Project Abstract

The challenge identified by this research was the manner of collaterisation of credits by financial institutions. It was discovered that due to the volume of funds available at the disposal of financial institutions as a result of the consolidation exercise and stiff competition towards making substantial margin of profits, some financial institutions often comprise or even ignore standard in giving out credit to their customers because of a combination of factors viz ï‚· Insider credits ï‚· Desire to make huge profits ï‚· Political reasons ï‚· Ethnic considerations Thus, as a result of the above factors, financial institutions often get saddled with lots of bad debts which usually militate against the growth of an organization with the likelihood of distress and corporate failure since the credits were not given based on business considerations. To arrest this situation, regulatory authorities like the Central Bank of Nigeria and the Nigeria Deposit Insurance Corporation should commence the enforcement of the provisions of the Banks and Other Financial Institutions Act which provides for various categories of offences and penalties relating to Bank officers who give credit facilities that were supposed to be backed by security, without such securities.

Project Overview

1.0 GENERAL INTRODUCTION

The 2005 consolidation exercise otherwise known as the recapitalization exercise embarked upon by the Central Bank of Nigeria (CBN), was meant to address the issue of inadequate share capital of banks in Nigeria by the introduction of N25Billion minimum share capital for all Banks in the country in order to make the banks stronger to be able to finance more businesses. The concept of recapitalization refers to the policy that compelled all commercial banks to raise their capital base from N2billion to N25billion by the Central Bank of Nigeria on or before 31st December, 20051. The exercise brought about huge resources at the disposal of financial institutions which in turn enabled them to make credit available to a large number of individuals and corporate entities with the intention of making huge profits. The desire to make huge profits consequently pushed the financial institutions into fierce competition as a result of which some of them started giving out loans without collaterals in a bid to lure customers with the ultimate aim of making huge profits. This culminated in billions of naira loans to the capital market which at the end of the day, got caught up in the financial meltdown (a situation were some financial institutions or assets suddenly lose a large part of their value especially in the stock market crashes). The melt down led to the near collapse of many banks/other financial Institutions as a result of bad debts which arose from credit facilities granted by financial institutions without adequate collateral.