This research is carried out on the problems that have pervaded the Nigerian Banking Industry in the last two decades, which eventually led to distress in the “Herculean” task of recapitalization.

The topic examines recapitalization from the point of distress and its causes in the financial system, taking cognizance of customer’s unwillingness to save and the poor banking habit which is due chiefly to the fact that they have lost confidence in the Nigerian banking industry. The scramble for cash to meet up with the recapitalization requirement is also carefully looked at here.

The study also offer positive suggestion not only as to how they can consolidate their financial position to avoid being caught in a position of unpreparedness for future recapitalization increases.

Lastly, it tries to educate the readers on the ways recapitalization can help to address (if not totally eliminate) the problems in the banking industry and its numerous benefits to the national economy.


P a g e

Title Page i

Declaration ii

Dedication iii

Approval Page iv

Acknowledgment v

Abstract vi

Table of Contents vii


Introduction --------1

Statement of the Problems ------4

Objective of the Study------5

Significance of the Research-----6

Scope of the Study -------6

Limitation of the Study------7

Definitions of Terms -------8


2.0 Development of Banking Industry in Nigeria - - - 13

2.1 Types of Banks in Nigeria and their Business - - - 18

2.2 Distress Syndrome in the Development of Banking in Nig. - 23

2.3 Effects of Distressed Banks on the Nigerian Economy - - 32

2.4 Historical Development of Banking Regulations - - - 34

2.5 The Concept of Capitalization - - - - - 53

2.6 Banks Reserves and Why Banks Keep Reserves - - - 55

2.7 Reasons for Introduction of Bank Capitalization - - - 58


Research Methodology------60

Data Collection Techniques------61

Justification of the Techniques Used----62

Population and Sampling------63

Sampling Procedures Used ------63


Introduction --------65

Banks Lending and Credit Administration ----66

Debt Recovering Process of Banks----68

Unsecured Debts Recovering-----69

Secured Debts Recovering------69

Enforcement of Security------70

Recapitalization Policy of the Federal Govt. of Nigeria (1997) -73

Recapitalization: The need and reason for a stronger capital base-75

Recapitalization option------75

Problems associated with recapitalization---83

Advantages of a strong capital base----86


5.0 Summary - - - - - - - - 89

5.1 Conclusion - - - - - - - - 90

5.2 Recommendation - - - - - - - 91

Bibliography - - - - - - - - - 95

Appendix - - - - - - - - - 97



It is widely recognized that the financial system plays a vital role in the economic development of any country. This is done basically through certain institutions in the system, which include such sectors like the banks who are mostly concerned with separating the savings and investment function within the economy. Such that those that save at any particular time need not be those that have to invest at that same particular time. Therefore the financial system includes the banking institutions, which are very important in the payment and collecting systems.

An efficient financial system is very important and widely accepted as a necessary condition for the effective functioning of a nation=s economy. A responsive banking system is Central to the attainment of a sound economic base and its economic performance has far reaching political implications.

Banks facilitates economic transactions between various national and international units financial sector is usually aimed at ensuring a safe and sound system where depositors are protected.

The banking industry in Nigeria has been marked by periods of good and bad fortune, chequered and battered from the early periods of the introduction of banking culture. The periods between 1947 and 1952 witnessed rapid growth of indigenous banks in Nigeria. This increase in the number of indigenous banks, was followed also by a high rate of failure of such banks. By 1954, twenty one

(21) out of the twenty five (25 banks established and operating in Nigeria had closed their doors or failed. The failures were attributed mainly to mismanagement of the banks, lack of adequate capital and inexperienced personnel. The country does not have a central bank at that time to monitor the

operations and capitalization of banks. Also there were no adequate regulations and 1egislation for the banking industry, not until the promulgation of the banking ordinance of 1952, which came into effect in 1954, and subsequently the establishment of the central bank of Nigeria (C.B.N) in 1959.

From this early stage, we discovered that the term distress has become synonymous with the banking industry while constituting a major addition to the growing wealth of banking and financial literature in Nigeria.

Distress appears to be a new development in the Nigerian banking industry because of its wide phenomenon effects in the 90's, but the fact is that this problem has been with the banks right from the inception of banking system in Nigeria. The reason for1his outlook is that such sick banks were always dealt with decisively either through liquidation or successive restructuring which returned them to healthy condition within a reasonable time frame.

