FINANCIAL STRATEGY AS SUPPORT DETERMINANT FOR THE AVOIDANCE AND RESOLUTION OF DISTRESS IN THE NIGERIAN BANKING INDUSTRY
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FINANCIAL STRATEGY AS
SUPPORT DETERMINANT FOR THE AVOIDANCE AND RESOLUTION OF DISTRESS IN THE
NIGERIAN BANKING INDUSTRY
ABSTRACT
The banking sector is the bedrock of
the Nigerian economy, and this industry is known to have contributed in no
small measure to the development of the economy. This industry is the enabling
hub of national and global payment systems, which facilitates trade
transactions within and amongst numerous national, regional and international
economic units and by so doing; it enhances commerce, industry and
exchange. In performing these various functions in the enabling
environment provided by the government through various fiscal, and monetary
policies and reforms, this industry has been experiencing a phenomenal distress
whereby the banking institutions could not meet their financial obligations to
their customers and stakeholders, which led to the liquidation of many
banking institutions, lost of deposits by depositors, lost of
investments by many investors and the crisis of confidence by the general
public. Various researchers and bodies including the Central Bank of Nigeria
(CBN) and Nigeria Deposit Insurance Corporation (NDIC) have done some works to
solve this problem. The Central Bank of Nigeria (CBN) has introduced various
reforms, yet this problem persists. The objective of this work is to evaluate
financial strategy as determinant for sustainable performance growth and an
antidote to distress in the Nigerian banking industry. The research
method is empirical, and descriptive with the use of primary and secondary data
from 1998-2007. Primary data were obtained from a sampled population through the
use of a corporate questionnaire, and for the secondary, macro data were
obtained from Central Bank and Nigerian Stock Exchange. Multivariate
Analysis of variance method (MANOVA) was applied in analyzing the primary data.
The results revealed the homogeneity, co linearity, and strong
interrelationship between the dependent variables and the independent variables
to solve distress in the three types of banks analyzed. With the results
obtained, all the five null hypotheses were nullified. Multiple regression
analysis was used to analyze the secondary data in conjunction with change in
growth model. The results from the two statistical methods revealed a
co-movement and correlation between Gross Domestic Product and Bank performance
indices in the banking industry. A change in bank performance will have the
same directional change in Gross Domestic Product as other sectors of the
economy are also affected. The Bank performance indices are strong predictors
of Gross Domestic Product. The work recommended a transformational financial
strategy model in the work for implementation in the banking industry so that
distress can be avoided and totally resolved. The model contains the following
indices: sound corporate governance, good investment policy, effective capital budgeting,
corporate planning, effective tax planning, effective budgetary control and
economic profit of investment. An implementation of the model will give birth
to sustainable performance growth which contains the following growth
variables: adequate capital, quality earning assets, stable profitability,
sustainable liquidity, enhanced dividend paid, and equitable tax liability.
Other recommendations are: effective risk assets management, sound training of
credit analyst, quality supervision from the industry regulators, and
independence of EFCC for effectiveness. However, all stakeholders must be
committed to the model and other recommendations.
TABLE OF CONTENTS
Chapter
one: Introduction
1.1 Background to the Study
1.2 Statement of the
problem
1.3 Objectives of the
study
1.4 Research
Questions
1.5 Statement of
Hypotheses
1.6 Scope of
Study
1.7 Significance of
Study
1.8 Preview of Research
Methodology
1.9 Operational Definition of
Terms
Chapter Two
Literature Review
2.1
Introduction
2.2 The Evolution of Banking in
Nigeria
2.2.1The Colonial Era (1892-1957)
2.2.2The Independence Era
(1957-1970)
2.2.3The Indigenous Era
(1970-1985)
2.2.4 The Privatization and
Commercialization Era (1986-1992)
2.2.5Bank Rehabilitation and
Restructuring Era
(1992-date)
2.2.6The Nature of Bank Reforms in
Nigeria
2.3 Review of Literature relating to
Financial Strategy and Sustainable
Performance
Growth
2.3.1 Competing for the
future
2.3.2 Central Bank of Nigeria (CBN) and
Nigeria Deposit Insurance
Corporation (NDIC) definition of distress and analytical
framework
2.3.3 Strategic Planning and
Sustainable Performance
Growth
2.3.4 Financial Strategy in the Banking
Industry
2.4 Review of Literature relating to
Strategic Planning and Bank
Performance for Sustainability and Growth in Nigerian Banking
Industry
2.4.1 Strategic planning: Financial
