The aim of this research study is to analyze and ascertain the extent to which fraud and poor management contributed to bank failure through a careful analysis of banking industry with a particular reference to the presently embattled Savannah Bank of Nigeria Plc. whose operating license was recently revoked.
Chapter one examined the historical development of banking in Nigeria, recognizing the catalytic roles of the business of banking in the economy, together with other introductory analysis on the extent of bank failure and fraud and their effect on the development of banking business in Nigeria.
In chapter two, an overview of bank failure in Nigeria economy was made. Emphasis were laid on their genesis, caused (fraud and poor management), control issues involved in bank failure management. Particular attention was drawn on the impact of banking business in the overall development of the people, and economy and the implications of its failure. The controversy surrounding the revocation of the operating license of Savannah Bank Plc and the prospects of banking business were also treated.
In chapter three, the research narrated how the various data for this study were collected and which informations were used with a view to realizing the objectives of the study.
In chapter four, tables of percentages were used to present and analyze the data collected and which information were used with a new to realizing the objective of the study.
In chapter four, tables of percentages were used to present in analyze the data collected while chi-square method was used to test the postulated hypothesis.
Finally, in chapter five, a critical analysis of the research study revealed that bank failure in Nigeria are attributable principally to fraud, poor management team and adverse economic conditions among other institutional and non- institutional factors. However, it was recommended among other things that due to the peculiar and strategic position of the banking industries and their synergistic effects of change arising. Therefore government should closely monitor the activities of bands through their agencies/regulatory authorities without necessarily politicizing their mandate Banks should equally strengthen their internal control measure. Moreover, if the regulatory authority saddle with the responsibility of managing industry keep an eagle in the industry’s activities, it will stem the tide to bank meddling with the fortunes of depositors shareholders and other interested parties and forth overall benefit of the economy. This is in view of the catalytic role of banking business in the economic confidence in the banking public. Further research on very relevant linked area of the research topic was also suggested by the research. This is in view of the dynamism, and inexhaustibility of the topic of study.
1.1 BACKGROUND OF THE STUDY
One of the indices for measuring the development of an economy is the size, maturity and safety of its banking industry. This is because the banking industry plays a very important role in the mobilization and utilization of investible resources (financial) in the economy. It acts as the intermediary units of the country through a process of “financial inter-mediation”. The absence of a market for which can greatly reduce the growth of economic activities; its business activities are catalysts for economic development.
The Nigeria banking industry at the movement appears to be the verge of collapse. The banking public seems to have cost confidence in banking and chances are that this erosion of confidence may not be reversed unless the regulatory agencies. The central Bank of Nigeria (CBN) and the Nigerian Deposit Insurance Corporation (NDIC) rise up to the challenge.
It was the belief by the government that the banking crisis of the 1990s was caused mainly by fraud that to the promulgation of the failed banks (Recovery of Debts) and financial malpractice’s in Banks Decree Number 18 of 1994 (failed banks Decree). It is however difficult to justify the draconian nature of the failed bank Decree and its implicit assumption that fraud was a major cause of the banking crisis licenses withdrawn by the C.B.N ON account of sharp practices. In other words while it is true that the monumental growth in the number o registered banks may have led to increased fraud, it is unlikely that it was the sole cause of the subsequent banking failures. There is no doubt that fraud has exasperated a desperate situation in the Nigeria Banking sectors. Fraud and embezzlement are not widespread. Both the government and the central Bank are unturned in the fraud and crises jamboree. Furthermore, fraud in itself may not be a sufficient condition for a banking crisis. The researcher submits that extremely bad management may not prove fatal to a bank until adverse economic conditions led to unexpected capital outflows or loan losses. Thus even if every bank which failed is judged to have suffered from mismanagement or fraud, or operated in a over populated banking market, it may well be the case that adverse economic conditions will be the proximate causes of many bank failure.
