This   study  was   a   historical   survey  of   determinants   of   bank   distress in Nigeria. The research population comprised banks operating in Nigeria between 1998  and  2004.  Data  used  in the  study  were  all  observational panel data obtained from t he published accounts of the  elements  of  the research population. A total  of  113  complete  bank  observations  were utilized in the study. The researcher visited the Nigerian Deposit Insurance Corporation ( NDIC), the Central Bank of Nigeria ( CBN), the  Chartered Institute of Bankers of Nigeria  ( CIBN)  and  the  Financial  Institutions Training  Centre  ( FITC)   to   obtain   t he    data   ut ilized   in    the   study. The  relationships  outlined  by   the   data  set  were   empirically  analyzed via multiple  regression  tests.  All  t he data  for  the  purpose  of  the  study were manually computed and then  calibrated  into  the  SPSS  regressio n module for extensive stat ist ical  analysis.  The  empir ical  results  indicated that loan quality is a significant  determinant  of  bank  distress  in Nigeria, while insider lending and extent of government ownership are insignificant.


Title Page








CHAPTER ONE – Introduction 1

Background of the Study1

Statement of the Problem5

Purpose of the Study5

Scope of the Study5

Objectives of the Study6

Research Questions6

Research Hypotheses6

Significance of the Study7

Limitations of the Study8


CHAPTER TWO – Review of Related Literature 10

What is Bank Distress?10

Determinants of Bank Distress12

Insider Lending13

Share Capital Requirement14

Bank Ownership15

Fraud and Fraudulent Practices17

Lending to High-Risk Borrowers18

Macro-economic Instability19

Liquidity Support and Prudential Regulation20

Inadequate Supervision21

Weak Corporate Governance21

Consequences of Bank Distress23

Erosion of Public Confidence23

Contagious Effects24

Economic Effects25

Global Effect26

Bank Distress in Nigeria26

Origin of Bank Distress in Nigeria26

Current Early Warning System (EWS) Employed

in Identifying Bank Distress in Nigeria 27

Ownership Structure as a Determinant of Bank Distress

in Nigeria 29

Tackling Bank Distress in Nigeria – A Regulatory Approach30

Distress Rationale for Banking Sector Reforms in Nigeria32



CHAPTER THREE – Research Design and Procedure 38

Research Design38

Research Population38

Nature, Sources and Size of Data38

Method of Data Collection38

Model Specification39

Variables’ Definitions39

Mode of Data Analysis40


CHAPTER FOUR – Data Analysis 43

Visual Tests for Outliers43

Kolmogorov-Smirnov and Shapiro-Wilk Tests for Normality46

Correlation Matrix Test for Multicollinearity47

The Regression Estimates48

Correlation Test for Existence of First-Order

Autoregressive Schemes 48

Durbin-Watson Test for Existence of First-Order

Autoregressive Schemes 50

Answering the Research Questions and Testing

the Research Hypotheses 51

Research Question 1 and Research Hypothesis 151

Research Question 2 and Research Hypothesis 251

Research Question 3 and Research Hypothesis 352

Research Question 4 and Research Hypothesis 452


CHAPTER FIVE – Summary of Findings, Conclusion and Recommendations 54

Summary of Findings54









Table Page

Table 2.1 – The Magnitude of Insider Abuse in Lending 13

Table 2.2 – Extent of Insider Loans in Liquidated Banks

(December 1996) 22

Table 2.3 – Weights of CAMEL Factors in Use in Nigeria 28

Table 4.1 – SPSS Case Processing Summary 46

Table 4.2 – SPSS Tests for Normality 46

Table 4.3 – Correlation Matrix of the Regressors 47

Table 4.4 – Correlation Results for Yt and Yt-1 48

Table 4.5 – Correlation Results for X1,t and X1,t -1 49

Table 4.6 – Correlation Results for X2,t and X2,t -1 49

Table 4.7 – Correlation Results for X3,t and X3,t -1 49


Figure Page

Fig. 1 – Outliers in Solvency Ratio vs. Capital Size 43

Fig. 2 – Outliers in Solvency Ratio vs. Insider Loans 43

Fig. 3 – Outliers in Solvency Ratio vs. Loan Quality 44

Fig. 4 – Outliers in Solvency Ratio

vs. Extent of Government Ownership 44

Fig. 5 – Specific Identification of the Outliers 45



