MANAGEMENT CRISIS IN THE BANKING INDUSTRY (A CASE STUDY OF SOME DISTRESS BANKS)
This section of the paper deals with the researchers review of related literature on the subject matter. This was necessary in other to sought for the opinion of stress. In so doing, the salient issues on the subject matter will be intensively highlighted. This was possible by consulting books, journals, articles etc. written by renowned authors and scholars in the banking industry especially the regulatory authorities which is also useful for this research work.
In other to facilitate coverage an brevity this section will be treated according to the dealings below.
- HISTORY OF DISTRESS IN NIGERIA BANKS, FROM 1930’S TO THE 50’S AND THE 1990’S.
- THE DEVELOPMENT OF REGULATORY/ SUPERVISORY AUTHORITIES
- GENERAL CAUSES OF DISTRESS
- OTHER CAUSES OF DISTRESS
- CHARACTERISTIC OF DISTRESS BANK
- HOLDING ACTION-SUCCESSES AND FAILURE
- HISTORY OF DISTRESS IN NIGERIA BANKS
A THE 1930’S TO THE 1950’S
According to Ndukwe (1994), the first indigenous bank in Nigeria was established in 1929 which is the industrial and commercial bank. It failed in 1930. the next bank that came on stream was the Nigerian Mercantile Bank which was in existence from 1931 to 1936. the bank following Aguonmaghe Bank which was established in 1938 and changed to WEMA bank in 1969. The Nigerian farmers and commercial banks was also established it lasted from 1947 to 1952. these are also the establishment of National bank of Nigeria in 1933 and African continental Bank in 1948. National Bank of Nigerian was taken over in 1952 and also African continental bank were in the control of central Bank of Nigeria which is the Apex financial institution in Nigeria.
Between 1951 and 1952 a total of sisteen
(16) banks were established. These banks include
- Pan African Bank
- Agro seas credit Bank
- Central Bank of Nigeria (Not the Apex institution).
- Union Bank of British Africa
- Merchant banks and so on.
The whole of these 16 banks were referred to as “mushroom” banks which later failed.
Onyiwa (1994) observed that 21 of 25 indigenous banks had failed by 1954.
- THE 1980’S TO THE 1990’S
In 1980, saw the emergence of the structural Adjustment programme (SAP) during the reign of general Ibrahim Babagigida. According to Onyima (1994), the underlying assumption of the re-strutting of the economic system of Nigeria is to enable the market based economic system to be more efficient in funds mobilization and allocation which will create an enabling environment for the sustenance of the banking industry than a system of administered prices and its regulatory frame work.
Consequently, the banking system was deregulated and this lead to a tremendous increase in number of bank branches to meet up with the demands of the deregulation. This brought about increasing competition in the establishment of banks. Due to deregulation in the banking sector, a lot of people earner on board, establishing banks. These banks owners lacks the professional experience and the ethics guiding the banking industry. However Ebahodaghe (1993) admitted that deregulating in the banking industry brought about visible take of strains into the financial system which is the power house of the economy.
This could also be as a result of an observation made by the Editor (1994) that, following the introduction of structural adjustment programme (SAP), the banking system was designed by all types of investors with funds to throw about:-
Incompetent and inexperienced hands assumed senior positions, people without clean credentials joined as well and these new entrants in the banking industry he said, prepared the ground for this virus infection called DISTRESS.
To add to this, Onyima (1994) observed that the new breed finance took advantage of the permissive rules, inept regulators, trusting depositors and the fragile political economy, to proper in letter disregard of the elementary test of solvency aid the going-concern concepts which are necessary for a bank to thrive.
Government economic policy made matter worst by shifting emphasis from direct support of banks to prevent failures to one of protecting the depositors, especially the small depositors. Under this new dispensation, the Nigeria deposit insurance corporation (NDIC) was established under decree no 22 of 1988 to industry the new dispensation, Onyima (1994) noted. Ebhodaghe (1994) admitted that the recent macro-economic refers of government had some banks.
