Effects and Causes of Bank Failure in Nigeria

INTRODUCTION 1.0BACKGROUND OF STUDY Banking is associated with different kinds of risks.  Although some of these risks like liquidity risks and credit risks have been as a result of rules and regulations guiding the industry. Failure is a word, which almost nobody would like to be associated with.  Everybody would like to succeed, to grow bigger, to excel rather them to fail.  In the immediate past up to the turn of this decade, it was only an issue of debate whether or not bank will fail again in Nigeria after the mass bank failure of the 1950’s. The area of SAP and deregulation equally increased number of banks in Nigeria.  Such failures seemed unlikely because the Nigerian banking industry appeared to have been resilient in its boom.  Banks kept on reporting huge profit which is fact were more “paper profit”.  This created impression that all was well with the industry.  This euphoria led to the emergence of new banks (both merchant and commercial) and other financial institutions.  Unfortunately many banking exports erroneously believed that the fears of bank failure were unfounded.  In an attempt to dispel such fears Nwankwo even argued that though well founded in the early history of banking in the country, that environment in different bank failures constitute a very big problem to the economy and should be carefully avoided for occurrence in the economy.  When a bank is unable to meet the bank examination rating system (CAMEL) this always lead to bank failure. Here:CStands for capital adequacy AStands for assets quality MStands for management competency EStands for earning strength Lstands for liquidity sufficiency Bank failure occurs in a bank if such a bank fails to meet such rating standard and this was what happened to so many banks as of 1950’s.
REVIEW OF LITERATUREIn the course of carrying out this research, the researcher reviewed many materials as part of his secondary source of information.  The researcher reviewed textbooks, journals, magazines, newspapers as sources of information.  Here are some definitions of bank failure as given by eminent scholars.(Banking failure)According to Anyanwu (1993) bank failure is seen as a declaration of insolvency by the chartering agency or as a reorganization to avoid defuse failure.MUNN (1973); Bank failure is defined in the encyclopedia of banking and finance as the situation when bank is closed temporarily or permanently on account of financial difficulties and including banks whose deposits liabilities were assumed by other banks at the time of closing, with the aid of loans or purchase of assets by Federal Deposit Insurance company (“thus in effect constituting hidden failure”).In Nigeria, the failed banks (Recovery of Debts) and financial malpractices in Bank Decree 1994 defined ‘failed bank’ as a bank or other financial institution whose license has been declared closed, placed under receivership or otherwise taken over by the Central Bank of Nigeria or Nigeria Deposit Insurance Company (NDIC).