Bank failure causes and consequences

1.0 INTRODUCTION
If there is anything that all well-meaning stakeholders in the Nigeria banking industry look forward to, it is a banking sector that is healthy and stable. A banking sector where investors, depositors, operators, regulators, etc can after a hard day’s work, go to steep with all eyes closed and without the anxiety that before dawn something amiss will happens.
To a large extent that was the nature of Nigeria’s banking industry from independence in 1960 to the deregulation and liberalization of the industry, which started in the mid 1980s. Situations have drastically changed since the manifestation of rounds of bank failures that subsequently claimed the life of 37 banks from 1994 to 2003. Since then, the banking industry and its environment have been anything but sound and stable. And the consequences have been very grave from the economy, especially in the areas of loss of wealth, public confidence in the system and of course a monetary management that has become more challenging with large amount of currency in circulation outside the banking system.
The bulk of the funds required by the investing sectors of most developed economy or business economics of the world is provided by the banking industry. In the main, the services of mobilizing funds from the saving sector to investment sector, is provided by the banking system, accounts for high status the banking industry is placed in development of any economy. The rate of economic development of nation has, hence, been very closely associated with the effectiveness and efficiency of the banking system of this nation.
The banking industry in Nigeria comprises of the commercial banks, the merchant banks and the development bank. At the apex of the industry is the central bank of Nigeria (CBN).
The commercial banks provides services like acceptance of deposits, granting of short and (very recently) medium term loans to customers, safe-keeping of valuables, offering of pieces of advice to investors ect. The merchant bank on the other hand provide medium and long-term loans etc.
The development banks services the development activities by making available about medium and long-term finances for this purpose.
The central bank functions regulate the activities of these banks.
Easily, we can point at a member of factors that may be contributing to the unhealthiness and instability in the banking sector. Such factors as unstable macro-economic and fiscal policies, unethical and unprofessional practices, as well as inadequate supervisory activities, rank high on the scale.
The search for appropriate initiatives should no doubt commence from a clear identification and classification of all factors responsible for the problems in the industry. Each factor should be critically evaluated to ascertain the degree of its contribution to weakness. It is equally imperative that efficacious remedial actions should be developed, prioritized and sequenced for effective implementation, which must be supported by all.

1.1 BACKGROUND OF THE STUDY
(A) GLOBAL HISTORY OF BANK FAILURES AND NIGERIA EXPERIENCES 
According to Hempel and Simonson (1999:16), from 1985 to 1992 there were 1304 failures per year. In an earlier period, from 1934 to 1984, the nation (U.S.A) had experienced only 756-bank failure or about 15 per year.
As at December 31st, 1996, they identified 9528 entities as ensured commercial banks, down from a post-world war 11 peak of close to 15380 in 1983. The cause of the failures was the banks’ poorly conceived lending programs in an industry that generally had relaxed credit standards and compromised in the quality of lending.
The collapse of oil prices in 1982 dried up the oil exporting nations cash flows and their ability to pay their huge bank loans. These difficulties were signaled by the Mexican government’s default on its huge bank debts, which servely impacted on numerous large banks in the United States and Europe. Developments in the Nigerian political economy since the mid 80s have greatly led to changes in the structure and art of banking. The period witnessed the proliferation of banks and other financial institutions. From CBN annual report (1994), there were 66 (sixty-six) commercial banks and 54 fifty-four) Merchant banks in Nigeria. According to the CBN diary 2003, as at June 2002, we had the following licensed financial institution 89 (eighty-nine) commercial and Merchant banks, 6 (six) development finance institutions, 97 (ninety-seven), finance companies and 125 (one hundred and twenty five) Bureau de change companies in Nigeria.
These new and old institutions were all introduced with little control over their proliferations, in the name of a deregulated economy.
The banks had to source for the raw materials of the industry (depositors if funds) in a depressed economy. The competition generated by these changes in the industry led to high interest rates, dearth of long term funds, and unprecedented cases of default in the interbank money market.
The inability of the supervisory authorities to control the nature of the competition and the unscrupulous activities of the management of some institutions led to failures in the industry and the erosion of confidence of the banking public. Furthermore, the depressed economy, the high rate of inflation and the supply side policies of the monetary authorities which were designed to control money supply and hence influence exchange rate through reduction of excess liquidity, inconfunction with earlier developments listed changed the art of banking, and hence, the process of fund mobilization.
The trade union became seriously involved in the issue of failed banks and on 21st May 1993 CBN classified five commercial banks as failed banks. The generation of failed bank is mostly owned by state governments, examples of which were the merchantile bank, pan African bank, National bank, New Nigerian bank, African continental bank. A careful examination of each of these banks would reveal that one of the managerial problems of the banks was frequency with which the state government that owned them changed their boards. Indeed, there is a strong relationship between the change in government and change in the boards of these banks.
For the second generation of failed banks, back of corporate culture and values are the attributable causes. For instance, employees of most banks and finance institutions are aware of the fraudulent past of their organizations and the way things have been done at that time and carried on long that line of culture and established months. According to THIS DAY Newspaper 5th march, 2003, financial failures in Nigeria’s banking systems dates back to 1994, 1995 and 1998 when the operating licenses of four banks, one bank and twenty-six banks were revoked respectively. Three years later (2001) the banking license of three other banks were withdraw before that of savannah bank was withdraw in (2002) in addition to the most recent, peak merchant bank; This brings to the total number of banks whose operating licenses have been withdraw to thirty-six.

