Major Causes of Bank failure in Nigeria

Last Updated on July 1, 2024 by admin

You will learn the cause of bank distress and failure in Nigeria from this post. The identification of principal factors in bank failure is usually an empirical issue. Distress in Nigeria’s banking system should have been known to emanate from a number of inter-related factors such as institutional factors ,Economic and political factors and regulatory and supervision measures.

However, there has been a debate about the major causes of bank failure ,while bankers usually blame the failure on external factors such as inappropriate government policies, supervision attributed bank failure to poor management and depositors invariably blame inadequate supervision and weak management.

3 Major Causes of Bank failure in Nigeria

1 Regulatory and Supervisory

The various policy reforms introduced by the government and the CBN in rapid succession and the technological changes appeared to have put the regulatory and supervisory framework under several stress. as the regulatory framework was unable to keep pace with the rapid changes in the banking industry. while, supervisory resources were overstretched especially as a result of phone mental growth in the number of banks and Non bank financial institutions.

2. Institutional Factors.

i : There are endogenous factors which are largely within the control of the owners and management of the bank. They are also the most profound factors that led to the distress condition. This assertion is corroborated by the finding of an empirical study on the cause and dept of distress in the financial services.

The Major institution factors and the extent to which they contributed to distress in the banking industry had been analyzed as follows.

ii Abuse ownership and weak Board of Directors.: In Nigeria, the extent of abusive tendencies vary with the nature of the ownership of distress banks and they include the following.

The private owned bank were inflicted by undue interference and passive influence dominant shareholders such as shareholders were unable to recruit and or retain competent management team

ii] Many owners and directors abused or misused their privileged position or breached their fiduciary duties by engaging in self serving activities of granting of unsecured credit facilities to owners, directors and related companies which some cases were in excess of their bank’s statutory lending limits in violation of the provision of the bank and other financial act BOFIA of 1991 as amended.

iii] Granting of interest waivers on non-performing insider credits without obtaining the CBN approval as required by BOFIA

iv] Diversion or conversion of bank’s resources to service their other business interests such as allocation of foreign exchange without naira cover to insiders which later crystallized as hard core debts.

v] Compelling their banks to directly finance trading activities either through the banks or other proxy companies ,the benefits of which did not accrue to the banks. Where losses incurred , they were passed to the banks.

VI ] Loans were granted without collateral and even where secured, the collateral were found to be inadequate or non-existent. Credit administration was found to be weak as credit was not being properly appraised and monitored.

Lending to the government and their related agencies also contributed to the distressed condition of many banks in Nigeria .As part of the supervision measure aimed at addressing the distress in the banking system.

The NDIC negotiated on behalf of creditor banks and got the federal Government to repay the principal portion of debt in 1997 NDIC disbursed a total of N3 billion to 74 creditor banks. However, by the time the funds were released it was too late to address the twin problem of liquidity and the insolvency in some of the distressed banks.

Some of the banks had no funding or placement policies which would have place limits and discrimination against unsound banks. This weakness resulted in mass cross defaults in the inter-bank market. Indeed some banks resorted to seeking redress in the court as a result of which various valuable bank assets were carted away.

In most of the banks that failed little attention was paid to sound assets -liability management. Loans were granted without regards to the tenor and nature of the funding base of the banks.

As a result in 1989 the withdrawal of public sector deposits from the bank and transfer of the same to CNB triggered a serious liquidity crisis as manifested in the overdrawn positions of many banks and cross defaults in the inter-banking market.

It would be recalled that in order to ameliorate the situation ,The CBN and NDIC had to provide liquidity support through accommodation bills guaranteed by the NDIC and later discounted by the CBN. About 10 banks benefited from the N2.3 Billion accommodation bills. Majority of beneficiaries .

vii] Inadequate Capital

The banking industry witnessed a steady and large-scale deterioration in capital positions until 1998 when a large number of the banks were closed with the trend of recapitalization.

The capital deficiency is a results of many factors ,Firstly, some of the banks were established with inadequate capital and failed to increase their capital base to meet the growth in their risk assets portfolio. Increase processions for loans as a result of increasing level of non- performing loans further eroded the capital funds of many banks.

3. Economic and Political Factors

Since the early 1980’s a number of factors, national and international, had induced greater instability in the economic environment for the Nigerian baking industry. After the collapse of the oil prices in the mid 1981, The nation witnessed large fiscal deficits, large debt burden, high rate of inflation and low rate of economic growth. These adverse conditions made it difficult for borrowers to service their debts resulting in higher level of non performing loans.

As part of the structural adjustment programmed ,SAP introduced in 1986,the CBN initiated a wide range of reforms which include the liberalization of licensing of banks, deregulation of interest rate and exchange rate, gradual removal of credit allocation and the introduction of Open Market Operation OMO in place of direct monetary control tools.

While the deregulation of interest rate resulted in substantial increase in the lending rates, the liberalization of the exchange rate led to substantial depreciation of naira.

Frequently ask question

Q: What are the main causes of bank failure in Nigeria?

A: Several factors contribute to bank failure in Nigeria. Some of the most common include:

Poor corporate governance: Weak internal controls, lack of transparency, and poor management decisions can lead to mismanagement of funds and increase the risk of failure.
Non-performing loans (NPLs): High levels of NPLs, often caused by poor credit risk management and inadequate loan recovery processes, can weaken a bank’s financial position.
Inadequate capital: Insufficient capital to cover potential losses can make banks vulnerable to financial shocks and economic downturns.
Macroeconomic instability: Economic instability, such as high inflation rates and currency fluctuations, can negatively impact a bank’s operations and profitability.
Fraud and insider abuse: Fraudulent activities and insider abuse can lead to significant financial losses and damage a bank’s reputation.
Weak regulatory oversight: Inadequate supervision and enforcement by regulatory authorities can allow for risky practices to go unchecked.

Q: What are the consequences of bank failure?

A: Bank failures have significant consequences for the Nigerian economy and its people. Some of the effects include:

Loss of deposits: Depositors may lose their savings, which can have devastating consequences for individuals and businesses.
Economic instability: Bank failures can trigger financial crises, leading to economic instability, reduced investment, and job losses.
Loss of confidence in the banking system: Bank failures can erode public trust in the financial sector, making it difficult for banks to attract deposits and provide credit.

Q: What steps are being taken to prevent bank failures in Nigeria?

A: The Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation (NDIC) are working to strengthen the banking sector and prevent future failures. Some of the measures include:

Enhanced regulatory oversight: Stricter regulations and supervision are being implemented to ensure sound banking practices.
Improved corporate governance: Banks are being encouraged to adopt better corporate governance practices and strengthen internal controls.
Increased capital requirements: Banks are required to maintain higher capital levels to buffer against potential losses.
Deposit insurance: The NDIC provides deposit insurance to protect depositors’ funds up to a certain limit.

Q: Can bank failures be completely prevented?

A: While it may be difficult to eliminate bank failures entirely, the ongoing efforts by regulatory authorities and the banking sector are aimed at minimizing the risks and protecting depositors’ interests.