EMPIRICAL DETERMINANTS OF BANK DISTRESS IN NIGERIA

BY

UZOMA, FRIDAY CHRISTOPHER

PG / M.Sc / 03 / 37156

DEPARTMENT OF BANKING AND FINANCE

FACULTY OF BUSINESS ADMINISTRATION

UNIVERSITY OF NIGERIA

ENUGU CAMPUS

SEPTEMBER, 2010

EMPIRICAL DETERMINANTS OF BANK DISTRESS IN NIGERIA

BEING A DISSERTATION PROPOSAL PRESENTED IN PARTIAL FULFILMENT

OF THE REQUIREMENT FOR THE AWARD OF MASTER

OF SCIENCE (MSC) DEGREE IN BANKING AND FINANCE

BY

UZOMA, FRIDAY CHRISTOPHER

PG / M.Sc / 03 / 37156

TO THE

DEPARTMENT OF BANKING AND FINANCE

FACULTY OF BUSINESS ADMINISTRATION

UNIVERSITY OF NIGERIA

ENUGU CAMPUS

SUPERVISOR: PROF. C.U. UCHE

SEPTEMBER, 2010

ii

DEDICATION I dedicate this dissertation to my late parents, Chief Uzoma Eze and Ada Ozor

Cecilia Uzoma, for their foresight. May their souls rest in perfect peace! Amen!!!

iii

ACKNOWLEDGEMENTS The conduct of this study and the subsequent writing of this thesis

was a herculean task that could not have been completed without the

contributions of so many persons and research institutions to which I owe

lots of gratitude.

My foremost mention goes to God for His strength, encouragement,

protection, guidance, favour, mercy and unmatched grace bestowed on me

throughout the duration of this research undertaking.

My supervisor, Prof. C. U. Uche, has been tremendously helpful.

Without his valuable comments, suggestions, personal encouragement and

support, I would never have completed this research study. From the very first

day till the last, he made sure that I put in my very best, and did all he could

to ensure that ‘excellence’ was attained during every stage of the work.

He helped me access numerous research papers that laid the theoretical

foundation of this study. He also deserves my gratitude for various suggestions

leading to the improvement that brought this work to its present standard.

Indeed, I am most grateful.

I must not fail to thank all my lecturers, namely Prof. F.O. Okafor,

Prof. Patrick Emekekwue, Dr. (Mrs.) E. N. Ogamba, Dr. B.E. Chikeleze,

Dr. J.U.J. Onwumere, Mrs. N.J. Modebe, Mr. E.O.C. Onah, Mr. F.C. Alio,

Mr. Obi, Mrs. Egbo, Mr. Ojiakor, Mr. Okoro Okoro, and Mr. Uhomoibhi Toni

Aburime, for meticulous and helpful comments. Their contributions further

enriched the concept of the study.

I would like to thank all my friends, especially Mr. Patrick Emeka

Nnamani and Mazi Egbuna Akpa (MD, National Broadcasting Corporation),

for all the moral support and encouragement. Specifically, Mazi Egbuna Akpa

laid the academic foundation that has blossomed up to this point.

During my fieldwork, lots of people helped me acquire the data

I used for this study. They were all very friendly and cooperative. At the CIBN

Library, the library staff were very cooperative in helping me to locate and

utilize research materials. I thank them all. In some institutions, personnel were

ivwilling to get me as much of what they could provide. Notable among these

institutions are the CBN Library, Enugu; the Department of Banking and

Finance Library, UNEC; and the NDIC Library, Enugu.

Finally, I must stop and say a big “THANK YOU” to my beloved wife,

Uzoamaka Uzoma, and our children, Obiajulu, Chidera, Obiamaka, and

Chidalu, for their tremendous patience and understanding. Without their

support, this dissertation would not have seen the light of day.

Uzoma, Friday Christopher

September, 2010

v

ABSTRACT

This study was a histor ical survey of determinants o f bank dist ress

in Niger ia. The research populat ion comprised banks operat ing in Niger ia

between 1998 and 2004. Data used in the study were all observat iona l

panel data obtained from the published accounts o f the elements o f the

research populat ion. A total of 113 complete bank observat ions were

ut ilized in the study. The researcher vis ited the Niger ian Deposit Insurance

Corporat ion (NDIC), the Central Bank of Niger ia (CBN), the Chartered

Inst itute of Bankers o f Niger ia (CIBN) and the Financial Inst itut ions

Training Centre (FITC) to obtain t he data ut ilized in the study.

The relat ionships out lined by the data set were empir ically analyzed

via mult iple regression tests. All t he data for the purpose o f the study

were manually computed and then calibrated into the SPSS regressio n

module for extensive stat ist ical analys is. The empir ical results indicated

that loan qualit y is a significant determinant o f bank dist ress in Niger ia,

while insider lending and extent of government ownership are insignificant .

vi

TABLE OF CONTENT

Title Page

TITLE PAGE i

DEDICATION ii

ACKNOWLEDGEMENTS iii

ABSTRACT v

TABLE OF CONTENT vi

LIST OF TABLES ix

LIST OF FIGURES x

CHAPTER ONE – Introduction 1

1.1 Background of the Study 1

1.2 Statement of the Problem 5

1.3 Purpose of the Study 5

1.4 Scope of the Study 5

1.5 Objectives of the Study 6

1.6 Research Questions 6

1.7 Research Hypotheses 6

1.8 Significance of the Study 7

1.9 Limitations of the Study 8

1.10 References 8

CHAPTER TWO – Review of Related Literature 10

2.1 What is Bank Distress? 10

2.2 Determinants of Bank Distress 12

2.2.1 Insider Lending 13

2.2.2 Share Capital Requirement 14

2.2.3 Bank Ownership 15

2.2.4 Fraud and Fraudulent Practices 17

2.2.5 Lending to High-Risk Borrowers 18

2.2.6 Macro-economic Instability 19

2.2.7 Liquidity Support and Prudential Regulation 20

vii2.2.8 Inadequate Supervision 21

2.2.9 Weak Corporate Governance 21

2.3 Consequences of Bank Distress 23

2.3.1 Erosion of Public Confidence 23

2.3.2 Contagious Effects 24

2.3.3 Economic Effects 25

2.3.4 Global Effect 26

2.4 Bank Distress in Nigeria 26

2.4.1 Origin of Bank Distress in Nigeria 26

2.4.2 Current Early Warning System (EWS) Employed

in Identifying Bank Distress in Nigeria 27

2.4.3 Ownership Structure as a Determinant of Bank Distress

in Nigeria 29

2.4.4 Tackling Bank Distress in Nigeria – A Regulatory Approach 30

2.4.5 Distress Rationale for Banking Sector Reforms in Nigeria 32

2.5 Conclusion 35

2.6 References 35

CHAPTER THREE – Research Design and Procedure 38

3.1 Research Design 38

3.2 Research Population 38

3.3 Nature, Sources and Size of Data 38

3.4 Method of Data Collection 38

3.5 Model Specification 39

3.6 Variables’ Definitions 39

3.7 Mode of Data Analysis 40

3.8 References 41

CHAPTER FOUR – Data Analysis 43

4.1 Visual Tests for Outliers 43

4.2 Kolmogorov-Smirnov and Shapiro-Wilk Tests for Normality 46

4.3 Correlation Matrix Test for Multicollinearity 47

4.4 The Regression Estimates 48

viii4.5 Correlation Test for Existence of First-Order

Autoregressive Schemes 48

4.6 Durbin-Watson Test for Existence of First-Order

Autoregressive Schemes 50

4.7 Answering the Research Questions and Testing

the Research Hypotheses 51

4.7.1 Research Question 1 and Research Hypothesis 1 51

4.7.2 Research Question 2 and Research Hypothesis 2 51

4.7.3 Research Question 3 and Research Hypothesis 3 52

4.7.4 Research Question 4 and Research Hypothesis 4 52

4.8 References 53

CHAPTER FIVE – Summary of Findings, Conclusion and Recommendations 54

5.1 Summary of Findings 54

5.2 Conclusion 54

5.3 Recommendations 55

5.4 Reference 55

BIBLIOGRAPHY 56

APPENDIX I 60

APPENDIX II 63

APPENDIX III 83

ix

LIST OF TABLES

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

x

LIST OF FIGURES

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

1

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study In many societ ies, liquidat ion is an unp leasant word because

of it s negat ive connotat ions. It connotes wip ing out what was once

in existence, winding up a company, killing what was once alive

or dest roying 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 liquidat ing such havens is understandably

uncomfortable. The discomfort ar ises from the potent ial lo sses that might

be sustained by the banks’ stakeho lders, namely depositors and the

society at large (NDIC, 2008: 2).

With many banks in Niger ia classified as dist ressed, some licenses

withdrawn and some banks acquired by the Central Bank o f Niger ia

(CBN) at a shamefu l purchase pr ice of N1 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 poss ible causes

of bank dist ress, how can problem banks be ident ified and problems

averted (Anyanwaokoro, 1996: 208).

Commit tee on Banking Supervis ion (2001) t races the history

of financia l dist ress in t he Niger ian banking system back to the 1930s

when about 21 bank failures were recorded pr ior to the establishment

of the CBN in 1958. The financia l cr is is was at t ributable to a number

of reasons including the under-capitalizat ion o f banks, weak management ,

inappropr iate corporate governance st ructures, reckless use o f depos itors’

funds, excessive growth (over-t rading), lack of regulat ion and supervis ion,

polit icizat ion and non-performing loans. Poor loan qualit y had it s roots

in the informat ional problems which afflict financia l markets, and which

are most acute in developing countr ies.

In Niger ia, many indigenous banks which commenced operat ions

in the ear ly 1950s went into vo luntary liquidat ion in the mid-1950s

with such rapid ity that confounded society. Some o f the depositors were

2

reported to have lo st their lives as a consequence. At that t ime,

there were neither banking regulat ions nor an inst itut ion to see to the

orderly liquidat ion o f failed banks. The banks simply closed their doors,

never to reopen them (NDIC, 2008:2).

Another financia l cr is is in Niger ia, which started in 1989 with the

ident ificat ion o f seven dist ressed banks, worsened gradually unt il 1993

when it led to the co llapse o f the int er-bank market and spread to all

segments o f t he financial system. The abilit y o f the supervisory agencies

to contain, manage and reso lve the d ist ress syndrome was severally

handicapped due to the absence o f a comprehens ive regulatory framework

for dist ress management .

Banks provide important benefit s to the community, and facilitate

the object ives o f financia l liberalizat ion, by boost ing compet it ion

in banking markets, st imu lat ing improvements in services to customers

and expanding access to credit , especially to domest ic small and

medium-scale businesses. Financial liberalizat ion in Niger ia brought

in it s wake a var iety o f financial inst itut ions operat ing in the country.

Commercia l 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 st ream as a result of financial sector reforms.

Among banks, these inc luded community banks, the people’s bank

and Mortgage banks, o ffic ially called pr imary mortgage inst itut ions

(PMIS). Among non-bank financial inst itut ion (NBIS) are finance

houses or companies, unit t rusts, and discount houses (Soyibo, 1996a).

Unfortunately, the at tainment o f the benefit s o f financia l liberalizat ion

in Niger ia has been jeopardized because banks have been vulnerable

to financial dist ress (Brownbr idge, 1998). Substant ial numbers o f banks

have failed, mainly due to non-performing loans.

Uche (1997) in his art icle t it led ‘Rethinking Deposit Insurance

in Niger ia’, t races the or igins o f bank dist ress in Niger ia to the co lonia l

era, dur ing the indigenous banking cr isis of 1950s, which necessit ated

to the passing into law o f the 1952 Banking Ordinance. The ordinance

3

required the indigenous banks in the Br it ish West Afr ican Co lony

of Niger ia to:

(1) Have a nominal share capit al o f at least £25,000 o f which not less

than £2,500 should be paid up.

(2) Be licensed by the financia l secretary in order to be able to carry

on banking business.

(3) Abstain from grant ing loans and advances on the secur it y o f their

own shares and grant ing 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 int erests.

(4) Maint ain adequate cash reserves.

(5) Maint ain a reserve fund out of net profit of each year o f not less

than 20 percent of such pro fit unt il the reserve fund equals the

share capital.

(6) Refrain from paying a dividend unt il a ll their capitalized

expenditure not represented by tangible assets had been writ ten o ff,

and

(7) Make per iodic returns to the financial secretary.

More damaging to these indigenous banks, however, were sect ions 5(2)

and 6(2) of t he ordinance which gave the exist ing banks three years with

which to comply with the provis ions o f the ordinance or to discont inue

banking bus iness. The fact that the indigenous banks were given

a maximum per iod o f three years to meet with the requirement s

of the ordinance or face liquidat ion coupled with the fact that there was

no deposit insurance scheme in place to compensate depositors in the

event of such liquidat ion, precipitated a run on these indigenous banks.

This contr ibuted to the eventual failure of several o f these banks.

Between 1953 and 1954, for instance, 17 of the 21 indigenous banks then

in existence failed. Not withstanding the fact that most of these banks

were poorly capit alized and poorly staffed, the last stages that t riggered

their mass failure was the government act ion of regulat ion.

4

Thereafter, the banking system remained fair ly stable unt il 1986

when the Babangida Administ rat ion under pressure from the Internat ional

Monetary Fund and World Bank, launched the Structural Adjustment

Programme, (SAP). An integral part of this programme was the

deregulat ion o f the banking system. Bank licensing po licy was liberalized

giving r ise to a proliferat ion o f 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 deregulat ion o f t he economy, loopho les and somet imes

out right evasion o f the law made it possible for some of the new banks

to survive and prosper by mainly buying and selling foreign exchange.

