Financial Strategy as Support Determinant for the Avoidance and Resolution of Distress in the Nigerian Banking Industry

Financial Strategy as Support Determinant for the Avoidance and Resolution of Distress in the Nigerian Banking Industry

Literature Review

2:1      Introduction

Strategy is grounded in the array of competitive moves, and business management of an organization depends on how to produce successful performance. Strategy, in effect is management’s game plan for strengthening the organization’s position, pleasing customers, and achieving performance targets. Strategy includes the goals and major policies of the organization. Managers device strategies to guide how the company’s business will be conducted and to help them make reasoned, cohesive choices among alternative courses of action. The strategy managers decide or indicate that among all the paths and actions we could have chosen, we decided to follow this route and conduct our business in this manner. Without a strategy, a manager has no thought-out course to follow, no roadmap to manage by, no unified action program to produce the intended results. Indeed, good strategy and good strategy execution are the most trustworthy signs of good management.

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Thompson and Strickland (2005:3) stated that managers must combine good strategy making with good strategy execution for company performance to approach maximum potential. Financial strategy is a combination of financial tools for the reengineering of an organization towards achieving the maximum potentials.

They highlight five tasks of organization strategy which include:

  1. Deciding what business the company will be in and forming an strategic vision of where the organization needs to be headed. In effect, this is infusing the organization with a sense of purpose, providing long-term direction, and establishing a clear mission to be accomplished.
  2. Converting the strategic vision and mission into measurable objectives and performance targets.

iii. Crafting a strategy to achieve the desired results.

  1. Implementing and executing the chosen strategy efficiently and effectively.
  2. Evaluating performance, reviewing new developments, and initiating corrective adjustments in long-term direction, objectives, strategy, or implementing in light of actual experience, changing conditions, new ideas, and new opportunities.


The evolution of banking in Nigeria has been brought to fore to study deep into the history of banking and bring out the salient points that led to the various crisis the industry has been passing through from pre-independence to date.

2.2.1.The Colonial Era 1892-1957:

Lagos Colony was colonized by the British in 1861, and banking was introduced into Nigeria when the African Banking Corporation (ABC) was established in 1892.The operations of ABC were later taken over in 1894 by the British Bank for West Africa BBWA (which later became Standard Bank and subsequently, First Bank of Nigeria).   The period which pre-dated the attainment of national sovereignty and the establishment of the Central Bank of Nigeria is viewed here as the colonial era.

According to the collaborative study carried out by Central Bank of Nigeria (CBN) and Nigerian Deposit Insurance Corporation (NDIC) (1995:2-6), this era was a period of free banking. The early stages of the Nigerian financial system were synonymous with commercial banking, and owing to Nigeria colonial heritage, not only were the pioneer commercial banks of foreign origin but also the banking system itself were designed to facilitate colonial business interests. The period is usually referred to as the era of “free banking” or period of banking boom” in Nigeria because, apart from the complete absence of any laws governing the establishment and running of the banks during this period, the setting up of banks was not related to the capacity of the economy to effectively absorb the sharp growth in financial assets. Consequently, most of the banks were hurriedly established and they also hurriedly went into voluntary liquidation or were closed down by the police.

According to Agene,(1995)) this era was characterized by the dearth of banking legislation and regulations or directives which resulted in banking becoming a free-for-all affair leading to gross misconduct and abuses. The second bank that was set up in Nigeria was the Anglo-African Bank established in 1899. It was renamed Bank of Nigeria, which was in competition with BBWA. As analyzed by Agene, Bank of Nigeria was absorbed by BBWA in 1912 when West African Currency Board (WACB) was formed. Colonial Bank, based in West Indies opened business in Lagos in 1916. It was taken over by Barclays Bank, Dominion, Colonial and Overseas (DCO) now known as Union Bank of Nigeria Plc.

CBN and NDIC’s (1995) collaborative study reveals that several other foreign and a host of indigenous banks were established. The establishment of indigenous banks was initially propelled largely by nationalistic consciousness rather than the existence of relevant resources, including basic skilled manpower for running such institutions. Consequently, most of the early indigenous banks collapsed in rapid succession, the way they were established. Banks that failed during this period were largely those with problem of inadequate capital, fraudulent practices and bad management.  Appendix 1 shows the list of failed banks during this era.

