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Bank Distress: An In-depth Analysis of the Factors and Potential Regulatory Measures in the Nigerian Banking Sector

Bank Distress: An In-depth Analysis of the Factors and Potential Regulatory Measures in the Nigerian Banking Sector

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Bank Distress: An In-depth Analysis of the Factors and Potential Regulatory Measures in the Nigerian Banking Sector

Chapter One: Bank Distress: A Critical Examination of the Causes and Potential Regulation in the Nigerian Banking Sector Introduction


The last financial report of the commercial and merchant bank indicated a consistent practise of maintaining surplus liquidity. However, as the year 1993 drew to a close, the substantial surplus of available funds diminished significantly. According to Nwaigwe K. O. (1995), a liquidity ratio of at least 30% was mandated.

In subsequent years, there was a decline in the ratio, and it was argued that the issuing of stabilisation securities played a role in this deterioration.

Furthermore, the researcher was apprised of another significant trend, namely, the substantial undercapitalization of a considerable proportion of the issued banks.

In addition, the insufficiency of the capital base was exacerbated by the presence of non-performing loans and advances, as the banks were obligated to provide sufficient provisions for these credit assets that were not generating expected returns.

The indemnification also suffered from inadequate management, leading to the emergence of distress inside the system. One of the primary factors contributing to the current difficulty in the banking industry is the inadequate management of the bank’s assets and obligations.

The influence of political dynamics inside the jungle environment also contributed to the decline of the economy, as evidenced by surveys indicating a persistent downward trend and the negative impact on the banking sector.

Moreover, in light of the heightened risk appetite exhibited by certain bank executives within a fiercely competitive landscape, coupled with the widespread occurrence of fraudulent activities and counterfeiting within the financial system, the foundation for potential bank crisis was established, eagerly awaiting its eventual manifestation and consequences.

In 1998, the federal government of Nigeria (FGN) established a Deposit Insurance Scheme, which was managed by the Nigeria Deposit Insurance Corporation. This scheme, created under Section 39 and 40 of Decree 22 of 1998,

aimed to restore public confidence and security in the banking system. Its primary objective was to control and manage distressed banks, thereby ensuring the safety and stability of the banking system in Nigeria.

The researcher decided to conduct an evaluation aimed at proposing effective methods to address the issues of distress, taking into consideration the existing context.


A distressed bank refers to a financial institution that consistently fails to meet the predetermined criteria for assessing its financial health. Additionally, a bank is considered distressed when it encounters a state of illiquidity or insolvency (Nwaigwe, 1995).

Insolvency refers to the state in which a bank is unable to fulfil its immediate financial obligations within the specified timeframe. Conversely, a bank is deemed insolvent when the aggregate worth of its liquidated assets is insufficient to cover its overall liabilities. Furthermore, it exhibits a negative net worth.

Nevertheless, the level of trouble experienced by banks differs depending on their individual degrees of insolvency and liquidity. It is crucial to acknowledge at this point that the regulatory authority, specifically the Nigerian Deposit Insurance Corporation (NDIC), employs the utilisation of the composite rating system known as “CAMEL” characteristics in order to evaluate the performance and financial standing of banks.

Based on this ranking, banks designated as unsound exhibit the following characteristics:

The depletion of shareholders’ funds can be attributed to the operational losses incurred by the company’s assets.

The non-performing loan ratio is significantly higher when compared to the overall loan portfolio.

One of the identified issues is the presence of a weak internal control mechanism.

The management information system is lacking in effectiveness.

The concept of liquidity refers to a situation in which an entity is unable to fulfil the cash requirements of its clients.

The company’s net income is significantly low or negative due to inadequate management of assets and liabilities.

The aforementioned features facilitated the Central Bank of Nigeria (CBN) in assuming control of the board and management of five financially troubled banks in 1993. The banks in question were deemed to be in a state of distress due to a significant decline in their financial status and the failure to secure the necessary capitalization as mandated by the monetary authorities.

