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REVIEW OF DISTRESS SY DROME I IGERIA BA KS WITH A VIEW TO PREVE TI G RECURRE CE

BY

OFFOR, EMEKA

Electronic copy available at: http://ssrn.com/abstract=1508335

ii

DEDICATIO

This work is dedicated with love to my parents, Mr. & Mrs. U. Simon Offor.

Electronic copy available at: http://ssrn.com/abstract=1508335

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ACK OWLEDGEME T

I wish to express my unreserved gratitude to the Almighty God without whose mercy, love, guidance and blessings, this work could not have been a reality.

I acknowledge with gratitude those whom I came in contact with, whose understanding, instructions, direction, contribution and encouragement led to the successful completion of this work.

May the blessings be!

Electronic copy available at: http://ssrn.com/abstract=1508335

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TABLE OF CO TE TS
Page Title Page .. Dedication.. .. Acknowledgement.. List of Tables.. Abstract.. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. i ii iii vi vii

CHAPTER I: Introduction .. .. .. .. 1.1 Objectives of the Study .. 1.2 Statement of the Problem .. 1.3 Relevant Research Questions .. 1.4 Scope of the Study .. .. 1.5 Significance of the Study.. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 4 4 5 5 6 1

CHAPTER II: Review of Related Literature.. 2.1 2.2 2.3 .. .. .. .. .. .. .. .. .. .. .. 7 9 10 7

Definition of Banks .. .. .. Definition of Distress .. .. .. Measures of Distress in Nigerian Banks []

2.4 2.5 2.6 2.7 2.8

Classification of Banks Based on the Proposed Ratings System .. .. [] Proposed Factor/Componen Weights .. Causes of Distress in Nigerian Banks .. .. Effect of Bank Failure.. .. .. .. Extent of Bank Distress in the Economy .. Role of the Regulatory Authorities .. .. Review of Some Distress Resolution Strategies .. .. .. .. .. [] The Emergency Measures .. .. [] The Long-Run Measures .. ..

.. .. .. .. .. .. .. .. ..

11 12 12 14 15 16 18 18 18

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CHAPTER III Methodology and Data Collection Procedure 3.1 3.2 3.3 3.4 3.5 3.6 .. .. .. .. .. .. .. .. .. 21 21 22 23 23 24 21

Introduction .. .. .. .. .. Population .. .. .. .. .. Sample .. .. .. .. .. Data Collection and Measurement of Variables Administration and Retrieval of Questionnaire Decision Rule .. .. .. .. .. CHAPTER IV

Presentation of Data Analyses of Results and Interpretation 4.1 Hypothesis I.. .. .. .. Analyses of Responses 4.2 Statistical Test of Hypothesis I 4.3 Hypothesis II .. .. .. 4.3a Analyses of Responses .. 4.3.1 Statistical Test of Hypothesis II 4.4 Research Question .. .. .. .. .. .. .. .. ..

.. .. .. .. .. .. .. ..

.. .. .. .. .. .. .. ..

.. 25 25 26 27 29 30 31

25

CHAPTER V Summary, Conclusion and Recommendations 5.1 5.2 5.3 [] [] Summary .. Conclusion . Recommendations Bibliography .. Apendices .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 33 33 34 37 39 33

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LIST OF TABLES
Page 2.1 Classification of Banks on the proposed Rating System .. .. .. .. Proposed Factor/Component Weights Administration and Retrieval of Questionnaire .. .. .. Analyses of Responses .. .. .. .. .. 11 12

2.2 3.1

.. ..

.. .. .. .. .. ..

.. .. .. .. .. ..

23 25 26 28 29 30

4.1 4.2 4.3 4.3a

Contingency Table for Hypothesis I .. Contingency Table for Hypothesis II .. Analyses of Responses .. ..

4.3.1 Contingency Table for Hypothesis IIa

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ABSTRACT
The problem of distress or outright bank failure has always featured in the Nigerian banking industry. However, never in history has the degree and scope of the distress been as high as witnessed in the mid 90s. In fact, during this period, the number of distressed banks and severity of the problem increased rapidly. The reason for this upward trend is not far fetched. Whereas the distress problem assumed epidemic proportions, its treatment has been rather piecemeal and ad hoc in nature. The

confidence reposed on the regulatory agencies by the banking public is now very shaky. Some are beginning to wonder if the regulators should not be regulated. Some others are doubting the effectiveness of the CAMEL rating system and a lot more.

It is observed that adequate efforts have not been made to conduct empirical test of the factors responsible for the distress rather, various factors are always blamed without subjecting them to any empirical verification.

The urge to remedy the limitations posed by such subjective conclusions inspired this study. The study inter alia, identified some major causes of the current distress in Nigerian banks; appraised the extent of the bank distress in our economy; reviewed previous resolution strategies to determine why they failed to achieve the desired objectives.

Following from the above, the study offered various strategies to arrest the situation and avoid future occurrence.

Finally, the study recommended immediate adoption of the newly proposed CAMEL rating system by members that participated in the CBN/NDIC collaborative study. Also favoured by the study is the adoption of long-term distress resolution strategies as against the present ad hoc measures.

CHAPTER I I TRODUCTIO
Distress in the banking sector is now a global problem. Like a scourge, the distress phenomenon has enveloped the banking industry in some notable countries of the world and has threatened to reduce the once enviable sector of the economy to mere rubbles as depositors, bankers and customers are caught in crises bordering on the recovery of deposits, managing a failing system and crisis of confidence.

Immediately after the first world war, former Czechoslovakia witnessed declining performance in the activities of her banking sector. This led to the establishment of a Nationwide Deposit Insurance Scheme in 1924 to encourage savings from the confused public and restore the much needed confidence for the sector.

In February 1995, Barings Bank, the oldest Merchant Bank in London, went under with losses in excess of $1 billion. The scandal rocked the international banking world and earned a six-and-a-half year jail sentence in Singapore for ick Leeson, a

28-year old trader whose derivative trading activities were blamed for the disaster.

As if that was not enough, later in the year, serious problems were disclosed at Daiwa Bank in New York, sending American Operators on a search for a scapegoat (somebody to blame) the regulators, auditors, directors etc.

In fact, in the United States of America (USA), the banking system suffered distress between 1930 and 1933 in the wave of great depression. According to CreditNews magazine, during this time, about one third of commercial banks, basically small unit banks failed. And between 1987 1993 an average, of about 150 banks were

reported to have failed annually. This led to the establishment of Federal Deposits Insurance Corporation, FDIC in the US to restore confidence in the system.

In Nigeria, the problem of distress and outright bank failure dates back to 1930 when the first bank failure was reported. Indeed, between 1930 and 1958 (when CBN was established) more than 21 bank failures were recorded. However, of great concern is the nature and magnitude of distress that engulfed the Nigerian Banking Sector in the 90s. The withdrawal of about =N=6 billion in respect of credits backed with foreign collaterals and the transfer of governments deposits away from the licensed banks to the Central Bank of Nigeria in 1989, caused panic in the banking system. This necessitated a joint Nigerian Deposit Insurance Corporation (NDIC)/Central Bank of Nigeria (CBN) accommodation facility to the tune of =N=2.3 billion for 13 banks.

Emerson (1996) opined that the turbulence in the banking industry did not start with this singular government directive; neither did it begin with previous government policies. Over time, he said, the industry had developed a hidden deterioration caused by complacency and lethargy.

The banking industry is going through a kind of upheaval that is unparalleled in the financial history of Nigeria. The degree of change being brought about by

environment pressure is now accelerating at a pace that can only magnify the consequences of mistaken or misguided management action.

After decades of almost concrete stability, the banking sector has become increasingly volatile. Developments in the operating environment of banks brought about a host of new players muscling on what used to be golden preserve of big banks from foreign exchange transactions through loan and capital markets to financial advisory services. The number of banks increased drastically from 81 in 1991 to 120 as at December, 1994. There have also been numerous competitive and regulatory attacks on both the balance sheet and earnings portfolio of banks. The chronology of events that set in motion the following pronouncements by the authorities are very pertinent. These include:

a] b]

Deregulation 1988 Credit Guidelines 1990

c] d] e]

Re-regulation 1991 Prudential Guidelines 1991 Stabilization Securities 1991

These are a few of the regulatory inundation the banking industry have to contend with in the 90s.

