LEAD CITY UNIVERSITY

YEKEEN IDRIS ADESEUN

LCU/PG/0012358

FACULTY

MANAGEMENT AND SOCIAL SCIENCE

DEPARTMENT

MANAGEMENT AND ACCOUNTING

PROGRAMME

PGD FINANCE

TOPIC: Within bank and non-bank financial institutions identify issues creating
management and operational challenges which hurts their going concern status.
Abstract
This paper presents a multi-dimensional structural critique of the persistent
challenges which hurt the going concern of banks and non-bank financial institutions in
Nigeria.
This study isolates and investigates three foundational dimensions driving
institutional vulnerability: leadership and corporate governance failures,
behavioral/ethical anomalies across institutional and consumer agents, and systemic
macroeconomic and structural environmental problems. This document details how
internal operational failures collide with severe external environmental headwinds to
create systemic distress, high non-performing loan portfolios, and recurrent institutional
liquidations.
Introduction
The Nigerian financial sector is a complex ecosystem divided into two major
segments: Deposit Money Banks (DMBs), which form the core banking backbone, and
Non-Bank Financial Institutions (NBFIs). NBFIs include Microfinance Banks (MFBs),
Finance Companies (FCs), Primary Mortgage Banks (PMBs), and Development Finance
Institutions (DFIs). Historically, this sector has undergone significant structural
transformations. Prominent among these was the 2004/2005 consolidation exercise led by
the Central Bank of Nigeria (CBN), which raised the minimum capital base of
commercial banks from ₦2 billion to ₦25 billion. This was followed by subsequent
recapitalization directives for MFBs and the recent tiered recapitalization framework for
commercial banks.
Despite these massive capital infusions, the sector remains highly fragile. Financial
institutions do not collapse solely due to a lack of nominal capital; rather, they collapse
due to structural breakdowns within their operating frameworks. This assignment
provides a rigorous evaluation of the three forces driving this fragility: leadership
anomalies, behavioral risks, and environmental disruptions.

Leadership and Corporate Governance Problems

1. Gross Insider Abuse and Conflicting Interests
The most severe threat to institutional stability in Nigeria is executive insider
abuse. Corporate board members often view their positions not as a fiduciary
responsibility, but as a mechanism for direct capital extraction. Directors routinely bypass
standard risk management boards to approve multi-billion Naira credit lines for their own
shell companies or political allies (Sanusi, 2010). These insider loans are regularly
characterized by an absence of verified or high-quality collateral, artificially low interest
rates, and lax oversight. When these loans default, the financial institutions are left with
massive asset deficits. This forces regulators to step in with costly public bailouts to
prevent complete systemic collapse.
2. Dominant Shareholder Autocracy and Weak Internal Controls
In many Nigerian financial institutions—particularly Microfinance Banks and
family-founded merchant entities—ownership concentration is extremely high. This
concentration directly breeds autocratic corporate governance. When a single individual
or family holds a majority equity stake, the board of directors often functions as a mere
rubber stamp for the founder's decisions (Central Bank of Nigeria [CBN], 2006).
Independent non-executive directors who question questionable transactions are routinely
marginalized, reassigned, or forced to resign. Consequently, statutory audit committees
and risk management frameworks are systematically neutralized, leaving no internal
check-and-balance mechanism to halt reckless executive actions before they cause
insolvency.
3. Competency Deficits and Technical Gaps
A critical flaw in the leadership architecture of many NBFIs and smaller banks is a
fundamental lack of modern technical competence. Board appointments are frequently
driven by political cronyism, ethnic considerations, or nepotism rather than technical
merit (Ajiboye, 2017). While these leaders may possess generalized business experience,
they often lack the deep analytical skills required to manage contemporary financial risks.
This includes an inability to properly evaluate advanced derivatives, structural liquidity
mismatch matrices under volatile interest rates, or complex cybersecurity landscapes.
When leadership cannot properly conceptualize these modern risk factors, their strategic
oversight fails, exposing their institutions to catastrophic operational vulnerabilities.
4. Short-Termism and Financial Statement "Window Dressing"
Corporate leaders in Nigeria face constant pressure from equity markets,
institutional investors, and parent companies to deliver high short-term returns. This
environment fosters a culture of short-termism, where executives sacrifice long-term
financial health for immediate, cosmetic performance metrics. To secure massive
performance-linked bonuses and maintain high stock valuations, executives frequently
engage in "window dressing"—an unethical practice where financial accounting entries
are systematically manipulated (Sanusi, 2010). Non-performing loans are deceitfully
reclassified as active, unearned fees are booked prematurely as revenue, and massive
liabilities are shifted off-balance-sheet. This creates a dangerous illusion of health,
masking deep capital erosion until the institution suddenly collapses into insolvency.

