Nigeria Commercial Banks Distress, Causes Effects and Solutions
In our review of related literature, we have taken note that the bank distress and bank failures are not new phenomena in the history of banking. Many banks had risen and failed due to variety of reasons; Some rose in response to demands of increasing commercial activities following the industrial revolution and subsequently failed because of inability to mobilize sufficient capital and to withstand stiff competition from more powerful ones. Some failed because of managerial inexperience and for lack of quality personnel. Government even contributed to bank failures and distress through its legislation, which were aimed at arresting bank failures and sustaining public confidence in the banking system.
According to Hanson (1977:401) there were 843 private banks in England by 1821. The large increase in the number of private banks was the result of industrial revolution. Hanson noted that by 1750, there were only 12 of such banks. Most of these banks were so small, unit banks that is they had no branches, and in times of crisis, many failure occurred. During 15 years, 1815-30 according to Hanson (1977-401) there was no fewer than 206 banks failures. Contrasting the development of banking in England with Similar developed nations like Scotland, Hanson (1977: 401) Stated that in Scotland, where banking development toed the line of joint-stock banking. It was noticed that bank failures there were rare than in England. He went further to state that, in the banking crisis of 1825-26, for example, not one of the joints-stock banks had to close down only a few in Scotland but over 80 in England.
In Nigeria, the story of bank failure and distress were not significantly different from the situation in England, particularly when it recalled that Nigeria was under the British colonial Administration. Tracing banking development in Nigeria Uzoaga (1981:65) stated that the African Banking corporation was first modern commercial bank to open a branch in Lagos but its existence was made precarious by the year (1892) the bank was actually distressed and was failing when it was taken over by Elder Dempster and company which ran it as a private bank until December 1892 when Bank of British West African(Now known as the first Bank) was organized and registered in London with an authorized capital of $100.000 (Uzoaga 1981:65) Brothers Bank which came the scene in 1899, was the Bank of Nigeria established by the Royal Nigeria company.
The bank fail to stand competition, the bank was absorbed after thirteen years of operation by Bank of British West African in July 1912.
Uzoaga pointed out that many indigenous banks were established as protest against unfair, discriminating services by the expatriate banks to Nigeria Businessmen. (Uzoaga,1981:79) But, most of these banks failed largely due to inadequate capital, inexperience in bank management and accounting as well as the depressive economic conditions then prevailing. For example, the industrial and commercial bank established in Lagos in 1929 went into liquidation in 1950 due to poor capital base inexperience in bank management.
According to Nwankwo, just as banks were established and some survived during the free banking era, some banks also failed during the period. Mentioning that, Paton described three such banks without mentioning names. Nwankwo stated that the banks appeared to be the industry and commercial banks.
Still tracing the development of banking and attendant bank failures Uzoaga (1981:79) stated that the former commercial Bank was incorporative in 1947 with an authorized capital of N60.000, adding that it was followed by establishment of pan Nigeria Bank in 1951 reported total deposit of N656, 576 and advances of N335,576 or 51% of total deposits. In addition, it had within four years of its operation established 30 branches in Nigeria and an official in London. But by the end of 1952, noticed Uzoagu (1981:79) it went into liquidation.
The pan Nigeria Bank, both incorporated in 1957, failed in 1954 (CBN Economic and financial Reviews Vol.6, No1, 1968:13)
It is note worthy that Nigeria experienced a rapid expansion in indigenous banking during 1947 to 1952. This rapid expansion was also accompanied by a high rate of Bank failure which by 1954 had claimed 21 out of 25 indigenous banks is with 16 of the collapsing in 1954.
In the recent time Nigeria, banking was liberalized in the spirit of the structural Adjustment Programme (SAP).
According to Odozi (1993:7) the number of commercial banks rose from 30 in 1986 to 66 in December,1992, while that of merchant Banks kept from 6 to 54 during the same period.
Many banking techniques including electronic banking and computer were introduced and adopted. This was the situation when the federal Government increased reserves requirement capital base and liquidity rations and capital base of banks and banned them from foreign exchange dealing.
The Central Bank of Nigeria has earlier in May, 1993 taken over five more insolvent banks with a promise to restore them in the interest of depositors and creditors.
On January 21 1994, the distress in the banking system became so intolerable that the CBN had to revoke the intolerable that the CBN had to revoke the licenses of two merchant Bank-Capital Merchant Banks. Limited and financial merchant limited (the Guardian January 25, 1994) many more banks commercial and merchant Banks were subsequently liquidated.
