ABSTRACT
The banking sector is the bedrock of the Nigerian economy, and this industry is known to have contributed in no small measure to the development of the economy. This industry is the enabling hub of national and global payment systems, which facilitates trade transactions within and amongst numerous national, regional and international economic units and by so doing; it enhances commerce, industry and exchange. In performing these various functions in the enabling environment provided by the government through various fiscal, and monetary policies and reforms, this industry has been experiencing a phenomenal distress whereby the banking institutions could not meet their financial obligations to their customers and stakeholders, which led to the liquidation of many banking institutions, lost of deposits by depositors, lost of investments by many investors and the crisis of confidence by the general public. Various researchers and bodies including the Central Bank of Nigeria (CBN) and Nigeria Deposit Insurance Corporation (NDIC) have done some works to solve this problem. The Central Bank of Nigeria (CBN) has introduced various reforms, yet this problem persists. The objective of this work is to evaluate financial strategy as determinant for sustainable performance growth and an antidote to distress in the Nigerian banking industry. The research method is empirical, and descriptive with the use of primary and secondary data from 1998-2007. Primary data were obtained from a sampled population through the use of a corporate questionnaire, and for the secondary, macro data were obtained from Central Bank and Nigerian Stock Exchange. Multivariate Analysis of variance method (MANOVA) was applied in analyzing the primary data. The results revealed the homogeneity, co linearity, and strong interrelationship between the dependent variables and the independent variables to solve distress in the three types of banks analyzed. With the results obtained, all the five null hypotheses were nullified. Multiple regression analysis was used to analyze the secondary data in conjunction with change in growth model. The results from the two statistical methods revealed a co-movement and correlation between Gross Domestic Product and Bank performance indices in the banking industry. A change in bank performance will have the same directional change in Gross Domestic Product as other sectors of the economy are also affected. The Bank performance indices are strong predictors of Gross Domestic Product. The work recommended a transformational financial strategy model in the work for implementation in the banking industry so that distress can be avoided and totally resolved. The model contains the following indices: sound corporate governance, good investment policy, effective capital budgeting, corporate planning, effective tax planning, effective budgetary control and economic profit of investment. An implementation of the model will give birth to sustainable performance growth which contains the following growth variables: adequate capital, quality earning assets, stable profitability, sustainable liquidity, enhanced dividend paid, and equitable tax liability. Other recommendations are: effective risk assets management, sound training of credit analyst, quality supervision from the industry regulators, and independence of EFCC for effectiveness. However, all stakeholders must be committed to the model and other recommendations.
TABLE OF CONTENTS
Title page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
Abstract viii
List of Tables xiii
List of Figures xv
Chapter one: Introduction
1.1 Background to the Study 1
1.2 Statement of the problem 8
1.3 Objectives of the study 12
1.4 Research Questions 13
1.5 Statement of Hypotheses 13
1.6 Scope of Study 14
1.7 Significance of Study 16
1.8 Preview of Research Methodology 18
1.9 Operational Definition of Terms 19
Chapter Two
Literature Review
2.1 Introduction 23
2.2 The Evolution of Banking in Nigeria 24
2.2.1The Colonial Era (1892-1957) 24
2.2.2The Independence Era (1957-1970) 28
2.2.3The Indigenous Era (1970-1985) 29
2.2.4 The Privatization and Commercialization Era (1986-1992) 32
2.2.5Bank Rehabilitation and Restructuring Era (1992-date) 35
2.2.6The Nature of Bank Reforms in Nigeria 36
2.3 Review of Literature relating to Financial Strategy and Sustainable
Performance Growth 44
2.3.1 Competing for the future 44
2.3.2 Central Bank of Nigeria (CBN) and Nigeria Deposit Insurance
Corporation (NDIC) definition of distress and analytical framework 46
2.3.3 Strategic Planning and Sustainable Performance Growth 52