performance relations in Banks: A causal
examination
2.4.2 Corporate Governance and
Sustainable Performance
Growth
Cases of Poor Corporate Governance in Banks
1. The Rumbles in Spring
Bank
2. Development in Wema Bank Plc
3. CBN Replaces Five Bank MDs,
Directors
2.4.3 Budgetary Control and Performance
Evaluation
2.4.4 Capital Budgeting and Sustainable
Performance
Growth
2.4.5 Tax Planning and
liquidity
2.4.6 Leadership and Sustainable
Performance
Growth
2.5 Review of Literature relating to
Investment Policies and
Management of Assets and Liabilities in Nigeria Banking
Industry
2.5.1 A case study of distress banks in
Nigeria by Central Bank of
Nigeria
2.5.2 Banking crisis: causes, early
warning signals and
resolutions
2.5.3 The causes of financial distress
in local banks in Africa and
Prudential policy
2.5.4 Incentives and Resolution of Bank
Distress
2.6 Review of Literature relating to
Bank Performance and Gross Domestic
Product
to Determine their
Co-movement
2. 6.1 Economic Profit and Performance
Measurement in the Banking Industry
2.6.2 Banking practice and the Nigerian
economy
2.6.3 Micro and Macro Determinant of
bank fragility in North Cyprus
Economy
2.7 Justification of
study
2.8 Theoretical
Framework
2.9.Framework Proposal:Causal Link
between Model and Research Work
Chapter Three
Research
Methodology
3.1
Introduction
3.2 Study
Area
3.3 Research
Design
3.4 Population, Sample Representatives
and Sampling
Techniques
3.5 Performance
Indices
3.6 Restatement of
Hypotheses
3.7 Data Collection
Techniques
3.8 Reliability and Validity
Test
3.9 Data
Administration
3.10 Method of Data
Analysis
3.11 Expected
Results
3.13
Chapterization
Chapter Four
Analysis and
Interpretation of Data
4.1
Introduction
4.2.Response to Questionnaire
4.3 Frequency Analysis of response to
Questionnaire
items
4.3.1 Section1 Relationship between
Financial strategy and Sustainable
Performance
4.3.2 Section2 Relationship between
Strategic Planning and Performance
For Sustainability of Growth of
Business
4.3.3 Section 3Assessment of Investment
Policy for Better Management of
Assets and Liabilities in
banks
4.3.4 Section 4Evaluation of Relationship
between Bank Performance and Gross
Domestic Product
(GDP)
4:4 Descriptive Analysis of response to
Questionnaire
items
4.4.1Evaluation of the relationship
between Financial Strategy and Sustainable
Performance Growth
4.4.2 Evaluation of the relationship
between Strategic Planning and Performance
For Sustainability of Business
Growth
4.4.3 Assessment of the relationship
Investment Policy and Management of Assets
and Liabilities for Sustainable Performance Growth in the Banking Industry
4.4.4 Evaluating the relationship
between Bank Performance and GDP
4.5.0 Statistical Testing
Model
4.5.1 Testing of
Hypothesis
1
4.5.2 Testing of
Hypothesis
2
4.5.3 Testing of Hypothesis
3
4.5.4 Testing of
Hypothesis
4
4.5.5 Testing of
Hypothesis
5
4.6 Analysis of Secondary
Data
4.6.1 Multiple
Regression
4.6.2 Analysis and Comparison of Growth
Change in GDP and Bank
Performance
Indices
Chapter Five
Summary of Findings,
Conclusion and Recommendations
5.1 Research Findings: Empirical
Findings
5.2
Conclusion
5.3
Recommendations
5.4 Suggestions for Further
Studies
5.5 Contribution to
knowledge
References
CHAPTER
ONE
INTRODUCTION
1.1
BACKGROUND TO THE STUDY
In the ordinary parlance, the word
distress connotes unhealthy situation or state of inability or weakness which
prevents the achievement of a set goals and aspirations. A financial
institution will be described as unhealthy; when it exhibits severe financial,
operational and managerial weaknesses where sustainability and stability are
missing in business. A business is any activity that seeks to make profit by
providing goods and services to the society by using inputs from the environment
and transform them into outputs that add meaning to human existence. A business
can be one’s regular employment, profession, occupation and can be an
organization established through the pooling together of resources by various
investors with the aim of providing products or services to the economy,
contribute to the development of the economy and earn returns on their
investments. Nigerian businesses can be classified into three major segments
viz: Private enterprises, Private limited Liability Companies and
publicly quoted companies. The banking sector belongs to the private limited
liability companies and the publicly quoted companies. While some banking
institutions are privately owned by investors, some are publicly quoted on the
Nigerian Stock Exchange. The banking sector is part of Nigerian financial
system, and financial system refers to the totality of the regulatory and
participating institutions, including financial markets and instruments,
involved in the process of financial intermediation. The major objectives of
investing in the banking sector are to provide financial services to the
economy and earn compensatory returns on capital employed.
