This 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.
Ordinary 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.
The 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
1.1 Statement of the Problem
1.2 Objectives of the Study
1.3 Research Questions and Hypothesis
1.4 Justification of the Study
1.5 Sources of Data and Methodology
1.6 Scope and Plan of the Study
1.7 `Definition of Difficult Items
LITERATURE REVIEW AND THEORECTICAL FRAME WORK
2.1 Effect Of Capital Formation
2.2 Banking 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
2.3 Rationale For Banking System Reform In Nigeria
2.4 Capital Base and Bank Soundness
2.5 How to Raise Capital Base of a Bank through Consolidation
2.6 Types of Mergers/Acquisitions
2.6.1 Examples of Successful Mergers in Nigeria
2 6.2 Sources of Synergy from Acquisitions
2.7 The Economic Impact of the Mergers and Acquisitions on the Nigerian Financial Sector
2.8 Factors that Aid Mergers and Acquisitions
2.9 Principles of Mergers and Acquisitions
2.9.1 Behavioural Aspects of Mergers: Corporate Culture
RESEARCH METHODOLOGY DESIGN
3.1 Restatement of Research Questions
3.2 Restatement of Research Hypotheses
3.3 Research Design and Instrument
3.4 Method of Data Analysis
3.5 Determination of Population Size
3.6 Model Specification
3.7 Apriori Expectation
3.8 Data Analysis Tools
3.9 Criteria for Design Making
3.10 The OLS Techniques
DATA ANALYSIS AND DISCUSSION
4.1 Presentation of Data
4.2 Model Estimation Results
4.3 Interpretation 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
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:
- 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.
- To ensure capital adequacy in providing initial an subsequent basic
infrastructure for banks operation and expansion without undue reliance
on external funding.
- To ensure conformity with international standard in view of the
depreciation of the country’s currency vis-à-vis other major
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
1.8 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, Herald
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 undercapitalization.
1.9 OBJECTIVES OF THE STUDY
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 upon.
The specific objectives of the study are:
- To investigate the desirability or other wise the increased minimums
capitalization requirement for banks as the basis of improvement in
As banking viability is the major factor
being adduced or the large increase in the minimum capital requirement,
it therefore becomes necessary.
- To examine the relationship between the two variables
(capitalization amongst Nigerian banks ) with a view of studying the
- To highlight the implication of the role of capitalization in the financial performance of banks in Nigeria.
- To see how capital formation facilities and promotes economic growth by operating a safe and sound manner.
- To 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
1.10 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:
- Why is huge capitalization requirement capable the viability and health of Nigerian banks?
- Why is capitalization a necessary factor for banking viability in Nigeria?
- Would the large capitalization requirement not lead to liquidation,
mergers and acquisitions and other impediments to vibrant competition
in the banking industry?
- 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
HO: There is no significant relationship between capitalization and bank stability.
1.11 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
1.12 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
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
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:
- First Bank Plc.
- Intercontinental Bank Plc
- UBA Plc
- Union Bank Plc
- IBTC Chartered Bank Plc
- Zenith International Bank Plc
- Fidelity Bank Plc
- Guaranty Trust Bank
10. First in Land Bank
1.13 SCOPE 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 given below
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 these hypotheses
If summarize the study, draw up recommendations and conclusion
1.14 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 bank.
- Viability: Defining low healthy a bank is in terms of its financial obligation.
- Distress: The state of a bank in un-performance stage.
- 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 acquire
- Market Capitalization: The most commonly used method s for companies quoted on NSE.
- NSE: Nigerian Stock Exchange
- SEC: Securities and Exchange Commission