Financial Distress in the Nigeria Banking Industry

 Financial Distress in the Nigeria Banking Industry

The issue of financial distress in the Nigerian banking industry has become the ‘Consequences of bank failures, the problem has become a major source of concern to the government, the regulations of financial institutions and to the general public. The experience of Nigerians during the first era of bank failures in Nigerian between 1953 to 1959 was such that generated understandable apprehension among the banking public. Unfortunately, the problem has reducing up till now in the Nigerian financial system. Also distress in Nigerian banking system is a phenomenon that must be tackle with every amount of Vigor in order to minimize its occurrence in the economy.

Although, Nigerian thought this was a good own for the economy, it soon downed on them that the perceived boom was a mirage and gross mismanagement. The increasing number of distress in the nations banking industry has impacted negatively on the economy by slowing down the tempo of business activities. The courage also effects some government and some healthly banks which have cost some of the confidence which they had enjoyed before the issue of banking distress become pronounced.


Financial distress in the Nigeria banking industry will therefore occur when a fairly reasonable proportion of banks in the system are unable to meet their obligations to their customer as well as their owners and the economy as a result of weakness in their financial, operational and managerial condition which have rendered them either insolvent. Also is a situation in which a sizable proportion of financial institutions have liabilities exceeding the market value of their assets.

A financial institution is said to be in distress where evaluation by the supervising authorities depicts the institution as deficient in the following criteria.

Weak Management, reflected in the poor credit quality, inadequate internal controls. High rate of frauds.

  1. High level of classified loans and advances
  2. Gross under Capitalization relation to the level of operation.
  3. Illiquidity, reflected in the inability to meet customers cash withdrawals.


In view of the above problems of distress in the banking industry, this study in word term aims at examining the techniques of managing distress in the banking industry. This objective in specific terms could be states this.

To examine debt recovery and cost reduction as a techniques of managing financial distress in the banking industry.

To also examines bank recapitalization as a techniques of managing financial distress in the banking industry. To examine bank acquisition and merger as technique of managing distress in the banking industry.

Also to make recommendation on how to manage financial distress in the banking industry.

To also examine bank Recapitalization as a technique s of managing financial distress in the banking industry.

To make recommendation on how to manage financial distress in the banking industry.


The aim of this study is to examine the techniques of managing financial distress in the Nigerian banking industry. The researcher demand it necessary to formulate the following question.

(i)  “Are Debt Recovery and cost Reduction a good techniques of managing financial distress in the banking industry

(2) “Is bank Recapitalization a good techniques of managing financial distress in the banking industry?

(3) “Are Bank Acquisition and merger  a good techniques of managing financial distress in the banking industry?


This study is to examine the techniques of managing financial distress in the Nigerian banking industry. Considering the nature of the subject matter, the researcher made it necessary to formulate the following hypotheisi.


(1)  Ho:       Debt Recovery and cost Reduction are not good techniques of

managing financial distress in the banking industry.


(2)  Hi:        Debit recovery and cost reduction are good techniques of

managing financial distress in the banking industry.


Hi:        banking Recapitalization  is a good techniques of managing

financial distress in the banking industry.


(3)  Ho:       Bank Acquisition and merger are not a good techniques of

managing financial distress in the banking industry.


Hi:        Bank Acquisition and merger are not good techniques of

managing financial distress in the banking industry.



This research work which deals mainly in examining the techniques of managing financial distress in the Nigeria banking industry will be of much significance to the readers, it will make them to be aware of the unhealthy conditions being experienced in our banking industry as well as being familiar with the various suggested technique which could be applied to reduces the banking industry out of this distress. It should be noted that a country’s wealth development, and advancement it normally judged by the healthiness of it’s banking industry. Also this study therefore sets to ascertain the technique of managing distress in the Nigerian banking industry.


The study will be of immense benefits to business students, other researchers in the field, financial institutions, and regulatory institutions and will obviously add to the pool of knowledge in the field of banking.


The scope of this study is limited to the examination of the techniques of managing financial distress in the Nigerian banking industry as the title of this project. The limitation to the study follows:

1)    Having initial access to the management staff of various banks.

2)    Fear of releasing information relating to the reports on distress banks examinations.

3)    Also it was not easy to obtain the right textbook, computer (internet) and periodicals that dealt extensive on the research study.

4)    Finally, time and financial constraints contributed in a little way in this research work.