The Bills of Exchange Acts Cap 21, Laws
of the Federation of Nigeria 1958 states that a ‘banker’ includes a body of
persons whether incorporated or not who carry on the business of banking. By
S.2 Coins Act Cap 34, laws of the Federation of Nigeria, 1958, bank and banker
mean any persons, partnerships or company carrying on the business of bankers
and also any saving bank established under the Saving Bank Ordinance, and also
any banking company incorporated under any ordinance heretofore or hereafter
passed relating to such incorporation. S.21 (1) Nigerian Evidence Act, Cap.62,
laws of Federation of Nigeria, 1958, also provides in like manner. (Olulana,
1999:16). The Banks and other Financial Institutions Act No 25 of 1991 defines
bank as one licensed under the Act and banking business as the business of
receiving deposits on current, saving or other similar account, and paying or
collecting cheques-S.62 BOFIA. The industry is the enabling hub of national and
global payments system by facilitating trade transactions within
and amongst numerous national, regional and international economic units and by
so doing; it enhances commerce, industry and exchange. The banking industry in
Nigeria is the bedrock of the economy.
According to Onoh (2002:10-13),the
establishment of modern banking in Nigeria dates back to the colonial era when
the African Banking Corporation was formed in 1892 to distribute currency notes
of the Bank of England for the British treasury. Subsequent developments were
encouraged by colonial entrepreneurs who needed banking institutions to back up
the colonial trade. In the bid to address the credit needs of indigenous
entrepreneurs, Nigerians later ventured into the banking business, initially
through private individuals and later through deliberate government policy.
According to CBN and NDIC (1995:1), the problem of distress in the financial
sector, including bank failure, has been observed in Nigeria as far back as
1930 when the first bank failure was reported. Between 1930 and 1958 when
Central Bank of Nigeria CBN was established, about 22 banks were liquidated
(appendix 1). In 1992, 3banks were liquidated while in 1994, 4banks were
liquidated. The degree of intensity and scope of the distress has never been as
serious as has been observed since June,1989 when the Government directive to
withdraw deposits of government and other public sector institutions from banks
to the CBN exposed the weak financial condition of most financial institutions.
This led to the increase in the number of distressed institutions and the
severity of the problem has been on the increase. The intensity of the problem
led to the liquidation of 26banks in 1998(appendix 2).
According to CBN (2004:1),
following the deregulation of the Nigerian financial sector in 1986 during era
of structural adjustment programme (SAP), the banking industry witnessed
remarkable growth, both in the number of deposit money banks and other types of
financial institutions. However, in the early 1990s, Nigerian banking
institutions faced many challenges, including increased competition and harsh
economic conditions. Against this background, the incidence of financial sector
distress induced by undercapitalization, liquidity crisis and high degree of
non-performing loans characterized the banking industry in Nigeria. Some of the
banks were faced with the threat of liquidation, while some were resuscitated
as a result of the timely intervention of the regulatory
authorities.
Several measures have been taken by the
supervisory agencies to tackle the problem of distress in the financial system
most especially the banking industry to stem the deterioration in the financial
conditions of ailing banks with the ultimate aim of restoring confidence in the
financial system. These varied from financial assistance, imposition of holding
actions and supervisory intervention to the outright liquidation of some
distressed banks. As a way of minimizing the distress in the banking system,
the Central Bank in 1990 introduced the Prudential Guidelines on early
recognition of loan losses and required banks to make adequate provisions for bad
and doubtful debts, a factor which was responsible for the insolvency of some
banks.
The Central Bank of Nigeria
explained that based on bank examination reports, the supervisory authorities
drew the attention of the Boards and Managements of distressed banks to a
number of shortcomings such as poor credit policy, large portfolio of
non-performing assets, weak internal controls, insider abuses. All the
recommendations were unheeded. The regulatory authorities had to impose holding
actions on such banks, the implementation of which was time bound. The
CBN in collaboration with the NDIC granted liquidity support to illiquid banks
to assist them meet their obligations as and when due. This helped to achieve
some measure of success and restore public confidence. Technical assistance was
provided by the supervisory agencies in form of advisory services and
secondment of staff when the need arose. Owing to limited success in the
application of Holding Actions, the CBN assumed control and management of some
distressed banks with the intention to acquire, restructure and subsequently
sell them to the public. In order to sanitize the banking system and install
market discipline, the licences of some banks were revoked in the system in
1992, 1994, 1998 and 2005.
According to Eghodaghe (1993) and cited
by CBN/NDIC (1995), a financial institution in distress is usually one where
the evaluation depicts poor condition in all or most of the five performance
factors as follows:
(a) Gross undercapitalization in
relation to level of operation;
(b) High level of classified loans and
advances;
(c) Illiquidity reflected in the
inability to meet customers’ cash withdrawals;
(d) Low earnings resulting from huge
operational losses, and
(e) Weak management as reflected by
poor credit quality, inadequate internal controls, high rate of frauds and
forgeries, labour turn-over, etc.
