BANK FAILURE “CAUSES AND CONSEQUENCES”
Research concerns “Bank failure” causes and consequences” Bank failure in our banking industry has become a peculiar household word in this country, which cannot be overemphasized. It is a re-current issue, which caused to captivate many individuals and banks, which has caused untold hardship to collective individuals, individual, stakeholders. This ugly scene has paved way for losses of staggering sum of money and investment by some banks.
As a matter of facts, Banks distress has significantly contributed to the bank failure of some banks. This project work examined the trend that lead to the Bank failure and moreover, some Bank staff have lost their jobs and single benefits. The confidence the public has on the bank is speedily warning down and many bank customers comment bitterly about this fact or issue.
The project surveyed the literature in the causes and consequences of bank failure, impact of bank failure, the remedies and the measures to control the incident of bank failure in the banking sector and the investigator concluded that the causes of bank failure comes under the following headings. Insider’s abuse, fraud and forgeries, inexperience staffing, poor attitude of bank management, recruitment of staff with low level academic qualifications, and high level of dishonesty among staff.
Specially, the objectives of the study are
To determine whether bank failure still exist in the banking industry.
To determine examine the causes and consequences of bank failure on Nigeria banking industry.
Determine to understand the degree of concern the bank management have shown in trying to prevent failure of banks.
To identify some of the enabling laws by the supervisory authorities to ensure depositors funds incase of bank failure.
To x-ray the poor accounting procedures adopted by the bank management staff.
To accomplish these objectives, a historical survey research design was conducted. Data were sourced only from secondary source, without questionnaire been used as an instrument of data collection.
Data collected were used to form the literature review by the researcher, and upon the literature review, findings, recommendations and conclusion was based by the researcher.
TABLE OF CONTENT v
1.1.1 BACKGROUND OF THE STUDY: GLOBAL HISTORY OF BANK FAILURES AND NIGERIA EXPERIENCE
1.1.2 HISTORICAL DEVELOPMENT OF BANKING IN NIGERIA WITH SHORT PERIOD OF MASS FAILURE OF INDIGENOUS BANKS.
1.2 STATEMENT OF THE PROBLEM.
1.3 OBJECTIVE OF THE STUDY.
1.4 SIGNIFICANCE OF THE STUDY.
1.5 SCOPE AND LIMITATION OF THE STUDY.
1.6 DEFINITION OF IMPORTANT TERMS
2.0 REVIEW OF RELATED LITERATURE- INTRODUCTION
2.1 DEFINITIONS OF BANK
2.1.1 DEFINITION BY TEXTBOOK WRITERS
2.1.2 STATUTORY DEFINITION
2.1.3 VIEW EXPRESSED BY THE COURTS
2.2 CONCEPTUAL FRAMEWORK
2.3 MEANING OF BANK FAILURE/CASE FOR BANK FAILURE
2.4 CAUSES OF BANK FAILURES IN THE NIGERIA BANKING INDUSTRY.
2.4.1 MACROECONOMIC ENVIRONMENT
2.4.2 BAD LOANS/DECLINE IN THE VALUE OF SECURITIES OWNED BY THE BANKS.
2.4.3 ASYMMETRIC INFORMATION
2.4.4 WEAK MANAGEMENT
2.4.5 FRAUD AND FORGERIES
2.4.6 POLITICAL INTERFERENCE/ADVERSE ECONOMIC ENVIRONMENT
2.4.7 INAPPROPRIATE CORPORATE GOVERNANCE STRUCTURES
2.5 RECENT DEVELOPMENT IN FINANCIAL SERVICES SECTOR AND BANK FAILURES IN NIGERIA
2.5.1 DEPOSITS IN THE BANKING SYSTEM.
2.5.2 RENDITION OF UNRELIABLE STATUTORY RETURNS.
2.5.3 BANKING SECTOR DISTRESS.
2.6 REGULATORY AUTHORITIES EFFORTS AT ADDRESSING ISSUES OF FINANCIAL/BANK SECTOR FAILURES.
2.7 CONSEQUENCES OF BANK FAILURES.
2.7.1 CONSEQUENCE OF BANK FAILURE ON THE SHAREHOLDERS.
2.7.2 CONSEQUENCES OF BANK FAILURE ON BANKING INDUSTRY.
2.7.3 CONSEQUENCES OF BANK FAILURES ON DEPOSITORS/BANK CUSTOMERS.
2.7.4 CONSEQUENCES OF BANK FAILURES ON THE ECONOMY
2.7.5 CONSEQUENCES OF BANK FAILURE ON GOVERNMENT
2.8 CONTROL MEASURES OF BANK FAILURES
3.0 RESEARCH DESIGN AND METHODOLOGY
3.2 SOURCES OF DATA
3.3 SECONDARY SOURCES OF DATA
5.1 CONCLUSION AND RECOMMENDATIONS.
If there is anything that all well-meaning stakeholders in the Nigeria banking industry look forward to, it is a banking sector that is healthy and stable. A banking sector where investors, depositors, operators, regulators, etc can after a hard day’s work, go to steep with all eyes closed and without the anxiety that before dawn something amiss will happens.