2.3.4 Financial Strategy in the Banking Industry 55
2.4 Review of Literature relating to Strategic Planning and Bank
Performance for Sustainability and Growth in Nigerian Banking Industry 58
2.4.1 Strategic planning: Financial performance relations in Banks: A causal
examination 58
2.4.2 Corporate Governance and Sustainable Performance Growth 63
Cases of Poor Corporate Governance in Banks
2.4.3 Budgetary Control and Performance Evaluation 70
2.4.4 Capital Budgeting and Sustainable Performance Growth 72
2.4.5 Tax Planning and liquidity 76
2.4.6 Leadership and Sustainable Performance Growth 81
2.5 Review of Literature relating to Investment Policies and
Management of Assets and Liabilities in Nigeria Banking Industry 86
2.5.1 A case study of distress banks in Nigeria by Central Bank of Nigeria 86
2.5.2 Banking crisis: causes, early warning signals and resolutions 93
2.5.3 The causes of financial distress in local banks in Africa and
Prudential policy 104
2.5.4 Incentives and Resolution of Bank Distress 106
2.6 Review of Literature relating to Bank Performance and Gross Domestic
Product to Determine their Co-movement 108
2.6.2 Banking practice and the Nigerian economy 113
2.6.3 Micro and Macro Determinant of bank fragility in North Cyprus
Economy 114
2.7 Justification of study 117
2.8 Theoretical Framework 121
2.9.Framework Proposal:Causal Link between Model and Research Work 124
Chapter Three
Research Methodology
3.1 Introduction 128
3.2 Study Area 128
3.3 Research Design 128
3.4 Population, Sample Representatives and Sampling Techniques 130
3.5 Performance Indices 133
3.6 Restatement of Hypotheses 138
3.7 Data Collection Techniques 138
3.8 Reliability and Validity Test 140
3.9 Data Administration 142
3.10 Method of Data Analysis 143
3.11 Expected Results 148
3.13 Chapterization 150
Chapter Four
Analysis and Interpretation of Data
4.1 Introduction 151
4.2.Response to Questionnaire 151
4.3 Frequency Analysis of response to Questionnaire items 156
4.3.1 Section1 Relationship between Financial strategy and Sustainable
Performance 156
4.3.2 Section2 Relationship between Strategic Planning and Performance
For Sustainability of Growth of Business 167
4.3.3 Section 3Assessment of Investment Policy for Better Management of
Assets and Liabilities in banks 173
4.3.4 Section 4Evaluation of Relationship between Bank Performance and Gross
Domestic Product (GDP) 181
4:4 Descriptive Analysis of response to Questionnaire items 186
4.4.1Evaluation of the relationship between Financial Strategy and Sustainable
Performance Growth 186
4.4.2 Evaluation of the relationship between Strategic Planning and Performance
For Sustainability of Business Growth 189
4.4.3 Assessment of the relationship Investment Policy and Management of Assets
and Liabilities for Sustainable Performance Growth in the Banking Industry 191
4.4.4 Evaluating the relationship between Bank Performance and GDP 195
4.5.0 Statistical Testing Model 198
4.5.1 Testing of Hypothesis 1 199
4.5.2 Testing of Hypothesis 2 207
4.5.3 Testing of Hypothesis 3 215
4.5.4 Testing of Hypothesis 4 225
4.5.5 Testing of Hypothesis 5 236
4.6 Analysis of Secondary Data 245
4.6.1 Multiple Regression 245
4.6.2 Analysis and Comparison of Growth Change in GDP and Bank
Performance Indices 252
Chapter Five
Summary of Findings, Conclusion and Recommendations
5.1 Research Findings: Empirical Findings 258
5.2 Conclusion 265
5.3 Recommendations 266
5.4 Suggestions for Further Studies 275
5.5 Contribution to knowledge 275
References 281
Appendix 1:Liquidated distressed Indigenous banks in colonial era 286
Appendix 2: List of liquidated distressed banks between 1992 and 1998 287
Appendix 3: List of distressed banks whose licenses were revoked In 2005 288
Appendix 4: Statistics for Evaluating the Relationship between Financial
Strategy and Sustainable Performance Growth in the Banking
Industry 289
Appendix 5: Statistics for Evaluating the Relationship between Strategic
Planning and Business Close Down/Failure in the banking
Industry 290
Appendix 6: Statistics for the Examination of the Relationship between Strategic Planning and Performance for Business Sustainability And Stability 291
Appendix 7: Statistics for Assessment of the Relationship between Investment
Policy and Management of Assets and Liabilitiesfor Sustainable Performance Growth in the Banking Industry. 292
Appendix 8:Statistics for Evaluation of the Relationship between Bank
Performance and Gross Domestic Product to Determine their
Co-movement. 293
Appendix 9:Statistics for testing hypothesis 1 294
Appendix 10: Statistics for testing hypothesis 2 297
