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PERFORMANCE AND PITFALLS OF THE BANKING SECTOR - REFORMS AND THE NIGERIA ECONOMY

CHAPTER ONE
INTRODUTION
1.1Background of the Study

Man’s adaptive capability, according to Sabine (1972), has not been limited to the improvement of his political life or the creation of political institution. If anything, man has been more ingenious in his economic life also. The introduction of modern banking in the 13th century in Italy (Microsoft Encarta, 2008) through applauded as a landmark development of the age did not present man with a pause. Banking reforms have been an on-going phenomenon around the world particularly from 1980s, but it is more intensified in recent time because of the impact of globalization which is precipitated by continuous integration of the world market and economies. Many countries in the world have undertaken one form of economic reforms another in the course of their history. The goals 9of such reforms are always directed toward putting their economies on the path of sustainable growth and development. In developing economies, such reforms have characterized the development strategy. The compelling reason for reforms typically includes structural weakness in economy, high debt service burden, spatial and sartorial unevenness and poor growth performance. Banking reforms involve several element that are unique to each country based on historical economic and institutional imperative in developing countries like Nigeria, the reforms in the banking sector preceded against of backdrop of banking due to highly undercapitalization deposit taking bank, weakness in regulatory and supervisory framework, weal management practices and the tolerance of deficiencies in the corporate governance behavior of banks (uchendu, 2005).

In the last two decades, Nigeria has witness various economic reform programmers’ aimed at fostering economic growth and development. One of such reforms is the re-capitalization of the commercial banks in the country. In almost every economic reform programmer, the primary objective is to achieve high and sustainable growth. So far the banking system in Nigeria has undergone radical changes during the 35 years since independence. Banking developed from an industry, which in 1960 was dominated by a small number of foreign owned banks into owned in which public sector ownership predomination in the 1970s and 1980s and in which Nigeria private investors have played an increasingly important role since the mid-1980s. government policies has a major influence on developments sector policies, beginning in the 1960s and intensifying in the 1970s, the objective of which was to influence resource allocation and promote indigenization. Since 1987 financial sector reform has been implemented, encompassing elements of liberalization and measure to enhance prudential regulation and tackle bank distress.

Banking crisis usually start with inability of the bank to meet its financial obligation to its stakeholders. This, in most case, precipitates runs on banks, the banks and their customers engage in massive credit recalls and withdrawals which sometimes necessitate central bank liquidity support to the affected banks. Some terminal intervention mechanism may occur in the form of consolidation (mergers and acquisitions), recapitulations, use of bridge banks, establishment of asset management companies to assume control and recovery of bank assets, and outright liquidation of non-redeemable banks. Bank consolidation, which is at the core of most banking system reform programmer, occurs, some of the time, independent of any banking crisis irrespective of the cause, however, bank consolidation is any banking system, embrace globalization, improve healthy competition, exploit economies of scale, adopt advanced technologies, raise efficiency and improve profitability. Ultimately, the goal is to strengthen the intermediation role of enhancing economic growth, which subsequently leads to improve overall economic performance and societal welfare. The proponents of bank consolidation believe that increased size could potentially increase bank returns, through revenue and cost efficiency gains. It may also, reduce industry risks through the elimination of weak banks create better diversification opportunities (Berger, 2000). On the other hand, the opponents argue that consolidation could increase bank’s propensity toward risk taking through increase in leverage and off balance sheet operations. In addition, scale economies are not unlimited as large entities are usually more complex and costly to manage (DE NICOLO ET AL 2003).

Banking sector reform in Nigeria are driven by the need to deepen the financial sector and reposition the Nigeria economy for growth, to become integrated into the global financial structural design and evolve a banking sector that is consistent with regional integration requirements and international best practices. It also aimed at addressing issues such as governance, risk management and operational inefficiencies, the centre of the reforms is around firming up capitalization (Ajiayi, 2005) Thus, the re-capitalization and consolidation of the commercial banks in Nigeria on the development and performance of banking in Nigeria since the re-capitalization.

1.2Definition of Research Problems

In almost every reform programme, the primary objective is to achieve high and sustainable growth. In doing this, the major drivers of growth such as agriculture, manufacturing and service are given adequate attention. However, for the reforms to have the desired impact on the real sector, the financial sector must of necessity be reformed too. Business organizations are recently seeing consolidation (mergers and acquisition) as a alternative means of recapitalizing. In fact of age long systematic distress, the loose-grasp of authorized regulatory bodies i.e, centre bank of Nigeria (CBN), Nigeria deposit insurance corporation (NDIC), etc. on the administration, control, and development of banks, ,the unethical and poor standard practices of the bank themselves gave rise to insecurity of depositor’s demand, rampant liquidation and distress of banks inability to give loans and fraudulent activities by employees due to a porous style of banking.

