THE EFFECT OF BANKING INDUSTRY DISTRESS ON THE NIGERIAN ECONOMY

CHAPTER ONE

 

INTRODUCTION

 

1.1          Background of the Study

 

The financial system of a country which the banking industry is part, refers to the totality of the regulatory and participating institutions as well as instruments involved in the process of financial intermediation.

 

An efficient system is widely accepted as a necessary condition for an effective functioning of a nation’s economy. The state of development of the financial market in a country, as noted by Varsh (1991), serves as barometer for measuring the stage of development of the economy. The mix of these financial intermediaries varies from country to country, reflecting the stage of development and the degree of sophistication of the country’s economic agents. The market provides services that are essential to a modern economy by offering access to a variety of financial instruments that enable economic agents to poll, price and exchange risk. This is done through assets with attractive yield and marketability.

 

In addition to the intermediation role, a nation’s financial links the domestic economy with the rest of the world by providing the means for the settlement of international transactions. It has also been observed that growth in the financial industry, if transmitted well, would result in the growth of real sector and the opposite is possible if the financial sector is repressed and inefficient (Cameroon, 1972). The component of the financial system that is at the centre of the intermediation role and the greasing of the engine of economic growth and development is the banking sector.

 

1.2          Statement of the Problem

Bank distress occurs when a bank or some banks in the system experience illiquidity or insolvency resulting in a situation where depositors fear the loss of their deposits and a consequent breakdown of contractual obligations.  While a bank is said to be illiquid when it could no longer meet its liabilities as they mature for payment, it is said to be insolvent when the value of its realization is less than the total value of its liabilities (a case of “negative networth”). These could lead to bank runs as depositors lose confidence in the system and seek to avoid capital loss. The uncertainty generated as a result of distress in banking institutions, if left unchecked, often raises real interest rates, creates higher costs of transactions and disrupts the payment mechanism with the attendant economic consequence.

 

The uncertainty generated as a result of distress in banking systems, if left unchecked, often raises real interest rates, creates higher costs of transactions and disrupts the payment mechanism with the attendant economic consequence.

The extent and dept of the banking distress can be of generalized nation or systematic generalized distress exists when its occurrence is spreading fast and cots across in terms of the ratio of total deposits of distress institutions to the total deposits of the industry: the ratio of total assets deposits of distressed institutions to total branches of the industry among others has not adversely affected the confidence of the public in the banking system.

 

The problem may become systematic and of serious concern to the relevant supervisory/regulatory authorities when its prevalence and the contagious effects become endemic and pose threats to the stability of the entire system, saving mobilization, financial intermediation process and depositors confidence (Balino 1991). Under this situation, the ratios of the relevant variables should have risen to a level that public confidence in the system would be completely eroded.

 

The current distress condition in Nigeria’s financial industry has been attributed to a variety of causes, ranging from institutional, social, economic and political factors. However, these were largely impressions, which had not been subjected to any empirical verification at least with respect to the Nigerian situation.

 

 

1.3          Objectives of the Study

This study was embarked upon to achieve the following objectives:

a.          To highlight the effect of banking industry distress on the Nigerian economy. .

b.         Ascertain whether bad dept is a significant determinant of bank distress in Nigeria.

c.          Ascertain whether fraud and forgeries is a significant determinant of bank distress in Nigeria.

 

1.4          Research Questions

Arising from our statement of problem, we ask the following question.

a.     How far does a relationship exist between bank distress and Nigeria ‘s  GDP

b.     To what extent does bad debt determines bank distress in Nigeria?

c.     What are the effects of fraud and forgeries in bank distress

 

1.5          Hypotheses

Our hypotheses are as follows:

 

 

 

 

 

Hypothesis One

There is no significant relationship between bank distress and Nigerian GDP (Gross Domestic Product).

 

Hypothesis Two

Bad debt has no significant effect on gross domestic product (GDP) of Nigeria

 

Hypothesis Three

There is no significant relationship between fraud and forgeries and bank distress in Nigeria.

 

1.6          Scope Of The Study

The study is limited to two banks. Distress bank and healthy banks. Distress in the history of the Nigerian banking sector is not an entirely new phenomenon, the manifestation of the current problem became discernible with some policy shocks starting in 1998 and reaching its climax in 2005 when banks are mandated to comply with N25 billion minimum capitalization requirements. This study is limited to thirteen years (2000 – 2012), which covered the take over of management and control of 24 distress banks by NDIC.

 

 

 

 

1.7          Significance Of The Study

This research work would not be useful and of immense significance to operators and regulators in the industry to work with.

a.     It will enable the policy makers to employ all the necessary measure in order to reduce the causes of distress in the banking industry and to know some reasons why banks went under.

b.     All stakeholders in the banking industry will appreciate better the damaging effects of non-performing loans and advances.

b.     Various banks credit customers will be able to understand better their contributions to the distress palaver of their banks.

c.     To academics it will add to the growing literature on credit products, product marketing and bank distress in Nigeria.

d.     The study will make relevant recommendations by solving the distress syndrome occasioned by non-performing loans and advances, as well as suggest the way forward.

 

1.8          Limitations Of Study

The limitations of this study are as follows: inability to lay hand on some vital bank documents which are classified as security, documents. This we believed would help in this analysis. Some of the respondents were reluctant to complete the questionnaires as they believe that it was another academic exercise which would not add value or influence how the issue of distress would be resolved.

 

These limitations notwithstanding, it is hoped that findings of this research work will help to achieve the entire objective of the study.

 

1.9          Operational Definitions of Terms

a.     Distress: This occurs when a bank experience illiquidity resulting in a situation where depositors fear the loss of their deposits and a consequent break down of contractual obligations.

b.     Hard Core Loan: This is a situation where a bank’s customer borrowed money and refused to service the loan/advance through the payment of capital and interest for a considerable length of time.

c.     Cosmetic Management: This is a derivation of technical mismanagement which consists of hiding past and current losses to buy time and stay afloat, looking, hoping and waiting for miracles to happen.

b.     Insolvent: This is inability of the banks to settle or repaid their current obligation as the fall doe.

c.     Open Bridge Over Loan: It is a short term loan to be repaid from know source. But the original property has not been sold prior to payment.

d.     Closed Bridge over Loan: A short loan to be repaid from a guaranteed brown source, closed bridgovers arises when the original property has been sold, contracts  and a firm completion data fixed, which means, repayment of the loan is certain from the property to be sold.

e.     Banker: This is a dealer in capital or more properly a dealer in money. He is an intermediate party between the borrower and the lender. He borrows to one part and lends to another.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

Egbojikwe G. (1996). Implications of distress in banking industry, paper presented at: a one day briefing on failed banks (recovery of debts) and financial malpractices in banks, organized by the NDIC.

 

Elebute, K. (1999). The role of external auditors in resolving distress”. This Day Newspaper 30th May.

 

Ezeuduji, F.U. (1997). Bank failure the worst corporate crisis of the millennium in Nigeria. Lagos: Frankad Publishers Ltd.

 

Magaji, S. (1996). Introduction to modern banking.  NDIC Quarterly: Various  Issues.

 

Nigerian Deposit Insurance Corporation (1999). A decade of deposit insurance in Nigeria: issues and challenges. Nigerian Deposit Insurance Corporation

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