CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Reports of banks adjudged financially distressed in the 1990s revealed that ownership category was one of the major variables that could be used to explain the degree of bank failures. Ownership structure, asset quality and quality of management are critical in determining bank soundness. In the 1990s, ineffective management was one of the major reasons for bank failures, especially those owned by private promoters and by state governments. Most of them were characterized by inept management and instability in the tenure of office of key management executives. Negative culture of inter-personal wrangling among some top management executives leading to polarization of the rank and file of staff persisted in the 1990s in most of the failed banks. Excessive operating expenses, in adequate credit administration, interest rate speculation, asset mismatching, overtrading, weak controls, boardroom quarrels, fraud and forgeries an overtly aggressive growth policy abandonment of prudent banking, persisted in those banks in the 1990s, all resulting in bank distress and failures, and turning some of the managing directors/chief executive officers into very important convicts (VICs) today. Bank failure could be caused by a combination of factors such as macroeconomic factors, regulatory factors or microeconomic factors. A major characteristic of the macroeconomic factor which cause bank crisis is that they are external and uncontrollable by the banks. These factors include among others, the volatility of the Gross Domestic Product (GDP), interest rate, high inflation, etc.
The rationale of banks, regulation rests on the need to protect depositors, reallocate credits to “socially desirable purposes prevent discrimination and ensure fairness in the functioning of financial markets. Regulation is necessary to ensure stability in the banking industry due to the unique element of systemic risk present in banking business. The other important factors almost directly related to poor management are the microeconomic factors. According to Sanusi, (1997) microeconomic factors which led to the Nigerian banking crisis are indicative of the quality of the decisions of the shareholders and the degree of efficiency of management operations. As equity-owners, shareholders choose the directors and key management staff of the banks. A majority of directors and key management staff in some Nigerian banks were appointed on the basis of flimsy considerations other than merit, proficiency, and experience in banking and finance. Sanusi (1997) posits that most of the appointments to managerial positions in the banks were heavily determined by tribal and political sentiments. This type of recruitment policy limits the quality of managerial personnel and perpetuates fraud and mediocrity within the banking subsector. Tribal and political factors result in low performance in banks because beneficiaries engage in “expense preference behavior which provides them with substantial personal rewards to the expense of their banks. Such frivolous behavior raises the operating expenses of banks and lowers profitability and distorts performance measures. In addition, some top managers and directors exacerbate the situation by making unsound and imprudent loans to themselves and their sponsors. The cumulative results of such behavior are increased loan losses and operating expenses, coupled with lower performance.
These factors were also responsible for the staggering doubtful and bad debts incurred by numerous state governments and privately owned banks. Political factors combined effectively with malfeasance together worsened banking operators. They bred insubordination, inefficiency and corrupt behaviors amongst bank operators. This gave room to boardroom quarrels, insider abuses, contravention of statutory regulations, etc. The incidence of frauds and forgeries in the Nigerian banking system questions the quality of internal controls and suggests the presence of syndicates of fraudsters. Another principal microeconomic cause of banking instability is swollen loan portfolios which result in low loan quality. Sometimes, banks rapidly increase their standards so as to attract more loans requests without correspondingly increasing the resources for credit administration and early monitoring of troubled credits. The effect would be higher non-performing loans which might ultimately be defaulted. These loan losses obviously exacerbate banking instability and failure. Again, some banks with zero or negative net-worth did consciously adopt high risk and high growth strategies in an effort to grow out of trouble. This is because loan losses due to new default were supposed to be borne by the Nigerian Deposit Insurance Corporation (NDIC). This type of management strategy, which is an example of moral hazard behavior, increases the risk exposure of the banking system. Thus, the quality of management and their strategy have much bearing on bank stability or failure in Nigeria.
1.2 STATEMENT OF THE PROBLEM
Financial crisis is extremely severe. It is also multidimensional, and it has already led to many analyses and policy-oriented documents. This contribution focuses on the treatment of distressed banks, a key element of the regulatory architecture which has however attracted insufficient attention so far. The treatment of distressed banks can however not be treated independently of other dimensions of this architecture, which motivated the researcher to embark on the study crisis management of some distressed banks.
1.3 OBJECTIVE OF THE STUDY
The main objective of this study is to ascertain the challenges of crises management of distressed banks in Nigeria. But to aid the successful completion of the study the researcher intend to achieve the following specific objective;
i) To ascertain the impact of financial crises on the performance of the bank
ii) To examine the role of management in repositioning the financial state of the banks
iii) To examine the relationship between crises management and managers efficiency
iv) To assess the effect of crises management on shareholders fund
1.4 RESEARCH HYPOTHESES
To aid the successful completion of the study, the following research hypotheses were formulated by the researcher;
H0: there is no significant relationship between crises management and managers efficiency in distressed banks
H1: there is a significant relationship between crises management and managers efficiency in distressed banks
H02: crises management does not have any effect on shareholders fund
H2: crises management does have any effect on shareholders fund
1.5 SIGNIFICANCE OF THE STUDY
It is believed that at the completion of the study, the findings will be of great importance to the management of distressed financial institution as the findings of the study will help them re-strategized on how to reposition the financial state of the organization, the study will also be of importance to investors and potential investors, as the study will guide them on their choice of investment, the study will also be of importance to researchers who intend to embark on a study in a similar topic as the study will serve as a reference point for further study. Finally the study will be useful to students, teachers, lecturers and the general public as the findings of the study will add to knowledge and the pool of existing literature on the subject matter
1.6 SCOPE AND LIMITATION OF THE STUDY
the scope of the study covers crises management of some distressed banks in Nigeria, however, in the cause of the study, the researcher encounters some constrain which limited the scope of the study;
a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
c) Organizational privacy: Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities.
1.7 DEFINITION OF TERMS
Crises:A crisis is any event that is going to lead to an unstable and dangerous situation affecting an individual, group, community, or whole society.
Financial crises:A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value
Financial management:Financial management refers to the efficient and effective management of money in such a manner as to accomplish the objectives of the organization
1.8 ORGANIZATION OF THE STUDY
This research work is organized in five chapters, for easy understanding, as follows
Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding. Chapter five gives summary, conclusion, and recommendations made of the study