Behavioral and Ethical Problems

1. Strategic Default Culture among Borrowers
A severe behavioral issue damaging the asset quality of Nigerian banks is the
culture of strategic default. Unlike standard economic defaults, where a borrower
genuinely lacks the financial capacity to repay due to business failure, a strategic default
occurs when a borrower has the financial means but deliberately chooses to withhold
payment (Nigeria Deposit Insurance Corporation [NDIC], 2017). This behavior is highly
prevalent among politically exposed persons (PEPs) and wealthy corporate elites. These
borrowers exploit Nigeria's slow judicial system to evade their obligations. When banks
attempt to foreclose on collateral, these elite borrowers deploy teams of lawyers to obtain
endless court injunctions and technical delays. This leaves the debts unresolved for
decades, starving the lending institutions of vital liquidity.
2. Staff Malfeasance, Internal Collusion, and Fraud
The rising frequency of internal fraud perpetrated by bank employees highlights a
deep ethical crisis within financial institutions. Staff malfeasance spans all organizational
tiers, from frontline tellers to senior database administrators (Ugwuegbe & Odo, 2021).
Common internal fraudulent activities include direct manipulation of ledger balances,
collusion with external syndicates to execute identity theft, and bypassing digital security
tokens to skim funds from dormant accounts. The growth of digital banking has amplified
the impact of this behavioral problem. A single unethical IT officer can compromise
millions of customer accounts, causing severe financial losses and devastating the
institution's public reputation.
3. Subjective, Relationship-Driven Credit Allocation
Ideally, credit expansion should rely strictly on objective, data-driven frameworks.
These frameworks evaluate historical cash flows, audited financial statements, credit
bureau scores, and verifiable collateral values. However, the credit culture across many
Nigerian banks and NBFIs remains heavily compromised by subjective, relationship-
driven allocation practices (Ugwuegbe & Odo, 2021). Loan underwriting officers
regularly bypass strict credit bureau checks in favor of personal friendships, shared ethnic
or religious affiliations, or direct bribery and kickback agreements. Loans granted
through these compromised channels rarely undergo rigorous stress-testing, leading to a
high probability of default and structural weakness in the institution's loan portfolio.
4. Consumer Herd Behavior and Panic-Induced Bank Runs
Public trust is the core currency of any financial system. Because of Nigeria's
history of sudden bank failures and unliquidated deposits, the consumer base is highly
volatile and prone to extreme herd behavior. When a negative rumor—whether accurate
or false—circulates on social media regarding an institution’s liquidity, consumers
routinely react with immediate panic (Ajiboye, 2017). This triggers sudden, massive cash
withdrawals. Because banks operate on a fractional-reserve system, keeping only a small
percentage of total deposits as physical cash, no institution can survive a sustained, panic-
driven run. This herd behavior can push even a well-capitalized, solvent bank into an
immediate, structural liquidity crisis.