According to Olalusi (1992), discriminatory lending practices by expatriate banks spurred indigenous entrepreneurs into banking; it was the imperatives of economic nationalism and economic development which were primarily responsible for government interest in banking. As the country prepared for political independence in 1960, efforts to establish banks were intensified by some nationalist who rightly recognized the pivotal role banks play in economic emancipation and development. This also accounted for the takeover of the surviving indigenous banks by the regional governments; particularly after 1954.The banks were expected to accelerate the economic and social development of the regions by bringing banking services to the doorsteps of the people in the regions. It was unfortunate that the establishment of the government owned banks, which started out, as a blessing to indigenous banking became its bane. The regional governments, which were later, succeeded in the 1970s by state governments were over the years blamed for the insurmountable problems, which the state-owned banks experienced.

According to Olulana, (2000: 6-7) and was corroborated by CBN and NDIC’s study, in 1952 the Nigerian government took the very first step to make regulative legislation on banking. This was expected to curb the excessive activities of the bankers and provide a remedy for the losses then suffered by innocent banking public. Thus the banking Act 1952 was put in place as premier legislation on banking business in Nigeria. The authorized capital for indigenous banks by this Act was ₤25, 000, but could commence operations after paying ₤12, 500, and for expatriate banks, minimum capital was ₤100,000.  The Central Bank Act 1958 was passed in 1958, which created the apex bank in Nigeria for the first time. The major characteristic of the colonial era was the unregulated banking practice, which led to the phenomenal distress and liquidation of banks. Onoh, (2002:15-30) in his study gave the following reasons for the collapse of the pioneer indigenous banks:

  1. Absence of regulatory authority and lender of last resort. The West African Currency Board (WACB) established in 1912 was not endowed with regulatory and supervisory powers.
  2. Under capitalization and over branching.
  3. They carried disproportionate overhead bills, which generated debt equity ratios inconsistent with the level considered appropriate for sound banking operations.
  4. Poor management and fraud. They practiced lending without scrutinizing the credit worthiness of borrowers. Advances were made to finance activities, which yielded no returns; fraud was rampant because there was no supervisory authority to detect frauds.
  5. Poor customer Patronage. Colonial government patronage could not be attracted because expatriate firms patronized only the expatriate banks to the neglect of indigenous banks.
  6. Poor liquidity. There was no authority to establish and enforce a minimum liquidity ratio for the banks and to demand monthly or periodic information on the ratio. There was no definition of what should constitute the liquid assets of banks until the Bank Act of 1962 when this was stated and approved.
  7. Poor quality manpower. Because of the inexperienced management personnel, indigenous banks were unable to carry out balance sheet analysis for detecting potential capital or liquidity problems. There were no statistical analysis of the trends of deposits, bad and doubtful debts and their implications to the banks operations.

2.2.2. The Independence Era 1957-1970:

According to CBN and NDIC(1995) collaborative study on distress in the financial system, the appreciation of the developmental role of a stable and efficient financial system was demonstrated by the concerned efforts to have a central bank established for Nigeria in spite of the reluctance of the colonial authorities. These efforts culminated in the enactment of Central Bank of Nigeria Act in 1958 and the commencement of operations of the Bank in July 1959.    This period coincides with the nationalistic struggle for self-rule and independence. According to Agene, (1995:61-62) the shortcomings of West African Currency Board provided a very strong basis for the agitation for the founding of the Central Bank of Nigeria (CBN). The establishment of the Central Bank of Nigeria and its commissioning of the first set of indigenous currency notes and coins on 1st July 1959 is regarded as an important watershed in the annals of banking in Nigeria, since most foundations of the Nigerian money and capital markets were laid in that year.  According to the  CBN (2000:122-155) the Central Bank Act of 1958 which established the Central Bank of Nigeria,  conferred on the Bank a number of functions and powers to control the operations of banks. This Act has been amended on several occasions to reflect changing economic circumstances and thereby give the Bank the necessary tools to deal with the changing economy. Within this period also, the Investment Company of Nigeria (which was restructured to form the Nigerian Industrial Development Bank, which became Nigeria’s pioneer development bank) was established in 1959. Four commercial banks were also established in 1959 namely: (a). Banque de l’Afrique Occidentals formerly called Bank for West Africa but subsequently changed to the International Bank for West Africa Limited (now Afribank PLC),( b). Bank of Lagos which surrendered its licence in 1965, (c). Berini (Beirut-Riyad) Bank,and d.Bank of the North.

