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.