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1.0 INTRODUCTION
Prior to the enactment of the 1952
banking ordinance in Nigeria, the business of banking was highly unregulated.
This lack of regulation created
rooms for speculative banking which led to the collapse of many financial
institution, there was massive financial losses by depositors and loss of
general confidence in the banking system.
Financial institution regulation
according to Ikotun (2005, is the body of laws, rules, directives and
guidelines which where put in place by the government and regulatory in the
market, for compliance/adherent by financial institution with in the market.
In Nigeria, modern banking started
in 1892 when South African had founded the African Banking Corporation (ABC),
now First Bank of Nigeria PLC with an office in Lagos. The free banking era
ended when the banking ordinance of 1952 was promugated. In spite of the
1952-1958. Uzoaga (1981) observes that only 4 out of 25 indigenous banks
established during this period survived while 21 others went under. The pre-CBN
bank failures were attributed to absence of regulation and control while the
post CBN bank failure was caused by the factors to be discussed here under.
With the promulgation of the central bank act of 1958, the banking business
came under the regulation and control of the CBN. Symptoms of distress in
Nigeria financial system was first officially pointed out by the world bank
team that examined the financial sector shortly before the NDIC (Nigeria Deposit
Insurance Corporation) Decree #22 of 1988 took off in February 1989, Ndiulor
(2000) thinks that the transfer of parasatals and government agencies accounts
to the CBN, investment mismatches, paper profits, round trip-ping in foreign
exchange and other rent seeking activities are thus signals of unfair wind in
the industry. The period of 1994-2003 saw another round of bank failure
culminating in a good number of banks having their licenses withdrawn by the
central bank of Nigeria (CBN) and liquidated by the NDIC. The 2004 banking
sector reforms swept away 14 additional banks. The tenacity of bank failure in
the country therefore became a matter of grave and utmost concern not only to
the entire nation in general but to the practitioners and the academia.
Several financial institutions in
Nigeria became distressed, thus highlighting the precarious position of the
financial sector. Between 1989 and 1996, the financial conditions of many banks
and non bank financial institutions worsened significantly, which compelled the
authorities to take decisive steps to restore public confidence in the
financial system. During this period, the number of banks classified as
distressed increased from 8 to 52. Since then, another round of banking crisis
started at the wake of the political instability occasioned by the annulment of
the 193 presidential election. Consequently, the CBN revoked the licenses of 5
banks (4 in 1994 and 1 in 1995). Also, the CBN took over the management of 17
distressed banks in 1995 and one additional bank in 1996. The bank, in
exercising its powers under Banks and other financial institutions Act, 1991
(as amended), announced the revocation of the banking licenses of 26 banks with
effect from January 16, 1998, which was necessitated by their grave financial
conditions. This has been the terrible situation of the sector up till July
2004 when the Central Bank governor came up with the #25billion
recapitalization policy for banks in Nigeria.
1.2 STATEMENT
OF THE PROBLEM
Financial sector distressed has been
described as a situation in which a sizeable proportion of financial
institutions have liabilities exceeding the market value of their assets which
may lead to runs and other portfolio shifts and eventual collapse of the
financial system. Put differently, distress in the financial system portfolio
shifts and fairly reasonable proportion of financial institutions in the system
are unable to meet their obligations to their customers, their owners and the
economy as a result of weaknesses in their financial, operational and
managerial capabilities which render them either illiquid and or insolvent
(CBN, 1997). In Nigeria, modern banking started in 1892 when South Africa based
African Banking corporation (ABC), now first bank of Nigeria PLC opened an
office in Lagos. The free banking era ended when the banking ordinance of 1952
was promulgated. The period from 1952 to 1958 saw the first round of bank
failures while another round of bank
failures occurred between 1994 and 2003. The recapitalization policy of
2004/2005 ended up with 14 out of the 89 deposit money banks disappearing from
the scene as a result of their in-ability to meet up with the minimum capital
base requirement.