The deregulat ion o f t he economy created both r isks and

opportunit ies for the banks and there was increased compet it ion, not just

among banks but also with finance houses which were also a creat ion

of government deregulat ion. SAP therefore fundamentally changed the

st ructure of banking in the country. The new spir it o f compet it ion meant

that the decis ion as to whether banks should fail or not was now to be

determined by market forces. Government therefore focused on protect ing

the depositors, hence the establishment o f the Niger ian Deposit Insurance

Corporat ion (NDIC).

The or igin o f banking cr ises in the 1990s was, perhaps, the sudden

decis ion, by the Federal Government in 1989, to withdraw public sector

deposits from all commercia l and merchant banks, leading to ser ious

liquid ity cr is is 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 st retched Niger ian banks with excessive

taxat ion. Government fiscal indiscipline also helped to sabotage

macro-economic stabilit y which, in turn, further entrenched dist ress

in the Niger ian banking sector.

5

1.2 Statement of the Problem Situat ions where t he so lvency and / or liquid ity o f several banks

have suffered shocks t hat shake public confidence have been a source

of concern to bank regulators, the government , depositors and the genera l

public. One worr isome aspect of the result o f liberalizat ion o f the

financial sector in Niger ia has been the extent o f dist ress 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 commercia l 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 Niger ia in the year 1995 were d ist ressed,

represent ing 52.2% of all t he banks exis t ing at the t ime (NDIC, 2003).

A very high proport ion of both community banks and finance houses were

also reportedly dist ressed. In 2004, the CBN Governor, Professor Char les

Soludo, was quite revealing in his analysis o f the dist ress posit ion

of Niger ian banks exist ing 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

Niger ian banking system can be adjudged sat isfactory, the state of some

of the banks was less cheer ing (So ludo, 2004:35).

1.3 Purpose of the Study In order to bet ter understand the problem necessitat ing this study,

the researcher intends to empir ically ascertain determinants o f bank

dist ress in Niger ia, as a means o f ident ifying and curbing future incidents

of dist ress in t he Niger ian bank ing industry.

1.4 Scope of the Study There are two aspects to bank dist ress. These are illiquidity and

inso lvency. The scope o f this study is delimit ed to inso lvency

as an indicator of bank dist ress in the Niger ian banking industry.

6

1.5 Objectives of the Study The researcher aims that this study achieves the fo llowing object ives:

( i) Empir ically ascertain whether capital size is a significant

determinant of bank dist ress in Niger ia.

( ii) Empir ically ascertain whether insider lending is a significant

determinant of bank dist ress in Niger ia.

( iii) Empir ically ascertain whether loan qualit y is a significant

determinant of bank dist ress in Niger ia.

( iv) Empir ically ascertain whether extent of government ownership

is a significant determinant of bank dist ress in Niger ia.

1.6 Research Questions ( i) Is capital size a significant determinant o f bank dist ress

in Niger ia?

( ii) Is insider lending a significant determinant o f bank dist ress

in Niger ia?

( iii) Is loan qualit y a significant determinant o f bank dist ress

in Niger ia?

( iv) Is extent of government ownership a significant determinant

of bank dist ress in Niger ia?

1.7 Research Hypotheses A hypothesis is a predict ion or a conjecture stated well in advance

of observance (or actual co llect ion o f data) about what can be expected

to occur under stated or given cond it ions (Asika, 1990). Streamlined

to the aforement ioned object ives and research quest ions, the fo llowing

null hypotheses have been formulated and sha ll be subjected to suitable

empir ical tests.

Null Hypothesis 1 HO1 : There is no significant relat ionship between capital size and

bank dist ress in Niger ia.

7

Null Hypothesis 2 HO2 : There is no significant relat ionship between ins ider lending and

bank dist ress in Niger ia.

Null Hypothesis 3 HO3 : There is no significant relat ionship between loan qualit y and

bank dist ress in Niger ia.

Null Hypothesis 4 HO4 : There is no significant relat ionship between extent o f government

ownership and bank dist ress in Niger ia.

1.8 Significance of the Study One advantage o f academic research is that it invest igates mat ters

which pract it ioners and po licy makers find useful but have lit t le t ime

to study. The significance o f this study stems from the important

posit ion banks ho ld in every economy, developed or undeve loped.

Banks are catalysts, around which all other economic act ivit ies revo lve.

A dist ressed banking sector may be a ser ious obstacle to economic

act ivit y and aggravate the effect of adverse shocks. For instance,

when banks are d ist ressed, firms may be unable to obtain credit to deal

with a per iod o f low int ernal cash flow. In fact , lack o f credit may force

viable firms into bankruptcy. Similar ly, lack o f consumer credit

may worsen declines in consumpt ion and aggregate demand dur ing

recession, aggravat ing unemployment . In extreme cases, bank-run and

bank failure can threaten the soundness o f payment system,

and by extension, the economy. It is against this backdrop that

studies on the empir ical determinant s of bank dist ress in Niger ia

are inevitable as:

- The study shall be o f great importance in minimiz ing incidence

of bank dist ress in Niger ia.

- The study shall be o f po licy relevance to NDIC and the CBN

towards evaluat ing and managing bank dist ress condit ions

in Niger ia.

8

- The study shall significant ly add to the exist ing body o f literatures

relat ing to bank dist ress in Niger ia.

1.9 Limitations of the Study The limitat ion o f any study are in the nature of constraint s and

bott lenecks, which could have created defic iencies, rest r ict ions, biases,

prejudices and confinements to the conduct , findings and limit at ions

of the study. For this study, the limitat ions include:

( i) Paucity o f stat ist ical data

( ii) Lack of willingness to release informat ion by bank o fficia ls.

( iii) Difficulty in accessing informat ion from informat ion techno logy

for this study.

(v) Observational Data Limitations:- Observat ional data pose major

challenges to econometr ic at tempts to est imate causal effects,

and the tools o f econometr ics to tackle these challenges. In the real

world, levels o f “t reatment” are not assigned at random, so it is

difficult to sort out the effect o f t he “t reatment” 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 ent ire dataset . S ince regression analys is is a parametr ic

stat ist ic, the complete abnormalit y o f the dataset amounts

to a fundamental stat ist ical flaw which adversely affects the

reliable interpretat ion o f t he regression est imates der ived via the

dataset as well as their generalizabilit y.

1.10 References Anyanwakoro, M. (1996) Banking Methods and Processes. Enugu:

Hosanna Publicat ions.

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

Niger ia: Longman.

9

Brownbr idge, M. (1998) “The Causes of Financia l Dist ress in Loca l

Banks in Afr ica and Implicat ions for Prudent ial Po licy”

UNCTAD/OSG/DP/132.

CBN / NDIC (1995) Distress in the Nigerian Financial Service Industry:

A CBN / NDIC Collaborative Study . Lagos: Page Publishers

Services Ltd.

Commit tee on Banking Supervis ion (2001) “Frame work for Cont ingenc y

Planning for Banking Systemic Dist ress and Cr ises”.

Niger ia Deposit Insurance Corporat ion (2003) Annual Report and

Statement of Accounts. Lagos: Niger ia Deposit Insurance

Corporat ion.

Soludo, C. (2004) “25bn Capit al Base: Implicat ions on the Economy”.

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

Soyibo, A. (2004a) “A Posit ive, Normat ive Analys is o f Bank Supervision

in Niger ia”. AERC Research Paper 145.

Soyibo, A. (1996b). Financial Sector Liberalization in Africa:

Some Empirical and Policy Issues. Nairobi: Afr ican Economic

Research Consort ium.

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

(Second Edit ion). Boston: Pearson Educat ion, Inc.

Uche, C. U. (1997) “Rethink ing Deposit Insurance in Niger ia”.

10

CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1 What is Bank Distress? The words “bank dist ress” has become a common par lance in the

country since the deregulat ion o f the nat ion’s banking system in the mid

1980s. However, the meaning o f the words has not been very clear

to many bank shareho lders, even though there ought to be no ambiguit y

as to what dist ress is all about . It is therefore considered apt to put

the concept of bank dist ress in the r ight perspect ive, given the focus

of this research.

Bank dist ress is a manifestat ion of a complex set of int er-related

problems. It is a condit ion o f “ill-health” for a bank that is evident

in illiquid ity and inso lvency. I lliquidity implies that a bank can no longer

meet it s liabilit ies as they mature for payment . Put different ly, an illiquid

bank cannot meet depositors’ demand for cash and customers’ draw-down

on approved loans. Under such sit uat ion, depositors fear the loss o f their

deposits, as there is a breakdown of contractual obligat ion. Inso lvency,

on the other hand, is a situat ion where the value of a bank’s realizable

assets is less than the total value of it s liabilit ies, a case of “negat ive net

worth”. It is important to add that a technically inso lvent bank could

remain liquid for long if it has a large and stable deposit base or engages

in dist ress borrowing (NDIC, 2008:14).

According to Benston et al . (1986), dist ress is a situat ion

of complete or near-complete loss o f shareho lders’ funds combined

with a cessat ion o f independent operat ion or cont inuance only by virtue

of financia l assistance from a deposit insurance inst itut ion.

The CBN / NDIC (1985) descr ibed a dist ressed bank as one with severe

financial, operat ional and manager ial weaknesses which have rendered

it d ifficu lt for the bank to meet it s obligat ions to depositors, customers,

and the rest of the economy as and when due.

According to Ebhodaghe (1997:18), bank dist ress occurs when

a fair ly reasonable proport ion o f banks in the system are unable to meet

their obligat ions to their customers, as well as their owners and the

11

economy. Such inabilit y o ften resu lts from weaknesses in their financial,

operat ional and manager ial condit ions which would have rendered them

either illiquid and/or inso lvent .

Under this situat ion, a sizeable proport ion o f exist ing banks would

have their liabilit ies exceeding the market value o f the ir assets.

I f left unchecked, such a situat ion may cause severe financial cr isis ,

leading to runs and other port fo lio shifts, co llapse, decrease in asset

pr ices and decline in total output and balance o f payments problems.

Thus, a bank is considered dist ressed when it is technically inso lvent ,

(Ebhodaghe, 1997).

In yet another development Bongini, Claessens and Ferr i (1999),

defined dist ress as all those instances in which a financial inst itut ion has

received external support as well as those instances in which it was

direct ly closed.

In Niger ia, a bank is classified as dist ressed based on the “CAMEL”

bank rat ing system. CAMEL is a mnemonic for Capital Adequacy (C),

Assets Qualit y (A), Management Competence (M), Earning Strength (E),

and Liquidity Sufficiency (L). Using these cr iter ia, banks are assigned

rat ings, (Anyanwaokoro, 1996:209). The regulatory author it ies assess

the performance o f the banks vis-à-vis the thresho lds already established

for each o f the five CAMEL parameters. As observed by Ebhodaghe

(1993), a financial inst itut ion in dist ress is usually one in which

the evaluat ion depicts poor condit ion in all or most of the five

performance factors, as fo llows:

( i) Gross under-cap italizat ion in relat ion to the level o f operat ion;

( ii) High level o f classified loans and advances;

( iii) I lliquid ity reflected in inability to meet customers’ cash withdrawals ;

( iv) Low earnings result ing in huge operat ional lo sses; and

(v) Weak management as reflected in poor credit po licy, inadequate

int ernal control, high rate o f frauds and forger ies, and high labour

turn-over.

12

2.2 Determinants of Bank Distress A problem bank is one that is most likely to present substant ial

financial r isk to the deposit insurance agency. Thus it is a bank that

has, in the eyes of the bank regulatory agencies, vio lated a law

or regulat ion or engaged in an “unsafe and unsound” banking pract ice

to such an extent that the present or future solvency o f the bank

is in quest ion (Sinkey, 1975).

Financia l dist ress has afflicted numerous banks, many o f which

have been c losed down by the regula tory author it ies or have been

rest ructured under their supervis ion. In Niger ia, four banks were put

into liquidat ion in 1994 and another had it s license suspended,

while in 1995, a further 13 banks were taken over by the Central bank

of Niger ia (CBN). Many more banks were dist ressed and subjected

to some form o f “ho lding act ion” imposed by the CBN and NDIC in 1995

(Brownbr idge, 1998).

CBN / NDIC (1995) asserted that the causes o f bank dist ress

in any economy are basica lly empir ical. The diversit y o f the exper iences

in bank dist ress is the regulatory and supervisory frameworks

of different macro-economic condit ions, along with the available human

and informat ion capital o f the financial system, makes it d ifficult

to generalize across countr ies.

Against this backdrop, there is need to establish the causes of bank

dist ress in Niger ia as it would enable us appreciate the failure reso lut ion

opt ions being adopted to address the problem.

Two major problems can confront a bank, as any other profit -

oriented organizat ion. These are the problems o f illiquidity and

inso lvency. A bank is said to be illiquid when it can no longer meet it s

liabilit ies as they mature for payments. On the other hand, a bank is said

to be inso lvent when the value o f it s realizable assets is less than the

total value o f it s liabilit ies (Jimoh, 1993).

It should be noted that an illiquid bank is not necessar ily inso lvent ;

while an inso lvent bank may not necessar ily be illiquid. Although

inso lvency should be taken more ser iously than illiquidity, illiquid it y

can lead to inso lvency when such scales are large enough.

13

2.2.1 Insider Lending The single biggest contr ibutor to the bad loans o f many o f the

failed banks was ins ider lending. In at least half o f the bank fa ilures

referred to above, ins ider loans accounted for a substant ial proport ion

of t he bad debts. In most o f t hese banks, owners and directors abused

or misused their pr ivileged posit ions or breached their fiduciary dut ies

by engaging in self-serving act ivit ies (Ogunleye, 2003:28).

Insider loans accounted for 65 percent of t he total loans o f four

banks liquidated in Niger ia in 1994, virtually all o f which was

unrecoverable (NDIC, 1994).

