Determinants of Corporate Failure in Nigeria: An Examination of Microfinance Banks Using a Pragmatic Approach
DOI:
https://doi.org/10.61143/umyu-jafr.3(1)2022.001Keywords:
Corporate Failure, Inadequate Capital, Management inefficiencyAbstract
Microfinance banks in Nigeria were created in 2005 to provide credit facilities to the economically active rural dwellers, low-income earners and so on. However, some few years after their creation, some of them started experiencing corporate failure which consequently resulted to some been closed down and their licenses revoked by the central bank of Nigeria (CBN). The objective of the research is to establish whether or not inadequate capital, poor asset quality, management inefficiency, poor earnings ability and illiquidity are determinants of Microfinance banks failure in Nigeria. This study is aligned with the pragmatic paradigm or mixed approach philosophy. In this regard the research combines the constructivism and post positivism philosophies. The mixed design adopted is exploratory sequential and the research method is interpretive and post action cross sectional case study. The research used both primary and secondary sources of data, semi structured interview and ratios were the technique used for data collection and extraction. Explicitation, panel logit and corrected standard error multiple regressions were employed as the techniques of analysis. The finding on inadequate capital was significant at <5%. The study concludes that inadequate capital is significantly a determinant of failure of microfinance banks in Nigerian. This implies that the CBN policy on mandating microfinance banks to shore up their capital base by meeting their peculiar capital requirement by April 2021 and April 2022 is adequate and in the right direction. The study strongly recommends that CBN should sanction banks that could not meet the deadline of April 2021 and April 2022 on minimum capital requirement as this will make banks have adequate capital.
Metrics
References
Adesina, K. S. (2012). A comparative performance evaluation of the Nigerian banking sector in the post - 2005 consolidation through the camel rating system. International Journal of Business and Social Science, 3(13), 259-268.
Ado, A.B., Rashid, N., Mustapha, U. A., & Ademola, L.S. (2020). The financial determinants of earnings management and the profitability of listed companies in Nigeria. Journal of Critical Reviews 7(9), 31-36. https://doi.org/10.31838/jcr.07.09.06
Adnan, M. A., & Dar, H.A. (2006). Predicting corporate bankruptcy: where we stand? Corporate Governance, 6(1), 18-33. https://doi.org/10.1108/14720700610649436
Ailemen, I.O., Taiwo J.N., & Areghan, I. (2016). Microfinance (Mf) and Poverty Alleviation In Southwest Nigeria: Empirical Evidence. Journal of South African Business Research http://www.ibimapublishing.com/journals/JSABR/jsabr.html DOI: 10.5171/2016.137638
Aliero, H.M., & Ache, P. (2017). Determinants of bank failure in Nigeria: an empirical investigation. NDIC Quarterly_Q1_Q2.www.ndic.org.ng
Aliela, J., & Miroga , J. (2019). Effects of capital adequacy on financial distress in commercial banks in Kenya. The Strategic Journal of Business & Change Management, 6 (2), 2128 - 2137. https://doi.org/10.61426/sjbcm.v6i2.1244
Alhassan, A.L Kyereboah-Coleman, A., & Andoh, C. (2014). Asset quality in a crisis period: An empirical examination of Ghanaian banks. Review of Development Finance 4 (8) 50-62. https://doi.org/10.1016/j.rdf.2014.03.001
Altman, E.I. (2006). Corporate financial distress and bankruptcy: Predict and avoid bankruptcy, analyses and invest in distress Debt (3rd Ed). New York (NY): John Wiley and Sons. https://doi.org/10.1002/9781118267806
Altman, E. I. (1970). Ratio analysis and the prediction of firm failure: A reply. The Journal of Finance, 25(5), 1169-1172. https://doi.org/10.1111/j.1540-6261.1970.tb00880.x
Altman, E. I. (1984). The success of business failure prediction models: An international survey. Journal of Banking and Finance, 8(2), 171-198. https://doi.org/10.1016/0378-4266(84)90003-7
Alostaz, A.O. (2015). Predicting corporate failure using cash flow statement based measures: An empirical study on the listed companies in the Palestine exchange. Being a Master of Business Administration Thesis submitted to the Islamic University of Gaza, Palestine.
Amendola, A., Bisogno, M., Restaino, M., & Sensini, L. (2011). Forecasting corporate bankruptcy: Empirical evidence on Italian data. Euro Med Journal of Business, 6(3), 294 312.
