THE BANK FAILURE: CAUSES AND CONSEQUENCES

By

OKAFOR ESTHER U.

Presented To

Department of Accountancy

TABLE OF CONTENTS

Title page

Approval page

Dedication

Acknowledgement

Table of content

CHAPTER ONE

1.0 Introduction

1.1 Background of study

1.2 Statement of problem

1.3 Scope of the study

1.4 Objective of study

1.5 Limitations of study

1.6 Definition of the term

CHAPTER TWO

2.0 Literature review

2.1 Bank

2.2 Importance of banks

2.3 Bank failure

2.4 Causes of bank failure

2.5 Management related factors

2.6 Ownership related factors

2.7 Environmental related factors

2.8 Consequences of bank failure

2.9 Measures to remedy bank failure

CHAPTER THREE

3.0 Summary of findings

3.1 Conclusions

3.2 Recommendation

References

CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The term bank means a place where money and other valuables are kept for safety. Modern commercial banking in Nigeria dates back to the colonial period.

The decline in barter system of trade and the rise in financial transactions of the colonial government goes rise to commercial bank for safety and transmissions of funds. It was for this purpose that African Banking Corporation bead in South Africa was invited in 1892 to open a branch office in Lagos. In 1894, its operations was taken over by the Bank of British west Africa. In 1899 the bank of Nigeria was established by the Royal Niger Company which was later absorbed in 1925 by the Bank of British West Africa.

The Central Bank of Nigeria (CBN) was established in 1957 and it began its operations on July 1^st 1959 with an authorized capital of N1.5m. This CBN manages the cost, volume, availability and directions of money and credit in an economy with a view of achieving some desired economic objectives. The industrial and commercial bank was established in 1929 by the business men but it went into liquidation in 1930. The Nigerian Merchant Bank was also formed in 1931 but it went into liquidation in 1936.

These banks contributed significantly to the economic development as follows: -

- The Commercial Banks helps business sectors and grant credit to small and large scale industries.

- They provide employment opportunities

- They maintain large portfolios of local securities

- The aggressive mobilization of domestic savings

- The Central Bank act as bankers bank, banker to government and bank of issue

- The CBN manages the national debt of the country

- It also controls money and credit in the economy.

Prior to the introduction of Structural Adjustment Programme (SAP), the interest rate in banks were foxed by fiat. At the introduction of SAP, the interest rate was deregulated with this deregulation, the interest rates went as high as 45% per anum while the inter-bank rates went as high as 50%. However, in December 1992, the average inter-bank rates closed at 46% for commercial banks and 42 to 80% for merchant banks.

These high rates caused the collapse of many banks and companies. This trend continues until the government formally pegged the rate in 1994 as follows: -

- Savings/deposit rate at 12 - 15% per anum

- Maximum lending rate, 21% per anum.

This is applied to loan and advances, bankers acceptance, commercial paper and rediscounts. These rates continued to apply until the middle of 1996 when the interest rates were deregulated. On the long term funds from the capital market, this has been besieged by many problems and failures among banks and companies.

In 1995, 60 banks were adjusted distressed. In 1996 the number was 47 with 35 banks critically distressed while 12 banks were fairly healthy.

To highlights the issued of bank failure further the managing director of NDIC on 25^th April 1995 during the Institute of Chartered Accountant of Nigeria national Award highlighted that: -

- 10 more distressed banks are to be put on sale bringing the total for sale to 16.

- N4billion (cash and assets) have been recovered from debtors of 52 distressed banks. This recovery represents 9.76% of N41billion depositors fund trapped and 6.93% of the institutions net assets estimated at N57.7billion 1996.

- About 48 cases have been prosecuted at the failed bank tribunal out of which to have been concluded

- About N46billion of government fund made up of overdrawn account with CBN, NEXIM, NEFRUND as well as SMS, projects that cannot be justified. This does not include government equity investment in some of these banks and debts owed to government agencies like NITEL, NEPA, Water corporation etc.

These become a source of worry to the public, managers and regulatory bodies like Central Bank of Nigeria, the Nigeria Deposit Insurance Corporation (NDIC) and a problem to the society at large.

This study however, intends to discuss the consequences of this bank failure on the economy of the country and also suggest the possible ways of solving the problem.

1.2 STATEMENT OF THE PROBLEM

Failure is a state of being inadequate, not functioning as it is

expected or required. A company is said to be technically insolvent if it is not able to meet its current obligations. This type of insolvent is temporal and is caused by liquidity. It can be rectified overtime.

On the extreme, a company is said to be operationally insolvent or insolvent in bankruptcy where its liabilities exceed its assets. In this case, the network of the company is said to be negative from the forgoing, it can be seen that the issue of failure of a company ranges from extremes of technical insolvency to bankruptcy.

However, a critical look at the indices of failure as identified in the empirical studies will conclude that the major causes of bank failures is management and other factors peculiar to the industry in which the company is located. Other factors can be referred to as intra endogenous and exogenous factors.

These problems can be stated as follows: -

- Management related factors

- Ownership related factors and

- Environmental related factors

1.3 SCOPE OF STUDY

The geographical scope of the study is Nigeria Banking

sector, while the subject scope is bank failures.

The problem of Nigeria banking sector are as myriad as they vary in nature and scope. And one single paper or a book cannot cover he whole spectrum of the problem. This research therefore, discusses those of paramount importance in details while limiting it to mention other problems.

1.4 OBJECTIVES OF STUDY

The study is aimed at

- Identifying the major causes of bank failure in Nigeria.

- Describing the consequences of bank failure in the economy.

- Suggesting possible ways of tackling the problem

1.5 LIMITATIONS OF THE STUDY

The research need to cover the banking sectors of the whole

world but it is limited to Nigerian banking sector because of lack of capital and time.

The researcher also encounters financial problems in the course of collecting data for the research, that is why the study is based on written material (text books, magazines, journals, newspapers and past project) related to the study.

1.6 DEFINITION OF TERMS

ADVANES: General terms embanking various categories of lending by the banks.

ASSETS: The goods, property and resources of all kinds of a company or firm which are available for the payment of debts and liabilities.

BANKS: A business or institutions or establishment for keeping money and valuables, safety, the money being paid out on the customers order.

BANK CHEQUES: It is used to describe interest charges on bank loans and overdrafts, but more correctly refers to the fees and commissions by banks for services rendered tot heir customers.

BANKER: A person/institutions carrying on the business of banking

BANKRUPTCY: A situation when a person is unable to pay his debt.

CAPITAL: It is used to represent the total resources employed in the business.