CORPORATE FAILURE AND SURVIVAL IN BANKING

INDUSTRY: AN EVALUATION OF TURNAROUD STRATEGIES

1.1 INTRODUCTION

In the last two decades, banking industry witnessed an upsurge in the number of

banks and an equal demise of many of them into the oblivion. This is attributable to

variety of complex factors that range from distorted management incentives to macro

economic imbalances. Banks therefore need to fight entropy in order to remain

relevant and survive in a turbulent and competitive business environment. This is the

essence of developing and implementing sound survival strategies. This paper is

divided into five sections. Section one is this brief introduction. The second section

examines the concept of bank distress while section three explores the major causes of

distress in banks. Section four evaluates the turnaround strategies employed to turn

distressed banks around. The final section is devoted to recommendations and

conclusions.

1.2 CONCEPT OF FAILURE AND BANK DISTRESS

A variety of terms, all unpleasant, have been employment in different contexts to

explain the concept of 'failure': collapsed, failed, bankrupt, broke, and bust (Argenti:

1976:01), distress, insolvency etc. In short, failure is the inability of an organisation to

survive.

Bank failure may differ from failures in other organisations because of its contagious

nature. Bank failures are contagious and the collapse of one bank tends to undermine

the confidence of the community and start runs on others. In addition, if bank failures

continue on a wide scale, business concerns, as well as individuals will be

increasingly likely to withdraw their accounts and hold liquid cash.

Distress in the banking industry generally occurs when banks are either illiquid and/or

insolvent and depositors fear the loss of their deposits and so there is a breakdown of

contractual obligations (Ebhodaghe, 1997:57). Sign of illiquidity appears when a

bank can no longer meet its liabilities or obligations as they fall due. Insolvency on

the other hand manifests when the value of a bank’s realisable assets is less than its

total liabilities. Ekpenyong (1994:16) concurs that a bank shows early sign(s) of

distress when it is unable to meet its financial obligations that fall due (illiquidity)

such as inter-bank indebtedness and depositors’ funds. Such a situation as he further

adds can be caused by the weak deposit base of the bank, its inability to meet its

capitalisation requirements and poor management. Other indices of bank distress

include the following: gross under capitalisation in relation to the level of operation;

illiquidity, reflected in the inability to meet customers’ cash withdrawals; low

earnings, resulting from huge operational losses; and weak management, reflected in

poor credit quality, inadequate internal controls, high rate of frauds and forgeries.

1.3 CAUSES OF DISTRESS IN THE NIGERIAN BANKING INDUSTRY

Bank distress in Nigeria was caused by many factors. Some of these factors are

discussed at length below.

ECONOMIC ENVIRONMENT - The introduction of the Structural Adjustment

Programme (SAP) in form of macro-economic reforms in 1986 and particularly the

devaluation of the naira and the deregulation of the interest rate structure further

compounded the situation. Escalating cost of manufacturing inputs leading to greater

domestic capacity under-utilisation effectively curtailed the ability of corporate

borrowers to repay their loans.

POLICY ENVIRONMENT - Closely related to the economic condition is the policy

environment itself. According to Nkwopara (1995:08), the banking sub-sector over

the years has been repressed and highly regulated. Ebhodaghe (1997:59) observes

that banks were subjected to substantial restrictions on their products and activities

which, apart from undermining their innovation and resourcefulness also limited their

ability to adapt to changing market conditions. Banks were forced to perform several

developmental roles such as mandating banks to provide subsidised credit to priority

sectors and public enterprises This consequently contributed to mismanagement of

the loans in the so-called priority sectors and the alarming level of non-performing

loans in the industry. Another instance is the compulsory participation by banks to

expand beyond their management capability. Though Rural Banking Programme has

assisted in mobilisation of deposits and also contributed greatly in developing the

banking habit of Nigerians, the scenario imposed substantial cost burden on the

commercial banks and most of their rural branches turned out to be unviable.

