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THE IMPACT OF BANK FAILURE IN NIGERIA ECONOMY A CASE STUDY OF SAVANNAH BANK OF NIGERIA PLC

  • Department: BANKING FINANCE
  • Chapters: 1-5
  • Pages: 97
  • Attributes: Questionnaire, Data Analysis, Abstract
  • Views: 347
  •  :: Methodology: Primary Research
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THE IMPACT OF BANK FAILURE IN NIGERIA ECONOMY A CASE STUDY OF SAVANNAH BANK OF NIGERIA PLC

CHAPTER ONE INTRODUCTION 1.1 BACKGROUND TO THE STUDY 

One of the indices for measuring the development of an economy is the size, maturity and safety of its banking industry. This is because the banking industry plays a very important role in the mobilization and utilization of investible resources (financial) in the economy. It acts as the intermediary units of the country through a process of “financial inter-mediation”. The absence of a market for which can greatly reduce the growth of economic activities; its business activities are catalysts for economic development.  The Nigeria banking industry at the movement appears to be the verge of collapse. The banking public seems to have cost confidence in banking and chances are that this erosion of confidence may not be reversed unless the regulatory agencies.

The central Bank of Nigeria (CBN) and the Nigerian Deposit Insurance Corporation (NDIC) rise up to the challenge. It was the belief by the government that the banking crisis of the 1990s was caused mainly by fraud that to the promulgation of the failed banks (Recovery of Debts) and financial malpractice’s in Banks Decree Number 18 of 1994 (failed banks Decree). It is however difficult to justify the draconian nature of the failed bank Decree and its implicit assumption that fraud was a major cause of the banking crisis licenses withdrawn by the C.B.N ON account of sharp practices. In other words while it is true that the monumental growth in the number o registered banks may have led to increased fraud, it is unlikely that it was the sole cause of the subsequent banking failures. There is no doubt that fraud has exasperated a desperate situation in the Nigeria Banking sectors. Fraud and embezzlement are not widespread. Both the government and the central Bank are unturned in the fraud and crises jamboree. Furthermore, fraud in itself may not be a sufficient condition for a banking crisis. The researcher submits that extremely bad management may not prove fatal to a bank until adverse economic conditions led to unexpected capital outflows or loan losses. Thus even if every bank which failed is judged to have suffered from mismanagement or fraud, or operated in a over populated banking market, it may well be the case that adverse economic conditions will be the proximate causes of many bank failure.

The NDIC implicitly agree with the above submission in a circular dealing party with current banking crises in Nigeria. It concluded, “the revival of the banking system would entail strong political will that should allow for the adoption of the appropriate failure resolution option, based on the technical judgment of the regulators. Finally and most importantly, a successful restructuring of the banking system would entail a stable macro-economic environment with little relative price distortions that would ensure a sustainable growth for the economy”. Macro economic instability in itself fuels fraud. If the future is perceived as uncertain for instance, persons are more likely to get desperate the perpetrate fraud. It should also be noted that general economic stress is not limited to the banking sector. Inconsistent government policies, high inflation, and the ever depreciating local currency have made planning impossible across most economic sectors further entrenching stress. The economic and social policies of government therefore play a prime role in the promotion of a stable business environment in all economic sectors, including banking. The policy actions that can effectively tackle bank failure in Nigeria must therefore look beyond the banks. It is the researcher’s submission that in addition to its traditional role of financial inter-mediation, the Nigeria Banking industry has a major role to play in the development of the Nigerian economy. Thus necessitating this research work for purposes of this study, the term banks failure and bank distresses are to be used inter-changeably. 

1.2  STATEMENT OF THE PROBLEM

In recent years, the volume and frequency of crises in the Nigerian banking industry has been on the increase. According to NDIC, the level of reported fraud in Nigeria banks rose from N804m in 1990, N3, 199m involved in fraud rose from 3 percent in 1990 to 22 percent in 1998. Perhaps the highest fraud ever reported in any particular year by a Nigeria bank occurred in 1998 when united Bank for African Plc wrote off N786m on account of fraud. One would be tempted to consider the inquisitive mind as to necessity, and indeed imperativeness of the banking industry in Nigeria economic developments/Empowerment as partner in progress. Could Nigeria not have continued to do without these banks, as in fact she had done prior to their advent?

Other problems/ poses to be discussed in this paper include:

a. Bank failures mimical to economic growth are development. The strategic position of bank has negatively wide implications on the fate of depositor, workers shareholders and the entire populace. The banking image is therefore grossly distorted with the result that not much has been achieved in eliminating crises and restoring confidence of the banking public.

b. Judging from the facts available in respect of major frauds perpetrated in the past and considering their astounding success. Apparent careful planning and the boldness with which they were executed one cannot but frankly, albeit painfully, admit that fraud is an upcoming sector of the invisible yet forceful (is it powerful?) industry called crime. Investigations are urgently needed to unravel their different forms. 

c. Aside of fraud, extremely poor management and adverse economic conditions lead to bank and failure due to unexpected capital out flows or loan losses. Thus, it may well be the case that adverse economic conditions will be the proscrimate cause of many bank failures. This is evident in situations of spillover of political uncertainties and political tension. 

d. Regulatory authorities are not responsive to challenges of enforcing basic lows relating to bank crises and fraud. This is perhaps the more worrisome. For instance, NDIC decree of 1998 required insured bank to render monthly returns of frauds, forgeries or outright theft including a detailed report of such events. Unfortunately, most banks do not obey these simple nile. The questions of course are how many banks appreciate the importance of this statutory requirements both for themselves and the entire industry and why are regulatory authorizes not responsive to these challenges?

e. The failed bank decree was supposed to represent an attempt by the Nigeria military government to prevent parties from evading justices by exploiting the technicalities, inefficiencies and loopholes in the legal system. The tribunal has exclusive jurisdiction over all ancillary matters, including remand, bail and any other preliminary issues connected with an off jurisdiction. With all these power culprits of bank failure who have met with these tribunal have never served as deterrents for intending perpetrators.  

Regulatory agencies need to do more practical work to encourage banking at all level, than just revolving operating licensee and paying N50, 000.00 to every depositor. Many depositors believe that government has not done enough to protect their funds since many will cry fowl, as there are chances of more banks collapsing. NDIC Act should be reviewed to accept N100, 000.00 as payment for insured deposits. These issues and views form the central focus of this work, which the paper addresses too.  

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