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EFFECT OF RECAPITALIZATION OF BANKS ON NIGERIAN ECONOMY
ABSTRACT
The global phenomenon in the financial service industry is
the consolidation of the financial activities towards ensuring financial
stability. It is occurring at a rapid pace due to changes in economic
environment, which often alter the constraints faced by financial service
firms.
The main objective of this study is to examine the effect of
recapitalization of banks on Nigerian economy. Secondary data was gathered from
CBN statistical bulletin on GDP, bank capitalization, number of distressed
banks, number of banks, from the year 1990-2007. The gathered data was analyzed
using the multiple regression models on statistical package for social sciences
(SPSS). The research showed a strong correlation coefficient between the
dependent and the independent variables. Hence, our finding revealed that there
is a significant and thus positive relationship between bank recapitalization,
number of banks, number of distressed banks and GDP.
Hence, this research work recommends that there should be
effective training and manpower development, asset management company (AMC),
cross border merger, and the use of modern information and communication
technology. These are to ensure stability, effectiveness and efficiency in the
system. Thus, from the analyzed data and other findings, this research work
concludes by recapitalization of banks as improved the Nigerian economy.
CHAPTER ONE
INTRODUCTION
1.1BACKGROUND OF THE STUDY
It is widely recognized that the financial system plays
crucial roles in economic development. In Boyd.et.al (1993), it was discovered
that in an Merger and acquisition arrangement, a larger, more efficient
institution tends to take over smaller, less efficient institution, presumably
at least, in part to spread the expertise or operating policies and procedures
of the more efficient institution over the one acquired.
It has also been found that acquiring banks are more
profitable and have smaller non-performing loan ratios than target (Peristiani
1993) consolidation of the financial activities is the global phenomenon been
faced in the financial stability. It is
a way of resolving problems of financial distress and its occurrence is at a
rapid pace in most countries of the world, particularly in emerging markets.
According to Lemo, T (2005), he argued that the primary
objective of the reforms is to guarantee an efficient and sound financial
system. The reforms are designed to
enable the banking system develop the required resilience to support the
economic development of the nation by efficiently performing its functions as
to fulcrum of financial intermediation.
It was also discovered in the study that profitable banks are
always willing to be acquires while small, unprofitable banks tend to be
acquired (Forcarell, Panetta and Salleo 1998).
Soludo 2004, argues that the consolidation is one of the key
components of financial reforms designed to ensure a diversified, strong and
reliable banking sector, which will in turn guarantee the safety of depositors
money, effective performance of developmental roles and competitive players in
African regional and global financial system.
There are some analysts that are of the view that the main
motivation behind consolidation is to maximize shareholders values which is
best achieved through mergers and acquisition while others view that
consolidation will not only bring about increase shareholders worth but also
contribute to the expectation of economics of scale as well as altering the
centers and peripheries of financial activity but in spite of its benefits, it
is not without its consequences.
One possible impact of financial consolidation on bank
customers could stem from the disruption of historical lending patterns. A lack
of short-run substitutes for bank credit would imply that a disruption in the supply
of bank credit would have negative consequences for the affected borrowers and
possibly for the macro-economy, as argued in the literature reviewed by
Bernanke (1993).
Strahan and Weston (1998) examined banks involved in mergers
by comparing the small business lending of the bank pre-and post-merger to a
sample of bank not involved in mergers. Their findings therefore, do not
support the consolidation hypothesis.
1.2PROBLEM IDENTIFICATION
The central bank of Nigerian (CBN) Act 21, 1990 and Bank and
other financial institution Act (BOFIA) 1991 represent significant watershed,
in capital regulation for the Nigerian banking system. From a modest value of
ten million Naira minimum paid up capital in 1988, Nigerian commercial banks
were required to maintain capital not below N50million in 1991. Between 1991
and 2005 subsequent increase have also been made ranging from
N500 million (1997); N2billion (2002), to N25 billion in 2005.
Today, a lot of people no longer have faith in these banks
anymore because of the fact that a lot of problem exists in distress while some
were liquidated. While, various regulator approaches starting from deregulation
to consolidation have brought about growth in the size structure and function
of the Nigerian banking system, capital regulation cannot be said to have been
efficient in ensuring a stable banking system or a corresponding level of
economic growth.
1.3 RESEARCH
QUESTIONS
The research work is attempting to answer the following
questions;
i. Has the
introduction recapitalization of banks in Nigeria brought a positive reaction
or not?
ii. Has it in
any way affected the economy?
iii. Is it a venture
that will boost the banking sector?
iv. Have the
problem of weak capital base been solved?
v. Do small
and medium savers now benefit from these banks?
vi. Does the
society now have the confidence to request for help form the bank? i.e.
financial supports.
1.4 PURPOSE OF THE
STUDY
The main purpose of this study is to examine;
1. The effect of recapitalization of banks on the Nigerian
economy.
2. To determine the relationship between bank
recapitalization, Gross domestic product (GDP), distressed banks and the number
of banks.
