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CAUSES, EFFECTS AND SOLUTIONS TO DISTRESS IN BANKING SECTOR IN NIGERIA A REVIEW OF THE ROLE OF NIGERIA DEPOSIT INSURANCE CORPORATION. (NDIC)

Dept: BANKING AND FINANCE File: Word(doc) Chapters: 1-5 Views:

Abstract

The main write up of this project is to identify the causes, effects and solutions to the problem of distress in banking sector of Nigeria economy. The chapter one deals with the introduction which talks about how bank failure that is inability of a bank to meet its obligations to its customers, owners and the economy occasioned by fault or weakness in its operation which had rendered it insolvent and bankrupt. The objectives of the study, the scope of the study, statement of the problem and limitation of the study are included. Chapter two is the Literature Review which deals with the Nature and implications of a bank classification as “DISTRESSED”. How the deregulation process has tremendously increased the tempo of activities of the banking sub- sector. The major Risk Areas in Banking and Bank Rehabilitation Efforts; the general administration of the affairs and business of the corporation and the conceptual issues in Distress Management. Chapter three deals wi

CHAPTER ONE

0 INTRODUCTION

Financial distress in the Nigeria Financial system is a Problem that has of recent assumed an intractable dimension.

However, before delving into the details of this write up, let me digress a little by asking this hypothetical question, “What do we mean by bank failure”? This question can only be adequately answered by attempting to give an explanation for what bank failure means within the context of this write up.

Connotatively, failure in banks can be described as “Inability of a bank to meet its obligations to its customers, owners and the economy occasioned by fault or weakness in its operation which had rendered it insolvent and bankrupt.

With this broad definition, it also includes the deliberate refusal by the owners and the operators of the bank especially the board and management to adhere to set roles and approved procedure, the effect of which had resulted to the collapse of the bank.

The situation is such that the regulatory authorities appear to be fighting a lost battle in their bid to sanitize the system.

The phenomenal growth of banks following the introduction of the “Structural Adjustment Programme” (SAP) creates a false impression that banking is an all comers business.

Hence, banking sector was laid down by all types of investors who have surplus fund to throw about.

Not only did incompetent and inexperienced hands assume very senior positions in some banks’ people with doubtful records and credentials also joined the band wagon.

The entry of these categories of operators prepared the grounds for the virus infection of financial distress and challenges currently facing the monetary authorities. There is a need to curtail this virus so that it does not spread to the healthy banks.

Besides the general macro-economic instability resulting in improper formulation of monetary policy. Environment has equally played a significant role in bringing about distress in banks.

The incessant mopping-up of excess liquidity through the issuance of stabilization securities has created liquidity crisis in the system and has adversely affected some banks.

A bank classification as distressed is based on the bank examination rating system with acronym “CAMEL” that is Capital adequacy, Asset quality, Management competence, Earning strength and Liquidity sufficiency.

A bank is rated and its position dictates its state of health.

Banking business is unique because it depends on public confidence and once this is eroded, it may spread to the whole system and the economy at large.

Hence, capital adequacy which is one of the indicator of the extent of solvency of a bank appears to be a “sine gua non” for public confidence in banking system.

It is ridiculous that some banks are adjudged healthy, whereas the banks they are indebted to are considered distressed.

It is hoped that the authorities concerned will carry out further cleaning-up exercise which has already commenced. Sanctions should be imposed on banks that stampeded others to distress.

The alternative of mergers and acquisition for some categories of distressed banks are commendable.

Also, the Central Bank of Nigeria should release money trapped in stabilization securities as that will help in salvaging some banks.

The implication of financial distress in the entire system will be devastating if some thing good is not done on time.

• OBJECTIVES OF THE STUDY

• To unfold that factors that can lead to a bank being classified as “distressed”.
• To examine the implication and impact of a distressed bank on the financial system.
• To examine the roles performed and the relationship between Nigeria Deposit Insurance and the Nation’s Banks.
• To make necessary suggestions and recommendation on how to improve on the current distress state of the banks.
• To show the importance and effects of various financial laws, rules and regulations in banking sector.
  • SCOPE OF THE STUDY

This study has its main focus basically on the impact of financial distress in Nigeria Banking industry.

The study also explains the impact felt by the depositors in the event of distress problem.

It also tries to explain the implication of distressed banks on the economy.

Moreover, the study is extended to the roles of government in the distress matter and the efforts of NDIC and Central Bank of Nigeria (CBN) to alleviate the financial distress in the Nation’s financial industry.

This write up also elaborate on measures suggestions and recommendations to alleviate the “Banking distress saga”.

• STATEMENT OF THE PROBLEM

If we look at the financial institutions in Nigeria today, it is ridiculous that some banks are adjudged healthy, whereas the banks they are indebted to are considered distressed.

These are the questions that necessitate the need for undertaking a research work with the following questions and to provide answers to them all.

• What are the factors that can lead to a bank being classified as “distressed”?
• Why are the banks distressed?
• What are the effects of banks being distressed on?
• What happens to the depositors in the liquidated banks?
  • LIMITATION OF THE STUDY

A great deal of efforts were made to obtain enough facts for the Project. In our search for information, we were limited by the following:-

Firstly, the problem of lack of text books. No text book has been

written on the “Distressed Bank” since this is a new phenomenon. So we have to rely on financial write-ups, publications of banks and Central Bank of Nigeria journals.

Also, since the topic of the project is degrading in nature, “DISTRESSED”, no bank classified is ready to release any vital information since it is detrimental to them.

Lastly, finance and time also pose problems in the execution of the project.