Banking is in the midst of change that has arisen due to economic depression. As government seek to improve economic efficiency and better allocation of resources to solve the problem of economic depression, policy makers are shifting towards openness, competitiveness and market discipline. In response to the developments, Deposit Money Banks in Nigeria engaged in financial sanitizing, management strengthening, corporate refocusing, Business Process Reengineering (BPR), mergers and acquisitions in order to survive the depressed economy. This whole process is called survival strategies through corporate restructurings.
The writer made efforts to discuss issues, facts and environmental factors surrounding the wave of deposit money banks’ survival in a depressed economy like Nigeria. The impact of this research in banks was gleaned from five performance indicators namely total assets, total deposits, loans and advances, profit before tax and shareholders’ funds, of First Bank of Nigeria Plc. The research looked at the position of these indicators before and after the sanitizing exercise undertaken by the banks for survival and also, its impact on the entire banking system bearing in mind the effect of globalization on the financial market in particular and the economy at large.
Chapter four shows the presentation and analysis of First Bank’s financial statement with the use of chart, tables, bar chart and graph.
Chapter five summarizes all that was discussed from chapter one to four and gave suggestions on how deposit money banks can survive in a depressed economy.
Finally, this researcher leaves this work open to constructive criticisms and expects future scholars to delve into further research and improve on this work.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study - - - - 1
1.2 Statement of the Problem - - - - 9
1.3 Objectives of the Study - - - - 11
1.4 Research Questions - - - - 12
1.5 Scope of the Study - - - - - 12
1.6 Significance of the Study - - - - 13
1.7 Limitations of the Study - - - - 14
1.8 Definition of Terms - - - - 15
CHAPTER TWO:
2.1 Issues in Bank Survival - - - - 17
2.2 An Overview of the Operating Environment for
Nigerian Deposit Money Banks - - - 19
Services in Banks - - - - - - - - 36
Deposit Money Banks - - - - - - 47
CHAPTER THREE:
3.1 Research Method - - - - - - - 65
3.2 Determination of Population size of the Study - - 65
3.3 Determination of Sample size - - - - - 67
3.4 Method of Data Collection - - - - - 68
3.5 Method of Data Analysis/Interpretations - - - 69
CHAPTER FOUR
4.1 Financial Statement of First Bank
Plc for the Month ended 31st March - - - - 71
4.2 Analysis of Total Assets - - - - - - 73
4.3 Analysis of Total Deposits- - - - - - 77
4.4 Analysis of Loans and Advances- - - - - 80
4.5 Analysis of Profit Before Tax - - - - - 86
4.6 Analysis of Shareholders’ Funds- - - - - 89
CHAPTER FIVE
5.1 Summary - - - - - - - - - 93
5.1.1 Total Assets - - - - - - - - 93
5.1.2 Total Deposits - - - - - - - 93
5.1.3 Loans and Advances - - - - - - 94
5.1.4 Profit Before Tax (PBT) - - - - - - 95
5.1.5 Shareholders’ Funds - - - - - - 95
5.2 Conclusion - - - - - - - - 96
5.3 Recommendation - - - - - - - 96
Bibliography - - - - - - - - 99
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Nigerian economy is faced with national and global economic challenges and as such, the financial institutions, especially the banking sector has an option of sanitizing and restructuring its operational processes in order to survive the depressed economy, as well as embarking on a consolidation exercise which would have some wider structural effects on the industry and on the economy as a whole.
Basically, banking is a service industry operated by human beings for the benefit of the general public while making returns to the shareholders. As such, it is natural that the services provided thereof by the industry cannot be 100% efficient; however, there is always a room for improvement. It is on this statement that the index of our further discussion on this study is based.
The banking sector in the third world economies has been grossly under managed when compared with their counterparts in the developed countries of the world. This has made it imperative for Nigerian banks to sanitize and restructure their operational processes so as to be in line with the global trends, and to survive the depressed economy.
Before the introduction of Structural Adjustment Programme (SAP) in 1986, the banking sector was characterized by few banks. The operators of these banks had almost total control of the business of banking as customers had to look for their services which most of the times were of poor quality. The managers, because of the pressure to provide banking services, had little time to market their bank services or design new products to improve their customers’ service and at the same time, they received changes based on the approved tariff. Competition was minimal and customers could spend long hours trying to obtain service in the banking hall due to long queues.
The quality of the bank staff was poor. They were rude to their customers and most of the time; they felt they were doing a favour to their customers. As at that time, no Nigerian bank had neither a simple computer nor a network of computers for online banking. In the area of credit appraisal, Ezeikpe (1993) observed that they were two conservative in extending credit facilities. The system was highly under banked while the payment mechanism was filled with imperfection such that locally drawn cheques took more than one week to clear.
However, with the introduction of Structural Adjustment Programme (SAP) and its policy of deregulation and liberalization, some structural reforms were ushered into the banking sector. By this policy, direct management and rigid controls in banking and security business by the government were de-emphasized for a broad based and private sector driven process. Laws inhibiting competition were removed to ensure that banks are reasonably sound, competitive and efficient.
