Nigeria Bank and Issue of Distress


It is imperative at this juncture that a review of related literature on the project topic be made. This is to establish the necessary acquaintance with the opinions of others in this area of study. A little, however is known to have been written on this topic.

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According to the ICAN news publications (April) June 1997, vol 2 No 2) in an article captioned “The challenge of management and leadership in a distressed company” distress is a function of organizational behavior.

It shows that companies, like natural human beings can also show signs of ill-health and would need the services of a medical team of management specialist, financial and investment analysis accountants, technocrate and human resources psychologists and human resources psychologist and trainers.

Owojori Adekunle in that article opined that most distressed companies are financial houses banks, investment and insurance companies. But a lot other non-financial companies are also in distress even though not currently declared as such. According to Owojori, the accounts way of determining whether a company is in distress or not is through examination of when last it paid divided its earning per share and price earning ratio, among others.

All companies on the stock market official list that has zero divided, zero earning per share and zero price-earning ratios are inherently in distress one way or the other. If these conditions persist, their audited financial reports and accounts are likely to be qualified by their external auditors.

According to Owojori, distress may be caused by a number of reason including:

  • Lack of liquidity and working capital
  • Management problems usually associated with employing mediveris, with no management skill as managers.
  • Greed by staff who may want become rich quick through pilfering and embezzlement, there has been a case of officials of bank printing fake money only to exchange them with genuine ones. Other staff also colludes with dubious people to cheat the company.
  • Adopting policies that are irrelevant to goals and objectives of the company.
  • Inconsistent economic policies by government eg structural adjustment programmer, foreign exchange policies and inter banking loans or call money.
  • Unsecured loans that may become bad;
  • Government are the major customers of the contractors that took loans from the bank. Lack of payments of contractors fee by government may have a spillover effect on the contractor’s inability to pay the bank the loan. Owojori attributed the primary cause of the above situations to leadership responsibility of policy formulation implementation and execution.

All Orjih John in his book “Elements of Banking” gave the meaning of bank distress as a bank, which is unable to meet the bank examination rating system (CAMEL). In otherwise, banks that do not survive the camel test is regards as distress.

This “CAMEL” test include:

  • Capital adequacy
  • Asset quality
  • Management computering
  • Earning strength
  • Liquidity sufficiency.

According to Orjih a bank can also be declared distressed when it is not able to meet the balance sheet value to cover its liabilities.

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  • Total capital to total profit
  • Total capital to total loans and advances.
  • Dividend to profit after tax
  • Equity capital to total capital
  • Total capital to total assets

The central bank of Nigeria (CBN) credit guideline No 26 of 1992 as amended August 1992 prescribed that for a bank to be adjudged healthily, it has to meet the following requirement.

  • Meeting specified cash reserve requirement
  • Meeting up statutory paid up capital requirement
  • Having capital adequacy ratio
  • Meeting specified liquidity ratio
  • Adherence to prudent guideline
  • Having sound management
  • Attribute of distress banks.

Generally, the following features are symptoms of a bank in distress.

  • Persistent illiquidity
  • Disproportional operating cost
  • Accelerated deterioration of portfolio
  • Snail-speed loan recovery
  • Loaning deposit rates
  • Undisclosed negative net worth
  • Raising of lending rates
  • Desperate management.

Orjih further opined that banks distress could be caused by two board factors:

Management related factors and ownership related factors.


The bank owners have contributed to these institutions in the following ways:


In most cases, shareholders do not provides adequate capital for the operations of the bank thereby making them under capitalized.


The board members of the some so of the distressed banks are so passive that they do not participate actively in the articulation of some strategic plans for the banks. Such members are rather more interested in collecting their allowances and other financial benefits that may accrue to them.

Adequate checks on the management are generally ignored and hence encouraging inefficiency.


The composition of board of director of some banks is made up of people who lack the basic academic and professional banking knowledge. As a result they are not able to contribute manfully to the strategy, management, control and operations of their banks.


The distressed banks especially those owned by state government have their board made up of people appointed on political basis gather them on merit.

This leads to frequent changes in boards, in turn with change in regime.


In most of the distressed banks some board members obtained loans that were made available to their personally, or to relations or related business without meeting the carious of good lending this factor contributed to the accumulation of classified loans of the distressed banks.


The distress in our banking sector today, especially the state owned commercial bank in Nigeria emanates from mainly capital inadequacy.

To justify this, out of the 65 commercial banks, only 16 were able to meet the minimum N50 million paid up share capital as at the end of December 1991.

This member represents about one quarter of insured banks.

A further break down shows that out of 25 banks with state government participation, only 5 had meet the capital requirement while only 6 out of 32 privately owned commercial banks complied with the requirement.

The total paid up capital of banks stood at N2, 342.21 million in 1990, representing an increase of 28.4 percent over that of the previous years.

On the average, each commercial bank had N 36 million-share capital at the end of 1990.

However, a good number of the country’s bank today is still grossly under-capitalized. This situation could partly be due to the fact that many of the banks were established with little capital base (especially most of the state owned commercial banks) and due to the poor growth of their researches.

This problem of capital inadequacy has been worsened by lack of growth, available statistic reveals that the amount required by distressed banks for recapitalization was about N 13,575 million at the end of 1992.

By 1994 years end, N 16.6 million was required to recapitalize insured banks.


The problems at the management and board levels include: unduly aggressive growth policies, distorted strategic foods, poor operation procedures porous internal control system, politicking, excessive task taking, loan concentration / non-diversification of portfolio, high operation cost and insider abuse. Bankers with income pertent management team easily fall prey to harsh economic condition. This is because the management lack the expertise to adjust with shifting changing economic and also are unable to take advantage of economic opportunities.

Moreover, in some distressed banks especially the state owned commercial banks the management environment is characterized by instability of tenure of director and key management staff due to shareholders interference.

Each state governor who comes to power; dissolves the board of the banks and change the directors just to appoint his people of profession, competence, and experience in the job.

Shareholders more often than not, vote out of office directors who do not meet their (shareholders) selfish credit request.

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