Examining the Causes of the Bank Insolvency

Abstract

The decade of the nineties saw major macro-economic policies changes in the Sudan., as such Financial liberalization, deregulation, foreign exchange system freedom, price reforms, export and import liberalization, and privatization were broadly adopted. Policy reforms reached the financial and banking sectors as well and bank credit ceilings removal, free exchange system of the Sudanese currency against other currencies, promotion of banking services and encouraging the banks competition and branching. Following the implementation of the banking reforms program, the banks achieved a good of progress in terms of profits, increase of local and foreign deposits, and development in domestic finance for priority economic sectors.

Despite, the golden days of banks’ healthy and easy money, pressure was arising on banks resulting in insolvency of some bank institutions and bankruptcy of two small banks in late 90s. There were, however, difficulties in the banks’ operations to meet their immediate payments, they were in failure position. The restructuring program in the banking sector during the study period is examined and positive changes regarding this reform are outlined in form of banking infrastructure reforms, application of Basel Accord Requirements on banking regulation and capital standards, and financial market liberalization. In this research, there are attempts to examine the causes of the banking insolvency in the Sudan during the period of 1992 – 2002, the study period. The process of data collection is concentrated on the published balance sheets of the banks and annual reports prepared by the central bank of Sudan.

The financial analysis has been employed to test the bank solvency, the liquidity, capital adequacy and profitability for the banking industry in general and for individual bank bodies in particular. In this connection, the opinion of the ratios principles had stated the actual and correct position of the concerned bank. And from the rules of ratios, the banks’ balance sheets data have been used to assess the healthy of financial position for each bank. Mathematical expressions as statistic yardstick provided a measure of relationship between assets and liabilities as well as per assets or liabilities analysis separately in their forms during a period from last date. Comparison assessments were also used to assess the banks performance level. The purpose of the research had focused on examining the data through calculating the following financial ratios: 1- Ratio of liquid assets to deposits, 2- Loans to deposit ratio, 3- Capital adequacy ratio, and 4- Ratio of return on foreign operations.

The model developed by Peek and Rosengren (1995b) has been used to test the impact of required minimum capital on bank insolvency. Analysis included into the determinants of insolvency such as poor assets quality and earnings, management weakness and capital inadequacy.

In reviewing major banking losses caused by poor internal controls, and dishonoring the regulations, the research had scrutinized the reasons of two cases in insolvent banks, namely, NIMA bank and Safa bank. The collapse of these joint-owned small banks implied the following, inter alia: - The failure of the bank management to act effectively according to deregulation environment, - Regulatory changes widen competition and diversification that expose banks to new risks, - Narrow ownership structure and politician involvement, - Violation of the regulations and rules, and - Inadequate capitalization and crisis of non-performance loans.

Finally, the research conclusions and recommendations are summarized in the following points: - Earlier warnings tools, - Prompt procedure for bank insolvency, and - Recommended actions in case the bank is experiencing the solvency problems.