Appendix 11: Statistics for testing hypothesis 3 300
Appendix 12: Statistics for testing hypothesis 4 304
Appendix 13: Statistics for testing hypothesis 5 309
Appendix 14: Data for the Gross Domestic Product and Performance Indices
For Banks (1997-2007) 313 Appendix 15: Analysis of Growth Change in Gross Domestic Product and
Bank Performance Indices from 1998 to 2007 315 Appendix 16: Multiple Regression Analysis of Gross Domestic Product and
Ban Performance Indices (1998 -2007) 315 Appendix17: Corporate Questionnaire 320
Appendix 18: Structured Personal Interview Questions 327
LIST OF TABLES
Table Number Name Page
1.1 Number of liquidated banks in Nigeria 9
1.2 Financial institutions contribution to GDP 11
2.1 Bank Ratings as at June 30, 2002 88
2.2 Asset Quality of Banks from 1989 to 2001 95
2.3 Extent of insider loans in selected banks in liquidation 97
2.4 Extent of frauds and forgeries in banks 98
2.5 Calculated ratios of deposits and assets and recapitalization requirement
of distressed banks 100
2.6 Contribution of Financial sector to GDP 1990-1994 114
3.1 Result of Reliability test 141
3.2 Categorization of banks in the sample 144
4.1 Response to Questionnaire 152
4.2 Management System 152
4.3 Period of service 153
4.4 Planning process 154
4.5 Junior staff minimum Qualification 154
4.6 Senior staff minimum Qualification 155
4.7 Central Purpose 157
4.8 Correlation of business of banking with strategy 157
4.9 Performance Growth 158
4.10 Poor Implementation of financial strategy 159
4.11 Applicability of Responsibility Accounting 159
4.12 Attributable to poor strategic planning 160
4.13 Poor tax planning and non-compliance with tax laws 161
4.14 Budgetary Control effectiveness 162
4.15 Leadership type 162
4.16 Training of staff professionally 163
4.17 Technical and managerial ability of staff 164
4.18 Profitability 165
4.19 Corporate Planning 166
4.20 Capital Growth 167
4.21 Corporate Governance and corporate existence 168
4.22 Corporate Governance and financial reporting 169
4.23 Poor Corporate Governance result 169
4.24 Sustainable Growth and corporate governance 170
4.25 Boardroom Upheavals 171
4.26 Lost of Investment 172
4.27 Board Consistency 173
4.28 Security Nature and non-performing loans and advances 173
4.29 Strong Relationship of investment policy and management of asset
And liabilities 174
4.30 Facility appraisal System 175
4.31 Liquidity Problem and Asset growing 176
4.32 Budgetary System and Liquidity Management 177
4.33 Investment Appraisal System 178
4.34 Depositors’ Money and Asset Acquisition 179
4.35 Tax benefits and Fund Retention 180
4.36 Policy Compliance 181
4.37 Co-movement of Gross Domestic Product and Bank performance 182
4.38 Economic Performance Indices 183
4.39 Other Sectors and Gross Domestic Product 183
4.40 Financial Strategy as Antidote and Gross Domestic Product 184
4.41 Financial Distress Killer Disease 185
4.42 Analysis of Growth in GDP and Bank Performance 253
CHAPTER ONE
INTRODUCTION
In the ordinary parlance, the word distress connotes unhealthy situation or state of inability or weakness which prevents the achievement of a set goals and aspirations. A financial institution will be described as unhealthy; when it exhibits severe financial, operational and managerial weaknesses where sustainability and stability are missing in business. A business is any activity that seeks to make profit by providing goods and services to the society by using inputs from the environment and transform them into outputs that add meaning to human existence. A business can be one’s regular employment, profession, occupation and can be an organization established through the pooling together of resources by various investors with the aim of providing products or services to the economy, contribute to the development of the economy and earn returns on their investments. Nigerian businesses can be classified into three major segments viz: Private enterprises, Private limited Liability Companies and publicly quoted companies. The banking sector belongs to the private limited liability companies and the publicly quoted companies. While some banking institutions are privately owned by investors, some are publicly quoted on the Nigerian Stock Exchange. The banking sector is part of Nigerian financial system, and financial system refers to the totality of the regulatory and participating institutions, including financial markets and instruments, involved in the process of financial intermediation. The major objectives of investing in the banking sector are to provide financial services to the economy and earn compensatory returns on capital employed.