Although there appears to be many
factors attributed to the incidence of bank failure in Nigeria, a good number
of authors have not really established the key ones. While,Ogubunka (2003)
identifies weak/ineffective internal control system, poor management among
others as causes of bank distress/failure. However, this work is an attempt to
narrow the scope of the causes of bank failure in Nigeria to the key ones such
as capital inadequacy, lack of transparency and non-performing loans and
sharpen the potency of each of these key causes. The author also attempts to
establish whether the other factors may also be accountable for bank failure in
Nigeria.
1.3 RESEARCH
QUESTIONS
This study identifies several research
question; that are the main objectives of the paper.
1. Can
capital adequacy and non-performing loans be established as the main factors
responsible for bank failure in Nigeria?
2. To
what extent are these identified factors accountable for bank failure in
Nigeria
3. Are
there other factors responsible for bank failure in Nigeria?
1.4 RESEARCH
HYP0THESES
In order to answer the research
questions and achieve the objectives of the study, the following hypothesis are
stipulated.
HYPOTHESIS 1
H0: Capital
inadequacy and non performing loans are not the main factors responsible for
bank failure in Nigeria.
H1: Capital
inadequacy, and non performing loans are
the main factors responsible for bank failure in Nigeria.
HYPOTHESIS 2
H0: Other factors may not be responsible for
bank failure in Nigeria
H1: Other factors may be responsible for bank
failure in Nigeria
2. Conceptual framework and review of
literature
According to the central bank of
Nigeria Annual Report (1995), financial distress is defined as that which
occurs in financial institutions which among other things:
i. Fail to meet capitalization
requirements
ii. Have weak deposit base; and
iii. Are afflicted and mismanagement
Therefore, there is distress in a
situation, in which the bank is having operational, managerial and financial
difficulties. The term distressed banks entered into the lexicon of banking in
Nigeria in the period from 1990 and 1995, though it has been in existence since
early 20th century. The term to the general public connoted and unmanageable,
unviable and insolvent bank that is tending towards liquidation. In ordinary
parlance, distress means being in danger or difficulty and in need of help.
Umoh (1999) asserts that "a
bank is distressed when it is technically insolvent implying that the banks
liabilities exceed the assets". The CBN/NDIC (1995:4) describes a
distressed financial institution as "one with severe financial,
operational and managerial weaknesses which have rendered it difficult for the
institution to meet its obligations to its customers. owners and the economy as
at when due. Without necessarily implying the degree of nature of the problem,
a bank said to be distressed when it is either illiquid and or insolvent to the
extent that its ability to discharge its obligations as at when is impaired. In
more precise terms, illiquidity is a state of inability to meet payments
obligations to customers as at when due, while insolvency is a situation in
which the value of the firms liabilities is in excess of its assets value i.e.
negative net worth.
The CBN annual report (1995)
describes banking system as "a situation in which a sizeable proportion of
financial institutions have liabilities exceeding the market value of their
assets which may lead to runs and other portfolio shifts and eventual collapse
of some financial firms".
Many people erroneously interchange
bank distress with bank failure, which are technically distinct. Bank distress
is the forerunner of bank failure. Whereas a bank in distress could have
chances of regarding health, a failed bank loses every chance of life. Its
final destination is the mortuary of Nigeria Deposit Insurance Corporation
(NDIC) occurred in many countries in recent decades, both in developed as well
as emerging market economies. These crises have resulted in substantial
macroeconomics and fiscal costs. Bank failures are widely perceived to have
greater adverse effects on the economy than the failure of other types of
businesses. They are viewed to banking system, felling solvent as well as
insolvent banks. Thus, the failure of an individual bank introduces the possibility
of system wide failure or systematic risk. Bank failures have been and will
continue to be a major public policy concern in all countries and that explains
the fact that banks are regulated more rigorously than other industries.
This study opines that there are
three major factors accountable for bank distress which consequently ends up in
Bank failure. Each of these factors is re-viewed in the following subsections.
