advert
home instructors journals contactus
Home

 

Instructors

 

Journals

 

Contact Us

 

JOURNAL OF RESEARCH IN NATIONAL DEVELOPMENT VOLUME 7 NO 2, DECEMBER, 2009

BANK DISTRESS, CONSOLIDATION AND ECONOMIC DEVELOPMENT IN NIGERIA

I. M. Eboreime

Department of Economics, Western Delta University, Oghara, Delta State
E-mail: mattheweboreime@yahoo.com

Abstract
The role of the banking sector in the economic development of any country cannot be over emphasized. Inter alia, the vicious circle of poverty thesis posits that low savings, low investment and capital deficiency constitute the principal causes of underdevelopment in the Third World. Unfortunately, the banking sector has remained unstable in both pre and post independence Nigeria, with several episodes of devastating distresses. This paper takes an overview of the phenomenon of bank distress coupled with its attendant causes as well as the recent banking consolidation initiative spear-headed by the Central Bank of Nigeria. The paper further examined the implications of these events for Nigeria’s economic development with the hope that the outcome will further prod and nudge the monetary authorities in ensuring a sound, expanding and enduring banking system in Nigeria.
Keywords: Bank; distress; consolidation; economic development


Introduction
Banks have a strategic role to play in the nation’s economic development. This is hinged on their basic function as financial intermediaries, mobilizing vital savings from surplus economic units and channeling same to deficits units. Thus, it is imperative that the banking system be healthy in order to fulfill its many expectations, chief among which is the provision of the financial catalyst for the attainment of economic progress, reduction in poverty and general improvement in the living standard of the people.
The history of banking in Nigeria is traceable to the twilight years of the nineteenth century when some foreign banks appeared on the scene. Before 1951, there was apparently no regulation of banking activities in the country.The first major attempt at regulating the banking sector came in the 1950s. Further statutory provisions for the regulations of the sector were put in place in the 1960s and 1990s. Regardless of these more sophisticated regulatory scenarios aimed at consolidating the activities of the banking industry, Nigeria witnessed its most severe financial sector crisis in the 1990s.

In 2004, a new chapter was opened in the nation’s banking history when the minimum capital base of commercial banks got pegged at N25 billion. This was against the backdrop that Nigerian banks were hitherto grossly under-capitalized, both individually and collectively. At that time, the least capitalized bank in Malaysia – a developing country – had a capital base of  over 50 times that of an average Nigerian bank.
Consequently, this paper takes an overview of bank distress in Nigeria as well as the consolidation initiative.
Bank distress in Nigeria
Rapu et al (2004) observed that distress refers to an unhealthy situation or the inability of a financial institution to achieve the set goals and aspiration. Financial (banking) distress is said to be commonly employed to describe two closely related conditions in a business, namely, illiquidity and insolvency. A bank is said to be illiquid when it suspends payments to depositors wishing to withdraw, and it is insolvent if the bank has a negative net worth in the balance sheet, with total liabilities exceeding total assets.
Banking sector distress can be classified as limited when its occurrence relates to a single or few banks and does not shake the public confidence in any significant ways. Furthermore, CBN (2005:14) averred that “the distress could become systemic if a sizeable number of banks are involved, resulting in bank runs as depositors lose confidence in the system and attempt to avoid capital losses in which case, the country is said to be experiencing a banking crisis”.
In Nigeria, the monetary authorities recognize a systemic banking crisis when at least two of the following situations are present:
           