It should be mentioned here that bank distress or failures constitute a high cost of doing business in an economy. The need to address squarely the banking system distress is particularly important in view of the fact that distress is a systematic risk i.e. there is a high degree of probability that the distress of one or more banks will result to the distress of some other banks particularly in the same financial market.

At this stage, I must state that the banking industry is once again witnessing another era of failure because of some administrative, bureaucratic, managerial and legalistic problems. The corporate suicide most of the banks committed that eventually led to their distress which now necessitate the recapitalization of the whole industry as is being witness now, is their inability to adhere strictly to the cannons of good lending or borrowing.

Thus a major issue we should be looking at is the question of what in the light of our various experiences should we do to sustain a healthy sector that will be relevant to this age of globalisation and swift information flow and thus stimulate economic growth? In responses to the disturbing level of distress in the Nigeria banking industry and in view of the urgent need to establish a frame work for a well functioning and properly coordinated financial system in the economy, the federal government of Nigeria (FGN) announced during the presentation of the 1997 budget speech, a number of major reforms and some failure resolution measures in the country's financial system.

The reforms include the increase in the minimum paid-up capital of banks. The failure resolution measure is aimed at decisively addressing the problem of distress in the country's banking system. Since banks in spite of their special status within the economy are regarded as any normal firm or business enterprises, they also depend on capital for survival and operational success within the financial system in particular and the total economy as a whole. So that availability of adequate share capital in any bank will be readily appreciated. We discover that the importance of capital to banking institutions goes beyond its significance as an economic sector, given that its stock in trade is money itself with all the inherent risks associated with such business, banks are mere empty vaults without adequate capital.

Capital lies at the very heart of banking operations and is therefore very vital to its existence. The level of equity indeed determines the amount or level of risk a bank can take and also the type and volume of business it can undertake.

In summation, the most important function of capital in a bank is to provide insurance against risk and losses. However in the search for ways of optimizing resources in the banking industry in the future, it is very important that we do not forget where we are coming from; indeed the awareness and motivation

should begin with revisiting the events leading remotely or directly to government's decision to increase the capital base of banks as stipulated in the 1997 budget.

This is necessary because, maintaining safety and soundness of the banking industry is not a one stop approach, It is a continuous process. Professionalism the interest of the industry and the over-all economy should be the watch-word if the banking industry wants to surge ahead.


The service of banking is supposed to be hinged on the effective satisfaction of both the surplus units and the deficit units of the economy. The quality of banking is based on the manner and the environment in which such services are rendered quality service in banking must meet three basic requirements namely; competence reliability and credibility.

For banks to be able to function effectively and maintain high efficiency level in the economy and to contribute meaningfully to the economic growth and development of a country, then the industrial sector must be safe. sound and stable, being devoid of any economic problem that can tilt it off the rail of achieving its primary duty of satisfaction, such as distress.

In all indication what we are experiencing and witnessing in this country today is a far cry from the ideal state of stability expected.

Due to inflation and the general socio-economic decline and political uncertainties around us which have taken a large toil on the banking industry. Most banks have suffered from loss of business and this has resulted to loss of income. The banks were unable to pay customers on demand due to non availability of liquid cash. The public lost confidence in the banking industry.

How sensitive is the banking industry to this problem? Also the fraudulent activities associated with insiders, large volume of unscreened loans and unauthorized loans to top bank officials are of great concern as they help to make most of these banks in solvent.

There have been a number of increases on minimum capital at various times in the past but non was of this magnitude as witnessed in 1997. The current increase which is over one thousand percent (1000%) is seen by many banks as a very glaring of pushing way them out of business. Those who are still optimistic only see a survival of their business through merging with other banks or being acquired by a different company and operating under different condition(s). Even those banks that are sure of raising the required capital are faced with the problem of how best to invest this new capital to maximize the investor’s interest.