On the growth rate of the banking industry, NDIC report showed that total deposit liabilities of insured banks grew by about 14.8% from =N=128.5 billion as at the end of May 1993 to =N=147.5 billion as at end of May 1994; a trading period that witnessed increased frauds and a rise in the number of distressed banks. While the number of distressed banks rose from 9 in 1989 to 60 as at December 1995 (Daily Times, May 17, 1996), the Vanguard Newspaper of October 9, 1996 reported that over =N=23 billion in local and foreign currencies was lost to fraud in Nigeria over the preceding three years with a total of 750 reported cases of fraud including 419 (Advance fee fraud)

Also speaking on the increasing distress syndrome, Ebhodaghe (1995), disclosed that as at December 1994, non-performing loans and advances constituted an average of 27.40 per cent of the total deposits of the banking industry and as high as 60.33 per cent for the distressed banks. The implication of this is that not less than 60k of every =N=1 deposit in distressed banks was tied down in loans that were not performing.

Furthermore, Ebhodaghe (1995) observed that distressed banks have continued to use depositors funds to finance capital projects, staff salaries and other expenses.

1.1

OBJECTIVES OF THE STUDY

According to Ogwuma (1996), one of the major criticisms of the various distress resolution initiatives is that, although the distress problem assumed epidemic proportions, its treatment was usually piecemeal and tentative in nature. The

implication is that the measures applied did not appear to have been based on any objective study of the causes of the problem.

The major objective of this study is basically to review the distress syndrome that characterized the Nigerian Banking Industry in the recent past and following from that recommend measures to prevent a recurrence.

1.2

STATEME T OF THE PROBLEM

The hidden, rapid deterioration of Nigerian banking industry was catalysed by the deregulation of the foreign services in all the sectors of the economy and the introduction of Foreign Exchange Market (FEM) with loose ends. These increased the appetite of most Nigerian businessmen for quick money making and resulted in increased demand for more banks. This unguarded bank spread brought about several consequences, inter-alia a dearth of trained professionals, breeding of criminallyminded directors, managers and even customers etc. who turned the banks into conduit pipes for siphoning the national economy for self-aggrandizement rather than being interested in the survival of the industry.

This study, realizing that the various temporal/emergency distress resolution strategies had not significantly achieved the desired result in restoring the health and stability of the banking industry, will attempt to objectively determine the real causes of bank distress as a yardstick for reviewing some of the previous resolution strategies. Finally, the study will attempt to develop more effective ways of preventing the recurring of distress in the future.

1.3

RELEVA T RESEARCH QUESTIO S

What are the major causes of distress in the Nigerian Banking System? Who should be held responsible for the outbreak of distress in the industry?

Hypothesis:

i]

Ho H1

Bank Managements and Board of Directors are not responsible for the distress in their banks. Bank Managements and Board of Directors bear the ultimate responsibility for distress in their banks.

ii]

Ho H1

Bank external auditors and regulatory authorities did not contribute to the current distress in Nigerian banking industry. Bank external auditors and regulatory authorities contributed largely to the distress in the Nigerian banking industry.

In addition to the above two hypotheses, the following thought provoking research question was postulated:

Do banks currently distressed in Nigeria stand any chance of survival? Can we truly prevent a recurrence of bank distress in Nigeria?

1.4

SCOPE OF THE STUDY

In the leading case, United Dominions Trust V Kirkwood (1966), a banker was defined as one who takes money on current account, pays cheques drawn on himself and collects for his customers.

In Roes legal charge (1982) this scope was widened when it was held in 1974 that an institution was deemed to be a bank even though it had no business premises of its own but provided service at the counter of another bank.

However, for the purpose of this study, the scope of the bank will be limited to licensed commercial and merchant banks.

1.5

SIG IFICA CE OF THE STUDY

As distress in the banking sector persists, analysts and banking practitioners remain aghast as to the formidable damage the development holds for the already tottering national economy, if comprehensive resolution strategies are not put in place to redeem the situation.

The writer believes, therefore, that the findings of this study would provide useful insights into the nature and causes of distress in the Nigerian banking sector and recommend a more enduring distress resolution strategies for both the operators and the regulators. This, expectedly will be applied in preventing the recurrence of

distress in the future.

Moreso, this study will also serve as a source of added knowledge to all the readers, especially, students.

CHAPTER II REVIEW OF RELATED LITERATURE


This chapter attempts to highlight some relevant theoretical and empirical studies which would provide an analytical framework for the study of distress in the Nigerian banking industry.

However, before getting to the main thrust of this analysis, it would be pertinent to highlight some of the definitions of banks by various authors, define distress both in general terms and for purpose of this study, basis for measuring distress and review available literature on distress resolution strategies.

2.1

Definition of Banks

In the leading case of United Dominions Trust V. Kirkwood (1966), a banker was defined as one who takes money on current account, pays cheque drawn on himself and collects for his customers. Sharing the same view, Doyle (1991), defined a banker as anybody carrying on the business of banking. In Roes legal charge (1982), this scope was widened when it was held in 1974 that an institution was deemed to be a bank even though it had no business premises of its own but provided service as the counter of another bank. Afolabi (1994), defined banks as intermediaries/institutions collecting savings of people who have more money than they immediately require and lending such money to people who require more money than they can immediately generate thus matching the saving requirements of depositors with investment requirements of borrowers.

wankwo (1991), saw a bank as a risk managing institution whereby five main constituencies must be satisfied:

a]

One is the surplus clients from which it borrows, and these clients will demand the best possible terms in the rates of interest and maturity structures and

maximum liquidity to enable them to have the funds back when they want them or as agreed. b] The second constituency is the bank debtors, those that borrow from the bank. The borrowers in this constituency want to borrow at a cheap rate. Like the lenders, the borrowers also impose the obligation of maximum liquidity on the banks to enable them meet the depositors request as agreed or when their funds are needed. c] In satisfying the surplus and deficit sectors, the shareholder must also be satisfied and to do this, a maximum or adequate return on their investment in order to remain interested in the bank and to be willing to continue to provide additional resources as and when called upon. d] The regulatory authority whose main duty is to see that the bank conforms with the regulation, that it operates prudently and within stipulated regulatory requirements. e] The community at large, the bank owes an obligation to the community to be a good corporate citizen, capable of maximizing the exploitation of the opportunities available and minimizing the threats in its environment.

Summarising the above various views, it could then be said that in modern times, banks play vital roles in commerce and other economic activities. It collects surplus funds from the general public and safeguards such funds. According to needs, banks transfer some of these funds from one person to another. It makes the use of cheques and credit transfer system possible. Banks act as executors and trustees; they

negotiate and collect bills of exchange on behalf of their teaming customers. All these laudable roles made the banking public to repose much confidence in the bank. Confidence in this case refers to peoples faith in the bank i.e. the extent to which people generally believe that their money is safe and that the possibility of loss is remote. This is in fact synonymous with the overall rating of the bank in the market.

This aspect makes the bank business all the more intricate as it borders on money as the main commodity of trade. Therefore, it is essential for every banker to bear in

mind that the obligation to repay depositors funds remains no matter what happens to the bank. The inability of any bank to see this as a guiding principle may lead to failure.

2.2

Definition of Distress

There are many definitions of distress as there are definers. The Oxford Advanced Learners Dictionary defined distress as (cause of) great pain, discomfort or sorrow ; serious danger or difficulty.

In the financial sector, distress is viewed by many, traditionally from the angle of funds. Benston et al (1986) described distress as a situation of complete of nearcomplete loss of shareholders funds. Alashi (1993) associates distress with a

cessation of independent operation or continuance with the assistance of relevant authorities such as a deposit insurance institution.

The implications of the above definitions are that distress is undesirable and that any organization in distress is not meeting its set objectives. It appears, therefore, that ot have a more embracing definition of distress for banks, it will be necessary to state some broad set objectives of a typical financial institution and also synthesize those factors that will make a financial institution unhealthy.

Ebhodaghe (1993) opines that the broad objectives and aspirations of a typical financial institution will be to meet its obligations to customers as and when due as well as to its owners and the economy within which it operates. On the other hand, speaking on the factors that could make a financial institution unhealthy, Ologun (1994) stated that a financial institution will be described as unhealthy if it exhibits severe financial, operational and managerial weaknesses.

