CHAPTER ONE

INTRODUCTION

1. BACKGROUND OF THE STUDY

The Nigerian financial institutions have faced difficulties over the years for a multitude of reasons but the major cause of serious banking problems in recent times continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management or a lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank’s counterparties. Credit risk is most simply defined as the potential that a bank borrower will fail to meet the obligations in accordance with agreed terms. The goal of risk management in bank lending is to maximize a bank’s risk adjusted rate of return, maintaining risk exposure with acceptable parameters.

The problem of Bank distress in the Nigerian Banking Sector has been observed since 1930s. In fact, between 1930 and 1958, over 21 Bank failures were recorded. The Bank failures during the time were attributed to the domination of foreign Banks in terms of the exclusive patronage by British firms. Other factors that led to mass failure of the indigenous banks were low capital base, lack of managerial expertise and untrained personnel.

The deregulation of the financial system was embarked upon by the military administration in 1986 as part of the Structural Adjustment Programme (SAP). The deregulation witnessed sharp changes in banks’ operations, regulatory environment and the distress syndrome resurfaced again in Nigeria. The changes brought about by SAP included the liberalization of the foreign exchange and money markets, the introduction of prudential guidelines and accounting standards, increase in minimum paid-up capital, establishment of Nigerian Deposit Insurance Corporation (NDIC), relaxation of mandatory sectoral allocation of credits,  etc.

The Late 1980s and early 1990s were years of financial boom, as the number of players increased substantially in the system? For instance, between 1986 and 1989, about 38 new commercial and merchant banks were created. The increase in the number of banks over-stretched the existing human resources capacity of banks which resulted to many problems such as poor credit appraisal system, financial crimes, accumulation of poor asset quality, among others. The consequence was increase in the number of distress banks. During 1994 alone, two banks had their licenses suspended (Republic Bank Ltd and Broad Bank of Nigeria Ltd). Another four banks has their licenses revoked. Also in 1994, the number of banks adjudged distressed by the Central Bank rose by 10 to 42, excluding the four banks that were closed during the year. By the end of year in 1994, non-performing loans and advances constituted about 60.33 percent of the total deposits of the entire banking industry. Furthermore, the ratio of non-performing loans and advances to the total loans and advances in the entire banking industry was 43.03 percent while that for the distressed banks was 64.5 percent according to CBN Annual Report 1994. By the year 1998, up to 31 banks were being liquidated.

The Global Financial crisis is yet to run its full course, but is already one of the largest crises ever experienced according to the existing literature. With its roots in banking, the sub-prime mortgage crisis that commenced in the United States in 2007 soon resonated in other sectors of its financial system, and the economy at large. The crisis later spread to Europe and now has become a global phenomenon. The emerging economies were not isolated. In the wake of the United State Government bid to boost housing was a policy error that permitted sub-prime clientele unrestricted access to mortgage finance. Combined with the thriving derivative market, the horizon for credit expansion widened to unprecedented levels. The result was private over-borrowing accompanied by an internal debt crisis. As long as capital flows and credit expansion grew unchecked, lending expectedly spilt over from financing safe and productive investments to risky and speculative assets. Housing prices had trended upwards for ten consecutive years up to 2004, enticing speculators. Mortgages perfected imprudent lending practices.

The cannons of basic lending were never followed in credit creation. Credits were generally not collaterized in the mortgage sub-sector.

1. 1. This material content is developed to serve as a GUIDE for students to conduct academic research work
2. 2. As a source for additional understanding of the subject.
3. 3. As a source for ideas for your own research work (if properly referenced).
4. 4. For PROPER paraphrasing (see your university definition of plagiarism and acceptable paraphrase)
5. 5. Direct citing (if referenced properly)
Thank you so much for your respect to the authors copyright.