Background of the Study

In   many  societies,   liquidation  is   an  unpleasant  word   because of  it s   negative  connotations.  It   connotes  wiping  out   what   was  once in existence,  winding  up   a   company,  killing  what   was   once   alive or destroying  what  had  been  carefully  built  over  t ime.  When  the  word is applied after a bank,  it is even more  fr ightening. This  is so because banks are expected to be safe havens for  people’ s money and  valuables; thus the thought of liquidating such havens is understandably uncomfortable. The discomfort arises  from the  potential losses that  might be sustained by t he banks’  stakeholders,  namely  depositors  and  the society at large ( NDIC, 2008: 2).

With many banks in Nigeria classified as distressed, some licenses withdrawn  and   some   banks  acquired  by   the  Central  Bank   of  Nigeria ( CBN) at a shameful purchase price of N 1 per bank, the issue has ceased to be whether banks will fail or not ( CBN / NDIC, 1995). Almost every concerned person  is rather  asking  what  will  be the  possible  causes of bank distress, how can problem banks  be identified  and  problems averted ( Anyanwaokoro, 1996: 208).

Committee  on  Banking  Supervision  ( 2001)  t races   the   history of financial distress in t he Nigerian banking system  back  to  the  1930 s when  about  21  bank  failures  were  recorded  prior  to  the  establishment of the CBN in 1958. The financial crisis was attributable to a number

of reasons including t he under- capitalization of banks, weak management, inappropriate corporate governance structures, reckless use of depositors’ funds, excessive growth ( over- t rading), lack of regulation and supervision, polit icization and non- performing  loans.  Poor loan qualit y had  it s roots in the informational problems which afflict  financial markets,  and  which are most acute in developing countries.

In Nigeria,  many  indigenous  banks  which  commenced  operations in the early  1950 s went  into  voluntary  liquidation  in the  mid- 1950 s with such rapidity that confounded society. Some of the depositors were

reported  to  have  lost their  lives  as  a   consequence.   At   that   t ime, there were neither banking regulations nor an inst itut ion to see to  the orderly liquidation of failed banks. The banks simply closed their doors, never to reopen them ( NDIC, 2008:2).

Another financial crisis in Nigeria, which started in 1989 with the identification of seven distressed banks, worsened gradually until 1993 when it led to the collapse of the inter- bank market and spread to all segments of t he financial system.  The  ability of the  supervisory agencies to contain, manage and resolve the distress syndrome was severally handicapped due to the absence of a comprehensive regulatory framework for distress management.

Banks provide important benefits to  the  community, and  facilitate the   objectives   of   financial   liberalization,   by   boosting  competition in banking markets, stimulating  improvements  in services  to  customers and expanding access to credit, especially to domestic  small  and medium- scale  businesses.  Financial   liberalization  in   Nigeria  brought in it s wake a variety of financial inst itutions operating in the country. Commercial banks increased from 29 in  1986  when  financial  sector reforms began, by over 124% to 65 in 1992. New deposit- taking financia l inst itut ions also came on stream as a result of financial sector reforms. Among  banks,   these   included  community  banks,  the   people’s  bank and  Mortgage  banks,   officially  called  primary  mortgage  inst itut ions ( PMIS). Among non- bank  financial  inst itution  ( NBIS)  are  finance houses or companies, unit t rusts, and discount houses ( Soyibo, 1996 a). Unfortunately,  the  attainment  of  the  benefits  of  financial liberalization in Nigeria  has   been  jeopardized  because  banks  have   been   vulnerable to financial distress ( Brownbridge, 1998). Substantial numbers of banks have failed, mainly due to non- performing loans.

