The resultant impact of financial liberalization opened up the
Nigerian economy to global financial markets, which has generated
increasing apprehension in the economy and has exposed the fragility
and vulnerability of her financial system. It is therefore imperative
for the Central Bank of Nigeria to introduce measures that will reduce
the exposure and enhance the stability of small business operators
in Lagos State and the nation’s financial system. A defensive measure
that will strengthen the existing banks and still provide small
businesses with financial facilities and services, is what is really
needed. This study investigated the impact of previous
recapitalization in the banking system on the performance of some
selected small businesses in the country with the aim of finding out
if the recapitalization is of any benefit. The study employed both
primary and secondary data obtained from responses gotten from issued
questionnaires and NDIC annual reports. The data were analyzed using
both descriptive e.g. means and standard deviations and analytical
techniques such as the t-test and the test of equality of means. It
was found that the mean of key profitability ratio such as the Yield
on earning asset (YEA), Return on Equity (ROE) and Return on Asset
(ROA) were significant meaning that there is statistical difference
between the mean of the bank before 2001 recapitalization and after
2001 recapitalization. The study recommends that the banks should
improve on their total asset turnover and to diversify their funds in
such a way that they can generate more income on their assets, so as
to improve their return on equity.
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
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 system.
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 industry.
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 banking industry.
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
- 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
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
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
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
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
- 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
- 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 fall due.
- 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 the organization.