The Impact of Bank Failure in Nigeria Economy

Introduction

1.1 Background to the study

Bank failure usually affects all sectors of the economy. Globalization has also contributed to the bank been involved in distress in recent time. John, Gianni and Elena (2008) stated that bank failure can be triggered by weakness in banking system, characterized by persistent illiquidity, insolvency, undercapitalization, level of nonperforming loans and weak, corporate governance among others. Distress in banking industry in Nigeria started between 1930 and 1950. As a matter of fact about 21 banks failed and were recorded in Nigeria between 1930 and 1958 when the central bank of Nigeria (CBN) was established. Examples of such banks are Alpha Merchant Bank, Financial Merchant Bank and Republic Bank (CBN statistical Bulletin, 1988).

Over the last couple of decades the Nigeria almost crude form it has characterized with in pre-colonial and colonial dry. It has become sophisticated that economic experts today can proudly thump their chests. With due regard to ownership structure of the institution, the regulatory framework, the instrument employed and number of established institutions, Nigeria can be said to posses the most sophisticated financial system in Africa.
Within the Nigeria financial system itself, the banking institution have been most remarkable in growth this is just as well in any case considering the critical position which they occupy in a complex financial position which supplies the money and cridit needs of the economy.

The world bank nor banker is neither used nor declined in the central of Nigeria (CBN) Decree No 24 of 1991 nor bank and other financial institution Decree (BOFIO) No 25 of 1991 but section 2 of bill of exchange act 1881 provides that bankers include a body of persons whether incorporated or not who carry out the business of banking section 2 (1) of the Evidence act defines banks bankers to means “any person or persons, partnership or company carrying on the business of bankers.

In view of these highlights, it becomes easily comprehensible why the failure of a bank has fare reading consequences the ability of bank to operate successfully rest upon how well they are able obtain the contidence of the public if that confidence is missing the gap will be too great for the banks to fill the impacts of bank failure on economic development of Nigeria can be expressed in a nut-shell to be the following.

1. Lack of effective and efficient financial intimidation
2. Loss of public confidence in the system further depression of the economy additional burden on the regulatory authorities escalation of social vices.

For the sake of citizenry and in the interest of economic development there is as expedient need to devise a host of remedying situation.

The fact that a bank fail today is not to say that incidence is systemic there must be a number of way out of any sad predicament. The only crack is how will these remedies are frothily employed such remedies would include:-

1. The cultivation of a stable political environment.
2. The strengthening of regulatory agencies
3. The taking over by regulatory bodies of all terminally distressed banks.
4. Privatization and commercialization of all government owned bank

1.2 Statement of problem

The problem of distress in the banking sector including outright failure of banks has been observed in Nigeria as far back as 1930. Indeed, between 1930 and 1958 over 21 banks failed. Also between 1994 and 1998, about 31 banks’ licenses were revoked for failure to meet the statutory minimum capital requirement for banking operations, (Mihael et al 2009). In 2009, the CBN hinged the removal of five banks chief executive officers on distress occasioned by high concentration of non-performing loans on the board. The distress syndrome has caused a down turn in the economy and made negative impact on virtually every segment of the Nigerian economy among
In Nigeria, CBN (2010) report reveals a large volume of commercial banks total credit goes to the government rather than the private sector which are the major corporate organizations that makeup the economy. In the past two decades, the country also witnessed an atmosphere of crisis and disappointment. The nation’s situation was in many ways dramatic which resulted in enormous and fast growing deficits.

This is because firms find it difficult to raise funds to engage in new investment or expansion. Commercial banks have abandoned their traditional services and engage in speculative businesses such as trading in stock and oil business This is an addition to the country’s heavy debt burden, the aid has also stagnated and the conditions of international credits are becoming more and more tough and the possibilities to increase Nigeria’s exports are diminishing as recession depends. It is therefore increasingly evident on the grater need and effort to mobilize domestic savings for onward credit delivery to develop industries in Nigeria, if a desired economic development is to be achieved.

Chris (2011) stated that in the past, and perhaps till now, most banks in Nigeria do not have clearly defined and adherently implemented credit lending policies. What exist is more or less “discretion or good judgment lending” a practice which has fuelled unacceptable incidence of bad debt stock, leading to stresses and depletion on liquidity position of the banks. However, The Central Bank of Nigeria (CBN) has continued to issue Prudential Guidelines to banks on time interval basis. The recent guidelines, which became effective from May 1, 2010, addresses various aspects of banks’ operations, such as risk management, corporate governance, know your customer (KYC), anti-money laundering, counter financing of terrorism, loan loss provisioning, peculiarities of different loan types and financing different sectors of the economy, among others.

Despite the past various guidelines, the banking industry has continued to witness various form of distress and liquidity problem, which has been caused by high investment in speculative businesses, mismanagement, high toxic assets, poor loan repayment supervision, fraud and corruption among bank staff, dynamic nature of the Nigerian economy etc.

This therefore raises the question of how effective CBN guidelines. Supervision and monitoring have been ensuring the Nigerian banks adoption of efficient credit management policy. From the fore-going, it shows that bank management have not taken seriously the issue of creating quality loans and have not respected the bank credit policies especially the five “C’S” thus the causes of distress in the banking industry.