Uche  ( 1997)  in   his  article  t it led  ‘Rethinking  Deposit  Insurance in Nigeria’, t races the origins of bank  distress in  Nigeria to  the colonial era, during  the  indigenous  banking  crisis  of  1950 s, which  necessitated to the passing into law of the 1952 Banking Ordinance. The  ordinance

required the indigenous banks in the British West African Colony of Nigeria to:

(1) ) Have a nominal  share  capital  of  at least  £25, 000  of  which  not less than £2, 500 should be paid up.

(2) ) Be licensed  by  the  financial  secretary  in order  to  be able  to carry on banking business.

(3) ) Abstain from  granting  loans  and  advances  on  the  security  of their own shares and granting unsecured loans  and  advances  in excess

of  £300  to  any  one  or  more  of  it s directors  or  to  a business in which it or any one or more of it s directors had any interests.

(4) ) Maintain adequate cash reserves.

(5) )      Maintain a reserve  fund out  of  net  profit  of each year  of not less than 20 percent  of  such  profit  until  the  reserve  fund  equals the share capital.

(6) )      Refrain  from  paying    a    dividend   until   all   their capitalized expenditure not represented by tangible assets had been written off, and

(7) )     Make periodic returns to the financial secretary.

More damaging to these  indigenous banks,  however, were  sections 5( 2) and 6( 2) of t he ordinance which gave the existing banks three years with which to comply with the provisions of the ordinance or to discontinue banking  business.  The   fact   that   the   indigenous   banks  were   given a maximum  period  of   three   years   to   meet   with   the   requirements of the ordinance or face  liquidation coupled  with the  fact  that  there  was no deposit insurance scheme in  place  to  compensate  depositors  in the event  of such liquidation, precipitated a run on these  indigenous banks. This contributed to the eventual failure  of  several  of  these  banks. Between 1953 and 1954,  for  instance, 17  of the  21  indigenous banks then in existence failed. Not withstanding t he  fact  that  most  of these  banks were poorly capitalized and poorly staffed, the last  stages that t riggered their mass failure was the government action of regulation.

Thereafter, the banking system remained fairly stable  until  1986 when the Babangida Administration under pressure from the International Monetary Fund and World Bank, launched the Structural Adjustment Programme, ( SAP). An integral part of this programme was the deregulation of the banking system. Bank licensing policy was liberalized giving r ise to a proliferation of banks and other finance inst itut ions. According  to   Uche   ( 1998),  between  1985   and   1992,   t he   number of licensed commercial  and  merchant  banks  in the  country  increased from  40  to  120.  Most  of  these  new  banks  were  no   more  than  bureau de changes. The  deregulation of t he economy,  loopholes and  sometimes out  right  evasion of the  law  made  it possible for  some of the  new  banks to survive and prosper by mainly buying and selling foreign exchange.

The deregulation of t he economy created both r isks and opportunities for the banks and there was increased competition, not just among banks  but  also  with  finance  houses  which  were  also  a creation of government deregulation. SAP therefore fundamentally changed the structure of banking in the country. The  new  spirit  of competition meant that the decision as to whether banks should fail or not was now to be determined by market forces. Government therefore focused on protecting the depositors, hence the establishment of the Nigerian Deposit Insurance Corporation ( NDIC).

The origin of banking crises in the 1990s was, perhaps, the sudden decision, by t he Federal Government in 1989, to withdraw public sector deposits from all commercial and merchant banks, leading to serious liquidity  crisis  in at least   nine   banks.   This   prompted  NDIC  to   set up a liquidity support programme, valued at N2. 3 billion, for the affected banks. The government further stretched Nigerian banks with excessive taxation.  Government  fiscal  indiscipline  also helped  to  sabotage macro- economic  stability  which,   in   turn,  further   entrenched  distress in the Nigerian banking sector.