Based on the foregoing, a working definition of distress for the purpose of this study is that a distressed financial institution is one with severe financial, operational and managerial weaknesses which have rendered it difficult for it to meet its obligations to its customers, owners and the rest of the economy as and when due. Thus, when a

Bank is said to be distressed, there are technically, two distinct but closely related conditions that come to mind viz. insolvency and illiquidity.

While insolvency refers to a condition in which the sum of assets of an Institution is less than the sum of its liabilities, a situation which prevents it from honouring its obligations to depositors and other shareholders, illiquidity, on the other hand, describes the problematic cash flow position of a firm (CB / DIC Collaborative Study, 1995). One may wonder whether a technically insolvent bank could at the same time be liquid and vice versa. The answer is in the affirmative. A technically insolvent bank remains sufficiently liquid long after it became insolvent if it has a large and stable deposit base, while a solvent bank could run into liquidity problems arising from a mismatch between the maturity profiles of its assets and liabilities. However,

Glaessner and Mas (1995) observed that illiquidity, if unassisted by monetary authorities can turn into insolvency if the institution has to sell its assets at distressed price or pay above market rates on deposits in a desperate scramble for liquidity. 2.3 Measures of Distress in igerian Banks

A banks classification as distressed is based on the bank examination rating system with acronym CAMEL. That is, Capital Adequacy, Asset Quality, Management Competence, Earnings Strength and Liquidity Sufficiency. Based on these,

appropriate financial ratios are developed. It is the aggregate or composite rating of performance in the above-mentioned areas that qualifies a bank to be branded healthy or unhealthy. Ebhodaghe (1993) observed that a financial institution in distress is usually one where the evaluation depicts poor condition in all or most of the five performance factors as follows: a] b] c] d] gross under-capitalization in relation to the level of operation; high level of classified loans and advances; illiquidity reflected in the inability to meet customers cash withdrawals; low earnings resulting from huge operational losses; and

10 e] weak management as reflected by poor credit quality, inadequate internal contols, high rate of frauds and forgeries, labour turnover, etc.

Using these parameters, an institutions financial condition is assessed against some standard benchmarks like minimum capital adequacy ratio, liquidity ratio, and ratio of non-performing credits to shareholders funds, etc. to determine whether such institution is healthy or unhealthy. Once these ratios deviate negatively from the predetermined standards, as set by the relevant authorities, the institution is described as exhibiting symptoms of distress.

The use of these ratios above however, only shows an institution with symptoms of distress. For greater details providing a good measure of the extent of distress

especially in the case of Nigeria, the CBN and the NDIC are proposing a new rating system to take care of the shortfall. The proposed rating system attempts to develop a composite measure based on CAMEL parameters. The composite measure is simply a weighted average of the CAMEL parameters in which the weighted parameters sum to unity (100%). The range of composite scores for each rating could enable the authorities determine those banks that are distressed and whether marginally or terminally.

The proposed rating grid and classifications are shown in Table 2.1 & 2.2.

TABLE 2.1

CLASSIFICATIO OF BA KS BASED O THE PROPOSED RATI G SYSTEM Class A B C D E Composite Score (per cent) 86 100 71 85 56 70 41 55 0 - 40 Rating Very Sound Sound Satisfactory Marginal Unsound

Source: CBN/NDIC Collaborative Study, 1995

11 TABLE 2.2 PROPOSED FACTOR/COMPO E T WEIGHTS Factor 1. Capital Component a] Capital to Risk-Weighted Assets Ratio b] Adjusted Capital Ratio c] Capital Growth Rate a] Non-performing Risk Assets to Total Risk Assets b] Reserve for Losses to Nonperforming Risk Assets c] Non-performing Risk Assets to Capital and Reserves a] CAEL/85 b] Compliance with Laws and Regulations a] Profit Before Tax to Total Assets b] Total Expenses to Total Income c] Net Interest Income to Total Earning Assets d] Interest Expenses to Total Earning Assets a] Liquidity Ratio b] Net Loans and Advances to Total Deposits Component Weight % 15 5 5 15 5 5 5 10 5 5 5 5 10 5 20 15 25 Total Weight %

25

2.

Asset Quality

3.

Management

4.

Earnings

5.

Liquidity

Total Source: CB / DIC Collaborative Study, 1995

15 100

2.4

Causes of Distress in igerian Banks

According to Afolabi (1994), there are many problems which could eventually lead to bank failure just as there are many possible causes of death of a human being. In most cases however, it is the case of one factor precipitating others unless and until policies are effected to effect a halt.

12 However, before we go into listing some causes of distress in Nigeria banks, it would be pertinent to identify some notable causes of distress in some other countries for effective comparison.

Sharing the view that factors responsible for bank distress differ from country to country, a renowned researcher, Balino (1991), observed that when discussing banking crises in Argentina, Chile, Malaysia, Spain, etc. the diversity of experiences with distress owing to cross-country differences in macroeconomic conditions, the regulatory framework, the intensity of the crisis and the approaches used to deal with it, makes it difficult to generalize and develop stylized descriptions or standardized prescriptions. In the case of Spain, its financial problems occurred within the period of its financial reform between 1977 and 1983. In the Philippines, the distress in its financial services industry set in immediately after the deregulation of its financial sector in 1981.

In the above cases, the distress experienced by these countries could be linked directly to their macroeconomic problems. The varying degrees of distress experienced by each of the countries cannot be separated from the severity of the recessions witnessed by their economy.

In Nigeria, the effects of economic and political factors on distress could not be explicitly determined. One of the key factors responsible for distress in Nigerian banks is the unprofessional practices both among the operators and the regulators. The CBN/NDIC Collaborative Study, 1995 listed the factors responsible for distress in Nigerian banks as inept management, boardroom in-fighting, greed and unprofessional practices According to Layi Afolabi (1994), some of the causes of bank failure in Nigeria are:

[]

Bad Management: Afolabi observed that this singular factor bears a high share of the causes of failure in banks. He further stated that because of relative attractiveness of banking, especially with respect to pay prospect, people from different professions and callings find themselves in the

13 midstream of banking operations without proper grooming, ignoring the fact that banking is a distinct profession of its own with its own intricate and idiosyncrasies.

[]

Inadequate Capital: For a bank to enjoy confidence of depositors it must have strong capital base as evidence of strength. In virtually all the distressed banks, the adjusted capital is negative to the extent that even fixed assets could be seen to have been financed from depositors fund.

[]

Risk Assets Portfolio: Most banks do not have clear investment or credit policy and there is absolutely no control on credit. In most cases, it is the Managing Director or Chairman or the promoters of these banks who have lending powers and they lend mainly to their own businesses, friends etc. without due assessment or collateral.

Other causes of bank failure as observed by Afolabi are Assets/Liability Management, Boardroom Crisis, Inability to Adapt to Change, Fraud and Lack of Planning.

2.5

Effects of Bank Failure

The failure of a bank has multi-dimensional effects. The direct effect on the depositor who may lose his money is obvious and even when the deposit is small and recoverable from NDIC, there will be considerable delay. Afolabi (1994), observed that bank failure results in loss of confidence by depositors who form the back-bone of banks. They troop to banks to make mass withdrawals leaving the industry with liquidity problems and shortage of loanable funds. He further stated that such failure discourages and inhibits the monetization of the economy. This implies that the negative effect of the failure transcends the banking industry.

As observed in the CBN/NDIC Collaborative Study, 1995, other effects of distress were the increased distortion of information on financial conditions of the banks arising from attempts to hide the facts. Debtor morality had also been negatively

13 affected as some debtors who obtained bank loans and who were in a position to pay refused to do so in an era of with the attendant liquidity squeeze led to significant increases in the interest rates as most banks engaged in distress borrowing, the prevailing market rates notwithstanding, in order to meet their due obligations. Most healthy banks were reluctant to lend to distressed ones therefore the distressed banks had to obtain such loans through third parties resulting in tiering of interest rates which eventually led to the collapse of inter-bank market.

2.6

Effects of Bank Failure In the CBN/NDIC

Distress in a financial system could either be of generalized nature or systematic, which is determined based on the extent/depth of distress.

Collaborative Study, 1995, it was observed that generalized distress exists when its occurrence is spreading fast and cuts across all the sub-sectors of the industry but its depth, in terms of the ratio of total deposits of distressed institutions to total deposits of the industry; the ratio of total assets of the distressed institutions to total assets of the industry etc. has not adversely affected the confidence of the public in the financial system.