The banks that are critically distressed or “ill” control 20 percent of the total assets in the industry;
*          15 percent or more of total deposits are threatened (that is, may be lost), and
*          35 percent of the banking system’s total loans and advances are non-performing (see CBN 2005:14).
Historically, the first ever incident of bank distress in Nigeria is traceable to the pre-colonial era. Commercial banking activities commenced in 1892 when African Banking Corporation (ABC), a South Africa - based bank, opened a branch in Lagos. However, the bank became distressed within two years due to operational problems, culminating in its eventual closure and take-over in 1894 by the Bank of British West Africa (BBWA), now First Bank of Nigeria Plc. The next bank, Barclays Bank DCO (now Union Bank of Nigeria Plc) was established in Lagos in 1917 (CBN 2005).
The first indigenous commercial bank in Nigeria, the Industrial and Commercial Bank, came on stream in the later part of 1920s. This bank came to grief in the 1930s as a result of mismanagement, accounting irregularities and stiff competition from the two British banks. The Nigeria Mercantile Bank was later established and never grew to any size but came to a premature end in 1936. In February 1933, the National Bank of Nigeria was founded by Dr. Maja, Dr. Doherty and H. A. Subair. Thus, it is with the incorporation of National Bank that the history of indigenous banking in Nigeria effectively began. Several other indigenous banks came on stream before 1951, including the Arab Bank in 1937, which later changed its name to African Continental Bank in 1948. The period of 1892 to 1951 is usually referred to as the era of “free banking” in Nigeria because of the complete absence of any laws governing the establishment and management of banks.
Prior to Nigeria’s independence in 1960, not less than 33 different commercial banks were registered in the country (see Table 1). Unfortunately, 22 out of the 33 banks went under between 1951 and 1960. Consequently, by 1959, only eight banks, four expatriate and four indigenous, with a total of 160 branches were operating in Nigeria (Rapu et al, 2004).

Table 1 Commercial banks registered in Nigeria between 1892 to 1959

S/N

Bank

Date Established

Remarks

  1.  

African Banking Corporation

1892

(NIL)

  1.  

Bank of British Corporation

1894

Now Standard Bank

  1.  

The Industrial and Commercial Bank

1929

Failed in 1930

  1.  

The Nigerian Mercantile Bank

1931

Failed in 1936

  1.  

Barclays Bank D. C. O.

1917

Now Union Bank

  1.  

National Bank of Nigeria

1933

Still in existence

  1.  

Agbomangbe Bank

1945

Now WEMA Bank

  1.  

The Nigerian Penny Bank

-

Failed in 1946

  1.  

The African Continental Bank

1947

Failed in 1953

  1.  

The Nigerian Farmers and Cooperative Bank

1947

Failed in 1953

  1.  

British and French Bank

1948

Now United Bank in 1961

  1.  

Mercantile Bank

1952

Failed in 1954

  1.  

Pan Nigerian Bank

1951

Failed in 1954

  1.  

Standard Bank of Nigeria

1951

Failed in 1954

  1.  

Premier Bank

1951

Failed in 1954

  1.  

Nigerian Trust Bank

1951

Failed in 1954

  1.  

Afro Seas Credit Bank

1951

Failed in 1954

  1.  

Onward Bank of Nigeria

1951

Failed in 1954

  1.  

*Central Bank of Nigeria

1952

Failed in 1954

  1.  

Metropolitan Bank of Nigeria

1952

Failed in 1954

  1.  

Provincial Bank of Nigeria

1952

Failed in 1954

  1.  

Union Bank of British Africa

1952

Failed in 1954

  1.  

United Commercial Credit Bank

1952

Failed in 1954

  1.  

Cosmopolitan Credit Bank

1952

Failed in 1954

  1.  

Mainland Bank

1952

Failed in 1954

  1.  

Group Credit and Agricultural Bank

1952

Failed in 1954

  1.  

Industrial Bank

1952

Failed in 1954

  1.  

West African Bank

1952

Failed in 1954

  1.  

Muslim Bank (W. Africa) Ltd.

1958

        -

  1.  

Bank of Lagos

1959

Failed in 1965

  1.  

Bank of the North

1959

Still in Existence

  1.  

Berini (Beruit – Riyad) Bank

1959

         -

  1.  

Banque de L. Afrique Occidentale

1959

         -

Source: CBN, Economic and Financial Review, 1968
*This was not connected with the Central Bank of Nigeria Established in 1959.  

