CAPITAL MEASURES, RISK ANALYSIS AND FINANCIAL DUTIES IN DEPOSIT MONEY BANKS IN NIGERIA (A CASE STUDY OF SELECTED DEPOSIT MONEY BANKS LAGOS STATE)

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

A sound, viable and competent banking sector is essential for a stable macroeconomic environment, therefore, the importance of deposit money banks in a country cannot be overemphasized, because they occupy key financial positions in a country and are essential agents that would lead to the growth and development of any economy (Oloye & Osuma, 2015). The financial manager takes three key financial decisions in an organization including the bank. These decisions include: finance decision, dividend decision and investment decision where the financing decision is the most primary amongst these three. Therefore, bank managers are usually at a dilemma on how to balance shareholders who are stringent on profitability, which has to do with their dividends and depositors who are also stringent with liquidity, which has to do with their demand deposits and term deposit as the case may be. This is why effective management of a bank working capital is highly imperative in corporate financial management, because it deals directly with the liquidity and profitability of deposit money banks. Thus, working capital is defined mathematically as the difference between current assets and current liabilities, which is a measure of a financial institution well-being. Working capital management also meets the short-term financial obligation of a firm. Working capital of a bank simply represents the operating liquidity available to run the bank on a daily business basis. Therefore, the efficient management of a bank’s working capital can produce benefits such as: maintaining a high level of customers’ confidence, enhancing the payment of short-term obligations, growth of the sector, which would contribute its quota immensely to the development of any nation, etc. Working capital is highly imperative to maintaining the solvency, liquidity, survival, and profitability of a firm (Hoque et al., 2015). Yahaya and Bala (2015) also stated that ineffective working capital management reduces profitability and may also lead to the financial crises of an organization which negates what Umoren and Udo (2015) posited that profitability is a yardstick to measuring the operating efficiency of a firm, but amongst the varying factors affecting bank performance, ineffective working capital management was not considered as one of them. In time past, the Nigerian banking sector has witnessed deposit money banks inability to meet up obligations of customers due to inadequate liquidity. This has led to the central bank of Nigeria (CBN) to take part in the management of deposit money banks such as Main-street bank, Spring bank and even Skye bank as at the fourth quarter of 2016. In 2008, CBN gave out bailout funds to some banks because of their high-level non-performing accounts and they could not meet up demands of customers and also satisfy shareholders demand dividend. Capital is of utmost importance for the efficient and effective performance of any business enterprise including a bank. The banking sector has always received upper attention on protection due to the vital role it plays in an economy. That’s why the stability of the banks is of utmost importance to the regulatory body so as to stabilize the economy which will eventually aid towards the growth and development of a nation. Bringing about stability in the banking sector, the apex authority, the Central Bank of Nigeria (CBN) regulates the minimum paid-up capital required to be kept by banking organizations. In order to meet the capital requirement, banks raise capital from the internal and external sources. The raising of capital internally entails that the principal source of capital is from earnings kept by the bank rather than paid out to stockholders. This has the advantage of not depending on the open market for funds, thus avoiding floatation cost while raising capital externally could be sourced by issuing common stocks to the public, issuing preferred stocks, issuing subordinated notes and debentures, selling assets and leasing facilities etc. It is against this background that this paper seeks to examine capital measures, risk analysis and financial duties in selected deposit money banks.

1.2 STATEMENT OF PROBLEM    

The spate with which banks are failing in Nigeria has become a major source of concern for the stakeholders in the banking industry in Nigeria. From the year 1994 to 2006, forty eight (48) Deposit Money Banks (DMBs) were liquidated (NDIC, 2011). A number of reasons have been attributed to the causes of banks failure among which is poor risk management by the banks (Hamisu, 2011). In a collaborative study by the CBN and the Nigeria Deposit Insurance Corporation in 2011, operators of financial institutions confirmed that bad loans and advances contributed most to the distress. In their assessment of factors responsible for the distress, the operators ranked bad loans and advances first, with a contribution of 19.5%. The crises in the banking sector led to the establishment of Nigeria Asset Management Corporation of Nigeria (AMCON) which commenced operation in the year 2010 to take over the management of the toxic assets in the books of the banks and also the management of intervened banks. While credit risk receive more attention from the regulators and the banks adequate attention is not given to other risk factors in both operation and in terms of empirical studies, especially their effects on the financial performance of banks in Nigeria. The available studies use few samples of the banks coupled with few years span. Therefore, the problem here is to determine whether there is a relationship between banks capital and risk analysis and financial duties in financial institutions. Also  if there is, whether the degree of linearity is such that capital measures issues could be largely a matter of bank failure or business exigencies as opposed to the current flex of legal muscle by the regulatory authorities.