The high incidence o f ins ider lending among failed banks suggest

that problems o f moral hazard were especially acute in t hese banks.

Several factors contr ibuted to this. First , polit icians were invo lved

as shareho lders and directors of some o f the banks. Po lit ical connect ions

were used to obtain public-sector deposits. Many o f the failed banks

relied heavily on who lesale deposit s from a small number o f parastatals.

Because o f po lit ical pressure, the parastatals which made these deposit s

are unlikely to have made a purely commercial judgment as to the safet y

of their deposit s (Ogunleye, 2000).

Moreover, the availabilit y o f parastatals deposits reduced the need

to mobilize funds from the public. Hence these banks faced lit t le pressure

from depositors to establish a reputat ion for safety.

Polit ical connect ions also facilitated access to bank licences and

were used in some cases to pressure bank regulators not to take act ion

against banks when vio lat ions o f the banking laws were discovered.

In addit ion, the banks reliance on po lit ical connect ion meant that they

were exposed to pressure to lend to the polit icians t hemselves in return

for the assistance given in obtaining deposits, licences, etc.

Table 2.1 - The Magnitude of Insider Abuse in Lending S/N Bank in Liquidation No. of Directors

Involved

Amount as at

Closure (N)

% of Total

Assets

1. Alpha Merchan t Bank PLC 11 1,314,418,700.43 33%

2. Un i ted Commercia l bank Ltd 5 741,755,808.86 30%

3. Financia l Merchan t Bank Ltd 1 383,061,096.00 100%

4. High Land Bank of Nig. PLC 12 33,197,157.58 38%

14

5. Commercia l Trust Bank Ltd 1 247,749.10 38%

6. ABC Merchan t Bank Ltd 8 272,981,634.00 49%

7. Royal Merchan t Bank Ltd 7 646,940,182.23 69%

8. Nor th South Bank of Niger ia 13 240,668,637.62 32%

9. Aba cus Merchant bank Ltd 14 568,888,245.11 47%

10. Credi te Bank Nig. Ltd. 6 379,634,611.47 76%

11. Pr ime Merchan t Bank Ltd 1 539,292,310.00 64%

12. Amicable Bank of Nig. Ltd 7 149,854,896.00 56%

13. Cen tury Merchan t bank Ltd 5 272,072,261.00 32%

14. Group Merchan t Bank Ltd 13 595,836,077.20 80%

15. Commerce bank Plc 4 1,298,766,751.76 20%

16. Pinnacle Commercia l Bank Ltd 10 161,375,466.00 38%

17. Republ ic Bank Ltd 1 - - So ur c e : N D IC Q u a r t er l y , V ol . 1 3 , D e c. 2 0 0 3 .

2.2.2 Share Capital Requirement Second, most of the failed banks were undercapitalized, in part

because the minimum capita l requirements in force when they had been

set up were very low. Owners had lit t le of their own funds at r isk should

their bank fail, which created a large asymmetry in t he potent ial r isks and

rewards o f ins ider lending.

Bank owners could invest the bank’s deposits in their own high-r isk

projects, knowing that they would make large pro fits if t heir pro jects

succeeded, but would lo se lit t le o f their own money if t hey were not

profitable. Of the 13 dist ressed banks taken over by the CBN in 1995,

all except one had paid up share capital which barely exceeded

the minimum required by law o f N50 million and N40 million,

for commercial and merchant banks respect ively, at the end of 1994.

One funct ion of capital in a bank is to serve as means by which

lo sses can be abso lved. Capital provides a cushion to withstand

abnormal loss not covered by current earnings, enabling banks

to regain equilibr ium and to re-establish a normal earnings pat tern

(Ebhodaghe, 1997).

Unfortunately, a good number o f the country’s banks were st il l

grossly undercapitalized. This situat ion could part ly be at t ributed to the

fact that many o f the banks were established with very lit t le capit al.

15

In part icular, most o f t he state government owned banks operated

with lit t le capit al.

This sit uat ion largely informed the decision of the regulatory

author it ies to raise t he minimum equity share capital o f commercial and

merchant banks from N50 million and N40 million, respect ively,

effect ive from June 20, 1992.

Uche, (1998) observed that the Federal Military Government

of Niger ia in it s 1997 Budget , raised the minimum share capit a l

requirement for Niger ian banks to N500 million. This represented a 1150

percent increase for merchant banks (previously N40 million) and a 900

percent increase for commercial banks (previously N50 million).

Exist ing banks were given up to the end o f 1998, to meet this new

requirement or face compulsory liquidat ion. The new regulat ion was

a consequence o f the cr isis in t he Niger ian banking industry. Today,

the minimum capitalizat ion for banks was increased to N25 billion

irrespect ive o f the t ype. This was as a result o f the int roduct ion

of deregulat ion in the banking system and the divestment of government

int erests in banks as bank licensing po licy was liberalized, giving r ise

to proliferat ion o f banks and other finance inst itut ions and this resulted

in increase in vo lume and quantum of bus iness undertaken by the

financial inst itut ions. Again, some of the banks were established wit h

inadequate capit al and failed to increase their capital base to meet the

growth in their r isk assets port fo lio . Increased provisions for losses

as a resu lt of increas ing level o f non-performing loans further eroded

the capit al funds o f many banks. Some shareho lders whose banks were

inso lvent refused or were unable to recapitalize them.

2.2.3 Bank Ownership The third factor contribut ing to bank dist ress was the excessive

concentrat ion o f ownership. Ownership st ructure is one o f the major

var iables that could be used to explain financial dist ress (Chen et al . ,

1998) in Niger ian banks. The government -owned banks suffered frequent

changes in board membership – usually associated with changes in t he

Federal and State governments. Many appo intments were based

on po lit ical patronage rather than mer it . Board members saw themselves

16

as representat ives o f po lit ical part ies and had lit t le or no loya lt y

to the banks they served. As a result , polit ical and social considerat ion

pervaded the decis ion-making processes. This situat ion prompted

indiscip line in such banks as sanct ions or deployments became ver y

subject ive. On the other hand, the pr ivate-owned banks were afflicted

by undue inter ference and pervasive influence o f the dominant

shareho lders. Such shareho lders were unable to recruit or retain

competent management teams. In some banks, major shareho lders

appo inted their children or fr iends to key posit ions without due regard

to their level o f exper ience and competence. Even where regulatory

author it ies declined approval o f such appo intments, the persons were

somet imes made to remain in t he posit ions in act ing capacity or under

different names as Chief Operat ing Officer.

Many o f t he pr ivately-owned banks were character ized by ser ies

of shareho lders’ quarrels and boardroom squabbles. While in a few banks,

the Regulatory Author it ies were able to intervene and reso lve t he cr is is,

in others, the cr is is became protracted and significant ly contr ibuted to the

eventual liquidat ion of the banks. The cr ises were at t ributed to many

reasons. Some shareho lders were mere st range bed-fellows who came

together to meet the requirement of geographical spread for ownership

of banks and the ceiling on individual shareho lding. There was a lso the

problem associated with the rais ing o f init ia l capit al o f some o f the banks

which as a result o f the cr is is, it was discovered that the share capital was

contr ibuted by few well-to-do individuals. As soon as such banks

commenced operat ions, the minor it y shareho lders felt marginalized.

In some cases, it was discovered that the ma jor promoters raised

commercia l papers for statutory paid-up capital and used depositors’

funds to liquidate such facilit ies.

The consequences o f the cr ises inc luded irregular board meet ings,

lack o f management cohesion as members and officers represented

different and opposing interest groups, confusion and chaos in t he bank,

high labour turnover, and lo ss o f public confidence, all o f which

adversely affected the banks (Olufon, 1992).

Most of t he directors remained ill- informed about the banks

they managed. Even where some of them were willing and interested

17

in the affairs of their banks, they were not provided with usefu l and

relevant informat ion by the management .

In many o f the failed banks, the majo r it y o f shares were held

by one man or one family, while managers lacked suffic ient independence

from int er ference by owners in operat ional decisions. A more diversified

ownership st ructure and a more independent management might have been

expected to impose greater constraints on ins ider lending, because at least

some o f t he directors would have stood to loose more t han they gained

from insider lending, while managers would not have wanted to r isk their

reputat ions and careers.

2.2.4 Fraud and Fraudulent Practices In recent years, the vo lume and frequency o f fraudulent pract ices

in Niger ian banks have been on the increase. According to Uche (2001),

the level o f reported fraud in Niger ian banks rose from N804 million

in 1990 to N3, 199 million in 1998. Furthermore, the proport ion

of actual/expected loss to the amount invo lved in fraud rose fro m

3 percent in 1990 to 22 percent in 1998. Perhaps the highest fraud ever

reported in any part icular year by a Niger ian bank occurred in 1998 when

United Bank for Afr ica Plc wrote off N786 million on account of fraud.

He went further to assert that the growing scope and scale o f fraud

in t he Niger ian banking industry is not surpr is ing, given the r is ing profile

of the country as a corrupt and fraudulent nat ion.

The or igin o f bank fraud in t he Niger ian banking scene started after

the establishment o f indigenous banks, claiming the economic

emancipat ion o f Afr icans as their main object ive. But in pract ice,

however, many o f these indigenous banks became known more for their

fraudu lent pract ice and less for their role in assist ing Afr icans

(Uche, 2001).

Up unt il 1925 when foreign banks dominated the Niger ian baking

arena, there was very lit t le documentat ion o f bank fraud in the country.

This was so despit e the fact that there were few rules regulat ing

the pract ice of banking at the t ime. In fact , some of these foreign banks

had sufficient internal control mechanisms to help prevent fraud

(Uche, 2001).

18

2.2.5 Lending to High-Risk Borrowers Juan (1991) asserted that bank dist ress occurs when ser iously

inso lvent banks concentrate their loans on the largest and worst

borrowers in an at tempt to prevent their bankruptcy. Unfortunately,

this ult imately t r iggers their bankruptcy. Recovery becomes a secondar y

object ive as massive mis-allocat ion o f resources takes place; and the

general outcome o f t he process is the crowding out of product ive lending

and the increase of lo sses in the system.

Lending at high interest rates to borrowers in high-r isk segments

of t he credit market t r iggers bank dist ress. This invo lves elements

of moral hazard on the part of both the banks and their customers and the

adverse select ion o f the borrowers. It is in part mot ivated by the high cost

of mobiliz ing funds (Brownbr idge 1998).

Dist ress banks in Niger ia have had difficulty in at t ract ing

non- interest bear ing current accounts because they could o ffer few

advantages to current account ho lders which could not also be obtained

from the established banks. Some of these banks relied heavily

on high-cost inter banks borrowings from other banks and financia l

inst itut ions, on which real interest rates of over 20 percent were

uncommon. The high cost of funds meant that the banks had to generate

high earnings from the ir assets; for example, by charging high lending

rates, with consequences for the qualit y o f their loan port fo lio s.

The banks almost inevitably suffered from the adverse select ion o f their

borrowers, many o f who had been rejected by the more established banks

(or would have been had they applied for a loan) because they did not

meet the st rict credit worthiness cr iter ia demanded of them.

Because they had to charge higher lending rates to compensate

for the higher costs of funds, it was very difficult for the banks

to compete with t he other established and st ronger banks for the “pr ime”

borrowers ( i.e. the most credit worthy borrowers). As a result , the credit

market were segmented, with many o f the banks operat ing in the most

r isky segment serving borrowers prepared to pay high lending rates

because they could access no alternat ive sources of cred it .

High-r isk borrowers included other banks and non-bank finance

inst itut ions which were short of liquidit y and prepared to pay

19

above-market interest rates for interbank deposit s and loans. In Niger ia

some o f the banks were heavily exposed to finance houses which

co llapsed in large numbers in 1993, as well as to other banks

(Agusto and Co., 1995). Consequent ly, bank dist ress had contagio n

effects because o f the extent to which banks lent to each other.

Within t he segments o f the credit market served by these banks,

there were probably good qualit y ( i. e. credit worthy) borrowers as well

as poor qualit y r isks. But serving borrowers in this sect ion o f the market

requires st rong loan appraisal and monitoring systems, not least because

informat ional imperfect ions are acute, the qualit y o f borrowers financia l

accounts are often poor, many borrowers lack a t rack record of successfu l

business, etc.

The problem for many o f the failed banks was that they did

not have adequate expert ise to screen and monitor their borrowers

and therefore d ist inguish between good and bad r isks. In addit ion,

credit procedures such as the documentation o f loans and loan secur it ie s

and internal controls, were frequent ly very poor. Managers and directors

of t hese banks o ften lacked the necessary expert ise and exper ience,

(Mamman and Oluyemi, 1994). Recruit ing good staff was o ften difficult

for these banks because the established banks could usually o ffer

the most talented bank o fficia ls bet ter career prospects. Moreover,

the rapid growth in the number of banks in Niger ia outst ripped the

supply o f exper ienced and qualified bank officia ls.

2.2.6 Macro-economic Instability The problems o f poor loan qualit y faced by t he dist ressed banks

were compounded by macro-economic instabilit y. Per iods o f high and

very vo lat ile inflat ion occurred dur ing these per iod in Niger ia.

Macro-economic instabilit y would have had two important consequences

for the loan qua lit y o f the dist ressed banks. First , high inflat ion increases

the vo lat ilit y o f business pro fit s because o f it s unpredictabilit y,

and because it normally entails a high degree of var iabilit y in t he rates

of increase o f the pr ices o f the part icular goods and services which make

up the overa ll pr ice index. The probabilit y that firms will make lo sses

r ises, as does the probabilit y that they will earn windfa ll pro fit s,

20

(Harvey and Jekins, 1994). This intensifies both adverse select ion and

adverse incent ives for borrowers to take r isks and thus the probabilit ies

of loan default .

