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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The Banking industry is so strategic to the economy that virtually everybody is a stakeholder. Banks act as lubricants of the economy and the custodians of the payment system. They therefore impact on every sector of the economy. Banks with high capital base perform their traditional role of banking by financing capital projects that is in the oil and gas sector. Banks help in mobilizing savings through a network of branches. By mobilizing savings, the bank channels them into investments. Thus, they help in capital formation. Umaru (2010) opined, one of the primary core mandates of NDIC has to do with supervision and regulation of the licensed banks and other licensed deposit taking institutions. Other roles performed by the banks in the economy include financing trade, agriculture, industry, consumer activities and they help in the implementation of monetary policies. Despite the fact that there are so many sectors in the economy that depend on banking, banks in Nigeria are yet to realize their full potentials. Likewise the banking sector has a long way to go in playing its expected roles in development and growth of the economy. Despite the fact that the banking industry recorded a strong second fastest growing sector in the economy, the banking industry has not been performing their traditional functions. A banking system that is in crisis cannot therefore, carry out its intermediation role effectively as new lending comes to a halt, which is known as credit crunch. Two mechanisms can act; low capital adequacy ratios of banks and shortfall of liquidity. Corporate governance and poor risk management have been regarded to be the major causes of the banking crisis in Nigeria. Umaru (2010) Distress connotes a state of being in danger or difficulty and in need of help. It is a state of ‘inability’ or ‘weakness’ which prevents the achievement of set goals and aspirations. Distress can also be associated with a cessation of independent operations or continuance only by virtue of financial assistance from the banking system’s safety net such as the supervisory regulatory agency or a deposit insurer. CBN / NDIC (1995) describes a distressed financial institution as ‘one with severe financial, operational and managerial weaknesses which have rendered it difficult for the institution to meet its obligations to its customers, owners when due. According to Ademu (1997), the history of financial distress and bank failure in Nigeria date back to the late 1940 and early 1950s otherwise known as the free-bank era. The current experience which became more manifest since 1993 has the resemblance of the earlier one in terms of causative factors.
However, each occurred in different institutional and regulatory environment. There absent was a pool of trained and experienced personnel in economic and financial matters. However in May 1989, distress in the banking system first came to existence after the withdrawal of treasury funds forms the licensed banks e.g. National bank of Nigeria. By 1993, distress has become widespread in the Nigerian banking sector leading to the closure of four banks in early 1994, Following the grave distressed financial condition of these banks, the merchant bank limited, Alpha merchant bank limited and united commercial bank limited and their licensed revoked by the CBN. The number of banks officially classified as problems banks especially in recent times is on the increase and have continued to be a serious concern to the government and the regulatory authorities. By December1992, the number rose to fifteen (15), and up to thirty-eight (38) as at December 1993 and fifty five (55%) as at 31st December 1994, As at December, 1995 out of about 120 banks, 60 were considered distressed, 5 had been liquidated, 5 were under interim management boards and 17 had been taken over by the CBN. As a result of the bank failures, the Nigeria Deposit Insurance Corporation (NDIC) was formed by the Nigeria deposit Insurance Corporation decree 22 of 1988, established by the Government to protect depositors against the loss of their insured deposits placed with member institutions in the event that a member institution is unable to meet its obligations to depositors. Deposit insurance ensures that the depositor does not lose all his money in the event of a bank failure. It also engenders public confidence in, and promotes the stability of, the banking system by assuring savers of the safety of their funds. Deposit insurance makes a bank failure an isolated event; hence it eliminates the danger that unfounded rumors will start a contagious bank run. Against the above background, there is therefore, the need to evaluate the role of NDIC in managing distressed banks.
1.2 STATEMENT OF PROBLEM
The history of bank failure in Nigeria dates back to 1930 when the Industrial and Commercial Bank failed. Thereafter, the Nigerian Mercantile Bank failed in 1936 while the Nigerian Penny Bank failed in 1946 (Folusho, 1985). It is instructive to note that 21 out of the 25 indigenous banks that were established collapsed in quick succession due to bad management, inadequate capital, inexperienced personnel, excessive branch expansion, and lack of banking regulation and unfair competition from foreign banks (Ajayi and Ojo 1981). Others included outright fraud, lack of acceptable prudential guideline and lack of right banking orientation among the operators. Most of the bank failures were resolved mainly through self-liquidation. These bank failures led to a significant loss to depositors, loss of confidence by the public in the Nigerian banking industry, loss of confidence also in the ability of Nigerians to manage banking business. The regulatory authorities were overstretched and distress set in, in the banking industry. Due to the banking failures and distresses, public confidence in the banking sector waned and governments concern for the protection of public deposit, the restoration of confidence in the banking sector and the financial system generally prompted government’s establishment of the Nigeria Deposit Insurance Corporation (NDIC). In what ways has the NDIC justified its existence- in restoring, enhancing public confidence in the banking sector? This is the crux of this research work.