On the other hand, systematic distress which is more severe, exists when, according to Balino (1991), the prevalence of distress and its contagious effects become endemic and pose some threats to the stability of the entire system, with its attendant negative effects on the nations payment system, savings mobilization, financial intermediation process and depositors confidence. In the case of Nigeria, available data

(CBN/NDIC Collaborative Study, 1995) indicate that the number of distressed commercial and merchant banks had reached 57 as at the end of the first quarter of 1995. Total deposits of distressed institutions stood at =N=47.9 billion or 24.6 per cent (i.e. about one quarter) of the banking sub-sectors total while their total assets stood at =N=68.5 billion or 18.5 per cent of the total assets of all banks. Although these ratios are high, public confidence in the entire financial system has not been adversely affected to a level that can trigger runs on the system. People only move their deposits from perceived distressed banks to healthy ones which is simply a flight to safety within the same system. Based on the foregoing, the Nigerian case

15 Is not a systematic distress but a generalized one.

2.7

Role of the Regulatory Authorities

The CBN has a role to play in ensuring sanity within the banking system. Section 38 of the Central Bank Decree No 24 of 1991 states that; the Bank shall, wherever necessary seek the cooperation of and cooperate with other banks in Nigeria: a] to promote and maintain adequate and reasonable financial service to the public; b] to ensure high standards of conduct and management throughout the banking sector

To achieve these objectives, Section 39 of the same Decree prescribed the powers which the Central Bank may exercise from time to time. These include the powers to specify critical ratios, to call for information from banks and to inspect the books of any bank under condition of secrecy. It equally has power to request that all

applications to any bank for loans exceeding such amount as the CBN may specify shall be submitted by the bank to the CBN for approval and no such loans shall be made without such approval. Afolabi (1994) observed that the CBN has never

exercised this power and concluded by saying; it tells us how far the CBN can go at least in theory.

The regulatory powers of the CBN are further strengthened under the Banks and Other Financial Institutions Decree 25 (BOFID), 1991. The powers if meticulously applied can achieve the following: control bank charges scrutinize entry and exit and avoid under capitalization ensure safety of depositors funds regulate conduct of directors and employees of licensed banks ensure adequate profit retention to strengthen capital base limit risk taken by the banks ensure sensitively to macro-economic etc.

16 above all, power to revoke, with the approval of the President, license granted to a bank under certain conditions. The NDIC as an arm of the CBN acts as both a liquidator and an underwriter, and has liability of up to =N=50,000 on each depositor. As an underwriter, the NDIC is supposed to have adequate knowledge of the state of affairs of each bank, especially in relation to use of the fund and this can only be done if it regularly examines the books of the banks and provides guidelines for improvement so that the risk accepted would not be different from the risk intended or the risk understood to have been intended.

Given all these powers vested in these two institutions, one may wonder whether banks should be allowed to fail in the first case, or whether we should regulate the regulations. What explanation has CBN offered, given the present high level of distress in Nigerian banks?

The Vanguard (August 30, 1996), the front page news read thus: Bank Distress: Odozi absolves CB of blame (Victor Odozi is a Deputy Governor of the CB ). He (Odozi) blames the situation on what he termed endogeneous factors and listed the factors as undercapitalization, management ineptitude, insider abuses, frauds, weak internal controls, among others. In the CBN/NDIC Collaborative Study, the CBN argued that the effectiveness of the CBN & BOFI Decrees (1991) was limited by the fact that the ultimate decision on what to do with distressed banks rests with the President. However, the public wonders how many banks CBN could claim to have objectively and accurately assessed with recommendations passed to the Presidency. Afolabi (1994), stated that the primary responsibility of ensuring a stable and healthy financial system is vested in the CBN, and by CBN Decree 24 of 1991, the bank has the necessary legal backing to discharge this responsibility. Based on the foregoing, the effectiveness of the CBN in the discharge of this responsibility can be assessed vis-vis the prevailing financial condition of the operators in the system. Sharing the same view, Ekpenyong (1994) threw two questions to the CBN. His first question was, why did it (CB ) not discourage irregular banking practices (which were noticed in

17 the wake of deregulation) to boost the sub-sectors professional credibility? The second question bordered on the even handedness of the CBN. According to him, if there are 29 distressed banks, why start with two and three?

2.8

Review of Some Distress Resolution Strategies

Based on the available literature, two broad distress resolution strategies have been identified. The first is the short run or femergency measures while the second is the long run measures.

The Emergency Measures These aim at stabilizing the financial system as rapidly as possible. Some of the measures usually adopted here rangefrom lender-of-last-resort facilities to special credit facilities, as was done in Thailand and Philippines for financial institutions showing signs of illiquidity. Moreso, there is the intervention by the apex banking institution in the management of ailing banks to help restore confidence as was done in Argentina, Chile and Spain during the early periods of their banking crises. Finally, there is the institution of explicit Deposit Insurance Scheme (DIS) as was the case in Argentina, Chile and the U.S.A.

Back home, some of these techniques have been applied and/or still being applied to some ailing banks in Nigeria. For instance, the NDIC could be likened to the DIS of the U.S.A. Moreover, the NDIC has taken over management of some ailing

commercial and merchant banks in our country.

The Long-Run Measures These are normally applied when the problem is that of insolvency. The long term measures that have been widely used include mergers and sale, recapitalization, takeover by government with the aim of turning the institutions around and then selling the

18 Institutions through competitive bidding. The ultimate treatment of terminally

distressed institutions is of course outright liquidation.

All these options have been applied in the following countries that have suffered severe financial distress viz.: Malaysia, Norway, Spain, U.S.A, Senegal etc.

In Nigeria, Agene (1995) pointed out that the House of Assembly debates in 1952 claimed that a total of 185 banking companies were registered in Nigeria between 1947 and 1952 (145 banks in 1947 alone and the remaining 40 in 1952). Most of these indigenous banks, according to Agene, did not survive due to undercapitalisation, overtrading, management incompetence and above all, absence of any machinery for bank supervision. Consequently, this led to the establishment of the Paton Commission in 1948 to enquire into the conduct of banking business. The Paton Report led to the enactment of the Banking Ordinance, the first ever banking law in Nigeria.

In 1992, the Central Bank took over the management of National Bank of Nigeria Limited, Cooperative and Commerce Bank Plc, New Nigerian Bank Plc among others. As the number of insolvent banks kept growing at an alarming rate, the CBN revoked the licenses of four banks in 1994, namely, Kapital Merchant Bank Limited, Financial Merchant Bank Limited, Alpha Merchant Bank Plc and United Commercial Bank Limited. Moreso, arrangement to merge Nigerian Merchant Bank, Continental and ICON Merchant Bank to form Atlantic Bank Plc has reached advanced stage. There were also cases of offer for sale of some banks by the CBN/NDIC.

In a bid to restore confidence in the financial system which has been greatly eroded by the general misconduct and unwholesome attitudes of some banks executives, the Federal Military Government established the Failed Banks (Recovery of Debts) and Financial Malpractices in Banks Decree Failed Bank Decree. The Decree is made up of 4 major sections or parts. Part I dealt with the o. 18 of 1994 popularly known as the

establishment and powers of the Failed Banks Tribunal, etc. Part II dealt with

19 Recovery of Debts owed to Failed Banks. Part III touched on offences and spelt out penalties while Part IV dealt with the miscellaneous such as trial in absentia, inconsistency, interpretation and citation.

The implementation of the Decree through the tribunal was done in a task force manner. In fact, the last report of the tribunal revealed that huge sum of money were recovered. The Guardian Newspaper of Thursday, August 29, 1996, reported that NDIC recovered =N=7.3 billion for 45 banks through the Failed Bank Decree. Those being tried by the tribunal, once convicted, have their personal property, moveable and/or immoveable, attached for debt liquidation. ThisDay Newspaper of September 29, 1996 reported that a former Chairman/Managing Director of Kapital Merchant Bank lost his estate in a =N=320 million deal, a fall-out of the trial at Failed Banks Tribunal which ordered sale of the property. It may not be far from the truth to say that the implementation of this Decree was done on classless basis. In deed, one of the unique things of law is that it is not the respecter of anybody. Notable individuals including retired generals were dragged to the tribunal by the NDIC. Prominent among them were a former Islamic leader, a retired army general, a billionaire, a former chief of army staff, a leading traditional ruler. The list is inexhaustible (Daily Times, Wednesday, August 14, 1996). The impact of this Decree in sanitizing the Nigerian banking industry can never be overemphasized.