Based on the extent and depth of the
problem, it is evident that Nigeria has been experiencing generalized type of
distress. The generalized type of distress exists when its occurrence is
spreading so fast and cut across all the sub-sectors of the industry but its
depth, in terms of the ratio of total deposits of distressed institutions to
total deposits of the industry; the ratio of total assets of distressed
institutions to total assets of the industry; and the ratio of total branches
of distressed institutions to total institutional branches of the industry;
among others, has not adversely affected the confidence of the public in the
financial system. This situation arose because of the highhandedness of the
Board of Directors and Management of the various institutions. The Managing
Directors and Chief Executive Officers of these banks had influencing and
controlling power over operational issues which have breached the tenets of
corporate governance. The four pillars of corporate governance of
Accountability, Fairness, Transparency and Independence have been thrown into
the dustbin. Non-compliance with monetary and fiscal policies and
regulatory authorities principles and regulations have resulted into abuse of
power, lack of initiative to put in place good credit policies that will aid
assets and liabilities management. Fraud and malpractices and poor lending
habit have been introduced into the system despite all the efforts of the
regulatory authorities to sanitize the system. Despite the growth
in business and volume of assets of these institutions, rather than performance
growth sustainability, what is prevailing is performance deterioration and financial
distress. The performance growth indices could not be sustained. The banking
institutions failed to design on their own strategies that will bring
sustainability and stability into the system like developing
strategies that critically measure and analyze performance indices of capital,
assets quality,profitability,liquidity,didvidend paid and tax paid. In 2005
December, when the Central Bank of Nigeria concluded the consolidation exercise
in the industry for a new reform and transformation, only the following banks
had the financial capacity to meet the minimum capital base of N25billion:
First Bank Plc, Union Bank Plc, Zenith Bank Plc, Oceanic Bank Plc and Citibank
Ltd. Others went into mergers and Acquisition options which eventually produced
25megabanks in the industry. Fourteen (14) banks whose balance sheet did
not possess any value for merger or acquisition were liquidated (appendix 3).
According to Masi, (1981) cited
in Agene, (1995: 56) “On the day of independence the financial system was
underdeveloped and most of the complex ramifications which are integral to it
today were not there. The Central Bank was only established two years before
independence and up to that date, there was little or no regulation of the
banking industry. Fiscal policy in colonial Nigeria was frankly rudimentary as
most of the banks were foreign-owned and foreign managed, and their orientation
was essentially foreign. He further explained that the two decades
preceding the country’s independence were therefore, a period of tremendous
growth and development in this crucial sector of Nigeria economy. The Nigeria
banking system may therefore be conceived as a network of monetary financial
institutions which act together as a repository for the community’s wealth; the
interbank financial markets i.e. foreign exchange and money markets, which
provide a web of debt instruments; and the framework of laws and regulations
which control the flow of money and credit in time and space.
The failure of various reforms introduced
in the past to resolve distress in the banking industry, makes it imperatives
for a survey to be carried out to get a strategy that will be supportive or for
avoidance and resolution of distress even in the face of financial reforms. For
the sustainability of performance, avoidance and resolution of distress in the
present Federal Government Economic Reforms where consolidation has taken place
in the banking industry, this research work was chosen to assess this problem
of financial distress that has posed a big challenge with a view to getting a
permanent solution. It is high time we moved from generalized distress to
stability and sustainability and avoid systemic distress which is imminent with
the sack of eight (8) Managing Directors and Chief Executive Officers of the
following banks in 2009: Intercontinental Bank Plc, Oceanic Bank Plc, Afribank
Plc, Finbank Plc, Union Bank Plc, Bank PHB, Spring Bank Plc and Equatorial Bank
Ltd. They were sacked for the manifestation of distress syndromes in their banks
with erosion of their capital base, threats to depositors’ funds, high figures
of non-performing loans and advances in relation to total loans and advances in
the banks and clear manifestation of poor corporate governance. The Central
Bank of Nigeria had to inject N620billion as bail-out capital pending
recapitalization. According to Balino (1991) as cited in CBN/NDIC
(1995:32) systemic distress is when its prevalence and the contagious effects
become endemic and pose some threats to the stability of the entire system,
with its attendant negative effects on the nation’s payment system, saving
mobilization, financial intermediation process and depositors confidence, and
under this situation, the ratios of the relevant variables should have risen to
a level that public confidence in the system would be completely eroded.
1:2 STATEMENT OF THE
PROBLEM
According to Hamel and Prahalad,
(1994:5-8) the painful upheavals in so many companies in recent years reflect
the failure of one-time industry leaders to keep up with the accelerating pace
of industrial change.
