Bank Distress: A Critical Review Of The Courses And Possible Control In The Nigerian Banking Industry


Bank Distress – The incidence of bank failures is not peculiar to Nigeria. It occurs in various economics of the world although the mode of handling the problems differs from one country to another.

To examine distress in the Nigerian Banking System, one many commence from May, 1989, when the first signs of distress emerged; it started after the federal government withdraw treasury depositors from licened commercial and merchant banks.

According to official figures, the number of banks which the Central bank of Nigeria (CBN) Nigeria Deposit Insurance Corporation (NDIC) classified as technically insolvent as distressed rose from 8 (eight) as at the end of 1991 to sixteen (16) as at the end of 1992. The rise in the number of problems banks has increased public awareness of troubles/problems in the banking system.


          Ebhodighe (1993) once wrote that distress is signaled when holding actions are imposed on any bank by the Central Bank of Nigeria (CBN), Nigeria Deposit Insurance Corporation. Holding actions are a list of actions to be taken by the affected bank in appropriate area to arrest the drift to collapse or minimize losses.

Alashi (1994) also declared that “insolvency means negative net worth, a situation where the value of a banks realizable assets are less than its total liabilities.


          Distress in our banking system, can be traced to a number of factors, including adverse economic condition/incidence of bad debts, the prior inhibitive policy environment (over-regulation) capital inadequacy manpower problems, political interference  in management, impact of deregulation, frauds and forgeries, etc.

Some of these factors are inherent while other are exogenous to the system. These factors are examined below;

(a)     Adverse economic condition/incidence of bad debt;

          A presentation by Nwaigwe stated that the sue of expansionary policies, to maintain economic growth in the late 1970’s and the early 80’s coupled with the use of external credits caused by these expansionist policies, the over valuation of the naira and instability in macro economic policies had devastating impact on the income flow and the financial structure of economic agents, enterprise and financial institutions.

The above view was further stressed by Payne (1995) who stated that “the huge volume of non performing loans and advances is a crucial factor in the distressed condition of most banks.

The non-repayment of principal and interest on credits have adverse implications for liquidity earnings and capital.

Given the above circumstances, the researcher admitted that the economic down-turn cause by the collapse of the world crude oil prices since the early 80s contributed to high inflation, large formal deficits, a heavy debt burden and slow growth.  The adverse economic condition has put government.  Corporate organization and individuals under severe economic pressure.

But Ebohdaghe (1995) was quick to point out that the inability of most debtors to repay their loan could not only be traced to the economic down turn.  The loan were bad, abinitio given that they were improperly granted.

(b)     Policy Environment:

          Olufidepe (1994) once stated in his paper found in the Nigerian economy and its implications for banks that prior to the introduction and adoption of the Structure Adjustment Programme (SAP) in 1986.

Our financial system was highly regulated some of the regulations, through desirable contributed to some of the problems in the economy banks were subjected to substantial restrictions on their products and activities. To ensure compliance, accounts of banks were often debited for short fall of their lending to agriculture and manufacturing too onward lending to these sectors through appropriate federal government institutions.

The regulatory authorities also introduced and enforced the rural banking scheme by making participation compulsory.  But most of the rural branches were unprofitable.

Inconsistency in government policies though understandable in some cases, also contributed to the distress in the financial system since the policies made it difficult for the operators to plan.

(c)          Inadequate Regulation and Supervision

          The financial system was liberalized without putting in place the appropriate  regulatory and monitoring system.  In addition, the regulatory and monitoring systems.  The regulatory agencies lack financial and human resources to monitor operators on ground.

Ideally, the books and affairs of the banks should examined at least once a year while the distressed once should examined more often.  But this has not been practicable in the Nigerian context due to the above constraints.

The regulatory (CBN/NDIC) lacks adequate powers to deal decisively with bank distresses without having to refer to the presidency for authority.  Even where penalties of times are imposed for violations by the operators, such finds are ridiculously so small that the operators prefer to pay and continues to flout the laws with impurity.