SECTION TWO
2.0 LITERATURE
REVIEW
2.1 Inadequacy
of capital
CBN (1995) claims that banks are
expected to maintain adequate capital to meet their financial obligations,
operate profitability and contribute to promoting a sound financial system. It
is for these reasons that the CBN prescribes minimum capital requirements. This
minimum ratio of capital adequacy has been increased from 6 percent in 1992 to
8 percent in 1996. It is further stipulated that at least 50 percent of the
component of a banks capital shall comprise paid up capital and reserves, while
every bank shall maintain a ratio of not less than one to ten (1:10) between
its adjusted capital funds and its total credit. When a bank`s capital falls
below the prescribed ratio, it is an indication that the bank may be heading
for distress. Bank examination reports showed that a good number of banks
operating in Nigeria were grossly un recapitalized. This situation has been
attributed to the low level of initial capital, the effect of inflation, the
adverse operating results mainly due to their inability to make appreciable
recoveries from their non performing assets and the large portfolio of nonperforming
loans maintained by some banks.
These factors have combined to erode
the capital base of many banks. With the introduction of Prudential guidelines,
banks were required to suspend interest due, but unpaid, on classified assets
and to make provisions for non performing credit facilities, a good proportion
of which was subject to losses. Inability to meet stipulated higher minimum
capital requirements was one of the criteria used for classifying banks into
either "healthy" or "unhealthy" and the later category was
barred from the foreign exchange market.
In describing capital inadequacy,
Ogundina (1999) argues that capital in any business whether bank or company
serves as a mean by which losses may be absorbed. It provides a cushion to
withstand abnormal losses not covered by current earnings pattern.
Unfortunately, a good number of banks are grossly undercapitalized. This
situation could partly be attributed to the fact that many of the banks were
established with very little capital. This problem of inadequate capital has
been further worsened by the huge amount of non-performing loans which have
eroded the capital base of some of these banks.
Available
statistics on banks capitalization reveal that as at the end of 1992, 120
operating banks in the country required the aggregate additional capital to the
tune of #5.8million to meet the statutory minimum capital funds set by bank
regulations for 1992.
Ogunbunka
(2003) contends that when a bank is undercapitalized, it ought not to continue
with its magnitude of operations prior to the depletion of capital. If it does
without the introduction of increased capital, distress could ensure. Many
banks that became distressed were affected by inadequacy of capital.
Consequently, they could not sustain their operations, first, as a result of
overtrading and second due to their inability to absorb losses arising from
costs of operation. A function of capital in a bank to serve as a means by
which losses can be absolved.
Capital
provides a cushion to withstand abnormal losses not covered by current
earnings, enabling banks to regain equilibrium and to re-establish a normal
earnings pattern. The need for adequate capital largely informed the decision
of the regulatory authorities to raise the minimum equity share capital of
banks over the years. as at 2002, the minimum paid up equity share capital is 2
billion for a new bank to be license and the existing universal banks had the
deadline of December 31, 2002 to beef up their paid up equity share capital to
1 billion. This has eroded some banks capital base. It has ever been discovered
that many of the closed banks in Nigeria started with fictitious capital
through the use of commercial paper. Such dept instruments were paid back soon
after commencement of business with deposits. Many of such so called owners
contributed nothing to own a bank, yet they use the means to amass wealth and
ruin the bank at the end of the day.
Imala (2004) opines that banks are
expected to maintain adequate capital to absorb operational shocks or
unexpected losses, support their level of operation, operate profitably and
consequently contribute towards promoting a sound financial system. It is for
these reasons that the CBN periodically prescribes minimum capital requirements
in the form of minimum paid up and the capital to risk weighted asset ratio.
The minimum capital adequacy ratio requirement has remained at the
international standard of 8% and this was expected to become 10% from January
2004. Inability to meet the minimum capital requirement was one of the criteria
for classifying banks as unhealthy one.