From the evolution of the banking
industry, the industry gained astronomical growth in the number of commercial
and merchant banks from 11 in 1960 to 120 with a total of 2,107 branches at the
end of 1992 and above 2,500 in 2005. This phenomenal growth and expansion in
the activities of banks resulted in successes and failure of banks. Despite the
robust growth in financial institutions and assets and profitability, some
problems remained while new ones developed, the most prominent being the
financial institution distress.The banking institutions could no longer
meet their financial obligations to their customers and various stakeholders.
It is evident that distressed banks were liquidated, depositors lost their
deposits, investors lost their various investments, stakeholders lost their
holdings and other sectors of the economy were adversely affected economically.
Between 1990 and 2005, the financial distress was of greater intensity, both in
scope and depth. During this period, confidence in the banking sector waned as
the table 1 below shows the data of liquidated financial institutions during
the period:
TABLE 1:1 NUMBER OF LIQUIDATED
DISTRSSED BANKS IN NIGERIA
S/N
Year
Number of Banks
1
Pre-Independence
22
2
1992
3
3
1994
4
4
1998
26
5
2005
14
|
|
Source: CBN, 2002, 2006 Annual Reports
According to Ugwu, Olajide, Ebosede,
Adekoya, Adepetun, and Oji(2009),the post 2005 consolidation exercise recorded
the following problem :
1. The Central Bank of Nigeria sacked
the Board and Management of Spring Bank Plc on January 5, 2007 for
technical distress and falsified mergers and acquisition reports.
2. The Central Bank of Nigeria sacked
the Managing Director of Wema Bank Plc in March 10, 2008 for technical distress
and lack of transparency in reporting
3. In August 14, 2009, the Managing
Directors of the following banks were sacked for technical distress, poor
corporate governance, destructive investment policies that had eroded the
capital base and eating deep into customers deposits, growing poor quality
assets that earned no income and breach of budgetary control policies:
Intercontinental Bank plc, Afribank plc, Finbank plc, Oceanic bank plc, and
Union bank plc.
4. In October 6, 2009, the Managing
Directors of the Bank PHB plc, Spring Bank plc and Equatorial Bank plc were
sacked in similar manner.
5. To avoid waning of public confidence
and runs in these affected banks and other institutions in the industry, the
CBN had to quickly inject N620 billion in all the eight affected banks
to keep them running.
The following are the factors that
characterize the problems identified above.
1.Non-compliance with the various
monetary and fiscal policies which gave room to abuse of power, manipulations
of figures, lack of transparency in their reports to CBN and outright fraud.
2. There were absence of financial
strategies in the industry that gave room for continuous appraisal
of performance in order to sustain performance growth. Sustainable
performance growth should meet the needs of the present without compromising
the ability of the future generations to meet their own needs. The present
growth of business in the industry has not been sustained to be able to prepare
them for the future.
3. The following sustainable
performance growth strategies are either not instituted, poorly instituted or
not reviewed during implementation thereby producing negative results:
corporate governance, investment policy for effective assets and liabilities
management, capital budgeting system, corporate planning, tax planning for
effective fund management and payment of equitable tax, budgetary control and
consideration for economic profit of investment.
4. Absence of responsibility accounting
where key performance indices are reviewed and variances analyzed and corrected
to ensure better performance and sustainable growth. Such indices are capital,
assets, profits, liquidity, dividend paid and tax paid. That was why during
consolidation and recapitalization, only five (5) out of eighty nine (89) banks
could meet the minimum capital of N25billion. The implication of this is
that 84 banks were distressed. The mergers and acquisitions option created
opportunities for 70banks which were technically distressed to go for the
option. 14 banks with total distress and whose cases were beyond redemption
went into liquidation. This was a position of inadequate capital base and
worthless assets values for purchase/merger considerations.
CBN had to revoke their operating
licences (Ugwu, Olajide, Ebosede, Adekoya, Adepetun and Oji: (2009)
5. According to CBN and NDIC(1995)
collaborative study, overhang of non-performing loans and advances, capital
inadequacy, non-compliance with monetary policies, poor corporate governance,
poor planning and control, lack of financial transparency, poor asset and
liability management, macro economic instability, political instability,
inadequate legal framework and economic recession are the contributing
factors to distress in the system
6. As the Gross Domestic Product (GDP)
is the measure of total money value of all the goods and services produced in a
country at a particular period of time, the contribution of the banking
industry to the GDP has been affected by the distress. The position of the
industry which occupied 3rd in contribution prior 1990 dropped as a
result of the distress. Table below shows the evidence.
TABLE1.