Aspal, P.K., & Nazneen, A. (2014). An empirical analysis of capital adequacy in the Indian private sector banks. American Journal of Research Communication, 2(11), 28-42.
Ayunku, P.E., & Uzochukwu, A. (2020). Agency cost and credit risk management: Empirical evidence from listed commercial banks in Nigeria. Asian Journal of Economics, Business and Accounting, 17(2), 1-17. https://doi.org/10.9734/ajeba/2020/v17i230254
Baimwera B., & Muriuki, A.M. (2014). Analysis of corporate financial distress determinants: A survey of non-financial firms listed in the NSE. International Journal of Current Business and Social Sciences 1(2), 58-80.
Bala, H., & Ibrahim, I. (2014). Monitoring characteristics and financial reporting quality of listed conglomerates firms in Nigeria. KASU Journal of Accounting Research and Practice, 3(2), 75-93.
Beaver, W. H. (1966). Financial ratios as predictors of failure. Journal of Accounting, 4(3), 71-111. https://doi.org/10.2307/2490171
Berger, A. N., Herring, R.J., & Szegö, G.P. (1995).The role of capital in financial institutions. Wharton 19, 50-90. https://doi.org/10.1016/0378-4266(95)00002-X
Bhandari, S., & Iyer, R. (2013). Predicting business failure using cash flow statement based measures. Managerial Finance Journal, 39(7), 667-676. https://doi.org/10.1108/03074351311323455
Boateng, G. O., Boateng, A. A., & Bampoe, H. S. (2015). Microfinance and poverty reduction in Ghana: Evidence from policy beneficiaries. Review of Business & Finance Studies, 6(1), 99-108.
Boyd, C.O. (2001). Phenomenology the method. In P.L. Munhall (Ed.), Nursing research: A qualitative perspective (3rd. ed., pp. 93-122). Sudbury, MA: Jones and Bartlett.
Carlisle, H. M. (1973) Situational management. Amacom, New York.
CBN (2008, 2010, 2011, 2015, 2017 and 2019) Report on Microfinance Banks.www.cbn.org.ng
Charitou, A., Neophytou, E., & Charalambous, C. (2004). Predicting corporate failure: empirical evidence for the UK. European Accounting Review Journal, 13(3), 465-497.
Creswell, J. W. (1998). Qualitative inquiry and research design: Choosing among five traditions. Thousand Oaks, CA: Sage.
Danilov, K. (2014). Corporate bankruptcy: Assessment, analysis and prediction of financial distress, insolvency, and failure. Being a Master Thesis Submitted to the MIT Sloan School of Management, USA. https://doi.org/10.2139/ssrn.2467580
Diete-Spiff, J.A. (2015). Determining sustainable strategies for directors of microfinance banks in Nigeria. Being a PhD Business administration dissertation submitted to the Walden University. UMYU Journal of Accounting and Finance Research VOL. 3 NO. 1 Jane, 2022 pg. 24
Dikmen, I. l., Birgonul, M. T., Ozorhon, B., & Sapci, N. E. (2010). Using analytic network process to assess Business failure risks of construction firms. Engineering, Construction and Architectural Management, 17(4), 369-386. https://doi.org/10.1108/09699981011056574
Dzeawuni , W. A. & Tanko, M. (2008). Camels and banks performance evaluation: The way forward. Working Paper.http://ssrn.com/abstract=1150968. https://doi.org/10.2139/ssrn.1150968
Echekoba, F.N., Egbunike, C. F. & Ezu, G. K. (2014). Determinants of bank profitability in Nigeria: Using Camel rating model. Journal of Business and Management, 16(9), 44-50. https://doi.org/10.9790/487X-16964450
Edewusi, D.G., Adeleke, K.O., & Adekanmbi, K. O. (2020). Effect of liquidity risk management on bank performance in Nigeria. International Journal of Economics, Commerce and Management, VIII(8), 221-238.