The NDIC implicitly agree with the above submission in a circular dealing party with current banking crises in Nigeria. It concluded, “the revival of the banking system would entail strong political will that should allow for the adoption of the appropriate failure resolution option, based on the technical judgment of the regulators. Finally and most importantly, a successful restructuring of the banking system would entail a stable macro-economic environment with little relative price distortions that would ensure a sustainable growth for the economy”. Macro economic instability in itself fuels fraud. If the future is perceived as uncertain for instance, persons are more likely to get desperate the perpetrate fraud. It should also be noted that general economic stress is not limited to the banking sector. Inconsistent government policies, high inflation, and the ever depreciating local currency have made planning impossible across most economic sectors further entrenching stress. The economic and social policies of government therefore play a prime role in the promotion of a stable business environment in all economic sectors, including banking. The policy actions that can effectively tackle bank failure in Nigeria must therefore look beyond the banks.
It is the researcher’s submission that in addition to its traditional role of financial inter-mediation, the Nigeria Banking industry has a major role to play in the development of the Nigerian economy. Thus necessitating this research work for purposes of this study, the term banks failure and bank distresses are to be used inter-changeably.
1.2 STATEMENT OF THE PROBLEM
In recent years, the volume and frequency of crises in the Nigerian banking industry has been on the increase. According to NDIC, the level of reported fraud in Nigeria banks rose from N804m in 1990, N3, 199m involved in fraud rose from 3 percent in 1990 to 22 percent in 1998. Perhaps the highest fraud ever reported in any particular year by a Nigeria bank occurred in 1998 when united Bank for African Plc wrote off N786m on account of fraud. One would be tempted to consider the inquisitive mind as to necessity, and indeed imperativeness of the banking industry in Nigeria economic developments/Empowerment as partner in progress. Could Nigeria not have continued to do without these banks, as in fact she had done prior to their advent?
Other problems/ poses to be discussed in this paper include:
a. Bank failures mimical to economic growth are development. The strategic position of bank has negatively wide implications on the fate of depositor, workers shareholders and the entire populace. The banking image is therefore grossly distorted with the result that not much has been achieved in eliminating crises and restoring confidence of the banking public.
b. Judging from the facts available in respect of major frauds perpetrated in the past and considering their astounding success. Apparent careful planning and the boldness with which they were executed one cannot but frankly, albeit painfully, admit that fraud is an upcoming sector of the invisible yet forceful (is it powerful?) industry called crime. Investigations are urgently needed to unravel their different forms.
c. Aside of fraud, extremely poor management and adverse economic conditions lead to bank and failure due to unexpected capital out flows or loan losses. Thus, it may well be the case that adverse economic conditions will be the proscrimate cause of many bank failures. This is evident in situations of spillover of political uncertainties and political tension.
d. Regulatory authorities are not responsive to challenges of enforcing basic lows relating to bank crises and fraud. This is perhaps the more worrisome. For instance, NDIC decree of 1998 required insured bank to render monthly returns of frauds, forgeries or outright theft including a detailed report of such events. Unfortunately, most banks do not obey these simple nile. The questions of course are how many banks appreciate the importance of this statutory requirements both for themselves and the entire industry and why are regulatory authorizes not responsive to these challenges?
e. The failed bank decree was supposed to represent an attempt by the Nigeria military government to prevent parties from evading justices by exploiting the technicalities, inefficiencies and loopholes in the legal system. The tribunal has exclusive jurisdiction over all ancillary matters, including remand, bail and any other preliminary issues connected with an off jurisdiction. With all these power culprits of bank failure who have met with these tribunal have never served as deterrents for intending perpetrators.
Regulatory agencies need to do more practical work to encourage banking at all level, than just revolving operating licensee and paying N50, 000.00 to every depositor. Many depositors believe that government has not done enough to protect their funds since many will cry fowl, as there are chances of more banks collapsing. NDIC Act should be reviewed to accept N100, 000.00 as payment for insured deposits. These issues and views form the central focus of this work, which the paper addresses too.
