AN EXAMINATION OF THE IMPACT OF FAILED BANKS ON NIGERIA ECONOMY

CHAPTER ONE

INTRODUCTIN

1.1              BACKGROUND OF THE STUDY

The importance of the banking section in any economy is derived from its roles of financial intermediation provision of an efficient payment system and facilitating the implantation of monetary policies.  In intermediation, banks mobilize saving from the surplus limits of the economy and channel these funds to the deficit units particularly private business enterprises for the purpose of expanding their productive capacity.  In operating the payment mechanism, the banking systems liabilities serve as the medium of exchange.  In the execution of monetary policies, bank serve as agents through which there policies are implemented.  Hence, an efficient and effective banking sector is essential not only for the promotion of efficient intermediation but also for the protection of depositors encouragement of healthy competition maintenance of confidence in, and stability of the system and protection against systematic risk and collapse. For the banking in industry of any economy to achieve there objective the industry must be stable safe and sound.

In Nigeria, there has been a rapid increase in the number of bank failure and the magnitude of the problem has reached an unprecedented level.

Currently, the problem has assumed a generalized dimension thereby making it an issue of concern to the government, the regulatory authorities the bankers the general public and the international financial institutions such as the world banks and international monetary fund (IMF).

The purpose of this research work is to evaluate the consequences of banks failure on the Nigerian economy.  Bank failure means different things to different people.

To some people, a bank fails only when it ceases operation even if it has not been declared liquidated officially. In a wider bank which is unable to meet  its obligations to its stakeholder as at when due arising form weakness in its financial operational and managerial conclusion which could has rendered it either illiquid and/or in solve (CBN/NDIC, 1995)

The relevant stakeholder to a bank will include the depositors, the owners of the bank and the economy at large.  From the foregoing, it will be clear that failed banks will not only include the liquidated banks but also the problem banks that have exhibited some form of weakness in their financial operational and managerial conditions which have rendered them either illiquid and/or insolvent

1.2              STATEMENT OF THE PROBLEM

In Nigeria, there has been a rapid increase in the number of failed banks and the magnitude of the problem has reached an unprecedented level. Bank failures in Nigerian banking industry is a problem that has of late assumed an intractable dimension.  The situation is such that regulatory authorities appear to be fighting  a losing battle in their bid to sanitize the system. This has of course resulted in the erosion of public confidence in the banking system and therefore the reduction in the flow of inventible resources that could be channeled to the productive sectors of the economy.

Therefore, that is why the researcher deemed it fit to examine the impact of there failed banks on Nigerian economy.

1.3              OBJECTIVE OF THE STUDY

Because of the central role which the banking system plays on the growth and development of any economy the objectives of this study are therefore.

1.                  To find out if there is loss of confidence in the banking system

2.                  To find out if there is reduction in bank deposits

3.                  To identify if there is any reduction in foreign investments.

4.                  To find out if bank failure can lead to devaluation of the Nigerian currency.

5.                  To find out if bank failure can lead to unemployment through retrenchment  of workers.

1.4              RESEARCH QUESTIONS

The researcher intends to make a critical and empirical evaluation fo the impact of failed banks on Nigerian economy.

Towards this end appropriate answers to the following research questions become  necessary.1.                  Is there loss of confidence in the banking system due to bank failure?2.                  Is there any reduction in bank deposits due to bank failure?3.                  Does bank failure lead to reduction in foreign investment?4.                  To what extent can bank failure lead to devaluation of Nigerian currency?5.                  Does bank failure lead to unemployment?1.5              RESEARCH HYPOTHESES 

1.         Ho:       Bank failure cannot to caused by poor portfolio management

Hi:       Bank failure can be caused by poor portfolio management

2.         Ho:       Government’s debts owed to banks cannot lead to bank failure

Hi:       Government’s debts owed to banks can lead to bank failure

3.         Ho:       Monetary authorities has no significant role to play in controlling

bank failure

Hi:       Monetary authorities have significant role to play in controlling

bank failure.

1.6              SCOPE OF THE STUDY

This research work is limited to Nigeria economy only. One to time, financial constraints and others, the researcher was unable to cover much ground.

DEFINITION OF TERMS

1.         Insolvent:       Inability of bank to meet the claims of its creditors as and when they fall due.

2.         Stakeholders: Defined as people who have invested some amount of money in the bank.

3.         Bank failure: Defined and use here as the inability of banks to meet its obligations as and when due from weakness in its financial, operational and managerial conditions

4.         Depositors: Those who deposit money with the bank

5.         C.B.N:            Defined as the Central Bank of Nigeria

6.         NDIC:            Defined as Nigeria deposit insurance corporation