PROJECT TOPIC :BANK LENDING AND THE EFFECT OF NON-PERFORMING CREDIT ON THE NIGERIAN ECONOMY
CHAPTERS: Chapter 1 – 5
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Keywords: BANK LENDING AND THE EFFECT OF NON-PERFORMING CREDIT
1.1 BACKGROUND OF THE STUDY
Nigerian economy is faced with national and global economic challenges and as such, the financial institutions, especially the banking sector has an option of sanitizing and restructuring its operational processes in order to survive the depressed economy, as well as embarking on a consolidation exercise which would have some wider structural effects on the industry and on the economy as a whole.
Basically, banking is a service industry operated by human beings for the benefit of the general public while making returns to the shareholders. As such, it is natural that the services provided thereof by the industry cannot be 100% efficient; however, there is always a room for improvement. It is on this statement that the index of our further discussion on this study is based.
The banking sector in the third world economies has been grossly under managed when compared with their counterparts in the developed countries of the world. This has made it imperative for Nigerian banks to sanitize and restructure their operational processes so as to be in line with the global trends, and to survive the depressed economy.
Before the introduction of Structural Adjustment Programme (SAP) in 1986, the banking sector was characterized by few banks. The operators of these banks had almost total control of the business of banking as customers had to look for their services which most of the times were of poor quality. The managers, because of the pressure to provide banking services, had little time to market their bank services or design new products to improve their customers’ service and at the same time, they received changes based on the approved tariff. Competition was minimal and customers could spend long hours trying to obtain service in the banking hall due to long queues.
The quality of the bank staff was poor. They were rude to their customers and most of the time; they felt they were doing a favour to their customers. As at that time, no Nigerian bank had neither a simple computer nor a network of computers for online banking. In the area of credit appraisal, Ezeikpe (1993) observed that they were two conservative in extending credit facilities. The system was highly under banked while the payment mechanism was filled with imperfection such that locally drawn cheques took more than one week to clear.
However, with the introduction of Structural Adjustment Programme (SAP) and its policy of deregulation and liberalization, some structural reforms were ushered into the banking sector. By this policy, direct management and rigid controls in banking and security business by the government were de-emphasized for a broad based and private sector driven process. Laws inhibiting competition were removed to ensure that banks are reasonably sound, competitive and efficient.
The traditional reforms were aimed towards achieving the following objectives:
1. A strategy for competition.
2. A sound organizational structure and effective management to support the strategy.
3. To ensure management of critical financial and operating risks in banking.
4. A system for planning, budgeting and measuring performance.
5. Entrenching a programme for human resource management.
6. Ensuring a strong and effective internal control.
7. Putting in place the most appropriate Information Technology (IT) to automate the process. Without any doubt, this policy was geared towards enabling banks to respond flexibly to monetary conditions and to facilitate an effective mechanism for transmitting the effect of monetary policy to the real sector.
The policy of liberalization ushered in an era of bank proliferation and reduction in professionalism. Investors rushed into banking business with about the same zeal with which they embraced contracts during the oil boom era of the 1970s. In no distant time, signals of distress started manifesting in the banking sector by way of liquidation. Some factors were identified as the causes of the distress that besieged the banking system. These factors included:
1. Under capitalization which made the capital structure of some of the banks to be inconsistent with their risk asset profile.
2. No clearly defined lending policies and credit appraisal techniques.
3. Unprofessionalism in the conduct of bank staff.
4. High incidence of bad debts and non-performing facilities.
5. Boardroom squabbles and undue interference of the board in the day-to-day management of the bank.
6. Poor staff quality which arose due to the absence of retraining, and giving lip service attention to human premium.
7. Incompetent management.
8. Conflict of interest and insider abuse.
9. Policy problem or delay and inadequate institutional arrangement and structures on the part of the regulatory authority before implementing policy changes thereby creating unhealthy and avoidable suspense and uncertainties.
10. Inadequate prudential regulation and framework for credit classification.
11. The sudden withdrawal of public sector deposit from the banking system to Central Bank in June, 1989.
12. The epileptic stabilization securities and their lack of clear guidelines or modalities with respect to timing, mode of computation and amount
The list is almost unending but one can observe from the above that apart from the last four (4) points which are externally induced stock, the rest are problems that can be controlled with appropriate in-built mechanism of internal control in the individual banks.
