Financial Distress In Source Commercial Bank Reasons, Consequences And Solution
Financial distress in Source Commercial Bank could arise due to various reasons, including inadequate risk management practices, high levels of non-performing loans, economic downturns impacting borrower repayment capabilities, and intense competition in the banking sector. Consequences of such distress may encompass deteriorating asset quality, increased provisioning requirements, loss of depositor confidence, regulatory scrutiny, and potential liquidity or solvency issues. To mitigate these challenges, the bank should focus on implementing robust risk management frameworks, enhancing credit risk assessment procedures, closely monitoring asset quality, exploring avenues for revenue diversification, and maintaining adequate capital buffers to absorb unexpected losses, thus ensuring long-term financial stability and resilience.
The basic objective situation under this study was the valuation of financial distress in some commercial banks reasons, issues the consequences and solution
This study has been structured into five (5) Chapters to make for easy reading and understanding
Chapter One dealt with the background of the study, the statement of problem, the objective of the study, the research questions, the scope of study, the limitation if study, the significance, rational, definition of terms and assumption of the study base on the country’s economy.
It also gives an insight into the causes of financial distress in Commercial banks and other Financial Institution.
From this, other four Chapters deserved that base from the chapter one in order to confirm the managing distress in Nigerian Banks, the assessment of tackle financial distress, measure laxtant of distress in Nigeria. More also the sources of data and its limitation and findings.
In view of the findings above, recommendations have been made to help tackle the financial distress in some Commercial Banks in Nigeria.
A descriptive study was made about financial distress in some commercial banks using secondary statistics.
This research work designed to describe the financial distress in some Commercial Bank in Nigeria.
The study also took at the follow objective such as; nature and types of financial distress facing source commercial banks, the banks involved.
It was also discovered that distress is caused is a result of poor management, insolvency, low asset base inadequacy of capital e.t.c.
Therefore, commendation such as: Inadequate, Funding, Increased assets base, provisions for adequate liquidity.
Also such research should be done to other non-financial banking institution and other West African Country.
i Title Page
ii Approval Page
iii Dedication
iv Acknowledgement
v Abstract
vi Table of Content
CHAPTER ONE
Background of the Study
Statement of Problem
Objective of the Study
Significant of the Study
Delimitation/Limitation of the Study
Delimitation of Terms
CHAPTER TWO
Literature Review
CHAPTER THREE
Research Design/Methodology
Sources of Data, Primary and Secondary Location Data.
CHAPTER FOUR
Summary and findings
CHAPTER FIVE
Recommendation
Conclusion
Biography
BACKGROUND OF
THE STUDY
In Nigerian Banking system considering the last decade the Commercial Banking to be praise had undergone a rapid expansion both in terms of the number of Institution and the scope of financial services rendered.
As bank increasing was liberalized so was the scared of instability sown in these banking system at the sometime.
As these expansion trend continuous, a sign of lacked vision among the investors and the directs motive of quick return to satisfy liquidity operation. The word distress had been in assistance but increased promptly as these institution increased due to acute shortage of resources and the massive withdrawal of deposits by government agencies and other public sectors from these banks.
The development trend the financial structure, exposed and undermine the economic system which impact development of the economy. Therefore, distress places a great burden on regulation, authority, depress the economy undermine the payment system and discourage savings.
1.2 STATEMENT OF THE PROBLEM
Some Commercial banks have been divided to assist in loans and advance to various sectors of the economy.
And the Commercial banking is know as retail banking which accept deposit and makes payment to his customers.
But the financial condition of source of these Commercial Banking due to the political instablility/lactory campaign that wad on. Political analyst describes the allocation to be one of the brutal crises that was to come. Therefore, there was price withdrawal of fund by these bank customers. These Institutes is now bogged down by distress, insolvency, poor liquidity due to deadline in deposit and the confidence. The crisis has been averted and the urgency prompted the study. This research work is disquiet to describe the financial distress in some Commercial Banking System in Nigeria.
1.3 OBJECTIVE OF THE STUDY
The objective of the study are:
1. To describe the nature and types of financial distress.
2. To identify some of the Commercial Banks involved in the distress in Nigeria.
3. To identify the causes of financial distress in these Commercial Banks.
4. To determine the level of distress in these Commercial Banks.
5. To find out if the distress is caused by poor management.
1.4 SIGNIFICANCE OF THE STUDY
The importance of a health banking system cannot be over emphasized for so many reasons, ranging from the vital economic importance of the longe deposit at state to public confidence jobs and carear of people and the key role these banks plays in economic development.