The second consequence o f high inflat ion is t hat it makes loan

appraisal more difficult for the bank, because the viabilit y o f potent ial

borrowers depends upon unpredictable developments in t he overall rate

of inflat ion, it s individual components, exchange rates and interest rates.

Moreover, asset pr ices are also likely to be highly vo lat ile under such

condit ions. Hence, the future real value of loan secur it y is also ver y

uncertain (Brownbr idge, 1998).

2.2.7 Liquidity Support and Prudential Regulation Deposit insurance schemes were not crucial factors in contr ibut ing

to moral hazard in t he fa iled banks. Niger ia has provided deposit

insurance since the late 1980s, but only for deposits below a specified

minimum amount . Many o f the failed banks’ deposits were not insured,

because they were too large (as in t he case o f most of the inst itut ional

deposits) and/or because they were from sources not covered by the

insurance scheme. But the willingness of the regulatory author it ies

to support dist ressed banks with loans, rather than close them down, was

probably an important contributor to moral hazard.

The extent of imprudent management in the failed banks indicates

that there were ser ious deficiencies in bank regulat ion and supervis ion.

When many o f the banks were set up in the 1980s or ear ly 1990s,

banking legis lat ion was outdated and Central bank supervis ion

departments were ser iously under staffed. In Niger ia many banks avo ided

being inspected for long per iods because the rapid expansion o f banks

in the second half o f the 1980s overwhelmed supervisory capac it ies

(Kar iuki, 1993). Furthermore, po lit ical pressure was brought to bear

on Central Banks to exercise regulatory forbearance. The Central Bank

often lacked sufficient independence from the government to refuse

liquid ity support to polit ically connected banks and to st rict ly enforce the

banking laws. In part icular, for those banks with st rong po lit ica l

connect ions, the expectat ion that regulators could be pressured

21

to exercise forbearance must have ser iously undermined discipline and

incent ives for prudent bank management .

2.2.8 Inadequate Supervision As the supplier o f credit , which promotes economic growth,

the banking system remains an important sector of t he modern economy.

Governments the wor ld over therefore supervise and regu late banks more

than any other sector of the economy. Infact , Bench (1993) asserted that

healthy bank supervis ion leads to healthy industry. A well supervised

banking system not only helps prevent bank dist ress, it a lso contains

built - in mechanism for ident ifying fa lt er ing banking inst itut ions and

predict ing failures.

2.2.9 Weak Corporate Governance: Corporate governance provides st ructure and processes within

which shareho lders, directors and management conduct the business

of a bank with t he u lt imate object ive o f realizing long-term shareho lders

value while taking into account the interests o f other stakeho lders.

The pract ice o f corporate governance demands not only t ransparency,

accountabilit y and probit y, but also a sense o f convict ion and

commitment to ensure that the interests of all part ies are protected.

Weak corporate governance and/or mismanagement played a major ro le

in bank failure in Niger ia as:

Inexper ienced and incompetent personnel were recruited to ho ld

key posit ions in banks. As a result , most of them lacked the abilit y

to respond to rapidly changing economic condit ions and regulatory

framework. The CBN’s recent ly issued guidelines on minimu m

qualificat ions for top management o f banks is therefore a welcome

development .

Significant deter iorat ion in management culture as the dist ressed

condit ion o f t he banks got worse was manifested in most banks.

Deter iorat ion invo lved several stages. First , it invo lved inadequate

polic ies, procedures and pract ices which resulted in over extension

of credit , and poor lending procedures. As the losses increased,

banks and management t r ied to hide losses so as to buy t ime

22

and remain in control. This led to manipulat ion o f profit s;

under provis ioning for lo sses through fixed asset revaluat ion.

When the banks became severely inso lvent , management resorted

to desperate st rategies to boost liquidity or income leve ls.

The pract ices included abuse o f the clear ing system through

the issuance o f phantom up-country cheques, purchasing high cost

funds at rates above the market levels, lending to marginal

or fr inge borrowers at excessive rates or engaging in speculat ive

t ransact ions. Furthermore, where the banks became inso lvent and

illiquid, the management engaged in massive fraudulent pract ices.

These included outright theft and diversion o f banks assets

to related companies or fict it ious companies. The culture of fraud

was elevated to corporate level and permeated all layers in the

organisat ions.

Weak Internal Control Systems character ized the operat ions

of many dist ressed banks. Even where the controls were in place,

they were not being complied with .Internal audit or inspect ion

funct ions were weak and sanct ions were not imposed on err ing

officers. The consequence o f weak internal controls was clear ly

reflected in the vo lume o f frauds and forger ies.

Non-compliance with laws and prudent ial standards. Management

of many banks fa iled to comply with prescr ibed code o f conduct

and also failed to keep proper books and accounts in contravent ion

of applicable banking laws, rules and regulat ions.

Table 2.2 - Extent of Insider Loans in Liquidated Banks (December 1996)

Liquidated Bank Total Loans Insider Loans

(Nm)

Proportion of Insider

to Total Loans (%)

Financia l Merchant Bank 577.5 363.1 62.9

Capita l Merchant Bank 246.8 140.0 56.7

Alpha Merchant Bank 2,837.2 647.2 22.8

United Commercial Bank 1,735.0 1,183.6 68.2

Republic Bank 308.5 219.1 71.0

Total 5.705.1 2,552.9 44.7 Source: NDIC Quar terly, Vol . 7, No. 314

23

2.3 Consequences of Bank Distress The adverse effect of bank dist ress on the economy o f any country

is not a respecter of the level o f development . Whether a country

is industr ialized, developed and big or poor, under-developed and small,

bank failures, if not well managed, portend doom and co llapse for the

economy. The devastat ing effects o f bank failures on the only super

power in the wor ld today – the Unit ed States of America and the threat it

posed to the economy o f the fir st indust r ial country – Br itain, are well

documented in the literature (Ebhodaghe, 1995: 29).

The governments, regulators, members of the public and bank

operators have always resented bank failures due to var ious reasons.

Governments are part icular ly concerned in view o f the social, po lit ica l

and economic implicat ions of bank dist ress.

The externalit ies associated with bank dist ress make it d istastefu l

and o f ser ious macro-economic implicat ions unlike what obtains when

a non-bank inst itut ion fails . For example, if a business out fit should

become inso lvent , it s demise would not adversely affect other similar

companies negat ively. As a mat ter of fact , they should benefit by having

more customers. However, when a bank becomes dist ressed, apart fro m

the economy, there may be a spillover of the problems to other banks,

(contagion effect). Of course, the real o r perceived threat of contagion

across banks and the potent ial for high macro-economic costs result ing

from bank dist ress have o ften led governments to adopt a safety net

to prevent these outcomes.

2.3.1 Erosion of Public Confidence About the greatest havoc o f bank dist ress is t he erosion o f public

confidence in the system especia lly if the dist ress is not well managed.

Banking is built on t rust and confidence. Once the t rust and confidence

are misplaced, banks would no longer be effic ient in playing their role

of financia l int ermediat ion. The loss of public confidence would

automat ically have many adverse effects. It can easily lead to panic and

bank run may ensure – especia lly if there is no insurance scheme.

A situat ion where there is lo ss o f public confidence and bank runs,

demonet izat ion, would be a logica l problem. There would be massive

24

port fo lio shift to safer assets such as foreign currencies, government

secur it ies and non-monetary assets as well as capital flight .

The preponderance of t he banking public that would not be able

to part icipate in port fo lio shift would not have a safe place to invest part

of t heir wealth. As this is supposed to be government’s responsibilit y,

there will be po lit ical pressure for government to abate the cr is is.

Equally related to demonstrat ion is the negat ive implicat ion for banking

culture. Already, the banking culture in Niger ia is poor and low and bank

dist ress would only exacerbate the situat ion. As an evidence o f this ugly

development in Niger ia, currency outside banks as a proport ion o f narrow

money supply rose sharply from 42.3% in 1987 before government started

to officially ident ify t he number o f dist ressed banks to 57.4% in 1995

(a year when 60 out of the 115 banks were declared dist ressed by the

author it ies) before it declined to about 50% in 1997 (Ebhodaghe, 1997).

Hitherto , investment in the banking sector had been considered

lucrat ive. Bank dist ress would make investors lose t heir investments

in t he banking industry; rather t here would be divestment from it .

This problem would be compounded by low pro fitabilit y for the

remaining banks as lo ss of public confidence in them would jeopardize

their patronage and earnings.

2.3.2 Contagious Effects The banking industry is special in terms of regulat ion as exper ience

has shown that failure (bankruptcy) in t he industry has externa l

consequences (Uche, 2000). The concern to safeguard the viabilit y o f the

depository industry arose from the fact that financia l failure had

significant external effects that reached beyond the depositors and stock

ho lders o f the financia l firm. The depository inst itut ion played

an important role as the Chief Conductor in both the payment process and

the savings and investment process.

Failure o f individual firms in t he depository industry may lead

to widespread deposit runs t hat could overflow to other depository firms,

which has come to be known as the contagious effect (Uche, 2000).

Cont inuing, he asserted that inst itut ional developments like the r ise

in inter-bank lending and var ious money market operat ions, propelled

25

mainly by the spir it of compet it ion with the aid o f advancement s

in informat ion techno logy, have also added to the contagion problem.

There has therefore been a steady r ise in the entwinement o f banks.

Therefore, no mat ter how small a financial inst itut ion may be, the impact

of it s fa ilure may be far-reaching fo r the ent ire financia l system

(Uche, 2000).

Again bank customers are protected despite the pr inciple o f Caveat

emptor. This is especially so where it is inherent ly difficult for the

individual or consumer to assess t he goods or services he or she is buying

or where the learning process for the society may be judged too cost ly

or difficult (Uche, 2000).

2.3.3 Economic Effects Banks are central to an efficient and effect ive payment system

in any country. With expensive bank dist ress, the payment s system would

be jeopardized and at great r isk as the link between the real sector,

and the financial sector including internat ional set t lement , would be

great ly impaired. This would inhibit t he intermed iat ion ro le o f banks.

In circumstances where the capacit y o f banks to perform their main ro le

of financia l int ermediat ion is impaired, the rea l sector of the economy

would be adverse ly affected.

Banks are the main means by which monetary po licy

is implemented in an economy. I f bank dist ress becomes chronic,

thereby result ing in bank failure, the effect ive imp lementat ion

of monetary po licy could be hampered. This could a lso have a contagio n

effect on economic development .

Dist ressed banks would be incapacitated from extending new credit .

The healthy banks would equally be constrained from grant ing credit

for fear o f such facilit ies becoming delinquent . I f credits are extended

at all, they are likely to be for short -term and mainly to finance

commerce and purchase o f foreign exchange. According to Onimode

(1996), a country where banks become highly speculat ive and reckless

such as depicted here is dubbed a “Casino” economy. The effect of these

would be to further crowd out the product ive sectors of manufactur ing

26

and agr iculture from the credit market . Yet the product ive sector must

be galvanized for macro-economic stabilit y to mater ialize.

The failure o f many banks can lead to a sudden contract ion o f the

money supply as well. This would have very ser ious adverse implicat ions

for macro-economic stabilit y as economists are in accord that the leve l

of money supply has a posit ive correlat ion with the vo lume o f act ivit ies

in any economy.

Bank failures can hinder effect ive compet it ion and an efficient

financial intermediat ion. Compet it ive banking system will force banks

to operate effic ient ly if t hey are to make profit , keep their custo mers and

remain in bus iness. For this to obtain will depend on, among others,

the number o f banks operat ing in a market , and whether t he exist ing

banks are o f an appropr iate size and st rength for the needs o f their

customers. Bank failures can lead to undue concentrat ion and inefficiency

in delivery o f banking services as failed banks are closed and new banks

are not given entry (Ebhodaghe, 1997).

2.3.4 Global Effect The pr imary counterparts o f foreign creditors are the banks

as they are the financial gateway to a country. With bank dist ress,

the internat ional percept ion o f the banking system could be that

of suspic ion as it would be feared that their funds could be locked

up and/or lost in the banking system. In most cases, the internat iona l

community would not extend credit to a country in which its banking

system is dist ressed. This would undoubtedly compromise foreign

investment and lead to escalat ion o f capit al flight out of the country.

2.4 Bank Distress in Nigeria

2.4.1 Origin of Bank Distress in Nigeria At the t ime banking business fully commenced in Niger ia,

bank ownership and customers were largely foreigners. That lopsidedness

was mainly responsible for the inabilit y o f ind igenous Niger ian

enterpr ises to have access to bank credit . To redress the ugly situat ion

and meet the financia l requirements o f businesses owned by Niger ians,

some ind igenous banks commenced operat ions in t he late 1920s. In view

27

of the weaknesses o f those indigenous banks in such areas

as capit alizat ion and management , and given the total absence

of regulat ion by any government agency, the indigenous banks could not

survive the host ile and st rong compet it ion posed by the foreign banks.

It was therefore not surpr ising that , by 1954, a total o f 21 out of 25

indigenous banks had failed and went into self- liquidat ion. It was a bit ter

exper ience for numerous depositors who lost their life savings ;

and, as a consequence, public confidence in the banking system,

especially among Niger ians, was severe ly eroded.

The pro longed o il glut that started in mid-1981 result ed

in economic down-turn. The financia l condit ion o f firms and individuals

worsened, and they could not honour their contractual obligat ions of loan

repayment to banks. This impaired banks’ port fo lio qualit y, leading

to asset impairment and write-o ffs. Those macroeconomic dis locat ions

combined with poor management , capital inadequacy, inhibit ive po licy

environment , effects of deregulat ion, and abusive ownership / po lit ica l

int er ference led some banks into severe financial dist ress. By 1990,

nine (9) banks were known to be technically inso lvent .

