Evaluating The Impact Of Bank Distress On The Profit Growth Of Existing Commercial Banks
(A Case Study Of Selected Commercial Banks)
The impact of bank distress on the profit growth of existing commercial banks can be substantial and multifaceted. During periods of bank distress, such as financial crises or economic downturns, existing commercial banks may face various challenges that impede their profit growth. These challenges can include increased loan defaults, reduced asset quality, higher provisioning for bad debts, tighter regulatory scrutiny leading to compliance costs, and a decline in consumer and investor confidence in the banking sector. Additionally, distressed banks may find it difficult to attract deposits and access funding, which can further strain their profitability. As a result, existing commercial banks may experience a slowdown or even a decline in profit growth during times of bank distress, as they navigate through heightened risks and uncertainties in the financial landscape.
This work “Evaluating the impact of Bank Distress on the profit growth of commercial banks” has the objective of showing the effect of distress on the profit growth of commercial banks. The causes of bank distress in Nigeria and the possible prevention strategies or failure resolution options of bank distress. The review of related literature was done to give an in depth knowledge of the topic to the researchers. Both primary and secondary sources of data were used by the researchers.
Simple statistical tools like T-test, least square (B) and tables were used to analyse the data collected. The following findings were made; Banks made lower profit during distress period and higher profit during distress period and higher profit after distress period. Meanwhile, banks generally made lower profit during distress period. We recommended that the supervisory arsenals to ensure minimum distress with little or no effect when it occurs.
ii Title page
iii Approval page
iv Dedication
v Acknowledgement
vi Abstract
vii Table of Content
CHAPTER ONE
1.0 Introduction 1
1.1 Background of the study 1
1.2 Statement of the problem 5
1.3 Purpose/Objectives of the study 5
1.4 Research Questions 6
1.5 Research Hypothesis 6
1.6 Significance of the Study 7
1.7 Scope, Limitations and Delimitations 7
1.8 Definitions of Terms 8
CHAPTER TWO
2.0 Review of Related Literature 10
2.1 Definition of Distress in Banking Industry 10
2.2 Symptoms of Distressed Banks in Nigeria 14
2.3 Causes of Banking Distress 16
2.3.1 Capital Inadequacy 18
2.3.2 Inept Management 19
2.3.3 Ownership Structure/Political
Interference in Management of Banks 20
2.4 Distress Management and Failure Resolution Option 21
2.5 The Role of Banks in an Economic System 30
Reference 33
CHAPTER THREE
3.0 Research Design and Methodology 35
3.1 Research Design 35
3.2 Area of Study 36
3.3 Population 36
3.4 Sample and Sampling Techniques 37
3.5 Instruments of Data Collection 37
3.6 Methods of Data Presentation 38
3.7 Methods of Data Analysis 38
Reference 40
CHAPTER FOUR
4.0 Data Presentation and Analysis 41
4.1 Graphical Illustration of Banks Profit 43
CHAPTER FIVE
5.0 Findings, Recommendation and Conclusion 54
5.1 Findings 54
5.2 Recommendation 56
5.3 Conclusion 58
Bibliography 59
Appendix
INTRODUCTION
BACKGROUND OF THE STUDY
In any modern economy, the efficient production and exchange of goods and services requires money and bank is the instrument for affecting it. The last few years have been both traumatic and revolutionary for the banking industry. The industry produced the largest number of technically insolvent and under capitalized banks. The magnitude of distress in the nation’s banking industry reached on unprecedented level making it an issue of concern to the government, the regulatory authority, the bankers and the general public.
The Nigeria banking scene was characterized by changes designed to promote banking in the country. The changes may be categorized into phases, but due to the nature of our work we will consider two phases: namely, the era of laissez-fair banking (1894-1952), the era of limited banking regulator (1952-1958). During the first phase, banking industry was monopolized by foreign banks, principally the African banking corporation which was the precursor of the (BBWA) British Bank for West African the present First Bank of Nigeria the Barclays bank DCO (Dominion Colonial and Overseas) the present day Union banks, and the British an French Bank, the for-runner of the present United Bank for Africa. Although discrimination against Nigerians by these banks led to the establishment of some indigenous banks which unfortunately offers litter or no competition to the foreign banks essentially because of their weak capital base or poor managerial capacity. Consequently, all but three of the indigenous banks failed. The survived includes the National Bank of Nigeria established in 1933, the Agbomagbe Bank (now Wema Bank) established 1945 and the Africa Continental Bank 1947.