20

CHAPTER III METHODOLOGY A D DATA COLLECTIO PROCEDURE

3.1

Introduction

To a large extent, bank distress is usually blamed on such factors as economic, institutional, political etc. This may well be true but in most cases, these factors were not subjected to any empirical verification.

As this relates specifically to the Nigerian situation, the study aims at remedying the limitations posed by subjective conclusions by conducting an empirical test of the factors responsible for bank distress. To this end, both survey and statistical analyses were employed. The survey covered the two major classes of operators in this subsector i.e. commercial and merchant banks as well as the major supervisory/regulatory agencies. The survey was designed to generate information on the following cases: 1] The operators and supervisory/regulatory agencies perception of

nature/extent and factors responsible for distress in Nigerian bank 2] 3] Their assessment of the various resolution options Suggestions to ensure a faster and more effective resolution of the distress problem etc. 4] Suggestions for prevention of a recurrence.

3.2

Population

The population for this study includes middle managers, senior managers and top executives of all the commercial and merchant banks that operated in the economy as at December, 1995.

Owing to the ease of entry into the industry that attended deregulation process between 1991 and 1994, it is possible that many banks were licensed. However, the

21

population includes only those that actually carried out banking business and reported their operations to both the NDIC and the CBN within the period specified.

The population is therefore finite in nature giving a total figure as follows: Commercial banks Merchant banks Grand Total = 64 = 115 51 ----

----Population size for the study is 115 banks (see Appendix I) 3.3 Sample

Owing to the special relevance of distress management to both the commercial banks and merchant banks, coupled with the fact that most of the analyses will be on a macro level, the study sample will be a fair representative of the population.

To ensure that the sample size is representative enough, statistical computation of sample size for finite population was employed with a 5% margin of error. Thus: (formula) N ----------1 + Ne2 = = = = sample size finite population statistical constant allowable margin of error

n = Where: n N 1 Ne2 . . . n=

115 --------1 + 115 (0.05)2

115 ---------. . 1.2875 = 89.32 Sample size for the study is therefore approximately 89 Commercial and Merchant . Banks (see Appendix II). However to determine the number of commercial and

22 merchant banks to be studied respectively, the ratio of each group to the pool is used as a yardstick. Computation of ratio is as follows:

Commercial Banks: Total . . . Merchant Banks : Total . . . 3.4

64 64 ----115

89 ----1

approx. 50

51 51 -----115 x 89 ----1 = approx. 39

Data Collection and Measurement of Variables

The survey which formed the primary source of data involved extensive observation/interviews by the researcher, coupled with the administration of a questionnaire to respondents in organizations studied. For the secondary source of data, the researcher made extensive use of the University of Lagos as well as the libraries of the CBN and NDIC.

The questions in the questionnaire were comprehensively prepared based on the hypotheses already formed. The Yes or No response mode and open-ended questions were adopted where appropriate, while the Likert Scaling Technique otherwise known as the Summated Rating Scale was used to measure the intensity of agreement by the respondents to some identified options/statements. Tables 3.1 3.5 Administration and Retrieval of Questionnaire of o. of Questionnaire Returned 42 23 1 2 5 73 Percentage of Returned (%) 82 58 33 66 100 73 o.

o. of Questionnaire Administered Commercial Banks 50 Merchant Banks 39 CBN 3 NDIC 3 Audit Firms 5 Total 100 Source: Extracted from responses

Class Respondents

23 From the above table, it could be seen that a total of 50 copies of questionnaire were distributed to 50 commercial banks studied out which 42 copies were completed and returned representing 82%, 39 copies were distributed to Merchant banks out of which 23 copies were completed and returned representing 58%. Also 3 copies each were distributed to the two major regulatory bodies, CBN and NDIC our of which I (33%) and 2 (66%) respectively were completed and returned while 5 copies were administered on banks external auditors and all duly completed and returned representing 100%.

Summarily, a grand total of 100 copies of questionnaire were administered and a grand total of 73 copies were duly completed and returned representing 73% while a total of 27 copies (27%) were either not returned or returned without completion.

3.6

Decision Rule

A percentage response which is above 50% shows the inclination of the respondent to the subject matter and thus is accepted, while a less than 50% response is rejected. These apply to some aspects of the hypotheses tested with the Yes or No response mode. However, chi-square x2 was chiefly used to test the hypotheses. Appropriate critical value was determined and each hypotheses accepted or rejected based on the value of the calculated x2. The decision rule states that if the calculated x2 is greater than the critical x2, we reject the null hypotheses and accept the alternate hypotheses, and vice versa.

24

CHAPTER IV PRESE TATIO OF DATA, A ALYSIS OF RESULTS A D I TERPRETATIO


This chapter deals with the analyses of the responses of the respondents chiefly based on the questionnaire administered and interviews granted. The analyses are structured according to the hypotheses formulated bearing in mind the ultimate objective of the study. Each hypotheses was tested with a number of questions to ensure consistency in responses (see Appendix III). 4.1 Hypotheses I

85% of the respondents agreed that virtually all the institutional factors cited were the major causes of distress in Nigerian banks. The differences were largely on the intensity of their agreement on the contribution of each factor to the distress while some of them also agreed that a blend of political and economic factors added fuel to the institutional factors. 15% of the respondents maintained strictly that the causes were political and economic factors.

Further detailed analysis is provided in Table 4.1. Table 4.1 Analyses of Responses Strongly Agree Agree (%) % Poor Credit policy & admin. 19.0 1.0 Insider dealing/abuse by Mgt. 14.5 8.0 Interference by Board members/some 9.7 10.0 shareholders Weak loan recovery Machinery 2.0 4.0 Weak internal control 4.0 1.0 Fraud 5.0 Poor supervision by regulatory bodies 4.9 Inadequate professional/Trained 3.0 1.7 manpower Upsurge in the number of banks .2 Total Source: Extracted from responses Total (%) 20.0 19.5 19.7 6.0 5.0 5.0 4.9 4.7 .2 85.0

25

Those that agreed that economic and political factors contributed listed the following reasons: harsh economic environment resulting from inconsistency in the monetary and fiscal policies during the year under study; foreign currency subsidy by CBN that encouraged complacency by bank administrators since income was guaranteed; widespread western propaganda against the economy of the third world countries; weak legal system. Judgement is usually delivered even when the cause of the problem is almost forgotten; defaulting borrowers deriving from the spate of immorality; the 1993 political crises created hiccups in the system and some banks could not contain the attendant financial crises.

4.2 Statistical Test of Hypotheses I The null hypotheses was tested using chi-square (x2) goodness of fit test. The goodness of fit test determines the likelihood that the frequencies observed for a categorical variable could have been drawn from hypothesized population. Ho H1 Bank Managements and Board of Directors are not responsible for distress in their banks. Bank Managements and Board of Directors bear the ultimate responsibility for distress in their banks Question: Please indicate whether you agree or disagree with the following

statement. State your reason(s) Table 4.2 Contingency Table for Hypotheses I OBSERVED Agree 11 Disagree 62 TOTAL 73 Source: Extracted from responses EXPECTED 36.5 36.5 73.0

Note: Since n = 73, the expected value is 73/2 because only 2 categories of data are Involved.

26 Key: * * * * * * X2 Ho Hi fe fo df n = = = = = = = Null hypotheses Alternate hypotheses Expected frequency (computed) Original frequency (given) degree of freedom sample size

(fo fe)2 -----------fe fe 36.5 36.5 (fo-fe) -25.5 25.5 (fo-fe)2 650.25 650.25 X2 Calculated = (fo-fe)2/fe 17.82 17.82 -----------35.64

fo 11 62

Note: X2 is a one-tail test always skewed to the right. The critical value of X2 statistic at 1 degree of freedom (df) with 5% level of significance is 3.841 The decision rule is that if the calculated x2 is less than the critical x2, accept the null hypotheses and vice versa. Therefore, since the calculated x2 (35.64) is greater than critical x2 (3.841), we reject the null hypotheses and accept the alternate hypotheses which states that Bank Management and Board of Directors bear the ultimate responsibility for distress in their banks.