2: FINANCIAL INSTITUTIONS CONTRIBUTION TO GDP
Year
% Contribution Position in
economyIndustry No
1998
3.97
5th
33
1999
4.06
5th 33
2000
4.03
5th
33
2001
4.02
4th
33
2002
4.97
4th
33
2003
4.12
4th
33
2004
3.96
4th
33
2005
3.81
4th
33
2006
3.77
4th
33
2007
3.22
5th
33
Source:
CBN Annual Reports (2007)
The distress in the industry has
affected negatively the percentage contribution of the industry to the Gross
Domestic product and also dropped to 5th position out of 33
industries in the economy. The CBN records revealed that if distress is
resolved, the bank performance contribution to GDP will be better than the
present position.
7. Mismatch of assets and liabilities:
The banks financed long term projects with short terms funds thereby created
illiquidity problem. According to 2005 Central Bank report, the total assets to
total available funds of distressed banks was 124.09% in 1995, and 154.47% in
1996. The industry position was 178.27% and 176.23% in1995 and 1996
respectively. The position for the unsound banks was 2,514% in 2003 and
marginally unsound bank was 159.67% while the industry was 207.10%. In 2004,
the position was 885.87% for the unsound banks, 186.67% for the marginally
unsound banks while the industry was 223.64%. With these figures, there is
clear evidence that these banks had liquidity problem which metamorphose into
financial distress.
Despite the efforts of regulatory
authorities to revitalize the affected institutions, Nigeria banking industry
continued to witness this financial distress even after consolidation.
Moreover, copious studies like those reports and early warning signals on
the vulnerability of the banking system in Nigeria, comparatively, little has
been done to provide a comprehensive assessment of the causes and strategies
for the avoidance and resolution of the problem so that the industry can
fully take its position as the bedrock of the national economy.
1:3
OBJECTIVES OF THE STUDY
Financial
distress has been a phenomenal event in Nigerian banking industry from
pre-independence to date which seems to have defied all past economic reforms
of Federal Government of Nigeria and Central Bank of Nigeria. The main
objective of this study is to evaluate financial strategy as antidote to
distress in the banking sector. In doing this,
the
study shall:
i. evaluate the
strength of the relationship between financial strategy and
sustainable performance growth in the banking industry.
ii. examine the
sustainability of the growth in the Nigerian banking industry by evaluating the
relationship between strategic planning (corporate governance, capital
budgeting, budgetary control, tax planning and corporate planning) and
performance.
iii. assess the
investment policies in the banks with a view to suggesting better policy for
better management of assets and liabilities in the banking industry,
iii. examine the
relationship between Bank performance and Gross Domestic Product (GDP) with a
view to determining the co-movement between the two.
1:4
RESEARCH QUESTIONS
The pertinent
questions which this research work addressed therefore are:
i.
To what extent is the relationship
between financial strategy and sustainable performance growth in banking
industry?
ii. To what
extent will strategic planning impact on the performance of banks in Nigeria
iii.
To what extent are the existing
investment policies of banks assisting in the quality of management of assets
and liabilities in the banking industry?
iv.
What is the relationship between bank
performance and Gross Domestic Product?
1:5
STATEMENT OF HYPHOTHESES
Usually an hypothesis is
formulated with the aim of nullifying it and rendering the hypothesis
insignificant.
The following are the hypotheses
for this work:
1.
H0: There is no relationship between financial strategy and
sustainable performance
growth
for avoidance and resolution of distress in the banking
industry. .
2.
H0: There is no relationship between strategic planning and business
failure and bank liquidation in the banking industry.
3. H0: Strategic
planning and performance do not affect sustainability and stability in the
banking industry
4 H0: Investment
policies do not affect assets and liabilities management in the banking
industry.
5. H0. There is no
co-movement between bank performance and Gross Domestic Product.
It is to be noted that hypotheses 2 and
3 were formulated from objective 2 because strategic planning and performance
could produce business failure and liquidation if not properly implemented, and
could produce stability and sustainability if properly implemented.
1:6 SCOPE OF
STUDY
The population for this study is
the banking industry, which is the financial bedrock of Nigerian economy and
consists of the 24 universal banks, the discount houses, the mortgage banks and
the micro-finance banks; the two banking industry regulators-CBN and NDIC;
capital market regulator –NSE, and two professional bodies that control ethics
in the banking industry-Institute of Chartered Accountants of Nigeria (ICAN)
and Chartered Institute of Bankers of Nigeria (CIBN). Before 2002, there were
operations of commercial banks in Nigeria until the reform in the financial
sector converted all to universal banks. For the purpose of this work, the
operations of all the commercial banks from 1998 to 2002 were taken into
consideration as commercial banks, and the operations from 2002 to 2005 were
considered as universal banks. The operations of the 24megabanks for 2006 and
2007 were considered as universal banks for adequate data and comprehensive
analysis.
Sample Size:
The sample selected consists of the
present 24megabanks (universal banks) in the economy which resulted from the
consolidation that took place in the banking industry in 2005, and the 5
regulators in the sector. The decision to focus on universal banking is
judgmental and purposive because the sector is the major financial bedrock that
services the economy and the recorded distress and liquidation in the economy
are majorly from this sector which has shaken the root of the nation.