INTERVENTIONS AND CONTROLS – These also contributed to distress syndrome

in the Nigerian banking industry. For instance, CBN in 1988 directed banks that

Naira backing for foreign exchange application is lodged with CBN. This was

followed in 1989 by another directive requiring public sector deposits to be

transferred from the commercial and merchant banks to CBN. This generally affected

all the banks, the most affected being the state banks. The sudden loss of government

huge deposits as experts observe affected all commercial banks liquidity and their

customers. In essence, these two directives exposed the precarious liquidity position

of such banks. What was then thought to be a temporary liquidity problem for a few

banks soon caught up with a lot more banks.

POLITICAL CRISIS - The deepening crisis in the industry as Molokwu (1994:48)

observes, could also be remotely ascribed to the political crisis in the second half of

1993. The crisis in June and November of that year (Ebhodaghe, 1997:58) led to

massive movement of people from various parts of the country and engendered

withdrawal of funds from the banking industry. Molokwu (1994:48) also adds that

many depositors who fled their usual place of residence withdrew their deposits from

banks and other finance houses, while those who remained behind made

precautionary withdrawal. He further adds that the volume and timing of these

withdrawals contributed to exacerbating the crisis of confidence within the industry,

and most of the adversely affected banks have remained unstable since then. The

crisis of July to August 1994, which resulted in the closure of banks and other

financial institutions, has further eroded public confidence (Ebhodaghe 1997:58)

MANAGEMENT AND ORGANISATION - There is a general agreement among

economists and management practitioners that the capability and quality of bank

management is a major determinant of performance (Mamman and Sunday, 1994:59).

Management is seen therefore as the single most important variable in the survival

and growth of a bank. Kubr and Wallace (1993) note that for improperly managed

business organisations like banks, even massive injection of finance and material

resources, as well as super human efforts, produce only fleeting improvements. This

underlines the argument that bank distress in Nigeria was exacerbated by poor

management.

Gbadamosi (1993:13) particularly argues that:

Because of poor management, many of the commercial banks gave out loans in
large sums without proper collateral securities. Personal relationships were
considered as basis for issuing out loans. Such loans were never paid back, which
inevitably led to liquidity problems.
The central argument here is that poor management breeds other undesirable

behaviour, which further compounds bank distress. Some of these are further

discussed:

Fraud - In the context of Nigeria’s commercial banking sub-sector, management’s

inability to put in place adequate control measures had resulted in series of fraudulent

activities by management themselves and staff and huge losses that wipe out large

part of some banks’ income (Mamman and Sunday, 1994:63). The NDIC reported

that in aggregate terms, the sum of N1, 377.15 million was involved in commercial

banks’ fraud and forgeries in 1993 compared with N351.9 million in 1992. This

represents an increase of about 291 percent. In the succeeding years, the figures

increased geometrically. Nkwopara (1995:07) examines fraud from a social

perspective, illustrating how personal ties affect human venality:

Family and social norms have made bank staff to collude with outsiders to
defraud banks. While directors collude with management to acquiesce to lend to
unviable companies related to the bank directors even when they are aware that
such companies are being used as vehicles to siphon the bank’s fund to the private
pockets of such directors. Some bank managers also collude with customers to
defraud their banks.

It is also appropriate to add that apart from direct involvement of management staff in

fraud and forgeries, their inefficiency also indirectly promotes fraud across other

categories of staff. Reports show that various categories of staff including

accountants, managers, supervisors, clerks, and even drivers connive to defraud banks

of large sums of money that run into several billions of Naira (NDIC: various issues).

Among the practices used to perpetrate fraudulent activities are blotting of account

numbers and cheque numbers, forging signatures, conversion of bank money and

giving out large sums of money in the name of loans to friends and relatives without

putting a well structured machinery in place to recover the sum.