(d)     Management Problem

The most important single parameter for ganging the financial conditions of a bank is the quality of its management.  The astronomical increase in the number of licensed banks.

S/N Banks Old Rate New Rate
A Commercial Bank N50 million N500 million
B Merchant Bank N40 million
C Community N25 million N100 million


Further, section 16 of the same decree prescribed contain percentages of profit after tax transferable to the reserve funds.

Critically examined, the prevalent high inflationary rate o naira for other major currencies have shown that the prescribed minimum capital requirement is no longer adequate.

 Asset Quality 

          The basic causes of bank poor asset quality includes:-

  • Poor selection of risks – loan assets.
  • Lack of supervision
  • Anxiety for income- unsound loans usually cost for more than they produce in revenue.
  • Compromise of credit principles.

Over Lending

          A bank which over lends to a customer looses control.  This is not obvious until difficulties occurs.


          Management performance can be eradicated virtually against all factors considered necessary to run a bank within accepted banking practice and in a safe and sound manner.  Good management borders on the following criteria;

  • Technological competence, leadership and administrative ability.
  • Compliance with banking regulations.
  • Ability to plan and respond to changing circumstances.
  • Adequacy of and compliance with internal policies.
  • The performance of management can be assessed thus;

(a)     Earnings

–        Returns on assets, return on equity, quality of earnings.

(b)     Growth

–        Deposits, loans, market share and new business.

(c)      Asset Quality

  • Provisions and recoveries
  • Risk identifications

(d)     Capital

–        Retained earnings, dividends

  • Employees
  • Morals, capabilities

Equity stake by banks throw burden of extra finance wholly upon the banks when trouble strikes. There is also the temptation to try and make a fortune by using other people money.


          Earnings arise as a result of proper mix of capital, management and asset quality.  Earning cover losses, provide for taxes, adequate capital and distributable dividends be measured in terms of peer group comparisons, quality and commission of net income.


          The test of liquidity rests on the volatility of deposits, the reliance on interest sensitive funds and level of borrowings.

The availability of assets readily convertible to cash and the access to money markets and other ready source of cash.

Ultimately, banks liquidity is evaluated on the basis of its capacity to promptly meet the demand for payment obligations and ability to meet sound credit needs of customer.

Apart from the CAMEL test, other causes of bank distress in a developing nation are;

  1. The economics of developing countries often depends on a number of leading sectors and are thus very vulnerable to exogenous shocks Nigeria political economics experience of (1993). They lack the buffer to offset adverse developments in one sector on other sector.
  2. The sound aid viable functioning of banks is also adversely affected by the choice of certain monetary and economic policy instruments like a rigidly administered interest rate structure.


The supervisory/regulatory monetary authorities usually, defined distress banks on those with severe financial, operational and management weakness. The CBN and NDIC two main techniques for identifying trouble banks include offsite bank analysis programme and on site bank examination programme.

  • Off-site bank analysis programme: Off site bank analysis is based on the statutory monthly returns and state of credited annual account returns and state of credited annual account submitted by banks, provides information pertaining to safety and soundness of the reporting bank. The short coming of the techniques is that the report can be as good as the information submitted by the banks, where the tone financial position of the reporting bank may not readily be disclosed find when signs of distress are eventually discovered it may prove to late to redeem to the bank.
  • On-site bank examination programme: This involves the physical examination of the books and affairs of licensed banks with a view to ensuring the safety and soundness of their operations and their compliance with the various banking laws and regulation.


          A bank is adjudged to be potentially distressed if bank examiners observe and report, certain negative trends which include the following:

  • Negative or very low interest margin
  • Negative capital and reserves
  • Negative loan policies
  • Negative examination comments
  • High volume of non-performing asset.


          They are of two types; internal and external environmental factors.