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A further analysis showed a major development of the introduction of merchant banking services into Nigeria during the independence era. The Nigeria Acceptances Limited (NAL) was set up in 1960 to perform the function of a discount house and became the pioneer merchant bank in Nigeria. The political uncertainty which led to the outbreak of a civil war in 1966, and which lasted until January 1970, made it impossible for the granting of new licence for bank establishment between 1962 and 1970. (CBN, 2000)

2.2.3. The Indigenization Era 1970-1985:

According to Ogowewo (1995:915-926) Nigeria had in the past had a certain distrust of foreign investment. Reflecting the dependency theory of foreign investment, this distrust led to the enactment of “anti-investment laws” in the 1970s. The view was that foreign control of significant sectors of the economy tended to impede economic development. The restrictive approach to foreign investment was also informed by the experience of colonial rule, under which the economy was controlled substantially by foreign investors, and this trend continued even after independence. The Nigerian government attempted to reverse this pattern of ownership and control by indigenizing the economy. A systematic policy emerged with the Second National Development Plan (1970-1974), which embodied the first national policy on indigenization. To carry out this policy; the Nigerian Enterprises Promotion Decree 1972 was promulgated. The policy it adopted was one of restricting foreigners to designated areas of the economy and compelling their divestment from areas of the economy in which they were now barred.

Agene, (1995:62-64) explained that the following programmes and activities characterized the period: economic reconstruction and development, government incursion into the banking scene, indigenization and rural banking. At the end of the Nigerian civil war in January 1970, the nation embarked on post war reconstruction and development, setting the stage for the indigenization of the country’s financial system, particularly the banking sector which occupies the commanding heights of the nation’s economy. Indigenization has been broadly defined as an evolutionary process by which the natives of a country are enabled and are seen to acquire ownership, control and management of their economy (Nwankwo, 1980 as cited in Agene, 1995:62). The period heralded the establishment of state-owned banks by the governments of the twelve states of the nation, and was complemented by the formation of more development banks by the Federal Government. The following development banks were established to complement the efforts of the Nigerian Industrial Development Bank: (a). Nigerian Bank for Commerce and Industry (NACB) was set up in April 1973 to provide equity capital and loans to indigenous persons and organizations engaged in commerce and industry, for long and medium term investment, (b). The Federal Mortgage Bank of Nigeria was constituted in July 1977 from the Nigerian Building Society, which had operated for twenty years previously. (c) The Nigerian Agricultural Bank was established in 1973 but restructured in 1978 to include the finance of co-operatives and therefore renamed the Nigerian Agricultural and Cooperative Bank (NACB).

This period was also characterized by the rural banking scheme, which was recommended for establishment by Okigbo Financial Systems Review Committee in 1976. According to Olalusi, (1992:285-289) the Committee saw the need for rapid transformation of the rural environment through deliberate policies which would promote rapid expansion of banking services in the rural and near rural areas and hence recommended that: “the banks should actively facilitate the transformation of the rural environment by promoting the rapid expansion of banking facilities and services and banking habit in the rural and near rural communities. They will thus serve as paying and receiving stations for hand-to-hand currency and provide facilities for remittances. They will provide savings deposit facilities for their customers and thereby help to mobilize rural savings. Most important of all, they will serve as vehicles for the creation of credit in the rural areas, this credit will take the form of equity and loans for small scale farmers and entrepreneurs” The analysis by Agene (1995) shows that the overall impact of the rural banking programme and other related policy measures adopted during the period, was that the number of licenced commercial and merchant banks rose from 14(excluding development banks) in operation at the close of the independence era in 1970 to 45, while the number of their branches reached 1,323 by December,1985.

Ajeigbe, (2009:10) stated that the nationalization of the major banks also heightened focus on compliance with the allocative policy on lending in accordance with the Banking Decree No.1 of February 1969.Thus, direct control measures such as sectoral credit guidelines and interest rate controls were used to influence allocation of resources to the public and preferred sectors of the economy, notably agriculture and manufacturing.  Nigerian banking during the indigenization era was fairly stable as Government was unwilling to allow banks in which they had interest to fail no matter their financial condition and or quality of management.