The traditional reforms were aimed towards achieving the following objectives:
1. A strategy for competition.
2. A sound organizational structure and effective management to support the strategy.
3. To ensure management of critical financial and operating risks in banking.
4. A system for planning, budgeting and measuring performance.
5. Entrenching a programme for human resource management.
6. Ensuring a strong and effective internal control.
7. Putting in place the most appropriate Information Technology (IT) to automate the process. Without any doubt, this policy was geared towards enabling banks to respond flexibly to monetary conditions and to facilitate an effective mechanism for transmitting the effect of monetary policy to the real sector.
The policy of liberalization ushered in an era of bank proliferation and reduction in professionalism. Investors rushed into banking business with about the same zeal with which they embraced contracts during the oil boom era of the 1970s. In no distant time, signals of distress started manifesting in the banking sector by way of liquidation. Some factors were identified as the causes of the distress that besieged the banking system. These factors included:
1. Under capitalization which made the capital structure of some of the banks to be inconsistent with their risk asset profile.
2. No clearly defined lending policies and credit appraisal techniques.
3. Unprofessionalism in the conduct of bank staff.
4. High incidence of bad debts and non-performing facilities.
5. Boardroom squabbles and undue interference of the board in the day-to-day management of the bank.
6. Poor staff quality which arose due to the absence of retraining, and giving lip service attention to human premium.
7. Incompetent management.
8. Conflict of interest and insider abuse.
9. Policy problem or delay and inadequate institutional arrangement and structures on the part of the regulatory authority before implementing policy changes thereby creating unhealthy and avoidable suspense and uncertainties.
10. Inadequate prudential regulation and framework for credit classification.
11. The sudden withdrawal of public sector deposit from the banking system to Central Bank in June, 1989.
12. The epileptic stabilization securities and their lack of clear guidelines or modalities with respect to timing, mode of computation and amount
The list is almost unending but one can observe from the above that apart from the last four (4) points which are externally induced stock, the rest are problems that can be controlled with appropriate in-built mechanism of internal control in the individual banks.
In the face of all these problems and uncertainties, the option available for the system to have a better control of these factors is to sanitize the bank internally and externally for survival. Aderingbe (1997) observed that “for Nigerian banks to remain relevant in the next century with the current incursion of technology and globalization of the world market, they have to learn how to sanitize their operations for survival.” Also Elumelu (1998: 26-27) observed that “the recent N25 billion recapitalization of Nigerian banks has made banks to go into several arrangements for its continued relevance. This has resulted into arrangements like mergers, acquisitions, take-overs, re-engineering etc.”
The issue of bank survival through restructuring and sanitizing does not exist only as a failure resolution strategy. However, it can be adopted in solving so many operational problems of corporate organizations. The financial service industry has applied it in many operational problems. In acknowledging the strategies and its impacts in the banking sector, a world bank report in the United States of America shows that for the year 1992-’96, the banking industry accounted for 13% of mergers, acquisitions and other survival activities by number of institutions and 12% by dollar amount and ranked first among other industries’ survival through sanitizing activities. However, certain global factors have been identified as haven contributed to the result in an upward trend in survival and sanitizing activities; these included:
1. The dismantling of regulatory barriers and regional economic groupings which jerked up the pace of globalization.
2. The recent advancement Information Technology (IT) and the new rate of interest in banking.
3. Continued institutionalization of the market participants as opposed to individualization.
4. The need for an enhanced payment mechanism.
5. The increase competition in the financial services delivery. The survival strategies and the impact of sanitizing the Nigerian banks have resulted in emergence of strong new local banks fully 100% owned foreign banks or both local and foreign participation in owners such as Citibank and NBM, Stanbic Merchant bank within the limited availability of component manpower.
Mike Hunder (1997:12) in his crusade for re-engineering, restructuring, sanitizing and survival, opined that, “as competition among banks become keener in the face of declining market margins, banks’ management have to manage the hard way of re-engineering.”
As the banks are devising ways of improving efficiency and ensuring the optimization of the available resources, policy makers and regulatory authorities are moving towards openness, competiveness, and at the same time ensuring market discipline. This is in tandem with the trend in the banking sector globally. Ahmed (2000:33) described this development as a magic one which caused quite a substantial number of Nigerian banks to be sick while some became healthier. In his view, he contended that growth in the banking sector should be transmitted easily into growth of the real sector. But as banks continued to record impressive growth in all economics, indices show a declining margin of economic growth. This makes one begin to wonder where the impacts of the impressive performance of the banks as reported in the financial reports are being felt. Even the NDIC which is established to insure the deposit liabilities of licensed banks has liquidated some distressed banks. The action, Ezeikpe (1993: 36-38) commended while arguing that some distressed banks should be liquidated as a way of survival for the banking system.
It is on this argument that this work lies to assess the survival strategies of deposit money banks in a critically depressed economy with special reference to the First Bank of Nigeria Plc, paying attention to its performance, growth and stability.
1.2 STATEMENT OF THE PROBLEM
Evidence has shown that the banking business is undergoing several transformations. With the increased deregulation and liberalization of the business, their structural changes are unavoidable; hence, the current wave of restructuring in the sector is to respond adequately to the fast changing and increasingly competitive business in order to survive. Banks that are unable to restructure in line with the global revolution in the industry should be ready to go down the drain in the process and be liquidated.
Between 1991 and 1997, a total of 31 Nigeria banks have been liquidated by the NDIC due to their protracted problem of distress, but some of the casualties would have been averted if appropriate restructuring strategies were implemented.
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