This research work is aimed at informing the readers on what the 1997 recapitalization policy is all about and providing a most appropriate option of raising the new minimum capital requirements to banks. It also intends to look at the relevance of the concept to the total economic development. It shall try to impact knowledge about the Nigerian banking industry in respect to business of banking, legal guides, history of banking in Nigeria, and the types and operations of banks in Nigeria. It shall shed light on the benefits of the recapitalization policy to the Nigerian banking industry and the Nigeria economy as a whole, circumstance that give rise to recapitalization and the credibility problem that pervaded the banking industry against the backdrop of the larger Nigerian macro-economic Environment. What has been the role of the regulatory bodies(CBN & NDIC) in distress resolutions. It should be pertinent to periscope issues like lending, distress and also dovetail into distress resolution.


The significance of the research is base on the fact that the role of financial institutions in general and banks in particular on the economic stability, well being and development of any society cannot be over looked and as such, these institutions must be stable and operating well for economic developmnt of any society .It is in this effort that the federal government of Nigeria introduce the 1997 recapitalisation policy in its annual budget in order to stabilise the industry and eradicate the long existing distress problems in our banking industry.

The recapitalisation policy has a lot to offer as regards the promotion of the banking industry and the economy, but most banks are frowning at the policy because of the obstacles concerning banks implementation of the policy but if proper measures are taken this could eliminate most of the problems which looks seemingly difficult at the beginning because of the bleak out look of the Nigeria economy at present. This project among other things, will educate the readers on; what recapitalisation is all about, how best a bank can successfully recapitalise, benefits of the 1997 policy to .both banks and the general economy, laws regulating relating banking operations in Nigeria and various happenings in the Nigeria banking industry since inception.


The time dimension within which this study covers is from 1892 to early 1999 and this has been the period of time in which banking has been existing in Nigeria.

Basically, the study covers the early banking period in Nigeria so as to relate the problem of recapitalisation to performance of banks in this period and the period in which the first banking legislature was released, hence the introduction of

minimum capital requirements of banks until date.

The work features structure and types of banks, business of banking, legal frame work concerning operations of banks, the recapitalisation policy of the federal government of Nigeria as announced in its annual budget for 1997 and why government felt there is a need for this policy. Included in the work are the various options on how best banks can raise the required capital base and the benefit to be derived from having a large capital base by banks and the economy in general. This work will also look at problems existing in the Nigeria banking industry since its inception and problems faced by the banking industry within the 1990's. Not left out is the period of banking boom in Nigeria, reasons for this boom and what problems it left behind. Finally, how recapitalisation will help to resolve the current problems in our banking system. Since this policy concerns the whole banking system, it has been decided that no particular case study will be used in this work, but that not withstanding, some banks would be mentioned and used as example in certain situations.


The major constraint to this study is the difficulty in getting the relevant data for the study. The area of study (recapitalisation policy of 1997) is a recent development in the banking sector, so that not much literature has been published on it and most banks are not ready to release needed data as they see it as an important business secret, this compounded the issue of scarcity of data.

Therefore the researcher has little option than to rely on textbooks (which were very scanty on the issue), newspapers reports, Journals, conference papers from

N.O.I.C top management and C.B.N Governors. and the opinions of some staff and managers of few banks. Sources of information are quoted in the report proper where necessary and also in the reference section.

Other limiting factors include;

⦁ Time Constraint-: as the available time has to be shared between academic work and extra-curriculum activities.

⦁ Financial Constraint-: This was one of the greatest source of constraint or limitation of this work. Due to high cost of transportation to sources of primary data, photostatting relevant materials and obtaining relevant newspapers, journals and magazines.

⦁ And finally, the inability to get vital informations from some of the banks, I went to as a result of some standing orders against the release of such information outside their corporate headquarters and by officer of a very high management level as witnessed especially at the first bank regional office and Habib Bank office in Abuja.


