CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND
OF THE STUDY
In
any modern economy, the efficient production and exchange of goods and services
requires money and bank is the instrument for affecting it. The last few years
have been both traumatic and revolutionary for the banking industry. The
industry produced the largest number of technically insolvent and under
capitalized banks. The magnitude of distress in the nation’s banking industry
reached on unprecedented level making it an issue of concern to the government,
the regulatory authority, the bankers and the general public.
The
Nigeria banking scene was characterized by changes designed to promote banking
in the country. The changes may be categorized into phases, but due to the
nature of work, we will consider tow phase namely; the era of laissez – fair
banking (1834 – 1952), the era of limited was monopolized by foreign banks,
principally the African banking corporation which was the precursor of the
(BBWA) British bank for West African the present First Bank of Nigeria, the
Barclays bank DCO (Dominion Colonial and Overseas) the present day Union Banks,
and the British and French Bank, the for – runner of present United Bank of
Africa. Although, discrimination against Nigerians by these banks led to the
establishment of some indigenous banks which unfortunately offers litter or no
competition to the foreign banks essentially because of their weak capital base
or poor managerial capacity. Consequently, all but three to the indigenous
banks failed. The survived includes the National Bank of Nigeria established in
1933, the Agbonmagbe Bank (now Wema Bank) established 1945 and the African
Continental Bank 1947.
A
commission of inquiry headed by G.D. patron set up in 1948 to investigate the
business of banking in Nigeria. Their report led to the enactment of the first
banking legislation in Nigeria, the banking ordinance of 1952. The 1952
ordinance laid down the standard and procedure for the conduct of banking
business by prescribing the mandatory minimum capital requirement for the banks
both expatiates and indigenous regulations to Ʃ100, 000 and Ʃ12,500
respectively and it is also introduced regulations to check bank failure.
However, the entire indigenous bank established in the country during this period
also all failed. The bank failures of this era were attributed largely to the
monopolistic structure of the banking industry, which allowed the foreign banks
to enjoy exclusive patronage form British firms. The indigenous banks that
survived were able to make it because of the support they got from their state
government.
The
distress phenomenon in Nigeria banking industry is of recent origin. The
manifestation became discernable with some policy shocks staring 1988 with
Central bank of Nigeria (CBN) directive to banks that naira backing for foreign
exchange application be lodged with CBN. This was followed in 1989 by another
directive requiring public sector deposits to be transferred to CBN. These two
directives exposed the precious liquidity position of some banks and the
distress they have subterraneous harbored. What was thought to be a temporary
liquidity problem for few banks soon catches up with a lot more banks.
It
is important to stress in this work that banking system was already in distress
by the time NDIC was established. By them, 7 (seven) banks were known to be
technically insolvent. The government at that time, did not embark upon a
clearing exercise that would have removed from the system that distressed
institutions because it was feared that such an action would lead to loss of
public confidence and flight of foreign capital more so there was no deposit
insurance institution to expeditiously manage such bank closures. The NDIC was
nevertheless required to insure all banks. That means that the corporation has
been involved in managing distressed banks even before it could settle down and
minister enough resources for this important task.
The
intermediating role of banks and their relevance both in the transmission of
monetary policies and in the payment system underscore their importance as well
as the problem that bank distress at the prevailing dimension in our economy
could precipitate. Arising from their intermediation, banks generate financial
resources and put these at the disposal of deficit economic growth in the form
of increased output. Therefore, an industry wide insolvency of banks, such as
the one experienced in Nigeria, should be expected to retard the economy’s rate
of capital formation, reduce its level of employment and output and ultimately
the pace of economic growth.
1.2 STATEMENT
OF THE PROBLEM
A
serious problem posed by widespread distress among banks is the threat to
banking habit and the development of an inefficient payment mechanism. The loss
of confidence, the after math of the distress that hit the banking sector
forced several businesses to take fewer risks by taking back their fund to well
established safe havens dominated by older generation banks.
This
research work is therefore concerned with “Evaluating the impact of bank
distress on the profit growth of commercial banks”, using (A vase of selected
commercial banks).
1.3 PURPOSE/OBJECTIVES
OF THE STUDY
The
main purpose/objective of this study is to have an overview of the effect of
bank distress on the profit growth of commercial banks. Investigate into the
reasons for bank failure in Nigeria.
Other
objectives include:
1.
To evaluate the
cause of bank distress in Nigeria. To find out the impact.
2.
To find out the
possible prevention strategies or failure resolution options of bank distress.
1.4 RESEARCH
QUESTIONS
1.
What are the
causes of bank distress?
2.
What is the
impact of bank distress?
3.
What is the
profit growth rate of commercial bank during distress?
4.
What are the
effects of bank distress?
5.
What are the
possible solution options to this phenomenon in the banking scene?
1.5 RESEARCH
HYPOTHESES
H1: Distress has no effect on the average profit of
commercial banks.
H0: Distress has effect on the average profit of
commercial banks.
1.6 SIGNIFICANCE
OF THE STUDY
This
research project will be of importance of the following persons:
i.
New generation
banks, which may wish to know the implication of banks distress in the banking
industry and how to restore the confidence of the customers and uphold
efficient payment mechanism.
ii.
Nigeria Deposit
Insurance Corporation: The work could be of immense help to NDIC in the area of
distress management and prevention strategies. And also, in the area of failure
resolution option in banking industry.
iii.
Students who may
wish to know the extent of distress in the banking industry and the trend of
distress as it affect the modern banking will also benefit from this bank.
1.7 SCOPE,
LIMITATIONS AND DELIMITATIONS
While
the banking impact distress in Nigeria will theoretically serve as the population
of study. The project is designed to appraise the impact of bank distress on
the profit growth of First Bank of Nigeria. It will also analyze the trend of
this bank profit within a period of 3 years (2011 – 2013).
1.8 DEFINITION
OF TERMS
DISTRESS:
It can be defined as an extreme suffering caused by lack of money or a state of
danger, calamity and misfortunate acute poverty.
EVALUATION:
This can also be defined as form of idea or judgment of something and also to
work out something in numerical value.
IMPACT:
This can be defined as a strong effect or impression to bank. It is also a
situation whereby something will be to be press closely or firmly together.
COMMERCIAL BANK:
Commercial bank or business bank is a type of bank that provides services, such
as accepting deposits, giving business loans and basic investment products.
Commercial bank can also refer to a bank or a division of a bank that mostly
deals with deposit and loans from corporations or large businesses, as opposed
to individual members of the public (retail banking).