The effects of bank consolidation on the performance of the migerian capital market

Thesis Overview

<p> </p><p><b>INTRODUCTION</b></p><p><b>1.1<br>BACKGROUND TO THE STUDY</b></p><p>The banking system<br>plays a fundamental role in the growth and development of any economy. In fact,<br>the health of the banking system of a nation determines the well-being of the<br>economy (Osaze 2000).The banking sector<br>in Nigeria had undergone a number of major reforms over the last two decades<br>brought about by the restructuring and<br>liberalization of the financial sector as well as technological improvements.<br>Before 1987, the Nigerian monetary authorities restricted entry, controlled<br>branch expansion and set both deposit and lending rates. This institutional<br>framework led to a situation of virtually little or no competition in the<br>sector, with more of the activities concentrated in the four largest banks. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;</p><p>In 1990s, a lot of<br>structural changes were observed in the sector. There was a significant closure<br>of banks, takeover of management and control by the Central Bank of Nigeria<br>(CBN) and the Nigerian Deposit Insurance Corporation (NDIC). The mandatory<br>capital level was increased to N500,000.00,<br>while the statutory minimum risk-weighted capital ratio remained at 8% on<br>average, the number of banks in Nigeria shrank by approximately 22% between<br>1997 and 1999 (Asogwa, 2004). &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;</p><p>The adoption of universal<br>banking in Nigeria brought about the need by the CBN to strengthen the<br>regulatory and supervisory framework. The requirement of capital base was again<br>raised to N2 billion in 2002 while the<br>risk-weighted capital ratio was increased to10%. In 2004, the CBN announced a<br>new 13 point reform agenda with the intent to promote soundness, stability and<br>efficiency of the Nigerian banking sector and to enhance its competitiveness in<br>the African regional and global financial system. One of the 13-point agenda was<br>to increase the minimum capital base to N25<br>billion approximately 18 months (December, 2005) after the announcement with<br>the statutory minimum risk- weighted capital ratio maintaining at 10%. This<br>brought about the need for some banks to terminate their existence, while some<br>find themselves into mergers, and acquisitions and the remaining banks went to<br>the capital market to raise new capital. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;</p><p>When the new reform was<br>announced, out of the 89 banks in operation in the banking sector, about 5-10<br>banks’ capital base was already N25billion;<br>11-30 banks’ capital base was within N10<br>to N20 billion; the remaining 50-60<br>banks were quite below N10 billion (Zhao and Murinde, 2009). The attempt to meet<br>the minimum capital base induced the merger and acquisition in the industry.<br>Further, banks raised capital from local as well as foreign direct investment.<br>This led to the increase in the industry’s capitalization as a percentage of<br>stock market capitalization and market’s liquidity during its 2005-2006 financial<br>year. At the end of the18 months given by the CBN, only 25 out of 89 banks were<br>standing with 21 private publicly quoted banks, 4 foreign banks but no<br>government-owned bank. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;</p><p>Since inception, the<br>reforms in the banking industry have been influenced by the need for sounder<br>banking industry, globalization of operations, technological innovation and the<br>adoption of supervisory and prudential requirements that conform to<br>international standards and the need to make Nigerian banks Basel Accord I and<br>II compliant. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;</p><p>The reforms in the<br>Nigerian banking sector were necessary due to reasons such as: weak capital<br>base of the banks, weak corporate governance, gross insider abuse, sharp<br>practices, overdependence on public sector deposits, insolvency and internally<br>focused competition. The reform brought about changes in size, structure and<br>operational characteristics of the Nigerian banking system (Ibid). Eventually,<br>24 larger and better-capitalized banks are currently in operation in Nigeria. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;</p><p>The roles and<br>performances of the Nigeria capital market before and after consolidation in<br>channeling investment opportunities is something that cannot be ignored.<br>However the question that is yet to be scientifically answered is which period<br>did the Nigeria capital market perform better? The objective of this study is<br>to assess the performance of Nigeria capital market before and after<br>consolidation.</p><p><b>1.2<br>STATEMENT OF THE PROBLEM</b></p><p>Banks made<br>consolidation (merger and acquisition) as an alternative means of recapitalizing.