Internal Squabbles – This could be between the management and board, or between

board members which are detrimental to the sustenance of distress-free operations. A

case in point is a liquidated merchant bank, where board disagreement played a key

role in destabilising the bank. Bank Examination Report in 1993 shows that as early

as 1991, two years before liquidation “there were clear indications that members of

the board of this bank were not always working in harmony for the benefit of the

bank”. Consequently, the resources of the banks are used to fight expensive,

prolonged legal battles leading to erosion of public confidence and wiping off the

goodwill they had, and distress creeps in slowly.

Large Portfolio Of Non-Performing Assets – This is another recipe for distress. For

many distressed banks in Nigeria, the process of deterioration in their financial

conditions began with poor lending practices. For example, management’s lack of

attention to the details of the loan functions, concentration of credits extended to

directors/shareholders and related companies opened the door to credit weaknesses

and left many banks vulnerable to economic changes.

GROSS INADEQUACY AND SHORTCOMINGS IN THE SUPERVISORY

APPARATUS

This is due to the following

• Rapid changes in the enabling environment have indeed outpaced the rate of

regulatory reforms. The rate of increase in the number of banks was faster

than the rate at which the supervisory capability of the monetary authorities

was enhanced.

• Closely related to this is the shortage of manpower, corruption, and sometimes

incompetence, which make it difficult to detect the warning signals in the bank
 operations, and many of them were left uncontained until their problems were

out of control.

• Bank regulatory agencies in Nigeria often shy away from enforcing sanctions

on erring operators. The statutory roles of the supervisory banks were not

faithfully carried out. The Citizen Magazine (1994, Jan 10:15) observes that

“part of the blame of the distressed commercial banks also go to the regulatory

bodies for not being alive to their responsibilities to the commercial banks”.

• The regulators do not act promptly and swiftly and they even engage in

regulatory forbearance thereby allowing more ailing banks to break the law,

hoping that time and economic recovery would resolve the problem perhaps

following the dictum of benign neglect that says ‘a problem deferred is

problem half solved’.

• Other problems relate to the enforcement power of the bank regulators i.e.

they do not have in most cases adequate powers to deal decisively with

distress syndrome. Sometimes far-reaching decisions are subject to approval

from the government, which eventually comes late.

OWNERSHIP STRUCTURE

This has also played a major role in promoting financial distress in the banking

industry. The ownership factor has relevance to the management set up of the banks.

The influence of their owners determines who holds what position in the bank’s

hierarchy especially in government-owned banks. Most of the banks were often

treated as political banks (Ebhodaghe, 1993:19) and were characterised by inept

management with unstable tenure. Appointments to the board and key management

position were based on subjective measures (Nkwopara: 1998).

Many banks employed mediocre and appointed inexperienced managers who could

not manage the business effectively. Worse still, some of these managers were people

who studied courses not related to banking.

INADEQUATE CAPITALISATION

This has also been identified as a contributory factor to the distress condition in the

banking industry. In Nigeria, poor capitalisation has for long remained a key problem

of the Nigerian banking system. Many of the banks were established with very little

capital and in other cases; the problem has been worsened by the huge amount of non-

performing loans, which have eroded the banks’ capital base.

5.4 CONSEQUENCES OF BANK DISTRESS

The concomitant bank distress had far-reaching consequences not only on the

economy but also virtually on every Nigerian.

5.4.1 Effect on Economic Variables

Banks find it difficult fulfilling their roles as engines of growth in the economy,

which they may not be able to do efficiently under the present crisis situation because

of the difficulties in mobilising deposits from the surplus sector. Ebhodaghe

(1994:30) concurs that bank distress retards economy’s rate of capital formation;

reduce its level of employment and ultimately the pace of economic growth.

