research investigate the effect of capitalization on the Nigeria
financial system. Using ten selected banks which include the banks that merged,
acquired and neither merged nor acquired. The research employed the secondary
data obtained from the annual reports and accounts.
least squares method (OLS) regression method was used, with the equity capital
a the independent variable, while the three indices (profitability, liquidity
and capital adequacy ratios) were used as the independent variables: These
paprameters were modeled into the linear Regression models I,I and III. The
Pearson’s product moment correlation coefficients ® of each model were obtained
and interpreted for each model.
statistical tools used for interpretation and F-test, t-test and Durbin- Watson
test statistic. The result shows that majority of the banks that have enough
equity are also profitable e.g. banks like First Bank Plc and Intercontinental
Bank. However the result shows that a bank can be profited and yet not liquid
e.g. UBA. Majority of the banks are adequately stable meeting up standard reslt
5:1. The research concluded that the reform was a success because it brought
improvement and stability in the sector
TABLE OF CONTENTS
of the Problem
of the Study
Questions and Hypothesis
of the Study
of Data and Methodology
and Plan of the Study
1.7 `Definition of Difficult Items
REVIEW AND THEORECTICAL FRAME WORK
Of Capital Formation
Sector Reforms and Consolidation in Nigeria
2.2.1 Capitalization as a Reform
Mechanism in Banking Sector
2.2.2 Elements of Reforms –
Hungarian Banking Experience
For Banking System Reform In Nigeria
Capital Base and Bank Soundness
2.5 How to
Raise Capital Base of a Bank through Consolidation
2.6.1 Examples of Successful Mergers in
of Synergy from Acquisitions
Economic Impact of the Mergers and Acquisitions on the Nigerian Financial
that Aid Mergers and Acquisitions
of Mergers and Acquisitions
Behavioural Aspects of Mergers: Corporate Culture
RESEARCH METHODOLOGY DESIGN
of Research Questions
of Research Hypotheses
Design and Instrument
of Data Analysis
of Population Size
3.6 Model Specification
for Design Making
3.10 The OLS Techniques
ANALYSIS AND DISCUSSION
of Model Estimation Results
4.4 Interpretation from Indices Computed
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
5.1 Summary of Findings
5 2 Recommendation
5.4 Suggestions for Future Studies
The Oxford mini-dictionary explains that capital
is “accumulated wealth” or “money with which a business is started’ in banking,
capital has these two meanings. At the out-set, capital in the form of issued
and paid up shares is money with which the business is started. Overtime, the
capital funds of the bank reflect the accumulated (addition of depletion of
capital in goods producing business, the needed for capital is obvious as this
is required to provide for substantial fixed capital resources in the form of
building, plant and machinery and even working capital in form of raw material.
The need for capital is not the same for business organizations. In the
financial services industry, market forest and contemporary history have
accentuated the need for higher capitalization of banks. The professional know
how of the operators is another key factor in the inter mediation between the
savers and the borrowers. Thus the first banker the Gold smith did not require
additional capital beyond what he had. However, today the ingenuity of the
banker has been developed so much that we can talk of the banker being engaged
in financial engineering.
The federal government of Nigeria, in its
annual 1997 budgets, announced the decisions to raise minimum paid-up capital for
new banks to N2 billion leaving the existing one to its N500 million. The reason
for the N2 billion minimum capital requirements could be broadly classified
into the following:
a. To curb the current distress in the
banking industry by injecting fresh funds into the system with a view to
enhancing the financial viability of the banking industry. It was banks which
have had their capital bases eroded by inflation believe that the injection of
new funds in the form of capitalization would give a new lease to live to most
banks operational losses and bad credits.
b. To ensure capital adequacy in providing
initial an subsequent basic infrastructure for banks operation and expansion
without undue reliance on external funding.
c. To ensure conformity with
international standard in view of the depreciation of the country’s currency
vis-à-vis other major international currencies.