4.3

Hypotheses II

In testing Hypotheses II, various questions were asked. First the two major regulatory bodies, CBN and NDIC were assessed in relation to their performance in the regulatory/supervision of banks. The two institutions were generally rated very

poorly and respondents listed the following reasons to justify their ratings: the two institutions are blamed for poor/late response to distress symptoms; CBN is involved in too many responsibilities outside regulation/supervision And so its resources are not totally or efficiently committed;

27

CBN lacks ability to even implement own policies on time due to unnecessary bureaucracy;

both institutions could not instill discipline among the ailing banks, NDIC seem to come in only when the bank is completely dead already; the NDICs compensation to depositors is so insignificant to instill confidence on the part of depositors;

both institutions have large number of staff that are not trained or updated with the increasing trend in electronic banking to meet the challenges posed by modern banks;

However, a further question was asked to confirm whether CBN is more effective than NDIC in performance of their duties. A test statistics was computed using chi square (X2) and the result is follows:

Ho: Hi:

CBN is more effective in performance of its duties than the NDIC; CBN is not more effective in the performance of its duties than the NDIC. Table 4.3 Contingency Table for Hypothesis II CBN NDIC 10 28 38 [16] [22] Total 30 40 70

Poor Good

20 [14] 12 [18] 32 Source: Extracted from responses

Note: Since we have four categories of data, the formula used for the computation of Expected Frequencies is as follows: Formula: X2 Row Total x Column Total --------------------------------Grand Total (fo fe)2 -----------fe fe (fo-fe) (fo-fe)2 14 6 36 18 -6 36 16 -6 36 22 6 36 X2 Calculated =

fo 20 12 10 28

(fo-fe)2/fe 2.571 2.000 2.250 1.636 ----------8.457

28 Note: x2 is a one-tail test always skewed to the right. The critical value of x2 statistic at 1 df with 5% level of significance is 3.841

The decision rule is that if the calculated x2 is less than the critical x2, accept the null Hypothesis and vice versa. Therefore, since the calculated x2 (8.457) is greater than critical x2 (3.841), we reject the null hypothesis and accept the alternate hypothesis which states that CBN is not more effective in the performance of its duties than the NDIC.

On whether the banks external auditors should be absolved of all blames in the current bank distress, the table below shows the responses of the respondents: Table 4.3a Analyses of Responses No. of Respondents 65 3 5 73 Agree 8 1 3 12 % 12.30 33.33 60.00 16.44 Disagree 57 2 2 61 % 87.69 66.66 40.00 83.56

Bankers CBN/NDIC Audit Firms Total

Most of the auditors maintained that their reports are based on the books provided by their clients.

However, the remaining 83.56% of respondents strongly blamed the banks external auditors. Some of the following points were listed to justify their ratings; some compromise so much that reports given lack objective; there is a limit to which the banks could play with the figures, therefore, an uncompromising auditor should be able to read in between lines especially as some of them have been auditing the books of some of those banks for a good number of years. since the investing public rely on their reports, such reports should be able to at least capture signs of distress on time. Respondents are of the view that having conducted a thorough audit of the banks books, indicators of distress in

29

the qualities of assets and liabilities would have been revealed to them. They maintained that it took more than just a day for the current distressed banks to go distress. auditors should even foresee future threats and warn the shareholders and management rather than narrowing their terms of reference to mere reporting of true/fair view of financial information especially, as they review accounts on a quarterly/half yearly and yearly basis. some respondents concluded that the auditors of the distressed banks should be treated as economic saboteurs.

4.3.1 Statistical Test of Hypotheses II Ho Bank external auditors and regulatory authorities did not contribute to the current distress in Nigerian banking industry H1 Question: Bank external auditors and regulatory authorities contributed largely to the current distress in the Nigerian banking industry. Do you think that the bank external auditors and regulatory authorities

(CB / DIC) contributed to the current distress in the igerian banking industry. Table 4.3.1 Contingency Table for Hypothesis IIa OBSERVED Yes 61 No 11 TOTAL 73 Source: Extracted from responses EXPECTED 36.5 36.5 73.0

Note: Since n = 73, the expected value is 73/2 because only 2 categories of data are involved. X2 = (fo fe)2 -----------fe fe 36.5 36.5

fo 61 11

(fo-fe) 25 -25

(fo-fe)2 625 625 X2 Calculated =

(fo-fe)2/fe 17.36 17.36 ---------34.72

The critical value of X2 statistic at 1 df with 5% level of significance is 3.841

30 The calculated x2 (34.72) is greater than critical x2 (3.841). In accordance with the rule, we reject the null hypothesis and accept the alternate hypothesis which states that the bank external auditors and regulatory authorities contributed largely to the current distress in the Nigerian banking industry.

4.4

Research Question Do Banks currently distressed in igeria stand any chance of survival?

Question:

In answer to the above research question, the general opinion was that banks currently distressed in Nigerian could still survive. 7% of the respondents were undecided while 19% maintained that currently distressed banks have no chance of survival for the following reasons; the economic environment is too hostile the compensation paid by NDIC is too insignificant that depositors could not afford to risk keeping their money with even a marginally distressed bank. weak capital base even the existing shareholders of distressed banks may not be willing to inject new funds into the banks.

However, contrary to the above views the remaining 74% of the respondents agreed tha currently distressed banks could still survive. To substantiate this claim, the following reasons were adduced; some only require management changes to survive; some require repayment of delinquent loans and injection of fresh capital; some may even require only a review of strategy to survive; some may need to call back some its long term investments; mergers and acquisitions may save a good number of them. government should hands off from the management of banks tough disciplinary measures from the regulatory authorities may minimize abuse in the system and enhance survival.

31 Seeking the opinion of the respondents on the role the government should play to arrest the present distress conditions in Nigerian banks, the following suggestions were made; government has no business doing business, therefore, the government should hands-off the management of banks as they end up appointing political heads who may not possess what it takes to be at such position; repay debts owed by governments and their agencies; allow banks that cannot be resuscitated to go under; strengthen bankruptcy laws in the country; consistency in government policies will reduce the negative effects of present hostile economic environment.

On the suggestions sought for avoidance of recurrence in the future, respondents advised as follows: upward review of capitalization of banks; people who must own/run banks should be people of unquestionable character; CBN to concentrate resources on core business only i.e. supervision/regulation and drop retail banking; upward review of NDIC compensation to depositors; retraining of staff in areas of loan administration/recovery; sustaining the failed bank tribunal and extending its scope to include the banks external auditors; more active capital market for raising debts and equity financing thereby reducing the risk of credit mismatch for banks;

32

CHAPTER V SUMMARY, CO CLUSIO S A D RECOMME DATIO S


5.1

Summary

The banking industry in Nigeria within the past four years passed through a kind of upheaval unparalleled in the financial history of the country. Following the upsurge in the number of banks various forms of fraudulent activities and unwholesome practices enveloped this sub-sector and the result was the present distress syndrome that is plaguing the banking industry.

The high degree at which the distress affected the banking sector in the face of the regulatory giants, the CBN and NDIC triggered off questions among the banking public. While some were wondering whether the regulators should be regulated, some were querying the effectiveness of the CAMEL rating system and some others were wondering whether banks should really be wasting money on the so called external auditors when the annual reports and accounts endorsed by qualified audit firms could not be relied upon by investors. The worried public would also want to know the root causes of the distress and what can be done to arrest the situation. All these and more formed the bedrock upon which this study was conducted.

5.2

Conclusion

Based on the statistical techniques and analysis used in the study, the study unveiled the fact that institutional factors ranging from bad management, insider dealings/abuse, poor credit policy and administration, undue interference by board members and some shareholders are the major causes of distress in the banking industry. Other exogenous factors like political, structural, economic etc. equally contributed to the distress in the industry.

The study also revealed that both the CBN and NDIC leave much to be desired in the discharge of their duties. The external auditors have a share of blame in the current distress for compromising objectivity in their reports.

33 Moreso, it was established that apart from the banks that are terminally distressed, opportunities still abound for the survival of most of the mildly or marginally distressed banks. Various survival strategies were identified ranging from change in management, set in motion appropriates loan recovery machinery, review of business strategy, mergers and acquisitions, recapitalization to mounting strong control system both internally and externally.