In summary, SAP (The structural Adjustment programme) was introduced in 1986 and deregulation followed in 1987. this also lead to the establishment of Nigeria development insurance corporation (NDIC) in 1988 and finally in May 1989, distress in banking industry came to the limelight after withdrawal of treasure funds from the licensed banks.
INSTITUTION
This according to the research department (1993) was expected to web the excesses of “professional” borrowers and assist the banks in identifying genuine borrowers which will go a long way in bring life to the banking industry.
The rampart failures of bank made the government to promulgate a decree no 18 of 1994 which came into effect and it empowes the supervisory authrotity to bring to trial those responsible for a banks debt through a tribunal called failed bank tribunal. This tribunal did everything in their power to reign punishment on erring banks that are disbessed: ths will serve as a detterant to others that might spring up.
However, Umoh (1994) observed that the Decree lacked in the area of debt recovery in non-failed banks to prevent the eventual failure of the banks. This is an important issue that should not be overlooked.
The central bank of Nigeria was empowered to impose holding action on distressed banks and were necessary it takes over banks and hands them over to NDIC for rex routing and removing or liquidation.
In 1995, Nigeria Deposit insurance corporation handled the liquidation of financial merchant Bank
- capital Merchant Bank
- Alpha Merchant bank
- United Commercial Bank
- THE DEVELOPMENT OF REGULATORY / SUPERVISORY AUTHORITIES
The rampant development of the banking industry, created the scene for proper and adequate regulatory and supervisory authorities to take cure of the banking industry. In all the sectors of the economy, there is regulatory bodies established to guide such sectors to the utmost benefit of the citizen. Banks were established to cater for the financial transaction and others of the masses. In the light of the above, the banking sector should not be left out. It is necessary and expedient for a body to be set for this purpose. For the to be achieved, the federal government of Nigeria in 1959 established the central Bank of Nigeria which is the open financial institution. This took place before the countries independence in 1960 and in 1958.
The central bank of Nigeria is statutory charged with the prudential regulation of the banking industry.
This was done to ensure control, monetary stability, a sound and healthy banking system among others, Ekezie noted.
However central bank can be defined as the apex monetary institution whose main function is to control, regulate and stabilize the banking and monetary system of a country for national interest.
Any developing or developed economy needs the establishment of a central bank due to the following reasons.
-CONTROL OR CREDIT
One of the main functions of commercial banks is credit creation. Credits created by commercial banks through their lending activities has a way of increasing the volume of money in circulation. A bank which controls other banks through the power of law, sees to it that this activity of credit creation does not get out of hand as to cause inflation in a country. This bank is the central bank.
-HELP TO OTHER BANKS
A central bank is also needed to help the commercial banks to overcome their economic problems. Without the central bank, any small crisis in the banking sector will witness the end of many banks.
-GOVERNMENT POLICES;
The central bank is also needed to help implement all monetary policies of the government. Sine it controls other banks, it is in the position to enforce government monetary and financial policies.
In regard to commercial bank, the central bank functions as bankers bank in three ways;
-the central bank keeps the cash reserves of commercial banks. Just as we deposit our excess money in a commercial bank and withdraw according to our needs, so does commercial banks keep their reserves with the central banks and withdraw in times of need.
- The central bank is the lender of last resort to commercial banks. When commercial banks cannot borrow from any other source they go to the central bank which is their last hope. As long as the commercial bank observed all the directives of the central bank, it will be given the loan. This means that in times of need, the central bank acts as the lender of last resort to commercial banks.
- CONTROLLER OF CREDIT
The central bank controls the credit creating abilities of the commercial banks for the purpose of stability of general prices. The central bank also perform many other miscellaneous functions especially in the developing countries where high degree of controls are needed for the achievement of rapid economic growth.
In line with the establishment of central bank of Nigeria, the federal government also established the Nigerian deposit and insurance corporation (NDIC).
The NDIC has regulatory powers to protect depositors against bank failures and their by strengthen the financial system. The NDIC was established under Degree no 22 of 1988.
