THE EFFECT OF BANK DISTRESS ON NIGERIA’S ECONOMIC GROWTH

The Effect Of Bank Distress On Nigeria’s Economic Growth

CHAPTER ONE      

   INTRODUCTION        

1.1     BACKGROUND OF THE STUDY     

Distress in the financial sector is a situation where financial institution has more liabilities than the value of their assets in the market. This can result to portfolio shifts which eventually cause the collapse of the financial system. Bank distress is many times confused with bank failure. In theory, these two terms are different. Bank distress comes before a bank failure. A distressed bank can recover whereas a failed bank has no chance of recovery.

Bank distresses have various unfavorable consequences which among them are on stakeholders and failure of banks. Sometimes the effects are felt by other sectors in the whole economy. A bank failure results to too much damage in the economy. This is because it affects the employment, earnings, financial development and other associated public interest.

Brownbridge (1989) states that in the 1980’s, there was closure of two local banks as well as taking over ten non-banking financial institutions by central bank of NIGERIA. Mamo (2001) also holds that after the financial regulation in 2000, NIGERIA suffered 39 bank failures which cost 10% of its GDP in terms of loans and grants.

Aburime (2009) stresses that bank distress means detrimental condition, immense pain in the banking activities which could be as a result of various factors. Some of these factors include discontinuity, policies and forgeries which are not consistent, mismanagement of poor loans and advances, board members interference and internal control which is poor. Bank distress is caused by bank conditions which may either be extrinsic or intrinsic. Ultimately, bank failure and unpleasant changes in the economic conditions of banks could be observed.

According to Mishra and Aspal (1991), the development of a country’s economy depends more on real factors such as the growth of industries growth and their development, upgrading of agricultural expansion of both internal and foreign trade. In the development of a nation, we cannot under estimate the important role of the banking sector and its financial way of doing things. In economic planning, banks and   financial institutions play a very significant role which is crucial. They set specific goals and allocate the exact amount of money to the government to ensure implementation of economic policies. A performance of any economy can be measured by the performance of the banking sector. The role played by a healthy banking system to the socio-economic and industrial growth of an economy is very important. It is the banking system that has been allocated the role of financing the planned economic growth. According to CBN (2008), the NIGERIAN banking sector was weighed down by a huge portfolio of Non-Performing Loans (NPLs) in the 1980’s and 1990’s. This led to the collapse of some banks. Borrowers who borrowed consecutively from various banks with an aim to default the loans were the major reason of this. This was possible due to lack of information between the creditors and the borrowers.

The Banking (Credit Reference Bureau) Regulations of 2008 oversee operation, licensing, and supervision of banks through CBN. CRBs offer help to the lenders; they enable them make faster decisions which are accurate. They collect, manage and make the lenders know the customer information within a provided regulatory framework. Since banks play a central role in improving financial services in an economy, credit bureaus help lenders to accurately make decisions within the shortest time possible.

According to CBN, NIGERIA’s financial system has improved significantly over the last few years and has become the largest in West Africa. NIGERIAN banking sector is credited for its size and diversification. NIGERIA has a variety of financial institutions and markets unlike other regions in East Africa. However, according to Beck et al (2010), there have been constrains in the growth of