THE CAUSES OF FINANCIAL DISTRESS AND BANK FAILURE IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1              BACKGROUND OF STUDY

Recapitalization is the most recent trend haunting the financial sector of the Nigerian economy. It was introduced in the form of an official order by the Central Bank of Nigeria (CBN) and was issued to banks to consolidate their capital bases to the tune of a minimum of N 25 billion to be raised by each bank before 31st December 2005 thus causing many banks incapable of raising such fund to merge with other bank (Johnson, P.F.)

Recapitalization involves a fundamental change in the ownership position of shareholders. Through a large stock offering or merger into another bank or withdrawal of shares to reduce shareholders’ equity, a bank in difficulties is recapitalized. Liquidation represents a final recapitalization of a bank.

Aside that the minimum capital requirement fixed by CBN seemed very impressive for majority of the banks that had been meddling with quite meager capital bases, the banks also consider time space allowed within which to meet the requirement as too short, though the order was seen to have come at a bad time due to the economic condition, the existing atmosphere of inflation and reduction in general savings and investments. Even the so called first generational banks that had more solid capital base found it difficult to meet the requirement of the recapitalization policy.

1.2               STATEMENT OF THE PROBLEM

1.     What are the structural implications of financial distress and bank failure?

2.     What are the causes of financial distress for commercial banks?

3.     To what extent these are unique or similar to those identified for the conventional banks?

4.     What lessons can be learned by the stakeholders of commercial banking from the episodes of financial distress?

1.3             OBJECTIVES OF THE STUDY

1.     To investigate the issue the causes of financial distress and bank failure in Nigerian banking sector.

2.     To examine the effect of financial distress and bank failure in Nigerian banks.

3.     To examine the effect of financial distress and bank failure and the “cost of financial distress.

4.     To examine the relationship between financial distress and bank failure

1.4               SIGNIFICANCE OF THE STUDY

The significance of this study relates to the assessment of the activities of commercial banks in Nigeria, and tries to observe which of the activities are liable to financial distress and bank failure.

To know the causes of financial distress and provide a way of avoiding it.

1.5                 SCOPE OF THE STUDY

This research work tends to cover mainly the financial distress in commercial banks and how it leads to bank failure. For the purpose of this study, attention will be on First Bank Nigeria Plc, how stable a bank can be to overcome financial distress.

1.6                LIMITATIONS OF THE STUDY

One limitation is the inability of some top managers of banks to reveal or tender data or information useful for the issues of financial distress

It is important to note here that the system of government inherited from the colonial masters has cropped into the operational set of Nigerian banking system, which has denied the release of vital information needed for this study is also a major limitation.

The lack of figures to measure specifically the performance of bank is another limitation to this work.

1.7                   DEFINITION OF TERMS

Bank: Banks perform very important functions in any modern economy. They provide a variety of financial services with lubricate transactions between business enterprises and their customers or suppliers. They also provide advisory and technical support services which help business enterprises to solve their operational problems (Inegbenebor: 2006).

A bank is an establishment for keeping money and valuables safely, the money being paid out on customers’ order. It acts as an agent of payment and settlement of debts on behalf of its customers.(Adams,2005:86)

Recapitalization: It involves a fundamental change in the ownership position of shareholders (Machiraju: 131-132).

Bank performance: Bank performance is the measurement or rating how well a bank is doing, its liquidity ratio ability to meet long and short term obligations and how it is able to aid the wealth of the nation.

Distress: a tight and difficult situation that limit ones ability to achieve a particular goal or objective

Failure: inability to meet up a predetermined goal or objective.