The Causes and Remedy for Bank Distress in Nigeria

Topics: Bank, Financial services, Central bank Pages: 22 (6298 words) Published: March 6, 2013
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                                                Abstract In recent times, instability in the financial system and the banking sector in particular has arisen from institutional failures as in the past. In Nigeria, the lesson of the earlier bank failures appeared to have been forgotten as generalized distress swept the banking sub-sector and systemic distress gripped the finance house sub-sector. This study assesses the distress phenomenon and empirically analyses the extent of distress in the banking industry as well as the major causes.  

The study involves over 506 respondents made up of 236 from the banks, 160 corporate customers, 105 individual customers plus 5 from the regulatory agencies in the industry.  Data for the study was drawn from both primary and secondary sources. The questionnaire instrument was used in collecting data for the study. The data generated was analysed using simple descriptive statistics (frequency analysis) and percentage.  The study confirmed the presence of distress in the banking industry, but generalized that the distress could not be described as systematic since a good number of banks remain healthy to which many customers “flown for safety”.  On the whole, 80.9% of the banks are believed to be healthy, 11.1% believed to be mildly distressed, and 8.09% confirmed to be severely distressed.  All the major factors causing distress namely institutional, economic, and political etc contributed in varying degrees to the distress, rating institutional factors (in terms of poor management, credit policy, ineffective machinery for debt recovery, insider dealings, abuses, fraud and poor credit administration) highest thus, significant to the distress. To arrest these factors and also avoid their encroachment into the banking system, the regulatory authorities may have to use better measures of evaluating the features of distress at an early stage. This will no doubt create sufficient lead-time to apply remediable solution before serious damage is done.  

1.0       INTRODUCTION      
The financial system of a country, which the banking industry is part, refers to the totality of the regulatory and participating institutions as well as instruments involved in the process of financial intermediation.   

An efficient financial system is widely accepted as a necessary condition for an effective functioning of a nation's economy. The state of development of the financial market in a country, as noted by Varsh (1991), serves as barometer for measuring the stage of development of the economy. The mix of these financial intermediaries varies from country to country, reflecting the stage of development and the degree of sophistication of the country’s economic agents. The market provides services that are essential to a modern economy by offering access to a variety of financial instruments that enable economic agents to pool, price and exchange risk. This is done through assets with attractive yield and marketability.  

In addition to the intermediation role, a nation’s financial system links the domestic economy with the rest of the world by providing the means for the settlement of international transactions. It has also been observed that growth in the financial industry, if transmitted well, would result in the growth of real sector and the opposite is possible if the financial sector is repressed and inefficient (Cameroon,1972). The component of the...
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