In a study like this it is necessary to define at the beginning those terms and concepts that will be used in the study to avoid ambiguities. For the purpose of this stli,terms like business, industry, firm, and enterprises are used inter changeably. So also is bank and financial institution. Others are distress and failure or bank-run, Capitalization and Recapitalization.

i. ASSETS: These are properties of a business and its stock in trade or its stock of goods at any particular time.

ii. ACCEPTANCE HOUSE: These are financial institutions that specializes in the grants of acceptance facilities.

iii. BANK: Sec 2 and 61 of(BOFID) 1991 defines a bank as; "A duly incorporated company in Nigeria holding a valid banking license to receive deposit on current account, savings account or other similar accounts, paying or collecting cheques drawn by or paid in by customers. provision of finance or such other business as the government may order to publish in the gazette designated as banking business.

iv. TO MARQUADUS: Banking is signified by certain kind of dealings in money, approved by the state accordingly by which money is deposited with the bankers for the benefit of the depositor, so that the ownership of the money passes to them, and so that the creditors (i.e. depositors) get security; and the debtors (i.e. the bankers) get advantage. The condition is however implied that the depositor may whenever he pleases demand the money he deposited. Therefore a bank can simply be said to be an establishment where money is deposited in accounts, withdrawn and borrowed.

v. BOFID: Banks and other financial institution decree.

vi. CAPITAL: This refers to the sum invested in a business. It is also seen or used in business by a person, corporation, government etc. Capital can also be referred to as the net worth of a business; amount by which the assets exceed the liabilities.

vii. CAPITAL BASE: The total sum value of amount invested in a business.

viii CAPITAL MARKET: The market for sale of Securities. It is also refer to as a market where investment instruments mostly in monetary forms are exchanged either through long, short or medium term agreements.

ix CAPITALIZE: Convert into capital.

x. DISTRESSED BANKS: These are banks with problems relating to liquidity, poor marginal or total earnings and non-performing assets. The climax of it is that it could be a condition of insolvency, which implies inability to pay debtors or meet maturity obligations as they fall due.

xi. FIXED INTEREST PAYMENT OR FIXED REDEMPTION: These are investments that already have a fixed duration and interest rate.

xii. HOLDING ACTION: This refers to condition prescribed by Central Bank for the turn-around of distressed banks.

xiii INFLATION: A rise in the average price level of goods and services.

xiv. LIABILITY: This is what a business owe to outsiders.

xv. LIQUIDATION: To put a firm out of business or stop its operations due to insolvency.

xvi. LIQUIDITY: Money or near money (e.g. Bank drafts).

xvii. MERGER: The combination of two or more companies in which one firm survive as a legal entity.

xviii. OPEN MARKET OPERATION (OMO): This is the sales and buying of government bonds in the market. The market consist of commercial banks and the public.

xix. PAID UP CAPITAL: The amount subscribed in a company share capital.

xx. RECAPITALISATION: Review of the require minimum capital and the process of adopting to the new requirement. It is also defined as the enhancement and restructuring of the financial resources of an organization with a view to enlarging the long term fund available to the organization.

xxi. RETURN ON INVESTMENT (ROT): Gain received from money put into a business.

xxi. SPECIAL DRAWING RIGHTS (SDR):- This is a device for increasing international liquidity to member nations of IMF. This was introduced in 1969. They are assets which are to be issued (i.e. created like commercial banks deposits) only by IMF. They are not to be regarded as borrowings from the fund, but are meant to supplement gold and convertible currency and so form part of members reserves.

xxiii. SHARE CAPITAL:- The value of a company's capital contributed by its owners.

xxiv. STOCK EXCHANGE:- Market for the issue and sale of new securities.

xxv. PRUDENTIAL GUIDELINES:- These are guidelines and practices which all licensed banks are required to adhere to in reviewing and reporting their performance, particularly in the areas of credit portfolio classification and disclosure, provision for non-performing facilities, interest accruals, classification of other assets and off balance sheet engagement.

xxvi. TAKE OVER:- The acquisition of another company which may (from the viewpoint of the acquired firms management) take the form of a "friendly" or "unfriendly" merger.

xxvii. SECURITY OWNERSHIP:- This is creditor interest in an organisation evidenced by a certificate.

xxviii. CAPITAL ADEQUACY RATIO:- this is defined as the total qualified capital to total risk weighted assets. The ratio is an indicator of appropriate level of capitalisation of a bank.

xxix. LIQUIDITY RATIO: This is defined as the ratio of total specified liquid assets to total current liabilities and reflects the liquidity position of a bank.

xxx. LIQUIDATION: This has been defined by Glenn G. Munn in Encyclopedia

of banking and finance as the termination or winding up of a business by conversion of its assets to cash and distribution of proceeds first to the creditors in the order of preference and the remainder, if any, to the owners in proportion of their holdings.




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