  1. Internal environmental factors refers to fraud facilitated by lapses traceable to staff incompetence dishonesty and weak control system or lack of them.
  2. External environmental factors have some macroeloume under pining that is inflation and unemployment. Inflation is the greatest enemy of workers all over the world where prices of foods and services are rising and workers salaries remain fixed purchasing power will tend to decline and surely, the standard of living will also tend to fall. In other to maintain their standard of living, bank staff may perpetuate frauds.



The collapse of the BCCI is a living example of what can happen to a bank riddled with frauds. The BCCI lesson is instructive.  So many of other banks are affected seriously by fraudulent with the failed bank tribunal established by decree 18 of 1994 in respect to bank distress, the safety or public and customers is assured.



  1. Capital inadequacy.
  2. Poor asset quality
  3. Bad management
  4. Negative earnings
  5. Dwindling liquidity.
  6. Capital

Capital represents the owners interest in a business and may be categorized into two forms:

  • Primary or first tier capital and
  • Subordinated debt or second tier capital.


Primary capital comprise of the following components:

  • Paid up capital
  • Statutory reserves
  • Share premium
  • Retained profits.


General reserve and free general provisions subordinated debts represents capital if its specific terms require that the debt be converted into equity or that if otherwise absorbs losses under certain circumstances. These include:

Loan stock of a minimum of seven years maturity debentures and preferences shares.

Capital adequacy, like shock absorbers in automobiles cushions shocks on the soundness and stability of banks has led to inadequate manpower to manage them.  Poor management resulted to excessive risk taking such banks were usually characterized by excessive overhead expenses, high interest expenses to attract deposits, poor credit policies and administration – inter-alia.  Instances of board room quarrels inside abuses, frauds and forgeries by some directors were common among the banks.


Contagion Effect: The entire financial system are interrelated. Distressed in one sub-sector often affects the operatives in other sectors of the financial system.  This led to what is now termed “fight to safety” thus banks perceived to be distressed are experiencing massive deposit withdrawals which re being transferred to the big banks.  The result of this is default in meeting current obligations to customers and further erosion of confidence.


Shareholders interference and insider abuse: In both private and government owned banks, the  shareholder’s have pervasive influence on the operations of their institution, they sometimes interfere in the day-to-day management such as recruitment’s, placement and discipline of staff, the acquisition of fixed assets etc.

Many privately owned banks are managed as personal estate of the dominant shareholders, who have the penchant to enrich themselves with the banks resources. This has contributed to the erosion of confidence in such banks.


Frauds and Forgeries: Fraud is defined legally as the act of depriving a person dishonesty of something which is his, it also has some other definitions as follows:

  1. A crime on any deceitful behaviour or act for the purpose of gain in the bank.
  2. Any activity that amounts to unfair dealings against the bank or customer by the banks official, customers of the public by manipulation of figures, facts and documents in order to gain dubious and undue financial advantage.

In view of the above definition, fraud can therefore be summarily referred to as an act of deal involving deceits and trick to falsify information or account with the intention of depriving a person or body of something which is his or hers might be entitled.  Also, forgery refers to the invitation of documents or signature for the purpose of community crime, which is tantamount to fraud.

According to source, fraud may be internal or external.

Internal fraud are those committed by members of staff within the branch without outsiders involvement.  External frauds emanate from outside the bank but can rarely succeed without the cooperation and convinced of a “insider” – member of staff.

Classification based on perpetration methods points to the area of operation or transaction which the fraud impact.



          A bank designation as “distressed” is based on the “CAMEL” rating system under this system, the supervisory/regulatory authorities assess a banks performance in five areas:

  • Capital adequacy
  • Assets quality
  • Management competency
  • Earning strength
  • Liquidity sufficiency

Based on this parameters, appropriate financial ratios are computed for depicting the condition of the bank under consolidation.