5.3

Recommendations

Based on the findings of the study, a number of recommendations which will impact positively on the growth and survival of the banks if upheld are listed below as follows: Since poor credit policy and administration scored highest in the endogenous factors that cause distress, it is strongly recommended that Risk Management Department be established in all the banks to spear-head the identification and measurement of risks facing the banks. Such department will also be charged with the responsibility of recommending and overseeing the strict administration of credit control techniques and above all, establish laid down procedures for all insider relationships.

To adequately combat the whims and caprices of the fraudsters, another source of distress, the following steps should be taken; [] statements of practice and procedures should not only be documented but also sufficiently disseminated to staff to prevent claim of immunity under ignorance; [] efficient and qualified internal inspection/audit team should be in place as the custodians of banks assets and records; [] the computers and other related equipment should undergo regular checks and maintained as the need arises lest fraudsters capitalize on the advantages of neglect; [] competency and efficiency should be vigorously pursued through a recruitment and training programme purely devoid of

spoils/favouritism. These are highly recommended also for CBN and

34 NDIC staff as the study established that staff in these institutions have poor knowledge of electronic banking which places them in a disadvantaged positons to capture the tricks played by some of these modern banks. Moreso, a good number of fraudsters take advantage of weak controls/bureaucracy at CBN to defraud a lot of banks and aliens under the popular 419 syndrome. Capital adequacy should be related as much as possible, to the levels of estimated risk exposure in banks operations to guard against crises that may result from an unidentified and unbridled financial risk. Currently, a good number of banks are highly under capitalized. As much as possible, board members should restrict their involvement in banks operations to policy formulations. The study revealed that loans granted to a number of delinquent borrowers were influenced by some board members and/or shareholders. Immediate adoption of the newly proposed rating system by the members that participated in the CBN/NDIC collaborative study. The proposed system is an improvement on the already in use CAMEL rating system. The major problem with the present system is that it does not provide a measure of the extent of distress. The proposed system not only captures distress signals but also measures the degree of distress owing to the availability of composite scores or weighted parameters (see Tables 2:1 and 2:2 in Chapter II) CBN to concentrate its resources on supervision/regulation of banks while disengaging completely from retail banking. CBN to increase frequency of spot-checks on banks The NDIC as both the liquidator and underwriter, has liability of up to =N=50,000 only on each depositor. This amount is considered

certainly inadequate to motivate depositors whose confidence had been greatly eroded. Allow all terminally distressed banks to die off. Strengthen bankruptcy laws and the legal system in its entirety in the country. Most banks develop cold feet in seeking legal redress even

35 when it is absolutely necessary simply because of uncertainties in respect of the time when judgement will be delivered. Government should embark on urgent and massive repayment of all debts owed to various banks. It is also recommended that since the banks annual reports and accounts remain major source of information to the public, the external auditors of any distressed bank that fails to alert the public should be dragged to failed bank tribunal and appropriate disciplinary sanctions imposed.

36

BIBLIOGRAPHY
Books Agene, C. E., The Principles of Modern Banking, (Gene Publications, Abuja, 1995) Benston, George, et al, Perspectives on Safe and Sound Banking: Past, Present and Future, (MIT Press, Cambridge, Mass, 1986) CBN/NDIC Collaborative Study, Distress in the Nigerian Financial Services Industry (October 1995) Doyle, E., Practice of Banking, Third Edition (United Kingdom, Pitman Publishing Ltd, 1986) Nwankwo, G., Bank Management, Principles and Practice, (United Kingdom, Mattheus Press Ltd, 1991) United Dominion Trust V. Kirkwood (1996) in Agene, C. E., The Principle of Modern Banking, (Gene Publications, Abuja, 1995) Journal Articles Afolabi, Layi, Bank Failures and the Rest of Us, The Nigerian Banker, Journal of the Chartered Institute of Bankers of Nigeria (April January 1994) Alashi, S. O., Bank Failure Resolution: The Main Options, NDIC Quarterly (June 1993), Vol. 3, No.2 Balino, T. J. T., The Argentine Banking Crisis of 1980, IMF Working Paper, No. 87/77 (1991), Vol. 6, No.1 Ebhodaghe, J. U., Context, Content and Indices of Distress in Banks: Practical Approach in Definition of Distressed Banks, NDIC Quarterly (1993), Vol. 3, No. 2 Ekpenyong, David B., The Impact of Regulation and Deregulation on the Banking Sector: Role of Regulators and Operators, The Nigerian Banker, Journal of the Chartered Institute of Bankers of Nigeria (January June 1995) Glaessner, T. and Mas, I., Incentive Structure and Resolution of Financial Institution Distress: Latin American Experience, The World Bank Report (1991) Hamilton, Stewart, How Safe is Your Company?, Institute for Management Development, Lausanne, Switzerland, (February 1996), Vol. II, No. 1

37 Ologun, S. O., Bank Failure in Nigeria: Genesis, Effects and Remedies, CBN Economic and Financial Review (September 1994) Vol. 32, No. 3. Magazines/ ewspapers Daily Times of Nigeria, May 17, 1996 Daily Times of Nigeria, Ex-Army Chief, Olu of Warri sued over =N=33.9m Debt, August 14, 1996 Ebhodaghe, J. U., Banking: The Growing Distress Syndrome, Thisday, (April 26, 1995) Guardian, August 29, 1996 Obioha, Robert, =N=23b Lost to Fraud in 3 years by Police, Vanguard (October 9, 1996) Odozi, Victor, Bank Distress: Odozi absolves CBN of Blame, Vanguard, August 30, 1996 Ogwuma, Paul, Poor Result of Banks Sanitisation, Thisday (September 26, 1996) Thisday, September 29, 1996 Conference/Seminar Emerson, Joe, Managing the Fundamentals, Speech delivered at the Bankers Forum Lagos, (1996) Others BOFI Decree, 1991 CBN Decree, 1991 Failed Bank Decree, 1994

38

APPE DIX I

POPULATIO SIZE

Merchant Banks
1] 2] 3] 4] 5] 6] 7] 8] 9] 10] 11] 12] 13] 14] 15] 16] 17] 18] 19] 20] 21] 22] 23] 24] 25] 26] 27] 28] 29] 30] 31] 32] 33] 34] 35] Abacus Merchant Bank Limited ABC Merchant Bank Limited Aribank International Centre-Point Merchant Bank Century Merchant Bank Citi Trust Merchant Bank Comet Merchant Bank Continental Merchant Bank Plc Crown Merchant Bank Limited Devcom Merchant Bank Limited FBN Merchant Bank Limited Fidelity Union Merchant Bank Limited FCMB Limited First Interstate Merchant Bank Limited Fountain Trust Merchant Bank Limited Great Merchant Bank Limited Group Merchant Bank Limited Hillcrest Merchant Bank Limited ICON Limited (Merchant Bankers) Indo-Nig. Merchant Bank Limited Industrial Bank (Merchant Bank) International Merchant Bank Investment Banking & Trust Co. Ivory Merchant Bank Lead Merchant Bank Limited Liberty Merchant Bank Limited Manufacturers Merchant Bank Marina International Bank Limited Merchant Banking Corporation Merchant Bank of Africa Merchant Bank of Commerce Metropolitan Merchant Bank Midas Merchant Bank Limited NAL Merchant Bank Limited Nationwide Merchant Bank

36] 37] 38] 39] 40] 41] 42] 43] 44] 45] 46] 47] 48] 49] 50] 51]

New Africa Merchant Bank Limited New World Merchant Bank Limited Nigbel Merchant Bank Limited Nigerian-American Merchant Bank Nigerian Intercontinental Merchant Bank Limited Nigeria Merchant Bank Plc Pacific Merchant Bank Limited Peak Merchant Bank Prime Merchant Bank Prudent Merchant Bank Rims Merchant Bank Limited Royal Merchant Bank Limited Societe Bancaire Nigeria Limited Stanbic Merchant Bank Limited Triumph Merchant Bank Limited Victory Merchant Bank Limited

