CRITICAL ANALYSIS OF CAUSES AND PROBLEM OF FINANCIAL DISTRESS IN NIGERIA
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CRITICAL ANALYSIS OF CAUSES AND PROBLEM OF FINANCIAL DISTRESS IN NIGERIA
INTRODUCTION TO CHAPTER ONE OF A CRITICAL ANALYSIS OF THE CAUSES AND PROBLEMS OF FINANCIAL DISTRESS IN NIGERIA
The importance of capital as a necessary but not sufficient condition for economic growth is recognised in the development economy, where it is thought that having adequate financial resources is a prerequisite for industrial transformation.
Experiences in several countries, most notably Japan, India, and Germany, have proven that banks, if properly developed in their respective countries, can act as a growth engine, considerably assisting the promotion of any nation’s rapid economic transition. Banks around the world play a strategic and lending role in the financial system.
Many Nigerians regard banks as locations where nothing can go wrong. As a result, they accept financial institutions as a safe place to put their money. It is also because of their trust in the sector as a whole that many of them have embedded this saving habit over the years, which is critical for the nation’s beneficial economic development.
According to Ekechi (1995), confidence is a prerequisite for economic recovery and long-term growth, but it is not a given. It must be gained via adjustment effort, or it is rented, because it is never yours and may be taken away at any time. Every day, an adaptable effort must be made.”
The expansion in the number of banks in the country prior to the implementation of SAP in 1986 is one legacy the structural adjustment programme (SAP) left on its trials. By August 1995, the figure had risen to around 127. This amazing growth of banks was initially seen as a positive development in the economy since it shared the economy’s resources.
Monetary authorities pay close attention to the banking industry due to its importance. During this process, they are occasionally confronted with the issue of how to appropriately address financial distress in the Nigeria banking industry. Financial difficulties in Nigeria’s banking system may be traced back to 1930, when the industrial and commercial bank (ICB) failed one year after its establishment.
As defined by Hornby, distress is “great pains, discomfort of sorrow caused by a lack of money or other necessities.”
In describing financial difficulty, John Ebhodaghe says, “two major problems are usually of serious concern.” There are two of them: liquidity and insolvency.” He went on to define liquidity as a bank’s incapacity to meet its obligations as they mature for payment when insolvent, which occurs when the value of its realisable assets is less than the total value of liabilities.
The following characteristics, which characterised the banks since during the time, summarise the grounds for early bank distress.
1. Foreign banks have a monopoly on the deposit base and credit availability.
2. Bank services targeted to expatriates’ needs.
3. The boom and bust of indigenous banks as a result of undercapitalization and poor quality management.
4. Inadequate banking, control, and direction.
It was recently realised that developing a statistically based, early warning system for identifying issue banks would substantially aid regulators in dividing banks into sound and unsound categories. Noteworthy is Decree No. 26 of August 1992, which specified the following for banks to remain healthy.
1. Designated cash reserve
2. Defined liquidity rationing
3. Compliance with prudential guidelines
4. Statutory required minimum paid-up capital Appropriate capital rationing
5. Effective management.
Any bank that does not meet any or all of the given criteria is deemed unhealthy. It must be stated here that there is a fine line between distressed and unhealthy banks. This is due to the fact that a bank that is unhealthy in the short run may become distressed in the long run. At the heart of a distressed bank are two fundamental issues: liquidity and insolvency. The latter cannot be ignored because it is an early warning sign of insolvency.
As a result, the CAMEL framework is commonly used to examine a bank’s financial situation. The ownership structure and types of banks are also crucial elements in explaining a bank’s financial state.
According to a recent NDIC analysis, ownership structure was utilised to explain the degree of financial crisis. Seven of the eight financially challenged banks were either owned or managed by the state government.
Another common indicator of a distressed bank in most countries is classified assets that exceed 100 percent of shareholders’ funds. Following from the preceding, it is reasonable to conclude that a distressed bank is one that is technically insolvent.
Financial distress is caused by a variety of factors such as macroeconomic conditions, the restraining policy of government capital adequacy, a widespread incidence of frauds, non-performing loans, unbraided risk by banks, and so on.
A distressed economy is the result of financial distress in the Nigerian banking industry. This book will go into detail into the causes, challenges, and solutions to the financial crisis.
