THE CONSOLIDATION OF THE NIGERIAN BANKING INDUSTRY - IMPLICATION FOR THE NIGERIAN ECONOMY

ABSTRACT
The purpose of this research work was to examine the challenges faced by recapitalisation of banks in Nigeria. Hypotheses were formulated in view of the challenges identified and to meet the objective of the study.
Questionnaires were designed and administered on sixty randomly selecte4d executive of five banks (Union Bank, First Bank, Intercontinental Bank, Guardian Express Bank and Standard Trust) all located in Anambra State of Nigeria. Out of sixty questionnaires distributed, fifty–five were found useful to study.
A thorough analysis using percentages and chi-square test revealed that bank consolidation will help to broaden the ownership base of Nigeria banks and as such tend to separate ownership from management as far as possible. This in turn will enhance management effectiveness. In addition, it was found that consolidation will enhance control and supervision of the banking industry by the CBN because the number of banks operating within the system will be reduced significantly. This will enhance the supervisory and regulatory role of the CBN in the industry and this will improve the quality of services offered to customers.
In particular, recapitalisation of banks will facilitate the economic growth of the nation because more credit will be channeled to the real sectors of the economy.

From the result of the study, we conclude that the newly consolidated banks need to employ highly qualified and competent professional in order to meet the expectation of shareholders in terms of returns on their equity and in order to compete favourably in a globalised world economy.

CHAPTER ONE
1.1       BACKGROUND OF THE STUDY
Banking institutions require adequate capital to function effectively. This can be explained from the Fact that banking is a highly leveraged industry with risky assets and liabilities and thus can be described as a conditionally solvent institution.

In Nigeria, the need for adequate capitalization of banking has being a source of concern to regulatory bodies especially the CBN. Over the years, the monetary authorities in the country have stipulated minimum capital requirements for the banking industry. For instance as a result of incessant bank failures recorded during the Free Banking era, the 1952 Banking Ordinance stipulated a minimum paid-up capital of N25000 and N200,00 for indigenous and expatriate banks respectively.

Ever since then, the minimum capital requirements of banks has been experiencing huge increment that in the year 2003 with the subsequent introduction of universal banking into the country in 2001, the CBN directed all banks operating in the country to store-up their base to a minimum paid-up capital of N2 billion.

Shortly afterwards in July, 2004 with the assumption of office of the governor of CBN Prof. Charles Soludo. He came up with his 13 point reform agenda of the financial system. Under the reform, banks were directed to recapitalise to the whooping tune of N25 billion before the end of December 31st, 2005. The main aim of this recent order by the CBN for banks to increase their capital base is to achieve the consolidation of Nigerian banks through mergers and acquisition.

Although a lot of controversies has surrounded this directive by the CBN, the point is that with adequate capital, public confidence on Nigeria banks will be maintained. With adequate capital, banks will be able to absorb unexpected or unusual losses not absorbed by normal earnings. Also, adequate capital will enable bank to attract additional funds in the market and to assuage the confidence of the depositors, the regulatory authorities and the general public on the banks ability to continue in business to discharge their obligations effectively and (Nwankwo G.O.).

It therefore follows ensuring adequate capital is of fundamental importance to bank management. In this connection, a broad consensus exists that high priority should be attached to restoring sound capital ratios and to improve the profit performance of banks in the face of increased vulnerability of banking that has resulted from greater economic and financial instability and the growing interdependence of financial institutions and markets all over the world.

1.2       STATEMENT OF PROBLEM
The issue of capitalization and management of capital funds of banks have drawn much attention in this era of globalization and Information Technology explosion. As a result, failure to give it the attention it deserves can pronounce doom for a bank.

For instance, one of the antidotes prescribed for the arrest of the distress syndrome and instabilities being experienced in our banks today has been the need for our banks to be adequately capitalized. Without adequate capital, a bank will not be able to compete favourably well in international financial market and also will not be able to cope with the sharp increase in the volume of business done by banks in this period of economic deregulation.

Furthermore, capital inadequacy has been pointed as the main impediment to quality service delivery and inability of banks to extend credit to the preferred sectors of the economy. And this has been the major reason for the underdevelopment of the economy. The problem of the study is therefore to find out if increased capital base for banks will bring about the derived financial capital sector stability.

1.3       OBJECTIVE OF THE STUDY
This research work is aimed at achieving the following objectives:-

To investigate the need for adequate capitalization of Nigerian banks.