2.4.2 Current Early Warning System (EWS) Employed in Identifying

Bank Distress in Nigeria The EWS in use by the CBN / NDIC is based on the CAMEL

parameters. For this purpose, thresho lds, based on their internat iona l

standards or local condit ions are used to assess a bank’s financial

condit ion. A composite measure, that is a weighted average o f the scores

on the var ious components o f the CAMEL parameters, is assigned to each

bank. The different factors and scor ing weights at tached to them are

shown in Table 3.

28

Table 2.3 – Weights o f CAMEL Factors in Use in Niger ia

Factor Component

Component

Weight

(%)

Factor

Weight

(%)

Capita l ( i) Capita l to risk assets rat io

( ii) Adjusted capit al rat io

( iii) Capita l growth rate

15

5

5

25

Asset

Qualit y

( i) Non-performing r isk assets

to total r isk assets

( ii) Reserve for losses to non-

performing r isk assets

( iii) Non-performing r isk assets to

capital and reserves

15

5

5

25

Management ( i) CAMEL/85*

( ii) Compliance with

laws/regulat ions

5

10

15

Earnings

( i) Profit sector tax to total assets

( ii) Total expenses to total

income**

( iii) Net interest income to total

earning assets

( iv) Interest expenses to total

earning assets

5

5

5

5

20

Liquidit y

( i) Liquidit y rat ion

( ii) Net loans and advances to total

deposits

( iii) Volat ile dependence rat io

5

5

5

15

TOTAL 100 100

Note: * CAMEL/85 is composite scores for capital, assets, earnings and

liquid ity divided by 85.

Net of interest in suspense.

29

For the composit e CAMEL rat ing used, the final score by each

bank i is computed as fo llows:

Let Wp c = Maximum weight allo tted to component c,

of CAMEL parameter p,

Where: P = 1, 2, 3, 4, 5 (with p = 1 is capital, p = 2 is asset

qualit y, etc.) ,

Sci = Credit score for component C o f bank I,

C i = Composite score for bank I,

Then, C i = p c Wp c Sc i , for each i.

2.4.3 Ownership Structure as a Determinant of Bank Distress in Nigeria Historically, the Niger ian banking industry has played host

to banks having different ownership st ructures. These inc lude banks

having different composit ions o f ownership ( foreign banks, indigenous

banks, government / state banks and pr ivate banks) and banks having

different spreads o f ownership (quoted banks and non-quoted banks).

Ownership st ructure is considered an important factor that

affects a firm’s health (Zeitun and Tian, 2007). In fact , the dist ress

condit ions o f banks in Niger ia have, at var ious t imes, been at t ributed

to the nature o f their ownership. For instance, report ing on the causes

of bank failures and persist ent dist ress in the Niger ian bank ing industry,

Ogunleye (2003: 23) stated:

“The government-owned banks suf fered frequent changes

in board membership usually associated with changes

in the federal and state governments. Many appointments

were based on political patronage rather than merit.

Board members saw themselves as representatives of political

parties, the states or local governments and had little

or no loyalty to the banks they served. As a result , political

and social considerations pervaded the decision-making

processes. This situation promoted indiscipline in such banks

as sanctions or deployments became very subjective…

30

On the other hand, the privately-owned banks were af f licted

by undue interference and pervasive inf luence of the

dominant shareholder(s). Such shareholders were unable

to recrui t and or retain competent management teams.

The problem of appointing incompetent management

is aptly described by G. K. Olufon (1992) as follows:…

Since the owner-managers regard banking as an extension

of their business empires, they invariable try to dominate

their operations by appointing their relatives or friends

to key positions instead of relying solely on professional

managers. In some banks, major shareholders appointed

their children or friends to key positions without due regard

to their level of experience and competence. Even where

regulatory authorities declined approval of such

appointments, the persons were sometimes made to remain

in the positions either in acting capacity or under dif ferent

names such as chief operating of f icer.

Many of the privately-owned banks were characterized

by series of shareholders quarrels and boardroom

squabbles.”

2.4.4 Tackling Bank Distress in Nigeria – A Regulatory Approach The phases o f bank regulat ion and supervision in Niger ia can

be classified into three:

( i) The post Niger ian Banking Ordinance per iod (1952-1958),

( ii) The post CBN establishment per iod (1959-1986), and

( iii) The era o f financial reforms (1987 to date).

The bank failures t hat came with the per iod o f free banking

- largely the fa ilure o f indigenous banks – brought ser ious hardships

to many depositors, leading to the enactment o f t he Banking Ordinance

of 1952. This brought some sanity into the banking scene. The ordinance

was amended in 1958 and 1962 and finally repealed in 1969 with the

enactment of the Banking Decree. The 1952 Ordinance was pr incipally

to regulate banking operat ions and pract ice.

31

The establishment o f the CBN in 1958 as the apex regulatory

agency for licensed banks ushered in another phase of bank regulat ion

and supervision in Niger ia. The act establishing the CBN as well as the

1969 Banking Decree were repealed with the promulgat ion o f the CBN

Decree 24 of 1991 and the Banking and other Financia l Inst itut ions

Decree (BOFID) 25 o f 1991. These decrees, respect ive ly, specify the

regulatory and supervisory powers o f t he CBN over banks and other

financial inst itut ions, as well as the rules governing the establishment ,

administ rat ion and inst itut ions operat ing in Niger ia (NDIC, 1991b).

With financial liberalizat ion, a number o f steps were taken

to ensure that banks are supplied with qualit y staff and that the

operat ions o f banks are st reamlined. These steps culminated in t he

promulgat ion o f the Chartered Inst itute of Bankers (CIBN) Decree 12

of 1990, the promulgat ion o f the NDIC Decree 22 o f 1988, the CBN

Decree o f 1991 and the BOFID, both ment ioned ear lier, as wel l

as the int roduct ion o f the Prudent ial Guidelines in November 1990

(Soyibo, 1991). The NDIC was empowered to insure the deposit s

of licensed banks, to protect, in part icula r, small savers. The corporat ion

is expected to complement the efforts of t he CBN in bank supervis ion

so as to ensure a safe and sound banking system. The BOFID enhanced

the powers o f the CBN, giving the CBN overall responsibilit y for the

control of the banking system. Pr ior to the promulgat ion of BOFID,

the minister o f Finance was respons ible for grant ing and withdrawing

banking licences and it was to the Minister that all mat ters pertaining

to problem and/or failing banks were refer red to for resolut ion.

It is inst ruct ive to note that both the CBN and NDIC decrees were

amended ear ly in 1997. The CBN was again placed under the Minist ry

of Finance and NDIC was granted operat ional autonomy to handle

reso lut ion of dist ress in banks.

The CBN and NDIC have recorded some degree of success

in tackling bank dist ress in Niger ia. Successful rest ructuring and reviva l

of some dist ressed banks by their owners, coupled with technica l support

32

from the CBN / NDIC led to the reclassificat ion o f the dist ressed banks

as sound banks. The revived banks inc lude:

( i) Crystal Bank o f Afr ica Limit ed, which later metamorphosed into

Standard Trust Bank Limited, and was acquired by UBA dur ing

the 2004 / 2005 financ ial sector reforms;

( ii) Mer idien Equity Bank o f Niger ia Limit ed, which later

metamorphosed into Equity Bank o f Niger ia Limit ed, and was

acquired by Intercont inental Bank Plc dur ing the 2004 / 2005

financial sector reforms;

( iii) Gamji Bank (Nig) Plc. , which lat er metamorphosed into

Internat ional Trust Bank Niger ia Plc, and was acquired by Oceanic

Bank Plc dur ing the 2004 / 2005 financial sector reforms;

( iv) Niger ia Universal Bank Limit ed, which later metamorphosed into

NUB Internat ional Bank Limited, and merged with other banks

to form First Inland Bank Plc dur ing the 2004 / 2005 financia l

sector reforms;

(v) New Niger ia Bank Plc, which later merged with other banks

to form Unity Bank Plc dur ing the 2004 / 2005 financia l sector

reforms;

(vi) Nat ionwide Merchant Bank Limit ed, which later metamorphosed

into Plat inum Bank Limit ed, and merged with Habib Bank

to form Plat inum-Habib Bank Plc dur ing the 2004 / 2005 financia l

sector reforms;

(vii) First Afr ican Trust bank Limit ed, which later metamorphosed into

Eagle Bank Limited; and

(viii) Or ient Bank Plc, which later metamorphosed into Afr ican Express

Bank Plc.

2.4.5 Distress Rationale for Banking Sector Reforms in Nigeria Reforms have been a regular feature of the Niger ian banking

system. There are usually int roduced eit her in response to the challenges

posed by factors and development s such as systemic cr is is, deregulat ion,

globalizat ion and techno logical innovat ion or as proact ive measures both

to st rengthen the banking system and prevent systemic cr isis , as is the

case in t he recent reforms. The recent reforms widely referred

33

to as consolidation of the Nigerian banking system , are part o f the broad

on-go ing nat ional economic reforms.

Pr ior to the commencement o f t he banks conso lidat ion programme,

the Niger ian banking industry had remarkable features of market

concentrat ion. For instance, Lemo (2005) noted that the top ten out

of eighty nine banks in Niger ia controlled:

More than 50% of the aggregate assets;

More than 51% of the total deposit liabilit ies; and

More than 45% of the aggregate credit s.

According to the Governor of the Central Bank o f Niger ia (CBN),

Professor Char les So ludo, the industry was generally character ized

by small-sized, marginal players with very high overhead costs.

Most banks in the country had a capit al base o f less than US$10 million.

Indeed, the capital base o f the largest bank before the reform was about

US $240 million compared to Malaysia where t he smallest bank had

a capital base o f US$526 million. The small size o f most Niger ian banks

coupled with their overheads and operat ing expenses has ser ious

repercussions for the cost of int ermediat ion. It also constrained them

in terms o f effect ive part icipat ion in big-t icket t ransact ions,

part icular ly in the light of the single obligor limit . Many o f them

could not meet client ’s request for fund ing, part icular ly in sectors

like telecommunicat ion, mar it ime, and o il and gas.

A sound banking system must , inter alia, be able to facilitate

economic development , provide a plat form for sound monetary po lic y

implementat ion as well as ensure pr ice stabilit y. However, the other

problems, which the conso lidat ion programme was designed to address

inc luded:-

( i) Heavy Reliance on Government Patronage: In a speech delivered

by the Governor of the Central Bank o f Niger ia (CBN),

Professor Char les So ludo, to the specia l meet ing o f the Bankers’

Commit tee, held on July 06, 2004, it was revea led that the

public sector accounted for over 20% of aggregate deposit s

in t he industry. For some banks, t he dependency rat io was as high

as 50%. This was not a healthy development from the perspect ive

34

of long-term planning, given the vo lat ile nature of t hese deposit s.

With the huge deposits from the public sector, these banks were

not under pressure to aggressively exploit the retail end of the

market to source for more stable funds that would have been

channeled to support the real sector. It was therefore not

surpr ising that the growth witnessed in the banking industry was

not matched by a corresponding increase in economic act ivit ies

in the real sector.

( ii) Weak Corporate Governance: According to the CBN, a number

of Board members and management staff o f banks were more

int erested in pursuit s o f t heir pr ivate or narrowly – defined

int erests, even at the detriment of the corporate goals and

object ives o f the banks they were serving. Consequent ly,

cases o f ins ider abuses were rampant in the industry. One area

where this was pronounced was the credit funct ion, result ing

in huge non-performing ins ider-related loans and advances.

( iii) Eroding Ethics and Professionalism:- The unhealthy compet it ion

that existed in the market , which was engendered by the relat ive

ease o f entry into the market as a result o f the low capit a l

requirement , necessitated some banks going into rent -seeking,

unwho lesome, unethical and non-core banking businesses.

Some o f t he banks were pre-occupied with t rading in foreign

exchange and, somet imes, indirect importat ion o f goods and wares

through surrogate companies.

These problems impacted negat ively on the health and performance

of t he industry. For instance, according to the NDIC Annual Report and

Statement of Accounts (2004) banks’ non-performing credit s increased

from N260.19 billion in 2003 to N350.82 billion in 2004. Similar ly,

the rat io of non-performing credit to total credit increased from 21.59%

in 2003 to 23.08% in 2004. Furthermore, a review o f the banking system

as at June, 2004, revealed that marginal and unsound banks accounted

for 19.2% of the total assets, 17.2% of total deposit liabilit ies, while

industry non-performing assets was 19.5% of the total loans and

advances. The implicat ion o f this unsat isfactory stat ist ics, as noted

35

by Lemo (2005), is t hat there was a t hreat of systemic dist ress judging

by the t r igger po ints in the CBN Cont ingency Planning Framework

of December 2002. This was demonstrated by the outcome o f the rat ing

of all licensed banks by the Central Bank of Niger ia in 2004. That result

showed that only ten (or 12%) of the eighty-nine banks in the country was

at 2004 were class ified as sound. On the other hand, twenty six

(represent ing about 30%) of the banks were adjudged as eit her margina l

or unsound.

From the forego ing review, it is evident that pr ior the reforms,

the Niger ia banking syst em was fragile and, as such, could not effect ively

meet the growth and development aspirat ions o f the economy.

The industry was in such a state that the nat ion could not rely

on it to facilit ate rapid economic growth and development . It was

therefore obvious that a reform o f the sector was inevit able.

2.5 Conclusion Aligned to the purpose o f this study, t he forego ing review

of related literature suggests that the plausible empir ical determinant s

of bank dist ress in Niger ia include: bank capit al size, loan qualit y,

ins ider lending and extent o f government ownership. These are var iables

that will be adopted in our model o f empir ical determinants o f bank

dist ress in Niger ia.

2.6 References Ako, R.M. (1999), The Capita l Market and Equity fa ilure in Niger ia”

CBN Economic and Financial Review, 37 (3), 77 – 100.

