Abstract:
Banks occupy a central position in the financial system of a country and are essential agents in the development process of the economy. Banks grant credit and by doing so, they create money, thus, influencing the level of money supply which is an essential item in the growth of national incomes. Banks also intermediate between the surplus and deficit spending units 'by increasing the quantum of national savings and investments and, subsequently, national output. Banks are central to the payments system by facilitating economic transactions between various national and international economic units and by so doing encourage and promote trade, commerce and industry. But when a bank becomes distressed, it will not be able to perform the above listed functions and so, for banks to be able to function effectively and contribute meaningfully to the development of a country, the banking industry must be stable, safe and sound. That the banking industry in Nigeria is seriously afflicted is not in doubt 'as distress in the industry is evident from the rising incidence of loan defaulters, increasing illiquidity, decreased earnings , declining profit margins, persistent' erosion of the capital base of most banks. Therefore, the research seeks to find out the fundamental causes of the current distress situation in the bank system, analyses the consequence/effects of the distress and makes recommendations on the effective preventive strategies. Several factors are responsible for the current distress in banks and they include among other things, poor management, inadequate capital, sudden growth in the number of banks, fraud, forgeries and embezzlement, economic situation in the country, etc. By the end of 1995, the number of distressed banks in the country rose to sixty. The situation was so bad that at the end of 1995, an average of about 1 to every 2 banks was distressed. Bank distress has a number of negative effects on depositors and the greatest effect is the erosion of public confidence in the banking industry. Bank distress is also observed to be a clog in the wheel of Nigeria economic development. Hence, some preventive strategies are recommended, one of which is that the government should evolve a stable environment that could encourage bank operation
