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CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

The importance of a banking sector in any economy derives from its role of financial intermediation; provision of an efficient payment system and facilitating the implementation of monetary policies.  Hence, an efficient and effective banking sector is essential not only for the promotion of efficient intermediation but also for the protection of depositors, encouragement of healthy competition, maintenance and protection against systematic risk.

The banking system as noted by Schempeter (1934) is regarded as a key agent in the process of development, because all other industries rely on it for working capital.  But, the Nigerian banking system in caught in systematic turmoil, there has been a rapid increase in the number of bank failures and the magnitude of the problem has reached an unprecedented level; the problem has assumed a generalized dimension thereby making it an issue of concern to the government, the regulatory authorities, the bankers, the general public and the international financial institutions such as the World Bank and the International Monetary Fund (IMF).

Distress in the Nigerian banking system dates back to the 1950’s when about 51 banks were forced out of the system following the introduction of the very first banking law in Nigeria.  The Banking Ordinance of 1952, the above ordained and the Central Bank of Nigeria Act of 1958 brought some element of sanity into the system.  The second phase of distress was experienced in the system after the era of Structural Adjustment Programme (SAP), which deregulated the economy; as a result led to the influx of the system with both efficient and inefficient banks, owing to the fact that banks licensing was liberalized.  Thus increasing the number of banks in the country from 42 in December 1991 (Oleyemi 1995:50) when SAP was put to an end following the enactment of Bank and Other Financial Institutions (BOFI) Decree N0. 25 of 1991.  The above represents an increase by about 186 percent in less than a decade.

In many societies, liquidation is an unpleasant word because of its negative connotations. It connotes wiping out what was once in existence, winding up a company, killing what was once alive or destroying what had been carefully built over time. When the word is applied after a bank, it is even more frightening. This is so because banks are expected to be safe havens for people’s money and valuables; thus the thought of liquidating such havens is understandably uncomfortable. The discomfort arises from the potential losses that might be sustained by the banks’ stakeholders, namely depositors and the society at large (NDIC, 2008: 2). With many banks in Nigeria classified as distressed, some licenses withdrawn and some banks acquired by the Central Bank of Nigeria (CBN) at a shameful purchase price of N1 per bank, the issue has ceased to be whether banks will fail or not (CBN / NDIC, 1995).

Almost every concerned person is rather asking what will be the possible causes of bank distress, how can problem banks be identified and problems averted (Anyanwaokoro, 1996: 208). Committee on Banking Supervision (2001) traces the history of financial distress in the Nigerian banking system back to the 1930s when about 21 bank failures were recorded prior to the establishment of the CBN in 1958. The financial crisis was attributable to a number of reasons including the under-capitalization of banks, weak management, inappropriate corporate governance structures, reckless use of depositors’ funds, excessive growth (over-trading), lack of liquidation and supervision, politicization and non-performing loans. Poor loan quality had its roots in the informational problems which afflict financial markets, and which are most acute in developing countries.

In Nigeria, many indigenous banks which commenced operations in the early 1950s went into voluntary liquidation in the mid-1950s with such rapidity that confounded society. Some of the depositors were 2 reported to have lost their lives as a consequence. At that time, there were neither banking liquidations nor an institution to see to the orderly liquidation of failed banks. The banks simply closed their doors, never to reopen them (NDIC, 2008:2). Another financial crisis in Nigeria, which started in 1989 with the identification of seven distressed banks, worsened gradually until 1993 when it led to the collapse of the inter-bank market and spread to all segments of the financial system. The ability of the supervisory agencies to contain, manage and resolve the distress syndrome was severally handicapped due to the absence of a comprehensive regulatory framework for distress management.

Banks provide important benefits to the community, and facilitate the objectives of financial liberalization, by boosting competition in banking markets, stimulating improvements in services to customers and expanding access to credit, especially to domestic small and medium-scale businesses. Financial liberalization in Nigeria brought in its wake a variety of financial institutions operating in the country. Commercial banks increased from 29 in 1986 when financial sector reforms began, by over 124% to 65 in 1992. New deposit-taking financial institutions also came on stream as a result of financial sector reforms. Among banks, these included community banks, the people’s bank and Mortgage banks, officially called primary mortgage institutions (PMIS). Among non-bank financial institution (NBIS) are finance houses or companies, unit trusts, and discount houses (Soyibo, 1996a). Unfortunately, the attainment of the benefits of financial liberalization in Nigeria has been jeopardized because banks have been vulnerable to financial distress (Brownbridge, 1998). Substantial numbers of banks have failed, mainly due to non-performing loans.

However, the study tends to examine the failed banks liquidation activities of the Nigerian Deposit Insurance Corporation NDIC an empirical analysis.

1.2       Statement of the Problem

Bank liquidation is implemented to ensure a sound and safe financial system in the economy. The measures are mainly concerned with the quality of risk asset in banks, compliance with key ratios such as liquidity ratio, cash reserve ratio, capital adequacy ratio amongst others, the quality of management and other corporate governance issues.

However, inadequate regulatory framework and lack of an effective risk asset database and information sharing system have contributed in no small measure in disrupting the activities of banks, thereby leading to the often-distasteful incidents of banking distress and liquidation by the regulators.

In line with this problem, various banking legislation/acts have been promulgated as well as the introduction of different strategies all aimed at increasing the efficiency of banking regulatory supervision. Among them are on-site, off-site banking examination, routine examination, special examinations culled at the instance of the regulators as well as other methods of surveillance to be discussed in subsequent chapters. These measures are mutually reinforcing and are designed to timely identify and diagnose emerging problems in individual banks with a view to presenting most efficient resolution directed towards ensuring continued public confidence in the banking system.

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