AN EXAMINATION OF THE SOUNDNESS OF BANKS IN NIGERIA: A CASE STUDY OF SELECTED BANKS

ABSTRACT

The objective of this study is to examine the soundness of Banks in Nigeria:  A case study of Access bank, Afribank, Ecobank, First Bank and Standard Chatered Bank were used.  Data for the research were collected through primary and secondary sources namely the annual reports and account of the respective banks, Central Bank of Nigeria(CBN) banking supervision unit annual reports on the banks, textbooks , journals and seminar papers..

The data were analyzed  and presented using tables, simple percentage and ratios based on CAMEL specifications.  The hypotheses were tested using CBN bench mark for CAMEL and simple percentages.

The findings of the study showed that the liquidity level of banks did not fall short of CBN bench mark of 30%during the study period; the banks’ capital adequacy exceeded the CBN bench mark of 10% during the study period; the banks gross earnings has been on the increase during the study period; the banks have good asset quality as evidenced by their level of performing loans during the study period; the banks management were efficient and have the expertise required to manage their banks during the study period.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Over the years financial system stakeholders have typically paid considerable attention to the significance of the banking sector in the development process, with limited thinking on the promotion of banking system soundness, except until recently with introduction of the banking sector reform. Bank soundness refers to the ability of banks to withstand adverse economic conditions and their ability to promote economic development [CBN, report 2005].

Reform are usually introduced either in response to the challenges posed by factors   and developments such as systemic crisis, deregulation ,globalization and technological innovation or as a proactive measures both to strengthen the  banking system and prevent system crisis, as in the case of the current reforms.

A  sound  banking    system  must  be  able  to  facilitate economic  development  and  provide  a platform for sound economic policy implementation and ensures that customers and other stakeholders in the banking  industry are satisfied. The importance of the banking system to the economy cannot be over-emphasized and it is on this ground that a study on the soundness of banks in Nigeria becomes necessary.

An examination of the soundness of banks in Nigeria was conducted by looking at their  capital adequacy, management expertise, assets quality , earnings, liquidity and sensitivity to market risk; as these variables helps to evaluate the   performance of these banks and by so doing determine their soundness.

1.2        STATEMENT OF THE PROBLEM

Safety and soundness of the banking system remains one of the key mandates of theCentral Banking of Nigeria [CBN]. This informed the    revolutionary effort by the CBN to strengthen banks, refocus and reposition them to meet the global challenges and play a pivotal role in supporting the growth of the Nigeria economy.

Inspite of the effort of the CBN, banks are still not sound as the suppose to be. People are still sceptical as to the soundness of banks in Nigeria in the face of the current economic meltdown. Most Nigeria still feels banks suffer from Some  problems  such as ; Capital inadequacy, low earnings, poor assets quality, liquidity problems, weak corporate governance, inability to finance large capital projects, poor rating by international rating agencies and weak financial intermediation.

The problems identified above, informed the decision to carry out a research work that will examine banks capital adequacy, assets quality, liquidity ratio, management expertise and sensitivity to market risk in order to determine the health and strength of our banks to meet emerging economic challenges and to able to compete favourably internationally ; as only a resilient bank can withstand risks associated with the current global economic and financial meltdown.

1.3       OBJECTIVES OF THE STUDY

The objectives of the study among others include:

1          To determine the quality of banks earning assets.

2         To determine the level of bank capital adequacy.

3          To determine the liquidity ratios of the banks.

4          To evaluate the banks earning performance.

5          To make recommendations based on observations and findings

1.4       RESEARCH QUESTIONS

The following research questions are formulated to guide in the collection and analysis of data. They are;

1) Is there inefficiency and lack of expertise in the management of the Banks?

2) Does   capital adequacy of the banks meet the CBN required standard?

3) What is the level of quality of bank earning asset?

4) Is the banks gross earnings on the decline?

5) Does the liquidity level of the banks fall short of the required benchmark?

1.5        STATEMENT OF HYPOTHESIS

Considering the statement of the problem and the objective of the study, the following research hypotheses were formulated to guide the study:

HO 1 : There is inefficiency and lack of expertise in the management of the banks. HO 2  : The capital adequacy of banks fall below the CBN required standard.

HO 3 : There is poor assets quality among the banks. HO 4 : Banks gross earnings has been on the decline.

HO 5 : Banks liquidity levels  fall short of the CBN benchmark.

1.6       SCOPE OF THE STUDY

This research work is based on commercial banks in Nigeria. It examined the soundness of banks in Nigeria. The research depended on primary data collected from five (5) banks in Nigeria with fabulous performance; they are: First Bank Nigeria plc, Standard Chattered Bank (Nig) ltd, Access Bank plc, Afri Bank Plc , and Eco Bank plc. The choice of the banks are based on the expert advice of the supervisor of this work.

The study was limited to examining the soundness of banks in Nigeria by looking at their level of capital adequacy, assets quality, liquidity level, earning performance and management expertise,

1.7       LIMITATIONS OF THE STUDY

This research work was carried out alongside with other academic work in the school. This study encountered some constraints as there were some initial difficulties in getting some the banks previous years’ annual reports and some other relevant information and materials. Time equally took its toll as there was a time limit for research to be completed.  Notwithstanding the above constraints, the research study was successfully completed as scheduled and met all the required objectives and standards.

1.8       SIGNIFICANCE OF THE STUDY

This study has a lot of useful information which include:

1)  It will be beneficial to investors who wishes to invest in the equities of these banks as it serves as a guide in determining how viable their in investment in these banks will be.

2)  It will be helpful to those who want to go into further research on the soundness banks in

Nigeria.

3)  This research work will also favour the banking public as it gives them a clue on how the soundness of their banks.

4)  It will be beneficial to financial analyst and practitioners on  evaluating the strength of a particular  bank  and  in  advising  their  client  about  the  opportunities  and  threats  of individual banks and to make comments.

5)  It will also enable any reader of this research work to gain insight on the health of the banking sector.

1.9       DEFINITION OF TERMS

Financial system: This refers to the banking and non banking institutions. However, it is acceptable in the literature to refer the banking system as the financial system if banks dominates the financial institution. In research work both are used interchangeably.

Systemic crisis: This refers to banking system crisis that may result in the collapse of the entire system.

Banking soundness: This is the ability of banks to withstand economic fluctuations.

Liquidity: This refers to the ability of banks to meet immediate or current financial obligations.Capital: This is the total fund   contributed by bank shareholders for its operations.

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