THE EFFECT OF RECAPITALIZATION OF BANKS ON THE NIGERIAN ECONOMY


Content

ABSTRACT

 

The global phenomenon in the financial service industry is the consolidation of the financial activities towards ensuring financial stability. It is occurring at a rapid pace due to changes in economic environment, which often alter the constraints faced by financial service firms. 

 

The main objective of this study is to examine the effect of recapitalization of banks on Nigerian economy. Secondary data was gathered from CBN statistical bulletin on GDP, bank capitalization, number of distressed banks, number of banks, from the year 1990-2007. The gathered data was analyzed using the multiple regression models on statistical package for social sciences (SPSS). The research showed a strong correlation coefficient between the dependent and the independent variables. Hence, our finding revealed that there is a significant and thus positive relationship between bank recapitalization, number of banks, number of distressed banks and GDP.

 

Hence, this research work recommends that there should be effective training and manpower development, asset management company (AMC), cross border merger, and the use of modern information and communication technology. These are to ensure stability, effectiveness and efficiency in the system. Thus, from the analyzed data and other findings, this research work concludes by recapitalization of banks as improved the Nigerian economy.   

TABLE OF CONTENTS

Contents                                                                                 Pages

Title of page                                                                             i

Certification                                                                                      ii

Dedication                                                                               iii

Acknowledgement                                                                    iv-v

Abstract                                                                                   vi

Table of Contents                                                                     vii-viii

 

CHAPTER ONE: INTRODUCTION                                         

1.1     Background of the Study                                               1 – 3

1.2     Problem Identification                                                    3-4

1.3     Research Question                                                         4-5

1.4     purpose of the study                                                      5

1.5     Research Hypothesis                                                      5-6

1.6     Research Methodology                                                   6

1.7     Significance of the Study                                               6-7

1.8     Scope and Limitation                                                     7 – 8

1.9     Plan of Study                                                                 8-9

1.10 Definition of Term                                                            9-10

          References                                                                      11-12

         

CHAPTER TWO: LITERATURE REVIEW 

2.0     Introduction                                                                   13-14

2.1     Evolution of banking in Nigeria                                     14-21

2.2     The Role of the Banking System in Economic                21-23

2.3     Historical Perspective of Recapitalization                       23-27

2.4     Banking Sector     Reform and Bank Consolidation      27-29

2.5     Facet in Reform and Conceptional Issues on

Consolidation in the banking Sector                              29-30

2.6     Rationale for Banking System Reform in Nigeria            31-32

2.7     The Objectives of banking Sector Reform                       32-34

2.8     Drives and Capital Success Issues in the

Banking Consolidation                                                  34-36

2.9     Nigerian Banking Industry Consolidation                      36-39

2.10   The Challenges of Consolidation                                    39-41

2.11   Banks that met the N25 Billion Minimum capital

          requirement and the Banks constituting each group     41-43

2.12   Selected Literature Review                                             43-44

          References                                                                      45-46

 

CHAPTER THREE: RESEARCH METHODOLOGY

3.1     Introduction                                                                   47     

3.2     Re-statement of Hypothesis                                            47-48

3.3     Re-statement of Model                                                    48

3.4     Nature and Source of Data                                             48-49

3.5     Method of Analysis                                                         49

3.6     Scope and Limitation                                                     49-50

          References                                                                      51-52

 

CHAPTER FOUR: ANALYSIS OF DATA AND DISCUSSION OF RESULT

4.1     Introduction                                                                   53

4.2     Presentation of Result                                                   53-54

4.3     Discussion of Result                                                      54-56

 

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION

5.1     Introduction                                                                   57

5.2     Summary                                                                       57-58

5.3     Conclusion                                                                     58-59

5.4     Recommendation                                                           59-60

5.5     Suggestion for Further Study                                        61

          Bibliography                                                                  62 – 64

          Regression 

 

 

 

 

 

 

 

 

 

 

 

 

 

CHAPTER ONE

INTRODUCTION

 

1.1      BACKGROUND OF THE STUDY

It is widely recognized that the financial system plays crucial roles in economic development. In Boyd.et.al (1993), it was discovered that in an Merger and acquisition arrangement, a larger, more efficient institution tends to take over smaller, less efficient institution, presumably at least, in part to spread the expertise or operating policies and procedures of the more efficient institution over the one acquired.

 

It has also been found that acquiring banks are more profitable and have smaller non-performing loan ratios than target (Peristiani 1993) consolidation of the financial activities is the global phenomenon been faced in the financial stability.  It is a way of resolving problems of financial distress and its occurrence is at a rapid pace in most countries of the world, particularly in emerging markets.