The distress recorded in the 1990s was the most serious in terms of depth and the extent of its impact on the financial system and the economy. The number of distressed banks was only 8 in 1990. However, this figure rose to 24 in 1993 and 60 in 1995 (Rapu et al, 2004). These authors stated that, by the end of December 1995, 52 percent of the licensed banks were adjudged to be technically insolvent. The banking distress in the 1990s actually became systemic in 1993, leading to massive withdrawals by depositors and this resulted in the eventual closure of most of the distressed banks during that decade.
At this juncture, a review of some of the principal causes of distress in the banking sector is considered apt, and  include the following:
*          Inept management characterized by a failure to operate within the laws, as well as flouting the rules and regulations of corporate governance.
*          A poor capital base.
*          Moral hazard, overtrading and excessive risk taking which was characterized by the high loan to deposit ratio of many of the distressed banks. These banks not only increased their loan portfolio, but extended credit at high interest rates to high – risk borrowers.
*          Ineffective and poor credit management resulting in bad loans or a huge level of non – performing assets.
*          Incomplete financial information. For instance, financial data on borrowing was inadequate and in some cases did not exist. Sometimes the overhead expenses of banks may not be ascertained because of deliberate suppression of inter-branch vouchers relating to organizational expenses.
*          Announcing effects. The public announcement by the Central Bank of Nigeria that certain banks had been sent out of clearing undermined public confidence and triggered flight to safety and consequently led to runs in some of the distressed banks.
*          The deregulation of the banking system brought about intense competition for a share of the market. Thus, the deregulation of the national economy and the banking industry led to an unhealthy competition. For instance, customers of doubtful credibility were granted loans in order to attract high interest income, while banks offered high interest rates to attract deposits.
*          The macroeconomic environment was also instrumental to the distress of many banks. The downturn in the economy has been found to be correlated with the banking sector crisis in Nigeria. For example, the significant fall in capacity utilization during the 1990s, especially in 1995, hindered many industrial establishments from repaying their loans and advances.
*          Fraud, forgeries and insider abuse was rampant in the banking industry and constitute a major cause of distress.
 *          The forbearance of the Central Bank of Nigeria also partly contributed to the depth of distress in the banking sector. Banks with poor financial credentials should not have

been allowed to continue in business for a longer period as the monetary authorities permitted them. (See Rapu et al, 2004 and Bello, 2005).

 Bank consolidation
Banking reforms broadly involve the reorientation and repositioning of the banking sector in order to be more effective and efficient. The first attempt at banking reforms in Nigeria came in 1952 when the Banking Ordinance was enacted by the colonial administration. The idea of bank consolidation was entrenched in this ordinance. Among other provisions, all banks were expected to have a nominal subscribed capital of £25,000 and a paid-up capital of £12,500. Further refinements were made to the original Ordinance resulting in the 1958 Banking Ordinance and its amendment by act of parliament in 1962. Other attempts at strengthening the regulatory framework resulted in the enactment of the following legislations: the Central Bank of Nigeria Act of 1958; the Banking Act of 1969; Nigerian Deposit Insurance Corporation Act of 1988; the CBN Act of 1991, which also amended and repealed the Act of 1958; Banks and Other Financial Institutions Act of 1991, which also amended and repealed the Banking Act of 1969 ( Imala, 2005).
In specific terms, banking consolidation may be defined as the reduction in the number of banks and other deposit taking institutions with a simultaneous or concurrent increase in size, concentration and efficiency of the consolidated entities in the sector (Ayayi, 2005 and Bello, 2005).
The rationale for banking consolidation in Nigeria is not far-fetched. Firstly, bank consolidation became an imperative due to low capital base of Nigerian banks. As Imala (2005) observed, the average capital base of

