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Prior to the enactment of the 1952 banking ordinance in Nigeria, the business of banking was highly unregulated.

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            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 The period of 1994-2003 saw another round of bank failure culminating in a good number of banks having their licenses withdrawn by the central bank of Nigeria (CBN) and liquidated by the NDIC.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.


            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.


            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?


            In order to answer the research questions and achieve the objectives of the study, the following hypothesis are stipulated.





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.


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.







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.


























            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.


            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


















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.








Top management




Middle management




Junior staff





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