In this work, we shall critically examine the impact of recapitalization on banking performance in Nigeria.

In view of this, the researcher attempts to answer the following questions:

Has recapitalization affected the lending rate banks?

Does it have any effect on shyareholder’s funds?

Has recapitalization affected the profit margin of banks?

1.3Aims and objective of the Study 

Our aims are to carry out an empirical study of the performance of commercial banks during the pre-Soludo era and their performance after the recapitalization process.

The study will seek to achieve the following objective:

To examine the impact of recapitalization on the lending rate of banks.

To determine the impact of recapitalization on shareholder fund.

To examine the impact that recapitalization will Have on the profit margin of banks.

1.4Research Hypothesis

Baridam (2001) defines hypothesis as a tentative answer to a problem. Hence it is a tool for correcting the defined problem of the study. Therefore, in order to solve these problems, the following hypothesis will be formulated from the objectives and will be verified in the course of this research work.

Ho1:There is no significant relationship between recapitalization and lending 

rate.

Ho2:there is significant relationship between recapitalization and shareholders 

fund. 

Ho3:there is no significant relationship between recapitalization and bank profit.

1.5Significance of the Study 

A research work of this sort will help to establish the performance and pitfalls of the banking sector reforms and the Nigeria economy and based on such pitfalls; provide future policies options that can boost reforms through the4 deliberate adoption of such policies that would ensure convergence of domestric and international rate return on financial market investments.

This study will be relevance to the following:

Academia/researchers,

Decision markers in the banks,

Government regulatory agencies e.g CBN

The significance of the study is to add to the general body of knowledge, enlighten the general public on the impact of recapitalization on the performance of banks in Nigeria

1.6 Scope of the Study

In this project work, we shall focus on majorly on re-capitalization of commercial banking in Nigeria. Their performance and pitfall as a result of the reforms or re-capitalization and provide future policies option that can improve on their performance.

Also, the project work will provide an objective assessment of the outcomes of the banking re-capitalization based on the following measures: branch networks, increased supply and improve access to credit, and above all increased ability to compete within the global economy.

The assessment will be done for ten commercial banks in Nigeria, namely: united bank for Africa (UBA) PLC, first bank of Nigeria, zenith bank plc, intercontinental bank plc, diamond bank plc, which will serve as the case study for this research work. Data will be gotten from central bank of Nigeria (CBN), Nigeria stock exchange (NSE) and other existing relevant literatures including the internet, security and exchange commission library and the association of issuing houses of Nigeria. Also libraries where relevant to the research topic are locate will be consulted and used.

1.7 Methodological Weaknesses

1.Problem of secondary data.

Reliability of Data 

Manipulation of data by government 

Source of the Data 

1.8Definition of Terms

Below are list of some term used this project work and their respective meanings:

Reforms: There is reorganization made by a government or anymore to improve on a system.

Policies: These are guiding principles’ and procedures established by authorities,

Re-capitalization:This is an economic term which means to re-invest.

Merger: It is the combination of two or more separate firms into a single firm.

Acquisition: It is where a company takes over the controlling of shareholding 

interest f other company.

Performance: It is extent to which an investment is profitable.

Consolidation: it is the combination of two or more banks into a newly created 

bank

1.9 Organization of Study 

The project work will made up of five chapters as follow:

Chapter one consists of the introduction statement of study, limitations of the 

study, origination of stud and definition of terms.

Chapter two consists of literature review, introduction, overview and structure of 

the Nigeria banking sector, history of bank recapitalization , rationale for the 

increase in the minimum paid up capital requirement for banks, the reform agenda 

, the benefits of recapitalization through merger and acquisition, challenges of 

bank consolidation, recapitalization and financial sector stability, 

Recapitalization as affects profits of banks, recapitalization and financial sector 

stability, recapitalization it affects profit of banks, recapitalization as it affects 

banks ability to grant loans the effect of the recapitalization exercise.

Chapter three will deal with the methodology, theoretical framework research 

design, population and sample size of the study, model specification.

Chapter four will cover the presentation and analysis of result, hypothesis, testing 

while chapter consist of finding, conclusion and recommendations.

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