Nigerian banks was US $10 million before the on-set of the most recent banking reforms in 2004, which is very low compared to that of banks in other developing countries like Malaysia where the capital base of the least or smallest bank was US $526 million. Additionally, the total capitalization of the Nigerian banking system at US $2.4 billion at that time was grossly low in relation to the size of the Nigeria economy as indicated by the Gross Domestic Product (GDP) and in relations to the capital base of US $688 billion for a single banking group in France and US $ 541 billion for a bank in Germany.
 Umoh (2004) aptly captured the essence of enhanced capital base in the following words: “Commercial banks must have enough capital to provide a cushion for absorbing possible loan losses or other problems, fund for internal needs and for expansion, and added security for depositors and the deposit insurance system. In addition, higher capital serves to increase the financial stake that stockholders have in the safe and sound operation of the bank. Consequently, bank regulators view capital as an important element in holding banking risks to an acceptable level”. In addition to serving as a safety-net for a variety of risk exposures and absorbing losses, adequate capital is a determinant of a bank’s lending capacity and maximum level of assets.
Table 2 shows the extent to which shareholders’ funds (capital)  supported the assets of Nigerian banks during the period 1995 to 2003. As Umoh noted, where such funds were minimal relative to total assets, one can deduce that available assets were acquired with depositors’ funds. Thus, shareholders funds to total assets ratio should give some indication of the owners’ stake in the business, compared to those of the other stakeholders, particularly given the tendency of Nigerian bank directors to readily refer to their banks as “my bank”.

Table  2. Ratio of shareholders’ funds to total assets of banks, 1995-2003


(1)
Year

(2) Shareholder
        funds N billion

(3) Total assets
N billion

(4)      Ratio (%)
     (2)(3)

1995

11.6

414.4

2.8

1996

17.3

491.5

3.5

1997

29.6

627.3

4.7

1998

70.9

760.6

9.3

1999

99.9

1,108.0

9.0

2000

133.8

1962.6

6.8

2001

183.7

2449.1

7.5

2002

229.9

2980.5

7.7

2003

211.1

3365.2

6.3

­­­

.

 

Source: NDIC. Annual Reports, Various Issues


It is evident from Table 2 that the ratio of shareholders’ funds to total assets never reached 10%, which is considered as very low. This clearly brings out the fact that shareholders’ funds has not been adequate to fund banks’ fixed assets in the years examined.
Another rationale for bank consolidation is the presence of a large number of small banks with relatively few branches. For instance as at May 2005, the 89 banks in Nigeria had a total of 3,382 branches whereas 8 banks in South Korea had about 4,500 branches. A third rationale is the dominance of few banks as evidenced in the top ten banks controlling about 50.8% of the aggregate assets, 51.7% of total deposit liabilities and 45% of the aggregate credits. Finally, the poor rating of many Nigerian banks provided further impetus for bank consolidation (Imala, 2005).
According to CBN (2005) Banking Supervision Report, some of the objectives of the recent banking sectors reforms (consolidation), which commenced in 2004 include:
(a)        Minimum capitalization for banks to be N25 billion with full compliance on or before end – December, 2005;
(b)        Consolidation of banking institutions through mergers and acquisition;
(c)        Adoption of a risk-focused and rule–based regulatory framework;
(d)        Adoption of zero–tolerance in the regulatory framework, especially in the area of data/information rendition and reporting;
(d)        The automation of the process of rendering returns by banks and other financial institution through the e-FASS; and
(e)        Strict enforcement of the contingency planning framework for systemic banking distress.
           
Table 3 shows the banks/groups that had met the N25 billion minimum capital base as at 31 December, 2005 and members of the group.

Table 3. Banks/Groups that had met N25 billion capital base as at December 31, 2005

   S/N

Group/Bank Name

Member of the Group

  •  

Oceanic Bank

  • Oceanic Bank Plc
  • International Trust Bank
  •  

Zenith Bank Plc

  • Zenith Bank Plc
  •  

Guaranty Trust

  • Guaranty Trust Bank Plc
  •  

Sterling Group

  • Magnum Trust Bank Ltd
  • NBM Bank Ltd
  • NAL Bank Plc
  • INMB Bank Ltd
  • Trust Bank of Africa Ltd
  •  

