A critical analysis of causes and problem of financial distress in nigeria banking sector

Thesis Overview

<p> </p><p><strong>INTRODUCTION</strong></p><p>The importance of capital as a necessity though not sufficient condition for economic growth is recognized in development economy where it is believed that the position of adequate financial resources is a pre-requisite for industrial transformation.</p><p>Experiences in some countries notably Japan, India and Germany have shown that banks if sufficiently in their respective countries could serve as an engine of growth to greatly assist the promotion of rapid economic transformation of any nation. Banks all over the world occupy a strategic and lending position in financial sector. Many Nigerians see banks as places nobody can mess up. Hence, their accepting institutions as the safety place for depositing their money. It is equally because of the confidence they have in the industry as a whole that over the years, many of them imbedded this habit of savings, which in turn is very necessary of positive economic development of the nation.</p><p>Ekechi (1995) said that confidence is a pre-requisite for economic recovery and sustained growth, but confidence is not a gift. It must be earned through the adjustment effort or rather confidence is rented because it is never yours and because it can be taken away anytime. The adjustable effort has to go on each and everyday”.</p><p>One legacy the structural adjustment programme (SAP) left on its trials is the increase in the number of banks in the country before the introduction of SAP in 1986. The number rose to about 127 as at August 1995. This phenomenal growth of banks was initially hailed as a healthy development in the economy because it was to spread the resources in the economy.</p><p>Because of the importance of banks monetary authorities pay great attention to the banking industry. In this process, they are sometimes faced with the problems of how best to handle financial distress in Nigeria banking sector. Financial distress in Nigerian banking sector date back to 1930 when the industrial and commercial bank, (ICB) failed one year after its established.</p><p>As Hornby defined distress as “great pains, discomfort of sorrow caused by wants of money or other necessary things.</p><p>John Ebhodaghe in explaining financial distress “two major problems are usually of serious concern. These are liquidity and insolvency”. He went further to explain liquidity as the inability of banks to meet its inabilities as they mature for payment while insolvent when the value of its realizable asset is less than the total value of liabilities.</p><p>The reasons for early distress of banks are summarized in the following features, which characterized the banks since during the period.</p><p>1. &nbsp; &nbsp; Foreign banks domination of deposit base, credit availability.</p><p>2. &nbsp; &nbsp; Banks services tailored to the needs of the expatriates.</p><p>3. &nbsp; &nbsp; Indigenous bank boom and failure resulting from under capitalization and poor quality management.</p><p>4. &nbsp; &nbsp; Lack of banking, control and direction.</p><p>Recently, it was realized that the development of statistical based, early warning system for problem banks identification would greatly assist regulators on classifying banks into sound and unsound categories. Worthy of notes is Decree No. 26 of August 1992 that prescribed the following for banks to be adjusted healthy.</p><p>1. &nbsp; &nbsp; Specified cash reserve</p><p>2. &nbsp; &nbsp; Specified liquidity ration</p><p>3. &nbsp; &nbsp; Adherence to prudential guidelines</p><p>4. &nbsp; &nbsp; Statutory minimum paid up capital requirement Adequate capital ration</p> <br><p></p>