Furthermore, since the issue of distress affects the whole economy, it is
professionally right to involve all the banks because 89 banks reduced to 24
because of the problem of distress required adequate data that cut across the
period before mergers and acquisitions and the post consolidation period. Five
of the regulators were added to the sample for relevant information necessary
for the work thereby making the sample size 29 corporate bodies.
Geographical Coverage:
Even though this study was designed to
cover the universal banks in the entire economy, it was however limited to
Lagos and Abuja due to sampling constraints. Lagos is the
headquarters of all the banks with the exception of Unity Bank Plc which is
based in Abuja. The design of the study required that the primary and secondary
data be obtained from the headquarters of the banks. Each banking organization
is treated as a corporate entity in the samples selected. The five regulators
are also located in Lagos and Abuja
Time Horizon:
The time horizon for this study was
10years from 1998 to 2007 in which the audited accounts for this period were
analyzed and interpreted.
The Situs:
Covenant University was used as data
collation and analysis center.
1:7
SIGNIFICANCE OF STUDY
The importance of this research cannot
be overemphasized in view of what the banking industry has witnessed before
independence and post independence in the areas of economic recession, distress
in the industry, collapse of banks and the inability of Nigerian banks to
integrate into the global economy (Soludo: 2004,p.48). The present economic
reforms of the Federal Republic of Nigeria have affected the banking industry
very greatly. With the efforts of the Federal government for favourable and
good environment for all banking operators and various investors in the economy
and for the banks to play active developmental roles in the Nigerian economy
and be competent and competitive players in the African and global financial
system, there was the need for this research work. The
“financial distress” which has become a feature
must be eradicated and become history. The project was designed to benefit the
following operators of the economy:
(i).It will form a theoretical focus as
a basis for solving any form of distress in the financial sector of the
economy. The various financial strategies will become concepts for sustainable
performance growth in the economy.
(ii).The Management of various
banks operating in the economy will benefit immensely from this work. The
recommendations contained therein about financial strategy, as necessity for
sustainable performance growth in the banking industry will be of immense benefit
to them. They will be able to review their objectives and take a critical look
at the internal and external resources to achieve the set objectives. They will
perform a critical analysis of their weaknesses, opportunities and threats to
be able to prepare a realistic budget and put in place necessary financial
strategies that will ensure growth and continuity of businesses in the economy.
They will be able to put in place budgetary control strategies on the
management of their risk assets that can guarantee good earnings, sound
liquidity, growth in capital and guide against distress. They will have the
opportunity to learn from past mistakes and misjudgments. The model introduced
in this work will form basis of the new transformation agenda.
(iii).Researchers and various
universities will benefit from the work. The indices of sustainable performance
growth in an economy will help them in their research work, publications,
conferences and seminars. This thesis will also assist them to conduct further
research in other areas highlighted in the last chapter of this
work.
(iv).The professional bodies will
benefit as basis for policy formulation and enhancement of their curriculum in
order to be relevant in Nigerian economy.
(v).Potential investors and existing
investors will benefit, as it will help them in their planning and the
execution of various plans concerning new investment and diversification of
investment in the banking industry.
(vi).The government will benefit
immensely as they have the responsibility of providing enabling environment for
all operators in the economy. They will have to put all the various financial
strategies into consideration in formulating policies and regulations for the
economy. The government will benefit most especially in the areas of corporate
governance, which has been a major problem in the public sector, and tax
planning, as many operating companies in the economy are known to be evading
and avoiding taxes, according to Chartered Institute of Taxation of Nigeria CITN
(2005). It will assist them in the proper planning of their tax
system to avoid leakage. The work will have a significant impact on the
economy.
1.8
PREVIEW OF RESEARCH METHODOLGY
The study is an empirical work
which applied on samples chosen from population to evaluate the impact of
financial strategy for sustainable performance growth in the Nigerian banking
industry in order to avoid and put an end to financial distress. The population
for the study is the banking industry which consists of universal banks, the
mortgage institutions, the micro-finance banks, the discount institutions, and
the various regulators in the industry viz: CBN, NDIC, ICAN, CIBN and NSE.
