THE CAUSES AND PROBLEMS OF FINANCIAL DISTRESS IN NIGERIAN BANKING SECTOR

THE CAUSES AND PROBLEMS OF FINANCIAL DISTRESS IN NIGERIAN BANKING SECTOR

A CASE STUDY OF FIRST BANK PLC

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

The importance of capital as a necessity though not sufficient condition for economic growth is recognized in development economy where it is believed that the position of adequate financial resources is a pre-requisite for industrial transformation.

Experiences in some countries notably Japan, India and Germany have shown that banks if sufficiently in their respective countries could serve as an engine of growth to greatly assist the promotion of rapid economic transformation of any nation. Banks all over the world occupy a strategic and lending position in financial sector. Many Nigerians see banks as places nobody can mess up. Hence, their accepting institutions as the safety place for depositing their money. It is equally because of the confidence they have in the industry as a whole that over the years, many of them imbedded this habit of savings, which in turn is very necessary of positive economic development of the nation.

Ekechi (1995) said that confidence is a pre-requisite for economic recovery and sustained growth, but confidence is not a gift. It must be earned through the adjustment effort or rather confidence is rented because it is never yours and because it can be taken away anytime. The adjustable effort has to go on each and everyday”.

One legacy the structural adjustment programme (SAP) left on its trials is the increase in the number of banks in the country before the introduction of SAP in 1986. The number rose to about 127 as at August 1995. This phenomenal growth of banks was initially hailed as a healthy development in the economy because it was to spread the resources in the economy.

Because of the importance of banks monetary authorities pay great attention to the banking industry. In this process, they are sometimes faced with the problems of how best to handle financial distress in Nigeria banking sector. Financial distress in Nigerian banking sector date back to 1930 when the industrial and commercial bank, (ICB) failed one year after it’s established.

As Hornby defined distress as “great pains, discomfort of sorrow caused by wants of money or other necessary things.

John Ebhodaghe in explaining financial distress “two major problems are usually of serious concern. These are liquidity and insolvency”. He went further to explain liquidity as the inability of banks to meet its inabilities as they mature for payment while insolvent when the value of its realizable asset is less than the total value of liabilities.

The reasons for early distress of banks are summarized in the following features, which characterized the banks since during the period.

1. Foreign banks domination of deposit base, credit availability.
2. Banks services tailored to the needs of the expatriates.
3. Indigenous bank boom and failure resulting from under capitalization and poor quality management.
4. Lack of banking, control and direction.

Recently, it was realized that the development of statistical based, early warning system for problem banks identification would greatly assist regulators on classifying banks into sound and unsound categories. Worthy of notes is Decree No. 26 of August 1992 that prescribed the following for banks to be adjusted healthy.

1. Specified cash reserve
2. Specified liquidity ration
3. Adherence to prudential guidelines
4. Statutory minimum paid up capital requirement Adequate capital ration
5. Sound management.

Any bank, which did not satisfy any or all the listed factors, is adjudged unhealthy. It must be expressed here that there exist a thin dividing line between a distressed and unhealthy banks. This is because a bank, which is unhealthy in the short-run, may become distress in the long run. At the core of distressed bank, are twos basic problems compared to liquidity the later could not be neglected because it is an ominous sign of insolvency.

Therefore, in assessing the financial condition of a bank, it is customary to use the CAMEL framework. Also ownership structure and types of banks are important factors on explaining the financial condition of a bank. The recent NDIC report revealed that ownership structure was used to  explain the degree of financial distress seven out of eight banks, that were financially distressed were either owned or controlled by the state government.

Another indicator of a distressed bank used in most countries of the world is a classified asset that exceeds 100 percent of shareholders fund. Following from above, it is therefore reasonable to conclude that a distressed bank is one that is technically insolvent the financial distress is caused by a number of factors including macro-economic conditions, the inhibitive policy of government capital adequacy, wide spread incidence of frauds, non-performing loans, unbraided risk by banks and so on. The effect of financial distress in Nigerian banking sector is a distressed economy. The causes and problems and the ways out of this financial distress will be discussed in details in this work.

1.2     STATEMENT OF THE PROBLEM

Financial distress in Nigerian banking sector dates back to colonial era. One of the early Nigerian indigenous banks, the industrial and commercial banks, the industrial and commercial banks (ICB) failed in the early 1930’s and between 1992 – 1994, the central bank of Nigeria (CBN) and Nigerian Deposit Insurance Corporation (NDIC) were face with the problems on how best to prevent the financial distress in the banking   sector. Within this period, more than thirty banks had been adjudged financially distressed.

