Valentine Ogudo, Babatunde Afolabi
Department of Banking and Finance, Afe Babalola University, Ado Ekiti, Nigeria, valentine.ogudo@gmail.com
Department of Banking and Finance, Afe Babalola University, Ado Ekiti, Nigeria, atunne@gmail.com
ABSTRACT
In recent past, many Nigerian banks became weak and highly unprofitable due to high non-performing loans portfolio accumulated by the banks. It is widely believed that the major reason for the huge non-performing loan portfolio can be attributed to insider dealing due to excessive and collaterised loans to bank directors that eventually became bad and irrecoverable. The study seeks to examine the effects of Non-performing loans on the performance of the banking sector in Nigeria. The exploratory research design was adopted in the study. The result of the analysis showed that high level of non-performing loans reduces the performance of banks in the long run in Nigeria. The study, therefore, recommends amongst other things that credit reporting and supervising authorities should be enhanced to stem the ugly tide of the high level of non-performing loans in the Nigerian banking sector.
INTRODUCTION
As bad debts triggered a global financial and banking crisis, Nigerian banks also endured her own home-grown troubles. Bad debts and overdependence on stock market returns had pushed almost half of Nigerian banking sector’s outstanding loans into default. Poor oversight resulting from weak institutional capacity on the part of regulators resulted in the banking crisis of 2004. Hence the then CBN Governor Professor Charles Soludo mandated an increase in bank’s minimum capital base from N2bn to N25bn, triggering a wave of foreign investments in Nigerian banks, bank mergers and provided share offerings on the Nigerian capital market. This reduced the number of banks from 89 in 2004 to 25 well-capitalized banks in 2005; including potential ‘regional' or ‘continental powers.'
At the end of the CBN induced consolidation in 2005, Nigerian banks further voluntarily increase their capital bases beyond the stipulated N25 Billion to attract more foreign investments and properly handle major transactions within and outside the country. Hence, between 2006 and 2007 not less than $12Bn (N1.9Trillion) had been raised in equity through the Nigerian Stock Exchange (NSE), raised not solely by investor demand but due to some financial interests from security underwriters and brokers skilled at share price manipulation. Banks typically lent to securities firms which use the money to buy equities at the Exchange. A JP Morgan Chase report alleging that Nigerian bank stocks were overpriced coupled with the global meltdown which was already sending ripples to Nigeria from other parts of the globe created panic and accelerated foreign investors exit from the market. Consequently, and with so many shares available and so many people selling, the long grind into a deep bear market began affecting most bank loans which had been raised to finance share purchase.
Series of reforms introduced by Sanusi further restored confidence in the banking sector. Following the audit exercise conducted by CBN’s examiners, it was discovered that five of the banks had accumulated margin loans of N500 billion, among other loans, which had gone bad and eroded their shareholders' funds. Hence, it was imperative to move in to send a strong signal to avert future recklessness on the part of bank executives. Due to the need to sanitize the banking sector, an Asset Management Company was created to absorb the bad loans and allow for buyers of the banks to recapitalize them. To ensure efficiency of every part of the economy functions, economic reforms were undertaken, hence achieving price stability, full employment, high economic growth and internal and external balances. Thus banking reforms in Nigeria were undertaken to sanitize the sector, restore confidence and reposition the Nigerian economy to achieve her macroeconomic goals.
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