1.1 BACKGROUND OF THE STUDY
Over the years, the Nigerian economy is faced with national and
global economic challenges and as such, the financial institutions,
especially the banking sector has an option of sanitizing and
restructuring its operational processes in order to survive the
depressed economy, as well as embarking on a consolidation exercise
which would have some wider structural effects on the industry and on
the economy as a whole.
Basically, banking is a service industry operated by human beings for
the benefit of the general public while making returns to the
shareholders. As such, it is natural that the services provided thereof
by the industry cannot be 100% efficient; however, there is always a
room for improvement. It is on this statement that the index of our
further discussion on this study is based.
The banking sector in the third world economies has been grossly
under managed when compared with their counterparts in the developed
countries of the world. This has made it imperative for Nigerian banks
to sanitize and restructure their operational processes so as to be in
line with the global trends, and to survive the depressed economy.
Before the introduction of Structural Adjustment Programme (SAP) in
1986, the banking sector was characterized by few banks. The operators
of these banks had almost total control of the business of banking as
customers had to look for their services which most of the times were of
poor quality. The managers, because of the pressure to provide banking
services, had little time to market their bank services or design new
products to improve their customers’ service and at the same time, they
received changes based on the approved tariff. Competition was minimal
and customers could spend long hours trying to obtain service in the
banking hall due to long queues.
Prior to the 2004/2005 recapitalisation exercise, the Nigerian
banking sector was highly oligopolistic with remarkable features of
market concentration and leadership. Under the recapitalization and
consolidation exercise in the industry, each licensed bank was expected
to meet up with the new minimum capitalization requirement of =N=25
billion on a solo basis or achieve that either through merger with
others or acquisition of/by others. The banks were encouraged to enter
into merger/acquisition arrangements with other relatively smaller banks
thus taking the advantage of economies of scale to reduce cost of doing
business and enhance their competitiveness locally and internationally.
According to the former governor of the Central Bank of Nigeria
(CBN), Prof. Charles Soludo, recapitalisation of the Nigerian Banking
Sector was necessitated by the high concentration of the sector by small
banks with capitalization of less than $10 million, each with expensive
headquarters, separate investment in software and hardware, heavy fixed
costs and operating expenses, and with bunching of branches in few
commercial centers - leading to very high average cost for the industry
(Soludo, 2004). The fragile state of the Nigerian Banking Sector in the
pre- recapitalization exercise is so bad that, only ten banks (10) out
of the eight-nine (89) in operation accounted for 51.9% of total assets,
55.4% of total deposit liabilities, and 42.8% of total credit (CBN,
2004). The rating of the licensed banks in operation, using the CAMEL
parameters, revealed that ten (10) banks were “sound”, fifty-one (51)
were “satisfactory”, sixteen (16) were rated “marginal” and ten (10)
banks were rated “unsound” in 2004 (CBN, 2004). However, the performance
of banks since 2001 exhibited a deteriorating trend as the number of
“satisfactory” banks declined steadily from 63 in 2001 to 51 in 2004. In
the same vein, the number of banks that were “marginal” increased from 8
in 2001 to 16 in 2004. “Unsound” banks also increased from 9 in 2001 to
10 in 2004. The marginal and/or unsound banks exhibited such weakness
as undercapitalization, illiquidity, weak/poor asset quality, poor
earnings etc (CBN, 2004; Soludo, 2004).
The CBN reform to consolidate the banking sector through drastic
increase of the minimum capital base of commercial banks from =N=2
billion to =N=25 billion in 2005 led to a remarkable reduction in number
of banks. Immediately after the recapitalization deadline ended in
December 31st, 2005, the number of operating banks in the country
reduced from 89 banks to 25 banks but later reduced further to 23 banks
with the merger of some banks like First Altantic Bank Plc and Inland
Bank to form Fin Bank Plc, Stanbic Bank Limited and IBTC Chartered Bank
Plc to form Stanbic-IBTC bank Plc. The number of operating bank later
increased to 24 banks with the entering of Citibank Nigeria Limited.