1.2 STATEMENT OF THE PROBLEM
The Nigerian banking system has been in financial difficulties since the colonial era. One of the first indigenous Nigerian banks, the industrial and commercial banks (ICB), failed in the early 1930s, and between 1992 and 1994,
the central bank of Nigeria (CBN) and the Nigerian Deposit Insurance Corporation (NDIC) grappled with the issue of how to best prevent financial distress in the banking sector. During this time, more than thirty banks were declared financially distressed.
The question remains as to what is causing these financial difficulties in the banking sector. According to Charles Worth, research occurs when there is a problem to be solved, idiosyncrasies or puzzles regarding a phenomenon, or a question to be answered in order to discover and study the causes and problems of financial hardship in the Nigerian banking system.
1.3 OBJECTIVES OF THE STUDY
The researcher has specific goals in mind when writing this project. The following are the goals of this article in accordance with this.
1. Determine the extent to which Nigeria’s banking sector’s inadequate capital base has contributed to financial turmoil.
2. Determine the extent to which the proliferation of banks has led to the financial distress in the Nigerian baking sector.
3. Determine how ineffective management contributed to financial distress in the Nigerian banking system.
4. To a considerable extent, highlight how fraudulent practises have contributed to financial distress in the Nigerian banking system.
5. Determine the consequences of financial distress in the Nigerian banking system.
6. To suggest potential methods of preventing financial hardship in the Nigerian banking system.
1.4 SIGNIFICANCE OF THE STUDY
This research will be extremely beneficial to the Nigerian financial sector. This would enable them to understand the reasons of financial distress in the Nigerian banking system, as well as how to avoid financial distress based on the study’s recommendations.
The government will benefit as well. As economic operators, they will be aware of the causes and consequences of financial distress in the economy. Depositors and potential investors will profit as well.
A development-conscious country like Nigeria must assess the functioning of its financial sectors in order to avoid jeopardising its development efforts. It is advantageous that our findings would contribute to the existing literature on the causes and challenges of financial distress in the Nigerian banking system.
1.5 HYPOTHESIS STATEMENT
The following hypothesis were developed and statistically evaluated in order to get a valid outcome.
1. Ho: The Nigerian banking sector’s financial difficulties is not due to a lack of capital.
Hi: The Nigerian banking sector’s financial difficulties has been exacerbated by a low capital base.
2. Ho: Inefficient management has not led to the Nigerian banking sector’s financial problems.
Hi: Ineffective management has exacerbated the financial distress in the Nigerian banking sector.
3. Ho: Fraudulent practises in the Nigerian banking sector have not contributed to the country’s financial woes.
Hi: Fraudulent practises in the Nigerian banking sector have contributed to the country’s financial hardship.
1.6 SCOPE AND LIMITATIONS OF THE STUDY
This study looks at the causes and challenges of financial hardship in the Nigerian banking sector, with a focus on AFEX Bank Plc. Due to the following constraints, the researcher was unable to complete the work extensively for the purpose of this study.
TIME CONSTRAINTS: Time was my greatest adversary because I had to balance my class work, assignments, home work, and project work all at once, and most of the materials for the project work were not in one location.
FINANCIAL CONSTRAINTS: Finance was my main constraint because I didn’t have enough money to run around, which hampered comprehensive coverage of the work.
1.7 DEFINITION OF TERMS
BANKS: Banks are financial institutions that provide services to the public (individuals, businesses, organisations, and governments) by receiving deposits, making advances, and performing other functions.
FRAUD: Fraud is the intentional twisting, manipulating, or distorting of financial statements, or the use of criminal deception to fool someone in order to gain an illegal benefit.
LIQUIDITY: The inability of a bank to meet its liabilities when they mature for payment is referred to as liquidity.
INSOLVENCY: A bank is insolvent when the value of its realisable assets is less than the total value of its obligations.
CAPITAL ADEQUACY: Capital adequacy occurs when banks have adequate capital, as a result of appropriate fund management, to serve as a backup and, of course, a shock absorber in the event of losses occurring from commercial transactions.
SHAREHOLDERS: Shareholders are the bank’s owners, whose names were listed in the bank’s memorandum when it was registered. This is accomplished by purchasing the bank’s stock.
PAID UP CAPITAL: This is the portion of the issued capital that has been paid up.
DISTRESS: Extreme agony; discomfort or grief induced by a desire for money or other necessities.
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