bank failure in Nigeria has created positive effects in economic development in Nigeria.
RESEARCH QUESTIONS
In light of instability in the banking industry this research addresser such questions as:
- What are the causes of banks failure in Nigeria?
- What are the efforts of the regulatory body to prevent such failure?
- Is there any effect of such failure in the economy?
- What are the role played by banks in the economy of Nigeria?
- How can banks restructure help to reduce further failure of banks?
These are the questions offered by the research.
1.5 SCOPE AND LIMITATION
This research is carried out in only three banks, African Confidential Bank (ACB), Progress Bank of Nigeria (PBN) and Co-operative and Commerce Bank (CCB). Though there a lot of Banks that failed outright but the study is restricted to only three due to unavailability of data and also the problem of getting in touch with bank officials, managers or director to know the reasons for such failures.
Therefore, the research relies mainly on the availability of information collected from text books, magazines, journals, newspaper and they shall be used as the basis for analysis.
1.6 DEFINITION OF TERMS
- a) BANK: A comprehensive term for a number of institution carrying out certain kinds of financial business. It is an establishment for keeping money and valuables safety.
- b) CAPITAL: Wealth used in production of further wealth
COLLATERAL SECURITY: Property or asset pledged as security as security for replayment of loan.
- c) DEPOSIT: Money in custody of bank. The amount paid by customer on first instalment.
- d) LIQUIDATION: Act of winding up a bank because of its insolvency.
- e) LIQUIDITY: State of raising cash easily by selling of Asset
- f) MONETIZATION: To give out cash. Cash obtained or being given out in an economy.
- g) NIGERIAN DEPOSIT INSURANCE CORPORATION (NDIC): Established by decree No 22 of 1998. It is a kind of government scheme introduced with the purpose of rehearing the government of direct financial support to banks and other deposit accepting institutions which may be facing solvency problem. It can also been seen as an attempt at engendering confidence in the financial system and hence reduce spill over from potentially frequent bank failure.
- H) CENTRAL BANK: Is an apex bank and carried out the monetary policies of the country.
- I) FRAUD: Criminal deception
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