A bank is a chronic stage of distress usually show poor condition in all or must of the give performance factors as follows:

  • High level of classified loans and advances
  • Cross under capitalization in relation to the level of operation.
  • Low earnings resulting from huge operation losses.
  • Illiquidity reflected in the inability to meet customers cash withdrawals.



          Ogbunleye (1995) in his paper titled, framework for ensuring banking confidence and financial stability in Nigeria stated that “that Central Bank of Nigeria (CBN) is empowered by sections 33, 24 and 35 of BOFID to take over any bank perceived to be distressed or to have failed and subsequently apply appropriate failure resolution option.  The CBN is further empowered to appoint a receiver or liquidity and in this regard the Nigeria Deposit Insurance Corporation (NDIC is given priority as official receiver or provisional liquidate.

According to him section 38 (3) of BOFID and section 28 of NDIC decree ensure this.

The researcher agree with Ogunleye’s further submission that were or distressed bank needed to be restructured as a failure resolution option the regulatory authorities were empowered to merge consolidated or sell such distressed banks.

A case in point in the recent decision of CBN/NDIC to package the 61 states owned banks from sale to the most qualified bidders section 34 of NDIC decrees ensures this.

Nigeria Deposit Insurance Corporation (NDIC) in a part of the regulatory authorities, which from time to time provides financial support to insured banks.

However, before a bank can qualify for a support the bank will be required to meat some stipulated conditions.

Some of these conditions include:

  1. The bank persistently suffers liquidity deficiency.
  2. The bank has accumulated losses, which as nearly or completely eroded shareholders funds.

The bank must submit and/or prove the followings:

  • Submit a time framed strategic turn around plan.
  • Provide evidence of adequate managerial resources.
  • Provision of tangible security to enable repayment.

The regulatory authorities have been adopting holding actions as measures to manage and control distressed banks.  The holding actions specify to management what it must do and what it must do and what it muse do vary with the extent bank has gone into distress.

Some of the holding action includes;

  1. Recapitalization through injection of fresh capital
  2. Aggressive debt recovery.
  3. Perfection of collateral pledged for loans.
  4. Branch and staff rationalization to enhance efficiency and restore viability.
  5. Obtaining prior consent o the CBN before the disposal of any fixed asset.

Owing to limited success in the application of holding actions, the regulatory authorities have resource to the assumption of control of a distressed bank.

According to section 36 and 52 (2) of BOFID “only the governor of Central Bank of Nigeria has the power to revoke a banking license, without prejudice to the provisions of companies and allied matters decree (CAMD) of 1990.

Fraud and forgeries as one of the causes of bank distress can be controlled in the following ways.

  1. Through the bank itself
  2. Through the customer
  3. Through the public



Duties of bankers are performed through the staff competence, fidelity and upto date review of controls will undoubtedly reduce frauds. Skills should be regarded as a key resources increasing skills levels would seem to be the right approach, but this necessitates knowledge of the business, effective use of training and constant evaluation of staff.

Skills are applied against unpredictable day-to-day problems hence still improvement programme target towards minimization of frauds must be a priority.

Staff infidelity and dishonesty should be tackled by the staff recruiting system.  As regards administrative, security and management controls within the system, this should be a continuing exercise. Internal audit staff and inspectors must not wait until fraud has been perpetrated.


It is not common for genuine customers to deliberately with to defraud the bank but by mere negligence on their part they can facilitate frauds. Customers must be aware of necessary precautions to be taken to avoid frauds. Cheque books must be kept in place of safety, under lock & key. Cheque should be drawn in ink (not typed).  In drawing cheques, both the words and figures should be written in such a way as to leave no space for an subsequent addition or insertion where the whole space is not covered, it should be ruled up.  Bank statements and passbook should constantly be verified in case of unauthorized withdrawals.

As have been earlier, customers owe a duty to the bank to exercise reasonable care in drawing up cheques and documents so that banks cannot be misled.