Folajimi, A.F., & Dare, O.E (2020).Credit risk and financial performance: an empirical study of deposit money banks in Nigeria. European Journal of Accounting, Auditing and Finance Research, 8(2), 38-58. https://doi.org/10.37745/ejaafr/vol8.no2.pp38-58.2020
Garba, A. (2019). Effect of microfinance banks on the growth of selected small and medium scale enterprises in Makurdi metropolis, Benue state. Journal of Advance Research in Business Management and Accounting, 5(7), 1-23. https://doi.org/10.53555/nnbma.v5i7.784
Gathecha, J.W. (2016). Effect of firm characteristics on financial distress of non-financial listed firms at Nairobi Securities Exchange. Doctoral dissertation submitted to the University of Kenyatta, Kenya.
Gaus, C.F. (1829). Principia generalia theoriae figurae fluidorum in statu aequilibrii. Die vier gauss"chen beweise. OK (14), 1890.
Getahun, M. (2015).Analyzing financial performance of commercial banks in Ethiopia: CAMEL Approach. Thesis submitted to Adis Ababa University, Ethiopia.
Groenewald, T and Schurink, W. (2003). The contribution of co-operative education in the growing of talent in south Africa: A qualitative phenomenological exploration. SA Journal of Human Resource Management, 1 (3), 93-104. https://doi.org/10.4102/sajhrm.v1i3.26
Gujarati, D. N., & Porter, D. C. (2009). Basic econometrics (5th ed.). New York: Douglas Reiner
Gujarati, D. N., (1995) Basic econometrics, 4th edition, oxford university press
Hannan, M.T., & Freeman, J. (1984). Structural inertia and organizational change. American Sociological Review, 49(2), 149-164. https://doi.org/10.2307/2095567
Hycner, R. H. (1999). Some guidelines for the phenomenological analysis of interview data. In A. Bryman & R. .G. Burgess (Eds.), Qualitative research (Vol. 3, pp. 143-164). London: Sage
Jankowicz, A.D. (2005). Business Research Projects. London: International Thomson Business Press 4th edition.
Johnny, N., & Ayunku, P.E. (2019). An empirical analysis of effect of capital structure on firm performance: evidence from microfinance banks in Nigeria. European Journal of Accounting, Auditing and Finance Research 7(9), 30-44.
Kamaruddin, B.H & Mohd, R (2013). Camel analysis of Islamic banking and conventional banking in Malaysia. Business and Management Quarterly Review, 4(3), 81-89.
Kandel, S (2019) Analysis of financial performance of commercial banks of Nepal using camel approach. IEEE-SEM, 10(6), 210-237.
Kazemian S., Shauri, N.A.A., Sanusi, Z.M., Kamaluddin, A., & Shuhidan, S.M. (2017). Monitoring mechanisms and financial distress of public listed companies in Malaysia. Journal of International Studies 10(1), 92-109. https://doi.org/10.14254/2071-8330.2017/10-1/6
Kenneth, U. O. & Adeniyi, A. M. (2014). Prediction of bank failure using camel and market Information: Comparative appraisal of some selected banks in Nigeria. Research Journal of Finance and Accounting, 5(3), 1-17.
Khan, M.M., Bhavana, A., & Raj, K.B. (2020). Liquidity-profitability analysis & prediction of bankruptcy- a study of select telecom companies. Journal of Critical Reviews 7(3), 308-316. UMYU Journal of Accounting and Finance Research VOL. 3 NO. 1 Jane, 2022 pg. 26
King, N. (1994). The qualitative research interview. In Cassell, C. & Symon, G. (eds.) (1994). Qualitative methods in organisational research, a practical guide. London: Sage.
Udoh, F. (2012). Why microfinance banks failed in their role as grassroots economic developers. Leadership Newspaper.www.leadershipnews.org. Accessed February, 2022.
Lawan, S.A., Falchrul, A.Z., & Mohammed, S.A. (2015). Lingering challenges of microfinance institutions (MFIs) and the way forward. International Journal of Academic Research in Economics and Management Sciences, 4(3), 31 - 37.
Liu, Z.J., & Wang, Y.S. (2016).Corporate failure prediction models for advanced research in china: identifying the optimal cut off point Asian Economic and Financial Review, 6(1), 54-65. https://doi.org/10.18488/journal.aefr/2016.6.1/102.1.54.65
Lotto, J. (2018). The empirical analysis of the impact of bank capital regulations on operating efficiency. International Journal of Financial Studies, 6(34), 1-11. https://doi.org/10.3390/ijfs6020034
Love, P., Matthews, J., Simpson, I., Hill, A., & Olatunji, O. (2014). A benefit realization management building information modeling framework for asset owners. Automation in Construction, 37(1), 1-10. https://doi.org/10.1016/j.autcon.2013.09.007
Manukaji, I. (2018). Corporate governance and income smoothing in the Nigerian deposit money banks. International Journal of Business & Law Research 6(1), 27-38 .