2.1 Disclosure
and transparency
Sanusi (2002) posits that disclosure
and transparency are key pillars of a corporate governance framework, because
they provide all the stakeholders with the information necessary to judge
whether or not their interest are being served. He sees transparency and
disclosures as an important adjunct to the supervisory process as they
facilitate banking sector market discipline. For transparency to be meaningful,
information should be accessible, timely, relevant and qualitative. According
to Anameje (2007), transparency and disclosure of information are key
attributes of good corporate governance which banks must cultivate with new
zeal so as to provide stakeholders with the necessary information to judge
whether their interest are being taken care of. Sanusi (2003) opines that lack
of transparency undermines the ethics of good corporate governance and the
prospect for effective contingency plan for managing systemic distress.
Anya (2003) observes that lack of
transparency has obscured the way many financial and economic activities are
conducted and has contributed to the alarming proportion of economic/financial
crimes in the financial industry. `Trust` and the fiduciary principle, which
was the cornerstone of banking, has been completely jettisoned as banks now
engage in all forms of sharp practices. Some of these sharp practices involve
the deliberate manipulation or distortion of records to conceal the correct and
true state of affairs.
These
records which form the bed rock of supervisory oversight by the regulatory
authorities in monitoring the soundness of the system has thus been undermined.
Such distortions therefore, would necessarily result in wrong information being
sent to the regulatory authorities, which sound have been in a position to take
adequate measures to prevent further deterioration of the banks position. The
regulatory authorities are thus handicapped by such concealment until the bank
hit the irreversible point of total collapse. Thus lack of transparency has
been identified as one of the most catastrophic modern societal problems
plaguing banks today.
Imala (2004) contends that the issue
of transparency has to be taken seriously in the new dispensation.
Transparency
has been a recurring problem in the financial industry in Nigeria, and, unless
improved upon, has the potential of making nonsense of the efforts of the
supervisors in implementing the New Accord. It is hoped that the Bankers
committee`s efforts, through its ethics and professionalism sub-committee and
the new code of corporate governance, would greatly assist in laying a solid
foundation for transparency in the industry, being one of the pillars of the
New Capital Accord. The evolutionary nature of the new accord increasingly
cedes more responsibilities in the measurement of capital adequacy to the
operations. Consequently, a bank has to convince the supervisor of improvement
techniques in order to rise to a higher level in the evolutionary ladder. With
the present situation in the banking industry, many banks may remain at the lowest
rung of ladder of sophistication in the capital measurement approach.
2.2 Huge
non-performing loans
A major revelation showed that many
owners and directors abused or misused their privileged positions or breached
their fiduciary duties by engaging in self serving activates.
The
abuses included granting of unsecured credit facilitates to owners, directors
and related companies which in some cases were in excess of there banks
statutory lending limits, in violation of the provisions of the law (Oluyemi,
2005). A critical review of the nation’s banking system over the years has
shown that one of the problems confronting the sector had been that of poor
corporate governance. From the closing reports of banks liquidated between 1994
and 2002, there were evidences that clearly established that poor corporate governance
led to their failures.
Ogundina (1999) observes that the
Nigerian financial system over the years has been under severe stress as a
result of large amounts of non-performing loans. The classified loans and
advances of the whole banking industry in 1990 amounted to #11.9bilion,
representing 44.1 percent of the total loans and advances. The problem of bad
debts is usually exacerbated by the negligence on the part of the lending
officers. Some of these loans were not granted without regard to the basic
tenets of lending, nor do they comply with any rational lending criteria. This
makes it extremely difficult or impossible to recover a substantial part of the
loans.
Also, the devaluation of the naira
in the wake of structural adjustment programme has its toll on the ability of
borrowers to repay. A devaluation by more than 600 percent since the
introduction of SAP shore up foreign manufacturing input prices, leading to
greater domestic capacity underutilization and reduced inability of business
borrowers to repay their bank loans and advances. According to CBN (1997),
several of the distressed banks suffer from poor asset and liability
management. The portfolios of assets of the majority of these banks were
concentrated on loans and advances that became non-performing. Other assets
such as treasury securities, investments and cash accounted for a small
proportion of their asset portfolio. Furthermore, merchant banks that were
expected to source medium to long term funds relied mainly on short term
deposits whose tenor ranged between call/overnight funds to 3 months. These
funds were obtained at excessively high rates of interest. In some cases, some
banks and finance houses borrowed short and lent long, resulting in mismatch of
assets and liabilities. The deterioration in asset quality was not provided for
through adequate loan loss provisions. This situation increased the
vulnerability of the banks to external shocks. The profile of poor asset and liability
management exposed the banks to liquidity risk which weak need the confidence
that the public had in the banking sector.