This regulatory body is expedient and necessary in other to create an enabling environment for the mutual benefit of depositors and the bank.
This body was also given the power to examine the books and affairs of insured banks and other deposit taking financial institutions.
These institutions (NDIC and CBN) derive their powers and duties from legislature pronouncements. This pronouncements is in form of Decree No 24 of 1991 as amended by Decree no 79 of 1993. the amendment increased some of the penalties for non-compliance with central bank of Nigeria guidelines. It also gave CBN the power to establish a credit –bureau which collects credit information the customers of the banks and other financial institutions.
CAUSES OF FAILURES
Ndukwe (1994), noted that banking failure in the 1930’s and 1950’s were unprecedented. He also opened between 1951 and 1952 had failed in 1960.
The domination of the market environment by foreign firms was not as supportive as expected for new firms, mismanagement of fund was not helpful. Most banks had no experienced and prudent managers not the executive capacity required for sound banking.
Generally, the banks suffered from under – capitalization and where a sizeable capital was reliable, loan profile did not match the capital base nor was the quality of loans provided good enough to meet acceptable standards to make them perform.
Most so-called Bankers cannot differentiate between capital and income and consequently spent all reliable revenue.
The ten banks established in 1952 wanted to take advantage of the allowed transition period by the 1952 ordinance without adequate preparation. Those opened in 1951 wanted to jump the gun, as news of the imminent law leaked and spread among the business people. The last blow that struck the camels back was the enactment of the 1952 ordinance. This ordinance affected the banking industry splendidly.
The ordinance was discriminatory against Africans many of whom lacked the required capital. This was designed to curb the freedom of Africa to establish banks. The ordinance clearly represented a repressive policy of the colonial government towards indigenous entrepreneurs, determination to hasten the pace of their development.
Orji (1987) was not entirely in support of the view expressed by Ndukwe (1994), rather he felt the ordinance should have made provision for the liquidation of banks and existence of bank of examiners. He observed that the rise in the number of these banks he described as mushroom institutions presented an intolerable and chaotic banking system to the Authorities.
THE 1952 ORDINANCE:
This banking ordinance titled “an Ordinance for the regulation of the business of banking was enacted by the legislative on many 22nd 1952. the recommendation according to Orji (1987) are inter-alia.
-Status and Form:
Only companies can engage in the business of banking and they must be registered for that purpose.
- A nominal capital of #25000 is reguired. Banks incorporated outside Nigeria must have a paid-up capital of $100,000.
- No dividend payment are allowed without a credit to reserve fund of an amount equal to 20% of the accounting periods profit. In addition, the reserve fund has to be equal to the paid up capital and all capitalized expenditure must have been retired before any dividend payment.
- All banks were required to maintain an adequate degree of liquidity.
- Loan and advance limit:
No bank has authority to make unsecured loan.
- GENERAL CAUSES OF DISTRESS
According to Onyima (1994) the causes of distress can be summarized under these five headings or the CAMEL THEORY.
- CAPITAL INADEQUACY
- POOR ASSET QUALITY
- BAD MANAGEMENT
- NEGATIVE EARNING
- WINDLING LIQUIDITY
CAPITAL INADEQUACY:
Capital is very necessary for any organization to thrive. In other words, it is the live wise of any successful business. Not only should this capital be enough to meet the demand of the organization but also adequate to fulfill its purpose in the organization. It is therefore necessary to source for fund that will yield high income and low cost in its acquisition.
However, capital represents the owners interest in a business and may be viewed as shock-absorber in auto-mobiles. Ebhodaghe (1994) adds that it provides a custom earnings effects, thus enabling the bank to regain equilibrium. Section 9 (2) of Decree of 1999 prescribed the acceptable minimum paid-up capital in banks. The inability of banks not meet up in the minimum acceptable paid –up capital, leads to the banks unable to meet the demands of depositors. This will lead to loss of public confidence in such bank.
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