Statement of the Problem

Situations where t he solvency and  / or  liquidity of several banks have suffered  shocks  t hat  shake  public  confidence  have  been  a source of concern to bank regulators, the government, depositors and the general public. One worrisome aspect of the result  of  liberalization  of  the financial sector in Nigeria has  been  the  extent  of distress  in t he sector. For instance, 31 banks were closed between January 1994  and  Januar y 1998. The year 1994 witnessed 4 bank closures ( 1 commercial bank and 3 merchant banks); 1 commercial bank was closed in 1995 ; 3 banks were closed in 2000 ; 1 bank was closed in February,  2002 ; and  1 bank  was closed in February 2003.  There  are  a lso  reports that  60  out  of the  total of 115 surviving banks in Nigeria in the year 1995 were distressed, representing 52. 2%  of all t he banks  existing  at the  t ime  ( NDIC,  2003). A very high proportion of both community banks and finance houses were also reportedly distressed. In 2004, the CBN Governor, Professor Charles Soludo,  was   quite  revealing   in   his  analysis  of  the   distress  position of  Nigerian  banks  existing  at   the   t ime   when  he   classified  62   banks as sound, 14 banks  as marginal,  11  banks as  unsound, while 2 banks did not render returns. He concluded by saying that, while the state of the Nigerian banking system can be adjudged sat isfactory, the state of some of the banks was less cheering ( Soludo, 2004:35).

Purpose of the Study

In  order to  better understand the problem necessitating this  study, the researcher intends to empirically ascertain determinants  of  bank distress in Nigeria, as a means of identifying and curbing future incidents of distress in t he Nigerian banking industry.

Scope of the Study

There are two aspects to bank distress. These are illiquidity and insolvency.   The    scope   of   this    study  is    delimited   to    insolvency as an indicator of bank distress in the Nigerian banking industry.

Objectives of the Study

The researcher aims t hat this study achieves the fo llowing objectives:

(i) ) Empirically ascertain whether capital size is a significant determinant of bank distress in Nigeria.

(ii) ) Empirically ascertain whether insider lending is a significant determinant of bank distress in Nigeria.

(iii) ) Empirically ascertain whether loan quality is a significant determinant of bank distress in Nigeria.

(iv) ) Empirically ascertain whether extent of  government ownership is a significant determinant of bank distress in Nigeria.

Research Questions

( i) Is capital size a significant determinant of bank distress


( ii) Is insider lending a significant determinant of bank distress


( iii) Is loan quality a significant determinant of bank distress


( iv) Is extent of government ownership a significant determinant

of bank distress in Nigeria?

Research Hypotheses

A hypothesis is a prediction or  a conjecture stated well in advance of observance ( or  actual collection of data)  about  what  can  be expected to   occur  under  stated  or  given  conditions  ( Asika,  1990).  Streamlined to the aforementioned objectives and research  questions,  the  fo llowing null hypotheses have been formulated and shall be subjected to suitable empirical tests.

Null Hypothesis 1

HO1 : There is no significant relationship between capital size and bank distress in Nigeria.

Null Hypothesis 2

HO2 : There is no significant  relationship  between  insider  lending  and bank distress in Nigeria.

Null Hypothesis 3

HO3 : There  is no   significant  relationship  between  loan  qualit y   and bank distress in Nigeria.

Null Hypothesis 4

HO4 : There is no significant relationship between extent of government ownership and bank distress in Nigeria.