The question remains what are the causes of these financial distresses in the banking sector? According to Charles worth, research arises when there is problem to solve, peculiarities or puzzle about a phenomena or the question to attaching meaning to identify and examine the causes and problems of financial distress in Nigerian banking sector.

1.3     OBJECTIVES OF THE STUDY

In writing this project, the researcher had certain objectives in mind. In line with this following are the objectives of this write up.

1. To identify the extent to which low capital base has contributed to the financial distress in Nigerian, banking sector.
2. To identify the extent to which multiplicity of banks has contributed to the financial distress in Nigerian baking sector.
3. To ascertain how inefficient management has contributed to financial distress in Nigerian banking sector.
4. To identify to a large extent how fraudulent practices has contributed to the financial distress in Nigerian banking sector.
5. To identify the effects of financial distress in Nigerian banking sector.
6. To recommend possible ways of preventing financial distress in Nigerian banking sector.

1.4     SIGNIFICANCE OF THE STUDY

This study will be immense benefits to the Nigerian banking sector. This will enable them to know the causes of financial distress in Nigerian banking sector, and based on the recommendation of this study, they will know how to prevent financial distress.

Government will also benefit. As the operators of the economy, they will know the causes and effects of financial distress in the economy. Likewise, the depositors and potential investors will also benefits. There is a need for a development conscious country like Nigeria, to evaluate the performance of her financial sectors so as not to jeopardize her development efforts. It is helped that these findings will add to existing literature on causes and problems of financial distress in Nigerian banking sector.

1.5     RESEARCH QUESTIONS

1. To what extent has low capital base contributed to the financial distress in Nigerian banking sector?
2. Does multiplicity of banks contributed to the financial distress in Nigerian banking sector?
3. Does inefficient management contribute to financial distress in Nigerian banking sector?
4. To what extent has fraudulent practices contributed to the financial distress in Nigeria banking sector?
5. What are the effects of financial distress in Nigerian banking sector?
6. What are the possible ways of preventing financial distress in Nigeria banking sector?

1.6     RESEARCH HYPOTHESIS

To come out with a reliable result, the following hypothesis were formulated and tested statistically.

H_o:    Low capital base has not contributed to the financial distress in                      Nigerian banking sector.

H_i:     Low capital base has contributed to the financial distress in         

1.7     SCOPE OF THE STUDY

This research work covers the causes and problems of financial distress in Nigerian banking sector with reference to First Bank Plc.

1.8     LIMITATIONS OF THE STUDY

This research work covers the causes and problems of financial distress in Nigerian banking sector with reference to First Bank Plc. In the cause of this study, the researcher could not carry out the work extensively due to the following constraints.

TIME CONSTRAINTS: Time was my greatest enemy as I had to cope with my class work, assignments, home work, and the project work at the same time, and moreover, most of the materials for the project work are not located in one place.

FINANCIAL CONSTRAINTS: Finance was my major constraints since I don’t have enough fund for running around and this hindered the full coverage of the work.

1.9     DEFINITION OF TERMS

BANKS: Banks are financial institutions, which hold themselves out to the public (individuals, firms, organization, and governments) by accepting deposits and giving out advances as well as performing other customers.

FRAUDS: Fraud is intentional distorting twisting or changing of financial statement or using criminal deception to deceive someone in order to achieve illegal advantage

LIQUIDITY: Liquidity is inability of a bank to meet its liabilities as they mature for payment.

INSOLVENCY: Insolvency is when the value of realizable assets of a bank is less than the total value of its liabilities.

CAPITAL ADEQUACY: Capital adequacy is when banks through proper fund management has enough capital to serve as a fall back and at course, shock absorber in the event of losses resulting from business transactions.

SHAREHOLDERS: shareholders are the owners of the bank, whose names were described to the memorandum of the bank when the bank is registered. This is done through the purchase of the bank’s shares.

PAID UP CAPITAL: This refers to that part of the issued capital, which has been paid-up.

DISTRESS: This means great pains; discomfort or sorrow caused by wants money or other necessary things.

