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EFFECT OF CAPITALIZATION ON THE FINANCIAL INSTITUTION IN
NIGERIA
ABSTRACT
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
CHAPTER ONE
1.0 INTRODUCTION
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
engineering.
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:
a. 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.
b. To ensure capital
adequacy in providing initial an subsequent basic infrastructure for banks
operation and expansion without undue reliance on external funding.
c. To ensure
conformity with international standard in view of the depreciation of the
country’s currency vis-à-vis other major international currencies.
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 31st2005.
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 strategy.
1.8STATEMENT 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 2004).
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.
1.9OBJECTIVES 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:
i. To
investigate the desirability or other wise the increased minimums
capitalization requirement for banks as the basis of improvement in banking
viability.
As banking viability is the major factor being adduced or the
large increase in the minimum capital requirement, it therefore becomes
necessary.
ii. To examine the relationship between
the two variables (capitalization amongst Nigerian banks ) with a view of
studying the performance
iii. To
highlight the implication of the role of capitalization in the financial
performance of banks in Nigeria.
iv. To see how
capital formation facilities and promotes economic growth by operating a safe
and sound manner.
v. 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 system.
1.10RESEARCH 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:
a. Why is huge
capitalization requirement capable the viability and health of Nigerian banks?
b. Why is
capitalization a necessary factor for banking viability in Nigeria?
c. Would the large
capitalization requirement not lead to liquidation, mergers and acquisitions
and other impediments to vibrant competition in the banking industry?
d. What are the
effects of capitalization on the stability of banks in Nigeria?
HYPOTHESIS 1
HO: There is no significant bank relationship between
capitalization and economic growth in Nigeria
HYPOTHESIS 11
HO: Thereis no significant relationship between
capitalization and bank stability.
1.11JUSTIFICATION 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
1.12SOURCES 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 publisher’s e.t.c.
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 dependent variables.
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
correlation.
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:
1. First Bank Plc.
2. Intercontinental
Bank Plc
3. UBA Plc
4. Union Bank Plc
5. FCMB
6. IBTC Chartered
Bank Plc
7. Zenith
International Bank Plc
8. Fidelity Bank
Plc
9. 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
CHAPTER ONE
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.
CHAPTER TWO
This review the related literatures and theoretical and
conceptual frame work of banks capitalization.
CHAPTER THREE
This is the research methodology which is going to state the
hypothesis to be tested and the measure to test these hypotheses
CHAPTER FOUR
If summarize the study, draw up recommendations and
conclusion
1.14DEFINITION 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
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