1.1.2(B) HISTORICAL DEVELOPMENT OF BANKING IN NIGERIA WITH SHORT PERIOD OF MASS FAILURE OF INDIGENOUS BANKS
Nigerian commercial banking system dates back to 1892 with the establishment of African banking corporation (ABC). This British bank for West Africa took this over in 1894. This today is known as First bank of Nigeria plc. The second was Barclays bank (Dominion colonial and Overseas), which commenced operation in Nigeria in 1917. This is today’s union bank of Nigeria plc. According to Uche (1997), “these institutions were registered in, had their head offices in and were controlled from London and consequently fell under the regulatory Jurisdiction of London thereby having little need for host territory regulation”
There was strong accusation among Nigerians that these expatriate banks (British banks) were discriminating against Nigeria and their business. At this period bank services were eluding most Nigerians. As a result of this, there was wide agitation for establishment of indigenous banks.
Hence, the period between 1892 and 1954 witnessed emergence of many banks in Nigeria. Most of these banks collapsed with the speed with which they were established. These collapsed because some of them were established with selfish motives and their nurturing was fraught with risks.
As already pointed out, one of the consequences of the 1952-banking ordinance was the mass failure of indigenous banks.
This was the second feature of commercial banking under the banking legislation and stabilization period. Many of the so-called indigenous banks could not provide the minimum paid-up capital requirement of 12,500 (equivalent of N25, ooo) Apart from this Nwankwo (1980:49) observed that during the free banking spree, “banks sprang-up with all abuses and malpractices in banking known to man. These include share-pushing, counterfeiting, gross under capitalization, and reckless spread of branches” Apart from these, many of the promoters and their associate did not have even a rudimentary idea of banking. Some of them went into banking out of the zeal of nationalism.
The obvious consequences of these shortcomings on the part of the indigenous banks were mass failures. By 1954 virtually all the indigenous banks that sprang-up during the free for all banking period has failed. Only three of them, the National Bank of Nigeria, the Agbonmagbe bank (now wena Bank), and the African Continental Bank survived. Those of them that survived were able to do so because of the support they got from state Government.
1.2 STATEMENT OF THE PROBLEM:
Bank failure in the banking industry has become a worried-some phenomenon to the depositors, management of the banks and the supervisory authorities of these banks in the country Nigeria. Report of bank failure in the banking sector have become so re-current headlines in our daily papers that they have ceased to captivate many people. Nevertheless, this problem of bank failure continued to increase unabated, which has resulted to cause untold hardship to the government, individual and more so, to the entire economy. For instance, Bank failure has accounted for the loss, by some banks, of staggering sum of money and investment etc. Some bank staff have been denied or deprived of some of their single benefits and, in liquidation situations, total loss of their jobs, the public confidence in the banks is speedily wearing down and some customers of banks comment very bitterly about this fact.
Besides, the great role, the banking industry play which is being challenged by bank failure through loss of fraud by, and liquidations of banks) the Nigerian business economy suffers under he burden of banks being failed from poor financial services and other related services nourishment. If this situation is allowed to continue, our future economy is bound to fail.

