THE CAUSE OF BANK FAILURE AND ITS EFFECT ON THE NIGERIA ECONOMIC DEVELOPMENT

CHAPTER ONE

1.0    INTRODUCTION

1.1    BACKGROUND OF THE STUDY

Commercial Banks are legal entity with perpetual succession formed as a corporate body under law, by an association of person, Basil (2001: 1) according to companies and Allied matters Act 1990 section 29, companies are classified into three types

1. A private company limited by shares shall end with the word “limited”. (Ltd).
2. Public company limited by shares ends with the words “public limited” (plc)
3. Company limited by guarantees shall end with the words “ limited by Guarantee)” in brackets (ltd Gtc)

It is based on these that we shall call to mind on the issues concerning financial organizations. A financial institution is a business organization and establishment, which deals with money and financial assets such as shares, bills of exchange, treasury bills etc. Augustine (2003:38).

Financial institution are regarded as banks, which is comprised of central banks, commercial banks (known as joint stock banks) and others. Financial institutions do not focus on banks as long but those institutions which pool or mobilize savings and excess liquidity from individuals, firms, corporate bodies etc.

It is obvious for one to know that a country or an economy cannot stand without a proper banking system. Banks originated from man’s question for store-keeping or safe keeping of wealth.

1.2    BACKGROUND OF THE CASE STUDY (ECOBANK)

Company’s profile of Ecobank

Ecobank Nigeria Plc, commonly referred to as Ecobank Nigeria, is a commercial bank in Nigeria. It is one of the commercial banks licensed by the central Bank of Nigeria the national banking regulator. The bank was established in 1985 and began operations in 1986. It operates as a universal bank providing wholesale, retail, corporate, investment and transaction banking services to its customers in the Nigerian market. The bank divides its operations into three major divisions: (a) Retail Banking (b) wholesale banking and (c) Treasury and financial institutions. The bank also offers capital markets and investment banking services during the forth quarter of 2011. Ecobank Nigeria acquired 100%of the shareholding in Ecobank, creating the expanded Ecobank Nigeria Plc.

STATEMENT OF THE PROBLEM

The statement of the problem serves as the corner stone upon which the gross research plan is based, Baridam (1993: 22). It is quite convincing that a “sound banking system is a healthy economy”. As we have previously discussed, there was an up ward trend in the failure of banks in the recent decades. A tendency, which though is not peculiar to Nigerians can impede the economy and affect the public adversely. This takes into consideration, the problems that are responsible for the banks which are as follows:

1. Fraud
2. Unqualified management staffing
3. Excessive overdraft facilities to customers
4. Lack of motivation to workers (incentives).
5. Excess liquidity i.e total operational failures

While the failures ahs effect on the economy at large, these are listed as follows;

1. Divestment: After a banks failure, instability comes which throws investors off balance and for this reason, the investors will retreat or withhold their investments
2. Demand deposit: Commercial banks collect this from customers with this agreement to pay interest to the individuals and there by making or creating their own interest or profit by lending to borrowers fails to redeem the loans as when even though the banks had collected some collaterals from them (borrowers).

1.4    OBJECTIVE OF THE STUDY

The main purpose or objective of this research is;

1. to conduct investigation on the causes of bank failures.
2. To know the effect of bank failures on companies i.e (investors) in the economy.
3. To explore and reveal the various failures of banks.
4. To proffer solution and recommendations on the possible ways to solve the problems of bank failures in all sectors of the Nigeria economy.

1.5    RESEARCH QUESTIONS

It is clear that a bank cannot fail without any sigh that means, that these are some other things that must have contributed in the failure of such organizations which we expect from the respondents to highlights us on them in this project: they are

1. What factors are responsible for bank failure in Nigeria?
2. Does banks failure have any effect on the Nigeria economy?
3. What corrective measure could be taken to the effect of bank failures on Nigerian economy?
4. What are the likely effects of bank failure to the other sectors of the economy?
5. What are the reactions of the individuals and stake holder/investors towards bank failure in Nigeria?
6. How has bank distress affected the banking habit of the people in Nigeria?

• STATEMENT OF RESEARCH HYPOTHESES

A hypothesis is a proposition that is stated in testable form and prediction of particular relationship between two or more variables.

Hypothesis

Ho: There is no relationship between bank fraud and economic development

Hi: There is a strong relationship between bank fraud and economic development

H₀: There is no strong relationship between poor bank financial management and distress in the banking sector.

H_i: Poor bank management leads to frauds and distress in the banking sector

• SIGNIFICANCE OF THE STUDY

This study will render a vital services to all the sectors in this economy. The banking sector is widely regarded as the financing or the financial power house to all other sectors in the economy internally and externally.

This study is obviously significant to the;

1. The productive sector: In every economy, the productive sector is the procreation of wealth or goods and services sector. The productive sector has so many dealing with the bank that makes it working to be hungry for the banking information.
2. The government: it is the government that controls the overall activities of all the sectors in an economy. Government needs sound information from the financial sector to forcast the future and the velocity of money in the circulation with the use of monetary policy i.e. fiscal and contractual policies. It uses the fiscal policy to monitor the spending habit of a given society, while contractual policy is used to reduce the aggregate spending with the use of cash reserve ration, sanction, directive from the CBN and the interest rate determination.
3. Academics: it is also useful to students of financial management especially, the accounting student. It serves as a guide to whatever financial management difficulties they may meet along the line.
4. Financial analysis: this study itself is a financial analyzed work. It has much to give to the finance decision-making of any financial field. It is a formidable guide to every one who has anything to do with finance and financial planning in order to eschew future losses.

• SCOPE OR DELIMITATION OF THE STUDY

This study focuses on commercial banks because of its role in Nigerian banking sector, although other banking sector will be investigated.

The foreseen limitation to this study would be:

Time: Considering the academic work load on campus, time is foreseen to be a limiting factor.

Finance: money in the economy is not quite enough and any project demands for therefore, finance is one of the limiting factors to this study.

Data collection: This could be problematic for some of the reasons concerning the negative altitudes of business organizations to the questionnaires. They may be afraid of disclosing their personal data to their competing rivals. The bank staff too, for some undisclosed reasons could not give us sufficient and useful information.

Bankers drafts: This is a bill of exchange drawn by a bank on another branch office of the same bank. 

Bankers habit: This means the extent or degree of willingness of the people in a given economy to make use of the facilities and services of bank sector.

Collateral: Assets pledged for securing a loan.

Liquidity: It can be defined as the ability of a bank to meet its day to day cash obligation on the depositors.

Moral Suasion: it involves the use of persuasion and appeal by the CBN to commercial banks to cope with the CBN guidelines.

Monetary policy: it is policy of government which influences the timing availability and cost of money and credit to the economy in other words; it is a deliberate measures design in the monetary authorities of a country to regulate, influence and control the volume of money circulation.

Treasury certificate: This is a money market instrument. It is used for raising money from the government for a duration of 1-2 years issued at a discount rate.

Bank overdraft: This a bank facility granted by a bank to a customer on agreed conditions to overdraw his account up to a certain limit on interest rate.