5.4.2 Effect on Confidence in the Industry

Bank distress also engenders crisis of confidence in the entire industry. This clearly

paralyses the development of a good banking culture. Several circumstances in

Nigeria contributed to the crisis of confidence: withdrawal of public sector deposits;

June 12 crisis; and even the promulgation of Failed bank Decree. These sent an

alarming signal to the public who made huge withdrawals and made it impossible for
even marginally stable banks to meet their deposit commitment. The bank run

affected even the healthy banks since investors do not know which of the banks are

actually distressed. This development increases the banks’ cost of intermediation, as

banks need to pay higher returns to attract and retain deposits. Many banks at the

height of the tension offer interest rates on deposits higher than the prevailing market

rates to boast their deposits and lure customers, and this further complicated the

situation. Coupled with the high cost of intermediation, there will be great and

pervasive uncertainty such that the perceived real return on financial assets will be

lowered. Frequent government intervention through the regulatory authorities adds to

other indirect cost. Finally, depositors’ fund in the event of liquidation will be lost at

least recoverable to the extent of N50, 000 where there is explicit/implicit provision

for protecting depositors.

5.4.3 Effect on Credit Market

Gilbert and Kochin (1994), and Ebhodaghe (1996) concur that expenditure of

economic agents are constrained by the quantity of credits made available to them.

Developments that reduce the total quantity of bank credit or disrupt the operations of

banks as intermediaries will reduce spending and consequently will affect aggregate

economic performance adversely. To the extent that bank failures disrupt the process

of financial intermediation, including credit-granting activities of banks, aggregate

economic activities may be adversely affected.

5.4.4 Effect on Other Stakeholders

Apart from the threats posed by bank distress to the economy which affect everybody

directly or indirectly, it is worth discussing the other stakeholders that suffer when a

bank is in distress or when it is liquidated.

(i) Owners
In Nigeria, the inability or refusal of owners to recapitalise distressed banks

culminated into their liquidation and total loss of investment by owners of such banks.

This exposes them to risk and indirectly discourage their future participation in

banking business or even other productive activities within the economy and therefore

promotes investment abroad.

(ii) Employees

The employees of distress banks also suffer. Rehabilitation and turnaround measures

involve re-sizing of banks and consequently certain jobs may be eliminated or

contracted. The loss of jobs leads to economic disenfranchisement of many families

thus confounding the challenges of the trying environment (Udezue: 1997). The

attendant substantial increase in the unemployment level negates government’s

current efforts at addressing the unemployment problem, and partly explains the

current social unrest particularly amongst the youth.

(iii) Depositors

Depositors also suffer when a bank is in distress and incur some costs. In the event of

liquidation, they lose everything except if there is implicit/explicit insurance cover.

They also incur additional cost of re-establishing relationship and good rapport with

other banks, which they have for long developed with the failed banks.

Despite the preceding arguments that see distress as negative and dysfunctional, there

exits arguments too that distress could indeed be functional, albeit to some limited

extent. Oboh (1999: 05) observes that bank distress experience increase awareness of

the ethics and demands of the banking profession. Thus, the regulatory authorities,

banks, and the public are red-alert on the legal and professional banking practice. It is

also a fact that it has helped to expunge the ‘bad eggs’ and prepare the grounds for

improving the industry and restoring stability.

From the foregoing, it is clear that adequate measures must be put in place to forestall

future occurrences. This is more important as bank distress has many spill over

consequences.

1.4 EVALUATION OF TURNAROUND STRATEGY

Banks are like living organisms. They evolve in cycles and in certain period of their

development undergo phases of rupture, which improve changes of direction and

make survival their central preoccupation (de-Carmoy, 1990:200). To remain

relevant and maintain their identity, they need to improve their competitive standing

and operational efficiency. The right strategies are the turnaround strategies

(Wheelen and Hunger: 1992, Colin and Keith: 1992), also referred to as strategies of

change (de-Carmoy: 1990).

According to Rue and Holland (1989: 51), a turnaround strategy is designed to reverse a

negative trend and to get the organisation back on the track to profitability. Turnaround

strategies usually try to reduce operating costs, either by cutting excess fat and operating

more efficiently or by reducing the size of operations. It thus involves the adoption of a

new strategic direction, the activation of which almost by definition involves

retrenchment as a first step. A turnaround strategy therefore involves a reallocation of

resources from one strategic thrust to another and focuses attention on the transitional

issues involved (John and Richard: 1987).