The aim here is to explain all the unique term used here, in order to avoid mis-interpretation as follows:


1)    Recapitalization:  this refers to the process of injecting more funds into a bank in order to make it carry on profitable business.

2)    Liquidation:          This refers to bringing to an end the operation of a going concern (bank) by the authorized authority.

3)    Insolvent:    Also is refers to ban is inability to meet the needs of its customers in the ordinary course of business.

4)    Fraud:    This can be defined as a conscious and deliberate effort aimed at financial advantage at the detriment of another person who is the rightful owner of the fund.

5)    Mergers and Acquisitions:   This means the crises ridden banks can pull their resources together through mergers. Stronger banks could take over or acquire the weaker ones for purpose of strengthening them and saving the entire financial system from collapse.

6)    Deregulation:  This refers to the relaxing of the stringent conditions that where lither to prevalent in the registration of banks.


The Chapter will review existing literature on examination of the techniques of managing financial distress in the Nigeria banking industry. There are many definition of managing financial distress as there are experts on the subject. According to F.Okafor (he process of managing distress in banking should involve the combined efforts of both the afflicted banks and banks regulatory authorities. The primary responsibility for helping a distressed bank into health lies with the board and management of the bank. The board and management should take appropriate measure to improve the operational performance and cost effectiveness of the bank in order to restore customer confidence measure should also be taken to improve the asset quality, expand the capital base and enhance the liquidity position. These measures could be achieved through some form of financial restructuring and most banks at the inception of distress could easily be rescued through the additional capital.

Another authoritative definition is given by central bank of Nigeria (CBN) and the Nigeria Deposit insurance Co-operation (NDIC) are the regulatory authorities for managing banking distress in the country. The authorities adopt two categories of distress managing namely.

Preventive measure to eliminate or at least to minimize the incidence of distress and rehabilitation measure to help distress banks back to health. They said prevention is better than cure is very apt in the management of bank distress. In a bid to prevent distress, the regulatory authorities often impose a number operation controls on bank. Such measures which are designed to promote sound financial condition in the banks include the following, among others; banks are required to maintain and build up reserves in order to prop-up the capital base of banks.

(i)   The imposition of minimum share capital well as other capital adequacy requirements on banks, prudential requirements governing provision for credit facilities, and measure designed to control credit expansion as those meant to discourage loan concentrate on individual borrowed, on economic sector and other customer group.

(ii)   the imposition of both routine and special bank examination visitations by both the N.D.I.C and C.B.N. to as certain the finance condition of banks as well as their compliance of bank with operating guidelines.

Measures to rehabilitate distress banks take various forms. In deciding on which action to action to take, the authorities are guide by the degree of operational imperilment, manifested by the bank. The main courses of action, often considered by the authorities include the following.:

(i)   Imposition of holding actions, such as restriction on new lending, specific directive on  new lending, specific directive on debt recovery and mandatory recapitalization by shareholders, so as to arrest further deterioration of financial condition.

(ii)  The outright acquisition of a distressed bank by the CBN, in exercise of its right, under sector 36 of the banks and other financial intuitions Decree (BOFID) of 1991 so as to give the regulatory authorities unrestricted powers to develop and execute a bail-out programe for the bank.

(iii)   Revocation of a banks license and liquidation where there is strong evidence of terminal insolvency and financial assistance to the bank to abil it out of difficulties.

(iv)   Direct management takeover of the distressed bank to ensure effective operational over. This measure is often implemented through board (IMBS) under the control and supervision of the CBN / NDIC.


A good number of the country banks are still under-capitalized. This  situation could be attributed to the fact that many of the banks were established with little capital base especially most of the state owned banks. The result is that the bank utilized depositor funds to acquire fixed assets. Consequently, the capita base of these banks became inadequate to support their  risk assets and absorb losses.

According, Sanusi, J.O. (2000). The depreciation of exchange rate and increasing inflation rate since 2000 when bank capital requirement were increased to N25 million for commercial and merchant banks respectively have eroded significantly the value of the naira. The quality of bank asset, had deterioted from 48% in 2000 to 32% in 2002 are to non-performing assets. This trend has necessitated on upward veview in the minimum statutory paid-up share capital of banks to uniform rate for both commercial and merchant banks. The NDIC in 2000m statistics on banks capitalization revealed that required by distressed banks for recapitalisation was N13,57 & bullion, but the CBN recently made pronouncement  on its first c phase of the diversified, strong an reliable banking sector which will ensure the safety of depositors by Prof. Charles, Soludo, outline the key element which have since generated so much concern are reaction from various shareholders are requirement that the minimum capitalization for banks should be N25 billon with full compliance before December 2005. Methods have been attempted to find solution by examine the technique of rating system by management competency and liquidity to help distressed banks back to health.