This dependence on domestic sources of capital, therefore, requires a wide range of independent well organized and adopted. Financial institution, which has to mobilize internal resources for the purpose of capital formation and allow the capital to be invested conveniently and freely into desired development ventures.

Commercial banks in Nigeria are expected to play this role as the largest and most active bank in the Nigeria financial system. It is against the background that this study attempts to explore past trends, the role and scope of commercial banks as financial intermediaries in mobilizing domestic savings for credit creation and investment purpose for development of business enterprises in Nigeria.

1.3 Objectives of study

The objectives of the study would be as follows:

1. To provide the conceptual meaning of banking failure.
2. To examine if banking failure as a result of credit delivery have impact on individual growth.
3. To evaluate the extent of credit delivery before its failure and after.
4. To examine if banking failure as a result of credit delivery have impact on the GDP.

1.4 Research questions

The study will attempt to find answers to the following relevant questions:

1. What is the conceptual meaning of banking failure?
2. Does banking failure as a result of credit delivery have any impact on the growth of any nation.
3. To what extent has is credit given after its failure
4. Does banking failure has impact on the GDP

1.5 Research hypothesis

The hypothesis further guided the work and have been stated in their null form.

H0: credit delivery in the era of bank failure has no relationship with the growth of the economy.

1.6 Significance of the study

Banks are often found at the center of systemic financial crises. The causes of these crises have long been debated. Do they stem from depositor panics or do they arise because bank balance sheets are exposed to common factors? If it is the latter, then is there any sense in which bank failures can be contagious? Can anything be done to prevent these crises or stop them from propagating once they begin? This thus makes this study of significance as it will provide answers to this questions.

This study is aimed at assessing the traditional role of commercial banks in delivery credit to the productive sectors of the economy in Nigeria. Thus, an exposition into how credit is made available to firms will help to evaluate the significance of the commercial banks in Nigeria.

It will also help to enlighten the public on how banks create credit and the various channels through finance can be raised from them.

It will further help monetary authorities assess the impact of their polices on the performance of commercial banks when carrying out their intermediation functions.

The nature of banking business which is highly geared and conducted with great secrecy when compared with other real sector business has raised some eye-brow from the authorities and the public of late which thus makes this study of great importance.

This study will also enlighten the public on the reform programmes and policies of the CBN to ensure the safety of the banking industry.

The work will also give an insight into credit management in Nigerian banking industry while also unveiling the quality of loans credited by banks in Nigeria

Past causes of failures and distress in Nigerian banks as identified will assist bank executives and board members take necessary steps and policies that will help avoid in the further such mistakes

A successful completion of the study will add to existing body of knowledge and serve as a reference material to other researches.

1.7 Scope and Limitations of the Study

This study focuses on assessing banking failure and its impact on Nigeria’s economy, a case study of Minna. It will further take a look at the reform programme of the authorities. The study will review the period of 2001 − 2010 with the use of empirical method of survey.

The study however, faced certain factors which serve as limitations these include;

1. Lack of adequate material due to reluctance by banks to release their financial records
2. Financial constraint to cover the whole banks in Nigeria.

1.8 Organization of the study

The study was done in chapter and consists of five chapters.

Chapter one introduces the study showing the background to the study, statement of the problem, research objectives, question, hypothesis, significance and scope.

Chapter two take a look at the literature works of others on the subject matter of the study.

Chapter three deals with the methodology used in carrying out the study.

Chapter four provides the presentation, analysis and interpretation of data.

Chapter five concluded the study with summary of findings and recommendations.

1.9 Operational definition of terms

Bank:

A bank is a financial intermediary that accepts deposits and channels those deposits into lending activities either directly or through capital markets.

Bank Failure:

A bank failure occurs when a bank is unable to meet its obligations to its depositors or other creditors because it has become insolvent or too illiquid to meet its liabilities.

Banking Industry:

In general term, it is the business activity of accepting and safeguarding money owned by other individual and entities and then lending out these money in order to earn a profit.

Bank regulation:

A body of specific rules or agreed behaviour either imposed by some government or other external agency, or self-imposed by explicit or implicit agreement within the industry that limits the activities and business operations of financial institutions e.g. CBN/NDIC.

Bank supervision:

Is the process of monitoring banks to ensure that they are carrying out their activities in accordance with laws, rules and regulations, and in a safe and sound manner.

Credit:

A credit is a sum of money that is paid into your account increasing your account balance credit.

Discount Rate:

The rate which member banks may borrow short term funds directly from a reserve bank.

Financial Intermediation:

Financial Intermediation is the mobilization of funds from the surplus spending units at a cost or lending of such funds to the deficit spending units at a price both within and outside the shore of a country.

Investment:

Can therefore be defined as the amount of current output that ads or replaces the national stock of real production assets

Liquidity:

This ability of a bank or business to meet its current obligations, the quality that makes an asset quickly and readily convertible into cash, the ease with which people can get their money bank from and investment the ability of an asset to the converted into cash quickly and without any price discount.

Prudential guidelines:

Is a body of specific rules imposed by government through the Central bank aimed at ensuring prudent management and administration of banks’ funds so that reports of financial institutions are correct and reflective of their true portfolio.