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FINANCIAL CRISIS IN THE NIGERIAN BANKING SECTOR: ROLE, EFFECTS AND SOLUTIONS

10,000 3,000

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CHAPTER ONE
INTRODUCTION

1.1     BACKGROUND OF THE STUDY

The first phase of the Bank consolidation initiated by Central Bank of Nigeria in 2005 was in order to provide a strong and reliable banking sector that would guarantee the safety of depositors’ money. The consolidated Banks were expected to playa very active role in the economic growth and development of Nigeria. The consolidation exercise was remarkable as some of the banks merged while others went for outright takeover of the assets and liabilities of the weak banks. Within the short period of consolidation, there were positive changes in the entire system, as interest and lending rates became stabilized and some of the consolidated banks became partners and correspondent Banks to some Foreign Banks.

Before the consolidation exercise started in 2005, the Nigerian Banking
Industry witnessed a lot of stress, uncertainty and anxiety. This eroded the confidence of the general public which used to be a great asset of banking sector in the past. In addition, investors and depositors funds were not guaranteed, hereby making most of the Banks to come under stress due to capital inadequacy. These problems greatly. impaired the quality of Banks assets as non-performing assets became bearable and became huge burden on most of the Banks. The financial intermediation role of the Banks became heavily impaired while the micro economic activities seriously slowed down. It was against this background that the Central Bank of Nigeria (CBN) announced a major reform in the entire Nigeria Banking industry. The recapitalization of the capital based of banks constituted the first phase of the reform policy in the entire banking sector of the Nigeria economy. The major issues in the consolidation exercise, according to Adeyemi (2005) include;

  • A minimum· capital base of 25 Billion naira with a deadline of 31st December 2005.
  • Consolidation of banking institution through merger and acquisitions.
  • Phase withdrawal of public sector fund from banks, beginning from July 2004.
  • Adoption of a risk-focused and role-based regulation framework.
  • Zero tolerance for weak corporate governance, misconduct and lack of transparency.
  • Accelerated completion of the electronic financial surveillance system (E-fass).
  • The establishment of assets Management Company.
  • Promotion of the enforcement of dormant law.
  • Revision and updating of relevant laws
  • Closer collaboration with the Economic and Financial Crime

Commission (EFCC) and establishment of the financial intelligence unit. The two outstanding issues in the reform initiatives that have attracted a lot of concern and reaction because of its peculiarities are:

  • The recapitalization requirement of 25 Billion by banks before the end of 31st December 2005.
  • Consolidation of banks through merger and acquisitions.

The primary objective of the reform initiative was to have an efficient and
effective banking industry that could guarantee rapid economic growth and development for the entire nation. Unfortunately, the current global economic crisis which has its root in the United State of America and Europe has spread to other parts of world. The crisis has eroded the confidence of the Public in Nigeria banking industry despite their consolidation. Even the Nigeria Stock Market (NSM) which is expected to act as buffer of fund is not left out of the financial crisis. It is against this backdrop that the research study seeks to examine the causes and effects of financial crisis in the Nigeria Banking Sector and possible solution.

1.2     STATEMENT OF THE PROBLEM

The Current Global Economic Crisis which started with the Financial Crisis in the United State of America in 2007 has its roots in credit contraction in the banking sector due to certain laxities in the US financial system. The crisis later spread to Europe and now has become a global phenomenon. The financial crisis of an early stage manifested strongly in the sub-prime mortgage because household faced difficult in making higher payment on adjusted mortgages (Soludo, 2009). This development led to the use of credit contraction by Financial Institution in US to tighten their standards in the light of their deteriorating balance sheets. In addition, the Financial Institutions stopped lending and recall their credit lines to ensure Capital Adequacy (Aluko, 2009).

Since the use of credit contraction -by foreign banks began, the Nigeria banking system has seriously been engulfed in Financial Crisis. At the moment, Nigerian Banks are unable to carry out their statutory function in the Nigerian Economy. In view of this development, the problem now is what are possible causes of the financial crisis in the Nigerian Banking sector, what are the effects of Financial Crisis in Nigerian banking sector on the Nigeria Economy, and how can the situation be remedied.

1.3     RESEARCH QUESTIONS

The research questions for the study are:

  • Does poor management give rise to Financial Crisis in Nigeria Banks?
  • Does undercapitalization of Commercial Bank Account for Financial Crisis in Nigeria Banking Industry?
  • Is there any correlation between poor liquidity and financial crisis in Nigeria banks?
  • How can financial crisis in Nigerian Banks be solved?

 

  • OBJECTIVES OF THE STUDY

The main objectives of this study, the perceived causes and effects of the
Nigerian Banking Sector. Specifically, the study aims as follows:

  • To ascertain how the Government can reduce Financial Crisis in Nigerian Banks to the barest minimum.
  • To determine how Financial Crisis affect the operations of Nigerian Banks.
  • To ascertain whether there is a correlation between poor liquidity and financial crisis in Nigerian Banks.
  • To ascertain whether undercapitalization IS responsible for financial crisis in Nigeria Banking Sector.

1.5     RESEARCH HYPOTHESES

The hypotheses of this study are:

H01:   Under capitalization of commercial banks does not militate against the growth and development of Nigerian banking sector.

H02:   Diversion of credit by clients of Banks does not contribute immeasurably to distress in the Nigerian banking sector.

H03: Poor liquidity is not a salient factor affecting the viability of Nigerian banks

H04:   Incompetent and inefficient management do not give rise to poor
performance of banks in Nigeria.

 

1.6     SCOPE OF STUDY

The research work concentrates on perception of the causes and effects of
Financial Crisis in Nigeria Banking Sector with special reference to First Bank of Nigeria P1c (FBN) and Intercontinental Bank Plc (ICB).

1.7 SIGNIFICANCE OF THE STUDY

This study is significant for a number of reasons:

  • It will reveal to the gene-nil-public the immediate and possible causes of financial crisis in Nigeria Banking industry.
  • It will suggest measures that can be taken by regulatory authorities to minimize financial crisis in Nigeria Banks.
  • It will serve as a body of knowledge that will be referred to be other researchers.
  • It will expose the consequences of financial crisis in Nigeria banking sector in the economy.
  • It will make useful suggestion to the management of banks on
    appropriate steps to initiate in order to minimize Financial Crisis in Banks.

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