 2.2.4. The Privatization and Commercialization Era 1986-1992:

According to  CBN, (2000:28-30) the demand management policies, which were pursued between 1981 and 1985, did not restructure production and consumption patterns in the national economy, it became necessary to introduce a structural adjustment programme (SAP) by 1986. The structural adjustment programme was introduced, among other reasons, to intensify the growth potential of the private sector. Ajeigbe, (2009:11-16) explained that the deregulation of the financial system was embarked upon in 1986 as part of the Structural Adjustment Programme (SAP).The sharp fall in oil revenues in the first half of the 1980s, accumulated trade arrears and increased debt service burden had precipitated an economic and consequently, liberalization of some of the controls over the financial markets.  The Central Bank of Nigeria issued new Prudential Guidelines in November 1990 to ensure proper credit classification and income recognition, as part of the measures to promote financial health of banks. The relaxed licensing requirement had led to the establishment of 79 banks between 1986 and 1991, and the CBN, in the light of the emerging signs of distress, suspended licensing of new banks with immediate effect. The Banking and Other Financial Institutions Decree (BOFID) was also enacted in 1991 to strengthen and extend the powers of the CBN to cover the new financial institutions. BOFID Decree No.25,1991 replaced Banking Decree No.1,1969.


According to CBN and NDIC (1995:5-6) collaborative study, the introduction of Structural Adjustment Programme (SAP) was a deliberate response to the severe distortions that had characterized the Nigerian economy, especially since 1982. The central focus of the economic reform programme was the dismantling of controls in the economy, including the financial sector which was expected to play a pivotal role in the reform process. The major objective of the deregulation of the banking industry was to enhance economic efficiency and effective resource allocation through service-driven competition and improvement in quality and spread of banking service delivery. According to the study, the key measures introduced included the following:

  1. Relaxation of the conditions for licensing new banks. This led to a phenomenal growth in the number of banks in Nigeria; from 41 in 1986 to 119 in 1991.This phenomenal growth resulted in several challenges for the industry and subsequently forced the Federal Government to place an embargo on the licensing of new banks, effective April 1991.
  2. The introduction of the Inter-bank Foreign Exchange Market (IFEM) and the establishment of the system of Foreign Currency Domiciliary Accounts, which led to increased earnings for many banks.
  3. Deregulation of the interest rate regime resulting in the unprecedented rise in lending rates which was a great disincentive for long-term investment although it encouraged significant increase in savings mobilization. Enhanced interest rate management was introduced through the following measures: all controls on interest rates was removed in August 1987 with CBN fixing only its minimum rediscount rate (MRR) to indicate its desired direction of interest rates.; prescription in 1991 of a maximum margin between each bank’s average cost of funds and its maximum lending rates with a later prescription of savings deposit rate and maximum lending rate; restoration of partial deregulation in 1992(banks only required to maintain a specified spread between their average cost of funds and their maximum lending rates);removal of maximum lending rate ceiling in 1993;restoration of direct interest rate controls in 1994.
  4. Promulgation of new CBN and Banks and Other Financial Institutions Decree 24 and 25 of 1991, respectively, to strengthen the regulatory and supervisory capacity of the CBN.
  5. Establishment of the Nigerian Deposit Insurance Corporation (NDIC) with the promulgation of Decree 22 of 1998, to safeguard customer deposits and promote banking stability.
  6. Licensing of Discounting House to enhance efficiency in money market operations.
  7. Re-introduction of Stabilization Securities as an instrument for checking excess bank liquidity.
  8. Introduction of Open market Operations (OMO) to influence the level of liquidity in the economy in place of the inefficient direct control through credit ceiling.
  9. Establishment of the Nigerian Inter-bank Settlement System to enhance inter-bank market transactions and ensure a more efficient payment system; and
  10. Promulgation of the failed Banks (Recovery of Debts) and Financial Malpractices in Banks Decree 18 of 1994 to help sanitize the financial services industry.
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2.2.5. Bank Rehabilitation and Restructuring Era (1992 to date):                       

According to Agene (1995), state governments-owned banks had shown signs of financial distress since the late 1980s, but government’s posture that banks should not be allowed to fail postponed the doomsday for such banks. The rapid upsurge in the number of licensed banks between 1987 and 1991 together with the creation of specialized financial institutions like community banks, which numbered 1050 by July, 1994 and the peoples Bank of Nigeria which opened 271 branch offices between 1989 and 1994, heightened competition for both funds and manpower in the banking industry.  Furthermore, the withdrawal of about N6billion in respect of credits backed with foreign collaterals and the transfer of government’s deposits away from the licensed commercial and merchant banks to the Central Bank of Nigeria in 1989 caused panic in the banking system. This necessitated a joint Nigerian Deposit Insurance Corporation NDIC and Central Bank of Nigeria CBN accommodation facility to the tune of N2.3billion for thirteen banks. Since then, the banking industry has witnessed a steady increase in the number of financially distressed banks .The number of insolvent banks grew from seven in 1988 to 16 in 1992 and rising further to over 40 in 1994.