 

According to Lemo, T (2005), he argued that the primary objective of the reforms is to guarantee an efficient and sound financial system.  The reforms are designed to enable the banking system develop the required resilience to support the economic development of the nation by efficiently performing its functions as to fulcrum of financial intermediation.

 

It was also discovered in the study that profitable banks are always willing to be acquires while small, unprofitable banks tend to be acquired (Forcarell, Panetta and Salleo 1998).

 

Soludo 2004, argues that the consolidation is one of the key components of financial reforms designed to ensure a diversified, strong and reliable banking sector, which will in turn guarantee the safety of depositors money, effective performance of developmental roles and competitive players in African regional and global financial system.

 

There are some analysts that are of the view that the main motivation behind consolidation is to maximize shareholders values which is best achieved through mergers and acquisition while others view that consolidation will not only bring about increase shareholders worth but also contribute to the expectation of economics of scale as well as altering the centers and peripheries of financial activity but in spite of its benefits, it is not without its consequences.

 

One possible impact of financial consolidation on bank customers could stem from the disruption of historical lending patterns. A lack of short-run substitutes for bank credit would imply that a disruption in the supply of bank credit would have negative consequences for the affected borrowers and possibly for the macro-economy, as argued in the literature reviewed by Bernanke (1993).

 

Strahan and Weston (1998) examined banks involved in mergers by comparing the small business lending of the bank pre-and post-merger to a sample of bank not involved in mergers. Their findings therefore, do not support the consolidation hypothesis. 

 

1.2      PROBLEM IDENTIFICATION           

The central bank of Nigerian (CBN) Act 21, 1990 and Bank and other financial institution Act (BOFIA) 1991 represent significant watershed, in capital regulation for the Nigerian banking system. From a modest value of ten million Naira minimum paid up capital in 1988, Nigerian commercial banks were required to maintain capital not below N50million in 1991. Between 1991

 

and 2005 subsequent increase have also been made ranging from N500 million (1997); N2billion (2002), to N25 billion in 2005.

Today, a lot of people no longer have faith in these banks anymore because of the fact that a lot of problem exists in distress while some were liquidated. While, various regulator approaches starting from deregulation to consolidation have brought about growth in the size structure and function of the Nigerian banking system, capital regulation cannot be said to have been efficient in ensuring a stable banking system or a corresponding level of economic growth.

1.3   RESEARCH QUESTIONS  

The research work is attempting to answer the following questions;

i.            Has the introduction recapitalization of banks in Nigeria brought a positive reaction or not?

ii.          Has it in any way affected the economy?

iii.        Is it a venture that will boost the banking sector?

iv.         Have the problem of weak capital base been solved?

v.           Do small and medium savers now benefit from these banks?

vi.         Does the society now have the confidence to request for help form the bank? i.e. financial supports.

 

1.4   PURPOSE OF THE STUDY

The main purpose of this study is to examine;

1. The effect of recapitalization of banks on the Nigerian economy.

2. To determine the relationship between bank recapitalization, Gross domestic product (GDP), distressed banks and the number of banks.

 3. To also examine the various theories of bank recapitalization.

 

No nation can attain greater height in its economy without the banking sector because banks are the pivot of any economy. there is no sound, safe and viable banking sector in an economy, nothing can be moved, be it political or other spheres of life.

 

 

1.5   RESEARCH  HYPOTHESIS

The conjectural statement for the research work in respect of the research question is as follows;

Ho – h=recapitalization  of banks has not improved the Nigerian economy. 

Hi – h ≠recapitalization of banks has improved the Nigerian economy. 

 

1.4      RESEARCH  METHODOLOGY

This research is based on secondary data which was sourced from the use of  bank journals, books on banking and CBN statistical bulletin etc. the span of the project takes place between 1990-2007 and the method of analysis goes this;

Y = F (bo + bI xI + eI)

Where;

Y = GDP

XI = Bank capitalization

bo = The constant (S)

bI = The co-efficient for the independence variable

e = Standard errors 

 

1.5      SIGNIFICANCE OF THE STUDY 

This study will bring about a comprehensive and detailed analysis of the effect of recapitalization of banks on the Nigerian economy. Thus, it will be useful for governmental agencies, monetary authorities, non- governmental organizations, board of directors of banks, researchers’ scholars, the students and academicians alike.

 

Banks facilitate economic growth in a variety of ways and also a sensitive and volatile industry.

