Bank owners’ direct interventions in the internal management of banks have contributed to the financial distress in  most banks. Some shareholders borrow funds in excess of the capital they invested to start the banks, and this is usually done through “director-related” companies. It is also not uncommon  for banks to borrow from the CBN to find directors’ loans.
Most of the government owned banks were often treated as political banks.
Some of these banks were characterised by inept management whose tenures were determined by the frequency of change in government. This led to inconsistencies in bank policies. Besides, loan and advances to owner government and their agencies were often not repaid, neither were the loans collaterised.
It is perhaps paramount to stress that the pervasive incidence of non- performing loans is one of the prime causes of distress in the banking system. Debts owed by governments and their agencies constitute a significant proportion of banks’ non-performing loans particularly in banks where state governments have controlling interests. The failure of state governments and their agencies to honour their obligations as and when due has continued to undermine the efforts of regulatory authorities in addressing the problems of ailing banks. As at June 30, 1995 total government’s indebtedness to banks stood at about N’9. 102 billion most of which were non-performing. Table 2.2 provides a breakdown of total government indebtedness to banks as at June 30, 1995.
In order to facilitate an early bank failure resolution through recovery of non-performing loans, deliberate efforts should be made to ensure that the debts of governments and their agencies are repaid. In fact, there could be no better example for the Federal Government to demonstrate its preparedness to sanitise the banking system than by ensuring that the state governments settle their overdue debts to the banks. Such action would also provide the moral high ground for proceeding against other defaulting borrowers.
2.5 Distress Management in the Nigerian Banking Industry
Distress management in the Nigerian banking industry is jointly handled by the CBN and the NDIC. If there is a significant deterioration in the condition of a bank it is officially declared to be distressed and placed under close supervision. Such a bank will normally be required to submit additional returns to the CBN/NDIC, so that the implementation of the various corrective measures imposed on it can be monitored. Over the years, the CBN and the NDIC have undertaken a number of such distress management measures to handle the problems of distressed banks. The measures taken include the following, among others:
Distress Management and Prevention Strategies for
2.5.1 Moral Suasion
As a first step in distress management, the CBN and the NDIC hold regular discussions and consultations with the owners and management of the affected banks with a view of making them embrace healthy practices that would enhance their performance as well as take prompt and decisive actions to revitalise their banks. Although this approach has helped in making the owners and management of most problem banks to focus greater attention on certain areas of operational problems, not much has been achieved in addressing die fundamental problems of under-capitalisation and debt recovery.
2.5.2 Imposition of Holding Actions
Banks that are identified to be distressed, after a special examination, are placed under close supervision and restrictions through the imposition of Holding Actions. The aims of the holding actions are to allow the troubled banks to undertake self-restructuring measures as a first line of self-salvaging action and to arrest further deterioration in their financial condition. This approach is anchored on the belief that given determined management and boards, the declining fortunes of the problem banks could be reversed.
To date, holding actions have been imposed on about fifty-two (52) distressed banks. Holding actions imposed on distressed banks require them to do the following:
(i)    stop further advertisement for deposits without prior consent of the CBN;
(ii)    not grant further loans and advances until the regulatory authorities are satisfied with the bank’s liquidity position;
(iii)    take necessary steps to ensure adequate internal control measures to safeguard its books, records and assets;
(iv)    inject further capital funds;
(v)    engage in aggressive debt recovery drive;
(vi)    take steps to perfect all collateral securities pledged for loans and advances (and keep them in protective custody);
(vii)    segregate all dormant accounts within a specified time limit;
(viii)    not embark on new capital projects without clearance from the CBN;
(ix)    to reconcile all long-standing items within a given deadline;
(x)    not dispose of any fixed assets of the bank without prior consent of the CBN; and
(xi)    Embark upon possible rationalisation of staff if considered necessary to enhance efficiency and restore viability.
In addition, each distressed bank on which the holding actions have been imposed, is required to furnish the CBN and the NDIC within 30 days of being served the holding actions, details of its strategic plan for the revitalisation and effective management of the bank. Such a turn-around plan is expected to be credible and to include proposals for debt recovery, rationalisation of costs and staff, injection of additional capital, training, etc.
