Banks in a Distressed Economy: Strategies for Long Term Liquidity

Abstract

Banking in Nigeria has been characterized by periods of intense pressure caused by severe distress in the economy. As an External Auditor for over eight years, I have been involved in consulting engagements for some troubled Commercial and Merchant Banks. My experience in this field informed my choice of this topic. Distress in the banking environment connotes a state of persistent failure to meet set objectives or fulfill ongoing demand obligations. The state of an enterprise may result from internal mismanagement or external exigencies. In a time of distress, loyalty and confidence in the financial institutions is eroded. The public at that point in time keeps money for transactionary purposes, thus starving the banking sector of needed funds. Credit customers also fail in their repayment obligations to the banks. While the revenue of these banks slides downward, overhead remain fixed. The underlying research objective was to adopt strategies and proffer solution for suitable liquidity for banks in a distressed economy. During the course of this research, we made use of secondary data from reports of the Central Bank of Nigeria, Nigeria Deposit Insurance Corporation, Financial Analysts reports and other related literatures. Consequent upon this research, the distress in the banking industry could be attributed to various factors, which could be summarized as: Low liquidity ratio, bad credit policy, serious boardroom crisis, lack of proper planning and financial control, indiscriminate and excessive investment in property development and interest mismatch. Measures aimed at mitigating the effects of the deficiencies highlighted above are detailed in the Summary of findings and recommendation, which include: Improved cash holding ratio, formulation and implementation of sound credit policies, effective planning, de-emphasis on property investment and elimination of interest rate mismatch. The problem of distress is an evolving one due to the uniqueness of particular cases; strategies will continue to evolve to address the peculiarity of every case.