Using Judgmental and purposive sampling techniques, the study covers all the 24
consolidated Universal banks in the economy plus five regulators because of
data collation and analysis. Primary and secondary data were used for the
study. The instrument for the primary data is a corporate questionnaire
developed for field work on the five stated hyphotheses, while Macro data for
ten years from 1998 to 2007 were obtained from Central Bank of Nigeria (CBN)
Annual Statistical Bulletin, Nigerian Stock Exchange Facts Book, and Nigerian
Deposit Insurance Corporation (NDIC) Annual Bulletin for the secondary
data. In the secondary data, we considered the data of all the commercial
banks from 1998 to 2001,universal banks from 2002 to 2005 and megabanks for
2006 and 2007.This is to enable us analyze the complete macro data for the
industry between 1998 and 2007. The primary data were analyzed using
Multivariate Analysis of variance (MANOVA) which is a parametric test
technique. The secondary data which were the bank performance performance from
1998 to 2007 were analyzed using two principal statistical tools viz: Multiple
linear Regression and Analysis of growth change in dependent and independent
variables. Multiple linear regression was applied in finding the relationship
between the independent variables and the dependent variables with a view to
computing their significant ratios, homogeneity and the Analysis of Variance
(ANOVA) to determine the co-linearity of the variables. The second method used
was to determine the co-movement between the dependent and independent
variables, analysis of specific trends in their growth changes over two-five
years period and the ten years period.
1:9
OPERATIONAL DEFINITION OF TERMS:
The following terms are defined for easy understanding by readers, and users of
this work:
Acquisition:
The gaining of something for oneself. The system where a bigger bank buys over
smaller or weak banks to add to its value, skill and gain synergy in business.
Avoidance:
Measures taken in advance to avoid an unpleasantness in business.
Antidote:
Something that helps to improve the effects of something bad.
BOFID:
Banks and other Financial Institutions Decree 1990.A decree which is to guide
the operations of banks in Nigeria economy which later became an Act.
(BOFIA)
Benchmark:
A reference point for making measurement.i.e where a bank chooses another
better performing bank as a standard that its activities can be compared with.
Channelization of
Money: This is a system that connects two
sectors together in the economy for easy access to cash and savings, i.e by
connecting surplus sector to the deficit sector.
Consolidation:
The process of strengthening a captured position to become solid, as it took
place in Nigeria in 2005, which reduced 89 banks to 25 and further to 24. It is
to a position of success stronger so that it is more likely to continue in
business.
Creation of Money:
This is a process of wealth creation through the bank services by taking
deposits from investors and extending credit facilities to intending borrowers
to create another deposit in circulation.
Dearth of banking
legislation: This is a situation where the banking
sector of the economy is operating without legislation or is in short of
legislation to guide operations.
Determinant: Decisive
element or determinant factor
Financial Distress:
This is an insolvency/illiquid situation in a financial institution where it
can no longer meet its financial obligations to the stakeholders.
Financial Strategy:
This is the application of accounting tools, skills and techniques to achieve
the corporate objectives and goals and to ensure an organization achieves a
sustainable performance growth and stability in the industry.
Forbearance:
To profess an effective legal framework needed to protect authorities, to
provide clear signals to the private sector, and to force policy makers to act
promptly during financial distress. To endure taking advantage of the strength
of the authorities.
Growth:
This is the process of growing or development and increase in size. Growth is
when securities of investments are expected to increase in value due to
expansion of the industry or the company.
Generalized Distress:
This is the distress that exists when its occurrence is spreading fast and cuts
across all the sub-sectors of the industry, but its depth, in terms of ratios
of total assets, total deposits, and total branches to the totals in the
industry has not adversely affected the confidence of the public in the
financial system.
Heterogeneity:
When the variables relevant to analysis composed of different or disparate
ingredients/elements.
Moral Hazard:
A damage or problem experienced by an organization following the practice of
the standards of behaviour considered acceptable and right by most people not
on legal rights or duties.
Painful Upheavals:
This is a big change in the operations of a business that causes a lot of
confusion and problems and therefore results into an unpleasant situation.
Performance
evaluation: To determine and assess what is
accomplished in a task, by comparing actual results with predetermined
expectations with a view to reviewing or instituting more controls for
corrective measure or to deplore more resources for performance enhancement.
Sustainable
Performance Growth: This is the performance that meets the
needs of the present without compromising the ability of future generations to
meet their own needs .It is a time path whose sustainability over the future is
never less than its current consumption/position.
Repository:
This is an organization like bank where a large number of things can be kept
and where full information required for a certain purpose can be obtained.
Strategy:
The process of planning or carrying out a plan in a skillful way so as to
achieve a purpose. Creative positive ideas in order to achieve some objectives
in the industry
Sustenance:
The power to keep something/business alive, prevent from falling, from
collapsing and making it to continue to exists.
Support:
To prevent from sinking, and to be actively in favour of a course
Systemic Distress:
Is a problem that gives serious concern to the relevant supervisory/regulatory
authorities when its prevalence and the contagious effects become endemic and
pose some threats to the stability of the entire system, with its attendant
negative effects on the nation’s payment system, savings mobilization,
financial intermediation process and depositor’s confidence.
Transformation:
The process of changing the fortune, the character of organization to
metamorphose especially so that it is better.
Resolution:
The quality of not allowing difficulties or opposition to affect one’s purpose.
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