EFFECT OF TWENTY-FIVE BILLION NAIRA RECAPITALISATION OF BANKS IN NIGERIA ON LOAN SYNDICATION (A CASE STUDY OF FIRST BANK, GUARANTY TRUST BANK AND SKYE BANK ABUJA BRANCH)

TABLE OF CONTENTS

          Title Page                                                                                Page

TITLE PAGE                                                                                            

CERTIFICATION                                                                                     

DEDICATION                                                                                 

ACKNOWLEDGEMENT                                                                         

ABSTRACT                                                                                              

TABLE OF CONTENTS                                                                          

CHAPTER ONE

1.0     Introduction                                                                                     

1.1     Historical Background                                                           

1.2     Purpose of Study                                                                   

1.3     Significance of Study                                                                       

1.4     Statement of Problem                                                                      

1.5     Scope and Limitations of Study                                                       

1.6     Research Hypothesis                                                                       

1.7     Research Methodology                                                           

CHAPTER TWO

2.0     Literature Review                                                                   

2.1     The Role of Banking Industry                                                          

2.2     Historical Background                                                           

2.3     Review of Previous Work                                                      

2.4     Review of Related Literature                                        

2.5     The Impact of the Research                                                    

CHAPTER THREE

3.0     Research Design                                                                               

3.1     Study Population                                                                   

3.2     Methods of Data Collection                                                             

3.3     Characteristics of Study Population                                       

3.4     Research Instrument Specification                                         

3.5     Method of Analysis                                                                

CHAPTER FOUR

4.0     Introduction                                                                           

4.1     Data Analysis and Presentation                                             

4.2     Test of Hypothesis                                                                 

CHAPTER FIVE

5.0     Summary, Conclusion and Recommendation                         

5.1     Summary                                                                                

5.2     Conclusion                                                                    

5.3     Recommendations                                                                  

BIBLIOGRAPHY                                                                  

APPENDIXES                                                                       

QUESTIONNAIRE                                                                

        CHAPTER ONE

          INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The potential crisis that is looming in the Nigerian banking industry can no longer wait to be addressed other than what could be witnessed in the revolutionary instance taking by Prof. Charles Soludo, directives on the N25b capitalization base for banks who wish to operates in Nigeria Economy.

In addressing the financial institutions, he maintained that, the directive is part of a series of reforms to get the banking sector in the modern proper shape, to have banking system “where people can afford to put their money and go to sleep”, where investors can rely on banking sector to provide long term credit and to develop a banking sector that can respond to demands of globalization for global competitiveness. Fundamentally, it is designed to prevent potential systematic crisis that is looming in the banking sector where you have 89 banks all of which put together happening to be less than one bank in South Africa, where the most capitalized bank in Nigeria has less than 50 percent of the capital base on the least capitalized bank in Malaysia; where indeed none of our bank is big enough to be able to transform the economy.

According to Soludo( 2006), among the 89 banks we almost cannot count on your fingertips, how many of them are really involved in the real act of banking, he described most of the banks as traders who just collect banking license, use connection to get public sector deposit, trade in government treasury bills, trade in foreign exchange and open letters of credit in the Nigeria economy. We have a weak banking system where nobody can put his money and go to sleep and that is why confidence in the system is impaired.

Considering banking sector as the life wire of economic growth and development of any economy, what is obtained presently is a back drop, hence N25b capitalization is needed to sanitize the industry particularly the entire economy of Nigeria.

  According to DoyinOdunfa (2005) Said during the unveiling of this year’s web-jurist rating for the financial services sector that 25billion naira capitalization would create several opportunities and hamess banks potentials and capitalization to drive e-banking in Nigeria.

1.2     STATEMENT OF RESEARCH PROBLEM

The statement of problem in question here, formed to enhance a clear articulation. This image is built up by information about the company while information is also centred on dividend payout, earnings announcement and management potentials. The questions awaiting instant answer are:

·                    What are the effects of N25b capitalization on Nigeria financial institutions.

·                    What meaningful choice of option were available (whether merger or acquisition) and its effect on employees and ownership control.

·                    What effect has this capitalization depict on the consumers of the services rendered by the banking sector.

