THE EFFECT OF BANK RECAPITALIZATION ON THE ECONOMY OF NIGERIA


THE EFFECT OF BANK RECAPITALIZATION ON THE ECONOMY OF NIGERIA

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 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.

TABLE OF CONTENT

CONTENT

Title page……………………………………………………………..ii

Certification……………..…………………………………………..iii

Dedication…………….….…………………………………………..iv

Acknowledgements….……..……………………………………….v

Table of content………………………….………………………...viii

Abstract………………………………………………………..…….xii

CHAPTER ONE (INTRODUCTION)

1.1 Background of the study…………………………………….1

1.2 Statement of problem………………………………………….5

1.3 Research Questions…………………………………………….6

1.4 Objective of the study…………………………………………6

1.5 Research Hypotheses………………………………………….8

1.6 Significance of the study………………………………………8

1.7 Scope of the study……………………………………………..9

1.8 Limitation of the Study………………………………………10

1.9 Operational definition of Terms……………………………10

1.10 Organization of the study…………………………………..12

References……………………………………………………………13

CHAPTER TWO

LITERATURE REVIEW

2.1 Overview of small and medium scale enterprises…….14

2.2 The growth of SMEs and the contributive schemes in Nigeria…………………………………………………………………16

2.2.1 The Nigeria bank for commerce and industry (NBCI)..16

2.2.2 The central bank of Nigeria special credit programme for small and medium scale enterprises (SMEs)……..…….17

2.2.3 World Bank facilities for small and medium scale enterprises……………………………………………………...19

2.3 The Nigeria financial system…………………………………20

2.4 Bank loans to small and medium-sized enterprises……22

2.5 The financial crisis and SMEs………………………….……25

2.5.1 Corporate restructuring and financial structure of SMEs…………………………………………………………….28

2.5.2 Credit crunch in the financial crisis and bank loans to SMEs…………………………………………………………….29

2.6 Theoretical framework…………………………………………31

2.7 Historical background of first bank of Nigeria plc………33

References…………………………………………………………….37

CHAPTER THREE

3.1 Introduction……………………………………………………39

3.2 Area of Study………………………………………………….39

3.3 Sources of Data ……………………………………….…….40

3.4 Research Design………………………………………….….40

3.5 Population of the Study……………………………………40

3.6 Research Sample and Sampling Technique….……….41

3.7 Description of the Research Instrument……………….41

3.8 Reliability and Validation of the Instrument…………42

3.9 Method of Data Collection……………………………..…42

3.10 Method of Data Analysis………………………………….…43

References…………………………………………………………...45

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

4.1 Introduction……………………………………………………46

4.2 Presentation Data…………………………………………….47

4.3 Test of Research Hypothesis……………………………….50

4.4 Interpretation of Research Hypotheses Analysis….…..61

CHAPTER FIVE

DISCUSSION OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

5.1 Summary of the findings…….……………………………….63

5.2 Discussion of Findings and its implication………………64

5.3 Conclusions……………………………………………………..66

5.4 Recommendation………………………………………………67

5.5 Recommendations for further studies…………………….70

5.6 Bibliography ……………………………………………..……72

Appendix………………………………………………………..…......71

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.                          

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 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 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. RESEARCH QUESTIONS 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 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.

.

THE EFFECT OF BANK RECAPITALIZATION ON THE ECONOMY OF NIGERIA



TYPE IN YOUR TOPIC AND CLICK SEARCH.






RESEARCHWAP.ORG

Researchwap.org is an online repository for free project topics and research materials, articles and custom writing of research works. We’re an online resource centre that provides a vast database for students to access numerous research project topics and materials. Researchwap.org guides and assist Postgraduate, Undergraduate and Final Year Students with well researched and quality project topics, topic ideas, research guides and project materials. We’re reliable and trustworthy, and we really understand what is called “time factor”, that is why we’ve simplified the process so that students can get their research projects ready on time. Our platform provides more educational services, such as hiring a writer, research analysis, and software for computer science research and we also seriously adhere to a timely delivery.

