THE ROLE AND IMPORTANCE OF CENTRAL BANK OF NIGERIA IN THE PREVENTION OF BANK FAILURE IN NIGERIA
WHAT IS BANK FAILURE?
An attempt would be made to look at the word “Failure” secure relating it to what “bank failure” is all about, according to some authorities.
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The general conception of failure means un-successful.
Unsuccessful in the sense that set goals are not attained as result of the presence of failure in the abilities of the individual or persons inn carrying out a particular assignment, which portrays weakness in such abilities.
The Oxford Advance Learner’s Dictionary of current English, by A. S. Hornby in his third edition of 1974, defines bank failure as “a state of being involve”. He went further to say that “it could be as a result of neglect omission.
Mumn, in the Racyclopedia or Banking and Finance defines bank failure “as a situation when a bank is closed temporarily or permanently or account of financial difficulties and including banks whose deposit liabilities went assumed by other banks at the time of closing, with the aid of loans or purchases of assets by Federal Deposit Insurance Company (thus in effect constituting “hidden failure”).
He finally summarized bank failure or insolvency as “the inability to pay deposit liabilities, Anyanweokoro.
Hassan Adamy in the news of 24th March, 1974, page 13 has the following to say on how to know a failure bank. “when the these portfolio a particular bank is carrying, is far out of proportion to its capital and deposit base. Mostly when the loan granted are of unsecured nature. He also said that “when the liquidity of a bank is very bank’s total asses”.
Hassan still went further to say, “when a bank is repeatedly suspended from the clearing house it is a sign of ill – health, the bank is insolvency.
Bank failure according to F. U. Ezeuduju means different things to different people.
To some people, a bank fails only when it leases operation even if it has not been declared liquidated officially. A bank is said to have failed if it has not succeed in achieving any of the objectives for which it was established. Thus, a bank is considered a failure not only when it ceases operation but also when it cannot meet any of it’s customers as well as to its shareholders and even the community where it is established. Failure to meet obligations could be serious, mild or negligible.
The last, but not the least definition that we shall look at is that of the failed banks (Recovery of Deses) and financial malpractice’s in banks decree 1994, which says “that a failure bank is a bank or financial institution whose license has been revoked or which has been declared closed, placed under receivership or otherwise taken over by the Central Bank of Nigeria or Nigeria Deposit Insurance Corporation.
This study will concentrate in series branches of bank’s obligations, which includes inability’s to meet depositor’s demand for withdrawals persistent losses and outright liquidation. These firms of serious bank failure become worry – some in Nigeria during the following periods 1930’s to 1950’s and since lots 1980’s and even into the 90’s.
- TYPES OF BANK FAILURE
From the various definitions given by different authorities, we can deduct the following types of bank failure by Anyanwaokoro.
- Temporary Bank Failure
- Permanent Bank Failure
- Hidden Bank Failure
- Open Bank Failure
- TEMPORARY BANK FAILURE
This is a situation where the bank retreats for a while due to financial difficulties and tries to find avenues for correcting it financial stress through or from the Nigeria Deposit Insurance Corporation of from other sources, after which it will open its doors again for business.
2.2.2 PERMANENT BANK FAILURE
This is when a bank as its license revoked and goes out of business for good. It is bought over by the Central Bank of Nigeria or the Nigeria Deposit Insurance Corporation.
2.2.3 HIDDEN BANK FAILURE
The bank in this case is able to obtain loans or make other necessary arrangement to get the situation of financial difficulty under control without the public having knowledge of the problem that the bank is going through. The situation is not made glaring to the eyes of the public.
- OPEN BANK FAILURE
Under this situation, the bank can no longer hide its financial difficulties from the public. All corrective measures to hide the bank’s ailment at this stage have proved abortive.
- CAUSES OF BANK FAILURE IN NIGERIA
- Macro – economic instability
- Environmental constriction.
- Poor portfolio management
- The crippling holds on the CBN economy
- Incompetent and unqualified stage
- In – adequate capital base
2.3.1 MACRO – ECONOMIC INSTABILITY
This is the cause of the even changing policies of the government as it affects the entire economy of the nation. This is as a result of the constant and unplanned change in regimes of President and Heads of States.