1.3      RESEARCH OBJETIVE

The purpose of this study is to attempt to answer questions raised in the statement of the problem of this research work. Such includes:

a.       To examine and assess the ability of the new regulation and to sanitize the banking sector of the economy.

b.       To identify the various effects and measures of performance evaluation on customers, employees and the bank as a whole.

c.       To carry out a detailed performance evaluation of the selected case study.

d.       Recommending viable solutions to these problems and prospects.

The study is also expected to determine the effects and impact of N25b Capitalization on Banking Industry in Nigeria. It will be of great help to the economic planners, academicians for future review, mostly banking executives and top-management of banks and statutory agencies governing and regulating the institutions.

1.4          RESEARCH QUESTION

The importance of research question is to guide the researcher on the specific methods and the procedures for acquiring information needed to structure or solve the problem under consideration. The method of collecting data for this research was through primary and secondary sources of data collection. The primary sources were through questionnaires given to some of the staff of the case study organizations and personnel interviewed while secondary sources were through documented literature such as CBN annual report, NDIC annual report, financial dailies, seminar papers, journals and textbooks.

1.5     RESEARCH HYPOTHESIS

This study will seek the following answer for the question:

H0:   The twenty five (25) Billion naira capitalization does  not have effect in the banking industry in Nigeria.

H1:   The twenty five (25) Billion naira capitalization will have effect in banking industry in Nigeria.

H0:   The twenty five (25) Billion naira capitalization will not have impact on loan syndication of Banks.

H1:   The twenty five(25) Billion naira capitalization will have impact on loan syndication of Banks.

H0:   The twenty five (25) Billion naira capitalization will not help to build customers confidence in the banks.

Hl:    The twenty five (25) Billion naira capitalization will help to build customers confidences in the banks.

H0:   The twenty five (25) Billion naira capitalization will not improve the services of the banks.

Hl:    The twenty five (25) Billion naira capitalization will improve the service of the banks.

1.6     SIGNIFICANCE OF THE STUDY

The significance of this study cannot be over-emphasized, owing to the fact that the banking industry plays a significant role in the economy. Most studies have dealt with profitability and social responsibility as the sole determinants of the performance of the banking industry; few have included other variables like leverage and managerial quality. It is commonly assumed that the Nigerian investors are dividend conscious, therefore, when a company is not paying dividend as at when due, there is tendency for investors to sell such equity. Furthermore, the ability of companies to raise funds from the capital market and the quantum of funds raised is a function of the image of the company in the eyes of the investing public.

1.7     SCOPE AND LIMITATION OF THE STUDY

Undertaking a project work of this nature is no doubt a herculean task that needs sufficient time and patience, funds and adequate material, commitment and concentration. However, some of these requisites and other factors combined to mitigate against the success of this project. In this research work, we have examined thoroughly the effects of N25b Capitalization of Banking Industry on loan syndication while proffering some recommendations.

The major constraint envisaged would be that of laying hands on relevant data and information on the banks and the dearth of adequate record of transactions and their inability to make available their annual year report on time for compilation to the apex bank and relevant authorities. Due to financial constraints, limited time amongst others, the research is limited to three banks, First Bank of Nigeria Plc., Guaranty Trust bank and Skye bank Plc. All in Abuja branch. Comments, opinions from questionnaires and excerpt from Central Bank of Nigeria (CBN) annual report, financial dailies, journals and textbooks were also utilized.

1.8SHORT HISTORICAL BACKGROUND OF THE BANKS.

First Bank of Nigeria Plc. was incorporated as a limited liability company on March 31st, 1894, with Head office in Liverpool by Sir, Alfred Jones, a shipping magnate. It started business in the office of Elder Dempster& Company in Lagos under the corporate name of the Bank for British West Africa (BBWA) with a paid up capital of 12,000 pounds sterling, after absorbing its predecessor, the African Banking Corporation, which was established earlier in 1892. In its early years of operations, the bank recorded an impressive growth and worked closely with the Colonial Government in performing the traditional functions of a central Bank, such as issue of specie in the West African Sub-region.

To justify its West African coverage, a branch was opened in Accra, Ghana in 1896 and another in Freetown, Sierra Leone in 1898. These marked the genesis of the Bank’s internationals banking operations. The second branch of the bank in Nigeria was in the old Calabar in 1900 and two year later, services were extended to Northern Nigeria.

To reposition and take advantage of opportunities in the changing environment, the bank had at various times embarked on restructuring initiatives. In 1957, it changed its name from Bank of British West Africa to Bank of West Africa.