In the face of all these problems and uncertainties, the option available for the system to have a better control of these factors is to sanitize the bank internally and externally for survival. Aderingbe (1997) observed that “for Nigerian banks to remain relevant in the next century with the current incursion of technology and globalization of the world market, they have to learn how to sanitize their operations for survival.” Also Elumelu (1998: 26-27) observed that “the recent N25 billion recapitalization of Nigerian banks has made banks to go into several arrangements for its continued relevance. This has resulted into arrangements like mergers, acquisitions, take-overs, re-engineering etc.”
The issue of bank survival through restructuring and sanitizing does not exist only as a failure resolution strategy. However, it can be adopted in solving so many operational problems of corporate organizations. The financial service industry has applied it in many operational problems. In acknowledging the strategies and its impacts in the banking sector, a world bank report in the United States of America shows that for the year 1992-’96, the banking industry accounted for 13% of mergers, acquisitions and other survival activities by number of institutions and 12% by dollar amount and ranked first among other industries’ survival through sanitizing activities. However, certain global factors have been identified as haven contributed to the result in an upward trend in survival and sanitizing activities; these included:
1. The dismantling of regulatory barriers and regional economic groupings which jerked up the pace of globalization.
2. The recent advancement Information Technology (IT) and the new rate of interest in banking.
3. Continued institutionalization of the market participants as opposed to individualization.
4. The need for an enhanced payment mechanism.
5. The increase competition in the financial services delivery. The survival strategies and the impact of sanitizing the Nigerian banks have resulted in emergence of strong new local banks fully 100% owned foreign banks or both local and foreign participation in owners such as Citibank and NBM, Stanbic Merchant bank within the limited availability of component manpower.
Mike Hunder (1997:12) in his crusade for re-engineering, restructuring, sanitizing and survival, opined that, “as competition among banks become keener in the face of declining market margins, banks’ management have to manage the hard way of re-engineering.”
As the banks are devising ways of improving efficiency and ensuring the optimization of the available resources, policy makers and regulatory authorities are moving towards openness, competiveness, and at the same time ensuring market discipline. This is in tandem with the trend in the banking sector globally. Ahmed (2000:33) described this development as a magic one which caused quite a substantial number of Nigerian banks to be sick while some became healthier. In his view, he contended that growth in the banking sector should be transmitted easily into growth of the real sector. But as banks continued to record impressive growth in all economics, indices show a declining margin of economic growth. This makes one begin to wonder where the impacts of the impressive performance of the banks as reported in the financial reports are being felt. Even the NDIC which is established to insure the deposit liabilities of licensed banks has liquidated some distressed banks. The action, Ezeikpe (1993: 36-38) commended while arguing that some distressed banks should be liquidated as a way of survival for the banking system.
It is on this argument that this work lies to assess the survival strategies of deposit money banks in a critically depressed economy with special reference to the First Bank of Nigeria Plc, paying attention to its performance, growth and stability.
1.2 STATEMENT OF THE PROBLEM
Evidence has shown that the banking business is undergoing several transformations. With the increased deregulation and liberalization of the business, their structural changes are unavoidable; hence, the current wave of restructuring in the sector is to respond adequately to the fast changing and increasingly competitive business in order to survive. Banks that are unable to restructure in line with the global revolution in the industry should be ready to go down the drain in the process and be liquidated.
Between 1991 and 1997, a total of 31 Nigeria banks have been liquidated by the NDIC due to their protracted problem of distress, but some of the casualties would have been averted if appropriate restructuring strategies were implemented.
In this era of customers’ sophistication and advancement in information technology, bank management should learn to be proactive and more efficient in product/service delivery. They should continually review their operational strategy in readiness for the on-going global challenges, more so, as customers are becoming aware of their environment and ready to move their funds to where their demands would be adequately met while yearning for more personalized services.
In consideration of the above challenges, one may ask, how effective are the various survival/options and sanitizing strategies adopted by banks in the face of economic depression? Has information technology been given adequate attention? Do bank mergers achieve the desired synergy? Has survival strategy through restructuring led to an improved bank performance? How far could the result of the exercise be sustained without abandoning the strategy?
