IMPACT OF BANK DISTRESS ON THE PROFIT GROWTH OF EXISTING COMMERCIAL BANKS
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IMPACT OF BANK DISTRESS ON THE PROFIT GROWTH OF EXISTING COMMERCIAL BANKS
PROPOSAL FOR EVALUATING THE IMPACT OF BANK DISTRESS ON EXISTING COMMERCIAL BANKS’ PROFIT GROWTH
The topic “Evaluating the Impact of Bank Distress on Commercial Bank Profit Growth (A Case Study of Selected Commercial Banks)”
The topic “Evaluating the Impact of Bank Distress on the Profit Growth of Commercial Banks” seeks to assess the impact of bank distress on the profit growth of commercial banks. It assesses how distress impacts commercial bank profits, either positively or negatively.
A ten-year profit trend of some selected institutions will be assessed for effective implementation of this operation. This ten-year profit will cover the period of distress as well as the period after distress for an accurate appraisal of the effort.
Meanwhile, these banks’ profits will be collected using a main data source (Annual Report) and secondary sources of information, and their primary data will be examined using the most relevant statistical tools for an accurate conclusion.
However, there will be a hypothesis formulation that is based on the known negative implications of distress. However, this hypothesis, as well as the formulation of research questions, will be sampled in relation to the work’s purpose for the best results.
After all, our statistical test results will be used to form an inference. A recommendation will be issued based on the findings of our tests.
The distress in a bank caused the banks to have lower profit during the distress period and higher profit after the distress permit; however, banks generally made lower profit during the distress period due to insufficient cover of losses from the profit generated internally, which prevented the banks from generating internally positive capital.
The bank or some banks may also face illiquidity or insolvency, resulting in a situation in which the bank is unable to meet its liabilities, resulting in illiquidity. In a bank, this occurs when the value of its realisable assets is less than the total amount of its obligations.
Furthermore, a financial institution’s inability to bridge its core task of producing credit and loss of liquidity, or the bank’s liability to convert assets into cash to meet any extraordinary demand for cash by its clients.
INTRODUCTION TO CHAPTER ONE OF EVALUATING THE IMPACT OF BANK DISTRESS ON THE PROFIT GROWTH OF EXISTING COMMERCIAL BANKS
BACKGROUND OF THE STUDY
Money is required for the efficient production and exchange of goods and services in any contemporary economy, and the bank is the vehicle for affecting it. For the financial business, the last few years have been both terrible and transformative.
The banking industry generated the most technically insolvent and undercapitalized banks. The amount of distress in the country’s banking system reached an unprecedented level, causing worry among the government, regulatory authorities, bankers, and the general public.
Changes aimed at promoting banking in Nigeria characterised the Nigerian banking scene. The changes can be classified into phases, but due to the nature of our work, we will focus on two: the laissez-faire banking era (1894-1952) and the restricted banking regulator era (1952-1958).
During the first phase, foreign banks dominated the banking industry, primarily the African Banking Corporation, forerunner of the (BBWA) British Bank for West Africa, the current First Bank of Nigeria, the Barclays bank DCO (Dominion Colonial and Overseas), the current Union banks, and the British and French Bank, forerunner of the current United Bank for Africa.
Although discrimination against Nigerians by these banks resulted in the development of several indigenous banks, these indigenous banks sadly offer little or no competition to the foreign banks, owing to their low capital base or insufficient management capacity.
As a result, all but three indigenous banks failed. The National Bank of Nigeria, founded in 1933, the Agbomagbe Bank (now Wema Bank), founded in 1945, and the Africa Continental Bank, founded in 1947, are among several that have lasted.
In 1948, a panel of investigation headed by G.D. patron was established to investigate the banking business in Nigeria. Their findings resulted in the adoption of Nigeria’s first financial legislation, the financial Ordinance of 1952.
The 1952 ordinance established the standard and procedure for the conduct of banking business by establishing a mandatory minimum capital requirement for banks, both foreign and domestic, of $100,000 and $12,500, respectively,
and it also established regulations to prevent bank failure. However, all of the indigenous banks that were formed in the country during this time period also collapsed.
The bank failures of this century were largely ascribed to the banking industry’s monopolistic structure, which allowed foreign banks to enjoy exclusive patronage from British enterprises. The indigenous banks that survived were able to do so because to the backing they received from their state government.
