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CONSOLIDATION
AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN NIGERIA
ABSTRACT
The
development of sound banking system in Nigeria is becoming increasingly
difficult to achieve because of increase distress and unethical practices. The
Nigerian banking sector was highly oligopolistic with remarkable features of
market concentration and leadership. The CBN’S decision to consolidate banks
through drastic increase to N25billion as minimum capital base has led to a
remarkable reduction in the number of banks changed their mode of operations
and their contribution to the economy. The need for a strong, reliable and
viable banking system is underscored by the fact that, the industry is one of
the few sectors in which the shareholders fund is only a small proportion to
the liabilities of the enterprise. It is therefore, not surprising that the banking
industry is one of the most regulated sector in any economy. This research
focuses on the relationship between banks’ capital and their deposit
mobilisation, asset base and profitability. The Ordinary Least Square (OLS)
econometric method was used to examine the regression models that were stated
to examine the relationship between the key variables. the results of the
analyses showed that the capital base of banks plays a crucial role in
determining the profitability of a bank. It was also found that capital base
influences the asset base and deposit liabilities of banks. The study found
that banks consolidation has changed the market structure of the banking
sector, increased the efficiency and reliability of banks, created opportunity
for financial institutions and market participants, and raised their
intermediation potentials. Thus, it has positive impact on the financial
performance of banks and the economy as a whole. It also become evident that
for such a policy/strategy to be effective, central bank of Nigeria needs to
make banks recapitalisation a continuous exercise at interval of 5 -10 years to
catch up with inflation and happenings in the world.
CHAPTER ONE
1.1 BACKGROUND TO THE STUDY
The history
of the Nigeria banking system is replete with growth and burst cycles in the
number of operating banks and their branches. The Central bank of Nigeria
resolves to carry out reforms in the banking sector in order to ensure a sound
financial system which is one of its mandates. Between 1994 and 2003 a space of
nine years, no fewer than 36 banks in the country closed shop due to
insolvency. In 1995 four banks were closed down. But 1998 may go down well in
history as the saddest year for the banking industry, 26 banks closed shops
that year. Three terminally ill banks also closed shop in 2000. In 2002 and
2003 at least one bank collapsed. The failed banks had two things in common –
small size and unethical practices. Of the 89 banks that were in existence as
at July 2004, when the banking sector reforms were announced, no less than 11
of them were in a state of distress.
According to
the CBN, between 69 and 79 of the banks were marginal or fringe players. The
decade 1995 and 2005 were particularly traumatic for the Nigerian banking
industry; with the magnitude of distress reaching an unprecedented level,
thereby making it an issue of concern not only to the regulatory institutions
but also to the policy analysts and the general public. Thus the need for a
drastic overhaul of the industry was quite apparent. In furtherance of this
general overhauling of the financial system, the Central Bank of Nigeria
introduced major reform programme that changed the banking landscape of the
country in 2004.
The main
thrust of the reform agenda was the prescription of minimum shareholders’ funds
of 25 billion for Nigerian Deposit money bank not later than December 31, 2005.
In view of the low financial base of these banks, they were encouraged to
merge. Out of the 89 banks that were in operation before the reform, more than
80 percent (75) of them merged into 25 banks while 14 that could not finalize
their consolidation before the expiration of deadline were liquidated
(Elumilade,2010; Afolabi, 2004).
In view of
the above, this study intends to examine the impact of consolidation and
recapitalization exercise on the financial performance of banks in Nigeria.
1.2 STATEMENT OF THE PROBLEM
Nigerian
banking sector has experienced a boom-and-bust cycle in the past 20-25 years.
After the implementation of the structural adjustment program (SAP) in 1986,
and the deregulation of the financial sector, new banks proliferated, mainly
driven by attractive arbitrage opportunities in the foreign exchange market
(Heiko, 2007). But prior to the deregulated period, financial intermediation
never took off and even declined in 1980s and 1990s (CBN, 2004).
The sector
was highly oligopolistic with remarkable features of market concentration and
leadership. Lemo (2005) noted that there were ten banks that control more than
50% of the aggregate assets of the banking sector; more than 51 % of the
aggregate deposit liabilities; and more than 45% of the aggregate credits. The
sector was characterized by small sized banks with high overheads; low capital
base averaging less than $l0million; heavy reliance on government patronage and
loss making. Nigeria’s banking sector was still characterized by a high degree
of fragmentation and low levels of financial intermediating up to 2004.
However, it
is not altogether clear whether the imposition of capital requirements actually
reduces risk-taking incentives. Santos (1999), notes that actual capital
requirements may increase risk – taking behavior. Also,
Shrieves and
Dahl (1992) argue that higher capital requirements may induce borrowers to shift
to capital markets and in the process impair capital allocation, while Gorton
and Winton (1995) show that raising capital requirements can increase the cost
of capital. Thus, theory provides conflicting predictions on whether capital
requirements curtail or promote bank performance. This study shall make effort
at clearing the air as regard the impact of capital base on bank performance
with evidence drawn from the Nigerian banking sector.
1.3 OBJECTIVES OF THE STUDY
The main
objectives of the study are highlighted below:
To evaluate
the influence of capital base on the savings mobilization performance of
Nigerian banks;
To determine
the relationship between capital base and asset base in Nigerian banks;
To examine
the effect of capital base of banks on their profitability.
1.4 RESEARCH QUESTIONS
This study
is being guided by the following research questions:
To what
extent does capital base influence the saving mobilization performance of a
bank?
What is the
relationship between capital base and asset base of a bank?
How does
capital base impact on banks’ profitability?
1.5 STATEMENT OF HYPOTHESES
HYPOTHESIS I
Ho : That
there is no relationship between the capital of a bank and
its deposit
liability.
H1 : That
there is relationship between the capital of a bank and its deposit liability.
HYPOTHESIS
II
Ho : That
there is no relationship between the capital of a bank and
its asset
base.
H1 : That
there is relationship between the capital of a bank and its asset base.
1.6 SIGNIFICANCE OF THE STUDY
The
significance of this study is to add to the general body of knowledge,
enlighten the general public on the effect of recapitalization and
consolidation on the performance of banks in Nigeria. Besides, it will put to
rest the argument between the proponents and opponents of the relationship
between bank’s capital base and performance. This research work would also
establish the fact that consolidation (merger and acquisition) is a veritable
means for fostering banking growth.
The findings
of the study would be beneficial to the regulators of the banking sector as
they would serve as a yardstick for appraising the bank consolidation. It would
also benefit the management of Nigerian banks as it would reveal the extent to
which the recapitalization and consolidation exercise have impacted on their
performance, thereby providing a basis for the need to re- strategize.
Investors,
Banking practitioners, analysts and students of banking and finance would be
more enlightened on the direct and indirect effects of bank recapitalization
and consolidation on banks’ performance and the banking sector as a whole.
1.7 SCOPE AND LIMITATION OF THE STUDY
In carrying
out this research, attention would be focused on selected Nigerian commercial
banks (First Bank of Nigeria Plc, United Bank for Africa plc, Guaranty Trust
Bank Plc and Zenith Bank Nigeria Plc.) and time frame considered is the period
between 1996 and 2010. The research also intends to ascertain whether the
objectives of the consolidation exercise had been attained and banks have
achieved their full potentials and can act as catalyst for economic development
of the Nation. The study shall consider the present state of banks in Nigerian
as compared to yester- years.
Due to time
couple with financial constraint, the study shall be unable to cover all of the
important references on capital and focuses on the effect of recapitalization
and consolidation on the financial performance of banks in Nigeria.
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