A turnaround strategy involves many changes and the most primary is management

change. Apart from management change, other turnaround elements involve revenue

generation, product market refocusing, liquidation of assets, divestment of parts of the

business, and costs reduction. At any rate attempting a turnaround necessarily,

depends on the root of poor profitability and the urgency of any crisis.
Turnaround effort is one sure way of reversing a declining fortune and improving the

competitive standing of a distress bank. In the banking sector, turnaround efforts could

be observed from three angles, based on internal source when induced by

management of the troubled bank and external when restructuring and reorganisation

of a bank is done by the regulatory or other bodies set-up to address the issue; or a

combination of the first two options (Ndekwu:1997).

Over the years, the Regulatory Authorities have employed several failure resolution

options aimed at ensuring the safety and soundness of the industry. The measures

adopted by the authorities as Ndekwu (1997) observes constitute restructuring

techniques, which are akin to a combination of UK model (lifeboat fund) and US

Model (deposit Insurance). These are restructuring models developed and adapted in

UK and US as a response to financial crises and distress. Therefore, since both

institutions (CBN and NDIC) jointly tackle distress in banks, the adoption of

combined UK-US Model has evolved in the Nigerian (CBN/NDIC) Model. The

hybrid model essentially consists of a number of strategies and measures. The

turnaround strategies in the model were to be initially formulated and implemented by

the banks as earlier observed. Failure to come up with effective strategy led to the

various measures by the regulatory authorities. The actions of the regulatory

authorities was informed by the widespread and numerous adverse or multiplier

effects of distressed banks on the economy.

Financial assistance in form of accommodation facility extended by NDIC in

collaboration with the CBN is one of the elements contained in the model. The

Corporation in collaboration with the CBN extended accommodation facility to banks

with liquidity problems in 1989 (Umoh and Ebhodaghe 1997:117), The financial

assistance strategy granted to our sample banks did not succeed due to poor diagnosis

of the problem and poor implementation. In fact, as it turns out to be, majority of

beneficiary banks were in a state of insolvency which mere liquidity support could not

resolve. This underlies the inherent weaknesses of the NDIC and CBN to separate

insolvent from solvent banks, especially following the explosion in the number of

banks which over stretched their supervisory capacity and the deliberate manoeuvres

by management of banks to conceal their state of affairs (poor information

disclosure). In addition, was the absence of timely management changes and staff

restructuring to effectively manage such resources. The lack of complete autonomy

on the part of NDIC due to government’s stance on the use of tax payers’ money

affected the implementation of the strategy.

The CBN/NDIC also introduced moral suasion with a view to hold discussions and

consultations with the owners and management of insured banks and making them

embrace healthy and corrective practices that would enhance the performance of their

institutions (Sanusi, 1997:09). It was also with the view of making the owners of

such banks realise the need for prompt and decisive action in resolving the problems

of their banks and to review the progress made towards the implementation of the

turn-around programmes (Ebhodaghe, 1997:161). He posits further that the approach

was necessitated by the fact that most of shareholder state government would view

regulatory actions from political perspective. The pervasiveness of poor management

in the commercial banking sub-sector affected the success of moral suasion. Since

81.8 percent of the management of the sample banks it is opined are characterised as

‘inept and self-serving’, it is not surprising that they failed to embrace healthy and

good corporate governance in the operations of their banks, which are the rubrics of
moral suasion strategy. In many cases (about 54.5 percent) it was further opined,

management skills were lacking and there was inadequacy of professionally trained

and competent manpower (63.6 percent). All these point to the fact that the strategy

could not have succeeded. This concurs with the views of the prevalent position in

the literature that moral suasion works well with highly principled and professional

bankers as against ‘rogue’ banks and fraudulent managers.