Furthermore, each distressed bank is expected to render to the CBN and the NDIC, using the format provided, the following returns on a monthly basis:
(i) Debt recovery;
(ii) New Lending;
(iii) Statement of non-performing and renegotiated loans and advances;
(iv) Maturity profiles of assets and liabilities;
(v) Cash flow variance analysis;
(vi) Profit and loss accounts;
(vii) Interest income; and
(viii) Non-interest income.
Finally, each bank on which the holding actions are imposed is expected to notify its staff of the measures and ensure that adequate steps are taken to comply with them. Officials of the CBN/NDIC monitor the compliance from time to time. The effects of these holding actions on the distressed status of the affected banks would normally suggest the next set of supervisory measures to adopt.
The experience of the regulatory authorities has shown that these holding actions have not materially reversed the distressed status of most of the banks because the heavy accumulated losses make the recapitalisation     requirement to be beyond the means of the shareholders. An evaluation of the holding actions has also revealed that while owner State Governments do not have the capacity and resources to turn around their ailing institutions, private shareholders do not appear to be committed to the survival of their banks. In addition, the debt recovery efforts have not been successful because the chronic debtors are mainly insiders to the affected banks who are usually unwilling to repay their debts, or who had not provided adequately perfected collateral which could be foreclosed.
2.5.3 Financial Assistance
The Nigeria Deposit Insurance Corporation (NDIC) in collaboration with the CBN extended Accommodation Facilities to help ten banks out of their liquidity problems in 1989. This measure recorded some success as confidence was restored within a reasonable period of time.
In the past five years, the Corporation has received an appraised applications for liquidity support from some banks. Though a few of these applications were approved, it was later found that the problems of the banks transcended illiquidity to include insolvency, and hence could not be adequately resolved by the mere provision of liquidity support. The regulatory authorities, therefore, decided to directly intervene by taking over the chronically distressed banks.
2.5.4 Supervisory Intervention
One major distress management measure that has been adopted by the regulatory/supervisory authorities is prompt supervisory intervention. The limited success of this measure has however suggested that regulatory! supervisory authorities must find a more effective approach to manage distress in the Nigerian banking system. The authorities have thus initiated and taken stronger supervisory actions which are discussed here.
(a) Change of Management
Following the protracted shareholders’ crisis in Fidelity Union Merchant Bank Limited in 1992, the CBN/NDIC removed the bank’s board and appointed an Interim Management Board (1MB) that managed the bank for one year. The bank was handed over to its shareholders after resolving their differences. Similarly, an Interim Management Board was constituted for Alpha Merchant Bank Plc on the receipt of protest from some shareholders that the bank was being mismanaged through careful manipulation of some board members and management staff and after confirming that the protest had merit. The presence of the CI3N/NDIC in the management of the bank further revealed a lot of insiders abuse and financial ma which eventually culminated in the revocation of the bank’s licence and its subsequent liquidation.
(b) Assumption of Control and Management
Early in 1992, the CBN took over the control and delegated the management of the distressed National Bank of Nigeria (NBN) to the NDIC pursuant to the provisions of sections 34 and 36 of BOFI Decree. The decision to take over the NBN was informed by a number of factors including the fact that the bank’s operations had virtually been suspended and the capital deficiency had grown beyond the financial capacity of the shareholders. Furthermore, the regulatory authorities believed that the action would send a strong signal to the owners of other distressed banks that they run the risk of losing their bank should they fail to take appropriate corrective actions to turn them around.
On its part, the NDIC appointed an 11 -man task force to examine the bank’s books and to evaluate its financial condition. From the report submitted by the task force, the ND made far-reaching recommendations to the Federal Government for the resolution of the problems of the bank. Unfortunately, government took much longer time than anticipated to decide on the distressed status of the NBN. It was finally agreed that the bank should be acquired for a nominal fee for the purpose of its restructuring and subsequent sale to the public. As required by law, the CBN had to obtain the approval of the President to invoke the provisions of section 36 of BOFI Decree for the acquisition of the bank. It is instructive to note that it took the CBN about 18 months to obtain a court order for the acquisition of the NBN after numerous adjournments. It would appear that the provisions of the BOFI Decree requiring court orders for the acquisition of banks has allowed the owners of such banks to challenge the action of the regulatory/supervisory authorities. Subsequently, an Interim Management Board (1MB) was appointed to turn around the bank.
