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EFFECTS OF BANK CRISIS ON THE NIGERIAN ECONOMY

10,000 3,000

Topic Description

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

The fiduciary nature of banking business exposes banks to the risk of failure. The business of banking is based on confidence and when confidence is eroded it portends a serious danger not only for the banking system but also the economy as a whole. This is aptly demonstrated by the global financial meltdown of 2008 which has devastating consequences for the global economy.

As the heart is central to the sustenance of the human system so is banking the main artery of the financial system. Banks play a catalytic role in the development process. That is why Gardener (1984) opines that in virtually all developed market economies the banking industry is more heavily regulated than any other commercial or industrial sector. Nwankwo (1990) observes that the very nature of banking business makes it to be regulated from “cradle to grave”.

Gardener’s observation in the developed market economies is virtually applicable also in the developing economies. Johnson (1987) as quoted in Nwankwo (1990) opines that no matter how stringently the system is regulated and supervised it cannot prevent the incidence of banking crisis and/or failure. This fact was corroborated by Douli (2009) where he pointed out that systemic distress is a phenomenon that no one can stop in any economy since it could be triggered by some complex factors between 1892 and 2009, Nigeria had witnessed various banking crises which had in some cases led to distress, bank failure and liquidation. Each period of banking boom was followed by another period of burst and vice-versa.

The banking crisis had dire consequences for the financial system and the economy. The recent banking crisis coming on the conclusion of the bank recapitalization exercise (2004-2005) has evoked germane discussions among professionals and experts on what should be done to save the banking system from intermittent burst of financial crisis

1.2    STATEMENT OF THE PROBLEM.

Prior to the establishment of the Central Bank of Nigeria (CBN) in 1958, the Nigerian economy witnessed a flurry of banking boom and failures particularly in the late 1940s and early 1950s. This period designated as the “Free Banking Era” (because of the absence of regulation) spanned a period of 60years (1892-1952). In all, a total of 21 indigenous banks failed during the period. The main causes of bank failure during the era include:

  • Gross under-capitalization,
  • Inadequate management skills,
  • Fraud and absence of regulation and supervision (CBN/NDIC, 1995).

The experience of Nigeria with respect to bank crisis did not however end with the establishment of the CBN and the evolution of the financial safety-not which comprised regulation and supervision, lender of last resort and deposit insurance. In particular, the country experienced a number of bank failures between 1994 and 2006. The major causes of bank failures during this period include:

  • Abusive ownership,
  • Weak corporate governance,
  • Insider abuse,
  • Self-serving disposition,
  • Inadequate executive capacity due to the phenomenal growth in the number of banks (from 40 in 1986 to 120 in 1990) without a corresponding growth in skilled manpower,
  • Inept management in the form of inadequate strategic plan and poor risk management among others.

Banks crisis and failure are not peculiar to Nigeria. As Gardener (1984) observed, bank failures must surely happen no matter how efficient banking regulation is carried out. Corroborating this view, Ogunleye (2003) opines that we cannot have a failure-free banking system and must accept some inherent instability in the system. Donli (2009) asserts that there is no society that can be free from banking crises. No country was immune to the wave of financial sector crisis in the 1980s and 1990s and the global meltdown of 2008.

  • OBJECTIVES OF THE STUDY.

The researcher aims that this study achieves the following objectives:

  • Ascertain whether bad debts have a significant effect on Bank crisis in Nigeria
  • Ascertain whether bank capital size have a significant effect on Bank crisis in Nigeria.

 

  • RESEARCH QUESTIONS
  • Are bad debts a significant effect on Bank crisis in Nigeria?
  • Is capital size a significant effect on Bank crisis in Nigeria?

 

  • RESEARCH HYPOTHESES

The hypotheses of this study are:

Ho1 :  Bad debts do not have a significant positive impact on the economy.

Ho2:  Bank capital size does not have a significant positive impact on the    economy.

 

  • SCOPE OF THE STUDY

The empirical investigation shall be restricted to the period 1991 to 2000. The empirical analysis is limited to this period because of the problem of unreliability of data obtained from secondary sources. The economy is a large component with lot of diverse and sometimes complex part. This research work will only look at a particular part of the economy (the financial sector).  This work cannot cover all the facets that make up the financial sector, but will look at the banking sector and its financing operations. Inotherwords, its focus is not on the entire financial sector, but the commercial banks in particular.

  • SIGNIFICANCE OF THE STUDY

One advantage of Academic research is that it investigates matters which practitioners and policy makes find useful but have little time to study. The significance of this study stems from the important position banks hold in every economy, developed or undeveloped.

Banks are catalysts, around which all other economic activities revolve. Lack of credit may force viable firms into bankruptcy. Similarly

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