Significance of the Study

One advantage of academic research is that it investigates matters which practitioners  and  policy  makers  find  useful  but  have  lit t le t ime to study. The significance  of  this  study  stems  from  the  important position banks hold in every  economy,  developed  or  undeveloped. Banks are catalysts, around which all other economic activities revolve. A distressed banking sector may  be  a serious  obstacle  to  economic activity  and  aggravate  the  effect  of  adverse  shocks.  For instance, when banks are distressed, firms may be unable  to  obtain credit  to  deal with a period of low internal cash flow. In fact, lack of credit may force viable  firms  into   bankruptcy.   Similarly,   lack   of   consumer  credit may worsen declines in consumption and aggregate demand  during recession, aggravating unemployment. In extreme  cases,  bank- run  and bank   failure   can    threaten    the    soundness    of    payment    system, and  by  extension,  the  economy.  It  is against  this  backdrop   that studies  on  the  empirical  determinants   of   bank   distress   in   Nigeria are inevitable as:

⦁ The  study  shall  be  of  great  importance  in minimizing  incidence of bank distress in Nigeria.

⦁ The study shall be of policy relevance  to  NDIC  and  the  CBN towards  evaluating   and   managing   bank   distress   conditions in Nigeria.

⦁ The study shall significantly add to the existing body of literatures relating to bank distress in Nigeria.

Limitations of the Study

The limitation of any study are in the nature of constraints and bottlenecks, which could have created deficiencies, restrictions, biases, prejudices  and  confinements  to  the   conduct,  findings  and   limitations of the study. For this study, the limitations include:

(i) )      Paucity of stat ist ical data

(ii) )     Lack of willingness to release information by bank officials.

(iii) )    Difficulty  in   accessing  information  from  information technology for this study.

(v) )      Observational Data  Limitations:- Observational data pose major challenges to econometric  attempts  to  est imate  causal effects, and the tools of econometrics to tackle these  challenges. In the real world,  levels  of  “treatment”  are  not  assigned  at random, so   it   is difficult  to   sort   out   the   effect   of  t he   “treatment” from other relevant factors ( Stock and Watson, 2007: 10).

(vi) ) Abnormality  of  the  Dataset:-  While  analyzing  the  data  ut ilized for the purpose of this  study, the  researcher observed abnormalit y of   the   entire  dataset.  Since   regression  analysis  is a   parametric statist ic,   the    complete   abnormality   of    the dataset  amounts to  a fundamental  stat ist ical   flaw   which adversely affects the reliable interpretation of t he regression est imates derived via the dataset as well as their generalizability.


Anyanwakoro, M. ( 1996) Banking Methods and Processes.  Enugu: Hosanna Publications.

Asika, N. ( 1990) Research Methodology in Behavioral Science.

Nigeria: Longman.

Brownbridge, M. ( 1998) “The  Causes  of  Financial  Distress  in Local Banks  in Africa and  Implications for Prudential  Policy” UNCTAD/ OSG/DP/132.

CBN / NDIC ( 1995)  Distress in  the  Nigerian  Financial Service Industry: A CBN / NDIC Collaborative  Study.  Lagos:  Page  Publishers Services Ltd.

Committee on Banking Supervision ( 2001 ) “Frame work for Contingenc y Planning for Banking Systemic Distress and Crises”.

Nigeria Deposit Insurance Corporation ( 2003) Annual Report and Statement of Accounts. Lagos: Nigeria Deposit  Insurance Corporation.

Soludo, C. ( 2004)  “25 bn  Capital Base:  Implications  on  the  Economy”.

This Day, Lagos, July 4, p. 35.

Soyibo,  A. ( 2004a)  “A Positive, Normative Analysis of Bank Supervision in Nigeria”. AERC Research Paper 145.

Soyibo, A.   ( 1996 b).  Financial   Sector   Liberalization   in   Africa: Some Empirical and Policy Issues. Nairobi: African Economic Research Consortium.

Stock,  J. H.   and Watson, M. W.   ( 2007)  Introduction to Econometrics

( Second Edition). Boston: Pearson Education, Inc.

Uche, C. U. ( 1997) “Rethinking Deposit Insurance in Nigeria”.



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