In 1969, the bank was incorporated locally as the standard Bank of Nigeria limited in line with the companies Decree of 1968. Changes in the name of the bank also occurred in 1979 and 1991, to First Bank of Nigeria Limited and First Bank of Nigeria Plc., respectively. In 1985, the Bank introduced a decentralized structure with five regional administrations.

First Bank got listed on the Nigerian Stock Exchange (NSE) in March 1971, and has won the NSE president’s Merit Award eleven times for the best financial report in the banking sector.

In 2002, the bank established the first off shore financial subsidiary of a Nigerian owned bank in the UK and in 2005 acquired two banks – MBC

International bank ltd & FBN (Merchant Banker) Ltd

In 2007 floated first ever hybrid capital offering out of Africa (www.first bank Nigeria.com)

The origins of Skye Bank date back to 1989 when Prudent Bank Plc., was incorporated as a limited liability company. In 1990, the bank was issued a license as merchant bank. That same year, it rebranded as Prudent Merchant Bank Limited. In 2006, Prudent Merchant Bank Limited merged with four other banks to form Skye Bank Plc.:

▪ EIB International Bank Plc.

▪ Bond Bank Limited

▪ Reliance Bank Limited

▪ Co-operative Bank Plc.

In January 2011, the bank introduced a Naira-denominated MasterCard debit card, called "MasterCard Verve", the first of its kind in Nigeria. The bank also offers Internet banking and mobile banking.[3]

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Subsidiaries

As of February 2011, Skye Bank Plc. maintains the following subsidiaries:[4]

1. Skye Mortgage Bankers Limited - Paid up share capital of US$6.42 million (NGN:1 billion)

2. Skye Stockbrokers Limited - Dealing member at Nigerian Stock Exchange (NSE)

3. Law Union and Rock Insurance Plc. - 51.95% shareholding in 2007

4. Apex Integrated Technologies Limited - IT Solutions Company

5. Skye Trustees Limited - Licensed by the Securities and Exchange Commission (SEC) to function as a Trustee and Funds Manager in the capital market.

6. Skye Financial Services - Paid up capital of US$12.84 million (NGN:2 billion). Asset management, corporate finance and securities underwriting

7. Skye Bank Sierra Leone Limited - 95% shareholding by Skye Bank Plc. 5% owned by Sierra Leonean investors. Paid up capital of US$3.1 million (SLL:13.85 billion) in 2008.

8. Skye Bank Gambia - Paid up capital of US$3.1 million (GMD:87.8 million) in 2008.

9. Skye Bank Guinea - Opened in April 2010.[5]

OWNERSHIP

The shares of stock of Skye Bank Plc. are listed on the Nigerian Stock Exchange, where they trade under the symbol: SKYBANK. The detailed shareholding in the bank is not publicly available at the moment.

Guaranty Trust Bank Limited was incorporated and has been in operation in the Commonwealth of The Bahamas since 15th January 1962 and is one of the country's oldest established Banks.

The Bank, which is an entirely independent corporate entity, both legally and practically, has established particularly effective relations with a significant number of companies and individuals worldwide, thus providing for a continuing flow of business and investment opportunities for the Bank and its clients.

The Bank employs a dedicated staff of qualified professionals with the necessary quality technical expertise in all practice and support areas, including accounting, legal, banking, trust, compliance and financial due diligence.

The majority of staff has been with the Bank, on average, over 15 years.

The Bank also has longstanding, professional relationships with banking, accounting and legal firms in other financial centres and in the major world cities

1.9 DEFINITION OF TERMS

In a study like this it is necessary to define at the beginning those terms and concepts that will be used in the study to avoid ambiguities. For the purpose of this, terms like business, industry, firm, and enterprises are used inter changeably. So also is bank and financial institution. Others are distress and failure or bank-run, Capitalization and Recapitalization.

i. ASSETS: These are properties of a business and its stock in trade or its stock of goods at any particular time.

ii. ACCEPTANCE HOUSE: These are financial institutions that specialize in the grants of acceptance facilities.

iii. BANK: Sec 2 and 61 of(BOFID) 1991 defines a bank as; "A duly incorporated company in Nigeria holding a valid banking license to receive deposit on current account, savings account or other similar accounts, paying or collecting cheques drawn by or paid in by customers. Provision of finance or such other business as the government may order to publish in the gazette designated as banking business.