CAUSES OF BANK DISTRESS
Bank failure and distress have been attributed to a number of reasons from Hanson (1977:40) inadequate capital was alluded to be one of the causes of Bank failure. Tracing banking development in England, Hanson noted the existence of many private banks which operated as unit bank having no branches and hence poor capital base could not resist crisis and hence failure. Another factor that caused bank distress was economic recession or depression. Hanson (1977:42) observed that whereas in Great Britain industries are highly localizes, a decline in the basic industry would probably result in many banks failures in that district if banks were single localized units. According to Hanson 7,000 banks in U.S.A closed their doors during (1930-33. No fewer than 3,010 of them in the two months February, March 1933 Uzoaga (1981:65) was also of the opinion that trade recession could lead to bank failure. Uzoaga noted that the existence of the bank was made precarious by the trade recession that cut Lagos in 1892. Another cause of bank distress according to Uzoaga (1981:81) was government legislation. To Uzoaga, banking ordinance of 1952 with its somehow straight conditions against the background of very under developed money and capital markets for sourcing of loan plus non-establishment of a central bank or anybody to perform central bank failure functions led to high incident of bank failure and distress of the indigenous banks by 1954.
In the recent times in Nigeria, some of the factors earlier mentioned as causes of bank failures still persist till today. Some other factors not yet listed such as bank fraud and forgeries, had assumed on unprecedented dimension. Presenting its 1990 annual report and statement of accounts, the Nigeria Deposit Insurance Corporation (NDC), mirrored deep into the operations and activities of the nations bank and unveiled starting malpractices (Daily Champion October 7 , 1991).
According to the report, returns of fraud and forgeries, as rendered by some banks in Compliance with the provision of section 39 and 40 of the NDC Decree No. 22 of 1988 spoke loudly of large scale frauds and forgeries in the banking industry.
In a press briefing on the NDIC annual report Mr. John Ebuodaghe, the managing director and Chief executive of NDIC lamented on the level of bank frauds and forgeries, saying that the acts were of special concern to the monetary and supervisory authorities because they undermined the safety, soundness and stability of banking industry, adopting that frauds and forgeries could precipitate bank failure and distress. (Daily Champion, October 7 1991, P.14). When the licenses of capital merchant bank limited were revoked on January 21,1994 (Daily Champion, January 22,1994) the banks were accused of capital inadequacy, poor management and unconventional banking practices plus large scale bank fraud. It has not been noted at this juncture, that tactics implantation of the Bank and other financial institution of the Bank and other financial institution. Decree (BDFD) No 251991 and the prudential guidelines plus worsening economic conditions have greatly deepened the distress in the banking system and so many other banks had failed since the liquidation of capital and financial merchant Banks on January 21, 1994. The persistent distress and attendant bank failure have serious implications for our banking industry in particular and the economic in general.
IMPLICATIONS OF BANK DISRESS FOR AN ECONOMY
The immediate effect of a bank failure is loss to depositors and this could result in public indignation against the failed and distress banks. According to Nwankwo (1984:47) the failure of Nigeria Merchant Bank, industrial and commercial banks and the Nigeria penny Banks in 1936, 1930 and 1946. Respectively caused losses to depositors and although the losses were relatively small in the country at that time, they nevertheless aroused much public indignation and concern. ASUZU 1995:63 -64)
In justifying its action (Daily Champion January 22, 1994) this statement implies existence of lack of confidence in the banking system.
Another is the level of banking habits, commenting on the effects of banks failure in Nigeria in the recent time. Ndu Ughjimadu stated that the banking habit of Nigerians described as being low had slumped back to near zero, if not zero following the increasing incident of bank distress and failed banks in the economy.
Another serious repercussion of bank distress in stalling of people’s business and plunging so many families in financial quagmire causing disaffection in the families and in some cases resulting in broken homes. Ughamadu noted that it could be in anticipation of these problems that the government promulgated the Nigeria Deposit insurance Decrees (N D C) No, 22 of 1985. This decree is aimed at protecting depositors and creditors of banks.
LIMITATIONS OF THE EXISTING LITERATURE.
From the literature reviewed, it was clear that bank distress and failure is an old as the history of banking. However, information on the subject were in patches as no single literature has discussed bank distress.
From the account given by Hanson Uzoagu and Nwankwo, it was possible to trace the origin of bank distress in England and Nigeria as well as the causes and effects of such failure, one thing that was significant was the changing nature of the factors that caused bank distress and failures. The causes ranged from capital inadequacy, poor management, fraud and forgeries in the modern time.
Hanson, Uzoagu, and Nwankwo merely traced the development of banking their respective works mentioning bank failure and the factors that caused it in passing. A part from Nwankwo, others did not say anything with respect to the effect of bank failure. The central bank of Nigeria annual economic and financial Review, and Ughamadu, that touched the effects, mentioned them as a justification for the measure taken by revoking the licenses of capital and financial merchant bank, or as general commentary on the fate of the economy under the increasing wave of bank failure. Even if, any other work has been done on bank failure unknowingly to the researcher, such a work may not be specifically on “commercial Bank Distress in the 2000s causes and effects, a case of study of banks in Enugu state, it is this gap that the researcher wishes to fill.