TESTIMONIES FROM OUR CLIENTS


Please feel free to carefully review some written and captured responses from our satisfied clients.

  • "Exceptionally outstanding. Highly recommend for all who wish to have effective and excellent project defence. Easily Accessable, Affordable, Effective and effective."

    Debby Henry George, Massachusetts Institute of Technology (MIT), Cambridge, USA.
  • "I saw this website on facebook page and I did not even bother since I was in a hurry to complete my project. But I am totally amazed that when I visited the website and saw the topic I was looking for and I decided to give a try and now I have received it within an hour after ordering the material. Am grateful guys!"

    Hilary Yusuf, United States International University Africa, Nairobi, Kenya.
  • "Researchwap.org is a website I recommend to all student and researchers within and outside the country. The web owners are doing great job and I appreciate them for that. Once again, thank you very much "researchwap.org" and God bless you and your business! ."

    Debby Henry George, Massachusetts Institute of Technology (MIT), Cambridge, USA.
  • "Great User Experience, Nice flows and Superb functionalities.The app is indeed a great tech innovation for greasing the wheels of final year, research and other pedagogical related project works. A trial would definitely convince you."

    Lamilare Valentine, Kwame Nkrumah University, Kumasi, Ghana.
  • "I love what you guys are doing, your material guided me well through my research. Thank you for helping me achieve academic success."

    Sampson, University of Nigeria, Nsukka.
  • "researchwap.com is God-sent! I got good grades in my seminar and project with the help of your service, thank you soooooo much."

    Cynthia, Akwa Ibom State University .
  • "Sorry, it was in my spam folder all along, I should have looked it up properly first. Please keep up the good work, your team is quite commited. Am grateful...I will certainly refer my friends too."

    Elizabeth, Obafemi Awolowo University
  • "Am happy the defense went well, thanks to your articles. I may not be able to express how grateful I am for all your assistance, but on my honour, I owe you guys a good number of referrals. Thank you once again."

    Ali Olanrewaju, Lagos State University.
  • "My Dear Researchwap, initially I never believed one can actually do honest business transactions with Nigerians online until i stumbled into your website. You have broken a new legacy of record as far as am concerned. Keep up the good work!"

    Willie Ekereobong, University of Port Harcourt.
  • "WOW, SO IT'S TRUE??!! I can't believe I got this quality work for just 3k...I thought it was scam ooo. I wouldn't mind if it goes for over 5k, its worth it. Thank you!"

    Theressa, Igbinedion University.
  • "I did not see my project topic on your website so I decided to call your customer care number, the attention I got was epic! I got help from the beginning to the end of my project in just 3 days, they even taught me how to defend my project and I got a 'B' at the end. Thank you so much researchwap.com, infact, I owe my graduating well today to you guys...."

    Joseph, Abia state Polytechnic.
  • "My friend told me about ResearchWap website, I doubted her until I saw her receive her full project in less than 15 miniutes, I tried mine too and got it same, right now, am telling everyone in my school about researchwap.com, no one has to suffer any more writing their project. Thank you for making life easy for me and my fellow students... Keep up the good work"

    Christiana, Landmark University .
  • "I wish I knew you guys when I wrote my first degree project, it took so much time and effort then. Now, with just a click of a button, I got my complete project in less than 15 minutes. You guys are too amazing!."

    Musa, Federal University of Technology Minna
  • "I was scared at first when I saw your website but I decided to risk my last 3k and surprisingly I got my complete project in my email box instantly. This is so nice!!!."

    Ali Obafemi, Ibrahim Badamasi Babangida University, Niger State.
  • To contribute to our success story, send us a feedback or please kindly call 2348037664978.
    Then your comment and contact will be published here also with your consent.

    Thank you for choosing researchwap.com.