Each government that comes into power does not follow strictly to the policies ready in existence before their regimes they embank on new plans or policies, which affects the entire economy and does not creates room for implication of some bank policies, which is expected to guide the bank for a period of time into the future. With these inconsistency the banks are left at the mercy of competent mangers with a stroke of good – luck, to see them through with adverse effect or individual banks.
The fault was indiscipline which was encouraged by weak banking laws which failed to provide adequate penalty for operators’ effective way of making banks and there customers, shareholders and regulators account for their role in providing, promoting and utilizing banking services.
- ENVIRONMENTAL CONSTRAINTS
Since the mid – 1980’s, the economy was beset with sluggish growth in output and rapidly rising inflation for most of the period, and fast depreciating exchange rate until 1995. Economic downturn deprived the banking sector of the vibrancy as economic activities, which were expected to stimulate banking sector, declined. High inflation ad depreciating exchange rate eroded the purchasing power of bank customers. This encouraged the withdrawal from banks in order to meet essential needs, thereby reducing deposit liabilities with constitute the main source of banks’ loan able fund.
- FRAUDULENT ACTIVITIES BY DIRECTORS AND STAFF
Tony Ndiulo, a senior finance correspondence attributed bank failure to fraudulent activities of directors of various banks. In a publication under money watch, tilted, “why the banks went under” on page 23 and 24 of Guardian of August 18, 1999 says the “apart from the three that owned banks – corporative and commerce bank, pan African bank and mercantile bank which were thrown into immediate problems by government directives in 1989 requiring all government parastatals to transfer their accounts to the Central Bank of Nigeria (CBN), the problem of the remaining 28 liquidated banks were caused by fraudulent activities by directors while many more are liked to financial mismanagement.
“For instance, the 1994 annual report of the Nigeria Deposit Insurance Corporation (NDIC) clearly showed how mindless borrowings from directors who had no intention to repay led to the liquidation of Alpha Merchant Bank and United Commercial Bank. In these banks a total sum of N2.43 billion was borrowed by directors and other top executives out of a debt stock of N2.74 billion. This follows that the loans borrowed by the bank chiefs represented 64.8% of the total loan portfolio of the banks.
“This point to the fact that the loans were not invested profit the bank, but was utilized to the benefits of greedy directors.
A financial expect observed that some bankers are moved into committing fraud as a result of the way directors and top management official move funds or degrade the bank. According to NDIC, frauds totaling of N1.37 billion was recorded in the banking industry in 1993. In 1994, the figure went of to N2.65 billion.
- THE CRIPPLING HOLD ON THE CBN’S AUTONOMY
The Abubakar’s regime, which finally granted or returned the CBN’s autonomy after ten(10) years under the presidency and ministry of finance, will never be forgotten by the banking industry.
The granting of this autonomy to the CBN is for the (CBN) to formulate and implement monetary, credit and other policies, which will help stabilize the banking industry as well as the entire Nigeria economy.
The forms CBN governor, Paul Ogwuma said that “the CBN acknowledges it supervisory capacity as being less than optimal in the previous years” but “blamed it on the non-traditional functions which the CBN was saddled with over the years by the government”. The single act was responsible for the diversion of funds from the banking industry to other countries without the approval of the monetary authorities, which affected the entire industry because of the money squeeze.
Emeka Anaeto “identified the Apex Bank inability to check the excess of banks, and to adequately monitor, identify and furnish banks with do not comply with its various regulations and guidelines”. All these according to Ogwuma, were as a result of the crippling hold on the CBN’s autonomy and not the entire fault of the regulatory authorities.
- INCOMPETENT AND UNQUALIFIED STAFF
Mike Anyanwaokoro in his book banking methods and processes reveals that incompetent and unqualified staff is recruited per jobs in the banks for key offices. With such, management team, the bank will surely lack innovations and will not meet professional demands of the jobs, which results, to incompetence
Some banks in the pose that failed had qualified staff in other field not related to banking which made them loose a séance of direction since the few months straining they received was not adequate for the competition in modern day banking which is quit dynamic and needs a qualified personnel in the filed who still needs his wits about him to survive the competition.
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