THE CAUSES OF FINANCIAL DISTRESS AND BANK FAILURE IN NIGERIA
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THE CAUSES OF FINANCIAL DISTRESS AND BANK FAILURE IN NIGERIA
INTRODUCTION TO CHAPTER ONE
1.1 BACKGROUND OF THE STUDY
The most recent development afflicting Nigeria’s banking system is recapitalization. It was implemented in the form of an official order issued by the Central Bank of Nigeria (CBN) to banks to consolidate their capital bases to the tune of a minimum of N 25 billion to be raised by each bank before December 31, 2005, causing many banks that were unable to raise such funds to merge with other banks. (P.F. Johnson)
Recapitalization entails a substantial shift in shareholders’ shareholding positions. A bank in trouble is recapitalized through a big stock offering, merger into another bank, or withdrawal of shares to lower shareholders’ equity. A bank’s liquidation marks its final recapitalization.
Aside from the fact that the CBN’s minimum capital requirement appeared to be very impressive for the majority of the banks that had been experimenting with quite meagre capital bases, the banks also consider the time space allowed within which to meet the requirement as being too short,
despite the fact that the order was seen to have come at a bad time due to the economic condition, the existing atmosphere of inflation, and a reduction in general savings and investments. Even so-called first generational banks with a more solid capital basis found it challenging to meet the recapitalization policy’s requirements.
1.2 STATEMENT OF THE PROBLEM
1. What are the long-term consequences of financial distress and bank failure?
2. What are the reasons of commercial banks’ financial distress?
3. To what extent are these distinct from or similar to those identified for conventional banks?
4. What lessons may commercial banking stakeholders take away from financial crises episodes?
1.3 AIM OF THE STUDY
1. To look at the reasons of financial crisis and bank failure in the Nigerian banking sector.
2. To investigate the consequences of financial crisis and bank failure in Nigerian banks.
3. To investigate the impact of financial distress and bank failure, as well as the “cost of financial distress.”
4. To investigate the link between financial crisis and bank failure.
1.4 THE SIGNIFICANCE OF THE STUDY
The significance of this study relates to the examination of commercial bank activities in Nigeria, with the goal of determining which activities are prone to financial crisis and bank failure.
To understand the causes of financial trouble and give a solution to avoid it.
1.5 SCOPE OF THE STUDY
This study focuses on financial distress in commercial banks and how it leads to bank failure. The focus of this study will be on First Bank Nigeria Plc, and how stable a bank may be in order to overcome financial difficulties.
1.6 LIMITATIONS OF THE STUDY
One barrier is the incapacity of some bank executives to release or submit data or information relevant to financial crisis situations.
It is important to highlight that the government system inherited from the colonial masters has crept into the operational set of Nigerian banking system, denying the availability of vital information required for this study.
Another disadvantage of this work is the lack of figures to explicitly measure the performance of the bank.
1.7 DEFINITION OF TERMS
Bank: Banks play critical roles in every modern economy. They offer a number of financial services that help to smooth transactions between businesses and their consumers or suppliers. They also give advice and technical support services to assist businesses in resolving operational issues (Inegbenebor: 2006).
A bank is a place where money and valuables are kept safe and then given out to customers on their request. It serves as a payment and debt settlement agency on behalf of its customers.(Adams,2005:86)
Recapitalization entails a substantial shift in shareholders’ shareholding positions (Machiraju: 131-132).
Bank performance is the measurement or rating of how well a bank is doing, its liquidity ratio, ability to meet long and short term obligations, and ability to boost the nation’s wealth.
Distress is defined as a tight and tough condition that limits one’s ability to achieve a specific aim or objective.
Failure is defined as the inability to accomplish a set aim or objective.
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