These stated problems together with the research questions below are what the researcher tries to encapsulate in the research topic with a view to providing their answers in the course of this research.
1.3 OBJECTIVES OF THE STUDY
In dealing with the above stated problems, the study seeks to achieve the following objectives;
1. To find out if the volume of assets of banks improved after survival strategies were employed through sanitizing and restructuring.
2. To find out how survival strategies adopted by the banks have affected deposit mobilizations.
3. To ascertain the extent the depositors’ confidences have been restored in the survival strategies employed by banks in a depressed economy.
4. To examine how survival strategies adopted by banks impacted on the shareholders’ funds of the affected banks.
5. To find out if the volume of loans and advances improved after adopting the survival strategies through sanitizing and restructuring.
6. To know whether profitability of banks improved as a result of survival strategies adopted by banks after sanitization and restructuring.
1.4 RESEARCH QUESTIONS
In trying to make a critical analysis of survival strategies for deposit money banks through sanitization of the banking industry for growth and stability, the following questions will be very important as the researcher tries to provide answers to those mind bugging questions which are:
1. Has there been any improvement in the bank’s assets as a result of the restructuring?
2. Has there been increase in deposit mobilization?
3. To what extent has depositors’ confidence been restored?
4. Has there been increase in the size of loans and advances?
5. How has the strategy impacted on the bank’s profitability?
6. What impact has the strategy made on the shareholders’ funds?
1.5 SCOPE OF THE STUDY
This study attempts to study survival strategies through corporate restructuring and sanitizing as they are applied in enhancing the performance of deposit money banks in a depressed economy. The study covers the activities and impacts of sanitizing in Nigerian banks using First Bank of Nigeria Plc as a case study. Acquisitions and business reengineering are discussed.
The period chosen is from 2003 – 2008 in First Bank Plc of the Nigerian Banking Sector. This is to enable the researcher study the trends for about three years before sanitizing and three years after sanitizing. This is with the understanding that the time frame will only be fair and balance for comprising their performance. It is also extended to 2008 to ensure that the information and data used are timely, up to date and accurate enough to represent the current position of the bank under study.
1.6 SIGNIFICANCE OF THE STUDY
Although much have been written about banks’ survival in a depressed economy and sanitizing of banks in recent times, much of these literatures approached the issue only as a failure resolution option. Though banks’ survival through sanitization can sometimes is appropriate approach for failure resolution, it can also be embarked upon to enhance performance in good performing banks.
In view of the above reason, this study does not limit its scope to the distressed banks or resolution of distress. A good performer may also be required to sanitize for survival of its business process or reposition for further challenges in the market or to respond to certain global developments. In this regard, bank directors, corporate bodies and management that want to embark on banks’ survival strategies and corporate refocusing to achieve better results will find this as an interesting piece. For academicians, it will serve the purpose of arousing deep thoughts and genuine interest on the subject matter for further research.
Consequently, upon completion, this work will:
1. Detail out the various forms of survival and sanitizing strategies that are desirable for banks using the First Bank as a case in point.
2. Recommend the approach or methodology to be followed in sanitizing and reengineering the business process in banks for survival in a depressed economy.
3. Determine if survival strategies and sanitizing have restored confidence among Nigerian banking public.
1.7 DEFINITION OF TERMS
SURVIVAL: The state of continuing to live or exist often in spite of difficulty or danger.
STRATEGY: A plan designed for a particular purpose. The process of planning something or carrying out a plan in a skillful way.
DEPOSIT MONEY BANKS: The resident depository corporations and quasi-corporations which have many liabilities in the form of deposits payable on demand, transferable by cheque or otherwise usable for making payments.
DEPRESSION: The state of being depressed. It is a period when there is little economic activity, and many people are poor or without jobs.
ECONOMY: The relationship between production, trade and the supply of money in a particular country or region. It is the system of trade and industry by which the wealth of a country is made and used.
DEREGULATION: It is a way to free a trade, business activity etc from certain rules and controls.
LIBERALIZATION: This is a way to free somebody or something from political, religious, legal or moral restrictions.
LOAN AND ADVANCE: Loan is a sum of money which is borrowed, often from a bank, and has to be paid back usually together with an additional amount of money known as interest, while Advance is bank lending which may be via term loan, overdraft, or bill discounting.