A Critical Analysis Of Causes And Problems Of Financial

Distress In Nigeria Banking Sector (A Case Study Of Afex

Bank Plc)

TABLE OF CONTENT

Title page
Approval page
Dedication page
Acknowledgement
Abstract
Table of content
List of tables
List of figures

CHAPTER ONE
1.0 INTRODUCTION
1.1

Statement of problems

1.2

Purpose of study

1.3

Significance of the study

1.4

Statement of hypothesis

1.5

Scope of the study

1.6

Limitation of the study

1.7

Definition of terms

CHAPTER TWO
2.0 REVIEW OF RELATED LITERATURE
2.1

Historical background of First Bank Plc

2.2 An overview of capital base

2.3

Under capitalization and its effects on the banking sector.

2.4

Multiplication of Banks

2.5

Inefficient management

2.6

Fraudulent practices

2.7

Loan mismatches

2.8

Effect on financial distress in Nigeria banking sector of the economy.

CHAPTER THREE
3.0 RESEARCH DESIGN AND METHODOLOGY
3.1

Sources of data
Primary data
Secondary data

3.2 Sample used

3.3 Method of investigation.
CHAPTER FOUR
4.0 DATA PRESENTATION AND ANALYSIS
4.1 Data presentation and analysis
4.2 Test of Hypothesis

CHAPTER FIVE
5.0

SUMMARY

OF

FINDINGS,

CONCLUSIONS

AND

RECOMMENDATION
5.1

Findings

5.2

Conclusion

5.3

Recommendation

Bibliography
Appendix
Questionnaire

CHAPTER ONE

INTRODUCTION
The importance of capital as a necessity though not sufficient condition
for economic growth is recognized in development economy where it is
believed that the position of adequate financial resources is a pre-requisite for
industrial transformation.
Experiences in some countries notably Japan, India and Germany have
shown that banks if sufficiently in their respective countries could serve as an
engine of growth to greatly assist the promotion of rapid economic
transformation of any nation. Banks all over the world occupy a strategic and
lending position in financial sector. Many Nigerians see banks as places
nobody can mess up. Hence, their accepting institutions as the safety place for
depositing their money. It is equally because of the confidence they have in the
industry as a whole that over the years, many of them imbedded this habit of
savings, which in turn is very necessary of positive economic development of
the nation.

Ekechi (1995) said that confidence is a pre-requisite for economic

recovery and sustained growth, but confidence is not a gift. It must be earned
through the adjustment effort or rather confidence is rented because it is never
yours and because it can be taken away anytime. The adjustable effort has to go
on each and everyday.
One legacy the structural adjustment programme (SAP) left on its trials
is the increase in the number of banks in the country before the introduction of
SAP in 1986. The number rose to about 127 as at August 1995. This
phenomenal growth of banks was initially hailed as a healthy development in
the economy because it was to spread the resources in the economy.
Because of the importance of banks monetary authorities pay great
attention to the banking industry. In this process, they are sometimes faced with
the problems of how best to handle financial distress in Nigeria banking sector.
Financial distress in Nigerian banking sector date back to 1930 when the
industrial and commercial bank, (ICB) failed one year after its established.
As Hornby defined distress as great pains, discomfort of sorrow caused
by wants of money or other necessary things.

John Ebhodaghe in explaining financial distress two major problems

are usually of serious concern. These are liquidity and insolvency. He went
further to explain liquidity as the inability of banks to meet its inabilities as
they mature for payment while insolvent when the value of its realizable asset
is less than the total value of liabilities.
The reasons for early distress of banks are summarized in the following
features, which characterized the banks since during the period.
1. Foreign banks domination of deposit base, credit availability.
2. Banks services tailored to the needs of the expatriates.
3. Indigenous bank boom and failure resulting from under capitalization
and poor quality management.
4. Lack of banking, control and direction.
Recently, it was realized that the development of statistical based, early
warning system for problem banks identification would greatly assist
regulators on classifying banks into sound and unsound categories. Worthy of
notes is Decree No. 26 of August 1992 that prescribed the following for banks
to be adjusted healthy.
1. Specified cash reserve

2. Specified liquidity ration

3. Adherence to prudential guidelines
4. Statutory minimum paid up capital requirement Adequate capital ration
5. Sound management.
Any bank, which did not satisfy any or all the listed factors, is adjudged
unhealthy. It must be expressed here that there exist a thin dividing line
between a distressed and unhealthy banks. This is because a bank, which is
unhealthy in the short-run, may become distress in the long run. At the core of
distressed bank, are twos basic problems compared to liquidity the later could
not be neglected because it is an ominous sign of insolvency.
Therefore, in assessing the financial condition of a bank, it is customary
to use the CAMEL framework. Also ownership structure and types of banks are
important factors on explaining the financial condition of a bank. The recent
NDIC report revealed that ownership structure was used to explain the degree
of financial distress seven out of eight banks, that were financially distressed
were either owned or controlled by the state government.
Another indicator of a distressed bank used in most countries of the
world is classified assets that exceeds 100 percent of shareholders fund.