1.3  PURPOSE OF STUDY
In the light of the above, the purpose of the study are:
1. To evaluate the role of NDIC in distress management of Nigerian banks.
2. To evaluate the effectiveness of NDIC’s offsite and onsite examinations.
3. To examine the achievement of NDIC generally.
4. To evaluate the impact of the corporation on the Nigerian banking system.
1.4 RESEARCH QUESTIONS
The pertinent questions for this research are:
1. To what extent has the NDIC played its role in distress management of Nigerian banks?
2. To what extent has the NDIC been effective as a supervisory authority?
3. To what extent is the NDIC living up to expectation in preventing distress?
4. In what ways has the deposit insurance scheme impacted on Nigerian commercial banks?
1.5 STATEMENT OF HYPOTHESIS
Hypothesis is a conjectural statement about relationships that need to be tested and subsequently accepted or rejected. Taking this definition into consideration, the following hypothesis will be formulated and later tested to ascertain their validity or otherwise. The following are the hypotheses for this work:
1. H₀: The NDIC has not played any role in the management of distressed banks in Nigeria.
H₁: The NDIC has played a role in the management of distressed banks in Nigeria.
1. H₀: The NDIC has not performed any effective role in the management of distressed banks in Nigeria.
H₁: The NDIC has performed an effective role in the management of distressed banks in Nigeria.
1.6 SIGNIFICANCE OF STUDY
In the wake of bank failures, the economy suffered severe stress. Many depositors lost their hard-earned money; many suffered starvation because their breadwinners lost their jobs in the process. In a number of cases, depositors who lost their life savings die because of apparent hopelessness. People from different spheres of life have commented on this seemingly topical issue as it touches the very fabric of the national economic life. This study is will be embarked upon as a way of further investigating the issue with a view of evaluating how effective it has been in rescuing and managing banks when they are in distress. The research will be of benefit to practicing bankers, customers, bank management, monetary authorities, students of business administration and economics and other individuals seeking to know more on the NDIC’s operation, activities, and role in achieving stability in the banking sector. It will also be a reference point to other further researchers.
1.7 SCOPE OF THE STUDY
This study focuses on the operations, role and evaluation of the NDIC in the management of distressed banks. The study evaluates the effectiveness of the deposit insurance by appraising the performance of the NDIC in terms of deposit guarantee, bank supervision, distress resolution and bank liquidation. Crucial issues relating to the deposit insurance system in Nigeria are raised with major challenges identified, benefits and costs.
1.8 LIMITATIONS OF THE STUDY
Because of the order of the nature of this research, limitations are bound to arise. The lack of universal approach to management problems; constrains, such as inadequate financial resources, possible low respondent to the questionnaire, limited literature (since much cannot be gathered within the short period available for the research study) cost of transportation, inadequate time for travelling and combining normal academic study, could all act as limitation to this study. As a result of the factors listed above the sensitive nature of this topic makes it quite difficult to obtain some vital information from banks as some of them are not competent to speak on such matters. Another constraint is that known banks currently under liquidation refuse to admit they are in distress so a lot of information is kept. The most telling constraint however will be the time as the time needed to effectively carry out this research is limited.
1.9 DEFINITION OF TERMS
CBN – Central Bank of Nigeria. It was established by the CBN Act of 1958. It is the apex regulatory and supervisory body of all financial institutions.
NDIC – Nigeria Deposit Insurance Corporation. Its main responsibility is to administer the deposit insurance scheme in Nigeria, with a view to protecting depositors and contributing to financial system stability in Nigeria.
Management – The group of people responsible for controlling and organizing a company or organization, especially senior executives.
Distressed banks – These are banks that are liquid, unprofitable and have large non-performing assets. At the extreme, they are insolvent, a situation where a bank’s liabilities exceed its assets. (Oke, 2008) Bank – This is a federally regulated financial institution that, in general, engages in the business of taking deposits, lending, and providing of other financial services. (Oke, 2008)
Banking – In general terms, banking is the activity of accepting and safeguarding money owned by other individuals and entities, and then lending out this money in order to earn profit. (Oke, 2008).
Savings – This is forgone consumption. It is the difference between current income and current consumption. (Oke, 2008) Stakeholder – Stakeholder refers to all parties that have an interest, financial or otherwise, in a company. That is, shareholders, creditors, bondholders, employees, customers, management, the community, and the government. (Oke, 2008) Financing – It is a means of obtaining or providing funding for a transaction or undertaking; to back; to support.
Deposit – This is the amount of money placed with a bank for safekeeping, convenience, and/or to earn. (Oke, 2008)
Deposit insurance - Deposit insurance is a system established to protect depositors against the loss of their deposits in the event of an insured institution’s inability to meet its obligations to depositors. (NDIC DIS glossary, 2012)
Commercial bank – This is a financial institution that provides a wide range of banking services, including accepting deposits and extending loans to individuals and businesses. (Oke, 2008)
Bank liquidation - This is the process by which a bank is brought to an end, and the assets and property of the bank are redistributed.

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