BANK DISTRESS: A CRITICAL REVIEW OF THE COURSES AND POSSIBLE CONTROL IN THE NIGERIAN BANKING INDUSTRY (A CASE STUDY OF N.D.I.C ENUGU)
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
In the past financial report of commercial and merchant bank showed that they usually carried out excess liquidity. But by the end of 1993, the huge excess liquidity disappeared. The minimum required liquidity ratio was 30%s Nwaigwe K. O. (2015). In later years, the ratio deteriorated, it was claimed that the issuance of stabilization securities contributed to the above. Also another development which the researcher was informed about is the fact that a good number of issued bank were grossly under capitalized. To worsen the case, non-performing loan and advances eroded the inadequate capital base since the banks were compelled to make adequate provision for the non-performing credit.
The indemnity also experienced poor management which eventually opened the floodgate for distress to surface in the system. Poor management of the assets and liabilities of the bank was one of the major causes of the distress in banking industry today. The jungle politics also helped to deteriorate the economy because survey shows a consistent down-turn and the effect the banking industry adversely. Also, given excessive risk taking by some banks management in a competitive environment and the prevalence of frauds and forgeries in the system, the evil seed for bank distress was sown awaiting germination and harvesting. However, in 1998, the federal government of Nigeria (FGN) as if in anticipation of the above ugly development had created a Deposit Insurance Scheme managed by Nigeria Deposit Insurance Corporation was created by Sec. 39 and 40 of Dec. 22 of 1998 to restore confidence and security of the public in the banking system to control and manage the distress banks thereby ensure a safe and sound banking system in Nigeria.It was against background that the researcher resolved to carryout an appraisal of attempting the proffer workable solutions to the problems of the distress.
1.2 STATEMENT OF THE PROBLEM
A distress bank is one whose performance has persistently not confirmed favourably with established parameter for gauging the financial conditions of banks and also when the bank becomes illiquid or insolvent Nwaigwe K. O. (2015). Insolvent means when the bank can not meet its current obligation as at when due. On the other hand, a bank is confided insolvent when the total value of its realization assets is less than the banks total liabilities. And also it has a negative net worth. However, the rate of distress varies from one bank to another and that is based on the degree of insolvency and liquidity. At this juncture, it is important to note that the regulatory authority (NDIC) use the composite rating “CAMEL” parameters to assess the performance and financial position of banks.
Base on this rating, the banks that are classified unsound has the following characteristics:-
(1) Compute sweeping away of shareholders funds are due to operating loss of its assets.
(2) High ratio of non-performing loans, relative to total loans.
(3) Weak internal control system.
(4) Poor management information system
(5) Liquidity-where they could no longer meet customers demand for cash.
(6) Very low or negative net income as a result of poor asset and liability management.
Based on the above characteristics it was possible for the Central Bank of Nigeria (CBN) to take over the board and management of five distressed banks in 1993. These banks were adjudged distressed because of the alarming deterioration in their financial condition and the inability to recapitalize them as called for by the monetary authorities. These take over came as a surprise and an Interim Management Board (IMB) was constituted to handle the affairs of these distressed banks until they revived. The (IMB) was charged with responsibility of seeing to early survival of the distressed banks through ensuring compliance of the bank with the regulations to ensure safe and sound banking practices. This also had the power and duty to recovering loans.
1.3 OBJECTIVES OF THE STUDY
The objectives of this research work is;
(1) To examine the distress in the banking industry.
(2) To determine the causes of the bank distress
(3) To determine the remedies to the distress in the banking industry.
(4) Banking industries attempts at evolving possible strategies for it eradication.
1.4 RESEARCH QUESTIONS
For the purpose of this study, the following research question are posed and answered to them will provide a guide to the research investigation.
(1) Why is there distress in the banking industry
(2) What are the causes of bank distress?
(3) How does it affect the banking industry?
(4) What are the remedies for bank distress?
1.5 RESEARCH HYPOTHESIS
The research work is based on the hypothesis that;
Ho: Banks are not the engine for growth and development in modern economy
Hi: Banks are the engine for growth and development in modern economy
Ho: Distress in banks has no serious consequences for the banking industry.
H1: Distress in banks has serious consequences for the banking industry.
Ho: Control of bank distress is not a compulsory task and should not be undertaken by the bank management.
H1: Control of bank distress is not a compulsory task and should be undertaken by the bank management.
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