ABSTRACT
This work “The effect of distress
resolution options on the profitability of commercial banks has the objective
of showing the effect of distress resolution options on the profit growth of
commercial banks. The causes of bank distress in Nigeria and the possible
prevention strategies or resolution options of bank distress. The review
of related literature was done to give an in depth knowledge of the topic to
the researchers. Both primary and secondary sources of data were used by the researchers.
Simple statistical tools like
T-test, least square (B) and tables were used to analyse the data collected.
The following findings were made; Banks made lower profit during distress
period and higher profit during distress period and higher profit after
distress period. Meanwhile, banks generally made lower profit during distress
period. We recommended that the supervisory arsenals to ensure minimum distress
with little or no effect when it occurs.
TABLE
OF CONTENT
Title
page
ii
Approval
page
iii
Dedication
iv
Acknowledgement
v
Abstract
vi
Table of
Content
vii
CHAPTER ONE
1.0
Introduction
1
1.1
Background of the
study
1
1.2
Statement of the
problem
5
1.3
Purpose/Objectives of the
study
5
1.4
Research
Questions
6
1.5
Research
Hypothesis
6
1.6
Significance of the
Study
7
1.7
Scope, Limitations and
Delimitations
7
1.8
Definitions of
Terms
8
CHAPTER
TWO
2.0 Review
of Related
Literature
10
2.1
Definition of Distress in Banking
Industry
10
2.2
Symptoms of Distressed Banks in
Nigeria
14
2.3
Causes of Banking
Distress
16
2.3.1 Capital
Inadequacy
18
2.3.2 Inept
Management
19
2.3.3 Ownership
Structure/Political
Interference in Management of Banks
20
2.4
Distress Management and Failure Resolution
Option
21
2.5
The Role of Banks in an Economic
System
30
Reference
33
CHAPTER THREE
3.0 Research
Design and
Methodology
35
3.1
Research
Design
35
3.2
Area of
Study
36
3.3
Population
36
3.4
Sample and Sampling
Techniques
37
3.5
Instruments of Data Collection
37
3.6
Methods of Data
Presentation
38
3.7
Methods of Data
Analysis
38
Reference
40
CHAPTER FOUR
4.0 Data
Presentation and
Analysis
41
4.1
Graphical Illustration of Banks Profit
43
CHAPTER
FIVE
5.0
Findings, Recommendation and
Conclusion
54
5.1
Findings
54
5.2
Recommendation
56
5.3
Conclusion
58
Bibliography
59
Appendix
61
PROPOSAL
The topic “The effect of distress
resolution options on the profitability of commercial banks in Nigeria.(A case
study of selected Commercial banks)
The Topic “The topic The effect of
distress resolution options on the profitability of commercial banks in
Nigeria” is posed to appraise the effect of distress on the profit growth of
commercial banks. It measures the way in which distress affects the profit of
commercial banks negatively or otherwise. It also offers resolution options
For effective execution of this work
a ten year profit trend of some selected banks will be evaluated. This ten year
profit will cover the period of distress and after distress for a proper
appraisal of the work.
Meanwhile the profit of these banks
will be collected using a primary data source (Annual Report) and secondary
sources of information and there primary data will be analysed using the most
appropriate statistical tools for an accurate result.
However, there will also be a
formulation of hypothesis which is based on the known negative implication of
distress. Though, this hypothesis and also there will be a formulation of
research questions which will be sample in relative to the objective of the
work for the best result.
After all, an inference will be
drawn based on the outcome of our statistical test. Based on the results obtained
in our tests there will be a recommendation thereof.
The distress in a bank made the
banks to have lower profit during distress period and higher profit after
distress permit, meanwhile, generally, banks made lower profit during distress
period, due to the insufficient cover of losses from the profit generate
internally was unable to generate internally positive capital.
The bank or some banks also
experience illiquidity or insolvency, this is resulting in a situation whereby
the banks could no longer met its liabilities and all there brings about
illiquid. These is also insolvent in the bank when the value of its realizable
assets is less than the total value of its liabilities.
Furthermore, the inability of a
financial institutions to bridge its primary obligation of creating credit and
loss of liquidity or the liability of the bank to turn assets into cash to meet
any abnormal demand for cash by their customers.
CHAPTER
ONE
INTRODUCTION
BACKGROUND OF THE STUDY
In any modern economy, the efficient
production and exchange of goods and services requires money and bank is the
instrument for affecting it. The last few years have been both traumatic and
revolutionary for the banking industry. The industry produced the largest
number of technically insolvent and under capitalized banks. The magnitude of
distress in the nation’s banking industry reached on unprecedented level making
it an issue of concern to the government, the regulatory authority, the bankers
and the general public.
The Nigeria banking scene was
characterized by changes designed to promote banking in the country. The
changes may be categorized into phases, but due to the nature of our work we
will consider two phases: namely, the era of laissez-fair banking (1894-1952),
the era of limited banking regulator (1952-1958). During the first phase,
banking industry was monopolized by foreign banks, principally the African
banking corporation which was the precursor of the (BBWA) British Bank for West
African the present First Bank of Nigeria the Barclays bank DCO (Dominion
Colonial and Overseas) the present day Union banks, and the British an French
Bank, the for-runner of the present United Bank for Africa. Although
discrimination against Nigerians by these banks led to the establishment of
some indigenous banks which unfortunately offers litter or no competition to
the foreign banks essentially because of their weak capital base or poor
managerial capacity. Consequently, all but three of the indigenous banks
failed. The survived includes the National Bank of Nigeria established in 1933,
the Agbomagbe Bank (now Wema Bank) established 1945 and the Africa Continental
Bank 1947.