<br>The latest reform compelled all commercial banks (deposit- taking<br>institutions) to raise their capital<br>base from N2 billion to N25 billion on or before 31st December, 2005 which sent some of the banks<br>on their toes considering consolidation (merger and acquisition) as the best<br>option From the Nigerian Stock Fact Book <br>during the years before consolidation, there were no improvement in<br>all-share index, volume, values of shares traded and banking sector<br>capitalization compared to the consolidation period and thereafter. Has this<br>improvement being brought about by the consolidation exercise of 2005? What was the sole factor that was responsible<br>for this sudden improvement? &nbsp;</p><p>What effect did banking sector consolidation have<br>on the Stock market performance in terms of improving the performance indices<br>of the stock market? What has been the trend of all-share index before and<br>after banking sector consolidation? To what extent has consolidation exercise<br>of 2005 impacted the stock trading activities in the stock market? Looking at<br>the Fact Books of NSE before, during and after consolidation, had the banking<br>sector consolidation brought boom or doom to the capital market in Nigeria? &nbsp; &nbsp; &nbsp; </p><p>Although the<br>consolidation program sounded attractive at the onset, experts have argued that<br>the exercise is policy-induced rather than market-driven and as such may<br>encounter difficulties in realizing the anticipated goals. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;</p><p>According to<br>Somoye(2008), the Government policy-promoted bank consolidation rather than<br>market mechanism has been the process adopted by most developing or emerging<br>economies and the time lag of the bank consolidation varies from nation to<br>nation and as such there are for instance, high degree of suspicions among the<br>antagonists that the consolidation policy lacks critical consideration of the<br>realties on ground, and that the authorities may have adopted it to disempower<br>certain group of bank owners who were recently linked to various forms of<br>economic crimes and financial improprieties (Ezeoha 2005) . A great concern for<br>the consolidation exercise, despite its good intents, has been the level of<br>controversy it generated since the CBN announced it in July 2004. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;</p><p>In the remarks of Akpan<br>(2009) maximizing returns and optimizing profitability became the challenge for<br>banks immediately after the consolidation exercise where banks were required to<br>significantly increase their level of returns and at the same time manage<br>costs, to realize this, banks will have to offer innovative products and<br>services to the marketplace including new ways of delivering them. As with the<br>general economic reforms that are concurrently taking place in the country,<br>however, most of the arguments centered more on the structure and the<br>implementation mechanism, and not on the desirability of the exercise (Ezeoha 2005). &nbsp; &nbsp; &nbsp; &nbsp;</p><p>It is as a result of<br>the afore-mentioned that this study sets out to examine the performances of the<br>Nigeria Capital market before and after the consolidation exercise of 2004, to<br>see if the consolidation of banks brought about significant improvement of the<br>capital market when compared to the <br>performance of the market before consolidation.</p><p><b>1.3<br>JUSTIFICATION FOR THE STUDY</b></p><p>The Evaluation of the<br>performances of Nigerian capital market before and after consolidation has been<br>an area of interest to many researchers in recent years and prior. Several<br>studies conducted on the evaluation of the performances of the Capital market<br>appear not to have adequately addressed all the major issues of concern in this<br>area. For instance, Abdulrahaman (2013) made an evaluation of the performances<br>of Nigerian capital market before and after banking sector consolidation<br>exercise between the period from 2001-2010.The study examined the significant<br>difference in the mean of the performances of the Capital market before and<br>after consolidation. However, the study failed to evaluate the difference in<br>the level of local investment and also the All-share index on the exchange<br>before and after consolidation in which the uniqueness of this study lie. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;</p><p>To the best of the<br>researcher’s knowledge and the literature available, it appears that no study<br>has been carried out which evaluates the capital market performances before and<br>after consolidation with particular respect to the level of local investment.<br>This is what gives rise to the study, and hence the gap the researcher intends<br>to fill.</p><p><b>1.4<br>RESEARCH OBJECTIVES</b></p><p>The general objective<br>of this study is to examine how badly or how well the Capital market fared<br>before the consolidation of banks in 2005,in comparison to the<br>post-consolidation performance.