FINANCIAL CRISIS IN THE NIGERIAN BANKING SECTOR ROLE EFFECTS AND SOLUTIONS

Amount: ₦5,000.00 |

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1-5 chapters |




ABSTRACT

This is a research project carried out to identify and determine the role, effects and solutions of financial crisis in the Nigerian banking industry, a study of selected banks (First Bank of Nigeria Plc, and Intercontinental Bank Plc). A sample size of 200 respondents. all randomly selected from the staff and management (both senior and junior) and customers of First Bank Nigeria Plc and Intercontinental Bank Plc was used in this study. Both  primary  and  secondary  data  were  collected  and  analyzed  using percentages  and  chi-square  test.  The  researcher,  based  on  the  data collected  and  analyzed,  found  that  poor  liquidity  is  a  salient  factor affecting the viability  of Nigerian Banks; incompetent  and  inefficient management  gives  rise  to  poor  performance  of  banks  in  Nigeria: Diversion of credit by clients of commercial banks does not necessarily contribute to bank distress; and undercapitalization of commercial Banks does  not  only  militate  against  the  development  of  Nigerian  banking sector. Finally, the findings were summarized, conclusions reached and recommendations made.

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

The first phase of the Bank consolidation initiated by Central Bank of Nigeria in 2005 was in order to provide a strong and reliable banking sector that would guarantee the safety of depositors’ money. The consolidated Banks were expected to playa very active role in the economic growth and development of Nigeria. The consolidation exercise was remarkable  as  some  of  the banks merged  while  others  went for outright takeover of the assets and liabilities of the weak banks. Within the short period of consolidation, there were positive changes in the entire system, as interest and lending rates became stabilized and some of the consolidated banks became partners and correspondent Banks to some Foreign Banks.

Before the consolidation exercise started in 2005, the Nigerian Banking Industry witnessed a lot of stress, uncertainty and anxiety. This eroded the confidence of the general public which used to be a great asset of banking sector in the past. In addition, investors and depositors funds were not guaranteed, hereby making most of the Banks to come under stress due to capital inadequacy. These problems greatly. impaired the

quality of Banks assets as non-performing assets became bearable and became huge burden on most of the Banks. The financial intermediation role of the Banks became heavily impaired while the micro economic activities seriously slowed down. It was against this background that the Central Bank of Nigeria (CBN) announced a major reform in the entire Nigeria Banking industry. The recapitalization of the capital based of banks constituted the first phase of the reform policy in the entire banking sector of the Nigeria economy. The major issues in the consolidation exercise, according to Adeyemi (2005) include;

   A minimum· capital base of 25 Billion naira with a deadline of 31st

December 2005.

      Consolidation   of    banking    institution    through    merger    and acquisitions.

      Phase  withdrawal  of  public  sector  fund  from  banks,  beginning from July 2004.

   Adoption of a risk-focused and role-based regulation framework.

      Zero  tolerance  for  weak  corporate  governance,  misconduct  and lack of transparency.

      Accelerated  completion  of  the  electronic  financial  surveillance system (E-fass).

   The establishment of assets Management Company.

   Promotion of the enforcement of dormant law.

   Revision and updating of relevant laws

   Closer collaboration with the Economic and Financial Crime Commission (EFCC) and establishment of the financial intelligence unit. The two outstanding issues in the reform initiatives that have attracted a lot of concern and reaction because of its peculiarities are:

      The recapitalization requirement of 25 Billion by banks before the end of 31st December 2005.

   Consolidation of banks through merger and acquisitions.

The primary objective of the reform initiative was to have an efficient and effective banking industry that could guarantee rapid economic growth and development for the entire nation. Unfortunately, the current global economic crisis which has its root in the United State of America and Europe has spread  to other parts of world.  The crisis has eroded  the confidence of the Public in Nigeria banking industry despite their consolidation. Even the Nigeria Stock Market (NSM) which is expected to act as buffer of fund is not left out of the financial crisis. It is against this backdrop  that the research study seeks to examine the causes and effects of financial crisis in the Nigeria  Banking  Sector and possible solution.

1.2     STATEMENT OF THE PROBLEM

The Current Global Economic Crisis which started with the Financial Crisis in the United State of America in 2007  has its roots in credit contraction  in  the  banking  sector  due  to  certain  laxities  in  the  US financial system. The crisis later spread to Europe and now has become a global phenomenon. The financial crisis of  an early stage  manifested strongly in the sub-prime mortgage because household faced difficult in making higher payment on adjusted mortgages (Soludo, 2009). This development led to the use of credit contraction by Financial Institution in US to tighten their standards in the light of their deteriorating balance sheets. In addition, the Financial Institutions stopped lending and recall their credit lines to ensure Capital Adequacy (Aluko, 2009).

Since the use of credit contraction -by foreign banks began, the Nigeria banking system has seriously been engulfed in Financial Crisis. At the moment, Nigerian Banks are unable to carry out their statutory function in the Nigerian Economy. In view of this development, the problem now is what are possible causes of the financial crisis in the Nigerian Banking sector, what are the effects of Financial Crisis in Nigerian banking sector on the Nigeria Economy, and how can the situation be remedied.

1.3     RESEARCH QUESTIONS

The research questions for the study are:

   Does poor management give rise to Financial Crisis in Nigeria

Banks?

   Does   undercapitalization   of   Commercial   Bank   Account   for

Financial Crisis in Nigeria Banking Industry?

      Is there any correlation between poor liquidity and financial crisis in Nigeria banks?

   How can financial crisis in Nigerian Banks be solved?

1.4    OBJECTIVES OF THE STUDY

The main objectives of this study, the perceived causes and effects of the

Nigerian Banking Sector. Specifically, the study aims as follows:

   To ascertain  how the Government can reduce Financial Crisis in

Nigerian Banks to the barest minimum.

   To   determine  how  Financial  Crisis  affect  the  operations  of

Nigerian Banks.

      To ascertain whether there is a correlation between poor liquidity and financial crisis in Nigerian Banks.

      To   ascertain   whether   undercapitalization   IS   responsible   for financial crisis in Nigeria Banking Sector.

1.5     RESEARCH HYPOTHESES

The hypotheses of this study are:

H01:   Under capitalization of commercial banks does not militate against the growth and development of Nigerian banking sector.

H02:   Diversion  of  credit  by  clients  of  Banks  does  not  contribute immeasurably to distress in the Nigerian banking sector.

H03:  Poor  liquidity  is  not  a  salient  factor  affecting  the  viability  of

Nigerian banks

H04:   Incompetent and inefficient management do not give rise to poor performance of banks in Nigeria.

1.6     SCOPE OF STUDY

The research work concentrates on perception of the causes and effects of Financial Crisis in Nigeria Banking Sector with special reference to First Bank of Nigeria P1c (FBN) and Intercontinental Bank Plc (ICB).

1.7 SIGNIFICANCE OF THE STUDY

This study is significant for a number of reasons:

      It will reveal to the gene-nil-public the immediate and possible causes of financial crisis in Nigeria Banking industry.

      It will suggest measures that can be taken by regulatory authorities to minimize financial crisis in Nigeria Banks.

      It will serve as a body of knowledge that will be referred to be other researchers.

      It  will  expose  the  consequences  of  financial  crisis  in  Nigeria banking sector in the economy.

      It  will make useful suggestion to the management of banks on appropriate steps to initiate in order to minimize Financial Crisis in Banks.



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