 

Efforts are been made in this study in other to discover the effect of the recapitalization programme on thee Nigerian bank and how it affect the Nigerian economy. At the end of this project, the projects write – up will tell if the effect is positive or negative.

  

1.6      SCOPE AND LIMITATION

Banks consolidation through mergers and acquisition came into existence in Nigeria in 2004 but the investigation on the reasons for the poor management of the CBN started in 2004 by the Pius Okigbo panel on the re-organization of the CBN set up by the then Head of state, SANI ABACHA.

 

This research is limited by some certain factors which tend to make the research work difficult; they include;   

i.            FINANCE

The basic aspect of any research work is the ability to back it up financially. Information is being made very difficult due to the limitation of most materials needed for this research such as, journals, textbooks, the CBN statistical bulletin and so on.   

ii.          Death research materials

Apart from journals, we don’t have any text book that contains an indebt explanation of the subject matter. 

iii.       TIME

There is no sufficient time as result of academic and other activities all requiring simultaneous performance.   

                                                           

1.7      PLAN OF STUDY

This research work shall be divided into five chapters. Chapter one will be devoted to introduction, historical background, the purpose of the study and limitation of the study. Chapter two will contain the review of past work on the related topic and in this regards journal and text books will be consulted. Chapter three will take a critical look at the methodology source of data,  data interpretation model specification and technique analysis. Chapter four contains data analysis and interpretation. Finally chapter five will focus on introduction, summary, conclusion and recommendation. 

 

1.8       DEFINITION OF TERMS 

The technical terms in this research work are suitably defined in this section to make room for general understanding.

Recapitalization: The current trends of compelling all commercial banks to raise their capital base from 2 billion to 25 billion Naira by the central bank. 

Mergers: This is the combination of organization or commercial companies into one entity.

Acquisition: This refers to a situation whereby company takes a controlling ownership interest in another firm.

Capital: This is the amount of money   used to set up a business.

Liquidity: State of being able to raise funds easily by selling assets.

Market: The set of all actual potential buy of a product.

Deregulated economy: This is a situation in whereby controls on all fiscal monetary trade pricing and exchange rate policies are removed.

Globalization: The idea of the different countries and economics of the world being closely connected together by modern communications and therefore economically, poetically, socially and environmentally dependent on each other.

Hypothesis: A conjectural statement preposition or an assumption about the relationship between two or more variables. This, which is subject to testing, may either be true or false (null or alternative)  

 

 

 

 

 

 

 

 

 

 

 

 

 

REFERENCES

Altunbas, Y Maude, D (1995): “Efficiency and mergers in the

U.K (retial) banking market” Working Paper, Bank of England.

Berger A. N, Hunterm W.C, and Timme S.G (1993): The

“Efficiency of Financial Institutions; a Review and Preview of Research Past, Present, and Future” Journal of Banking and Finance, Vol. 17, No 2-3 April, page 221-49              

Central Bank of Nigeria (2004): “Guidelines and incentives

On consolidation in the Nigerian Banking Industry” Abuja.  

Forcarelli D, Panetta F, Salle O.C (1998) “Why do banks merge?” some empirical evidence for Italy, Mimeo.

Jaiye Oyedotun (2005) “Merger and Acquisition;  An overview” The Journal of Banking and Finance JBF Vol. 7 No 2, A Publication of Financial Institute Training Centre (FITC), Lagos.

Lemo, T. (2005)        “Regulatory Oversight and Stakeholder

Protection”. A paper presented at the BGL merger and Acquisition interactive seminar held at Eko Hotel and suits,  V.I on June 24

 

Perisstiani S. (1993): “The Effect of mergers on Bank

Performance”, Federal Reserve Bank of New York studies on excess capacity in the financial sector, March.

Savage,D. T., (1991): “Mergers, Branch closing, and cost

Savings,” Working Paper Board of Governors often Federal Reserve System, Washington, D.C   

Soludo, C.C (2004): “Consolidating the Nigerian Banking

Industry: To meet the development challenges of the 21st century”, being a paper presented at the special meeting of the Bankers committee, held on July 6, at the CBN Headquarters Abuja.    

Strahan P.E and J Weston (1998): “Small Business Lending

and the Changing Structure of the Banking industry”, Journal of Banking and Finance Vol. 22, pp 821-845.

Wheelock, D.C Wilson, P.W (1998): “Why do Banks

Disappear?” The determinants of U.S. Bank failures and acquisition Mimeo, May.       

 

 

 

 

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