Critical Analysis of Cause and Problem of Financial Distress in Nigeria’s Banking Sector
Chapter One
OBJECTIVE OF THE STUDY
The objectives of the study are;
- To ascertain the causes of financial distress in Nigeria banking sector
- To ascertain the effects of financial distress on the Nigerian Banking sector
- To ascertain the factors that contributes to distress in the banking industry.
- To ascertain the effect of banking distress on Nigeria economy
CHAPTER TWO
REVIEW OF RELATED LITERATURE
THEORETICAL ISSUES
The study examines some of the theories relating to bank distress and economic growth. These theories include theory of financial intermediation, theories of economic growth and bank crises theory. Claus and Grimes (2003) gave two strands that formally explain the existence of financial intermediaries. The first strand emphasizes financial intermediaries’ provision of liquidity. The second strand focuses on financial intermediaries’ ability to transform the risk characteristics of assets. In both cases, financial intermediation can reduce the cost of channeling funds between borrowers and lenders, leading to a more efficient allocation of resources. Financial intermediaries thus assist the efficient functioning of markets, and any factors that affect the amount of credit channeled through financial intermediaries can have significant macroeconomic effects. Credit is an important aspect of financial intermediation that provides funds to those economic entities that can put them to the most productive use. Schumpeter (1934), Goldsmith (1969), McKinnon (1973) and Shaw (1973), in their studies, strongly emphasized the role of financial intermediation in economic growth and concluded that financial intermediation leads to growth. Bencivenga and Smith (1991) explained that development of banks and efficient financial intermediation contributes to economic growth by channeling savings to high productive activities and reduction of liquidity risks. According to Robert (1956), the neo-classical model of growth argues that a sustained increase in capital investment only temporarily increases the rate of growth because the ratio of capital to labour increases but the marginal product of additional units of capital is believed to fall and the economy eventually moves back to a long-term growth path with real GDP growing at the same rate as the workforce plus a factor to reflect improving productivity. A steadystate growth path is reached when output, capital and labour are all growing at the same rate, so output per worker and capital per worker are constant. Neo-classical economists believe that to raise an economy’s long term trend rate of growth requires an increase in the labour supply and an improvement in the productivity of labour and capital. Differences in the technological change rates are said to explain much of the variation in economic growth between developed countries. The result of the growth model was that financial institutions had only minor influence on the rate of investment in physical capital and the changes in investment are viewed as having only minor effects on economic growth. The endogenous growth theory holds that policy measures can have an impact on the long-run growth rate of an economy. The growth model is one in which the long-run growth rate is determined by variables within the model, not an exogenous rate of technological progress as in a neoclassical growth model’ (Trevor, 1956). Jhingan (2006) explained that the endogenous growth model emphasizes technical progress resulting from the rate of investment, the size of the capital stock and the stock of human capital. Nnanna, Englama and Odoko (2004) observed that in an endogenous growth model, financial development can affect growth by influencing the percentage of private savings, raising the efficiency of financial intermediation and increasing the social marginal productivity of capital, meaning that a financial institution can affect economic growth by efficiently carrying out its functions. John, Gianni and Elena (2008) constructed the bank crises indicators using primarily information on government actions undertaken in response to bank distress. They formulated a simple model of a banking industry; the symptom of a systemic bank shock; its evolving into a crisis; and the government’s policy response. Then they used implications of the theory to construct empirical indicators of systemic bank shocks. The theory indicates empirically that the theory based indicators of systemic bank shocks consistently predict bank crises. This implies that the indicators actually measure lagged government responses to crises, rather than the occurrence of crises.
