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THE EFFECT OF BANKING CONSOLIDATION ON THE ACTIVITIES OF INSURANCE INDUSTRY IN NIGERIA

ABSTRACT

The effect of Banking consolidation on the activities of insurance industry in Nigeria (A case study of AILCO Plc) The consolidation experience of the Nigeria banking sector commended as a result of the monumental reform of the banking system which started on July 6, 2004 at the 23rd meeting held at the Central Bank of Nigeria headquarter when the newly appointed governor of the Central banking shared his preliminary concerning the reform of the Nigeria banking sector (Ogowewo and Uche 2006). The objectives of the study are to enumerate the expected impact of bank consolidation on insurance industry, to appraise the impact of bank consolidation in the rural sector of Nigeria economy. The significance of the study will reveal the reasons and importance of bank consolidation on the growth and development of insurance business in the economy, it will serve as a data for researchers that will carryout related research studies in the future. The researcher used both the primary and secondary data in gathering information for the study. In conclusion bank consolidation has significantly affected insurance business in Nigeria due to the recapitalization exercise that warranted the life assurance business to pay a minimum capital based of N25billion, while general insurance was N3billion. Thus the recapitalization exercise reduced insurance business in Nigeria into a total of 49 insurance companies.

CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND TO THE STUDY

The consolidation experience of the Nigeria banking sector commended as a result of the monumental reform of the banking system which started on July 6, 2004 at the 23rd meeting of the Nigerian bankers committee meeting held at the Central Bank of Nigeria shared his preliminary though concerning the reform of the Nigerian banking sector (Ogowewo and Uche, 2006). The ostentations reasons for the reform according to Soludo (2005) were to consolidate, deepen and enhance financial sector stability and competitiveness. To end a 13 point reform agenda for the banking sector was rolled out on July 6, 2004 with a terminal data of December 31, 2005 barely 18 months. The consolidation exercise having been completed with twenty five (25) banks emerging/form seventy five banks consolidating and thirteen (13) banks are not being able to survive the exercise (CBN 2006) This resulted to the mergence of the much taunted mega bank that are suppose to help facilitate economic growth in Nigeria.

The Central Bank of Nigeria (CBN) increased the minimum capital base for all universal bank to N25 billion in July 2004. This was an effort to strategically place the nation banking system in regional international convex and provide soundness, stability and enhance efficiency of the system. This led to merges and acquisition. Within the banking industry and thereby restructuring the entire system. The aim of the consolidation exercise among others was to groom and transform the bank into institution that investors can rely on, and depositors can trust, play development roles in the nations economy, to eliminate corruption and enhance transparency. It is also expected that the reform will overtime, down size the cost structure of the banks and guarantee higher returns to the shareholder and stakeholders of the banking industry. The consolidation banking system no doubt poses some challenges to both the banking institution as well as the regulatory authorities. This is because the banking industry becomes more concentrated as a result of consolidation and larger institutions also are more complex and tend to deal in sophisticated financial products. This makes them pose greater challenges in case of any failure.

However, banks ability to engender economic growth and development depends on the health, soundness and stability of the system, the need for a strong reliable and viable banking system is under scored by the fact that the industry is one of the few sectors in which the shareholders fund is only a small portion of the liabilities surprising that the banking industry is one of the most regulated sectors in any economy. It is against this background that the Central Bank of Nigeria (CBN) in the maiden address of its current Governor Professor Chukwuma Soludo outlined the first phase of its banking sector reforms designed to ensure a diversified, strong and reliable banking industry.  Thus, the reforms were to ensure the safety of depositors money, position banks to play active development roles is the Nigeria economy and become major player in the sub-regional, regional and financial markets. The N25 billion minimum requirement of the banks announced by the CNB are to benefits banks that survive it, in a way of holding huge public sector deposit and may be permitted to hold some foreign reserve deposits. Having the target of competing globally but also embraced innovation in their intermediation functions. The surviving banks are molding hope that national economy hang to on them would provide a final solution to funding for the productive sectors of the economy. Arrangement is said to be on that there will be automation process rendition of returns by banks and other through electronic financing surveillance system.

The post consolidation era in the sector no doubt has witnessed the emergence of the middle class in Nigeria and significant growth in the retail/consumer end of banking. The consolidation exercise in the country is also to tackle the need for customer derived banking. It is also going to change the shape of banking in the country. They are being tested and equipped to compete with the international banking sectors. It will build confidence on the mergers, in that banks focus will be on electronic banking and eradication of counter banking consolidation of the banking sector in Nigeria is to enable banks to compete globally and embrace innovation in their inter medication functions.

1.2  STATEMENT OF THE PROBLEMS

The Nigerian banking system has undergo remarkable change over the years, in terms of number of institution ownership structure, as well as the scale of operation driven largely, by the deregulation of the financial sector in the line with the global trend. With the introduction of the consolidation exercise in the banking industry, it was pertinent that to other institutions such as the insurance industry to address the problem currently facing the industry they are low capital base, lack of confidence by the insured and so on. It is also to this end that this stud was carried out to evaluate how the banking industry consolidation could affect the growth of insurance business in Nigeria.

1.3  OBJECTIVE OF THE STUDY

The objective of the study include the following:

· To appraise the role of bank consolidation in real sector of Nigerian economy.

· To examine the purpose of banking consolidation.

· To know the effect of banking consolidation on economic development of insurance industry.

· To enumerate the expected role of bank consolidation on insurance industry.

1.4  RESEARCH QUESTION

· Do you think that there will be some changes in banking industry after the consolidation exercise?

· Does bank consolidation affect insurance business in Nigeria?

· Do you think that bank consolidation will bring positive change in insurance business?

1.5  SIGNIFICANCE OF THE STUDY

· This significance of the study will reveal the reason and important of bank consolidation on the growth and development of insurance business in the economy.

· It will help individual to know about the consolidation exercise and its effect on the operation.

· It will serve as a data for researchers that will carryout related research studies in the future.

· It will make individual have confidence in the banking institution.

1.6  SCOPE AND LIMITATION OF THE STUDY

The researchers have chosen United Bank for Africa (UBA) Plc and Niger Insurance Plc in Enugu metropolis because the researcher cannot study all the insurance and banking industries.

1.7  DEFINITION OF OPERATIONAL TERMS

1. Consolidation: It is term used by CBN to describe the coming together of some banks within, to become one bank and be able to meet CNB’s requirement for capitalization to minimum base.

2. Merger: It is the coming of two or more entities into one through a purchase acquisition or a pooling of interest.

3. Acquisition: This is the act of acquiring the effective control by one company over assets or management of another company without any combination of companies.

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