The regulatory authorities have since discovered that the case by case approach adopted in handling the distressed NBN was inadequate due to many reasons. The selection of the banks, one at a time, for restructuring would prolong the exercise while the financial condition of other distressed banks not yet taken over would continue to deteriorate. This, therefore, necessitated the reassessment of the framework for the handling of problem banks in Nigeria. The reassessment was further informed by the following factors:
(i) The continued existence of the distressed banks would constitute a threat to the ND Deposit Insurance Fund because of the continued deterioration of the banks’ financial condition; and
(ii) The selection of which bank to restructure next would be viewed as arbitrary and subjective by interested parties.
Against this background, a framework that entailed simultaneous takeover of all the first generation insolvent banks (global restructuring) was adopted. Following the approval of the President on May 21, 1993, the CBN in the exercise of the powers vested in it assumed the control of the affairs of five distressed State Government-owned banks and handed over their control and management to NDIC, thus bringing the number to six. The banks are African Continental Bank Plc New Nigeria Bank Plc Pan African Bank Ltd., Mercantile Bank Plc, and Cooperative and Commerce Bank PIc. The responsibilities of the NDIC as a managing agent include superintending over the affairs of the banks as well as proposing a failure resolution option consistent with the circumstances of each bank. The Corporation, in turn, appointed an Interim Management Board (1MB) for each bank to assist it in working our appropriate restructuring plans. The key terms of reference of the IMBs were as follows:
(i)    To superintend over the affairs of the banks;
(ii)    To evaluate the condition of the banks, with the assistance of external auditors appointed by the Corporation and recommend appropriate failure resolution strategy;
(iii)    To undertake extensive rationalisation of operations of the banks so as to reduce operational losses;
(iv)    To implement, generally, the Holding Actions imposed on the banks by the CBN and the NDIC; and
(v)    To assist in the banks’ debt recovery efforts.
After an exhaustive evaluation of the turnaround plans submitted by the lMl3s, the CBN/NDIC reached a conclusion that the plans would not reverse the distressed condition of the banks without spending a huge amount of tax payers money. As the Federal Government was not willing to bailout any bank with tax payers money, it requested that the banks should be sold to willing and credible buyers within six months after which those that were not sold should be liquidated. The CBN/NDIC has since dissolved the IMBs and constituted a Transitional Supervisory Board (TSB) to midwife the sale and or liquidation of the six banks.
The CBN had also acquired, through the Federal High Court, all the first six banks under its control and management at a nominal fee. It should be observed here that while the legal process in acquiring the NBN was unnecessarily prolonged, probably being the first of its kind, the acquisition of the five other banks had been done with relative ease and without much legal constraint. The acquisition of these banks was to facilitate their sale or liquidation by the authorities.
(c) Comprehensive Supervisory Intervention
While considerable efforts had been made towards addressing distress in the banking system, the supervisory measures adopted had not stopped the crisis. As at the time the six banks were taken over, there were fewer than twenty distressed banks in the industry under the close supervision of the CBNINDIC. Since then, the number of distressed banks had risen to about sixty (60) as earlier indicated. It therefore became necessary to consider a more comprehensive approach that would simultaneously address all the terminally distressed banks in the system.
