The study is based on why bank fail in Nigeria. The study found out that banks fails because low level of customer patronage; high expenditure and government policy

1. WHY BANKS FAIL: THINGS TO WATCH OUT FOR
ABSTRACT
The study is based on why bank fail in Nigeria. The study is based
on review of related literature. The study found out that banks fails
because low level of customer patronage; high expenditure and
government policy.
1.0 INTRODUCTION
Bank failure is said to be the inability of a bank to meet up with its
financial obligations to its customers. Banks are seen as financial
distressed when they are technically insolvent and/or illiquid. In
today’s world, banks are one of the main players in the financial
systems, with an active role and thus being necessary to preserve
the public trust in banks. A bank failure has more consequences
both on the financial sector and the nation’s economy with

2. compared with a company’s bankruptcy. Reason why when it
happens on a large scale it affects the whole banking system which
can be disastrous to the economy.
The most common cause of bank failure occurs when the
value of the bank's assets falls below the market value of
the bank's liabilities, which are the bank's obligations to creditors
and depositors. This might happen because the bank loses too
much on its investments. Bank failures are not uncommon or
unusual, neither are they limited to a few countries. The cost of
bank failure can be high, and if this causes instability in the
financial system, which in turn affects the nation’s growth rate,
then it consequently causes governments or the central bank to
intervene in order to organise a rescue package for the failing
banks. The cost of these rescue packages is high and such
packages are difficult to organise, especially in a competitive
environment. Although bank failures are more commonly observed
in those countries that have deregulated or liberalized their
financial market, they are not uncommon where banks have made
bad loans and carried a high proportion of non-performing loans in

3. those countries where the financial markets were once highly
regulated and only survived due to government subsidies. Thus, the
question is: why do banks fail. This is why it is important to identify
the main causes and costs of the bank failures, in order to prevent
them, or to avoid at least partially their consequences.
OVERVIEW OF THE NIGERIAN BANKING SECTOR
There has been a wave of restructuring and consolidation of the
banking sector around the globe, particularly in the developed and
the emerging market economies. This has been driven mainly by
globalization, structural and technological changes, as well as the
integration of financial markets. Banking sector consolidation has
become prominent in most of the emerging markets, as financial
institutions strive to become more competitive and resilient to
shocks. It is also promoted by the desire to reposition corporate
operations to cope with the challenges of an increasingly globalized
banking system. It was based on the above premise that banking
sector consolidation, through mergers and acquisitions, was
embarked upon in Nigeria from 2004.

4. The Bank consolidation was focused on further liberalization
of banking business; ensuring competition and safety of the system;
and proactively positioning the industry to perform the role of
intermediation and playing a catalytic role in economic
development. The reform was designed to ensure a diversified,
strong and reliable banking sector which will ensure the safety of
depositors' money, play active developmental roles in the Nigerian
economy, and be competent and competitive players in the African,
regional and global financial system.
WHY BANKS FAIL
A) LOW LEVEL OF CUSTOMER PATRONAGE
Customer patronage is achieved when the anticipations of
customers are fulfilled. Excellent customer service does not only
make customers patronize the products, but they also spread
positive word-of-mouth to other people, which is an avenue for
creating profits for the bank. In effect, if customers change their
ways of patronizing, it will have a great impact on the long term
revenue of the bank.

5. Therefore, when banks do not have high customer patronage it can
lead to failure or liquidity.
B) HIGH EXPENDITURE
High expenditure is another reason why banks fail. When
expenditure is higher than income it can affect the growth of a bank
therefore leading to bank failure.
C) FRAUD AND FINANCIAL IRREGULARITIES
Fraud can be defined as ‘deceit, trickery or sharp practice or breach
of confidence perpetrated for profit to gain some unfair or dishonest
advantage’. Is an intentional mistake or distortions of financial
statement such as misrepresentation or misappropriation of assets.
Fraud is also an intentional deception to cause a person to give up
property or some lawful right.” fraud is the use of one’s occupation
for personal enrichment through the deliberate misuse or
misapplication of employing an organizations resources or assets.”
Fraud in the Nigerian Banking Industry before the recent merger,
acquisition and recapitalization efforts was at alarming rate. It has

6. caused many banks to collapse, and many investors and depositors
funds were trapped in. Infact it has prevented many banks from
achieving their goals and many businesses went into liquidation.
Honestly speaking it has become a cankerworm that has eating
deep into the financial sector of the Nigerian economy.
D) CBN MONETARY POLICY
Monetary Policy refers to the specific actions taken by the Central
Bank to regulate the value, supply and cost of money in the
economy with a view to achieving Government's macroeconomic
objectives.
This involves the measures through which the central bank
manages the supply of money, in order to stabilize prices. Though
the primary objective of monetary policy is the attainment of low
and stable inflation, the central bank also has the added mandate
to promote economic growth and employment. In practice,
monetary policy plays a counterbalancing role to address price
stability concerns and stabilize the economy.

7. During a period of high inflation, contractionary monetary policy is
used to reduce the amount of money in circulation while
expansionary monetary policy is used when economic conditions
are weak. Depending on the level of financial development of a
country, monetary policy is usually implemented through the
banking system and financial markets. Implementing monetary
policy involves interactions between the monetary authorities and
financial intermediaries, using tools of monetary policy including
reserve requirements, open market operations, and the policy rate,
amongst others. Various frameworks of monetary policy have been
used including monetary targeting, exchange rate targeting and
inflation targeting, etc.
The primary mandate of the Central Bank of Nigeria (CBN) is
promotion of price stability as enshrined in section 2(a) of the CBN
Act 2007. Price stability is a major monetary policy objective that
enhances predictability of domestic prices, a key requirement for
sound consumer decisions.
HOW TO AVOID BANKRUPTCY

8. A) REVIEW YOUR STAFFING
One of the ways to avoid bankruptcy is to review your staffing. The
growth of the bank should be synonyms with its staffs. When the
staffs are many, the bank may not be able to pay all its workers.
Therefore, the appropriate thing to do is to review your staffing.
B) CONSIDER MERGERS AND ACQUISITION
Along with globalization, merger and acquisition has become not
only a method of external corporate growth, but also a strategic
choice of the firm enabling further strengthening of core
competence.
Merger and acquisition (M&A) plays an important role in external
corporate expansion, acting as a strategy for corporate
restructuring and control. It is a different activity from internal
expansion decisions, such as those determined by investment
appraisal techniques. Merger and acquisition (M&A) can facilitate
fast growth for firms and is also a mechanism for capital market
discipline, which improves management efficiency and maximizes
private profits and public welfare.

9. C) WORK TOWARDS RECAPITALIZATION
A banking crisis can be triggered by weakness in banking system
characterized by persistent illiquidity, insolvency,
undercapitalization, high level of non-performing loans and weak
corporate governance, among others.
Capitalization is an important component of reforms in the Nigeria
banking industry, owing to the fact that a bank with a strong
capital base has the ability to absolve losses arising from non
performing liabilities. Attaining capitalization requirements may be
achieved through consolidation of existing banks or raising
additional funds through the capital market.

10. REFERENCES
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12. Gavin, M., Hausmann, R., “The Roots of Banking Crises: The
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