Martin (1977) Early warning of bank failure: A logit regression approach. Journal of Banking and Finance, 1(1), 249-276. https://doi.org/10.1016/0378-4266(77)90022-X
Mazouz, A., Crane, K., & Gambre, P. (2012). The impact of cash flow on business failure analysis and prediction. International Journal of Business, Accounting, and Finance, 6(2), 68-81.
Merton, R.C. (1974). On the pricing of corporate debt: The risk structure of interest rates. The Journal of Finance 29(2):449-470. https://doi.org/10.1111/j.1540-6261.1974.tb03058.x
Mishra, S. & Aspal, P. (2012). A CAMEL model analysis of state bank group. Electronic copy available at: http://ssrn.com/abstract=2177099 Accessed, October, 2020. https://doi.org/10.2139/ssrn.2177081
Munangi, E., & Sibindi, A.B. (2020).An empirical analysis of the impact of credit risk on the financial performance of South African banks. Academy of Accounting and Financial Studies, Journal 24(3), 1-20.
Moustakas, C. (1994). Phenomenological research methods. Thousand Oaks: Sage. https://doi.org/10.4135/9781412995658
Obasi, N.J., Chukwuka, O.I., & Akwawa, U.A. (2014). Impact of microfinance lending on economic growth of third world nations: study of Nigeria. International journal of business, economics and management, 1(8), 201-2015.
Obeten, O. I., & Ocheni, S. (2014). Empirical study of the impact of corporate governance on the performance of financial institutions in Nigeria. Journal of Good Governance and Sustainable Development in Africa, 2(2), 57-73.
Ogundipe, A.S., Akintola, A.F., & Olaoye, S.A. (2020). Interest rates and loan performance of deposit money banks in Nigeria. EPRA International Journal of Economic and Business Review, 8(1), 13-24. https://doi.org/10.36713/epra3014
Ohslan, J.A. (1980) Financial ratios and probabilistic predictions of bankruptcy. Journal of Accounting Research (Spring), 101-131.
Okezie, B. (2019) Microfinance challenges in Nigeria. Daily Trust News Paper.www.dailytrustnews.org. Accessed February, 2022.
Olalekan, A., & Adeyinka, S. (2013).Capital adequacy and banks' profitability: an empirical evidence from Nigeria, American International Journal of Contemporary Research, 3(10), 87-98.
Olarewaju, O.M & Akande, J.O (2016). An empirical analysis of capital adequacy determinants in Nigerian banking sector. International Journal of Economics and Finance 8(12), 132-142. https://doi.org/10.5539/ijef.v8n12p132
Oloruntoba, O., Olabamiji, O., & Kunle, A. M. (2018). Microfinance banks and financial inclusion: Empirical investigation of women entrepreneurs in Kwara State, Nigeria. International Journal of Innovative Finance and Economics Research 6(1), 50-59. https://doi.org/10.9734/ARJASS/2018/39811
Olowe, F.T., Moradeyo O.A., & Babalola, O.A. (2013). Empirical study of the impact of
microfinance bank on small and medium growth in Nigeria. International Journal of Academic Research in Economics and Management Science, 2(6), 22-35.
Owusu, A. G. (2012). Using CAMEL rating system to assess the performance of local and foreign banks in Ghana. Thesis submitted to Faculty of Engineering and Computing, Coventry University.
Paul, G.D, Ebelechukwu, E.C., &Yakubu, S. (2015). Impact of corporate governance on
financial performance of microfinance banks in North central Nigeria. International Journal of Humanities Social Sciences and Education (IJHSSE) 2(1), PP 153-170.
Pitera, R. (2018). Evaluation of the reliability of selected discriminatory methods in assessing the financial condition of an enterprise. A n n a l e s U n i v e r s i tat i s M a r i a e c u r i e - S k ł o d o w s k a Lublin - Polonia vol. lii, 5 section
Purnanandam, A. (2008). Financial distress and corporate risk management theory and evidence. Journal of Financial Economics, 87, 706-39. https://doi.org/10.1016/j.jfineco.2007.04.003
Rai, E. (2010). A study of CAMEL analysis of commercial banks in Nepal. Thesis submitted to Tribhuvan University, Nepal.