A commission of inquiry headed by G.D. patron set up in 1948 to investigate the business of banking in Nigeria. Their report led to the enactment of the first banking legislation in Nigeria, the banking ordinance of 1952. The 1952 ordinance laid down the standard and procedure for the conduct of banking business by prescribing the mandatory minimum capital requirement for banks both expatiates and indigenous banks at the tune of ∑100,000 and ∑12,500 respectively and it also introduced regulations to check bank failure. However, all the indigenous bank established in the country during this period also all failed. The bank failures of this era were attributed largely to the monopolistic structure of the banking industry, which allowed the foreign banks to enjoy exclusive patronage from British firms. The indigenous banks that survived was able to make it because of the support they got from their state government.
The distress phenomenon in Nigeria banking industry is of recent origin. The manifestation became discernable with some policy shocks starting in 1988 with the Central Bank of Nigeria (CBN) directive to banks that naira backing for foreign exchange application be lodged with CBN. Thus was followed in 1989 by another directive requiring public sector deposits to be transferred to CBN. These two directives exposed the precious liquidity position of some banks and the distress they have subterraneous harbored. What was thought to be a temporary liquidity problem for few banks soon caught up with a lot more banks.
It is important to stress in this work that banking system was already in distress by the time NDIC was established. By them, about 7 (seven) banks were known to be technically insolvent. The government at that time, did not embark upon a clearing exercise that would have removed from the system that distressed institutions because it was feared that such an action would lead to loss of public confidence and flight of foreign capital more so there was no deposit insurance institution to expeditiously manage such bank closures. The NDIC was nevertheless required to insure all banks. That means that the corporation has been involved in managing distressed banks even before it could settle down and minister enough resources for this important task.
The intermediating role of banks and their relevance both in the transmission of monetary policies and in the payment system underscore their importance as well as the problem that bank distress at the prevailing dimension in our economy could precipitate. Arising from their intermediation banks generate financial resources ad put these at the disposal of deficit economic growth in the form of increased employment of otherwise idle resources and this in turn leads to increase output. Therefore, an industry wide insolvency of banks, such as the one experienced in Nigeria, should be expected to retard the economy’s rate of capital formation, reduce its level of employment and output, and ultimately the pace of economic growth.
1.2 STATEMENT OF THE PROBLEM
A serious problem posed by widespred distress among banks is the threat to banking habit and the development of an efficient payment mechanism. The loss of confidence, the after math of the distress that hit the banking sector forced several business to take ferver risks by taking back their fund to well established safe havens dominated by older generation banks.
This research wok is therefore concerned with “Evaluating the impact of bank distress on the profit growth existing of commercial banks. Using ( A vase study of selected Commercial banks).
1.3 PURPOSE/OBJECTIVE OF THE STUDY
The main purpose/objective of this study is to have an overview of the effect of bank distress on the profit growth of commercial banks. Investigate into the reasons for bank failure in Nigeria.
Other objectives include:
1. To evaluate the causes of bank distress in Nigeria. To find out the impact.
2. To find out the possible prevention strategies or failure resolution options of bank distress.
1.4 RESEARCH QUESTIONS
(1) What are the causes of bank distress?
(2) What is the impact of bank distress?
(3) What is the profit growth rate of existing commercial bank during distress.
(4) What are the effects of bank distress?
(5) What are the possible solution options to this phenomenon in the banking scene?
1.5 RESEARCH HYPOTHESIS
H1: Distress has no effect on the average profit of commercial
bank
Ho: Distress has effect on the average profit of commercial
banks.
1.6 SIGNIFICANCE OF THE STUDY
This research project will be of importance of the following persons –
1. New generation banks, which may wish to know the implication of banks distress in the banking industry and how to restore the confidence of the customers and uphold efficient payment mechanism.