The unexpected occurrence of these takeovers necessitated the establishment of an Interim Management Board (IMB) to oversee the operations of these financially troubled banks until their recovery.

The International Monetary Board (IMB) was entrusted with the task of ensuring the timely viability of troubled banks by enforcing regulatory compliance to promote secure and prudent banking operations. Additionally, it possessed the authority and responsibility to facilitate the retrieval of loans.

1.3 Objectives Of the Study

The aims of this research work are;

(1) The purpose of this study is to analyse the levels of distress within the banking industry.

In order to ascertain the underlying factors contributing to the financial difficulties experienced by banks, an investigation is required.

In order to ascertain the solutions for the challenges faced by the banking industry, a comprehensive analysis is required.

The banking industry’s efforts to develop potential techniques for the eradication of banking fraud.

1.4 Research Questions

In order to facilitate the investigation, the study formulates and addresses the following research questions, which will serve as a framework for the research inquiry.

(1) What are the causes of hardship in the banking industry?

(2) What are the factors contributing to bank distress?

(3) What is the impact of this phenomenon on the banking sector?

(4) What are the potential solutions for addressing bank distress?

1.5 Formulation of Research Hypothesis

The present study is grounded on the underlying idea that;

Hypothesis: Banks do not serve as the primary catalyst for economic growth and development in contemporary economies.

Greetings, Banks play a pivotal role in driving economic growth and facilitating development within contemporary economies.

Hypothesis: The absence of distress in banks does not result in significant ramifications for the banking industry.

Hypothesis 1: The occurrence of distress within banks yields significant ramifications for the banking industry.

Hypothesis: The management of banks should not be obligated to undertake the task of controlling bank distress.

H1: The management of banks should have the discretion to decide whether or not to address instances of bank distress.

1.6 Scope and Limitations of the Study

The study on bank distress in licenced commercial and merchant banks in Nigeria was carried out by the Nigeria Deposit Insurance Corporation (NDIC) because to the lack of cooperation from bank officials. Despite attempts to gather information regarding the banks’ operations,

the officers of the affected banks declined to answer questions and disclose any relevant details pertaining to their institutions. One of the primary obstacles encountered in this research is the limited amount of time available.

This is due to the necessity of balancing the research work with other academic responsibilities required for the attainment of a Higher National Diploma (HND). Consequently, there is a scarcity of time, particularly given the condensed duration of the semester.

Another constraint is to the concerning extent of bank distress that has been observed since its inception. The regulatory authorities appear to lack a comprehensive understanding of the practical methods for addressing the issues at hand.

Foreign consultants have frequently encountered restrictions in providing their professional assistance on addressing this ongoing issue in order to secure complete eradication.

This study endeavour will additionally illuminate the experiences of certain foreign nations that have encountered comparable circumstances. The regulatory measures implemented by the authorities in Nigeria thus far deserve commendation for the level of accomplishment attained.


The study of banking holds significant importance due to its role as the driving force behind economic growth and development in any given economy. The imperative to regulate troubled banks has become necessary and urgent in order to prevent economic collapse.

The significance of this research is heightened by the growing concern over the financial stability of banks in Nigeria, given the prevailing misery and the potential for economic turmoil if left unaddressed.

The information presented in this research study will provide significant assistance to economic planners, investors in the banking industry, and industrialists who rely on banks for their growth and development.


The liquidity ratio refers to the proportion of liquid assets in relation to current liabilities. In essence, the liquidity of a licenced bank in Nigeria refers to its capacity to utilise its liquid assets in order to fulfil its immediate obligations. It is mandated that these banks maintain a minimum liquidity ratio of 30%.

According to the Longman Dictionary of Contemporary English, fraud is characterised as a deceptive conduct undertaken with the intention of acquiring personal benefits.

Insolvency refers to a situation in which the total obligation of a bank exceeds the realisable value of its assets.

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