Rudolf, D. (2009). Managing liquidity in banks: A top down approach. John Wiley and Son
Sangmi, M., & Nazir, T. (2010). Analyzing financial performance of commercial banks in India: Application of CAMEL Model. Pakistan Journal of Commerce and Social Sciences, 4 (1): 40-55.
Sanni, Salami, & Uthman, (2020). Determinants of bank performance in Nigeria: do they behave differently with risk-adjusted returns? Studia Universitatis "Vasile Goldis" Arad. Economics Series, 30(3), 1-30. https://doi.org/10.2478/sues-2020-0015
Shetima, U and Dzolkarnaini, N. (2017). Board characteristics and microfinance institutions" performance: Panel data evidence from Nigeria.
https://www.napier.ac.uk/~/media/worktribe/output-1149126/board-characteristics-and-microfinance-institutions-performance.pdf. Accessed November, 2020.
Smith, M., (1983).Sampling consideration in evaluating cooperative extension in program.
Sporta, F. (2018).The distressing effect of non-performing assets to asset quality for commercial banks in Kenya. International Journal of Innovation and Economic Development, 3(6), 71-83. https://doi.org/10.18775/ijied.1849-7551-7020.2015.36.2006
Stiglitz, J.E & Wiess, A. (1981). Credit rationing in markets with imperfect information, part II: A theory of contingency contracts, mimeo, Bell laboratories and Princeton Univ.
Tremblay, M.A. (1982). "The key informant technique: a non-ethnographic application." In Burgess, R. (ed.) Field Research: A Sourcebook and Field Manual. London: Allen and Unwin.
Tunji, S.T., Ifeanyi, O.P., Chibuzo, O.O., & Adeleye, O. R. (2019). Corporate governance and reported earning quality in deposit money banks in Nigeria. International Journal of Business and Management Review, 7(5), 26-37.
Uchenna, O.L., Adedayo, E.O., Ahmed, A & Isibor, A (2016). Corporate governance and financial sustainability of microfinance institutions in Nigeria proceedings of the 29th IBIMA conference on sustainable economic growth, education excellence, and innovation management through Vision 2020, covenant university, ota, Nigeria, pp. 4035-4045.
Umoru, D., & Osemwegie, J.O. (2016).Capital adequacy and financial performance of banks in Nigeria: Empirical evidence based on the FGLS estimator. European Scientific Journal, 12(25), 23-35. https://doi.org/10.19044/esj.2016.v12n25p295
Veganzones, D., & Severin, E. (2019). Corporate failure prediction models in the twenty-first century: a review. https://www.emerald.com/insight/0955-534X.htm
Vuran, B. (2009). Prediction of business failure: A comparison of discriminant and logistic
regression analyses. Istanbul University Journal of the School of Business Administration, 38(1), 47-65.
Wachukwu I.P, Onyema J.I, & Amadi, S.N. (2018). Effects of microfinance banks and economic growth in Nigeria. Journal of finance and Marketing, 3(1), 12-25.
Williams, H. T. (2011). Determinants of capital adequacy in the banking sub-sector of the Nigeria economy: Efficacy of camels. (A model specification with co-integration analysis). International Journal of Academic Research in Business and Social Sciences, 1(3), 233-248. https://doi.org/10.6007/ijarbss.v1i2.36
Yuksel, S., Dincer, H. & Hacioglu, U. (2015). CAMELS-based determinants for the credit rating of Turkish deposit banks. International Journal of Finance and Banking Studies, 4 (4), 1-17. https://doi.org/10.20525/ijfbs.v4i4.35
Yunusa, A., Oyindamola, O. E., & Orshi, T.S. (2019).The determinants of survival of listed
deposit money banks (DMBs) in Nigeria. https://ndic.gov.ng/wpcontent/uploads/2020/03/NDIC-Quarterly-Q1-and-Q2-2019-Article-The-Determinants-of-Survival-of-Listed-Deposit-Money-Banks-DMBs-in-Nigeria.pdf UMYU Journal of Accounting and Finance Research VOL. 3 NO. 1 Jane, 2022 pg. 31
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2023 UMYU Journal of Accounting and Finance Research
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