PROSPECTS AND CHALLENGES OF INFORMATION TECHNOLOGY IN NIGERIA BANKING SECTOR

PROSPECTS AND CHALLENGES OF INFORMATION TECHNOLOGY IN NIGERIA BANKING SECTOR

(A  Case Study of GT Bank Plc (GTB) Abuja)

ABSTRACT

This study investigated the prospects and challenges of information technology in modern banking operation in Nigeria with references to GT Bank and had for its objectives the following: evaluate the impact of electronic banking on the operations of financially institutions in the country. Examine the effect of information technology on bank customer relationship; identify barriers to efficient information technology system written a financial institution. The simple percentage and the Chi-Square method were used for the analysis. The findings show that the key factor to success in the banking business in Nigeria is good patronage by the customers. The customers have to be satisfied in terms of meeting their demands properly through appropriate information channels. The customer on the other hand have shown wide acceptance of information technology in banking service delivery. This is evident, usually huge turnover and increased profit declared at the end of financial year of banks. The following were also recommendations. The banks must be  focused in terms of their needs and use the right technology to achieve goals rather than acquiring technology of internet banking because other banks have it. Government participation in ensuring vibrant telecommunication industry must be visible to reduce or remove avoidance cost of implementing e-commerce and internet banking: regulating authority like C.B.N (Central Bank of Nigeria) must stipulate standards for the banks to follow to avoid making Nigerian banking sector a dumping ground for the outdated technological infrastructure: Training and manpower development is another major problem militating against the growth of e-commerce in the country. Government must take right IT policy by ensuring that computer communication equipments and other IT infrastructure to a larger extent are manufactured in the country so that people can acquire first hand necessary money laundering, fraud and security risks posed by net banking and e-commerce, the necessary legal threat and security posed to net banking and e-commerce, the necessary legal codes banking the industry must be established this will enhance the growth of the industry.

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

Although a lot of research works have been done on the prospects and challenges of information technology in the banking industry, these research works were broad based, while a few were actually carried out on  the role of information technology in modern banking operations.

Modern banks now realize that only those that overhaul their payment service delivery and operations are likely to service and proper in the 21^st century. This is due to the presence of globalization, consolidation, privatization, deregulation and rapidly changing technological environment. In order to properly place themselves in favourable positions for competitions and be one of the corporations to be reckoned with in the new century, banks make use of internet facilities to execute mobile making. This is developed by using personal computers (PCS) to form local area networks (LAN) and wide area networks (WAN) through client/server technology (Davenport, 1993).

Many banks have installed modern computer interconnectivity backbone that would enable them achieve their communications of data and multimedia over internets, intranets and extranets.

They also realize that they have to achieve not only management/staff will computer literacy but what could be called information literary i.e knowing how to locate,, analyze, store and use information.

All staff and managers in a modern bank need to be able to search and gather data from different sources, analyze them, select relevant ones and organize them in such a manner as to allow informed decision making in the organization.

Banks of the future realize that the banking and other banking tomorrow requires more of electronic manipulations and shuffling of bits based money and other banking transactions, instead of paper. In other words, paper base of transactions, instead of paper. In other words, paper based transactions, like the internet banking services (Connel and Saleh, 2004). Whether a bank would be successful or not depends on the extent to which it invests on internet and communication technology (ICT) and how she uses it in an innovative manner. This area has been tip to be a major competitive ground for banks that are operating in the post – consolidation era.

What is the trend in the use of information technology in Nigerian banking industry?

To what extent does information technology chance employees and organizations performance?

1.2     STATEMENT OF THE PROBLEM

Business need to continuously find better and faster ways to adapt to the competitive market place in order to complete in today’s high technology and fast paced environment. According to Hammer and Champy (1993) learning organizations provide a framework that encourages finding better and faster way to adapt in today’s high technology and fast paced world by:

1. Looking at the whole versus the parts a systematic perspective.
2. Detecting and correcting errors.
3. Improving actins through knowledge and developing the broad skills of their work force.

These days computers and information processing are in common usage. Computers influence what decisions are made, when decisions are made, what and who is available at the point of decision and who is asked to decide computers and information processing affects how work is organized and how employees fell about work (Stephen, 2012).

From my perspective, the essential element of management of information provision and this information technology system are expected to heavily influence management and business operation and as such the main thrust of this research work is to investigate the extent of this influence with special focus on modern banking operations in Nigeria.

1.3     OBJECTIVES OF THE STUDY

The study generally in kinds to investigate the prospects and challenge of modern banking operations in Nigeria, and to specifically:

1. Evaluate the impact of electronic banking on the operations of financial institutions in the country.
2. Examine the effect of information technology on banks customer relationship.
3. Identify barriers to efficient information technology system within a financial institution.
4. And from the findings make suggestions on how to make information technology system more efficient in modern banking operations.