</p><p>The specific objectives<br>are to:</p><p>(i.) &nbsp; &nbsp; &nbsp; Examine the value and volume of market<br>transactions before and after &nbsp; &nbsp; &nbsp; banks’<br>consolidation.</p><p>(ii.) &nbsp; &nbsp; &nbsp; Evaluate &nbsp;the All-share index of the stock exchange<br>before and after consolidation &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; of<br>banks.</p><p>(iii.) &nbsp; &nbsp; Determinethe level of local investments in<br>the market before and after &nbsp;banks’ &nbsp; &nbsp; &nbsp; consolidation.</p><p><b>1.5<br>RESEARCH QUESTIONS</b></p><p>(i.) &nbsp; &nbsp; &nbsp; To what extent has the banks’<br>consolidation improved the value and volume of &nbsp; &nbsp; transactions<br>in the capital market in comparison to the value and volume &nbsp; &nbsp; &nbsp; &nbsp; of transactions &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; before consolidation?</p><p>(ii.) &nbsp; &nbsp; &nbsp; Has the All-share indices of the stock<br>exchange significantly improved after &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; consolidation<br>relative to pre-consolidation?</p><p>(iii.) &nbsp; &nbsp; Is there a significant improvement in the<br>level of local investments in the &nbsp; capital market after consolidation when compared to the level of local investments<br>before consolidation?</p><p><b>1.6<br>HYPOTHESES OF THE STUDY</b></p><p>The hypotheses of the<br>study are: &nbsp; &nbsp; &nbsp; </p><p>Ho1: &nbsp; There is no significant relationship between<br>&nbsp;the value and volume of market<br>transactions in the &nbsp; capital market<br>before and after banks’ consolidation.</p><p>Ho2: &nbsp; Banks’ consolidation in Nigeria has no<br>significant relationship with All-share index of the &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; Nigerian Stock Exchange before and after consolidation.</p><p>Ho3: &nbsp; There is no significant improvement on the<br>level of local investments before and after &nbsp; &nbsp; &nbsp; banks’<br>consolidation.</p><p><b>1.7<br>SCOPE OF THE STUDY</b></p><p>&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; The study considers the performance indicators of the<br>capital market which covers the time period between 2003-2008.The study<br>compares the performance of Nigeria capital market for the period of five years<br>which are divided into two different periods, pre consolidation period (2003 –<br>2005) and post consolidation period (2006 -2008).The performance indicators<br>evaluated include: The value of market transactions, volume of stock traded and<br>the All-share index; and also primary information on the level of local<br>investments on the exchange.</p><p><b>1.8<br>DEFINITION OF TERMS</b></p><p><b>Bank</b></p><p>According to<br>dictionary, a bank is an institution for keeping, lending and exchange of, and<br>so on and so forth of money.Generally speaking, bank is an institution that<br>accepts deposits from customers and thus advances loans to the customers. The<br>major difference between banks and other financial institutions that accept<br>deposits is that banks create credit while other institutions cannot.</p><p><b>Capital<br>Market</b></p><p>The Capital market is<br>the segment of the financial market which facilitates the mobilization and<br>allocation of medium and long term funds through the issuance and trading of<br>financial instruments. Such instruments, otherwise known as securities include<br>stocks and company shares; commercial and industrial loan stocks and<br>debentures; state government bonds and stocks; federal government development<br>stock bonds.</p><p><b>Consolidation</b></p><p>Consolidation is<br>reduction in the number of banks and other institutions that take deposits with<br>a simultaneous increase in size and concentration of consolidated entities in<br>the sector.</p><p><b>Mergers<br>and Acquisition</b></p><p>A merger is<br>continuation of two or more companies into one single company. On the other<br>hand, acquisition takes place where a company takes over the controlling<br>shareholding interest of another company.</p><p><b>1.9<br>ORGANIZATION OF THE STUDY</b></p><p>The study will be<br>divided into five chapters. Chapter one presents the introduction of the study<br>and the overview of the research work. Chapter two reviews the existing<br>literature on the Nigerian banking sector, development and transitions at<br>different points in time leading up to the announcement of the new minimum capital requirement of banks by the<br>CBN in 2004 resulting into consolidation; and also the history and evolution of<br>the Nigerian capital market, conceptual framework and &nbsp;theoretical framework. Chapter Three examines the methodology adopted for<br>this study in terms of data collection and instruments. Chapter four presents<br>the data analysis and interpretation of results. Chapter Five discusses the<br>summary, conclusion and recommendations of the study.</p> <br><p></p>