Onwumere, (2005:10-13) argued that countries embark on economic policies, plans, programmes and reforms in order to enhance the growth and development of their economies. While economic growth generally refers to increases over time in a country’s real output per capital conveniently measured by increases in a country’s per capital Gross National Product (GNP), economic development can be viewed as a process of growth which should be self-reliance in the abundant utilization of resources. Banking reforms have been undertaken in Nigeria with the objectives of: (a). improving the financial strength and lending capacity of banks through recapitalization, (b). To promoting real banking activities, (c). To protecting depositors’ funds, (d). To strengthening prudential regulations, (e). To promoting competition while avoiding market failures, (f). To checking insider abuse, and (g). To evolving a sound banking industry and by extension, a more efficient financial system.  Onwumere posited that the country’s development remains far-fetched in spite of several years of planning and adoption of several policies.

2.2.6. The Nature of Bank Reforms in Nigeria.

 According to CBN, (2000:14-60) and Onwumere, (2005:13-18), the history and nature of bank reforms in Nigeria take the following order:

a.The Era of Banking Regulation (1959-70):

This was a period during which several legislations were enacted to correct past defects and distortions that led to bank failures in the system. The Central Bank was established in 1959 following the enactment of the Central Bank of Nigeria Act of 1959. The 1958 Ordinance (Ammended) retained ₤12,500 as paid up capital for indigenous banks. Profits transferable to reserve fund was increased from 20% to 25%, while banks were restricted from owning real estates except where absolutely necessary. The 1961 amendment of the Ordinance concentrated on the liquidation of banks by providing for the appointment of receiver and liquidator. The Ordinance was further amended in 1962 which raised minimum paid up capital of existing indigenous banks from ₤12,500 to ₤25,000 given 7 years to comply. Expatriate banks were to keep within Nigeria assets valued for at least ₤25,000. Banks were allowed to write off losses before effecting the transfer of 25% of profits to reserve fund, while CBN was empowered to adopt some flexibility in applying the definition of liquidity when computing liquidity ratio.

The Companies Act of 1968 provided that foreign banks operating in the country were required to incorporate their businesses in Nigeria. The 1969 Banking Act provided that: (a). Adjusted minimum paid-up capital requirements for indigenous banks should be ₤300,000 while expatriate banks should be ₤750,000 (b). Provision for the first time of capital deposit ratio of between 10 and 30 per cent and capital loan ratio of between 25 and 33. 3%, (c). CBN was empowered to monitor and vet advertisement by banks and to authorize bank amalgamations and opening or closure of bank branches. Banking regulations during this period were largely prudential to ensure banking practices and customer protection.

  1. The Era of Guided Regulation (1970-1985): This was guided by the passion for self-reliance. The government took actions that altered the banking industry landscape. The following characterized this period:
  2. The government promulgated the Indigenous Decree, 1972 which was amended in 1977, which required Nigerians to dominate the ownership, management and control sections of the economy.
  3. The Federal Government acquired controlling interests in the then existing three expatriate banks in Nigeria, viz: First Bank, Union Bank and United Bank for Africa.

iii. The Federal Government of Nigeria set up Financial System Review Commission (the Okigbo Commission) in order to strengthen the operational efficiency of the financial system.

  1. The Federal Government established wholly owned banks to accelerate the pace of economic development: the Nigerian Agricultural and Cooperative Bank, the Nigerian Bank for Commerce and Industry. Reconstitution of the Nigerian Building Society to form a new Federal Mortgage Bank.
  2. The states of the Federation were allowed to establish banks, which led to the establishment of state owned banks.
  3. Intensive public sector intervention by way of direct credit, and selective credit controls imposed on the size of lending to the private sector, sustained increase in paid-up capital of new banks to N25million for commercial banks and N50million for merchant banks, and strict control of interest rates.

vii. The government approved preferential treatment to certain priority sectors such as agriculture and manufacturing in terms of allocation of credit and interest rates on deposits and loans.

viii. The government introduced stricter foreign exchange control practices in 1982 with the issuance of import license to   some approved individuals and companies supported by trade restrictions.