          We line a jealous society and the continue aspect of money which affects both the business man and the private individuals means that the banking in one of the most exposed aspect of our commercial life.  The situation is made the more difficult for banks by the fact that they are so often the instruments of government monetary and fiscal policy.

The relationship between the bank, public and customers involves nothing more than movement management, investment and monitoring of money.  The attach on bank fund by fraudsters is informed on the belief by the public that the banks make a lot of profit every year.  They are liquid and that any amount of financial loss may not materially affect their existence.  A cursory survey of the published accounts of some banks shows that a few of them are even unable to provide for losses sustained through frauds.  If the trend should continue in the manner majority of the banks will be wiped out of existence.

In other to avoid this position, the banks and customers must do their duties. They regulation too, have a big role to play.

It is a common criticism with rather than confront bank management’s. The assets of many banks grew rapidly in recent years due largely massive increase in commercial lending.  Most of these lending were approved at the highest levels of the bad under poor criteria and without security.  And problem like this is common in all banks, and examination hardly draw the attention of the management to the problem of such lending if there is any hope for banks in this country to service the threat posed by frauds and forgeries, it lies enforcement of decrees 18 of 1999 (failed banks recovery of debt and financial malpractice’s in banks).

It follows therefore that no amount of legal sanction will be too much for the preservation of this critical sector of the national economy.  The period of relative relaxation in the official and professional controls of the banking industry as we have noted at the introduction witnessed a tremendous decline in the integrity of the industry, a process that led to untold hardship to millions of people who were misled into the banking claws through fraudulent acts by those who ran these institutions.

The researcher also attempted to examine NDIC’s liquidity support to a bank that has started showing symptoms of distress.  However, where a bank is finally liquidated, the provisions of section 27 of the NDIC decree ensures that all depositors receive whole or part of their deposit, subject to a maximum of N50,000 per account. The only deposit that are not insured in line with section 20 pf NDIC decrees are:

  • Inside deposits
  • Counter- claims from the person who maintains both deposit and loans accounts the former used as collateral security for the loan.
  • Such other deposits as may be specified from time to time by the board.



It would seen that the most drastic piece of legislation directed a curbing the rising wave of white-collar criminality in the banking industry is the failed banks (recovery of debts) financial malpractices decree No. 18 of 1994.  it is a drastic legislative reaction to the frustration occasioned by the inadequate of legal remedies available to visions of bank frauds under the exiting laws.  The situations under which criminals were escaping the reach of the legal process through legal technicalities and other dubious means did not augur well for the integrity of the banking system and society as a whole. The criminal laws of the country were written when white-collection criminal were not as sophisticated and educated as they are today.

The bank criminals of today is not interested in stealing peanuts but “pulling out” millions from the banks.

He is rich and sophisticated young man; with no background banking training or ethics, when at best parades on MBA degree super imposed on his political science basis education or in some cases on NCE certificate in handicapped children’s education. His starting pay is about 15 to 20 times what his  peers outside the banking industry earn.  It is so much money could be this, why not help himself for more? The society does not bother, rather it is acclaimed and showered with chieftaincy titles and in some case honorary degrees of some local and foreign universities for such yongerster the law means little or nothing. If he could bet the control of the banking system, he most certainly would beat the legal imperative planted on his path. He is now rich and comfortable while his bank is toileting in debts and the prospect of an imminent bankruptcy; the depositor and the numerous customers are facing a bleak future made inevitable by the loss of their life savings and worthy assets through their deposit and other savings.  Since the regular courts cannot redress this ugly situation, the failed bank tribunal has the solution and control the ugly state of affairs. Under the decree No. 18 of 1994, the sin of a “father” director or employee or relatives. Besides not much of the realities of natural justice (for the fraudster) nor endless adjournments are expected under the decree on paper, justice shall be swift and decision at the tribunals but time will tell.

[simple-links category=”3195″]

Leave a Reply

Your email address will not be published. Required fields are marked *