A STUDY OF THE IMPACT OF FINANCIAL DISTRESS ON NIGERIA COMMERCIAL BANKS

CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND TO STUDY

A bank can be defined as an organisation whose principle operation is concerned with the accumulation of temporarily idle money of the general public from the purpose of advancing to others for expenditures. John Paget defined a bank as “A corporation or person(s) who accepts money on current account pays cheques on such account on demand and collects cheques for customers” Oxfords advanced learners dictionary defined a bank as an organisation or place that provides a financial service or a place where something is stored ready for use.

The establishment of modern banking in Nigeria dates back to the colonial era when the African banking corporation was formed in 1892 to distribute currency notes of bank of England for the British Treasury subsequent developments were encouraged by colonial trade.  In the bid to address the credit needs of indigenous enterprenurs, Nigerian later ventured into the banking business, initially through private individual initiatives and later through deliberate government policy.

The problem of distress in the financial sector, including outright bank failure, has been observed in Nigeria as far back as 1930 when the First Bank failure was reported.  Indeed, between 1930 and 1958 when the Central Bank of Nigeria was established, over 21 banks failure were recorded. However, the degree of intensity and scope of the distress has never been as serious as had been observed since June 1989 when the government directive to withdraw deposits of government and other public sector institutions from bank to the CBN exposed the weak financial condition of most financial institution and the severity a problem has progressively increased. The distressed condition has been traced to a wide range of causes, some of which are listed on literature review. Eventually, when distress come into the scene, tears of loosing fund to the banks influenced negatively, in the commercial bank.

1.2    STATEMENT OF PROBLEMS

With the ware of distress spreading in the finance companies, community banks and primary mortgage institutions a total of 24 banks were distressed in 1993, as against to in 1992, 31 finance house were classified distressed while 118 were in default of matures obligation, 456 complaints against 156 finance companies for non resumption of mortared funds however, total assets on liabilities of 395 finance firms stood at N13.38 billion in 1993 as against N2.44 billion reported for the proceeding year (2012).

The situation was attributed to the followings:

1. Prevailing economic recession, policy induced stock poor and detonating assets quality arising from large portfolio of non-performing credit, non maintenance of assets and liability.

2. Poor management bothering on sharp practice and lack of experience, which is the most serious problem, associated with bank distress in the commercial bank.

3. Ineffective inefficient and poor performance of the financial sector on the role of promoting and supporting economic development in the commercial bank.

The problem in focus above, triggered off the interest of the researchers to carry out study.