Consequently, the Federal Government approved the taking over of additional seventeen (17) distressed banks for the purpose of restructuring them. This consisted of eight commercial banks and nine merchant banks. The commercial banks were: Amicable Bank of Nigeria Limited, Credite Bank Nigeria Limited, First African Trust Bank Limited, Lobi Bank of Nigeria Limited, Nigeria Universal Bank Limited, North-South Bank Nigeria Plc, Premier Commercial Bank Plc, and Progress Bank of Nigeria Plc. The nine merchant banks were: Abacus Merchant Bank Limited, Century Merchant Bank Limited, Great Merchant Bank Limited, Group Merchant Bank Limited, Ivory Merchant Bank Limited, Merchant Bank of Africa Limited, Nationwide Merchant Bank Limited, Prime Merchant Bank Limited and Victory Merchant Bank Limited. All the banks were taken over by the CBN on September 15, 1995. The boards of directors of these banks were dissolved and in their place management boards were constituted as conservators. The shareholders of these banks were given another opportunity to recapitalise their banks to the satisfaction of the CBN/NDIC within one month failing which the management boards would package the banks for sale, merger, or liquidation depending on which option would help to restore public confidence and would be most cost effective. In addition, the management boards which were to report to the NDIC were charged with the responsibility of, among others, implementing the holding actions earlier imposed on the banks, identifying the bad debtors for the purpose of recovery and identifying those involved in financial malpractices with a view to prosecuting them in accordance with the provisions of Decree No. 18 of 1994 for the purpose of recovery of debts owed to the banks, and conserving the banks’ assets.
(d) Suspension of Banking Licence
In February 1994, the CBN suspended the licences of two commercial banks – Republic Bank Limited and Broad Bank (Nigeria) Limited – following the discovery of serious malpractices perpetrated by the management of these banks in the inter-bank clearing system. While the suspension of Broad Bank was subsequently lifted, the Republic Bank could not meet the conditions for the restoration of its operating licence.
(e) Liquidation of Distressed Banks
Having exhausted all possible means of resolving the distressed condition of some banks, the CBN/NDIC decided to invoke the provisions of the BOFI Decree and revoked the operating licences of five banks with the approval of the Head of State. The licences of Kapital Merchant Bank, Financial Merchant Bank, Alpha Merchant Bank and United Commercial Bank were revoked in 1994 and that of Republic Bank was revoked in 1995.
Consistent with the provisions of the BOFI and NDIC Decrees, the CBN appointed the NDIC as the liquidator of the five banks. The liquidation of these banks was unique as it was the first time since banking business became formally regulated in Nigeria that distressed banks were being liquidated. Secondly, the liquidation of failed banks was consistent with the posture of deregulation that allowed for free entry and free exit of banks, a major departure from the previous policy of propping inefficient and mismanaged banks. Lastly, liquidation of technically insolvent banks would promote market discipline by sending strong signals that shareholders of banks stand to lose their investments should they run their banks aground.
2.6 Prevention Strategies
Prevention of distress in the banking industry is the responsibility of various parties, namely, bank directors, shareholders, bank management, supervisory authorities, bank employees, and government. However, the following specific measures can be taken in order to prevent/minimise distress in the banking sector.
(a)    Harmonisation of Efforts Among Various Regulatory! Supervisory Bodies in the Finance Sector
There is need for greater co-operation among the various regulatory authorities to enhance the exchange of information and make supervision and regulation less burdensome and more effective. The present effort in this regard, through the setting up of the Financial Services Co-ordination Committee (FSCC), is a step in the right direction. To make the deliberations and decisions of the FSCC more effective, legal backing should be given to its existence. Such legal backing would also make it mandatory for all member institutions including the Federal Ministry of Finance to be represented.
(b) Tackling the Critical Problem of Poor Management
One of the most critical factors that has contributed to the poor health of many banks is the poor quality of management. The ineptitude of management translated into a number of related problems such as poor asset quality, poor credit administration, fraudulent practices, insider abuse and ineffective machinery for debt recovery.
In order to effectively address this problem, the regulatory/supervisory authorities should ensure that the policy on the possession of proper and adequate academic professional qualification, technical know-how, relevant experience and credible track record as prerequisites in constituting the management team for banks, is rigorously enforced. In addition, the assessment of the quality of management as a performance indicator during examinations should continue and recommendations contained in the examination reports on specific changes in management structure should attract more rigorous monitoring.
Furthermore, the importance of a workable and effective internal control system covering all aspects of a bank’s operations and strict implementation of the laid- down procedures need to be emphasised. With an efficient and effective internal control system, the incidence of insider abuse, fraud, poor asset quality, poor credit administration and ineffective machinery for debt recovery would be reduced.