To analyse the various ways in which banks attempt to achieve recapitalization.

To highlight on the challenges posed by consolidation to the management of Nigerian banks.

To examine the benefits of recapitalisation to Nigerian banks and the entire economy.

1.4       FORMULATION OF HYPOTHESIS
Ho:      The level of capital has no significant effect on the profitability of a bank.

H1:      The level of capital has a significant effect on the profitability of a bank.

Ho:      Capitalization of a bank has no direct relationship with the volume of credit extended to the real sectors of the economy.

H1:      Capitalization of a bank has a direct relationship with the volume of credit extended to the real sectors of the economy.

Ho:      There is no significant relationship between level of capitalization and efficiently of the banking system.

H1:      There is a significant relationship between the level of capitalization and efficiency of the banking system.

1.5       METHOD OF STUDY
This research work tends to study the challenges posed by recapitalisation of Nigerian banks by sampling the opinions of bank executives within Awka and Onitsha territory. The total number of the bank executive which is estimated to be two hundred and forty (240) will form the population of the study.

Simple random sampling will be used to select a sample of sixty (60) executives of these banks that are going to be studied. The banks to be studied include Union Bank Hallmark Bank. These banks are expected to express the opinions of the banking industry because they represent both first generation and new generation banks opening in the country.

Questionnaires will be used to collect data. While the responses obtained from the questionnaire administered to respondents will be analysed with the responses categorized into “Strongly Agreed” to “Strongly Disagree” and presented in tales.

Finally, the hypothesis formulated will be tested using chi-squate test (x2).

1.6       SCOPE OF THE STUDY
This research work is prospective since the consolidation is still in progress and therefore the study will be limited to the present impact and problem posed by the consolidation on the banking industry and not on the economy as a whole.

The study will focus more in the areas of management efficiency, credit extension, quality service delivery and meeting with the expectation of the shareholders etc.

1.7       LIMITATIONS OF THE STUDY 
The researcher encountered the following problems while carrying out this research work;

Time constraint – The time set aside for this work is too short.

Financial constraints – Lack of finance made it difficult for the researcher to cover most of the banks operating in Nigeria, and to reach out to a large area of the country.

The busy nature of banks executives made it difficult to return all the questionnaires administered to them.

Difficulty in getting information needed due the level of confidentiality of bank documents, and sometimes lack of confidence and/or adequate knowledge on the part of the respondent.

1.8       DEFINITION OF TERMS USED
Recapitalisation: This is defined as the enhancement and restructuring of the financial resources of a bank with a view to enlarging the size of the long term funds available to the bank.

Adequate capital: This is defined as that quantum of funds which a bank should have or plan to maintain in order to conduct its business in a prudent manner. Similarly, it can be viewed functionally, as the amount of capital that can effectively discharge the primary capital function of preventing bank failure by absorbing losses.

Mergers: This is a legal arrangement whereby assets of two or more banks become vested in or under the control of, one company, which has as its shareholders, all or substantially all, the shareholders of those banks in the arrangement. It can in other words be seen as a commercial or economic marriage among banks or roughly equal size that is evidenced by signing of memorandum of understanding among the banks.

Acquisition: This is a situation where a bank acquires control of another company, usually a smaller bank than the acquiring bank. It involves take over of management of usually a smaller bank by a bigger bank.

Bank distress: This is defined as when a bank is unable to meet its obligations as a result of weakness in their financial, operational and managerial capabilities which render the bank illiquid or insolent.

Non-performing credit: These are loans and advances in which repayment of principal and or interest are not up to date and as such have been classified as either substandard, doubtful or lost.

Real sector of the economy: This is defined as the sector of the economy that plays a crucial role to the economic growth and development of the nation. This sector includes the agricultural sector, manufacturing sector and the SMEs.

Capital of reserve: This implies depleting banks general reserves so as to achieve recapitalisation. The extent to which this is done depends on the other activities that may need to be financed through the reserves such as pension and gratuity and reserve for SMIEIS.

Capital market: This is the market where long-term funds are mobilized for investment purposes. The funds mobilized in these markets can be inform of equity stock, debentures etc. The capital market enhances the mobilization of financial resources form the general public and channeling them to accumulation of capital.

Initial public offer (IPOs): It is an offer for subscription by a company for its own shares made for the general public for the first time.

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Item Type: Project Material  |  Attribute: 109 pages  |  Chapters: 1-5
Format: MS Word  |  Price: N3,000  |  Delivery: Within 30Mins.
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