Environmental and Structural Problems

1. Macroeconomic Volatility and Monetary Policy Shocks
Nigerian financial institutions operate within a highly volatile macroeconomic
environment that constantly undermines long-term planning. The economy's heavy
dependence on crude oil exports exposes it to external price shocks, which regularly
trigger severe domestic currency devaluations and high inflation rates (PwC Nigeria,
2022). To counter high inflation, the Central Bank of Nigeria frequently raises interest
rates. This aggressive tightening spikes borrowing costs across the economy.
Consequently, existing business borrowers see their variable interest rates surge, new
credit demand drops significantly, and corporate profit margins collapse, triggering a
direct surge in system-wide Non-Performing Loans (NPLs).
2. Severe Infrastructural Deficits and High Operational Costs
Operating a financial network in Nigeria requires substantial investment in basic
infrastructure that should ideally be provided publicly. Due to the historical instability of
the national electricity grid, banks and NBFIs must power their headquarters, branch
networks, and data centers using expensive alternative energy solutions, such as high-
capacity industrial diesel generators and solar grids (PwC Nigeria, 2022). Furthermore,
unreliable commercial telecommunications infrastructure forces institutions to invest
heavily in redundant networks to maintain processing links. These heavy infrastructural
expenses significantly inflate operating ratios, leaving fewer resources available for core
product development.
3. Compromised Judicial Enforcement and Legal Loopholes
The external legal environment provides inadequate support for rapid financial
contract enforcement. Nigeria's commercial courts are overwhelmed, burdened by
outdated manual filing systems and slow procedural frameworks. As a result, standard
debt recovery litigations regularly stall in the judicial system for years (NDIC, 2017).
Delinquent borrowers exploit these legal delays by filing endless technical appeals,
effectively freezing the lender's ability to seize and liquidate mortgaged assets. This weak
legal enforcement framework reduces the real value of collateral and encourages a culture
of default, as borrowers know that the consequences of non-repayment can be postponed
indefinitely through the courts.
4. Regulatory Arbitrage and the Rapid Evolution of Fintech
The rapid growth of the financial technology (Fintech) sector in Nigeria has
created a significant regulatory gap. Agile digital lenders, mobile payment operators, and
decentralized finance applications have emerged at a pace that traditional regulatory
frameworks struggle to match (PwC Nigeria, 2022). This regulatory asymmetry allows
many fintech platforms to operate with lower capital demands and lighter compliance
oversight than traditional NBFIs and Microfinance Banks. Consequently, these
unregulated or lightly regulated entities capture market share by offering high-yield
deposits and instant microloans, diverting low-cost retail deposits away from traditional
banking institutions.
5. Regional Insecurity and Physical Operational Risks
Persistent regional insecurity poses a direct threat to financial operations across
various parts of Nigeria. Incidents such as banditry, regional disruptions, and extremist
insurgencies create severe physical risks for personnel and branch infrastructure
(Ugwuegbe & Odo, 2021). In high-risk areas, financial institutions face frequent armed
robberies targeting branches and transit vehicles, the forced closure of physical branches,
and sustained economic disruptions that destroy local commerce. These security
challenges increase insurance premiums, require heavy spending on private security
forces, and hinder financial inclusion efforts in rural and vulnerable communities.
 References
Ajiboye, O. (2017). Effective leadership practices of bank leaders in Nigeria (Publication No.
10615714) [Doctoral dissertation, Walden University]. Walden University ScholarWorks.

Central Bank of Nigeria. (2006). Code of corporate governance for banks and other financial
institutions in Nigeria. Central Bank of Nigeria Economic and Financial Review.

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs
and ownership structure. Journal of Financial Economics, 3(4), 305-360.

Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk.
Econometrica, 47(2), 263-291.

Nigeria Deposit Insurance Corporation. (2017). Determinants of bank failure in Nigeria: An

empirical investigation. NDIC Quarterly, 31(1/2), 35-51.

PwC Nigeria. (2022). Advisory outlook: ESG and the Nigerian financial sector.
PricewaterhouseCoopers Nigeria Intelligence Hub.

Sanusi, L. S. (2010). Banking sector crisis and resolution options in Nigeria. Central Bank of
Nigeria Bullion, 34(2), 1-12.

Ugwuegbe, S. U., & Odo, S. I. (2021). Bank and non-bank financial institutions and the
development of the Nigerian economy. Journal of Finance and Economic Research, 5(1), 114-
128.