1.3 OBJECTIVE OF THE STUDY
It is argued that regulatory authorities have been unable it arrest the ugly causes of incidences of bank failure in the world over irrespective of the strategies applies. The rare of frauds in our banking system has for sometimes assured an alarming proportion such that it has become a matter of concern to the management of our banks. It would be said that in Nigeria, they have contributed to the existing structural and economic imbalances playing the country by neglecting most important economic sector through the attention offered to it.
The aim of this study in the light of the above is to analyze the aspects and intricacies of the problems of bank failures, the contributions of fraud, poor management and other causes in order to suggest realistic solutions to arrest them. Specifically therefore, this study seeks to:
a. Examine the functions of banks an assess their impacts as catalysts for economic development of Nigeria;
b. Identify the evolution, dimension and degree of bank failure in Nigeria;
c. Examine the extent to which frauds, poor arrangement or both have contributed to the incidence of bank failure.
d. Identify other caused of bank failure:
e. Implore the ways and means in which the regulatory authorities and banks have checkmated this ugly monster;
f. Identify the problem militating against the effective executions of such measures employed.
g. Examine the principles of banking business, the performance of banks so far and their future prospects; and
h. Highlight measure for curbing frauds and bank failures in Nigeria.
The author hopes that by the end of his research, these objectives would have been accomplished in line with numerous doubts surrounding the effective capability of banks to deliver the desired dividends without cutting short the life of the institutions.
1.4 SIGNIFICANCE OF THE STUDY
The choice of the topic of study by the researcher was based on self-interest and the need to improve the state of the Nigeria economy in the wake of the deplorable banking environment and incessant bank failure. The study will be of great mentioned for the various reasons indicated: -
A. The banking industry will be better improved by consummating the findings and recommendations from the study in stemming down the incidence of bank failure arising from fraud or poor management.
B. The economic policy makers will utilize the result of the study in restoring the safety and soundness of the banking system. Far- reaching negative effects on the national economic well-being caused by bank distress of such as loss of job, strangulation of sources of finance for government and the citizenry, loss of deposits, withdrawal of financial security / protection etc. could be minimized from the study.
C. A great deal of effect has been made by the regulatory authorities to sponsor legal reform policies aimed at empowering them to deal more expeditiously and decisively with problems of distress in the financial institutions. The implications, which are of paramount importance in assisting to promote the survival and stability of the banking system, will be addressed by this study.
D. Furthermore, computer frauds in critical particularly in the Nigeria banking environment where little or nothing is known about this electronic device until recently. This study seeks to unravel measures for stalling the negative affects of this technology on the internal control systems of banks.
E. Finally, the general public will benefit from this study immensely. It will assist n resolving their search for economic break-through in putting in place a formidable, system, which in essence will lead to improve standard of living, and the restoration of the Nigeria’s battered image.
1.5 RESEARCH QUESTION:
In the cause of this study, the following research question will be used:
a. What are the sources of bank failure?
b. Do banks fail as result of fraud alone?
c. Can bank crises be attributed to poor management?
d. What are the effects of bank failure?
e. Can bank fraud be subsumed as a consequence of poor management structure of a bank?
f. What are the approaches to the minimization of bank fraud?
g. What are the contributions of regulatory authorities in arresting or worsening bank crises in Nigeria?
h. Do banks serve as catalysts for economic growth and development in Nigeria?
i. How effective are the law enforcement agencies in handling bank crises culprits?
j. Does the NDIC Act on insured deposit provide adequate settlement/ cover for depositors in a failed bank?
k. What factors militate against the responsiveness of the regulatory umpire to their ever- increasing challenges?
l. What are the performance of the banks so far and their prospects in the future?
1.6 FORMULATION OF HYPOTHESIS
Based on the data collected, the following hypotheses would be stated and tested for validity in the subsequent chapters.
Ho1: Bank failure has no relationship with fraud.
H02: Bank failure has no relationship with poor management team.