  1. Era of De-regulation (1986-1995):

This was a period of expansionary banking era. This was largely the Structural Adjustment Programme (SAP) era. The Federal Government introduced the SAP in 1986 in order to open up the country with the objectives of achieving the following: (CBN, 2000)

  1. Achieving balance of payments viability in the short to medium terms.
  2. Laying foundation for sustainable non-inflationary growth and

iii. Improving the efficiency of the private and public sectors.

The notable regulatory reform measure in the banking industry, in line with SAP was de-regulation. The following were the events in the industry during the period in addition to the ten points stated under privatization and commercialization:

  1. The introduction of prudential regulations-Prudential Guidelines in 1990. It was to sanitize banking operations in the country, and stem financial distress

ii Nigerian Export and Import Bank (NEXIM) was established in 1991 to promote export of non-oil goods through the provision of credit and risk bearing facilities. This was in addition to National Economic Reconstruction Fund (NERFUND) established in 1989 to provide easier access to a variety of credit for small and medium scale enterprises.

CBN review (2000) shows that the industry witnessed cut-throat competition with many; especially the new entrants adopting all kinds of strategies to outwit each other. The branch network of banks increased astronomically. The merchant bank branches increased from 26 in 1985 to 144 in 1994 while branches of commercial banks within the same period, increased from 1,297 to 2,541.Competition led to innovations in products and service delivery leading to a critical overhaul of the banking industry. The competition led to the following events in the industry during this period:

  1. Some banks created risk assets at incredibly low interest rates with or without collaterals or adequate cover while some others generated liabilities at incredibly high rates.
  2. Insider abuse manifested in several dimensions (granting loans secured and unsecured to dummy organizations and individuals, outright stealing).

iii. High rate of loan repayment default especially by state Governments, Federal ministries and parastatals.

  1. Managerial incompetence, the general economic down turn and adverse macro economic conditions.
  2. Unstable government policies like the dual exchange rate regime which started with secondary foreign exchange market SFEM in 1986,the use of stabilization securities with debited funds not made available to banks in the face of problems, withdrawal of government funds without prior notice, and non-payments of contractors who have had executed projects for government.
  3. Inadequate regulatory/supervisory capacity and other factors listed were major contributory factors that brought about crisis in the industry which reached an epidemic proportion in 1995 when 55 out of the 120 operating banks were distressed.
  4. The Guided De-regulation and Globalization Era (1996 and beyond):
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Major reforms of this period according to Onwumere, (2005) were to ensure that Nigerian banks became globally competitive, while implementation of many past reforms measures with a view to ensuring stability in the system was continued. Major tenets that characterize this period are stated below:

  1. Interest rate was deregulated in October 1996.
  2. Minimum paid up capital of banks was increased to N500million in 1997 and later to N2.0billion.

iii. Universal banking was adopted in the economy in 2002.

  1. Re-introduction of Dutch Auction System (DAS) in July 2002 with a view to realigning the Naira exchange rate. Under the system, there is intervention by the CBN twice weekly and end-users bought foreign exchange at their bid rates through authorized dealers.
  2. Further to liquidity management by CBN, there would be withdrawal of Public Sector Funds from banks when necessary upon two weeks notice and return of same when liquidity conditions improve.
  3. The current banking reforms (since 2004).

The National Economic Empowerment and Development Strategy (NEEDS) which is the government reform agenda identified the problems confronting the financial sector to include the following:

  1. The inability of the sector to play a catalyst role in the real sector.
  2. Shallowness of the capital market.

iii. Dependence of the banking system on public funds as a significant source of deposit and foreign exchange trading.

NEEDS came out with the following strategies, which are to be incorporated in the monetary framework and adopted by regulated authorities:

  1. Comprehensive reform process aimed at substantially improving the financial infrastructure (legal codes, information system)
  2. Restructuring, strengthening, and rationalizing the regulatory and supervisory framework in the financial sector.

iii. Addressing low capitalization and poor governance practices of financial intermediaries that submit inaccurate information to the regulatory authorities.

Soludo, (2004:48-51) addressed a special meeting of the Committee of Bankers in which he outlined some elements of the current banking reforms some of which are:

(i) Minimum capitalization for banks of N25billion   with full compliance by 31st December 2005.

(ii) Phased withdrawal of public sector funds from banks which started in July 2004.

(iii) Consolidation of banking institutions through mergers and acquisitions.