Bench, R.R. (1999), “Developments in Internat ional Financia l regulat ion,

some observat ions” Paper presented at the GGM Inst itute

of Finance annual Conference, Salt Late City, Utah.

Brownbr idge M. (1998) “The causes o f Financial Dist ress in Local Banks

in Afr ica and Implicat ions fo r Prudent ial Po licy”

UNCTAD/CNB/NDIC.

36

Chen, C., Steiner, T. and Whyte, A. (1998) “Risk-taking Behavior and

Management Ownership in Depositors’ Inst itut ions”. The Journal

of Financial Research , 20, 1 – 16.

Doguwa, S. (1996) “On Ear ly Warning Models for the Ident ificat ion

of Problem Banks in Niger ia”, CBN Economic and Financial

Review, Vo l. 3(1), 462 – 487.

Ebhodaghe, J. (1995) “Causes and Environmental Effects o f Bank

Failures in Niger ia”, NDIC Quarterly , Vo l. 5 (3).

Ebhodaghe, J. (1997) “Financial Dist ress and Failure Reso lut ion”,

NDIC Quarterly , Vo l. 7.

Gupta, L.C. (1979) Financial Ratios as Forewarning Indicators

of Corporate Sickness. Bombay: ICICI.

Harvey, C. and Jenkins, C. ((1994) “Interest Rate Po licy, Taxat ion and

Risk”. World Development , Vo l. 22.

Jimoh, A. (1993) “The Ro le o f Ear ly Warning Models in the

Ident ificat ion of Problem Banks: Evidence from Niger ia”.

Nigerian Financial Review, 6 (1), 29 – 40.

Mamman H. and Oluyemi S. (1994), “Bank’s Management Issues and

Restor ing the Health of Niger ian Banks through Improving

the Qualit y o f Management / Employees”. NDIC Quarterly , Vo l. 4.

Nwankwo, G.O. (1980) The Nigerian Financial System . London:

Macmillan Publishers.

Ogunleye, G.A. (2000) “Ethics and Professionalism: Lessons fro m

the Recent Dist ress in t he Niger ian Banking System”.

NDIC Quarterly , Vo l. 10 (1).

37

Ogunleye, G.A. (2003) “The Causes of Bank Failures and Persistent

Dist ress in t he Banking Industry”. NDIC Quarterly , 13 (4),

21 – 41.

Olufon, G.K. (1992) “Problems o f Boardroom Imbroglio Afflict ing

the Banking Industry in Niger ia”. In Adewumi, W. (Ed.)

The Leadership Role of Board Chairman in Bank Management ,

Lagos: CIBN.

Pandey, I . M. (2000) Financial Management . New Delhi: Vickas

Publishing House PVT Ltd.

Sinkey, J. F. (1975) “A Mult ivar iate Stat ist ical Ana lysis

of Character ist ics o f Problem Banks”. Journal of Finance , 30 (1),

21 – 36.

Uche, C. U. (2002) “Banking Regulat ion in an Era o f Structural

Adjustment : The Case o f Niger ia”. International Journal

of Financial Regulation and Compliance , Vol. 8, No. 2.

Uche, C. U. (2001) “Niger ia Bank Fraud”. Journal of Financial Crime ,

Vol. 8.

Zeitun, R. and Tian, G. G. (2007) “Does Ownership Affect a Firm’s

Performance and Default Risk in Jordan?”. Corporate Governance ,

7 (1), 66-82.

38

CHAPTER THREE

RESEARCH DESIGN AND PROCEDURE

3.1 Research Design This study is a historical survey o f determinants o f bank dist ress

in Niger ia. The research s imply analyzes historical data and ut ilizes

the outcome to ascertain significant determinants o f bank dist ress

in Niger ia.

3.2 Research Population The populat ion ut ilized in t his study comprises banks operat ing

in Niger ia between 1998 and 2004.

3.3 Nature, Sources and Size of Data Data used in this study were all observat ional panel data

(Stock and Watson, 2007: 10 and 16) obtained from banks’ published

accounts. Based on the rule o f thumb provided by Green (1991) and Fie ld

(2005: 173), the minimum acceptable data size for the conduct of this

study is 108. Barely exceeding this minimum, a total o f 113 complete

bank observat ions were ut ilized in this study. Appendix I highlights

the data employed.

3.4 Method of Data Collection: The researcher vis ited t he Niger ian Deposit Insurance Corporat ion

(NDIC), the Central Bank o f Niger ia (CBN), the Chartered Inst itute

of Bankers o f Niger ia (CIBN) and the Financia l Inst itut ions Training

Centre (FITC) to obtain annual reports required for the empir ical analys is

invo lved in this study.

39

3.5 Model Specification The fo llowing mult iple regression model has been adopted for the

purpose of this empir ical analys is:-

Ŷ = o + ∂1 X1 + ∂2 X2 + ∂3 X3 + ∂4 X4 + t

Where Ŷ = Predicted bank so lvency rat io

X1 = Bank Capital Size

X2 = Size of Insider Loans

X3 = Loan qualit y

X4 = Extent of government ownership

∂1 – 4 = Var iable coeffic ients

o = Regression int ercept

t = Stochast ic error

3.6 Variables’ Definitions

SOLVENCY:- Fo llowing Anyanwaokoro (1996:191-192), so lvency shal l

be computed as:

Total Liabilit ies

Total Assets

CAPITAL SIZE:- Capita l size shall be computed as total shareholders’

funds.

INSIDER LOANS:- Insider loans shall be computed as given in t he

respect ive bank financia l statements.

LOAN QUALITY:- Loan qualit y shall be computed as:

Total per forming Loans and Advances

Total Loans and Advances

40

EXTENT OF GOVERNMENT OWNERSHIP:- This var iable shal l

be computed as given in respect ive NDIC annual reports.

3.7 Mode of Data Analysis All the data for the purpose o f this study were manually computed

and then calibrated into the SPSS regression module for extensive

stat ist ical analys is. There were five steps in the analys is.

( i) The first step in t he SPSS analys is was the conduct ing o f visual

tests for out liers. Field (2005) explains t hat out liers tend

to adversely bias regression est imates.

( ii) The second step invo lved test ing whether the data dist r ibut ions

were normal. The Ko lmogorov-Smirnov and Shapiro-Wilk tests

were used to test for normalit y o f the data dist ribut ions.

( iii) The third step invo lved test ing for mult ico llinear it y among

the regressors. A correlat ion matr ix test (Field, 2005: 175) was

employed for this purpose. The rule for this test is: “where the

correlat ion between two predictors is found to be stat ist ically

significant at p < .01, two-tailed, one o f the regressors has

to be expunged from the model”.

( iv) The fourth step invo lved comput ing the regression est imates and

convent ional support ing indices. A regressor is deemed stat ist ically

significant if α = .05, two-tailed.

(v) The final step invo lved test ing for the existence o f a first -order

autoregressive scheme (Koutsoyiannis, 2003: 200-232) in the

regression funct ion. Its existence would necess itate a modificat ion

of the model. Koutsoyiannis (2003: 226) expla ins that :

“The consequences of autocorrelation are serious for the

values and the standard errors of the parameter estimates.

When the u’s are temporarily dependent we have the

following consequences:

(i) The values of the parameter estimates are statistical ly

unbiased despite the presence of autocorrelation.

(ii) The variance of u may be underestimated.

The underestimation is serious in the case of positive

autocorrelation of the u’s and of positively

41

autocorrelated X t’s, which is the usual case in the real

economic world.

(iii) The variances of the parameter estimates are likely

to be seriously underestimated when both the u’s and

the X’s are positively autocorrelated. Thus we run the

danger of accepting as signif icant variables which

in reality are not signif icant explanatory variables.

(iv) The estimates b’s are not best (they do not possess the

minimum variance property) as compared wi th

estimates from other econometric techniques.

(v) The predictions based on estimates obtained from

OLS applied to a model with autocorrelated u’s are

not ef f icient.”

The test for the existence o f a first -order autoregressive

scheme was done in two stages. Dur ing the fir st stage, correlat ion

tests were employed. The rule for each test was: “where the

correlat ion between Y t and Y t -1 or X t and X t -1 is found

to be stat ist ically significant at α = .01, two-tailed, fir st -order

autocorrelat ion is deemed to have been ident ified and Y t -1 or X t -1 ,

as t he case may be, shall subsequent ly be inc luded in the model

as a regressor”. Dur ing the second stage, the regressio n residuals

were stat ist ically analyzed, with the aim o f correct ing

autocorrelat ion disturbances from the model’s var iables, if such

disturbances were ident ified.

3.8 References Anyanwaokoro, M. (1996) Banking Methods and Processes.

Enugu: Hosanna Publicat ions.

Field, A. (2005) Discovering Statistics Using SPSS . New Delhi:

SAGE Publicat ions Ltd.

Green, S.B. (1991) “How Many Subjects Does It Take to Do a Regression

Analys is?”. Multivariate Behavioural Research , 26, 499-510.

42

Koutsoyiannis, A. (2003) Theory of Econometrics (Second Edit ion).

New York: PALGRAVE.

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

(Second Edit ion). Boston: Pearson Educat ion, Inc.

43

CHAPTER FOUR

DATA ANALYSIS

4.1 Visual Tests for Outliers

Linear Regression

0.0010000000000 .00

20000000000.0030000000000 .00

40000000000 .00

Capital Size (N)

1.000

1.500

2.000

2.500

Solvency R

atio

Solvency Ratio = 0.90 + -0.00 * CSR-Square = 0.01

Source: Researcher ’s computat ions

Fig. 1- Outliers in Solvency Ratio vs. Capital Size

Linear Regression

0.00100000000000.00

200000000000.00300000000000.00

400000000000.00500000000000.00

Insider Loans (N)

1.000

1.500

2.000

2.500

Solvency Ratio

Solvency Ratio = 0.89 + -0.00 * ILR-Square = 0.00

Source: Researcher ’s computat ions

Fig. 2- Outliers in Solvency Ratio vs. Insider Loans

44

Linear Regression

0.00 0.25 0.50 0.75 1.00

Loan Quality

1.000

1.500

2.000

2.500Solvency Ratio

Solvency Ratio = 1.24 + -0.44 * LQR-Square = 0.21

Source: Researcher ’s computat ions

Fig. 3- Outliers in Solvency Ratio vs. Loan Quality

Linear Regression

0.00 0.10 0.20 0.30 0.40

Extent of Government Ow nership

1.000

1.500

2.000

2.500

Solvency R

atio

Solvency Ratio = 0.88 + 0.17 * EGOR-Square = 0.01

Source: Researcher ’s computat ions

Fig. 4- Outliers in Solvency Ratio vs. Extent of Government Ownership

45

Figures 1-4 reveal t he consistent existence o f two out liers

which may tend to bias the mult iple regression model to be developed

(Field, 2005). Therefore, these two out liers have to be ident ified and

expunged from the dataset before final analysis is conducted.

6.0E11

4.0E11

2.0E11

0.0E0

5673

251

68

954667

9568

9982

297354

492781

90

24

2935

32

1550 23

6

Source: Researcher ’s computat ions

Fig. 5- Specific Identification of the Outliers

Figure 5 clear ly ind icates that cases 82 and 99 in the dataset

are the cases producing the out liers ident ified in Figures 1-4.

Hence, these cases shall be omit ted dur ing the stat ist ical computat ions

so that a reliable mult iple regression model can be obtained.

46

4.2 Kolmogorov-Smirnov and Shapiro-Wilk Tests for Normality

Table 4.1- SPSS Case Processing Summary

Cases Valid Missing Total N Percent N Percent N Percent Solvency Ratio 111 98.2% 2 1.8% 113 100.0% Capital Size (N) 111 98.2% 2 1.8% 113 100.0% Insider Loans (N) 111 98.2% 2 1.8% 113 100.0% Loan Quality 111 98.2% 2 1.8% 113 100.0% Extent of Government Ownership 111 98.2% 2 1.8% 113 100.0%

Source: Researcher ’s computat ions

Table 4.2- SPSS Tests for Normality

Kolmogorov-Smirnov(a) Shapiro-Wilk Statistic df Sig. Statistic df Sig. Solvency Ratio .356 111 .000 .338 111 .000 Capital Size (N) .233 111 .000 .612 111 .000 Insider Loans (N) .234 111 .000 .680 111 .000 Loan Quality .150 111 .000 .810 111 .000 Extent of Government Ownership .465 111 .000 .512 111 .000

a Lilliefors Significance Correction Source: Researcher ’s computat ions

Significance o f the Ko lmogorov-Smirnov and Shapiro-Wilk stat ist ic

across all the data dist r ibut ions indicates non-normalit y o f the dataset .

This is a fundamental caveat to be noted when int erpret ing regression

est imates der ived via the dataset .

For viewing purposes, other stat ist ica l and visual normalit y indicators

are showcased in Appendix II of this dissertat ion.

47

4.3 Correlation Matrix Test for Multicollinearity

Table 4.3- Correlation Matrix of the Regressors

Capital Size (N)

Insider Loans (N) Loan Quality

Extent of Government Ownership

Capital Size (N) Pearson Correlation 1 .398(**) .142 -.170 Sig. (2-tailed) .000 .137 .074 N 111 111 111 111 Insider Loans (N) Pearson Correlation .398(**) 1 -.121 -.122 Sig. (2-tailed) .000 .204 .202 N 111 111 111 111 Loan Quality Pearson Correlation .142 -.121 1 -.218(*) Sig. (2-tailed) .137 .204 .021 N 111 111 111 111 Extent of Government Ownership

Pearson Correlation -.170 -.122 -.218(*) 1

Sig. (2-tailed) .074 .202 .021 N 111 111 111 111

** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

Source: Researcher ’s computat ions

Though the correlat ion between capital s ize and ins ider loans is stat is t ically

s ignificant at p < .01, two-tailed, the correlat ion coefficient it self does

not exceed 0.9. Thus, according to Field (2005: 185), allowing both

var iables to remain in the predicted model will not produce

mult ico llinear it y and it s adverse effects in the regress ion funct ion since

the size of the correlat ion coefficient is not large enough.

