ABSTRACT
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 the 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 in 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 banks, investors, government public, and customers. The
data were analyzed using both descriptive e.g. means and standard deviations
and analytical techniques. It was found that the mean of key profitability
ratio such as the yield on earning asset, Return on equity and Return on Asset
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 assets turnover
and to diversify their funds in such a way that the can generated more income
on their assets, so as to improve their return on equity. As a result of the
findings, recommendations were made and some of them are:Recapitalization
should be sustained until Nigerian banks are among the first 100 banks in the
world. Standard regulations should be enacted in order to control banks
services to prevent exploitation tendencies various types of competitions
should be stimulated thereby pushing Nigerian banks towards global trends.
TABLE OF
CONTENTS
Title page i
Declaration ii
Approval iii
Dedication iv
Acknowledgement v
Abstract vi
Table of content vii
CHAPTER ONE INTRODUCTION
1.1 Background of the study 1
1.2 Statement of the problem 4
1.3 Objectives of the study 5
1.4 Research Question 6
1.5 Research Hypotheses 6
1.6 Significant of the study 7
1.7 Scope of the study/limitation 8
1.8 Limitation of the Study 8
1.9 Definition of terms 9
References 10
ix
CHAPTER TWO LITERATURE REVIEW
2.1 Conceptual Framework 11
2.1.1 Recapitalization 11
2.1.2 History of Recapitalization 11
2.1.3 Effects of 25 billion Naira capital
base on the Nigeria
economy 13
2.1.4 Recapitalization & economic growth
& development 16
2.2 Theoretical Framework 18
2.3 Bank concentration theory 18
2.3.1 The bank capital channel theory 19
2.3.2 Recapitalization & economic growth
model 19
2.4 Empirical framework 20
References 26
CHAPTER THREE METHODOLOGY
3.1 Research Design 30
3.2 Nature and Source of Data 30
3.3 Population 30
3.4 Samples 30
3.5 Model specification 31
x
3.6 Techniques of Data Analysis 32
References 34
CHAPTER FOUR DATA PRESENTATION AND ANALYSIS
4.1 Introduction 35
4.1.1 Data Presentation 35
4.1.2 Restatement of Hypothesis in Null and
Alternate forms 40
4.2 Data Analysis and Interpretation 40
CHAPTER FIVE SUMMARY OF FINDINGS, CONCLUSION
AND
RECOMMENDATION
5.1 Summary of findings 54
5.2 Conclusion 54
5.3 Recommendation 55
Bibliography. 56
CHAPTER ONE
INTRODUCTION
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. Uboh
(2005) set the pace for the landslide of other works on the interdependent and
the relationship between banks and economic growth. Also, Imala (2005) posited
that the objectives of banking system are to ensure pure stability and
facilitate sustained rapid economic development.
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. 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. Thus, this has led to
the recapitalization of banks.
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 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. Sixteen banks
(16) that were operating in the banking sector before recapitalization and also
met the N25 billion minimum requirements shall be studied.
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 3 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. Assets management company of Nigeria(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
(2010) 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 (2010) the reports of the
special examination team carried out by CBN/NDIC revealed that nine (9) out of
the 24 (twenty four) 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
The recapitalization of banking sectors is
also an evidence of transformation as to achieve economic growth in Nigerian.
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 unemployment, interest
rate and population 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.
Many 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, thus, the loss of confidence in
the banking industry by the public. The above problems has necessitated the
need to carry out this study.
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:
1. To determine the effect of the bank recapitalization
policy on unemployment before and after recapitalization.
2. To examine the circumstances that gave
rise to the 2005 bank recapitalization.
3. To analyse the impact of the 2005
recapitalization policy on interest rate changes and loan to small business
enterprise before and after the recapitalization exercise.
4. To examine how the recapitalization
exercise brought changes to GDP economic growth in Nigeria before and after
recapitalisation.
1.4 Research Questions
1. To what extent has the bank
recapitalization policy affect unemployment in Nigeria before and after the
recapitalization policy of 2005?
2. What circumstances gave birth to the need
for the 2005 recapitalization policy on Nigerian banks?
3. Have the 2005 recapitalization policy has
positively significantly influence changes in interest rate and loan to small
business enterprise before and after
recapitalization?
4. Recapitalization of bank has not
positively significantly affected GDP?
1.5 Research Hypotheses
In order to arrive at a result the following
hypotheses will be tested
1. H0: The bank recapitalization policy of
2005 has not significantly enhance unemployment rate in Nigeria.
2. H0: The bank recapitalization policy of
2005 have no significant impact on the interest rate changes in Nigeria.
3. H0: The bank recapitalization policy of
2005 have no significant impact on the increase in commercial banks’ loan to
SMEs in Nigeria.
4. H0: The Bank recapitalization has not led
to increase economic growth GDP
1.6 Significance of the Study
This study is very beneficial to the
following:
– The federal government is making policies
that will benefit the economy. It will help formulate similar policies in other
sectors of the economy by emphasizing the
need for prudence in using loans.
– The CBN in better articulation of the
policies that can improve the banking profession.
– The international community of investors in
having faith in the Nigeria’s economy.
– The local economy in improving investment
and eradication poverty at the long run.
The significance of the research is based on
the fact that the role of financial institutions in general and banks in
particular on the economic stability, wellbeing
and development of any society cannot be over
looked and as such, Banks, investors, government public and customer 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 outlook of the
Nigeria economy at present. This study 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.
1.7 Scope of the Study/ limitation
Basically, the study covers the early
recapitalization 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. This study would examine the
significance of several economic variables in relation to economic growth
5-year before and 5-year after bank
recapitalization in Nigeria.
Included in the work are the various options
on how best banks can raise the required capital base. This work will also look
at progress existing in the Nigeria economy since
its inception and problems faced by the
economy within the 2005 to 2010. Finally, how recapitalisation will help to
resolve the current problems in our economy system. Since
this policy concerns the whole economic
system, it has been decided that this study will cover the recapitalization of
banks and its effect on unemployment.
1.8 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.
1.9 Definition of Terms
Banks: this study will give banks a basis to
be able to compare their past performances (before re- recapitalization) and
their present performance (after re-recapitalization). Such comparison will
point out how well they have done and what capacity they still have for
expansion. It will also highlight those areas that are still un-harnessed with
very high potential.
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.
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 an organization with a
view to enlarging the long term fund available to the organization.
References
Bunescu , R.A( 2010). The Financial Sector in
Africa: Overview and Reforms in Economic Adjustment Programmes. CBN Econ.
Finance Rev., 29(4), pp. 110-
124.
Imala ,O. I. (2005). Challenges of Banking
Sector Reforms and Bank Consolidation in Nigeria. CBN Bullion, 4 (29), pp. 2-27
Onaolapo, A. A. (2008). Implication of
Capitalization on Bank Financial Health. Journal of Economic Theory, 2(5), pp.
4-19
Soludo, C.C (2004). Consolidating the
Nigerian Banking Industry to Meet the Development Challenges of the 21st
Century”. Bankers’ Committee held on July 6,
at the CBN Headquarter, Abuja.
Sanusi, T. A. (2004). The Impact of Bank
Reform on Commercial Bank Performance in Nigeria. Journal of Economic Thought,
1(6), pp. 31-