EMPIRICAL ISSUES
Soyibo and Adekanye (1992) found that the role of an efficient banking system in economy growth and development in Nigeria lies in saving mobilization and intermediation. According to them, banks are financial intermediaries, whose primary functions are to channel funds from surplus economic units to the deficit economic units to facilitate trade and capital formation. Koivu (2002) analysed the finance-growth nexus using a fixed-effects panel model and unbalanced panel data from twenty five transition countries during the period of 1993 to 2000 to measure the qualitative development in the banking sectors with the margin between lending and deposit interest rates. His findings show that the interest rate margin has a significant negative relationship with economic growth and that a rise in the amount of credit does not boost economic growth. He gave several reasons for the result, amongst which are the numerous banking crises that the transition countries have experienced and the soft budget constraints that are still prevalent in many transition countries. Oren (2009) examined the effect of bank profits, bank capital and bank reserves on economic growth concentrating on short term banking shocks and their impact on economic growth. Having estimated the lagging effect of banking shocks on GDP growth, he found that Shocks to bank profit have a significant effect on GDP growth. He also found that activities that are more affected by banking shocks also exhibit higher sensitivity to interest rate shocks and stock market shocks suggesting that the estimated bank effects have significant effect on the economic growth. Eboreime (2009) examined the implications of distress for Nigerians economic development. He emphasized that distress in financial system will seriously impair the ability of banks to fulfill the role of financial intermediation in resource mobilization and allocation, fostering depositors confidence, attraction of foreign direct investment, project investment in micro, small, medium and large enterprises, enhance the growth rate of GDP, accelerate the pace of economic development, leading to a general rise in people’s standard of living. Babalola (2009) investigated the perception of financial distress and customers’ attitude toward banking in Nigeria.
CHAPTER THREE
RESEARCH METHODOLOGY
Research design
The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study sought critical analysis of cause and problem of financial distress in Nigeria Banking sector
Sources of data collection
Data were collected from two main sources namely:
(i)Primary source and
(ii)Secondary source
Primary source:
These are materials of statistical investigation which were collected by the research for a particular purpose. They can be obtained through a survey, observation questionnaire or as experiment; the researcher has adopted the questionnaire method for this study.
Secondary source:
These are data from textbook Journal handset etc. they arise as byproducts of the same other purposes. Example administration, various other unpublished works and write ups were also used.
Population of the study
Population of a study is a group of persons or aggregate items, things the researcher is interested in getting information critical analysis of cause and problem of financial distress in Nigeria Banking sector. 200 staff of UBA in Lagos state was selected randomly by the researcher as the population of the study.
CHAPTER FOUR
PRESENTATION ANALYSIS INTERPRETATION OF DATA
Introduction
Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey. This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.
DATA ANALYSIS
The data collected from the respondents were analyzed in tabular form with simple percentage for easy understanding.
A total of 133(one hundred and thirty three) questionnaires were distributed and 133 questionnaires were returned.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to ascertain critical analysis of cause and problem of financial distress in Nigeria banking sector. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of cause and problem of financial distress in Nigeria banking sector
Summary
This study was on critical analysis of cause and problem of financial distress in Nigeria banking sector. Four objectives were raised which included: To ascertain the causes of financial distress in Nigeria banking sector, to ascertain the effects of financial distress on the Nigerian Banking sector, to ascertain the factors that contributes to distress in the banking industry, to ascertain the effect of banking distress on Nigeria economy. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of UBA in Lagos state. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made front human resource managers, marketers, accountants and customer care officers were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies
Conclusion
From the foregoing discussions, we it is clear that a bank is said to be in distress where it cannot pay all of its depositors in full and on time. This means that such a bank can no longer play its basic role as a financial intermediary. The problem of distress can affect a single bank as well as many banks within the banking industry. Bank distress syndrome is not only peculiar to Nigeria, it cuts across the entire world both developing and developed world. Countries encounter it at one time or the other in their economic history. The causes of bank distress however, vary cutting across the following factors: political instability, economic depression, institutional factors, Undue interference of owner’s especially state government, regulatory constraints etc.
Recommendation
Based on the results and conclusions made the following recommendations are made as a way of averting the problem of distress in the Nigerian banking industry;
- Effort should be made by the CBN and other regulatory agencies in the industry to domesticate the Altman’s model for a result oriented monitoring of the health of banks. The domestication of the model can be achieved through the development of interactive systems built around financial ratios as used by Altman with some adjustment index based on character of management of banks be used for on-site and off-site supervision of banks.
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