BANK FAILURE AND ECONOMIC DEVELOPMENT IN NIGERIA

ABSTRACT

Banks occupy the most strategic point in the financial system of the economy. For a total of banks to fail between 1992 to 2002 a space of four years means that something definitely is wrong. Certain question have been asked. Solution proffered and prospects for the future explained but none of them seems to have solved the problem.

This study is not antagonistic of any other rather it is complementary other works have been used here and duly acknowledge but everything is with an intent to find a lasting solution to the issue of bank failure.

The major findings include inadequate attention is accorded the unorganized private sector in favour of the organized private sectors (especially the Merchant banks) a consistent erosion of their capital base due to the inflationary trends in the economy not enough attention is research and development not enough attention is accorded staff training the problem of bank failure is not systemic, it is only a few banks in industry that have failed, lack of technical expertise in most banks the fact that most bank promoters only set out for initial capital instead of appropriation and compatible follows poor internal control systems and finally banks are currently in liquidation.

To this effect the following recommendation were presented. Bank should maintain proper internal control system, emphasis more emphasis on research and development, none emphasis on staff training, maintain paid up capital structures that will be relevant to inflationary trends, government should ensure that there is an enabling environment, promoters of compatible status and management should be of high technical skill ability and dynamic.

In conclusion it will be quite expedient to point out that the Nigerian economy is still under developed one and will take the astuteness of every single Nigeria to get it out of the doldrums. It is only when the economy become stable that we shall have a very stable banking environment where failure might not be entirely absent but reduced to rate. This task is not only for the authorities. Everyone has a role to play.

CHAPTER ONE

INTRODUCTION

1.1 THE BACKGROUND OF THE STUDY

Over the past couple of decades the Nigeria financial system has grown remarkably. From the almost crude form it was characterized with the in pre-colonial and colonial days. It has become so sophisticated that economic experts today can proudly thump their chestc. With due regard to owners if structure of the institution, the regulatory framework, the instrument employed and number of established institutions, Nigeria can be said to posses the most sophisticated financial system in African. Within the Nigerian financial system itself the banking institutions have been most remarkable in growth. This is just as well in any case considering the critical position which they occupy in a complex financial position which they occupy in a complex financial system which supplies the money and credit needs of the economy.

The world bank nor banker is neither used nor defined in a central of Nigeria (CBN) Decree n0. 24 of 1991 nor bank and other financial institution Decree (BOFIO) No. 25 of 1991 but section 2 of bills of exchange Act 1881 provides that bankers include a body of persons whether incorporated or not who carry out the business of banking section 2.

One of the evidence Act defines banks banker to means “any person or persons, partnership or company carrying on the business of bankers.

Finally, the banking Act of 1969, provides that bank means any person who carries our the business of banking and include a commercial bank and an acceptance house.

The role of banks is this an important one in the process of economic development in the sense that they moblise funds from the surplus spending and for of the economy. In this way the increase the quantan of rotational savings and investment. Secondly, though an appropriate service produced increase a result of investment projects financial by bank funds. All of which head to a successful promotion of an efficient system of payment, creating banking habits, development the society and providing employment opportunities.

In view of these highlights, it becomes easily comprehensible why the failure of a bank of a bank has for reaching consequences. The ability of banks to operate successfully nests upon how well are able to obtain the confidence of the public if the confidence is missing, the gap will be too great for the banks to fill. The effects of banks failure on the economic development of Nigeria can be expressed in a nut-shell to be the following.

a) Lack of effective and efficient financial intimidation.

b) Less of public confidence in the system further depression of the economy additional burden on the regulatory authorities escalation of social viacse.

For the sake of the citizenry and in the interest of economic development, there is an expedient need to devise a host of remedying situation.

The fact that a bank fails today is not to say that incidence is systemic.

There must be number of way out of any sad predicament.

The only crack is how will these remedies are fruitfully employed such remedies would include;

a) The cultivation of stable political environment.

b) The strengthening of regulatory agencies

c) The taking over by regulatory bodies of terminally distressed banks.

d) Encouragement of banking education

e) Sincere pursuit by government of all economic and monetary policies.

f) All regulations pertaining capital adequacy, minimum paid up capital liquidity ratio and assist quality should be reviewed in relation to inflation rate.

g) Privatization and commercialization of all government owned banks.

h) All debt owned bank by government (State Federal and even parietals) should be paid back immediately.

i) All laws relating to bankruptcy and default should be reviewed and made more function.

An address like this will go a long way in remedying the situation and restoring public confidence in the system.

1.2 STATEMENT OF THE PROBLEM

In light of the vital role which bank play in developing the National economy in their capacity as vectors of fund for savings investment and employment opportunities it will be expedient to point out the Nigeria banking system in all its advancement and sophistical has not succeeded yet in effectively achieving this mission. The reason is not just one of the fact some banks have failed, but that some.

Factors have continued to meditate against the successful performance banks. The problem of economic inorder-development in Nigeria can arguably traced to the fact that banks have been responsible for the conditions in which banks have found themselves today. The effects of a bank failure range from loss of depositors funds to loss of confidence (which the spring-board on which the bank business of banking) to a total lack of effective financial intermediation, such as reduced lending to the priority sector of the economy and using incidence of distress in other sub-sector.

Then the problem of bank failure is not peculiar to Nigeria neither is it peculiar to the third world. It is visal universal and the caused are generally in the same distinct categories. The difference lies in the different ways which the situation can be remedied. The causes of bank failure are: incompetent management both shareholder and management executive) capital inadequacy, poor internal control, poor asset quality competition and such factor as economic environment, socio-political environment and government.

1.3 OBJECTIVE OF THE STUDY

The objective of this study is to critically appraise “Bank failure and economic development. That is the impact which bank failures has had on the development of the Nigeria economy with a view to highlighting the implications on the depositions. The general public, the effect bank, the entire banking industry and the general macro-economy, subsequently an agenda will be portrayed as to how the tide could be stemmed and the situation tackled in an effective manner.

The study will go ahead to reveal the prospect of banking in the future.

1.4 SIGNIFICANCE OF THE STUDY

This study is significant in that a careful appraisal with an intent to reveal the gensis of bank failure how o avert bank failure and on the event of an inability to avert this how to deal with the situation effectively.

The study will be of immense benefit to scholar in the field of banking, official of regulatory agencies and intellectual in the field of banking.

1.6 DEFINITION OF TERM

Some of the technical terms that will be used in subsequent chapter will be thorough defined in this sub-section in order to facilitate assimilation of the content of the study capital adequacy. This is the ratio of classified loans and advance to shareholder finds asset quality. This is the proportion of classified loan and advance to total loans and advance minimum capital ratio. The proportion of capital a bank is meant to maintain in relation to risk assets.

Risk asset: asset which by their nature are prone to losses.

Liquidity Ratio: Ratio of liquid asset to total deposit liabilities.

Illiquidity: This is the mobility of a bank to meet its liabilities as they nature for payment.

Irosolvency: This is when the value of realizable assets is less than total value of liability.

Liquidation: The taking over of the assets and after the bank has been adjusted failed.

Holding action: These are action which prohibit or curtail certain activities of boards and management or certain activities required of them to ensure bank safety.