H03: Poor banks management do not result in failure of banks
1.7 SCOPE AND LIMITATIONS OF THE STUDY
This research work is a compendium of fraud and poor management as caused of bank failures in the whole world with particular reference to “Savannah Bank of Nigeria Plc”, its effect on the depositors, staff, shareholders, economy and the national image abroad. The punishment meted out to perpetrators of fraud to be adequate to serve as deterrent to others, the future prospects of banking business and the present state of the confidence in the banking public.
Conducting a research entails a lot of stress and can sometimes be debilitating and problematic. It involves an lot of trekking and diplomacy, and being a one-man affairs, my lead to some short-coming especially in a country as vast as Nigeria.
The shortcomings in this case are in the form of uncooperative attitude of some respondents in sensitive topics and fraud and bank failure. Dearth of secondary data owing to unwillingness of banks to purse their pending litigation on fraud penetrated in view of the cost and time involved, malfunctioning of most Nigeria breweries. Financial problems in terms of transportation, cost of photocopying relevant materials, time constraints, departmental specifications and the general economic condition with regards to cost of materials and other accessory costs.
Another serious limitation worthy of note is the inability of the legal system to interpret and punish offenders in the true spirit of the Act Decree establishing them. This presupposes that judgements are not in practice carried out to the later to enable the author make a conclusive opinion on the extent of compliance.
1.8 DEFINITION OF TERMS
Bank: For the purpose of this work, the oxford Advanced Learner’s Dictionary’s definition of the terms will be most relevant. The dictionary defined banks as “an organization or a place that provides a financial service in terms of acceptance of deposit’s and payment on demand”. Banking therefore is the business activities of banks.
Failure: The same dictionary defined failure as “the state or an instance of being inadequate or of not functioning as is expected or required. Banking business as required.
Catalyst: This could be seen as somebody or something that helps or brings about a change by aiding or speeding up the process. It is a “doing” process.
Economic: This is an adjective form of economy. Thompson’s Dictionary of Banking defined economy as “The administration of the concern’s and resources of the any community or establishment with a view to orderly conduct and productiveness”. It entails the art and science of such administration. It is also seen by Oxford Dictionary as “the theoretical science dealing with the laws that regulate the production and distribution of the wealth.”
Distress: According of Oxford Advanced Learner’s dictionary, a distress position portends’ a situation caused by lack of money to meet urgent need”. A bank is therefore seen to be in distress if it is unable to meet with the bank examination rating system known as CAMEL”. This is the height of chronic liquidity and insolvency.
Officer: This is defined Oxford Advance Learner’s dictionary as “ a Person with a position of authority or trust”. An officer of a bank going from this definition is a staff of a bank who is in a position to maker commitment of on the bank.
Insolvency: According to the same Dictionary, insolvency indicates “a condition or situation of inability to pay ones debts”. A bank is declared insolvent if it is unable to redeem or maker good its debts (both short and long term).
NSE: Nigeria stock Exchange.
Fraud: For the purpose of this work, Adetanye’s definition would be most appropriate. According to him “fraud is defined as a conscious, predetermined action of a person or group of persons with the intention of attending the truth and / or fact for selfish personal monetary gain. It involves usually, the use of trick and deceit. The action, which takes the form of forgery, falsification of documents, unauthorized signatories and outright theft”.
Management/Poor Management: Management’s is defined by Oxford Advanced Learner’s dictionary as “the people who control a business or similar organization”. Expatiating further; it boils down to the fact that poor management means the control of a business by inexperienced and unskilled set of people.
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Federal Republic of Nigeria (1995): Failed bank (Recovery of depts.) and financial Malpractices in banks Decree No. 18 Lagos Government press.
Hornby, A.S. (1963): Oxford Advanced Learners Dictionary of current English London: Oxford University press.THE IMPACT OF BANK FAILURE IN NIGERIA ECONOMY A CASE STUDY OF SAVANNAH BANK OF NIGERIA PLC