(c) Reducing Bank Examination Cycle
In the last five years, the frequency of bank examination by the CBN and the NDIC increased considerably. However, efforts must be made to further reduce the on-site examination cycle to once every year. To achieve this, it is necessary to speed up the computerisation of information gathering, analysis and report generation. This effort should be complemented with a functional early warning system, (that clearly defines intervention thresholds and needed corrective action) developed by the regulatory authorities.
(d) Examination of Financial Supermarkets
Currently, the supervisory activities of the regulatory authorities are concentrated on commercial and merchant banks, while their affiliated financial companies operate largely outside the scope of supervisory authorities. This has provided ample avenue for circumventing official regulation. This situation needs to be redressed in line with the Basle Convention. Banks and other financial institutions should report in detail on all companies in which they have significant interests. Field examination should now be extended to cover these other institBtions. To make this possible, the legal framework should be expanded while the co-operation of the immediate regulatory authorities responsible for monitoring these other institutions should be sought through the aegis of the FSCC.
(e) Overhauling the Existing Legal Framework
The effectiveness of the regulatory and supervisory authorities is dependent on the existence of an effective and efficient legal framework with clearly defined responsibilities for the various regulatory/supervisory bodies. In spite of the significant improvement in the legal framework following the promulgation of the CBN Decree and the Bank and Other Financial Institutions (BOFI) Decree, in 1991, there is an urgent need to review the legal framework to make for greater efficiency.
In this regard, the BOFI Decree should be amended to give the CBN the power to deal decisively with ailing banks without recourse to the political authorities. In addition, the 1988 NDIC Decree should be amended to enable it take greater responsibility for the resolution of distress in banks with respect to restructuring, mergers, purchase and assumption as well as liquidation.
f) Encouraging Self-Regulation by Various Groups Within the Financial System
With the phenomenal growth in the number and type of financial institutions, it is expedient to encourage self-regulation as a way of reducing the pressure on the supervisors. In this regard, operators within cach banking sub-sector should be encouraged to form associations with laid-down rules and procedures for their operations backed by appropriate sanctions for non compliance.
(g) Strengthening Accounting and Audit Reporting Systems and Standards
The regulatory/supervisory authorities had in the recent past expressed concern at the level of account and auditing reporting systems, especially in respect of proper recording and reporting of accounting related transactions. Consequently, it is proposed that a consultative system should be established to enable the regulators/supervisors and the external auditors of banks hold regular consultative meetings to discuss issues of common interest touching on accounting/audit reports, such as transparency and greater standard of disclosure of financial information with a view to enhancing greater cooperation between both parties.
(h) Establishing a Loan Recovery Agency
In order to complement the Failed Banks (Recovery of Debts) and Financial Malpractices in Banks Decree No. 18 of 1994, there is the need to establish a Loan Recovery Agency with sufficient legal powers to facilitate loan recovery. The Agency will articulate its loan recovery strategy and implement monitor recovery processes. Such Agency would also have the responsibility for taking over non-performing assets and the corresponding liabilities of liquidated banks for final determination on behalf of the NDIC, for an agreed commission.
(I) Macroeconomic Policy Stability
Absence of a stable macroeconomic policy regime and uncoordinated policies have contributed to bank distress over the years. Government must forestall this situation by ensuring consistent and stable macroeconomic policies that would encourage overall economic growth and development. Government must also ensure budget discipline, fiscal transparency and accountability. Governments at all levels should map out strategies for the repayment of large debts owed to banks and contractors.
(j) Promoting Political Stability
There is no doubt that a stable political environment would enhance general economic development and by extension, prevent bank distress. Aside from providing a conducive environment for foreign investment, a stable political environment would encourage domestic investment upon which economic growth is based.
2.7 Summary and Conclusion
In this paper, an attempt has been made to discuss some distress management measures that have been adopted by the regulatory/supervisory authorities in Nigeria. Beyond the discussion of these measures however, the paper has examined some preventive strategies necessary to stem the tide of distress on a permanent basis in the nation’s banking system. In all, the way forward is for all parties concerned to contribute to a favourable banking environment. In this regard, the operators should adhere strictly to the rules of the game; the regulatory/supervisory authorities should enhance the supervisory capacity while the government should put in place enabling legal, macroeconomic and political frameworks.