In the recent times, when the Apex
Bank realized that the paid up capital did not yield tangible success in terms
of management of financial institutions from being distress, the central Bank
of Nigeria (CBN) in July 2004 came up with a major policy reform that required
bank licensed in Nigeria to increase their paid-up capital to a minimum of N25
billion on or before December 31st 2005.
The new requirement initially raised
a lot of dust and became a subject of desirability and feasibility of such high
quantum of capital base. However, the emphasis of players in the industry has
since shifted o the modus operandi for attaining the target amount by the
stipulated date. In the months following the pronouncement, many of the banks
resorted to private placements with high net worth individuals and
institutional investors to raise the short fall (between the current balance
sheet figures and the new required amount). The inadequacy of that option only
became apparent when many of the banks (led by all states Trust Bank and four
others) began to initiate and sign memorandum of understanding (MOUS) for
merger and acquisition with one another.
The recent announcement from the CBN
Governor for a new minimum capital requirement of N25 billion for banks, is
necessary, since larger capital adequacy was required to create a strong and
viable banking system with minimal distress and meaningful contribution to the
growth of the Nigerian economy. Anticipating inability of some banks to
singularly satisfy this capital requirement, the Governor has emphasis zed
merger and acquisition as a viable strategy.
1.1 STATEMENT OF THE PROBLEM
This research study to highlight
major weakness in the banking system. A combination of many weak elements of
financial institutions could jeopardize the health of the system. These results
primarily from the extraction of which are made possible through weak
regulatory system frame work, poor corporate governance and structure of the
banking system. In view of these, the facets of banking reforms aimed at
ensuring a healthy ambience. The vortex of the reforms is around firming up capitalization.
Therefore, capitalization is an important component of reforms in the banking
industry, owing to the fact that a bank with a strong capital base has the
ability to absolve losses arising from non-performing liabilities. This is
attained through consolidation, convergences as well as the capital markets.
Thus stabilities are primarily driven by the need to achieve the objectives of
consolidation and convergence and competitions ( Deccan,
Majority of the back drop of banking
crisis was due highly under capitalization of state owned banks. This research
study tends to look into diversities of the major crisis that arises with
1.2 OBJECTIVES OF THE
Realizing that various ad-hoc
distress resolution strategies had not significantly achieved the desired
objectives in terms of the safety, soundness and stability of the financial
system. The present study was initiated. Its aim is to objectively determine
the real causes of the current distress in the financial services industry as a
basis for re-assessing various distress resolution strategies already embarked
The specific objectives of the study
investigate the desirability or other wise the increased minimums
capitalization requirement for banks as the basis of improvement in banking
viability is the major factor being adduced or the large increase in the
minimum capital requirement, it therefore becomes necessary.
examine the relationship between the two variables (capitalization amongst
Nigerian banks ) with a view of studying the performance
highlight the implication of the role of capitalization in the financial
performance of banks in Nigeria.
see how capital formation facilities and promotes economic growth by operating
a safe and sound manner.
see how capitalization promotes soundness stability and enhance efficiency of
the system, to achieve the goals of protecting depositors ensuring monetary
stability and efficient and competitive financial system.
1.3 RESEARCH QUESTIONS AND HYPOTHESIS
For the purpose of this
investigation, there will be a need to ask the following research questions in
other to guide our understanding of the topic, these include:
a. Why is huge capitalization
requirement capable the viability and health of Nigerian banks?
b. Why is capitalization a necessary
factor for banking viability in Nigeria?
c. Would the large capitalization requirement not
lead to liquidation, mergers and acquisitions and other impediments to vibrant competition
in the banking industry?
d. What are the effects of
capitalization on the stability of banks in Nigeria?
HO: There is no significant bank
relationship between capitalization and economic growth in Nigeria
There is no significant relationship between
capitalization and bank stability.