(iv) Establishment of an Assets Management Company as an important element of distress resolution.

(v) Revision and updating of relevant laws, and the drafting of new ones relating to the effective operations of the banking system.

(v) Collaborating closely with the Economic and Financial Crimes Commission (EFCC) in the establishment of the Financial Intelligence Unit (FIU) and the enforcement of the anti-money laundering and other economic crime measures.

When the Central Bank Governor introduced the current reforms, the banking industry’s operational performance was not in the best of states. Bank ratings of licensed banks was carried by CBN using CAMEL parameters of the prudential guidelines of 1990. CAMEL means: C=Capital adequacy; A=Asset quality; M=Management competence; E=Earnings; L=Liquidity.

Akingbola, (2001:6-11) in his analysis of the banking environment posited that without doubt, one development which has posed the greatest challenge for the financial industry  within the last decade is the crisis of confidence arising out of the pervasive distress that shook the industry in recent years. The distress saga, which at first emerged mainly within the non-bank sub-sector soon spread to the mainstream institutions in 1991. By 1995, the problems had gone bad enough to threaten the entire banking system. Expectedly, the problem prompted an unprecedented confidence crisis within and outside the industry, which resulted in serious disability for not only the financial system, but also the wider economy. He further stated that it was when Central Bank of Nigeria took courageous move to take out a record of 26 banks at a time, that public confidence gradually began to return to the system. In his conclusion he put the total number of banks already liquidated at thirty-one.

From the background to this study, it is observed that Nigeria has implemented various reforms from pre-independence to date with a view to ensuring that the banking industry occupies its rightful position in the development of Nigeria economy.  However, the phenomenal distress witnessed in the industry prompted our interest to conduct a research work in this area. Onwumere, (2005:10-11) in his research work concluded that “the country’s development remains far-fetched in spite of several years of planning and adoption of several policies”. According to Uchendu, (1996:15-21) the financial sector reforms have aided the enormous development of the sector and the growth of the Nigerian economy. The output of the economy as evidenced by the Gross Domestic Product, doubled from N54.1billion in 1970 to N104.4billion in 1994 provides an indication for this. The financial sector’s contribution to the Gross Domestic Product (GDP) rose from 3.3 per cent in 1985 to 4.5 per cent in 1990 before declining to 1.4 per cent in 1994, as the economy decelerated from 9.4 per cent in 1985 to 1.2 per cent in 1994.Despite the robust growth in financial institutions and assets and profitability, some problems remained while new ones developed, the most prominent being the financial institutions distress. He further explained that the impact of the sector on the rest of the economy was limited; especially since the early 1990s.The rapid expansion of the financial sector as a result of the reforms was identified as one of the contributing factors to the distress facing the financial sector (CBN, 2000). This is related to the thin spread of qualified management staff among the new institutions. As a result, poor management and control contributed to expanding non-performing loans, embezzlement and mismatch of funds, resulting in part to the current financial sector distress. The initial success of the structural adjustment programme and the growth of the Nigerian economy were attributed to the financial sector reforms. However, the negative growth experienced by the economy since 1991 and the persistence of inflationary pressure are regularly linked to the failure of the financial reforms (CBN, 2000). That the improper functioning of the financial markets led to the problems of the real sector, while on the other hand, the lack of productive investment climate rendered ineffective the enormous resources and opportunities generated by the financial sector.

2.3 This section reviews relevant literature relating to the evaluation of the relationship between financial strategy and sustainable performance growth in the  Nigerian banking industry.


Hamel and Prahalad, (2000:5-19) recognized that restructuring is ultimately a dead end, and smart companies have moved on to reengineering their processes, because it aims at rooting out needless work and getting every process in the company pointed in the direction of customer satisfaction, reduced cycle time, and ensure total quality. Reengineering through strategic planning offers the hope and reality. However, reinventing regenerating strategy propel sustainable growth. In their research work,  “From organizational transformation to Industry transformation” which centered on IBM, AT&T and Hewlett-Packard, they came out with the following results: The organizational transformation challenge faced by so many companies today is, in many cases, the direct results of their failure to reinvent their industries and regenerate their core strategies a decade or more ago. Many observed that IBM had, in the early 1990s, the wrong kind of organization, skills, systems, and behaviours for a radically transformed

Financial Strategy as Support Determinant for the Avoidance and Resolution of Distress in the Nigerian Banking Industry


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