The Impact of Bank Distress on Commercial Banks

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 work, we will consider tow phase namely; the era of laissez – fair banking (1834 – 1952), the era of limited 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 and French Bank, the for – runner of present United Bank of 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 to the indigenous banks failed. The survived includes the National Bank of Nigeria established in 1933, the Agbonmagbe Bank (now Wema Bank) established 1945 and the African 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 the banks both expatiates and indigenous regulations to Ʃ100, 000 and Ʃ12,500 respectively and it is also introduced regulations to check bank failure. However, the entire 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 form British firms. The indigenous banks that survived were 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 staring 1988 with Central bank of Nigeria (CBN) directive to banks that naira backing for foreign exchange application be lodged with CBN. This 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 catches 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, 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 and put these at the disposal of deficit economic growth in the form of increased 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.