2. Nigeria deposit insurance corporation: The work could be of immense help to NDIC in the area of distress management and prevention strategies. And also in the area of failure resolution option in banking industry.
3. Students who may wish to know the extent of distress in the banking industry and the trend of distress as it affect the modern banking will also benefit from this work.
1.8 SCOPE, LIMITATIONS AND DELIMITATIONS:
While the banking impact distress in Nigeria will theoretically serve as the population of study. The project is designed to appraise the impact of bank distress on the profit growth of Union Bank of Nigeria Plc, First Bank of Nigeria, United Bank for Africa and Guarantee Trust Bank. It will also analyse the trend of these banks profit within a period of 10 years (1992-2001).
1.8 DEFINITION OF TERMS
What is Distress? It can be defined as an extreme suffering caused by lack of money or a state of danger, calamity and misfortunate acute poverty.
What is an Evaluation? This can also be defined as form of idea or judgment of something and also to work out something in numerical value.
What is Impact? This can be define as a strong effect or impression to bank. It is also a situation whereby something will be to be press closely or firmly together.
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Evaluating The Impact Of Bank Distress On The Profit Growth Of Existing Commercial Banks:
The impact of bank distress on the profit growth of existing commercial banks can be significant and multifaceted. Bank distress refers to a situation where a bank faces financial instability or insolvency due to various factors. Here are some key ways in which bank distress can affect the profit growth of existing commercial banks:
- Reduced Lending Capacity: When a bank is in distress, it may become cautious about lending money. This can result in a reduced lending capacity, which means that the bank may extend fewer loans to individuals and businesses. As lending is a primary source of revenue for commercial banks, a reduction in lending can directly impact profit growth.
- Higher Credit Risk: Banks in distress may also be more inclined to make riskier loans to generate higher returns quickly. This can lead to an increase in the bank’s non-performing loans (NPLs) and credit losses. Higher credit risk can erode profits as banks need to set aside provisions for potential loan defaults.
- Increased Funding Costs: Distressed banks may face higher funding costs as they might need to offer higher interest rates to attract deposits and capital. This can squeeze their net interest margins (the difference between interest earned and interest paid), which is a critical component of bank profitability.
- Regulatory Scrutiny: Regulatory authorities often increase their oversight of distressed banks. This can lead to additional compliance costs and restrictions on certain activities, which can further reduce profitability.
- Loss of Customer Confidence: Bank distress can erode customer confidence. When customers start losing trust in a bank’s ability to safeguard their deposits and provide financial services reliably, they may withdraw their funds or move their accounts to healthier banks. A loss of deposits can weaken a bank’s balance sheet and hinder its ability to generate profits.
- Market Perception: The market’s perception of a bank in distress can negatively impact its stock price. A declining stock price can make it more challenging for the bank to raise capital, which may be necessary to recover from distress. Moreover, the stock price can affect a bank’s ability to reward employees through stock-based compensation, which can impact labor costs.
- Increased Regulatory Costs: Distressed banks often face additional regulatory requirements, including more frequent reporting, stress tests, and capital adequacy mandates. These requirements can be costly to implement and maintain, further affecting profitability.
- Strategic Shifts: To survive or recover from distress, banks may need to make significant strategic shifts, such as selling off assets, exiting certain businesses, or merging with healthier institutions. These strategies can have implications for profitability in both the short and long term.
- Legal Costs: Bank distress can lead to legal challenges, including lawsuits from shareholders, regulators, or counterparties. Defending against these legal actions can be costly and may result in financial settlements or penalties.
In summary, bank distress can have a substantial negative impact on the profit growth of existing commercial banks. It can lead to reduced lending capacity, increased credit risk, higher funding costs, regulatory scrutiny, loss of customer confidence, negative market perception, increased regulatory costs, strategic shifts, and legal expenses. The severity of these impacts depends on the extent of distress and how effectively the bank manages the crisis. In many cases, recovering from distress and restoring profitability can be a long and challenging process.