22

     First Bank Plc Group

  • First Bank of Nigeria Plc
  • FBN Merchant Bankers
  • MBC International Bank Ltd
  •  

Intercontinental Bank Group

  • Global Bank Plc
  • Equity Bank of Nigeria Ltd
  • Gateway Bank
  • Intercontinental Bank Plc
  •  

Wema Bank Group

  • Wema Bank Plc
  • National Bank Plc
  •  

ETB/Devcom Group

  • Equatorial Trust Bank Ltd
  • Devcom Bank Ltd
  •  

STB/UBA

  • Standard Trust Bank
  • United Bank for Afriica Plc
  • Continental Trust Bank
  •            

IBTC/Chartered Bank Group

  • Regent Bank Ltd
  • Chartered Bank Plc
  • IBTC Ltd
  •  

Unity Bank Group

  • Bank of the North
  • New Africa Bank Plc
  • Tropical Commercial Bank
  • Centre Point Bank Plc
  • New Nigerian Bank Plc
  • First Interstate Bank Ltd
  • Intercity Bank
  • Societe Bancaire Ltd
  • Pacific Bank Ltd 
  •  

Union Group

  • Union Bank of Nigeria Plc
  • Union Merchant Bank
  • Universal Trust Bank
  • Broad Bank Ltd
  •  

Afribank Group

  • Afribank Nigeria Plc
  • Afribank Int’l Ltd (Merchant Bankers)

.

  •  

FCMB Group

  • FCMB Bank Plc
  • Cooperative Devpt. Bank Plc
  •  

Access Group

  • Marina International Bank Ltd
  • Capital Bank International Ltd
  • Access Bank of Nigeria Plc
  •  

Skye Group

  • Prudent Bank Plc
  • Bond Bank Ltd
  • Cooperative Bank Plc
  • Reliance Bank Ltd
  • EIB Bank Ltd
  •  

Platinum/Habib Group

  • Platinum Bank Ltd
  • Habib Nigeria Bank Ltd
  •            

Diamond Bank

  • Diamond Bank Ltd
  • Lion Bank Plc
  • African International Bank Ltd

 

  •  

23

     First Inland Group

  • IMB Bank Plc
  • Inland Bank Plc
  • First Atlantic Bank Ltd
  • NUB Bank Ltd

 

  •  

Fidelity Group

  • Fidelity Bank Plc
  • FSB International Bank Plc
  • Manny Bank Ltd

 

  •  

Springbank Group

  • Guardian Express Bank Ltd
  • Citizens International Bank Ltd
  • Fountain Trust Bank Ltd
  • Omega Bank Plc
  • Trans International Bank Ltd
  • ACB International Bank Plc

 

  •  

Ecobank 

  • Ecobank Bank Nigeria Plc
  •  

NIB

  • Nigeria International Bank Ltd
  •  

Stanbic

  • Stanbic Bank Ltd
  •  

Standard Chartered

  • Standard Chartered Bank Ltd

 

Source:  CBN (2005)


Implications of banking sector distress
Firstly, the banking distress in the 1990s significantly affected the saving culture or habit of Nigerians in a negative way. Even before the on set of major financial crisis after 1990, Nigeria’s domestic savings was comparatively much lower than that of many countries. For instance, domestic savings averaged only 15.7% of GDP between 1986 and 1989. However, with the emergence of financial sector distress, Nigeria’s domestic savings as a percentage of GDP plummeted to a critically low value of 6.0% between 1990 and 1994. For the period 1993-1999, the saving-GDP ratio averaged only 11.3% per annum (Nnanna, 2003). The above outcome stifles investment activities, especially in the real sectors of the economy, and constrained the rate of capital formation and hence economic development.
Also bank distresses generally affects all sectors of the economy. Due to reduced purveyance of operational and investment credits, output falls. For instance, manufacturing as a percentage of GDP fell from 8.7% in 1986 to 5.4% in 1995 (see Nnana 2004). In fact, manufacturing capacity utilization reached its all-time low during that decade in 1995.

