1.0 BACKGROUND OF STUDY
Banking is associated with different kinds of risks. Although some of these risks like liquidity risks and credit risks have been as a result of rules and regulations guiding the industry.
Failure is a word, which almost nobody would like to be associated with. Everybody would like to succeed, to grow bigger, to excel rather them to fail. In the immediate past up to the turn of this decade, it was only an issue of debate whether or not bank will fail again in Nigeria after the mass bank failure of the 1950’s.
The area of SAP and deregulation equally increased number of banks in Nigeria. Such failures seemed unlikely because the Nigerian banking industry appeared to have been resilient in its boom. Banks kept on reporting huge profit which is fact were more “paper profit”. This created impression that all was well with the industry. This euphoria led to the emergence of new banks (both merchant and commercial) and other financial institutions. Unfortunately many banking exports erroneously believed that the fears of bank failure were unfounded. In an attempt to dispel such fears Nwankwo even argued that though well founded in the early history of banking in the country, that environment in different bank failures constitute a very big problem to the economy and should be carefully avoided for occurrence in the economy. When a bank is unable to meet the bank examination rating system (CAMEL) this always lead to bank failure.
Here: C Stands for capital adequacy
A Stands for assets quality
M Stands for management competency
E Stands for earning strength
L stands for liquidity sufficiency
Bank failure occurs in a bank if such a bank fails to meet such rating standard and this was what happened to so many banks as of 1950’s.
Many banks have been established in Nigeria both commercial and merchant banks. They increase in number every year. They declare in papers profits generated in their business for the year. They introduce many consumer products, despite all these banks are still failing in form of distress. Good credit management, laws and principles are introduced to enhance banking business. Regulatory bodies like NDIC, Corporate Affairs Commission, Insurance Companies are established to avoid the issue of bank failures in the banking industry. After all those effects we still experience bank failures.
The question now is why do banks fail after all the provisions made to avoid it. Why is it that all these efforts don’t prevent bank failure?
The research work intends to:
Having been the rate at which banks fail in Nigeria, the researcher has the following objectives over the topic “Effects and causes of Bank failure in Nigeria”.
The following research questions were administered for purposes of this study.
It is assumed that all the secondary data collected is reliable and the method used is correct.
The study is concerned generally with the effects and causes of bank failure in Nigeria and it is not limited to any sector.
The researcher encountered some problems in the course of carrying out the research. He encountered the problem of time limits, financial handicap, protocols from offices where some information were sourced. He encountered the problem of lack of good materials and a secondary data for the research. He was unable to meet the bank examination rating system known as “CAMEL” under this criterion a banks performance is assessed based on its ability to meet the following five conditions VIZ.
Capital adequacy
Assets quality
Management competency
Earning strength
Liquidity sufficiency
Anyawaokor (1996) defined distress as state of financial difficulties. He said that if the problem is widespread, the bank is labeled distress bank.
Having seen the rate at which Nigerian commercial and merchant banks fail, the researcher decided to carryout this research work to see how the ugly situation could be tackled. This project solves as one of the solutions to the problems of bank failure among Nigeria commercial and merchant banks.
Banks will find it rewarding to use this material, because it vividly highlighted the meaning of bank failing, causes, effects and solution to it.
For the purpose of this work emphasis will be laid here to explain the terms involved in the topic.
Fraud is defined as an act by which one person intends to gain a dishonest advantage over another person. Gavin MCFARLANE defines frauds as a conduct based on deceit forgery on corruption. It is an irregularity for distortion of financial statements.
a. Internal fraud: Those that are perpetrated exclusively by members of staff like cashing fraud.
b. External fraud: Those which are committed exclusively by outsides without the proven connection of bank staff e.g. signature forgeries.
c. Mixed fraud: Those that are facilitated with the collection of bank staff and the outsides.
d. Teeming and lading: A peculiar method of stealing by the receiving cashier particularly in the rural area. It is perpetrated by suppressing tellers and misappropriating the fund. The cashier diverts the found into his own use.
e. Telex fraud/computer fraud: Telex fraud involves tempering with coded transfer instructions in such a way that the wrong person (fraudster) receives the proceeds of the telex message. Computer frauds are more destructive to an establishment than any other kind of fraud.
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