1.4 JUSTIFICATION OF THE STUDY
The banking sector in the financial
landscape needs to be reformed in other to enhance its competiveness and
capacity to play a fundamental role of financial investment. Recently, the
financial sectors have not met this spectaculars objective. The essence of
banking to any nation’s financial management is like what lungs are to heart of
human being. Nigeria
have had bank failure, however, funding revealed that its calamity was as a
result of inadequacy of the capital base to trade with.
The major objectives of the banking
system are to ensure price stability and facilities rapid economic growth and
development. Regrettably, these objectives have remained largely unattained in Nigeria as a
result of some deficiencies of which low capital base has contributed immensely
to majority of banks failure. The
failure of big banks in Nigeria
(e.g the old National Bank) has the propensity to cause significant social and
financial disease for the economy.
This research study in lieu of the
above will like to see if the share holder capital
is huge and adequate than it will both be able to absorb to large
extent, harsh deposit withdrawals
and create a good level of confidence necessary
to curtail financial panic. It is also imagined that a reasonable
capital adequacy requirement is a pressure on the stakeholders to insist on
prudent and skilled management of their bank: hence there is the urgent need
for permanent solution in ensuring that banks do not fail any more in Nigeria,
thereby sustaining, strengthening and improving the health of the country’s
financial system. Hence, there is urgent need for permanent solution to this
vital area of the economy
1.5 SOURCES OF DATA AND METHODOLOGY
The main of data for this research
is going to be secondary data, to be retrieved from CBVN quarterly Reports,
NDIC reports annual reports of ten banks (randomly selected). The Nigeria banking
finance and commerce publication of reputable publisher’s e.t.c.
Data analyses would be by
statistical inference in nature from the collected data, indices would be
completed for profitability, liquidity and capital adequacy, representing the
The nominal level of equity capital
represented the independent variables.
The bank would be arranged in a table in descending order of equity ranking
with their ranks.
Using the Pearson product moment
correlation co-efficient® (PMCC) method a coefficient would be obtained for
each dependent/independent variable relationship. This coefficient will
determine the pattern and extent of relationship between equity capital and
each of the three dependent variables .The correlation coefficient would be
tested for validity using the student’s t-distribution at 95% confidence level.
Thereafter, a repression analysis would run for those relation ships which
would show significant correlation.
The population size for this
research is based on random selection and ten banks have been randomly selected
for the test of hypothesis. These are:
1. First Bank Plc.
2. Intercontinental Bank Plc
3. UBA Plc
4. Union Bank Plc
6. IBTC Chartered Bank Plc
7. Zenith International Bank Plc
8. Fidelity Bank Plc
9. Guaranty Trust Bank
10. First in Land Bank
AND PLAN OF THE SUDY
This research is limited to a sample
drawn from among Nigeria
commercial new generation banks only. The data to be analyzed is limited to the
statement of account from 1980 to 2005 for respective samples.
This research study would be di8vide
into five (5) inter-related chapters.
A brief over-view of each chapter is
This chapter one provides an
introduction to the research work. Discussions here are: statement around the
objectives of the study, statement of research problems. Justification of the
study and the scope of work, others include discussion on sources of work data
and research methodology.
This review the related literatures
and theoretical and conceptual frame work of banks capitalization.
This is the research methodology
which is going to state the hypothesis to be tested and the measure to test
If summarize the study, draw up
recommendations and conclusion
1.7 DEFINITION OF DIFFICULT ITEMS
In other to facilitate reading,
there is need to define some terminologies to reflect their deep meanings
according to the reach. These technical terms include:
Capitalization: Referring to the
process of strengthening the capital base of a financial institution.
- Stability: Referring to the financial position of a
- Viability: Defining low healthy a bank is
in terms of its financial obligation.
- Distress: The state of a bank in un-performance
Merger/consolidation: The fusion of two or more enterprises through direct acquisition by one of the net asset
of the other or others.
- Acquisition: To
Market Capitalization: The most commonly used method s for companies quoted on
- NSE: Nigerian
- SEC: Securities
and Exchange Commission