24

     Additionally, apart from the direct job losses that were associated with the scores of distressed banks, the fall in output in the real sectors (though, this was not uniform) increased the rate of unemployment in the economy. Not only were factories and businesses shut down, resulting in many people being thrown into the job market, the economy had little absorption capacity for the new entrants into the labour force such as school leavers and university graduates.
Furthermore, the distress scenario in the Nigerian banking industry, negatively affected its ability to attract foreign direct investment. Thus, all the above factors contributed to a significant rise in the poverty level in Nigeria. As FOS 1999 data reveals (see Eboreime 2007:61), the core poor in Nigeria increased from 12% of the population in 1985 to 29% in 1996, while the moderately poor rose from 34% to 36% during the same period. On the whole, the national poverty level increased from 46% to 66% between the period 1985 and 1996.

Consolidation and Nigeria’s economy
Banking is one business that thrives so much on public confidence. Once this confidence is eroded, bank runs and crisis is usually the ultimate outcome. However, one of the hallmarks of banking sector consolidation is to ensure that banks maintain adequate capital, not only to serve as a “safety-net” for a variety of risk exposures and losses but also to enhance banks’ lending capacity, funding of fixed assets for expansion and foster depositor confidence. Thus, a consolidated banking system will be more efficient in resource mobilization by pooling savings from surplus economic units. Savings plays a pivotal or extremely important role in generating economic growth and development through investments, capital formation, output growth, and generation of employment and higher living standard for the citizens.
A consolidated banking system has the potential of increasing the proportion of societal resources devoted to interest yielding assets and long term investments, which in turn contributes to economic


JORIND 7(2) December, 2009. ISSN 1596 – 8308. www.transcampus.org., www.ajol.info/journals/jorind


growth. Prior to consolidation, banks were generally involved in short-term lending because of the nature of their deposits but the current reform is expected to significantly remove this limitation. This was exemplified with the recent approval of a credit facility for Zen Oil (Nigeria) Limited to the tune of US $2.3 billion (over N280 billion) by a consortium of nine Nigerian banks. Without consolidation, this feat would have been impossible. Long-term investments in production and industrial activities ensure that more goods and services are produced, thus increasing productivity and the nation’s standard of living.
Consolidation will result in economies of scale, which will drive down the unit cost of production. It is also expected to lead to economies of scope, which will make the joint costs of producing two complementary outputs to be less than the combined costs of producing the two outputs separately. The above development coupled with increased pool of funds available for lending would drive down the cost of borrowing and this will impact positively on the economy.
The increased competition engendered by consolidation would expand banking services into under-banked regions (good examples include the recent presence of Skye Bank in Amai community and Oceanic Bank in Obiaruku, in Delta State). Of course, this will promote economic development. Additionally, competition would lead to improvement in efficiency and the deployment or greater utilization of modern technologies. Consequently, the society will enjoy higher quality of banking services, including the provision of insurance and project monitoring.

25

     Consolidation would promote monetary policy transmission mechanism. The need for a better platform for the effective implementation of monetary policy cannot be over-emphasized. A consolidated banking industry is expected to remove dominant group of players and this would stimulate quicker response to direct monetary policy signals. It is well to remember that with the deregulation of the Nigerian economy, the Central Bank of Nigeria (CBN) has increasingly placed more emphasis on indirect monetary policy tools to fine-tune the economy. Therefore, banking sector consolidation in providing a more effective avenue for the execution of the CBN’s monetary policy, contributes to the achievement of the following macroeconomic goals:
     
