THE IMPACT OF BANK DISTRESS ON THE NIGERIA ECONOMY

CHAPTER ONE: INTRODUCTION

1.1             BACKGROUND OF THE STUDY

Banking Institutions occupy a central position in the nation’s financial system.

According to Nwankwo (1999:11), banking institutions are essential agents in the development process of the economy. The importance of the banking sectors in any economy is derives from three major functions:

i.                    Financial intermediation

ii.                 Provision of efficient payment system

iii.               Facilitate the implementation of monetary policies

By intermediating between the surplus and deficit spending units, the banks create money, the quantum of the nation’s savings, investment and national output. By grating credits, banks creates money thus influencing the level of money supply which is an essential item in the growth of the nation’s income as it determines the level of economic activities in the country.

Banks are central to the payment system by facilitating between various nations and international economic units, and by so doing encourages and promotes trade commerce and industries. Hence on efficient and effective banking sector is essential not above all attainment of steady economic growth. For banks to be able to function effectively and contributes meaningfully to the development of a country, the industries must be stable, sate and sound, but what we have today is far from the level of stability required. It is indeed a great shock to state that the present banking industries in Nigeria are witnessing what is described as a situation in which a market value of their assets which many lead to portfolio shifts and eventual collapse financial system.

In other words, distress in the financial system occurs when a fairly reasonable proportion of financial institution in the system are unable to unit their obligations to their customers, owners, and the economy at large as a result of weakness in their financial operational and managerial capabilities which render them either liquidation or insolvent. The problem of distress in financial sector dates bank to the 1930s, where banks failures were recorded prior to the establishment of the Central Bank of Nigeria in 1958.

Recently, several financial institutions in Nigeria became distressed. Example, Savannah Bank Plc, Allied Bank of Nigeria Plc, State Trust Bank Plc, etc. this highlight the precarious position of the financial sectors.

Between 1993, financial condition of many banks worsened significantly which compelled the authorities to take decisive steps to restore public confidence in the financial system.

According to Ebhodahye (1996:21), sixty Commercial Banks and Merchant Banks were severely distressed and the prospect of receiving them is going in view of the current economic predicament.

1.2             STATEMENT OF THE PROBLEM

The research topic is to study the distress in banks and its impacts on the Nigeria economic.

Considering the role and importance of banks in the overall development of the economy, distress in the banking sector will be of great concern to the government, the regulatory authorities, the banks and general public. It is against this background that the researcher wishes to investigate the followings:

i.                    What are the causes of distress on the banking sector?

ii.                 What are the impacts of distress on the Nigeria banking sector?

iii.               What are measures available to prevent distress in the banking sectors?

1.3             OBJECTIVES OF THE SUDY

In this project, the researcher would know what distress in banks is all about, the causes and its impacts in banks, the depositors and the economy at large and how distress can be managed.

1.4             SCOPE OF THE STUDY

This project is limited to the banking system in Nigeria from 2006 to 2012, with a case study of Diamond Bank of Nigeria Plc, Jos.

1.5             SIGNIFICANCE OF THE STUDY

The significance of this study is to show that, a better understanding of the nature of distress in the financial institutions is crucial to the management of banks, the government and general public.

This research work is also set out to examine the various dimension of the problems exposed to them and proper solution strategies in combating the distress disease. The result of this research is expected to be beneficial to the banking sectors, the regulatory authorities such as Central Bank of Nigeria (CBN) and the government. It will also contribute meaningfully to the researcher and provide a good basis for anyone wishing to carryout detail research work on the topic.

1.6             LIMITATION OF THE STUDY

This research work is limited to the banking system in Nigeria from 2006 to 2012. Many factors are likely to limit the final output of this research work. For example, financial constraint, time, and unwillingness of banks officers and regulatory authorities to give out information classified as official secret.

1.7             HISTORICAL BACKGROUND OF DIAMOND BANK PLC

Diamond Bank Plc began as a Private Limited Liability Company on March 21, 1991 (the company was incorporated on December 20, 1990). Ten years later, in February 2001, it became a Universal Bank. In January 2005, following a highly successful Private Placement share offer which substantially raised the Bank’s equity base, Diamond Bank became a Public Limited Company. In May 2005, the Bank was listed on The Nigerian Stock Exchange. Moreover, in January 2008, Diamond Bank’s Global Depositary Receipts (GDR) was listed on the Professional Securities Market of the London Stock Exchange. The first bank in Africa to record that feat.

Today, Diamond Bank is one of the leading banks in Nigeria respected for its excellent service delivery, driven by innovation and operating on the most advanced banking technology platform in the market. Diamond Bank has over the years leveraged on its underlying resilience to grow its asset base and to successfully retain its key business relationships. And like a diamond, our strength makes us even more valued and valuable. Diamond Bank has won several awards including the prestigious “Nigerian Bank of the Year, 2009”, the “Most Improved Bank of the Year, 2007” and “Best Bank in Mergers & Acquisition, 2006” all by the  ‘This Day Annual Awards’. We have retained excellent banking relationships with a number of well-known international banks, allowing us to provide a bouquet of world class banking services to suit the business needs of our clients. These international banking partners include Citibank; HSBC Bank; ANZ Banking Group; ING BHF Bank AG; Standard Chartered Bank; Belgolaise Bank S.A; Deutsche Bank;

Commers Bank; and Nordea Bank Plc. in 2008, and to ensure we grow with the needs of our customers, we streamlined our operations into three distinct strategic business segments: Retail Banking, Corporate Banking, and Public Sector. Diamond Bank continues to develop and to build on its core competencies. By continually cutting from the rough, we have improved our services and our banking facilities. Like cutting from a rough gem to create a diamond of the finest quality, we are proud to have become a gem of a bank.

1.8             DEFINITION OF TERMS

                                i.            Bank:- This is a financial institution that deals with money, receiving on deposit from customers, honouring customers, drawing against such deposits on demand and on maturity (Fixed Deposit Account) and lending or investing the surplus at a specified interest.

                             ii.            Bankruptcy:- This is a legal proceeding involving a person or business that is unable to repay outstanding debts.

                           iii.            Capital adequacy:- This is a measure of the financial strength of a bank or securities firm, usually expressed as a ratio of its capital to its assets.

                           iv.            Credit portfolio:- This is an investment portfolio comprised of debts, like home and car loans.

                              v.            Distress:- This is a condition when the banking system as a whole has negative capital and current profit are insufficient to cover losses to such an extent that the banking system is unable to generate internally positive capital.