A commission of inquiry headed by
G.D. patron set up in 1948 to investigate the business of banking in Nigeria.
Their report led to the enactment of the first banking legislation in Nigeria,
the banking ordinance of 1952. The 1952 ordinance laid down the standard and
procedure for the conduct of banking business by prescribing the mandatory
minimum capital requirement for banks both expatiates and indigenous banks at
the tune of ∑100,000 and ∑12,500 respectively and it also introduced
regulations to check bank failure. However, all the indigenous bank established
in the country during this period also all failed. The bank failures of this
era were attributed largely to the monopolistic structure of the banking
industry, which allowed the foreign banks to enjoy exclusive patronage from
British firms. The indigenous banks that survived was able to make it because
of the support they got from their state government.
The distress phenomenon in Nigeria
banking industry is of recent origin. The manifestation became discernable with
some policy shocks starting in 1988 with the Central Bank of Nigeria (CBN)
directive to banks that naira backing for foreign exchange application be
lodged with CBN. Thus was followed in 1989 by another directive requiring
public sector deposits to be transferred to CBN. These two directives exposed
the precious liquidity position of some banks and the distress they have
subterraneous harbored. What was thought to be a temporary liquidity problem
for few banks soon caught up with a lot more banks.
It is important to stress in this
work that banking system was already in distress by the time NDIC was
established. By them, about 7 (seven) banks were known to be technically
insolvent. The government at that time, did not embark upon a clearing exercise
that would have removed from the system that distressed institutions because it
was feared that such an action would lead to loss of public confidence and
flight of foreign capital more so there was no deposit insurance institution to
expeditiously manage such bank closures. The NDIC was nevertheless required to
insure all banks. That means that the corporation has been involved in managing
distressed banks even before it could settle down and minister enough resources
for this important task.
The intermediating role of banks and
their relevance both in the transmission of monetary policies and in the
payment system underscore their importance as well as the problem that bank
distress at the prevailing dimension in our economy could precipitate. Arising
from their intermediation banks generate financial resources ad put these at
the disposal of deficit economic growth in the form of increased employment of
otherwise idle resources and this in turn leads to increase output.
Therefore, an industry wide insolvency of banks, such as the one experienced in
Nigeria, should be expected to retard the economy’s rate of capital formation,
reduce its level of employment and output, and ultimately the pace of economic
growth.
1.2
STATEMENT OF THE PROBLEM
A serious problem posed by widespred
distress among banks is the threat to banking habit and the development of an
efficient payment mechanism. The loss of confidence, the after math of the
distress that hit the banking sector forced several business to take ferver
risks by taking back their fund to well established safe havens dominated by
older generation banks.
This research wok is therefore
concerned with “Evaluating the impact of bank distress on the profit growth
existing of commercial banks. Using ( A vase study of selected Commercial
banks).
1.3
PURPOSE/OBJECTIVE OF THE STUDY
The main purpose/objective of this
study is to have an overview of the effect of bank distress on the profit
growth of commercial banks. Investigate into the reasons for bank failure in
Nigeria.
Other objectives include:
- To evaluate the causes of bank distress in Nigeria. To find out the impact.
- To find out the possible prevention strategies or failure resolution options of bank distress.
1.4 RESEARCH
QUESTIONS
(1)
What are the causes of bank distress?
(2)
What is the impact of bank distress?
(3)
What is the profit growth rate of existing commercial bank during distress.
(4)
What are the effects of bank distress?
(5)
What are the possible solution options to this phenomenon in the banking scene?
1.5 RESEARCH
HYPOTHESIS
H1: Distress has
no effect on the average profit of commercial
bank
Ho: Distress has
effect on the average profit of commercial
banks.
1.6
SIGNIFICANCE OF THE STUDY
This research project will be of
importance of the following persons –
- New generation banks, which may wish to know the implication of banks distress in the banking industry and how to restore the confidence of the customers and uphold efficient payment mechanism.
- Nigeria deposit insurance corporation: The work could be of immense help to NDIC in the area of distress management and prevention strategies. And also in the area of failure resolution option in banking industry.
- Students who may wish to know the extent of distress in the banking industry and the trend of distress as it affect the modern banking will also benefit from this work.
1.8 SCOPE,
LIMITATIONS AND DELIMITATIONS:
While the banking impact distress in
Nigeria will theoretically serve as the population of study. The project is
designed to appraise the impact of bank distress on the profit growth of Union
Bank of Nigeria Plc, First Bank of Nigeria, United Bank for Africa and
Guarantee Trust Bank. It will also analyse the trend of these banks profit
within a period of 10 years (1992-2001).
1.8
DEFINITION OF TERMS
What is Distress? It can be defined as an extreme suffering caused by lack
of money or a state of danger, calamity and misfortunate acute poverty.
What is an Evaluation? This can also be defined as form of idea or judgment of
something and also to work out something in numerical value.
What is Impact? This can be define as a strong effect or impression to bank.
It is also a situation whereby something will be to be press closely or firmly
together.
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