Maintenance of relative stability in domestic price;
-     Attainment of a high rate of, or full employment;
-     Achievement of a high, rapid and sustainable economic growth
-     Maintenance of balance of payment equilibrium; and
-     Exchange rate stability.
Evidently, the achievement of the above goals results in a rapid and sustainable development.
Consolidation would enhance international integration of Nigerian banks through increased international presence, especially in West Africa. Nigerian banks can now open more branches abroad. There will be better opportunities to attract offshore financing. The flow of foreign direct investment (FDI) would rise. All these would contribute to economic expansion, more output, employment and general development.
More resources will be made available for the financing of micro, small and medium enterprises (MSMEs). This has a direct bearing in poverty eradication. Banks are by law required to set aside 10% of their profit after tax for the financing of MSMEs. Consolidation has resulted in Nigerian banks declaring jumbo/mega profits on an increasing basis. Thus, more funds would be channeled to MSMEs and the impact on the nation’s economic progress will be salutary.
In summary, bank consolidation would accelerate the tempo of economic development in Nigeria through better savings mobilization, investment, economies of scale/scope, competition, international integration, attraction of FDI and financing smaller business units apart from the larger ones (see Nnanna 2003, Imala 2005, Ajayi 2005, Agusto 2004, Nnanna 2004, Ohuabunwa 2006, Ibru 2006 and Anyanwu 1992).

Recent post - consolidation challenges
On Friday, the 14th day of August 2009, the Governor of the Central Bank of Nigeria declared five prominent commercial banks technically insolvent, chronically illiquid, with a revelation that they had largely eroded their shareholders funds and practically breached all regulatory


JORIND 7(2) December, 2009. ISSN 1596 – 8308. www.transcampus.org., www.ajol.info/journals/jorind


ratios in banking (Guardian, Aug 18 and 20, 2009). The banks include: Afribank, Finbank, Intercontinental Bank, Oceanic Bank and Union Bank. The immediate consequence of this development is that these institutions could no longer be allowed to have their doors opened to the public without government intervention. The problem is expected to be widespread as many other banks are still being audited by the apex institution.
The above development has been attributed to a variety of factors. The successful banking consolidation exercise and the public offers provided a huge cache of funds which encouraged the banks to engage in predatory lending and thus, ignored tested risk management principles. Other contributory factors relate to ethical issues and a failure at corporate governance with virtues such as probity, accountability, transparency and prudence thrown overboard. The resultant effect was the disbursement of huge margin loans and unsecured credit facilities. The five banks had about half a trillion naira lent to the stock market with collateral predicated on the same risks and whims of dispirited stock prices. Insider trading was rampant. Approximately another half a trillion naira was extended to the oil and gas sector – specifically, the down stream sub-sector. Most of these loans totaling about N1.14 trillion are adjudged to be doubtful of recovery. 
Given the massive erosion of shareholders funds resulting in the five banks requiring the sum of N205 billion to meet the minimum benchmark of 10 percent capital adequacy, the Central Bank of Nigeria (CBN) intervened by not only sacking the entire Board of Directors of these banks but also injected a total of N420 billion ($2.6 billion or £1.6 billion) of fresh funds. The financial integrity of these institutions was seriously compromised as they recently reported almost N800 billion in shareholders funds instead of the copious deficiency. The CBN has so far been able to contain depositors run and systemic distress through repeated assurances that no bank will fail and has gone to the extent of guaranteeing all foreign loans and correspondent lines of the five banks.

26

       The implications of these recent post-consolidation challenges include (see Guardian, Aug 19, 2009):

  • Further crash in stock market prices as investors dumb their shares;
  • The nervousness generated could also dampen appetite for bond issues planned by Nigerian banks to diversify their capital and funding structure;
  • The short-term impact on monetary policy include the fact that the Naira currently fell by two percent against the United States dollars after the bank bail-out was announced and may weaken further if there is capital flight;
  • The CBN may need to provide additional dollar supply at its bi-weekly auctions to meet demand;
  • The uncertainty surrounding the Nigerian capital market could force inter-bank rates to rise further as banks become even more reluctant to lend to peers;
  • The CBN may find itself under pressure to cut interest rates and inject further liquidity into the system.

.