The Bills of Exchange Acts Cap 21, Laws of the Federation of Nigeria 1958 states that a ‘banker’ includes a body of persons whether incorporated or not who carry on the business of banking. By S.2 Coins Act Cap 34, laws of the Federation of Nigeria, 1958, bank and banker mean any persons, partnerships or company carrying on the business of bankers and also any saving bank established under the Saving Bank Ordinance, and also any banking company incorporated under any ordinance heretofore or hereafter passed relating to such incorporation. S.21 (1) Nigerian Evidence Act, Cap.62, laws of Federation of Nigeria, 1958, also provides in like manner. (Olulana, 1999:16). The Banks and other Financial Institutions Act No 25 of 1991 defines bank as one licensed under the Act and banking business as the business of receiving deposits on current, saving or other similar account, and paying or collecting cheques-S.62 BOFIA. The industry is the enabling hub of national and global payments system by facilitating trade transactions within and amongst numerous national, regional and international economic units and by so doing; it enhances commerce, industry and exchange. The banking industry in Nigeria is the bedrock of the economy.
According to Onoh (2002:10-13),the establishment of modern banking in Nigeria dates back to the colonial era when the African Banking Corporation was formed in 1892 to distribute currency notes of the Bank of England for the British treasury. Subsequent developments were encouraged by colonial entrepreneurs who needed banking institutions to back up the colonial trade. In the bid to address the credit needs of indigenous entrepreneurs, Nigerians later ventured into the banking business, initially through private individuals and later through deliberate government policy. According to CBN and NDIC (1995:1), the problem of distress in the financial sector, including bank failure, has been observed in Nigeria as far back as 1930 when the first bank failure was reported. Between 1930 and 1958 when Central Bank of Nigeria CBN was established, about 22 banks were liquidated (appendix 1). In 1992, 3banks were liquidated while in 1994, 4banks were liquidated. The degree of intensity and scope of the distress has never been as serious as has been observed since June,1989 when the Government directive to withdraw deposits of government and other public sector institutions from banks to the CBN exposed the weak financial condition of most financial institutions. This led to the increase in the number of distressed institutions and the severity of the problem has been on the increase. The intensity of the problem led to the liquidation of 26banks in 1998(appendix 2).
According to CBN (2004:1), following the deregulation of the Nigerian financial sector in 1986 during era of structural adjustment programme (SAP), the banking industry witnessed remarkable growth, both in the number of deposit money banks and other types of financial institutions. However, in the early 1990s, Nigerian banking institutions faced many challenges, including increased competition and harsh economic conditions. Against this background, the incidence of financial sector distress induced by undercapitalization, liquidity crisis and high degree of non-performing loans characterized the banking industry in Nigeria. Some of the banks were faced with the threat of liquidation, while some were resuscitated as a result of the timely intervention of the regulatory authorities.
Several measures have been taken by the supervisory agencies to tackle the problem of distress in the financial system most especially the banking industry to stem the deterioration in the financial conditions of ailing banks with the ultimate aim of restoring confidence in the financial system. These varied from financial assistance, imposition of holding actions and supervisory intervention to the outright liquidation of some distressed banks. As a way of minimizing the distress in the banking system, the Central Bank in 1990 introduced the Prudential Guidelines on early recognition of loan losses and required banks to make adequate provisions for bad and doubtful debts, a factor which was responsible for the insolvency of some banks.
The Central Bank of Nigeria explained that based on bank examination reports, the supervisory authorities drew the attention of the Boards and Managements of distressed banks to a number of shortcomings such as poor credit policy, large portfolio of non-performing assets, weak internal controls, insider abuses. All the recommendations were unheeded. The regulatory authorities had to impose holding actions on such banks, the implementation of which was time bound. The CBN in collaboration with the NDIC granted liquidity support to illiquid banks to assist them meet their obligations as and when due. This helped to achieve some measure of success and restore public confidence. Technical assistance was provided by the supervisory agencies in form of advisory services and secondment of staff when the need arose. Owing to limited success in the application of Holding Actions, the CBN assumed control and management of some distressed banks with the intention to acquire, restructure and subsequently sell them to the public. In order to sanitize the banking system and install market discipline, the licences of some banks were revoked in the system in 1992, 1994, 1998 and 2005.
According to Eghodaghe (1993) and cited by CBN/NDIC (1995), a financial institut
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