iv.TO MARQUADUS: Banking is signified by certain kind of dealings in money, approved by the state accordingly by which money is deposited with the bankers for the benefit of the depositor, so that the ownership of the money passes to them, and so that the creditors (i.e. depositors) get security; and the debtors (i.e. the bankers) get advantage. The condition is however implied that the depositor may whenever he pleases demand the money he deposited. Therefore a bank can simply be said to be an establishment where money is deposited in accounts, withdrawn and borrowed.

v. BOFID: Banks and other financial institution decree.

vi. CAPITAL: This refers to the sum invested in a business. It is also seen or used in business by a person, corporation, government etc. Capital can also be referred to as the net worth of a business; amount by which the assets exceed the liabilities.

vii. CAPITAL BASE: The total sum value of amount invested in a business.

viiiCAPITAL MARKET: The market for sale of Securities. It is also refer to as a market where investment instruments mostly in monetary forms are exchanged either through long, short or medium term agreements.

ixCAPITALIZE: Convert into capital.

x.DISTRESSED BANKS: These are banks with problems relating to liquidity, poor marginal or total earnings and non-performing assets. The climax of it is that it could be a condition of insolvency, which implies inability to pay debtors or meet maturity obligations as they fall due.

xi. FIXED INTEREST PAYMENT OR FIXED REDEMPTION: These are investments that already have a fixed duration and interest rate.

xii. HOLDING ACTION: This refers to condition prescribed by Central Bank for the turn-around of distressed banks.

xiiiINFLATION: A rise in the average price level of goods and services.

xiv. LIABILITY: This is what a business owe to outsiders.

xv.LIQUIDATION: To put a firm out of business or stop its operations dueto insolvency.

xvi. LIQUIDITY: Money or near money (e.g. Bank drafts).

xvii. MERGER: The combination of two or more companies in which one firm survive as a legal entity.

xviii. OPEN MARKET OPERATION (OMO): This is the sales and buying of

Government bonds in the market. The market consists of commercial banks and the public.

xix. PAID UP CAPITAL: The amount subscribed in a company share capital.

xx. RECAPITALISATION: Review of the require minimum capital and the process of adapting to the new requirement. It is also defined as the enhancement and restructuring of the financial resources of an organization with a view to enlarging the long term fund available to the organization.

xxi. LOAN SYNDICATION: This is an inter-bank relationship and facilities in carrying on a common interest in financing a project.

xxii. RETURN ON INVESTMENT (ROT): Gain received from money put into a business.

xxiii. SPECIAL DRAWING RIGHTS (SDR):- This is a device for increasing international liquidity to member nations of IMF. This was introduced in 1969. They are assets which are to be issued (i.e. created like commercial banks deposits) only by IMF. They are not to be regarded as borrowings from the fund, but are meant to supplement gold and convertible currency and so form part of members reserves.

xxiv. SHARE CAPITAL:- The value of a company's capital contributed by its owners.

xxv. STOCK EXCHANGE:- Market for the issue and sale of new securities.

xxvi. PRUDENTIAL GUIDELINES:- These are guidelines and practices which all licensed banks are required to adhere to in reviewing and reporting their performance, particularly in the areas of credit portfolio classification and disclosure, provision for non-performing facilities, interest accruals, classification of other assets and off balance sheet engagement.

xxvii. TAKE OVER: - the acquisitions of another company which may (from the viewpoint of the acquired firm’s management) take the form of a "friendly" or "unfriendly" merger.

xxviii. SECURITY OWNERSHIP: - This is creditor interest in an organization

Evidenced by a certificate.

xxix. CAPITAL ADEQUACY RATIO: - this is defined as the total qualified

Capital to total risk weighted assets. The ratio is an indicator of appropriate level of capitalization of a bank.

xxx. LIQUIDITY RATIO: This is defined as the ratio of total specified liquid

Assets to total current liabilities and reflects the liquidity position of a bank.

xxxi. LIQUIDATION: This has been defined by Glenn G. Munn in Encyclopedia of banking and finance as the termination or winding up of a business by conversion of its assets to cash and distribution of proceeds first to the creditors in the order of preference and the remainder, if any, to the owners in proportion of their holdings.