1.3 OBJECTIVE OF THE STUDY
The objective of this study include:
To examine factors responsible for bank failure in Nigerian banks and to x-ray their impact on the Nigerian banking system.
Determine /to find out whether bank failure still exist in the banking industry of Nigeria.
To examine the causes and effects of bank failure on Nigerian banking industry.
Determine to understand the degree of concern the bank management has shown in trying to prevent failure of banks and also the amount of interest they have put in handling cases of bank failure.
To identify some of the enabling laws by the supervisory authorities to ensure depositors funds incase of bank failure.
To identify or to x-ray the poor accounting procedures adopted by the bank management staff.
To examine whether bank failure still exist in the Nigerian banking industry.
Recommend or suggest if applicable the best strategies banks should adopt to improve in their ways of operations as to prevent bank failure.

1.4 SIGNIFICANCE OF THE STUDY
This work will be in part, to immense help to all the banks in Nigeria, and on the whole, to all other organizations (both private and public) that may have a need for assistance in remedy and prevent the ugly trend of bank failure incidence in the Nigerian banking industry.
The recommendations and suggestion made in this study, if improved by banks, will help them to modify and replace most of their cumbersome and effective internal control checks with more effective and less rigorous ones.
This will improve the banks efficiency and no doubt go along way to restore almost lost glory of the banks.
Furthermore, this will be of great assistance to all those who may wish to carry further study on bank failure in Nigerian banking industry or in way other related field.

1.5 SCOPE AND LIMITATION OF THE STUDY
The scope of the study covers Enugu, the Enugu state capital and concern was on banks failure: cases and consequences in the economy. Every human polity has its inherent weakness and strengths. As a result every researcher need to make inferences with caution.
This study is not, without limitations nor is it without some inherent pitfalls caused by some extraneous variables. A major constraint on the researcher is that the study limited the scope to Enugu and the literature review was also limited to the inception of banking meaning and banks failure.
However, an effort was made to ensure an equitable representation of banks in Enugu metropolis which was chosen by the unbiased selection method and this constitute a limitation since not all banks could be covered in this study considering the time and financial resources available at the researchers disposal. Also the researcher in the course of this study encountered problem of textbooks and other secondary data used in carrying out the research to that extent, therefore, the researcher has some limitations but none is considered so serious as to affect its validity.

1.6 DEFINITION OF IMPORTANT TERMS 
1.BANK: The term “Bank” in its proudest sense may be applied to any organization engaged in any or all of the various function of “banking” that is receiving, collecting, transferring payment lending, investing, dealing exchange and servicing (safe deposit, custodianship, agency, trusteeship) money and claims money, both domestically and internationally (Encyclopedia of banking and finance 64) or the institution providing deposit facilities for the general public.
2. BANK FAILURE: Is the use of funds for the personal gains of some individuals, reckless deposit expansion by some banks and the state government who have controlling shares siphoning out funds from the banks with careless abandon.
3. C.B.N (CENTRAL BANK OF NIGERIA): This is the apex bank which regulate and supervises the activities of all commercial banks business activities in economy.
4.N.D.I.C: (NATIONAL DEPOSIT INSURANCE CORPORATION): This is a financial guarantee institution, which ensures that depositors do not suffer financial loss or lose all their money in the event of a bank failure.
5 DEPOSITORS: This means customer of any commercial bank who operates a current, savings and fixed deposits account with the bank.
6. CHEQUES: Is a bill of exchange, drawn on a banker payable on demand according to the bill of exchange act of 1882.

REFERENCES
Anyanwuokoro .M. (2001) “Element, practice and processes of banking.
Operations”, Enugu, Hosanna Publishing
Company ltd
NDIC. (2003) “ Peak merchant bank limited
Was not one of the approved revenue?
Collecting banks for Federal Inland
Revenue services” This Day, June 5 p35.
NDIC Annual Report, 1991.
Sansui .J.O (2003), “Ensuring Banking soundness
And financial sector stability
Challenges for the Nigerian Banking”
The Nigerian Banker, October- Dec. 2003
Ailemen .1.0 (2003) “Bank distress: concepts,
Causes and magnitude, role o
Trade union and
Bank management,
the Nigerian Banker Oct-Dec 2003