THE FINANCIAL DISTRESS IN THE BANKING SECTOR
CHAPTER ONE
INTRODUCTION
1.1    BACKGROUND OF THE STUDY
    The last two decade have been seen as a proliferation of systematic banking problems in Nigeria. Banking crisis have threatened macro-economic stability through their effects on monetary control, the fiscal consequences on banks rescue packages and the knock on effects on capital outflows and the external balance.
    For a developing country like Nigeria, the banking industry is a vital sector of the financial system in the management of the nations financial resources. It creates the necessary financial environment for international trade. This explains why there is great concern even the performance of the Nigerian banking sector.
    Banking sector distresses as well as outright bank failures in Nigeria dates back to 1930s. However, the period between 1892, when the African Banking corporation was established in Nigeria and 1952 witnessed the emergence of many banks in the financial system. Most of the banks collapses with the rapidity with which they sprang up the mainly to poor asset management, lack of adequate capital, inexperienced personal, insufficient business patronage and speculative operating. Following the spate of features, the first banking ordinance was exacted in 1952 to regulate banking activities in Nigeria. The main provision include requirement of business, minimum capital, reserve requirement and credit exposure limits. The ordinance was amended in 1958 and the central bank AG also came into existence.
    Furthermore, a division responsible for bank examination in the federal ministry of finance was established to the central bank in January, 1966. The legal framework for bank supervision was further strengthened by the promulgation of the banking decree of 1969 and the banks and other financial institutions decree (BOFID) 25 of 1991. The Nigerian financial system, particularly the banking sector has witnessed several reforms and developments since late 1980s sequel to the implementation of the structural adjustment programme (SAP) which took effect from economic reform programme. Consequently, there was a tremendous growth in the number and types of market participants, volume and complexity of the operation as well as number of products offered due to increased competition. The upsurge in the number of banks operating in the country between 1989 and 2002 engendered increased competitions among operators which resulted in excessive risk taking, sharp practices, large volume of non-performing credits, insiders abuses, bend room squabbles, increased wave of fraud, self-saving management practices and financial distress in the system. It was against this background that remedial measures were taken to revenge the entire banking system in Nigeria.
1.2    STATEMENT OF RESEARCH PROBLEM
    The issue of Banks distress and its impact on a nation’s economy cannot be overemphasized. It remains in the front banner of most national issues affecting the Nigeria economy today. Several empirical studies conducted by finance experts within and other countries have shown that banks distress is a major set back to any nations economic growth and development. This is the reason why the policy makers specifically the Apere  bank in Nigeria (CBN) has taken some bold steps to ensure hence the recent banks reconsolidation in the Nigerian economy.
    Again, banking industry plays a crucial role in an economy and it should be noted that the soundness of the banking system of any country is an indicator of the strength of that country’s economy.
    The prominent role plays by the banking industry calls for proper scrutiny of their activities as distress banks in the past have led to many investors/depositors moving their deposits elsewhere.
    In view of the above, therefore, the study seeks to provide answered to the following research questions,
i.    What are the impact of banks failure on the Nigerian economy?
ii.    What are the effects of banks distress on investment in Nigeria?
iii.    What are the effects of banks distress on the standard of living in Nigeria?
1.3    OBJECTIVE OF THE STUDY
1)    To determine the impact of bank failure on the Nigerian economy.
2)    To determine the impact of banks failure on investment in Nigeria.
3)    To determine the impact of banks failure on the standard of living in Nigeria.
1.4    RESEARCH HYPOTHESES
a)     Ho:     Bank failure has significant impact on the Nigerian economy.
Hi:     Bank failure has no significant impact on the Nigerian economy.
b)    Ho:    Bank failure has significant impact on investment in Nigeria.
Hi:    Bank failure has no significant impact on investment in Nigeria.
c)    Ho:    Banks failure has significant impact on the standard of living in Nigeria.  
Hi:    Banks failure has no
significant impact on the standard of living in Nigeria.  
1.5    SCOPE OF THE STUDY
    For the purpose of this study, the financial distress in the banking sector will focus on commercial banks since they are the major players in the banking sector. The data for the study will be sourced from various publications of the central bank of Nigeria annual report, federal office of statistics, relevant texts and materials from the internet.