Capital plays crucial roles in banking as in other industry. The first of capital in banking is for the acquisition of physical assets the skill base and the institutional structure necessary to perform the intermediation function and provide related services. With adequate capital, a bank can venture into related financial services areas and provide additional services to it customers, this expending its customer base. The infrastructure role of capital in banking dose not require a large amount of capital in banking, it represent on the average less than 2% of total assets as compared to average percent in, manufacturing. This noted that banking involve risks, the risk banker face present opportunities for either gain or losses. The banker is expected to absorb the losses from his normal; earnings. But there may some unanticipated loss which cannot be absorbed by normal earning. This way , capital plays an insurance function it in absorb the losses from his normal; earnings. But there may some unanticipated loss, which cannot be absorbed by normal earning. This way, capital plays an insurance function it insured against unanticipated lossed that cannot be absorbed by current earning.

Capital also acts as a confidence booster in banking, adequate capital provides the customer, the public and the regulatory authority with confidence in the continued financial viability of the bank. Confidence to the deposition that his money is safe, to the public that the bank is a going concern or is in a position to meet credit and other banking needs in good as well as bad times and to the regulating authority that the bank will remain.

Continued existence. The role of capital in banking also has a public relations dimension the public relation role of bank capital devote from the fact that the variability of a bank depends critically upon confidence, while it is generally recognized that availability of the state of health of a bank, nor a sufficient condition to ensure the maintenance of confidence depositor and other creditors, adequate capital no doubt represents a major element in shaping public perception of the bank.

In addition, with the growing involvement of bar in the financial marks, the markets view of banks capital has acquired greater importance. It has become the basic reference for classifying a banks standing its competitor in the market in which it operates the most visible symbol of a banks strength. In many countries is determined by the level of capital adequacy similarly, capital loan and capital risk nations are usually requirements to minimize risks in banking. It is clear from the above that capital in baking performs financing, insurance, public-relations and regulatory functions. It is indispensable in banking as in any other industrial or commercial enterprise. Its functions may, however, change with various  stage in the banks life cycle.

For regulators, capital is an instrument to discipline bank management. Apart from specifying minimum initial capital requirement regulators imposed standards on the level and compositors impose standards on the levels and composition of capital and its relationship to risks factors and one of permitting expension.


Capital as one of the factors of production has two basic forms. These are share or equity capital and debt capital. Due to its attribute of performance and lack of obligatory servicing, equity capital tends to receive more emphasis than debt capital.

Equity capital, which is the basic component, is the sum of ordinary paid-up share capital, share premium, undistributed profits, statutory and general reserves and non-redeemable preference shares while  debt capital usually include all forms of interest-bearing obligations which repay a fixed amount of money, preference capital are convertible into equity and after being so converted, they become equity capital.

The four factors, which usually guide bank management in managing bank capital. The first is the over all financial plan of the bank. This overall financials plan usually indicates the anticipated course of future development of the bank during the planning horizon. Secondly, with the course of the future determined, bank management go a step further to decide what amount of capital is required based on the functions anticipated, regulatory constraints, produce and safety of the bank.

The  third consideration is the structure of the capital as it relates to how much will be generated internally and how much externally, How much by loan and what type of loan instrument? The three factors are crucial in this consideration, the required capital relationship, earing and divided payouts. These need careful consideration as they effect the amount a bank can finance through retained earnings.

Finally, if internally generated capital is in adequate to finance the banks anticipated capital needs, resort is the made to raising externally, coat and availability flexibility and the immediate and future financial effects of the various sources all required to be carefully considered.


Major options in bank recapitalization would involve the capital market plough bank on retained earnings. In the capital market its examine the instruments used for recapitalization which include the common stock of shares debentures and preference shares.

Another option for banks recapitalization is by issuing long-term debt. Debt preserved the ownership rights of shareholders and can substitute well for sustained inflation, the cost of debt decline because of the fixed interest commitment interest payments are the cost of cash to service debt may be less than the cost cash to service dividends.


 —-This article is not complete———–This article is not complete————

This article was extracted from a Project Research Work Topic


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Financial Distress in the Nigeria Banking Industry

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