A CRITICAL ANALYSIS OF FACTORS RESPONSIBLE FOR FINANCIAL DISTRESS IN NIGERIA BANKING SECTOR
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- 1-5 Chapters
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- Simple Percentage
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- Reference Style: APA
- Recommended for : Student Researchers
- NGN 3000
Background of the study
In a development economy, where it is believed that adequate financial resources are a pre-requisite for industrial transformation, the importance of capital as a necessary though not sufficient condition for economic growth is recognized. However, this does not negate the fact that capital is a necessary condition for economic growth. Experiences in various nations, most notably Japan, India, and Germany, have proven that banks, if properly developed in their respective countries, have the potential to act as an engine of development and significantly contribute to the promotion of fast economic transition in any country (Adehla, 2022). Banks all across the globe maintain a crucial position within the financial industry, as well as a lending role. A significant number of Nigerians see financial institutions like banks as safe havens. As a result of this, they consider financial institutions to be a secure location in which to put their money. It is also because of the faith they have in the sector as a whole that over the years, many of them have ingrained this habit of saves, which is, in turn, highly vital for the positively oriented economic growth of the country. According to Altman (2022), confidence is a prerequisite for economic recovery and sustainable prosperity, but confidence is not a given. Confidence is something that must be earned. Confidence is something that must be gained by the work of adjusting to new circumstances; alternatively, it may be leased since it is never really yours and because it can be taken away at any moment. Each and every day, the effort that can be adjusted must be put forward. The expansion in the number of banks in the nation prior to the implementation of the structural adjustment program (SAP) in 1986 is one of the legacies that the structural adjustment program (SAP) left on its trials. As of August 1995, the total had reached around 127. This amazing rise of banks was first lauded as a positive development in the economy since it was to share the resources that were available in the market. However, recent research has shown that this growth may really be harmful to the economy. Because of the vital role that banks play in the economy, the regulatory bodies in charge of money devote a lot of attention to the banking sector (Babalola, 2021). During this process, they are sometimes confronted with the challenge of figuring out how to effectively deal with the widespread financial instability in the Nigerian banking industry. The troubled financial history of Nigeria's banking industry can be traced back to 1930, when the Industrial and Commercial Bank (ICB), which had only been operating for a year at the time, went bankrupt. According to the definition given by Horn, distress may be described as "severe aches, discomfort, and grief caused by lacks of money or other required items." In his explanation of the causes of financial hardship, John Ebhodaghe states that "two key difficulties are frequently of great concern" (Ebhodaghe, 2022). These are referred to as liquidity and insolvency, respectively. He went on to define liquidity as the incapacity of financial institutions, such as banks, to satisfy their obligations when they come due for payment while insolvent. This occurs when the value of a financial institution's realizable assets is lower than the entire value of its liabilities. The following traits, which have defined banks from the beginning of the era in question, might be used to outline the causes for the early crisis of banks.
1. The preponderance of deposits held by foreign banks and the amount of credit that is available
2. Services provided by banks that are adapted to meet the requirements of expatriates
3. An increase in the number of indigenous banks, followed by their bankruptcy due to insufficient capitalization and inadequate management.
4. The absence of any kind of banking, control, or direction.
A recent realization was made that the construction of a statistically based early warning system for the identification of issue banks would be of great assistance to regulators in categorizing banks into sound and unsound categories (Donli, 2022). The Decree No. 26 of August 1992, which mandated the following for banks to be altered so that they are healthy, is worthy of being noted.
1. A predetermined amount of available cash
2. A predetermined percentage of available liquidity
3. Adherence to prudential principles
4. Statutory minimum paid up capital need acceptable capital ration.
1.2 STATEMENT OF THE PROBLEM
Banks all over the world occupy a strategic and lending position in financial sector. Many Nigerians see banks as places nobody can mess up. Hence, their accepting institutions as the safety place for depositing their money. Presently, a lot of banks are being criticized by many individuals, people moving their funds from one bank to the other, and people changing their bank of transaction to another. Also so many banks are faced with the concept of liquidity problem, there by not being able to meet their obligations as and when due. Most individual’s loss confidence on some banks while some do not have confidence on bank in general. Furthermore, some categories of persons prefer holding their cash (liquidity preference) while some prefer investing it rather than saving such fund with the bank as a result of lack of trust and confidence on Nigerian Banks. This make the researcher wants to investigate the cause and problem of financial distress in Nigeria banking sector
1.3 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
1.4 RESEARCH HYPOTHESES
For the successful completion of the study, the following research hypotheses were formulated by the researcher;
H0: there are no causes of financial distress in Nigeria banking sector.
.H1: there are causes of financial distress in Nigeria banking sector
H02: there are no factors that contribute to distress in the banking sector.
H2: there are factors that contribute to distress in the banking sector.
1.5 SIGNIFCANCE OF THE STUDY
The significance of the study establishes the justification for carrying out my study. Therefore, banks and other numerous financial institutions will have this research work an item of reference. Banks will benefit from this work as it will reveal to them the major and other factors that militate against the concept of distress, as well as its measures to be prevented. However, this research work will be of great significance to the Nigerian Banking sector and curtail the extent of liquidity problems, bank distress as well as failures.
1.6 SCOPE AND LIMITATION OF THE STUDY
The scope of the study covers critical analysis of cause and problem of financial distress in Nigeria banking sector. The researcher encounters some constrain which limited the scope of the study;
a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
c) Organizational privacy: Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities.
1.7 DEFINITION OF TEERMS
LIQUIDITY: Liquidity entails the ability of the bank to meet promptly its current obligation, or ability of the bank to meet the customers demand as and when due.
LIQUIDITY PROBLEM: This arisen where the bank cannot be able to meet up with its current obligations.
BANK DISTRESS: This implies failure that is when a bank has a negative net worth and can no longer meet up with bank examination rating or acronym known as camel; that is capital Adequate, Assets quality, Management competency earning capacity and liquidity position.
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