SECTION THREE
3.0 METHODOLOGY
For the purpose
of this study, the researcher has identified the problem, formulated the
research questions and hypothesis. Survey research design through the use of
structured questionnaire is adopted. The study population covers all the banks
in Nigeria and the elements are the entire workforce within the sector.
Nigeria has six geopolitical zones and one of them, the south
west, with Lagos as its main city, serves as the headquarters of almost all the
banks. Nigeria also operates a branch banking system and more than 25% of the
branches are concentrated in Lagos and its environs while the rest are
scattered all over the country. Since all the branches of these banks are
scattered over a large geographical area, it is not possible within the time
frame to reach this population of the study. Any attempt to cover this group of
interest will result in considerable expenditure of time, money and effort.
Besides it is rather unnecessary and generally impracticable to use the entire
group of interest. All individuals with whom the study is conserved cannot be
included, hence, a small proportion of the population through a process of
sampling is selected. This small representative group from the population is
the sampled elements for the study.
3.1 SAMPLING METHOD
The sampling
methods employed are stratified sampling and simple random sampling. The banks
are divided into 2 and they are healthy banks and troubled banks. From a total
number of 24 banks, 15 are healthy while 9 are troubled going by the
classification of the CBN in August/September 2009. The banks were selected at
random and the 5 banks are Fidelity bank plc, Eco bank plc representing the 15
healthy banks and accounting for 20% of the banks in this category. The other
two are equatorial trust bank plc and union bank of Nigeria plc representing
the 9 troubled banks and accounting for approximately 20% as well. A total of
100 questionnaire were distributed to each of the 20 staff selected in each of
the 5 banks. The 15 officials from each of 5 selected banks (4 top management
staff, 8 middle management staff and, 8 junior staff) were selected randomly
from the head office and 3 randomly selected branches for each of the 5 banks.
To ensure the
validity and the reliability of the questionnaire used for the study, two
experts were consulted to examine its contents in relation to its ability to
achieve the stated objectives of the research, the level of coverage how
logical and how suitable they are for the prospective respondents. A total of
82 questionnaires were returned by the respondents. The data collected from the
questionnaire were analyzed, summarized and interpreted according to the aid of
descriptive statistical techniques such as total scores and simple percentages.
Chi-square was used to measure the discrepancies existing between the observed
and the expected frequencies and to also prove the level of significance in
testing in stated hypotheses.
In addition to
the survey research design approach employed by this study, secondary sources
were utilized. Academic journals, textbooks, research papers and other
materials that are secondary in nature and are considered useful for the study
were also consulted. Simple percentages were used for the analysis of the
secondary data collected.
3.1 Data presentation and analysis
TABLE 1: SEX
|
|
FREQUENCY
|
PERCENTAGE
|
CUMULATIVE PERCENTAGE
|
|
Male
|
54
|
65.85
|
65.85
|
|
Female
|
28
|
34.15
|
100.0
|
|
TOTAL
|
82
|
100.0
|
|
Field survey 2010
Table 1 shows that 54 or 65.85% of the respondents are male while
28 or 34.15% of respondents are female. Thus, the survey reveals that more of
the respondents were male who are considered to be more objective.
TABLE 2: WORK STATUS
|
|
FREQUENCY
|
PERCENTAGE
|
CUMULATIVE PERCENTAGE
|
|
Top management
|
16
|
19.51
|
19.51
|
|
Middle management
|
34
|
41.46
|
60.97
|
|
Junior staff
|
32
|
39.03
|
100
|
|
TOTAL
|
|