INCESSANT BANK DISTRESS AND THE POLICES OF CENTRAL BANK OF NIGERIA
BY
ADEOSUN HUMANI ABIDEMI
CHAPTER ONE INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The financial sector is one of the dominant economic sectors in Nigeria. In the financial sector, Banks are the major channel for mobilizing saving which mobilizes financial resources from surplus spending economic agent or allocation to the deficit spending units {Comfort 2011}. By mobilizing savings, banks channels themselves into investment, thus they help in capital formation, financing trade, agriculture, industry, consumer activities. In addition, banks serve as channels, for implementing monetary policies. Banks all over the world have through their unique position in an economy contributed extremely to the economic development as well as the growth of nations. The basic economic activity of Banks is intermediation, which is, acting as a conduit for the efficient transfer of resources from net service to net borrowers. This process engenders an increase in capital accumulation through institutionalization of savings as well as investment. The gains to real sector of the economy depend on how efficiently the financial sector performs this basic function of financial intermediation {Comfort 2011}.
The Nigeria banking system, which is regulated by the Central Bank of Nigeria, is made up of Deposit money banks, Development Finance Institutions and other financial institution which include micro finance banks, finance companies, discount houses and primary mortgage institutions. The Nigeria banking which actually started in 1892 has experienced Bank Distress and failure in the 1900s and in the early 2000s due to poor governance and economic decay.
liquidated. For instance, the Banking failure of the late 1940s and early 1950s, and that of 1994-2006, had led to erosion of confidence in the banking system. During these period banks witnessed banking boom and banking doom. As a matter of fact 21 out of 25 indigenous banks failed due to bad management, inadequate capital, inexperienced personnel, excessive branch expansion, lack of acceptable prudential guidelines and lack of right banking orientation among the operators. Between 1994 and 2006, a total of 45 Banks failed and were closed having their licenses revoked by the Central Bank of Nigeria. The federal high court issued orders for them to be closed and appointed the Nigeria Deposit Insurance Corporation (NDIC) as liquidator of the banks.
The common strategy adopted by the Central Bank of Nigeria to prevent bank distress and strengthens their soundness is the employment of capital regulation. The Central Bank of Nigeria over the years resorted to shoring up the capital base of Nigerian banks up to the year of 2005 to improve their competiveness and soundness. The Central Bank of Nigeria further increased the minimum capital requirement to N25 billion in the light of new development occasioned by global financial crisis, change in technology and globalization. After the increment in minimum capital requirement it was noted that liquidity ratio, asset quality have not improved tremendously and bank distress are common phenomenon (Eferakaya, 2014).
1.2 STATEMENT OF PROBLEM
In 1892, the modern Banking started when South African had founded the African Banking Corporation (ABC), now First Bank of Nigeria PLC with an office in Lagos. The second was Barclays Bank (dominion colonial and overseas), which commenced operation in Nigeria in 1917 now known as our today’s union Bank of Nigeria. The first indigenous Bank in Nigeria was established in 1929 and called Industrial and Commercial Bank. The bank was liquidated in 1930 and was replaced by mercantile Bank n 1951. Agbonmagbe Bank was one of the most preferred bank decades ago but it’s now Wema Bank. It was incorporated in 1945 but the bank failed to meet the provision of the new banking decree and it was taken over and renamed Wema Bank in 1970. The free Banking era ended when Banking Ordinance of 1952 was promulgated. The period of 1952 and 1958 saw the first round of bank failure while another round of bank failures occurred between 1994 and 2006.
Bank failures leads to a significant loss of depositors, funds loss of confidence by the public in the Banking industry.
Due to the Bank failure and Distresses, public self-assurance in the Banking sector decline with attendant comments like:
“Why go to the Bank, I have a safe in my room” “I can’t keep my money in the Bank again”
“I can’t afford to lose my money” “We can’t continue like this”
These and many more comments from the public and government concern to protect public deposit and the restoration of confidence in the banking system prompted this researcher to examine the Central Bank policies and their effect on the sustenance of banks in Nigeria.
1.3 OBJECTIVE OF THE STUDY
In the light of the above the objectives of the study include:
i. To examine the situation of the Banking system in Nigeria prior to the establishment of CBN.
iii. To examine the role expected of Central Bank of Nigeria in the prevention of Bank crisis in the country.
iv. To examine the causes and the remedies of Bank Distress.
1.4 RESEARCH QUESTION
In order to achieve the objectives of the study, the following research questions have been raised, providing answers to them will help achieve the aim of this work. These questions include;
i. What are the causes of Bank Distress?
ii. What are the expected roles of Central Bank of Nigeria in the prevention of Bank Distress?
iii. What are the impacts of polices of Central bank on the sustainability of banks in Nigeria.
iv. What are the remedies for Bank Distress?
1.5 RESEARCH HYPOTHESIS
Two hypotheses were formulated to be tested:
HO: Central Bank of Nigeria policies do not significantly contribute to Bank Distress in Nigeria.
HO: The CBN through Nigeria Deposit Insurance Scheme has not significantly enhanced public confidence in the Banking Industry.
HI: The CBN through Nigeria Deposit Insurance Scheme has significantly enhanced public confidence in the Banking Industry.
1.6 SIGNIFICANCE OF STUDY
This study is undertaken with a view to provide the general public, banks and other financial institutions a clear picture of the causes, symptoms and remedies of Bank Distress. More so, to create awareness with a view to making them informed about the procedures to be followed in the event of Bank Distress.
This research shall assist monetary authorities in the formulation and implementation of banking policies so as to ensure sound banking practice. This research will ultimately contribute to the identification and resolution of the issues that touch on the financial crisis in Nigeria.
1.7 SCOPE & LIMITATION OF THE STUDY
This project entitled “Incessant Bank Distress and the Policies of Central Bank of Nigeria” scrutinizes the extent and the nature of Bank Distress and ascertains the adequacy of the economic and monetary policies of the government to solve the problem of financial crisis in Nigeria. This research entails what Bank Distress is, what constitute Bank Distress. It also discusses about the policies of Central Bank of Nigeria.
During the course of this research work the researcher encounter come hic-cups including:
I. Uncooperative attitude of some of my respondent: Due to the fact that some of the respondents do not fully understand why the questions were asked, some of them returned the questionnaires.
II. Financial problem: The success of any research work depends on the finance availability.
III. Time: This has to do with the time-frame given for the completion of the study and also other challenges; activities and engagements resulting in the limitation of the time devoted to the research work.
1.8 DEFINITION OF TERMS
BANK: An establishment authorized by a government to accept deposits, pay interest, clear checks, make loans, act as an intermediary in financial transactions and provide other final services to its customers
FINANCIAL DISTRESS: This is a condition where a company cannot meet, or has difficulty paying off, it financial obligations to its creditors, typically due to high fixed costs, illiquid asset.
INSOLVENCY: This is a state of being unable to pay money owned by a company on time. Those in a state of insolvency are said to be insolvent.
REFERENCES
1) Eferakaya Idowu (2014). Is increasing Bank capital the solution to improving Bank Liquidity and preventing Bank Distress in Nigeria?
2) Onoh J.k (2002). Dynamics of money banking and finance in Nigeria, An emerging market. Astra merdian publishers, P.O Box 5350, Aba, pg. 15-30.