1.4     RESEARCH QUESTIONS

          This research work shall be guided by the following research questions:

1. Does information technology contribute to the efficiency banks and bank customer relationship in Nigeria.
2. To what extent would information technology improve the fortune of banks?
3. Should all banks in Nigeria venture into electronic banking services rather than continuing with the traditional banking?

1.5     RESEARCH HYPOTHESIS

In line with objective of the study, the understated hypothesis will be tested for its validity:

H0: There is no relationship between the adoption of information technology and the modern baking operations in Nigeria.

1.6     SCOPE OF THE STUDY

Nowadays, financial originations and other business organizations in general need to identify with the fact that information technology system has a strategic impact on their business. This research work shall strict contribution to this recognition and understanding by examining the impact and trend of information technology within the financial business sector in Nigeria.

The focus of this study shall be on the adoption of information technology in banking operation by Nigeria banking operations of GT Bank Plc. This study shall cover the period since the introduction of information technology in Nigerian banking sector to date. Information technology was introduced into Nigeria economy upon the commencement of the electronic payment scheme in 1996. All the various information technology related schemes introduced since this period to date shall be examined in the course of the study.

1.7     SIGNIFICANCE OF THE STUDY

A vital component of any move towards better business performance is an integrated information technology infrastructure that supports an organizations internal requirements for greater performance as well as compliance with market and industry regulations. This study is significant in the following ways:

1. It would have a direct effect on the efficiency and effectiveness of the use of information systems in the various steps of the modern banking operations.
2. It would enable employees and managers who are involved in the information systems of their organization to see opportunities for improvement in the use of information technology systems thereby improvement in the use of information technology system thereby improving the organizational productivity.
3. It would also be an invaluable tool for student academic, institutions and individuals that want to know more about the relevance of information technology in modern banking in Nigeria.

1.8     LIMITATION OF THE STUDY

The following limitations were encountered by the researcher in the course of carrying out this study.

Time: This has always been a limiting factor for a research of this kind, because the structure needs to complete his work within a specified time frame.

Data Collection: The problems of data collection was a recurring decimal, since bank officials were not ready to release classified data neither were they to be found through other official sources.

Therefore, the researcher had to limit herself to the available data for this study.

Finances: Research has always been cost intensive, as the researcher had to make various journeys, photocopy materials and obtain official information. Thus, whereas the need for finance abounded, it’s supply was limited.

REFERENCES

Beny, M.J. A; Linott, G.S (1999), Mastering Data Mining: The Art and Science of customer relationship management new York: John Wiley and Sons.

Connel F. and Saleh M. N (2004) sic puzzles in electronic money and banking” IMF working paper, IMF institute Vol. 19. PP. 5-23.

Davenport, T. H (1993), process innovation: Re-engineering work through information technology, Boston; Harvard Business School Press.

Hackathorn, R. (2003), factors for implanting Active Data Managing Business processes Research Bulleted, electrical from http://www.itressearch.com

Hammer M. Chanpy, J. (1993) Re-engineering the corporation.

Hellinger, M; Fingerhult S. (2002) “Business Activity Monitoring. EAI.

Jersy: Natalic Anderson .PP. 11-36

Marting, W. (2003) Business Performance management Efficiently.

Meets Data Warehousing EAI journal, July PP 18-21

New warehousing: Retrieved from http//www.datawarehousing.com

---

REQUEST FOR PROJECT MATERIAL

Good Day Sir/Ma,

WARNINGS!

PLEASE make sure your project topic or related topic is found on this website and that you have preview the abstract or chapter one before making payment.

Thanks for your interest in the research topic. The complete research work will cost you N2000 and we will send the material to you within 24hours after confirming your payment.

Make the payment of N2000 into any of the account number below and we will send the complete material to you within 24hours after confirming your payment.

Account Name: Agada Leonard E
Account No: 2070537235
Bank: UBA

Or

Account Name: Agada Leonard E
Account No: 3049262877
Bank: First Bank

Or

Account Name: Agada Leonard
Account No: 0081241151
Bank: Diamond Bank

After payment, send the following information to us through this email
address: enemsly@gmail.com

Topic paid for:
Amount Paid:
Date of Payment:
Teller No or Transaction ID:
Name of Depositor:
Depositor Phone Number:
Email address:

NOTE: The material will be forwarded to the email address you provided
within 24hrs after confirmation of the payment.

Thanks.

Agada Leonard E.
For: Enems Project.

 For more information visit our contact page @ CONTACT US

---