Following from above, it is therefore reasonable to conclude that a distressed

bank is one tht is technically insolvent the financial distress is caused by a
number of factors including macro-economic conditions, the inhibitive policy
of government capital adequacy, wide spread incidence of frauds, nonperforming loans, unbraided risk by banks and so on. The effect of financial
distress in Nigerian banking sector is a distressed economy. The causes and
problems and the ways out of this financial distress will be discussed in details
in this work.

1.2

STATEMENT OF PROBLEM
Financial distress in Nigerian banking sector dates back to colonial era.

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

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

1.3

OBJECTIVES OF THE STUDY

in writing this project, the researcher had certain objectives in mind. In

line wit this following are the objectives of this write up.
1. To identify the extent to which low capital base has contributed to the
financial distress in Nigerian, banking sector.
2. To identify to the extent to which multiplicity of banks has contributed
to the financial distress in Nigerian baking sector.
3. To ascertain how inefficient management has contributed to financial
distress in Nigerian banking sector.
4. To identify to a large extent how fraudulent practices has contributed to
the financial distress in Nigerian banking sector.
5. To identify the effects of financial distress in Nigerian banking sector.

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6. To recommend possible ways of preventing financial distress in Nigerian

banking sector.

1.4

SIGNIFICANCE OF THE STUDY

This study will be immense benefits to the Nigerian banking sector. This

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

1.5

STATEMENT OF HYPOTHESIS

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To come out with a reliable result, the following hypothesis were

formulated and tested statistically.
1. Ho:

Low capital base has not contributed to the financial distress in

Nigerian banking sector.

Hi:

Low capital base has contributed to the financial distress in

Nigerian banking sector.

2. Ho:

Inefficient management has not contributed to the financial

distress in Nigerian banking sector.

Hi:

Inefficient management has contributed to the financial

distress in Nigerian banking sector.

3. Ho:

Fraudulent practices have not contributed to the financial distress

in Nigerian banking sector.

Hi:

Fraudulent practices have contributed to the financial distress

in Nigerian banking sector.

1.6

SCOPE AND LIMITATIONS OF THE STUDY

This research work covers the causes and problems of financial distress

in Nigerian banking sector with reference to AFEX Bank Plc. In the cause of

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this study, the researcher could not carry out the work extensively due to the
following constraints.
TIME CONSTRAINTS: Time was my greatest enemy as I had to cope with
my class work, assignments, home work, and the project work at the same
time, and more over, most of the materials for the project work are not located
in one place.
FINANCIAL CONSTRAINTS: Finance was my major constraints since I
dont have enough fund for running around and this hindered the full coverage
of the work.

1.7

DEFINITION OF TERMS

BANKS: Banks are financial institutions, which hold themselves out to the
public (individuals, firms, organization, and governments) by accepting
deposits and giving out advances as well as performing other customers.
FRAUDS: Fraud is intentional distorting twisting or changing of financial
statement or using criminal deception to deceive someone in order to achieve
illegal advantage

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LIQUIDITY: Liquidity is inability of a bank to meet its liabilities as they

mature for payment.
INSOLVENCY: Insolvency is when the value of realizable assets of a bank is
less than the total value of its liabilities.
CAPITAL ADEQUACY: Capital adequacy is when banks through proper
fund management has enough capital to serve as a fall back and at course,
shock absorber in the event of losses resulting from business transactions.
SHAREHOLDERS: shareholders are the owners of the bank, whose names
were described to the memorandum of the bank when the bank is registered.
This is done through the purchase of the banks shares.
PAID UP CAPITAL: This refers to that part of the issued capital, which has
been paid-up.
DISTRESS: This means great pains; discomfort or sorrow caused by wants
money or other necessary things.

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REFERENCES
CharlesWorth, J.C (1967), contemporary political Analysis New York Free
Press, P. 281
Ebhodaghe, J.A (1999), Agenda for the prevention of bank distress, Ibadan;
African FEB publication Ltd, P. 153.
Ekechi, A. (1995), Implication of the declining market share of banks in
business times (Lagos, daily times of Nigeria Limited
October 26, 1995 P.9
Hancombe. H.M. (1976) Bankers management Handbook United Kingdom,
McGraw Hillbook co; P. 51
Ughamadu N.I (1999) importance of Ban king, Abeokuta spectrum
books Ltd, P. 12.

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