Imposition of Holding Actions is yet another strategy. According to Herbert

(1997:15), a holding action is a regulatory imposition with an option allowing the

directors of a distressed bank the first opportunity to undertake self-restructuring

measures in a bid to salvage the bank and stem the tide of financial deterioration.

Those banks identified as distressed, after a special examination, are placed under

close supervision and restrictions (Umoh and Ebhodaghe, 1997:122). Up to the end

of 1996, CBN/NDIC imposed holding actions on about fifty-two (52) distressed

banks. Herbert (1997:15) further argues that holding action is a list of regulatory

actions, requirements, do’s, and don’ts imposed on a distressed bank ranging from

restrictions on advertisement for deposits to injecting of further capital funds and

taking necessary steps to ensure adequate control measures to safeguard the books,

records, and assets of the banks. Evidence suggests that between 1991 and 1997, the

regulatory/supervisory authorities had virtually imposed holding actions on over 40

percent of all the commercial banks operating in Nigeria. Despite this, many banks

did not respond positively to the holding actions prescriptions. The following are

attributable to the failure of the strategy:

• The fact that the strategy in majority of the cases was implemented

when the banks’ net worth was already negative means that the banks
 had long qualified for liquidation. The measures constituted only a

post-mortem exercise.

• The punitive actions contained in the strategy as the analysis reveals

succeeded only in constraining the ability of the banks to grow out of

their distressed conditions. Prescriptions such as barring distressed

banks from Autonomous Foreign Exchange Market (AFEM)

participation, suspension from the clearinghouse, sanctions on granting

loans and advances for deposit mobilisation endangered public

confidence in the banks and affected their ability to make profits.

• The recapitalisation prescription under the holding action it is observed

could not be attained considering the deteriorated conditions of the

banks, which largely degenerated due to prolonged and sustained

losses. Besides, the shareholders of such banks were least concerned

with the survival of the banks considering the huge amount needed for

recapitalisation, which skyrocketed due to the high presence of insider

dealings and unperfected loan procedures. In addition, the

managements were busy taking excessive and inordinate risks and

playing internal power politics and in the process violating rules and

contravening the prescriptions of holding actions.

• The absence of timely management changes also affected the ability to

pursue vigorous, unbiased, and efficient staff rationalisation. The

incumbent management in most cases due to emotional reasons and

intense interference of their BODs and owner-state governments did not

pursue the process objectively. Yet in many successful turnarounds,

staff rationalisation has often remained a key to success.

Though the assumption and control of management strategy was positive because it

attempted to deal with the problem at the root by wrestling control of the management

of the ailing banks from incumbent boards and transferring same to boards appointed

by the regulatory authorities, it failed to empower the IMB/TSB to aggressively

pursue a turnaround programme for the distressed banks. Instead, it focused more on

arresting further deterioration on the affairs in the distressed institutions. According

to Jimoh (1993:17) even the composition of the task-force was such that the longer it

takes to resolve the problems of the banks, the higher the cost, and the more

precarious the banks’ position. He adds further that in some cases those appointed

had their own banks, whose interest could not have been subjugated to the interest of

distressed banks.

Experts also echo the desirability to redress bank distress through Merger and

Acquisition option since they are antidotes to financial distress in order to avoid the

many adverse effects of going into voluntary or involuntary liquidation (Omachonu

et’al, 1997). However, up to 1998 no bank was saved through merger except for two

banks that where saved through acquisition.

Following the failure of many of the strategies, the CBN opted to liquidate the

terminally distressed banks. Though some experts argue that the liquidation of banks

in 1998 marks another leap forward toward sanitisation of the banking industry,

others see the liquidation option as undesirable and costly since it spreads many

negative externalities. For instance with the liquidation of twenty-six (26) banks,

depositors in those banks lost about N10 billion while about six thousand employees

lost their jobs creating more social problems

1.5 CONCLUSIONS AND RECOMMENDATIONS