ABSTRACT
The pervasive problem of distress in the banking sector in Nigeria in recent years requires the development of a cost effective, reliable and quick technique for predicting potential failures. Although several studies on distress in the banking sector in Nigeria has been carried out, most of them were limited to causes and efficacy of distress rather than predictability. The objectives of this study were to test the predictability of corporate
bankruptcy prior to occurrence by applying Edward I. Altman's Multiple Discriminant Analysis (MDA) and to make recommendation based on the
findings.
In carrying out the study, a random sample of 29 banks in Nigeria were selected without bias or stratification. From data obtained in the banks financial
statements, Z- scores for the period 1989-94 were calculated using the Microfost Excel Computer Software. The results showed that Z - scores for the selected banks ranged from 0.0768- 0.4020. Comparing these Z- scores with Altman's minimum of 2.99 for nonbankruptcy and below 1.8 for bankruptcy, all the banks in Nigeria could be classified as bankrupt. The discrimination amongst banks may only be in terms of extent of the distress. This finding confirms and justifies the recent directive by the Federal Government for banks to raise their paid-up share capital to at least N500 million by the end of 1998.
The results showed that there are early warning signals that can be detected from readily available data to predict fairly accurately, the prospect of
bankruptcy and these signals can lead to timely intervention to avert the prospect of bankruptcy.