Conclusion
Banks are financial intermediaries that play important roles in resource mobilization and allocation; providing efficient payment and settlement services for both domestic and international trade as well as providing investment services. In view of the above, distress in the financial system will seriously impair the ability of banks to fulfill these roles. There have been three major episodes of distress in the Nigerian banking sector - in the 1930s, 1950s and 1990s. These all had their painful effects on the society. Consequently, the recent bank consolidation exercise is expected to bring a halt to the distress syndrome, especially given the lessons of history. Finally, it is important to note once again, that a post-consolidated banking system has a lot to offer in terms of fostering depositor confidence, significantly enhanced level of savings mobilization, attraction of foreign direct investment, project investment in micro, small, medium and large enterprises as well as greatly enhanced efficiency. The consequence of the above positive prospects is to raise the growth rate of GDP, accelerate the pace of economic development and lead to a general rise in the people’s standard of living.



JORIND 7(2) December, 2009. ISSN 1596 – 8308. www.transcampus.org., www.ajol.info/journals/jorind


.

References
Augusto, O. (2004). “Beyond Bank Consolidation: Effect on Banking and Real Sectors.” In Consolidation of Nigeria’s Banking Industry Proceedings of CBN’S Fourth Annual Monetary Policy Conference, 18th-19th November.

Anyanwu, J.C (1992). Monetary Economics: Theory, Policy and Institutions. Onitsha: Hybrid Publishers Nigeria.

Aromolaran, A. (1978). Modern Economic Analysis. Ibadan: Aromolaran Publishing Company Limited.

Ajayi, M. (2005). “Banking Sector Reforms and Bank Consolidation: Conceptual Framework.” CBN Bullion. Vol. 29 No.2. April/June.

Bello, Y.A. (2005). “Banking System Consolidation in Nigeria and Some Regional Experiences: Challenges and Prospects.” CBN Bullion Vol. 29 No. 2 April/June.

Central Bank of Nigeria. (2005). A Case Study of Distressed Banks in Nigeria. Abuja: Research and Statistics Department, Central Bank of Nigeria.

Central Bank of Nigeria (2005) “Banking Supervision Annual Reports.” Abuja: Central Bank of Nigeria.

Eboreime, I. M. (2007). “Evaluation of Poverty Reduction Interventions of Selected Multinational Oil Firms in Nigeria’s Niger Delta.” Unpublished PhD Dissertation, Imo State University, Owerri

.

27

     Guardian (August 18, 2009) “Sack of bank chiefs renews focus on corporate governance”  pp. 33   .

Guardian (August 19 2009) “Bank crisis and the implications for the markets” pp. 23  

Guardian (August 20, 2009) “Central Bank and the bubble in the banks” pp.20

Imala O. (2005). “Challenges of Banking Sector Reforms and Bank Consolidation in Nigeria.” CBN   Bullion. Vol. 29 No. 2 April/June

Ibru, C. A. O. (2006). “Small to Medium Scale Enterprise Financing: Creating Market Leaders.” Oceanic Bank Economic and Business Journal. Vol. 1 Issue 1. Oct- Dec.

.

Nnanna, O. J. (2003). “ Promoting Savings and Investment Culture for National Development. “ Central Bank of Nigeria Economic and Financial Review. Vol. 4 No. 3. September.

_________ (2004). “ Beyond Bank Consolidation: The Impact on Society.” In Consolidation in Nigeria’s Banking Industry. Proceedings of CBN’S Fourth Annual Monetary Policy Conference, 18th-19th November.

Ohubunwa, 5.1. (2006). “ Real Sector Challenges in a Consolidated Financial System.” Oceanic Bank Economic and Business Journal. Vol. 1 Issue 1. Oct.- Dec.

Rapu S.C. (2004). “ Episodes of Financial Sector Distress in Nigeria.”  In O. J. Nnanna, A. Englama, F. O. Odoko ed., Financial Markets in Nigeria. Abuja : Central Bank of Nigeria.
Umoh, P. N. (2004). “ Capital Restructuring of Banks: Conception Framework.” In Consolidation in Nigeria’s Banking Industry. Proceedings of CBN’s Fourth Annual Monetary Policy Conference, 18th-19th November.


.