DISTRESS IN THE BANKING SYSTEM: THE EFFECTS ON THE NIGERIAN ECONOMY

DISTRESS IN THE BANKING SYSTEM: THE EFFECTS ON THE NIGERIAN ECONOMY

Abstract

This research works the distress in the banking system: its effects on the Nigeria economy. In Nigeria, the prominent role played by the banking sector has called for proper scrutiny of their activities as distressed banks have led to loss of public confidence. The main objective of this study is to determine the cause of bank distress in Nigeria and also to determine the political and institutional factor that contributes to bank distress in the banking system. The data collection method used is secondary data and it was collected from the Central Bank of Nigeria (CBN) Statistical bulletin. It was discovered that the institutional factors that cause bank distress are poor credit management and administration, poor loan recovery, frauds, insider abuses, shareholders interference. The study concludes that if banks have high rate of non-performing loans, it would cause distress in the banking sector, and also the liquidity position of banks have a positive implication on the Nigerian economy. The study recommends that there should be enforcement of accountability through failed banks tribunals and the use of early warning signals.

CHAPTER ONE

INTRODUCTION

1.1   Background to the Study

The last two decades have been seen as a proliferation of systematic banking problems around the world. Banking crisis has threatened macro-economic stability through their affect on capital outflows and external balance. The banking sector serves as the nerve centre of any modern economy being the repository of people’s wealth and supplier of credit which lubricates the engine of the growth of the entire economic system. For a developing country like Nigeria, the banking industry is the very vital sub-sector of the financial industry and plays a vital role in the management of the nation’s financial resources. It therefore goes without saying that the existence of an efficient banking industry is essential for the economy. it will create the necessary financial environment as well as vibrant international trade. This is why there is a great concern over the distress in the Nigerian banking sector.

Distress in the Nigerian banking sector, as well as outright bank failure in Nigeria, dates back to the 90s. The first bank distress in Nigeria occurred in 1930 and since then it has been a regular feature of the banking industry. However, the period between 1892 when the African Banking Corporation was established and 1952 witnessed the emergence of many banks in the Nigerian financial system. Most of these banks collapsed with the same speed with which they sprang up, due to poor asset management, lack of adequate capital, inexperienced personnel, insufficient business patronage and speculative operations. Distress which was first experienced in 1930 in Nigeria happened again in the 1950s and 1990s. Nineteen (19) out of twenty three (23) indigenous banks that were established between 1930 and 1968 were distressed and went into liquidation.