With the recent merger and acquisition of some of the nine rescued banks
i.e the merger of Access Bank Plc with Intercontinental Bank Plc;
merger of Ecobank Transnational Incorporated with Oceanic Bank Plc;
merger of First City Monumental Bank with Fin Bank Plc, the number of
banks operating in Nigeria has been reduced further.
However, in August 2011, the CBN revoked the licenses of three of the
rescued banks for failing to show ability to recapitalise ahead of the
September 30, 2011 deadline, effectively nationalizing Bank PHB,
Afribank and Spring Bank. The assets of these banks were transferred to
three newly created, nationalised banks: Keystone Bank, Enterprise Bank
and Mainstreet Bank. AMCON which took over the banks also injected N680
billion to recapitalise the banks. Unity Bank Plc, one of the bailed out
banks has already recapitalised while Wema Bank Plc, the last of the
rescued banks, has since scaled down operations to become a regional
bank with emphasis in the south west region.
The post-recapitalization performance of all Nigerian banks was
overcast in 2008 by the global financial and economic crisis, which was
precipitated in August 2007 by the collapse of the sub-prime lending
market in the United States (Bunescu, 2010). The crisis led to the crash
of most other sectors and markets across Europe with consequent effect
on developing economies especially oil-export dependent countries like
Nigeria. The rush by stock investors to liquidate their investment to
repay their loans in order to avoid the excessive lending rate caused
the Nigerian stock market to crash. The crash of the stock market did
not only affect the financial performance of some of the banks, it also
increased their risk exposure. Sanusi (2010a) attributed the
post-recapitalization challenges of Nigerian banking industry to the
inability of the industry and the regulators to sustain and monitor the
sector’s explosive growth which as a result led to risk-build in the
According to Sanusi (2010b) the reports of the special examination
team carried out by CBN/NDIC revealed that nine (9) out of the 24
(twenty) banks were in grave situation, prompting immediate intervention
by CBN. The reports further revealed that non-performing loans in ten
banks totaled =N=1,696 billion, representing 44.38% of total loans while
the Capital Adequacy Ratio in the ten banks ranged between -1.01% and
7.41%, which were below the minimum ratio of 10%. This statistics
portrays a fragile banking system. It is therefore necessary to conduct a
study of this nature to evaluate the =N=25 billion recapitalization
exercise in Nigerian banking sector in terms of the financial
performance of the commercial banks.
1.2 STATEMENT OF THE PROBLEM
Evidence has shown that the Nigerian economy is undergoing several
transformations. With the 2005 recapitalization policy mandated on banks
in Nigeria, the various effects from structural changes in these banks,
mergers and acquisitions, and liberalization of businesses can be
noticed in the economy. The service of banking is supposed to be hinged
on the effective satisfaction of both the surplus units and the deficit
units of the economy. The quality of banking is based on the manner and
the environment in which such services are rendered quality service in
banking must meet three basic requirements namely; competence
reliability and credibility.
For banks to be able to function effectively and maintain high
efficiency level in the economy and to contribute meaningfully to the
economic growth and development of a country, then the industrial sector
must be safe, sound and stable, being devoid of any economic problem
that can tilt it off the rail of achieving its primary duty of
satisfaction, such as distress.
In all indication what we are experiencing and witnessing in this
country today is a far cry from the ideal state of stability expected.
Due to inflation and the general socio-economic decline and political
uncertainties around us which have taken a large toil on the banking
Most banks have suffered from loss of business and this has resulted
to loss of income. The banks were unable to pay customers on demand due
to non availability of liquid cash. The public lost confidence in the
1.3 OBJECTIVES OF THE STUDY
The main aim of the study is to critically review the 2005 bank
recapitalization policy, and bring out the total effects the policy has
had on the economy of Nigeria. The specific objectives of the study are:
To examine the circumstances that gave rise to the 2005 bank recapitalization.
To identify the benefits of the recapitalization policy to the Nigerian banking sector and the Nigerian economy as a whole.
To suggest better economy friendly financing options for Nigerian banks.
What circumstances gave birth for the need for the 2005 recapitalization policy on Nigerian banks?