Commercial Banks 1] Access Bank (Nig) Limited 2] Afribank Nigeria Plc 3] African Continental Bank Plc 4] Allied Bank of Nigeria Plc 5] Allstates Trust Bank Limited 6] African International Bank Limited 7] Amicable Bank Limited 8] Bank of the North Limited 9] Broad Bank Limited 10] Chartered Bank Limited 11] Citizens Bank Limited 12] Commerce Bank Plc 13] Comm. Bank (Credit Lyonnais) Limited 14] Comm. Bank of Africa Limited 15] Comm. Trust Bank Limited 16] Coop. Bank Limited 17] Coop. & Commerce Bank Plc 18] Coop. Development Bank Limited 19] Credite Bank Nig. Limited 20] Crystal Bank Limited 21] Diamond Bank Limited 22] Ecobank Nigeria Plc 23] Eko Inter. Bank Plc 24] Equitorial Trust Bank Limited 25] Equity Bank Limited 26] First Bank of Nig. Plc

27] 28] 29] 30] 31] 32] 33] 34] 35] 36] 37] 38] 39] 40] 41] 42] 43] 44] 45] 46] 47] 48] 49] 50] 51] 52] 53] 54] 55] 56] 57] 58] 59] 60] 61] 62] 63] 64]

First African Trust Bank FSB International Bank Plc Gamji Bank Plc Gateway Bank Limited Guarantee Trust Bank Limited Gulf Bank of Nig. Limited Habib Nig. Bank Limited Hallmark Bank Limited Highland Bank of Nig. Plc Inland Bank Limited Intercity Bank Limited Lion Bank of Nig. Plc Lobi Bank Limited Magnum Trust Bank Limited Mercantile Bank Plc National Bank of Nigeria New Nigeria Bank Plc Nigeria-Arab Bank Limited Nig. International Bank Limited Nigeria Universal Bank Limited North-South Bank Plc Oceanic Bank International Limited Orient Bank of Nig. Plc Owena Bank of Nig. Plc Pan African Bank Limited Pinacle Commercial Bank Limited Premier Commercial Bank Plc Progress Bank of Nigeria Savanna Bank of Nigeria Limited Societe Generale Bank (Nig) Limited Trade Bank of Nig. Plc Trans International Bank Plc Tropical Comm. Bank Plc Union Bank of Nigeria Plc United Bank for Africa Plc Universal Trust Bank Limited Wema Bank Plc Zenith International Bank Limited

APPE DIX II

SAMPLE SIZE

Merchant Banks
1] 2] 3] 4] 5] 6] 7] 8] 9] 10] 11] 12] 13] 14] 15] 16] 17] 18] 19] 20] 21] 22] 23] 24] 25] 26] 27] 28] 29] 30] 31] 32] 33] 34] 35] Abacus Merchant Bank Limited ABC Merchant Bank Limited Aribank International Centre-Point Merchant Bank Century Merchant Bank Citi Trust Merchant Bank Comet Merchant Bank Continental Merchant Bank Plc Crown Merchant Bank Limited Devcom Merchant Bank Limited FBN Merchant Bank Limited Fidelity Union Merchant Bank Limited FCMB Limited First Interstate Merchant Bank Limited Fountain Trust Merchant Bank Limited Great Merchant Bank Limited Group Merchant Bank Limited Hillcrest Merchant Bank Limited ICON Limited (Merchant Bankers) Indo-Nig. Merchant Bank Limited Industrial Bank (Merchant Bank) International Merchant Bank Investment Banking & Trust Co. Ivory Merchant Bank Lead Merchant Bank Limited Liberty Merchant Bank Limited Manufacturers Merchant Bank Marina International Bank Limited Merchant Banking Corporation Merchant Bank of Africa Merchant Bank of Commerce Metropolitan Merchant Bank Midas Merchant Bank Limited NAL Merchant Bank Limited Nationwide Merchant Bank

36] 37] 38] 39]

New Africa Merchant Bank Limited New World Merchant Bank Limited Nigbel Merchant Bank Limited Nigerian-American Merchant Bank

Commercial Banks 1] Access Bank (Nig) Limited 2] Afribank Nigeria Plc 3] African Continental Bank Plc 4] Allied Bank of Nigeria Plc 5] Allstates Trust Bank Limited 6] African International Bank Limited 7] Amicable Bank Limited 8] Bank of the North Limited 9] Broad Bank Limited 10] Chartered Bank Limited 11] Citizens Bank Limited 12] Commerce Bank Plc 13] Comm. Bank (Credit Lyonnais) Limited 14] Comm. Bank of Africa Limited 15] Comm. Trust Bank Limited 16] Coop. Bank Limited 17] Coop. & Commerce Bank Plc 18] Coop. Development Bank Limited 19] Credite Bank Nig. Limited 20] Crystal Bank Limited 21] Diamond Bank Limited 22] Ecobank Nigeria Plc 23] Eko Inter. Bank Plc 24] Equitorial Trust Bank Limited 25] Equity Bank Limited 26] First Bank of Nig. Plc 27] First African Trust Bank 28] FSB International Bank Plc 29] Gamji Bank Plc 30] Gateway Bank Limited 31] Guarantee Trust Bank Limited 32] Gulf Bank of Nig. Limited 33] Habib Nig. Bank Limited 34] Hallmark Bank Limited 35] Highland Bank of Nig. Plc 36] Inland Bank Limited 37] Intercity Bank Limited 38] Lion Bank of Nig. Plc 39] Lobi Bank Limited 40] Magnum Trust Bank Limited 41] Mercantile Bank Plc

42] 43] 44] 45] 46] 47] 48] 49] 50]

National Bank of Nigeria New Nigeria Bank Plc Nigeria-Arab Bank Limited Nig. International Bank Limited Nigeria Universal Bank Limited North-South Bank Plc Oceanic Bank International Limited Orient Bank of Nig. Plc Owena Bank of Nig. Plc

APPE DIX III


A Survey of Distress Management System in igerian Banks using the banks in Lagos area

QUESTIO
1a] 1b] 2]

AIRE

Name/Organisation: (Optional) _____________________________________________ Position: (Optional) ______________________________________________________ Where does your institution belong?

[ ] [ ] [ ] 3]

Commercial Bank Merchant Bank Other (specify): ___________________________________________

Please list what you think are the major causes of distress in Nigerian banks _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ (Please attach extra sheet if space provided is not adequate)

4]

Do you think that institutional problems contribute to the present bank distress? [ ] Yes [ ] No

5]

If yes in (4) above, please specify the intensity of your agreement with contribution of the following factors to the distress in Nigerian banks. Strongly Agree (5) Agree (4) Undecided (3) Disagree (2) Strongly Disagree (1)

1 2 3 4 5 6 7

8 9

10 6]

Inadequate professional/ Trained manpower Fraud Upsurge in the number of Banks Poor credit policy & administration Weak loan recovery machinery Insider dealing/abuse by management Undue interference by Board members & some shareholders Weak internal control Poor supervision/examination by the regulartory/ supervisory institutions Other (specify) What do you perceive to be the major problem(s) in your bank which could lead to

distress if not addressed now?

_____________________________________________________________ _____________________________________________________________ _____________________________________________________________ _____________________________________________________________ _____________________________________________________________ 7]


If your institution is already in distress, please list major factors led to the distress situation. _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________

8]

Please list what could be done to address the problems highlighted in numbers (5) and (6) Or (7) respectively. _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________

9]

Do you believe that some economic and political factors contributed to the present distress in Nigerian banks [ ] Yes [ ] No

10]

If Yes in (9) above, please list the problems; and if No, please state your reasons. _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________

11]

How would you assess the performance of the two major bank regulatory/supervisory institutions listed below: Outstanding a] b] CBN NDIC [ ] [ ] Above Average Average [ ] [ ] [ ] [ ] Poor [ ] [ ]

12]

Please list a few reasons to justify your ratings in No. (11) above. _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________

13]

Based on questions (11) and (12) above, please suggest ways through which these identified shortcomings could be addressed. _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________

14]

From your assessment of CBN and NDIC which of the two would you rate good or poor in terms of effectiveness in performance of their functions: CBN NDIC [ ] Good [ ] Good [ ] Poor [ ] Poor

14a] Agree The external auditors that audit & authorize the publication of banks annual reports should be absolved of all blame in the current bank distress Disagree

15]

Please list a few reasons to support your claim in No (14) above. _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________

16] Agree Banks currently distressed in Nigeria stand no chance of survival 17] State a few reasons to support your claim in No. (16) above. _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ Undecided Disagree

18]

What role should the government play to arrest the present distress conditions in Nigerian banks? _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________

19]

What other ways would you suggest in general for handling of the present distress? _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________

_________________________________________________________________________

20]

Please list a few suggestions for avoidance of recurrence in the future

_________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________

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