1. AIMS OF THE STUDY

The major purpose of this study is to examine capital measures, risk analysis and financial duties in Nigerian deposit Banks. Other general objectives of the study are:

1. To examine the how banking industry in Nigeria has been faring in management, managing risk in the bank.

2. To examine how asset quality can be efficiently and effectively monitored.

3. To examine the effect of capital measure, risk management on banks’ deposit and lending.

4. To examine the effects of credit risk exposure on growth and profitability of Nigeria deposit banks.

5. To examine the relationship between capital measures, risk management and financial performance of Nigerian banks.

6. To examine the policy measures put down on how to tackle the effect of credit risk in order to enhance the quality of banks’ risk assets.

1.4 RESEARCH QUESTIONS

1. How is the banking industry in Nigeria faring in management, managing risk in the bank?

2. How can asset quality are efficiently and effectively monitored?

3. What are the effects of capital measure, risk management on banks’ deposit and lending?

4. What are the effects of credit risk exposure on growth and profitability of Nigeria deposit banks?

5. What is the relationship between capital measures, risk management and financial performance of Nigerian banks?

6. What is the policy measures put down on how to tackle the effect of credit risk in order to enhance the quality of banks’ risk assets?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

1. There is no effect of capital measure, risk management on banks’ deposit and lending.
2. There is a significant effect of capital measure, risk management on banks’ deposit and lending

Hypothesis 2

1. There is no significant relationship between capital measures, risk management and financial performance of Nigerian banks.
2. There is a significant relationship between capital measures, risk management and financial performance of Nigerian banks
   1. SIGNIFICANCE OF THE STUDY

This study has a number of significant dimensions. The result of this study should provide information to the commercial banks risk management department on the progress so far made in identifying and evaluating risks as to enhance growth and profitability of the financial institutions. The result of this study should also reveal how much such progress has impacted on the growth of the entire commercial banks in Nigeria. Essentially, this work is a step in a right direction to assist and enlighten the general public on what risk management in commercial banks is all about and hence guide them in their immediate decision of handling risks. Furthermore, there is need to provide a reference document for further researchers and evaluation of risk management conducted by other Nigerians/other Nations. This research work will go a long way to increase the availability of literature in the field of risk management in the banks and other related business associates that involve risk in the day-to-day running of the businesses. Finally, the study is of immense benefit to policy makers, investors, financial manager’s lecturers and the general public.

1.7    SCOPE OF THE STUDY 

The study is based on the study on capital measures, risk analysis and financial duties in Nigerian deposit Banks, A case study of Lagos State.

1.8 LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS

Risk: Risk of an asset is the potential change of future returns due to its assets (Weston & et al, 2008). Investors always face the risk that their rates of return asset June be lower than value of expected. So the "risk" is likely to be different the real rate of return with investor's desired rate. The risk of a financial asset is a function of one or more factors that cause changes securities prices in market.

Management: - This is defined as the process of directing, co-ordination and influencing the operations of an organization so as to obtain desired result and enhance a total performance.

Deposit Money Banks- These are financial institutions, which accept deposit and other loans to the customers.

Credit:- A transaction between two parties in which one (creditor or lender) supplier money, goods, securities in returns for a promised future, payment by the other of debtor borrower. To sell or lend in the basis of future payment.

Money:- This can be defined as anything which passes freely from hand to hand and is generally acceptable in settlement of debt.

Hedging: According to (Ebhalaghe, 2010 : 161) defined hedging as a system employed to smoothen out unpredictable fluctuations in financial variables so as to aid planning and avoid embarrassment induced by cash shortfalls.