2. What are the benefits of the 2005 recapitalization policy to the economy of Nigeria?
What better financing strategies could be used by Nigerian banks in
such a way the Economy of Nigeria would not be negatively affected?
1.5 SIGNIFICANCE OF THE STUDY
The significance of the research is base on the fact that the role of
financial institutions in general and banks in particular on the
economic stability, well being and development of any society cannot be
over looked and as such, these institutions must be stable and operating
well for economic development of any society .It is in this effort that
the federal government of Nigeria introduce the 2005 recapitalisation
policy in its annual budget in order to stabilise the industry and
eradicate the long existing distress problems in our banking industry.
The recapitalisation policy has a lot to offer as regards the
promotion of the banking industry and the economy, but most banks are
frowning at the policy because of the obstacles concerning banks
implementation of the policy but if proper measures are taken this could
eliminate most of the problems which looks seemingly difficult at the
beginning because of the bleak out look of the Nigeria economy at
present. This project among other things, will educate the readers on;
what recapitalisation is all about, how best a bank can successfully
recapitalise, benefits of the 2005 policy to .both banks and the general
economy, laws regulating relating banking operations in Nigeria and
various happenings in the Nigeria banking industry since inception.
1.6 SCOPE OF THE STUDY
Basically, the study covers the early banking period in Nigeria so as
to relate the problem of recapitalisation to performance of banks in
this period and the period in which the first banking legislature was
released, hence the introduction of minimum capital requirements of
banks until date.
The work features structure and types of banks, business of banking,
legal frame work concerning operations of banks, the recapitalisation
policy of the federal government of Nigeria as announced in its annual
budget for 2005 and why government felt there is a need for this policy.
Included in the work are the various options on how best banks can
raise the required capital base and the benefit to be derived from
having a large capital base by banks and the economy in general. This
work will also look at problems existing in the Nigeria banking industry
since its inception and problems faced by the banking industry within
the 2005 to date. Not left out is the period of banking boom in Nigeria,
reasons for this boom and what problems it left behind. Finally, how
recapitalisation will help to resolve the current problems in our
banking system. Since this policy concerns the whole banking system, it
has been decided that no particular case study will be used in this
work, but that not with-standing, some banks would be mentioned and used
as example in certain situations.
1.7 LIMITATION OF THE STUDY
The major constraint to this study is the difficulty in getting the
relevant data for the study. The area of study (recapitalisation policy
of 2005) is a recent development in the banking sector, so that not much
literature has been published on it and most banks are not ready to
release needed data as they see it as an important business secret, this
compounded the issue of scarcity of data.
Therefore the researcher has little option than to rely on textbooks
(which were very scanty on the issue), newspapers reports, Journals,
conference papers from N.O.I.C top management and C.B.N Governors. and
the opinions of some staff and managers of few banks. Sources of
information are quoted in the report proper where necessary and also in
the reference section.
1.8 DEFINITION OF TERMS
ASSETS: These are properties of a business and its stock in trade or its stock of goods at any particular time.
ACCEPTANCE HOUSE: These are financial institutions that specializes in the grants of acceptance facilities.
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.
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.
CAPITAL BASE: The total sum value of amount invested in a business.
CAPITAL 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.
CAPITALIZE: Convert into capital.
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
FIXED INTEREST PAYMENT OR FIXED REDEMPTION: These are investments that already have a fixed duration and interest rate.
HOLDING ACTION: This refers to condition prescribed by Central Bank for the turn-around of distressed banks.
INFLATION: A rise in the average price level of goods and services.
LIABILITY: This is what a business owe to outsiders.
LIQUIDATION: To put a firm out of business or stop its operations due to insolvency.
LIQUIDITY: Money or near money (e.g. Bank drafts).
MERGER: The combination of two or more companies in which one firm survive as a legal entity.
OPEN MARKET OPERATION (OMO): This is the sales and buying of
government bonds in the market. The market consist of commercial banks
and the public.
PAID UP CAPITAL: The amount subscribed in a company share capital.
RECAPITALISATION: Review of the require minimum capital and the
process of adopting to the new requirement. It is also defined as the
enhancement and restructuring of the financial resources of
anorganization with a view to enlarging the long term fund available to