For viewing purposes, a matr ix scat terplot of t he regressors is showcased

in Appendix III of this dissertat ion.

48

4.4 The Regression Estimates The modified predicted model to be tested is:-

Ŷ = o + ∂1 X1 + ∂2 X2 + ∂3 X3 + ∂4 X4 + Et

Where Ŷ = Bank so lvency rat io

X1 = Capital size

X2 = Size of Insider Loans

X3 = Loan qualit y

X4 = Extent of government ownership

∂1 – 4 = Var iable coeffic ients

o = Regression int ercept

Et = Stochast ic error

The Results

Ŷ = 1.228 – 0.232 X1 + 0.129 X2 – 0.406 X3 + 0.023 X4 + Et

(0.000) (0.027) (0.212) (0.000) (0.682)

R2 = 0.433

Adjusted R2 = 0.465

Durbin-Watson = 2.285

NOTE:- Stat ist ical significance levels are in brackets!

49

4.5 Correlation Test for Existence of First-Order Autoregressive Schemes

Table 4.4- Correlation Results for Yt and Yt-1

VAR 00006 = Y t

VAR 00007 = Y t -1

RY t ,Y t -1 = -0.062

Significance Level (2-tailed) = 0.522 > 0.01

There is no first -order autoregressive scheme in var iable Y.

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

VAR00006 VAR00007 VAR00006 Pearson Correlation 1 -.033 Sig. (2-tailed) .785 N 111 108 VAR00007 Pearson Correlation -.033 1 Sig. (2-tailed) .785 N 108 111

VAR 00006 = X1 , t

VAR 00007 = X1 , t -1

RX1 , t , X1 , t -1 = -0.033

Significance Level (2-tailed) = 0.785 > 0.01

There is no fir st -order autoregressive scheme in var iable X1 .

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

VAR00006 VAR00007 VAR00006 Pearson Correlation 1 -.040 Sig. (2-tailed) .684 N 111 108 VAR00007 Pearson Correlation -.040 1 Sig. (2-tailed) .684 N 108 111

VAR00006 VAR00007 VAR00006 Pearson Correlation 1 -.062

Sig. (2-tailed) .522 N 111 108

VAR00007 Pearson Correlation -.062 1 Sig. (2-tailed) .522

N 108 110

50

VAR 00006 = X2 , t

VAR 00007 = X2 , t -1

RX2 , t , X2 , t -1 = -0.040

Significance Level (2-tailed) = 0.684 > 0.01

There is no fir st -order autoregressive scheme in var iable X2 .

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

VAR00006 VAR00007 VAR00006 Pearson Correlation 1 .059 Sig. (2-tailed) .547 N 111 108 VAR00007 Pearson Correlation .059 1 Sig. (2-tailed) .547 N 108 111

VAR 00006 = X3 , t

VAR 00007 = X3 , t -1

RX3 , t , X3 , t -1 = 0.059

Significance Level (2-tailed) = 0.547 > 0.01

There is no fir st -order autoregressive scheme in var iable X3 .

Table 4.8- Correlation Results for X4,t and X4,t-1

VAR00006 VAR00007 VAR00006 Pearson Correlation 1 .035 Sig. (2-tailed) .723 N 111 108 VAR00007 Pearson Correlation .035 1 Sig. (2-tailed) .723 N 108 111

VAR 00006 = X4 , t

VAR 00007 = X4 , t -1

RX4 , t , X4 , t -1 = 0.035

Significance Level (2-tailed) = 0.723 > 0.01

There is no fir st -order autoregressive scheme in var iable X4 .

51

4.6 Durbin-Watson Test for Existence of First-Order Autoregressive Schemes Based on the regression results given in Sect ion 4.4:

Durbin-Watson Stat ist ic = 2.285

Koutsoyiannis (2003: 214) specifies that :

( i) I f d* < dL we reject the null hypothesis o f no autocorrelat ion

and accept that there is posit ive autocorrelat ion of the fir st order.

( ii) I f d* > (4 - dL) we reject the null hypothesis o f no autocorrelat ion

and accept that there is negat ive autocorrelat ion of the fir st order.

( iii) I f dU < d* < (4 – dU) we accept the null hypothesis

of no autocorrelat ion.

( iv) I f dL < d* < dU or if (4 – dU) < d* < (4 - dL) the test

is inconclusive.

Given that d* = 2.285

dL = 1.48 (α = .01)

dU = 1.60 (α = .01)

Case 1

d* > dL – Do not reject the null hypothesis of no autocorrelat ion!

Case 2

d* < (4 - dL) – Do not reject the nu ll hypothesis o f no autocorrelat ion!

Case 3

dU < d* < (4 – dU) – Accept the null hypothesis o f no autocorrelat ion!

Case 4

dL < d* > dU and (4 – dU) > d* < (4 - dL) – The test is conclusive!

Summary

There is no fir st -order autoregressive scheme in the ent ire est imat ion.

52

4.7 Answering the Research Questions and Testing the Research Hypotheses

4.7.1 Research Question 1 and Research Hypothesis 1 Based on the regression results given in Sect ion 4.4, the answer

to Research Quest ion 1 and the result o f the hypothesis test

for Hypothesis 1 are given as fo llows:

Answer to Research Question 1

Capita l size is a significant determinant of bank dist ress in Niger ia.

Hypothesis 1 Test Result

∂1 Significance Leve l = 0.027

α = .05, two -tailed

Do not accept the null!

There is a s ignificant relat ionship between capital size and bank dist ress

in Niger ia.

4.7.2 Research Question 2 and Research Hypothesis 2 Based on the regression results given in Sect ion 4.4, the answer

to Research Quest ion 2 and the result o f the hypothesis test

for Hypothesis 2 are given as fo llows:

Answer to Research Question 2

Insider lending is not a significant determinant of bank dist ress

in Niger ia.

Hypothesis 2 Test Result

∂2 Significance Leve l = 0.212

α = .05, two -tailed

Do not reject the null!

There is no significant relat ionship between ins ider lending and

bank dist ress in Niger ia.

53

4.7.3 Research Question 3 and Research Hypothesis 3 Based on the regression results given in Sect ion 4.4, the answer

to Research Quest ion 3 and the result o f the hypothesis test

for Hypothesis 3 are given as fo llows:

Answer to Research Question 3

Loan qualit y is a significant determinant of bank dist ress in Niger ia.

Hypothesis 3 Test Result

∂3 Significance Leve l = 0.000

α = .05, two -tailed

Do not accept the null!

There is a significant relat ionship between loan qualit y and bank dist ress

in Niger ia.

4.7.4 Research Question 4 and Research Hypothesis 4 Based on the regression results given in Sect ion 4.4, the answer

to Research Quest ion 4 and the result o f the hypothesis test

for Hypothesis 4 are given as fo llows:

Answer to Research Question 4

Extent of government ownership is not a significant determinant

of bank dist ress in Niger ia.

Hypothesis 4 Test Result

∂4 Significance Leve l = 0.682

α = .05, two -tailed

Do not reject the null!

There is no s ignificant relat ionship between extent of government

ownership and bank dist ress in Niger ia.

54

4.8 References Field, A. (2005) Discovering Statistics Using SPSS . New Delhi:

SAGE Publicat ions Ltd.

Koutsoyiannis, A. (2003) Theory of Econometrics (Second Edit ion).

New York: PALGRAVE.

55

CHAPTER FIVE SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

5.1 Summary of Findings The fo llowing are the pr imary findings o f this study:-

( i) Capita l size is a significant determinant of bank dis tress in Niger ia.

( ii) Insider lending is not a significant determinant o f bank dist ress

in Niger ia.

( iii) Loan qualit y is a significant determinant of bank distress in Niger ia.

( iv) Extent of government ownership is not a significant determinant

of bank dist ress in Niger ia.

5.2 Conclusion This study has discovered that loan qualit y has a significant

negat ive relat ionship with bank dis tress in Niger ia. High-r isk lending

therefore plays a key role in bank distress in Niger ia. High-r isk

borrowers include other banks and non-bank finance inst itut ions which

are short of liquidit y and prepared to pay above-market interest rates

for interbank deposit s and loans (Agusto and Co., 1995). Hence, within

the segments o f the credit market served by banks in Niger ia, t here

is need for the constant ident ificat ion o f good qualit y ( i. e. credit worthy)

borrowers. However, serving borrowers in this sect ion o f the market

requires st rong loan appraisal and monitor ing systems. In the past ,

the problem for many o f the dist ressed banks in Niger ia was that they

did not have adequate expert ise to screen and monitor their borrowers

and therefore dist inguish between good and bad credit r isks. Credit

procedures, such as the documentat ion of loans and loan secur it ies and

int ernal controls, were frequent ly very poor. In addit ion, bank managers

and directors often lacked the necessary expert ise and exper ience

(Mamman and Oluyemi, 1994).

56

5.3 Recommendations Having concluded this study, the researcher deems it pert inent

to make the fo llowing recommendat ions:-

( i) There is need for banks in Niger ia to maint ain adequate

capitalizat ion, as this will help to minimize inc idence o f dist ress

in the Niger ian banking industry.

( ii) Banks in Niger ia should exercise more care when dea ling wit h

high-r isk segment s o f their credit markets. This will enhance

their loan qua lit ies, thus minimiz ing the chances of their

becoming dist ressed.

5.4 Reference Mamman H. and Oluyemi S. (1994), “Bank’s Management Issues and

Restor ing the Health of Niger ian Banks through Improving

the Qualit y o f Management / Employees”. NDIC Quarterly , Vo l. 4.

57

BIBLIOGRAPHY

BOOKS

Anyanwaokoro, M. (1996) Banking Methods and Processes. Enugu:

Hosanna Publicat ions.

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

Niger ia: Longman.

CBN / NDIC (1995) Distress in the Nigerian Financial Service Industry:

A CBN / NDIC Collaborative Study . Lagos: Page Publishers Services Ltd.

Field, A. (2005) Discovering Stat istics Using SPSS . New Delhi:

SAGE Publicat ions Ltd.

Gupta, L.C. (1979) Financial Ratios as Forewarning Indicators of Corporate

Sickness. Bombay: ICICI.

Koutsoyiannis, A (2003) Theory of Econometrics (Second Edit ion).

New York: PALGRAVE.

Niger ia Deposit Insurance Corporat ion (2003) Annual Report and Statement

of Accounts. Lagos: Nat ional Deposit Insurance Corporat ion.

Nwankwo, G.O. (1980:20) The Nigerian Financial System . London:

Macmillan Publishers.

Olufon, G.K. (1992) “Problems o f Boardroom Imbroglio Afflict ing the Banking

Industry in Niger ia”. In Adewumi, W. (Ed.) The Leadership Role

of Board Chairman in Bank Management , Lagos: CIBN.

Pandey, I . M. (2000) Financial Management . New Delhi: Vickas Publishing

House PVT Ltd.

58

Soyibo, A. (1996b). Financial Sector Liberalization in Africa: Some Empirical

and Policy Issues. Nairobi: Afr ican Economic Research Consort ium.

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

(Second Edit ion). Boston: Pearson Educat ion, Inc.

JOURNAL ARTICLES

Ako, R.M. (1999), The Capita l Market and Equit y failure in Niger ia” CBN

Economic and Financial Review, Vo l. 37 No 3, 77 – 100.

Chen, C., Steiner, T. and Whyte, A. (1998) “Risk-taking Behavior and

Management Ownership in Depositors’ Inst itut ions”. The Journal

of Financial Research 20, 1-16.

Doguwa, S. (1996) “On Ear ly Warning Models for the Ident ificat ion

of Problem Banks in Niger ia”, CBN Economic and Financial Review,

Vol. 3(1), 462 – 487.

Ebhodaghe, J. (1995) “Causes and Environmental Effects o f Bank Failures

in Niger ia”, NDIC Quarterly , Vo l. 5 (3).

Ebhodaghe, J. (1997) “Financia l Dist ress and Failure Reso lut ion”.

NDIC Quarterly , Vo l. 7.

Green, S.B. (1991) “How Many Subjects Does It Take to Do a Regression

Analys is?”. Multivariate Behavioural Research , 26, 499-510.

Harvey, C. and Jenkins, C. ((1994) “Interest Rate Policy, Taxat ion and Risk”.

World Development , Vo l. 22.

Jimoh, A. (1993) “The Ro le o f Ear ly Warning Models in the Ident ificat ion

of Problem Banks: Evidence from Niger ia”. Nigerian Financial Review,

6 (1), 29-40.

59

Mamman H. and Oluyemi S. (1994), “Bank’s Management Issues and Restoring

the Health o f Niger ian Banks through Improving the Qualit y

of Management / Employees”. NDIC Quarterly , Vo l. 4.

Ogunleye, G.A. (2000) “Ethics and Pro fessionalism: Lessons from the Recent

Dist ress in the Niger ian Banking System”. NDIC Quarterly , Vo l. 10 (1).

Ogunleye, G.A. (2003) “The Causes o f Bank Fa ilures and Persistent Dist ress

in the Banking Industry”. NDIC Quarterly , 13 (4), 21-41.

Sinkey, J. F. (1975) “A Mult ivar iate Stat ist ical Analys is o f Character ist ics

of Problem Banks”. Journal of Finance , 30 (1), 21 – 36.

Uche, C. U. (2002) “Banking Regulat ion in an Era o f Structural Adjustment :

The Case o f Niger ia”. International Journal of Financial Regulation and

Compliance , Vo l. 8, No. 2.