1.6    SIGNIFICANCE OF THE STUDY
    The issue of banks distress has been like a threat to economic development because the banking industry plays a major role in the Nigeria economy and it is important to note the fact that a good banking industry is an indicator of a progressing economy.
    Therefore, the results of this study will be of great relevance to remains stakeholders such as policy makers in government, fund seekers, investors and portfolio managers, financial analysts, academia, researchers, students of banking and finance and similar disciplines in the management sciences.
a)    Policy makers in government: Due to its significant role in economic development a healthy banking industry has a positive effect in an economy. Therefore, it is important for policy makers in government to do all they can do to ensure policies that will help the banking industry. Consequently, if the result of this study shows that bank distress has a negative impact on the Nigerian economy, policy marker will adopt measures to addressed issues that lead to banks distress. This will help to prevent banks distress hence rapid economic development in the Nigerian economy.
b)    Fund Seekers: Results of the study will also be of significance of funds seekers as it will create an impression in their minds on the need to pay back advance they seek for because failure to do so as a factor that leads to banks distress hence poor economic development.
c)    Investors and Portfolio Managers: Results of this study will be of great significance to investors because of the implication it will have on their returns for funds invested on the distressed banks. If the banks are distressed it means a high level of risk of loss on investment but if not distress it implies that confidence will be boosted on assured positive returns on investment overtime.
d)    Financial Analysts: Financial analyst will find the results of this study very significant as it will provide them the opportunity of checking the consistency of the result with theory as well as with existing literature, such compassion will equip the financial analyst with relevant results to make reasonable generalization about the stains of the Nigeria banking industry.
e)    Academia: The results of this study is of great significance of the academia in the sense that it will serve as an added knowledge to an already existing one. It will equally help the academia know the areas that could be improved upon.
f)    Researchers: Researcher will find the result of this study useful as some may be interested in verifying such results while others may wish to replicate the study using same or different methodologies. It is important to note as well that results of this study will constitute the basis for further studies.
g)    Students of Banking and Finance: Lastly, results of this study will constitute data that will be useful to students of banking and finance as well as allied disciplines in the management sciences.
1.7    LIMITATION OF THE STUDY
    In the lenses of carrying out this study, some level of constraints were observed. It is important to note that some of these constraints include the imprecise measurement of variables, inability to gain access to data from the CBN freely, timing and financial problems, accessing relevant site in the internet.
1.8    ORGANIZATION OF THE STUDY
    This study will consist of five chapters. The first chapter which is the introduction section briefly gives the aims, objectives, problems of the study. The second chapter will be a review of relevant literature. Chapter three will focus on the methodology of the study, chapter four deals with analysis of results and while chapter five focuses on the summary, recommendations and conclusions.
1.9    DEFINITION OF TERMS
    Apere (CBN): This refers to the Central Bank of Nigeria (CBN). Every country in the world has only one Central Bank whose motive is not to make profit but to carry out the major financial operations of Central government of the country.
Bankruptcy: A bank is described as being bankrupt if it is without enough money to pay what it owe.
Capital Market: This refers to the market for long term funds. It has both securities based segment and man securities based segment i.e stock market and market for long term loans.
Discount houses: This is the place were trade instruments are eligible for rediscount at central bank of Nigeria.
Depositors: This refers to person(s) who put money in a bank account.
Distress: This is an unhealthy situation or a state of inability or weakness which prevent the achievement of set goals and aspirations.
Money market: The money market is the channel through which short term debt instruments are trade. The major function of the money market is to facilitate the raising of short term funds for the deficit sectors of the economy from the surplus sectors.
Financial distress: This is a situation whereby a bank or an institution is unable to meet its financial needs i.e not having enough capital at present.
Financial Institutions: This is an institution set up purposely for safe keeping of money, valuable goods and documents like will.
Investors: This refers to a person(s) or an organization that invest money in something with the hope of making profit at the end of the investment.
Primary data: These are direct data from the observation of the study including responses to questionnaires.
Secondary data: These are already made data i.e data collected from federal office of statistics, Nigeria stock exchange etc.
Treasury bills: These are short term (91 days) obligations of federal government to pay the bearer a fixed sum of money after a specifics number of days from the date of issue.
Solvency: This when a bank is able to discharge its facilitates.