ABSTRACT

The study aimed at establishing the various factors that affect the real GDP of the NIGERIAN economy, however great emphasis is on the effect of bank distress on the performance of the economy. The study used a time series data for the period from 1985 to 2015.The study applied a Vector Error correction model as determined by the presence of cointegration through the use of the Johansen test of cointegration. The period of consideration was crucial since it shows the critical dynamics the banking industry has evolved from, especially from the narrow traditional money depositing and borrowing obligations to the diversification of such roles to the provision of loan facilities to various stakeholders namely households, small savers, industries or even the government. Despite the major objective of the study being to assess the effect of bank distress on the NIGERIAN economic performance, the study incorporated a number of factors which seem to have either a direct or indirect impact on the loan performance but a direct influence on the NIGERIAN economic performance. The variables of analysis were; foreign direct investment, real effective exchange, remittances, government revenue, total investments and Bank distress. The study found out that existence of bank distress had a significant and retrogressive effect on the NIGERIAN real GDP performance, on the other hand the other factors namely Foreign Direct investment(FDI), Government revenue and proportion of GDP spent on investment had positive and significant effect on real GDP growth except the latter two which were insignificant. The appreciation of the NIGERIAN currency also did  reveal an improvement in the real GDP contrary to expectation however this could be due to cheaper importation of efficient inputs. Finally, the study was able to establish that when all the other factors are held constant there will be (significant/insignificant) decline in the NIGERIAN economic growth, therefore we do conclude that despite the various regressors having varying effects on the real GDP, other factors not captured in the econometric equation have a negative effect on GDPgrowth.

CHAPTER ONE INTRODUCTION

Background of the study

Distress in the financial sector is a situation where financial institution has more liabilities than the value of their assets in the market. This can result to portfolio shifts which eventually cause the collapse of the financial system. Bank distress is many times confused with bank failure. In theory, these two terms are different. Bank distress comes before a bank failure. A distressed bank can recover whereas a failed bank has no chance of recovery.

Bank distresses have various unfavorable consequences which among them are on stakeholders and failure of banks. Sometimes the effects are felt by other sectors in the whole economy. A bank failure results to too much damage in the economy. This is because it affects the employment, earnings, financial development and other associated publicinterest.

Brownbridge (1989) states that in the 1980’s, there was closure of two local banks as well as taking over ten non-banking financial institutions by central bank of NIGERIA. Mamo (2001) also holds that after the financial regulation in 2000, NIGERIA suffered 39 bank failures which cost 10% of its GDP in terms of loans and grants.

Aburime (2009) stresses that bank distress means detrimental condition, immense pain in the banking activities which could be as a result of various factors. Some of these factors include discontinuity, policies and forgeries which are not consistent, mismanagement of poor loans and advances, board members interference and internal control which is poor. Bank distress is caused by bank conditions which may either be extrinsic or intrinsic. Ultimately, bank failure and unpleasant changes in the economic conditions of banks could beobserved.

According to Mishra and Aspal (1991), the development of a country’s economy depends more on real factors such as the growth of industries growth and their development, upgrading of agricultural expansion of both internal and foreign trade. In the development of a nation, we cannot under estimate the important role of the banking sector and its financial way of doing things. In economic planning, banksandfinancial institutions play a very significant role which is crucial. They set specific goals and allocate the exact amount of money to the government to ensure implementation of economic policies. A performance of any economy can be measured by the performance of the banking sector. The role played by a healthy banking system to the socio-economic and industrial growth of an economy is very important. It is the banking system that has been allocated the role of financing the planned economic growth.According to CBN (2008), the NIGERIAN banking sector was weighed down by a huge portfolio of Non-Performing Loans (NPLs) in the 1980’s and 1990’s. This led to the collapse of some banks. Borrowers who borrowed consecutively from various banks with an aim to default the loans were the major reason of this. This was possible due to lack of information between the creditors and theborrowers.

The Banking (Credit Reference Bureau) Regulations of 2008 oversee operation, licensing, and supervision of banks through CBN. CRBs offer help to the lenders; they enable them make faster decisions which are accurate. They collect, manage and make the lenders know the customer information within a provided regulatory framework. Since banks play a central role in improving financial services in an economy, credit bureaus help lenders to accurately make decisions within the shortest time possible.

According to CBN, NIGERIA’s financial system has improved significantly over the last few years and has become the largest in West Africa. NIGERIAN banking sector is credited for its size and diversification. NIGERIA has a variety of financial institutions and markets unlike other regions in East Africa. However, according to Beck et al (2010), there have been constrains in the growth of the sector especially in 1980’s and 1990’s due to factors such as non-performing loans and weakness in corporate governance leading to a number of commercial banks failing. Banks in NIGERIA are said to continue facing challenges, among them being financialdistress.

According to Cheserek (2007), one of the important requirements for a stable economy which is growing is a healthy financial sector in the banking industry. Due to this, the primary goal of many stakeholders is to assess the banks’ financial conditions.Quickactionbythesupervisoryauthorityisrequiredtoailingbankssoasto salvage them before they collapse because the cost of bank failure is too much in an economy.

Table1.The performance rating of NIGERIAN banks in 2014 and 2015.

Source: Banking supervision annual report 2015

As shown in Table 1.1, the rating of banks in NIGERIA in 2014 was stronger than that of 2015. This clearly shows that there was deterioration in bank performance in 2015.

According to the Central Bank of NIGERIA, there was a great deterioration of banks due to increase in Non-Performing Loans. Table 1.2 shows a summary of loans under NBRR for both commercial and micro-finance banks in 2014. As indicated in the table, there were numerous loans issued by the banks, which had high values; this undoubtedly affects the performance of the banks in the country.