Uche, C. U. (2001) “Niger ia Bank Fraud”. Journal of Financial Crime , Vo l. 8.

Uche, C. U. (1997) “Rethink ing Deposit Insurance in Niger ia”.

Zeitun, R. and Tian, G. G. (2007) “Does Ownership Affect a Firm’s

Performance and Default Risk in Jordan?”. Corporate Governance , 7 (1),

66 – 82.

NEWSPAPER

Soludo, C. (2004) “25bn Capit al Base: Implicat ions on the Economy”. This Day ,

Lagos, July 4, p. 35.

RESEARCH REPORTS AND PAPERS

Bench, R.R. (1999), “Developments in Internat ional Financia l regulat ion, some

observat ions” Paper presented at the GGM Inst itute

of Finance annual Conference, Salt Late City, Utah.

60

Brownbr idge M. (1998) “The Causes of Financial Dist ress in Local Banks

in Afr ica and Implicat ions for Prudent ial Policy” UNCTAD/CNB/NDIC.

Soyibo, A. (2004a) “A Posit ive, Normat ive Analysis o f Bank Supervis ion

in Niger ia”. AERC Research Paper 145.

61

APPENDIX I RAW DATA EMPLOYED

.914 1.8E+010 8.3E+008 .96 .00 .925 5.3E+009 6.7E+008 .69 .34 .876 3.9E+010 1.7E+009 .65 .00 .892 1.3E+010 6.6E+008 .97 .00 .919 1.6E+010 3.8E+008 .99 .00 .902 6.8E+009 3.1E+009 .91 .00 .904 3.0E+009 7.7E+008 .93 .00 .749 7.9E+009 1.1E+009 .95 .00 .873 1.6E+009 46800000 .89 .00 .883 4.4E+009 70447000 .84 .00 .902 3.6E+010 1.4E+009 .77 .00 .881 1.0E+010 2.1E+009 .98 .00 .884 2.8E+009 1.6E+009 .91 .00 .872 3.5E+009 1.5E+009 .82 .00 .881 2.3E+009 8.3E+008 .24 .00 .886 2.0E+009 1.0E+009 .94 .26 .850 2.8E+009 1.1E+008 .80 .27 .882 2.8E+009 1.3E+008 .75 .00 .857 5.0E+009 1.2E+009 1.00 .00 .907 5.1E+009 5.7E+008 .96 .00 .793 5.6E+009 1.1E+009 .85 .00 .885 2.3E+009 63439000 .86 .00 .887 8.0E+009 3.2E+009 .83 .00 .708 3.9E+009 2.3E+008 .64 .21 .853 2.0E+010 1.9E+009 .92 .05 .881 1.4E+009 1.0E+008 .89 .00 .734 2.9E+009 1.3E+008 .67 .00 .854 4.4E+009 8.4E+008 .94 .00 .814 8.9E+009 6.3E+009 .45 .00 .880 2.0E+009 5.4E+008 .68 .00 .886 3.0E+009 69325617 .85 .07 .964 4.8E+008 4.0E+008 .30 .43 .832 2.3E+009 1.4E+008 1.00 .00 .885 1.0E+010 1.9E+008 .89 .00 .844 1.6E+009 2.3E+008 .34 .00 .869 2.0E+009 3.1E+008 .84 .29 .877 2.4E+009 1.1E+008 .80 .25 .886 1.8E+009 1.3E+009 .80 .00 .904 2.3E+009 1.5E+008 .77 .00 .905 4.2E+009 1.1E+009 .96 .00 .860 3.0E+009 2.9E+008 .89 .12 .846 2.2E+009 54730000 .78 .16 .895 1.8E+009 14500000 .70 .00 .882 7.2E+009 1.8E+009 .85 .40 .899 9.2E+009 1.3E+009 .91 .00 .683 2.8E+009 1.1E+008 .55 .00 .807 4.0E+009 1.8E+008 .93 .00 .874 1.1E+010 5.9E+008 .97 .00 .888 1.3E+010 2.6E+008 .99 .00

62

.912 5.2E+009 3.4E+009 .88 .00 .889 2.5E+009 1.4E+009 .89 .00 .879 8.6E+009 1.0E+008 .94 .00 .754 5.9E+009 5.3E+008 .97 .00 .873 1.5E+009 7600000 .95 .00 .871 3.5E+009 2.4E+009 .85 .00 .901 3.3E+010 1.3E+009 .74 .00 .877 8.0E+009 2.8E+008 .94 .00 .831 2.6E+009 2.8E+008 .94 .00 .830 6.2E+009 .00 .75 .00 .888 2.5E+009 12650000 .81 .00 .941 2.8E+009 3.8E+008 .69 .00 .852 1.9E+009 5.4E+008 .83 .37 .888 2.3E+009 1.3E+008 .91 .07 .743 2.0E+009 43148426 .49 .28 .834 2.4E+009 5.9E+008 .60 .00 .878 1.3E+009 82930000 .85 .00 .666 4.2E+009 .00 .73 .00 2.503 -3E+009 1.6E+009 .01 .20 .910 1.4E+009 3.5E+008 .67 .00 .843 7.5E+009 1.3E+009 .80 .00 .773 5.0E+009 8.4E+008 1.00 .00 .794 1.4E+009 14000000 .87 .00 .890 3.0E+010 4.7E+009 .75 .00 .899 9.3E+009 51700000 .99 .00 .903 5.2E+009 1.2E+009 .91 .00 .851 2.2E+009 5.0E+008 .75 .00 .829 1.9E+009 3.8E+008 .85 .00 .866 7.9E+009 4.4E+008 .98 .00 .895 5.6E+009 8.4E+008 .96 .00 .936 2.4E+009 4.2E+008 .73 .00 .721 1.2E+009 18958000 1.00 .00 .860 1.5E+009 5.0E+011 .78 .00 .872 1.9E+009 3.3E+008 .63 .00 .903 3.2E+009 4.1E+008 .94 .00 .854 1.7E+009 29770000 .81 .16 .894 1.2E+009 14500000 .76 .00 .915 3.8E+009 4.2E+008 .85 .00 .914 6.0E+009 1.2E+009 .92 .00 .786 1.6E+009 2.4E+008 .75 .00 .718 3.7E+009 4.7E+008 .92 .00 .838 2.1E+009 2.2E+008 .89 .07 .775 1.7E+009 9800000 .53 .30 .878 1.6E+009 7.4E+008 .83 .00 .928 7.3E+008 45197000 .83 .00 1.525 -2E+009 2.0E+009 .12 .00 .892 1.1E+009 2.5E+008 .54 .00 .907 3.5E+009 8.1E+008 .83 .00 .902 1.7E+009 1.6E+008 .92 .27 .873 9.7E+008 5.2E+011 .75 .00 .904 4.6E+009 1.3E+008 .98 .00 .866 1.3E+009 43370000 .74 .16 .901 8.1E+008 13000000 .78 .00

63

.883 1.2E+009 3.0E+008 .95 .00 .929 4.3E+009 8.5E+008 .93 .00 .888 4.0E+008 1.2E+008 .70 .00 .886 2.0E+009 1.6E+008 .93 .00 .880 2.8E+009 1.1E+009 .93 .00 .825 7.8E+008 19340000 .77 .18 .875 5.5E+008 7030000 .49 .00 .908 7.3E+008 1.6E+008 .96 .00 .896 1.3E+009 1.6E+008 .96 .00 .863 2.2E+009 4.6E+008 .90 .00 .903 1.7E+009 13000000 .94 .40

64

APPENDIX II OTHER STATISTICAL AND VISUAL NORMALITY INDICATORS

Solvency Ratio Solvency Ratio Stem-and-Leaf Plot Frequency Stem & Leaf 11.00 Extremes (=<.775) 1.00 78 . 6 2.00 79 . 34 1.00 80 . 7 1.00 81 . 4 2.00 82 . 59 5.00 83 . 01248 3.00 84 . 346 7.00 85 . 0123447 5.00 86 . 03669 13.00 87 . 1223345677889 22.00 88 . 0011122334556666788889 9.00 89 . 022455699 15.00 90 . 112223334445778 6.00 91 . 024459 3.00 92 . 589 1.00 93 . 6 1.00 94 . 1 .00 95 . 1.00 96 . 4 2.00 Extremes (>=1.525) Stem width: .010 Each leaf: 1 case(s)

65

Source: Researcher ’s computat ions

Observed Value2.5 2.01.5 1.00.5

Expected Normal

3

2

1

0

-1

-2

-3

Normal Q-Q Plot of Solvency Ratio

66

Source: Researcher ’s computat ions

Observed Value3.0 2.5 2.01.51.00.5

Dev from Normal

8

6

4

2

0

-2

Detrended Normal Q-Q Plot of Solvency Ratio

67

Source: Researcher ’s computat ions

Solvency Ratio

3.0

2.5

2.0

1.5

1.0

0.5

68

95

4667

2781 90

24

68

Capital Size (N) Capital Size (N) Stem-and-Leaf Plot Frequency Stem & Leaf 1.00 -3 . 2 .00 -2 . 1.00 -1 . 9 .00 -0 . 7.00 0 . 4457778 26.00 1 . 01122333345556667778899999 26.00 2 . 00001222233333455577888899 9.00 3 . 002455679 9.00 4 . 022334599 8.00 5 . 01235689 2.00 6 . 17 5.00 7 . 24999 3.00 8 . 068 3.00 9 . 239 2.00 10 . 35 9.00 Extremes (>=1E+010) Stem width: 1.0E+009 Each leaf: 1 case(s)

69

Source: Researcher ’s computat ions

Observed Value4.0E103.0E102.0E101.0E100.0E0-1.0E10-2.0E10

Expected Normal

3

2

1

0

-1

-2

-3

Normal Q-Q Plot of Capital Size (N)

70

Source: Researcher ’s computat ions

Observed Value4.0E103.0E102.0E101.0E100.0E0-1.0E10

Dev from Normal

3

2

1

0

-1

Detrended Normal Q-Q Plot of Capital Size (N)

71

Source: Researcher ’s computat ions

Capital Size (N)

4.0E10

3.0E10

2.0E10

1.0E10

0.0E0

-1.0E10

3

11

56

73

251

5

4

49

72

Insider Loans (N) Insider Loans (N) Stem-and-Leaf Plot Frequency Stem & Leaf 42.00 0 . 000000000000000000000000111111111111111111 17.00 0 . 22222222223333333 13.00 0 . 4444445555555 4.00 0 . 6677 7.00 0 . 8888888 5.00 1 . 00001 8.00 1 . 22222333 4.00 1 . 4455 2.00 1 . 67 2.00 1 . 99 1.00 2 . 0 6.00 Extremes (>=2E+009) Stem width: 1.0E+009 Each leaf: 1 case(s)

73

Source: Researcher ’s computat ions

Observed Value8.0E9 6.0E94.0E92.0E90.0E0-2.0E9

Expected Normal

3

2

1

0

-1

-2

-3

Normal Q-Q Plot of Insider Loans (N)

74

Source: Researcher ’s computat ions

Observed Value6.0E9 4.0E9 2.0E9 0.0E0

Dev from Normal

4

3

2

1

0

-1

Detrended Normal Q-Q Plot of Insider Loans (N)

75

Source: Researcher ’s computat ions

Insider Loans (N)

6.0E9

4.0E9

2.0E9

0.0E0

29

73

50

236

55

76

Loan Quality Loan Quality Stem-and-Leaf Plot Frequency Stem & Leaf 6.00 Extremes (=<.45) 2.00 4 . 88 2.00 5 . 34 1.00 5 . 5 4.00 6 . 0344 7.00 6 . 7779999 6.00 7 . 234444 9.00 7 . 555567778 17.00 8 . 00000112222344444 13.00 8 . 5555668888999 23.00 9 . 00001111122233333334444 18.00 9 . 555556666777788899 3.00 10 . 000 Stem width: .10 Each leaf: 1 case(s)

77

Source: Researcher ’s computat ions

Observed Value1.2 1.00.8 0.6 0.40.20.0

Expected Normal

3

2

1

0

-1

-2

-3

Normal Q-Q Plot of Loan Quality

78

Source: Researcher ’s computat ions

Observed Value1.00.8 0.60.40.2 0.0

Dev from Normal

0.5

0.0

-0.5

-1.0

-1.5

-2.0

Detrended Normal Q-Q Plot of Loan Quality

79

Source: Researcher ’s computat ions

Loan Quality

1.0

0.8

0.6

0.4

0.2

0.0

95

68

29

3532

15

80

Extent of Government Ownership Extent of Government Ownership Stem-and-Leaf Plot Frequency Stem & Leaf 87.00 0 . 0000000000000000000000000000000000000000000 24.00 Extremes (>=0) Stem width: 10.00 Each leaf: 2 case(s)

81

Source: Researcher ’s computat ions

Observed Value0.50.4 0.30.20.1 0.0

Expected Normal

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

Normal Q-Q Plot of Extent of Government Ownership

82

Source: Researcher ’s computat ions

Observed Value0.50.4 0.30.20.1 0.0

Dev from Normal

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

Detrended Normal Q-Q Plot of Extent of Government Ownership

83

Source: Researcher ’s computat ions

Extent of Government Ownership

0.5

0.4

0.3

0.2

0.1

0.0

32

44113

62

2

9236

1798

16 37

2468

108

42

85

10141

6391 3125

21

84

APPENDIX III MATRIX SCATTERPLOT OF THE REGRESSORS

Source: Researcher ’s computat ions

Extent of Government Ownership

Loan QualityInsider Loans (N)

Capital Size (N)

Extent of Government Ownership

Loan Quality

Insider Loans

(N)

Capital Size

(N)