Also the benefit of finding solution of how to get a solution ofthe crisis will be found useful to invest or customers of these banks, the regulatory and supervisory authority and even the Government. The solution will also be useful to the managers in general of these banks.
1.5 LIMITATION OF THE STUDY
The study is limited within Enugu State due to insufficient t6ime to carryout the work.
Apart from these factor the inability of accessing all distress Commercial Banks, financial contains also cause the limitation e.t.c.
Other possible limitation to the study could be lack of transparency among the distressed banks to the researchers to avoid exposing their image.
1.6 DEDICATION OF TERMS DISTESS.
As been defined by Hornby, it is the state of backing in difficult and needing help Smith and Wall 199:Ologun, 1994 defined distress as “Unhealthy”, Situation” or a state of inability or weakness which prevent the achievement of set goal and objective
1.7 FINANCIAL DISTRESS
This is when Financial Institute can no longer cope with their financial structure and require help. This could take various firms like, Insolence. Poor Management, Inliquidity, Lack of deposits. e.t.c.
1.8 COMMERCIAL BANK
This are Financial Institution referred to as retail bank. They accept and make payment on demand to their customers.
Financial Distress In Source Commercial Bank Reasons, Consequences And Solution:
Financial distress in a commercial bank can have significant repercussions not only for the institution itself but also for the broader financial system and the economy as a whole. Let’s explore the reasons, consequences, and potential solutions for financial distress in a source commercial bank:
Reasons for Financial Distress:
- Asset Quality Issues: One of the primary reasons for financial distress in a bank is a deterioration in the quality of its assets. This can occur due to a high level of non-performing loans (NPLs) caused by economic downturns, poor underwriting standards, or inadequate risk management.
- Liquidity Problems: Banks rely on short-term funding to meet their obligations. If they cannot roll over their short-term debts or access additional liquidity when needed, they may face liquidity crises.
- Capital Adequacy: Banks must maintain sufficient capital to absorb losses and protect depositors. Falling below regulatory capital requirements due to losses or rapid growth can trigger financial distress.
- Market Risks: Banks are exposed to market risks such as interest rate risk, credit risk, and foreign exchange risk. A sudden adverse movement in these markets can erode a bank’s financial health.
- Operational Issues: Internal problems, such as fraud, inadequate internal controls, or mismanagement, can lead to financial distress.
- Economic Factors: Broader economic factors, like recession or an industry-specific downturn, can impact a bank’s profitability and asset quality.
Consequences of Financial Distress:
- Systemic Risk: Financial distress in a commercial bank can spread to other financial institutions, causing a domino effect and potentially leading to a systemic financial crisis.
- Customer Panic: News of financial distress can lead to a bank run, where customers withdraw their deposits en masse, further exacerbating the bank’s liquidity problems.
- Credit Crunch: A distressed bank may reduce lending, leading to a credit crunch that can harm businesses and individuals seeking loans.
- Downgrades: Credit rating agencies may downgrade the bank’s credit rating, making it more expensive for the bank to raise capital and borrow funds.
- Regulatory Intervention: Regulators may step in to stabilize the bank, which can involve a change in management, asset sales, or even closure and resolution.
Solutions for Financial Distress:
- Capital Infusion: Raising additional capital through equity issuance or asset sales can improve the bank’s capital adequacy.
- Asset Quality Improvement: Banks can work to reduce NPLs through aggressive loan restructuring, better underwriting practices, and improved risk management.
- Liquidity Management: Implementing robust liquidity risk management practices can help a bank better weather short-term funding challenges.
- Operational Improvements: Addressing internal issues through enhanced controls, governance, and risk management can prevent further deterioration.
- Regulatory Support: In some cases, regulators may provide support, including temporary capital injections or liquidity facilities.
- Mergers and Acquisitions: A distressed bank may seek a merger or acquisition by a healthier institution to stabilize its operations.
- Asset Sales: Selling non-core assets or divisions can generate cash and improve capital ratios.
- Cost Reduction: Cost-cutting measures, including staff reductions and branch closures, can help conserve capital.
- Enhanced Risk Management: Strengthening risk assessment, monitoring, and mitigation processes can prevent future financial distress.
It’s important to note that addressing financial distress in a commercial bank often requires a multi-pronged approach, involving collaboration between the bank’s management, regulators, and other stakeholders to stabilize the institution and protect the broader financial system. Swift and effective action is crucial to mitigate the negative consequences of financial distress.