The distress situation in Nigeria’s banking industry is very new. The manifestation became visible after a series of policy shocks, beginning in 1988 with a requirement from the Central Bank of Nigeria (CBN) to banks that naira backing for foreign exchange applications be registered with the CBN.
This was followed in 1989 by another regulation demanding the transfer of public sector deposits to the CBN. These two mandates exposed some banks’ precious liquidity position and the distress they have been harbouring underground. What was supposed to be a transient liquidity problem for a few banks quickly engulfed many more.
It is critical to emphasise in this work that the banking sector was already in trouble when the NDIC was founded. According to them, around 7 (seven) banks were technically insolvent.
The government did not undertake a clearing exercise that would have removed distressed institutions from the system at the time because it was feared that such an action would lead to a loss of public confidence and a flight of foreign capital, and there was no deposit insurance institution to expeditiously manage such bank closures.
Nonetheless, the NDIC was compelled to insure all banks. That is, the organisation was involved in managing distressed banks before it could settle down and devote sufficient resources to this vital role.
Banks’ intermediation role and relevance in both the transmission of monetary policy and the payment system highlight their importance as well as the difficulty that bank distress at the current level in our economy could cause. Banks generate financial resources and put them at the disposal of deficit economic growth in the form of higher employment of otherwise idle resources,
which leads to increased output. As a result, an industry-wide bank insolvency, such as that seen in Nigeria, could be expected to slow the economy’s rate of capital formation, cut its level of employment and production, and, eventually, slow the pace of economic growth.
1.2 STATEMENT OF THE PROBLEM
The danger to banking habits and the establishment of an effective payment mechanism is a severe concern posed by widespread bank distress. The loss of confidence, the aftermath of the banking sector’s difficulties, forced numerous businesses to take greater risks by returning their funds to well-established safe havens dominated by older generation institutions.
This research project is thus concerned with “evaluating the impact of bank distress on existing commercial bank profit growth.” Making use of (a vase study of selected commercial banks).
1.3 PURPOSE/OBJECTIVE OF THE STUDY
The primary goal of this research is to provide an overview of the impact of bank crisis on commercial bank profit growth. Investigate the causes of bank collapse in Nigeria.
Other goals are as follows:
1. Determine the root reasons of bank distress in Nigeria. To determine the impact.
2. Determine viable bank distress avoidance techniques or failure resolution possibilities.
1.4 RESEARCH QUESTIONS
(1) What are the underlying reasons of bank distress?
(2) What effect does bank distress have?
(3) What is the present commercial bank’s profit growth rate during times of distress?
(4) What are the consequences of bank insolvency?
(5) What are the potential solutions to this situation in the banking industry?
1.5 RESEARCH HYPOTHESIS
H1: Distress has little effect on commercial average profit.
bank
Ho: Distress has an impact on business average profit.
banks.
1.6 SIGNIFICANCE OF THE STUDY
The following people will benefit from this research project:
1. New generation banks that want to understand the implications of bank crisis in the banking industry and how to restore consumer confidence while maintaining an efficient payment mechanism.
2. Nigeria Deposit Insurance Corporation: The work could be extremely beneficial to the NDIC in terms of crisis management and prevention techniques. Also, in the financial industry, there are options for failure resolution.
3. Students who want to know the magnitude of the banking industry’s suffering and the pattern of distress as it affects modern banking may profit from this study as well.
1.8 SCOPE, LIMITATIONS, AND DELIVERY:
While the population of study will theoretically be the banking impact distress in Nigeria. The research aims to assess the influence of bank distress on profit growth at Union Bank of Nigeria Plc, First Bank of Nigeria, United Bank for Africa, and Guarantee Trust Bank. It will also examine the trend of these banks’ profits over a ten-year period (1992-2001).
1.8 DEFINITION OF TERM
What exactly is Distress? It is characterised as excessive suffering caused by a lack of money or a state of risk, tragedy, and misfortune.
What exactly is an evaluation? This can also be defined as a type of notion or judgement of something, as well as the calculation of anything in numerical value.
What exactly is Impact? This is a strong influence or impression to the bank. It is also a condition in which something will be pressed tightly or firmly together.
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