To a large extent that was the nature of Nigeria’s banking industry from independence in 1960 to the deregulation and liberalization of the industry, which started in the mid 1980s. Situations have drastically changed since the manifestation of rounds of bank failures that subsequently claimed the life of 37 banks from 1994 to 2003. Since then, the banking industry and its environment have been anything but sound and stable. And the consequences have been very grave from the economy, especially in the areas of loss of wealth, public confidence in the system and of course a monetary management that has become more challenging with large amount of currency in circulation outside the banking system.
The bulk of the funds required by the investing sectors of most developed economy or business economics of the world is provided by the banking industry. In the main, the services of mobilizing funds from the saving sector to investment sector, is provided by the banking system, accounts for high status the banking industry is placed in development of any economy. The rate of economic development of nation has, hence, been very closely associated with the effectiveness and efficiency of the banking system of this nation.
The banking industry in Nigeria comprises of the commercial banks, the merchant banks and the development bank. At the apex of the industry is the central bank of Nigeria (CBN).
The commercial banks provides services like acceptance of deposits, granting of short and (very recently) medium term loans to customers, safe-keeping of valuables, offering of pieces of advice to investors ect. The merchant bank on the other hand provide medium and long-term loans etc.
The development banks services the development activities by making available about medium and long-term finances for this purpose.
The central bank functions regulate the activities of these banks.
Easily, we can point at a member of factors that may be contributing to the unhealthiness and instability in the banking sector. Such factors as unstable macro-economic and fiscal policies, unethical and unprofessional practices, as well as inadequate supervisory activities, rank high on the scale.
The search for appropriate initiatives should no doubt commence from a clear identification and classification of all factors responsible for the problems in the industry. Each factor should be critically evaluated to ascertain the degree of its contribution to weakness. It is equally imperative that efficacious remedial actions should be developed, prioritized and sequenced for effective implementation, which must be supported by all.
1.1 BACKGROUND OF THE STUDY
(A) GLOBAL HISTORY OF BANK FAILURES AND NIGERIA EXPERIENCES
According to Hempel and Simonson (1999:16), from 1985 to 1992 there were 1304 failures per year. In an earlier period, from 1934 to 1984, the nation (U.S.A) had experienced only 756-bank failure or about 15 per year.
As at December 31st, 1996, they identified 9528 entities as ensured commercial banks, down from a post-world war 11 peak of close to 15380 in 1983. The cause of the failures was the banks’ poorly conceived lending programs in an industry that generally had relaxed credit standards and compromised in the quality of lending.
The collapse of oil prices in 1982 dried up the oil exporting nations cash flows and their ability to pay their huge bank loans. These difficulties were signaled by the Mexican government’s default on its huge bank debts, which servely impacted on numerous large banks in the United States and Europe. Developments in the Nigerian political economy since the mid 80s have greatly led to changes in the structure and art of banking. The period witnessed the proliferation of banks and other financial institutions. From CBN annual report (1994), there were 66 (sixty-six) commercial banks and 54 fifty-four) Merchant banks in Nigeria. According to the CBN diary 2003, as at June 2002, we had the following licensed financial institution 89 (eighty-nine) commercial and Merchant banks, 6 (six) development finance institutions, 97 (ninety-seven), finance companies and 125 (one hundred and twenty five) Bureau de change companies in Nigeria.
These new and old institutions were all introduced with little control over their proliferations, in the name of a deregulated economy.
The banks had to source for the raw materials of the industry (depositors if funds) in a depressed economy. The competition generated by these changes in the industry led to high interest rates, dearth of long term funds, and unprecedented cases of default in the interbank money market.
The inability of the supervisory authorities to control the nature of the competition and the unscrupulous activities of the management of some institutions led to failures in the industry and the erosion of confidence of the banking public. Furthermore, the depressed economy, the high rate of inflation and the supply side policies of the monetary authorities which were designed to control money supply and hence influence exchange rate through reduction of excess liquidity, inconfunction with earlier developments listed changed the art of banking, and hence, the process of fund mobilization.
The trade union became seriously involved in the issue of failed banks and on 21st May 1993 CBN classified five commercial banks as failed banks. The generation of failed bank is mostly owned by state governments, examples of which were the merchantile bank, pan African bank, National bank, New Nigerian bank, African continental bank. A careful examination of each of these banks would reveal that one of the managerial problems of the banks was frequency with which the state government that owned them changed their boards. Indeed, there is a strong relationship between the change in government and change in the boards of these banks.
For the second generation of failed banks, back of corporate culture and values are the attributable causes. For instance, employees of most banks and finance institutions are aware of the fraudulent past of their organizations and the way things have been done at that time and carried on long that line of culture and established months. According to THIS DAY Newspaper 5th march, 2003, financial failures in Nigeria’s banking systems dates back to 1994, 1995 and 1998 when the operating licenses of four banks, one bank and twenty-six banks were revoked respectively. Three years later (2001) the banking license of three other banks were withdraw before that of savannah bank was withdraw in (2002) in addition to the most recent, peak merchant bank; This brings to the total number of banks whose operating licenses have been withdraw to thirty-six.