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. ix ixTABLE OF CONTENTSTitle page iDeclaration iiCertification iiiDedication ivAcknowledgements vAbstract viiiList of Tables xiiiList of Figures xvChapter one: Introduction1.1 Background to the Study 11.2 Statement of the problem 81.3 Objectives of the study 121.4 Research Questions 131.5 Statement of Hypotheses 131.6 Scope of Study 141.7 Significance of Study 161.8 Preview of Research Methodology 181.9 Operational Definition of Terms 19Chapter TwoLiterature Review2.1 Introduction 232.2 The Evolution of Banking in Nigeria 242.2.1The Colonial Era (1892-1957) 242.2.2The Independence Era (1957-1970) 282.2.3The Indigenous Era (1970-1985) 292.2.4 The Privatization and Commercialization Era (1986-1992) 322.2.5Bank Rehabilitation and Restructuring Era (1992-date) 352.2.6The Nature of Bank Reforms in Nigeria 362.3 Review of Literature relating to Financial Strategy and SustainablePerformance Growth 442.3.1 Competing for the future 44x2.3.2 Central Bank of Nigeria (CBN) and Nigeria Deposit InsuranceCorporation (NDIC) definition of distress and analytical framework 462.3.3 Strategic Planning and Sustainable Performance Growth 522.3.4 Financial Strategy in the Banking Industry 552.4 Review of Literature relating to Strategic Planning and BankPerformance for Sustainability and Growth in Nigerian Banking Industry 582.4.1 Strategic planning: Financial performance relations in Banks: A causalexamination 582.4.2 Corporate Governance and Sustainable Performance Growth 63Cases of Poor Corporate Governance in Banks1. The Rumbles in Spring Bank 672. Development in Wema Bank Plc 683. CBN Replaces Five Bank MDs, Directors 692.4.3 Budgetary Control and Performance Evaluation 702.4.4 Capital Budgeting and Sustainable Performance Growth 722.4.5 Tax Planning and liquidity 762.4.6 Leadership and Sustainable Performance Growth 812.5 Review of Literature relating to Investment Policies andManagement of Assets and Liabilities in Nigeria Banking Industry 862.5.1 A case study of distress banks in Nigeria by Central Bank of Nigeria 862.5.2 Banking crisis: causes, early warning signals and resolutions 932.5.3 The causes of financial distress in local banks in Africa andPrudential policy 1042.5.4 Incentives and Resolution of Bank Distress 1062.6 Review of Literature relating to Bank Performance and Gross DomesticProduct to Determine their Co-movement 1082. 6.1 Economic Profit and Performance Measurement in the Banking Industry 1092.6.2 Banking practice and the Nigerian economy 1132.6.3 Micro and Macro Determinant of bank fragility in North CyprusEconomy 1142.7 Justification of study 1172.8 Theoretical Framework 1212.9.Framework Proposal:Causal Link between Model and Research Work 124Chapter ThreeResearch Methodology3.1 Introduction 1283.2 Study Area 1283.3 Research Design 1283.4 Population, Sample Representatives and Sampling Techniques 1303.5 Performance Indices 1333.6 Restatement of Hypotheses 1383.7 Data Collection Techniques 1383.8 Reliability and Validity Test 1403.9 Data Administration 1423.10 Method of Data Analysis 143xi3.11 Expected Results 1483.13 Chapterization 150Chapter FourAnalysis and Interpretation of Data4.1 Introduction 1514.2.Response to Questionnaire 1514.3 Frequency Analysis of response to Questionnaire items 1564.3.1 Section1 Relationship between Financial strategy and SustainablePerformance 1564.3.2 Section2 Relationship between Strategic Planning and PerformanceFor Sustainability of Growth of Business 1674.3.3 Section 3Assessment of Investment Policy for Better Management ofAssets and Liabilities in banks 1734.3.4 Section 4Evaluation of Relationship between Bank Performance and GrossDomestic Product (GDP) 1814:4 Descriptive Analysis of response to Questionnaire items 1864.4.1Evaluation of the relationship between Financial Strategy and SustainablePerformance Growth 1864.4.2 Evaluation of the relationship between Strategic Planning and PerformanceFor Sustainability of Business Growth 1894.4.3 Assessment of the relationship Investment Policy and Management of Assetsand Liabilities for Sustainable Performance Growth in the Banking Industry 1914.4.4 Evaluating the relationship between Bank Performance and GDP 1954.5.0 Statistical Testing Model 1984.5.1 Testing of Hypothesis 1 1994.5.2 Testing of Hypothesis 2 2074.5.3 Testing of Hypothesis 3 2154.5.4 Testing of Hypothesis 4 2254.5.5 Testing of Hypothesis 5 2364.6 Analysis of Secondary Data 2454.6.1 Multiple Regression 2454.6.2 Analysis and Comparison of Growth Change in GDP and BankPerformance Indices 252Chapter FiveSummary of Findings, Conclusion and Recommendations5.1 Research Findings: Empirical Findings 2585.2 Conclusion 2655.3 Recommendations 2665.4 Suggestions for Further Studies 2755.5 Contribution to knowledge 275References 281