3. To also examine the
various theories of bank recapitalization.
No nation can attain greater height in its economy without
the banking sector because banks are the pivot of any economy. there is no
sound, safe and viable banking sector in an economy, nothing can be moved, be
it political or other spheres of life.
1.5 RESEARCH HYPOTHESIS
The conjectural statement for the research work in respect of
the research question is as follows;
Ho – h=recapitalization
of banks has not improved the Nigerian economy.
Hi – h ≠recapitalization of banks has improved the Nigerian
economy.
1.4RESEARCH
METHODOLOGY
This research is based on secondary data which was sourced
from the use of bank journals, books on
banking and CBN statistical bulletin etc. the span of the project takes place
between 1990-2007 and the method of analysis goes this;
Y = F (bo + bI xI + eI)
Where;
Y = GDP
XI = Bank capitalization
bo = The constant (S)
bI = The co-efficient for the independence variable
e = Standard errors
1.5SIGNIFICANCE OF THE STUDY
This study will bring about a comprehensive and detailed
analysis of the effect of recapitalization of banks on the Nigerian economy.
Thus, it will be useful for governmental agencies, monetary authorities, non-
governmental organizations, board of directors of banks, researchers’ scholars,
the students and academicians alike.
Banks facilitate economic growth in a variety of ways and
also a sensitive and volatile industry.
Efforts are been made in this study in other to discover the
effect of the recapitalization programme on thee Nigerian bank and how it
affect the Nigerian economy. At the end of this project, the projects write –
up will tell if the effect is positive or negative.
1.6SCOPE AND LIMITATION
Banks consolidation through mergers and acquisition came into
existence in Nigeria in 2004 but the investigation on the reasons for the poor
management of the CBN started in 2004 by the Pius Okigbo panel on the
re-organization of the CBN set up by the then Head of state, SANI ABACHA.
This research is limited by some certain factors which tend
to make the research work difficult; they include;
i.FINANCE
The basic aspect of any research work is the ability to back
it up financially. Information is being made very difficult due to the
limitation of most materials needed for this research such as, journals,
textbooks, the CBN statistical bulletin and so on.
ii.Death research materials
Apart from journals, we don’t have any text book that
contains an indebt explanation of the subject matter.
iii.TIME
There is no sufficient time as result of academic and other
activities all requiring simultaneous performance.
1.7PLAN OF STUDY
This research work shall be divided into five chapters.
Chapter one will be devoted to introduction, historical background, the purpose
of the study and limitation of the study. Chapter two will contain the review
of past work on the related topic and in this regards journal and text books
will be consulted. Chapter three will take a critical look at the methodology
source of data, data interpretation
model specification and technique analysis. Chapter four contains data analysis
and interpretation. Finally chapter five will focus on introduction, summary,
conclusion and recommendation.
1.8 DEFINITION OF TERMS
The technical terms in this research work are suitably
defined in this section to make room for general understanding.
Recapitalization: The current trends of compelling all
commercial banks to raise their capital base from 2 billion to 25 billion Naira
by the central bank.
Mergers: This is the combination of organization or
commercial companies into one entity.
Acquisition: This refers to a situation whereby company takes
a controlling ownership interest in another firm.
Capital: This is the amount of money used to set up a business.
Liquidity: State of being able to raise funds easily by
selling assets.
Market: The set of all actual potential buy of a product.
Deregulated economy: This is a situation in whereby controls
on all fiscal monetary trade pricing and exchange rate policies are removed.
Globalization: The idea of the different countries and
economics of the world being closely connected together by modern
communications and therefore economically, poetically, socially and
environmentally dependent on each other.
Hypothesis: A conjectural statement preposition or an
assumption about the relationship between two or more variables. This, which is
subject to testing, may either be true or false (null or alternative)
REFERENCES
Altunbas, Y Maude, D (1995): “Efficiency and mergers in the
U.K (retial) banking market” Working Paper, Bank of England.
Berger A. N, Hunterm W.C, and Timme S.G (1993): The
“Efficiency of Financial Institutions; a Review and Preview
of Research Past, Present, and Future” Journal of Banking and Finance, Vol. 17,
No 2-3 April, page 221-49
Central Bank of Nigeria (2004): “Guidelines and incentives
On consolidation in the Nigerian Banking Industry”
Abuja.
Forcarelli D, Panetta F, Salle O.C (1998) “Why do banks
merge?” some empirical evidence for Italy, Mimeo.
Jaiye Oyedotun (2005) “Merger and Acquisition; An overview” The Journal of Banking and
Finance JBF Vol. 7 No 2, A Publication of Financial Institute Training Centre
(FITC), Lagos.
Lemo, T. (2005)
“Regulatory Oversight and Stakeholder
Protection”. A paper presented at the BGL merger and
Acquisition interactive seminar held at Eko Hotel and suits, V.I on June 24
Perisstiani S. (1993): “The Effect of mergers on Bank
Performance”, Federal Reserve Bank of New York studies on
excess capacity in the financial sector, March.
Savage,D. T., (1991):
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