The impact of recapitalization on the performance of banks in nigeria (a case study of nigerian banks)

Thesis Overview

<p> </p><div><b><p><b>1.1 BACKGROUND OF STUDY<br></b></p><p><b></b></p><b><p>Banking reforms have been an ongoing phenomenon around the<br>world right from the 1980s till date,<br>but it is more intensified in recent time because of the impact of<br>globalisation which is precipitated by continuous integration of the world<br>market and economies. Banking reforms involve several elements that are unique<br>to each country based on historical, economic and institutional imperatives. In<br>Nigeria, the reforms in the banking sector preceded against the backdrop of<br>banking crisis due to highly undercapitalization deposit taking banks; weakness<br>in the regulatory and supervisory framework; weak management practices; and the<br>tolerance of deficiencies in the corporate governance behaviour of banks<br>(Uchendu, 2005). Banking sector reforms and recapitalization have resulted from<br>deliberate policy response to correct perceived or impending banking sector<br>crises and subsequent failures. A banking crisis can be triggered by weakness<br>in banking system characterized by persistent illiquidity, insolvency, undercapitalization,<br>high level of non-performing loans and weak corporate governance, among others.<br>Similarly, highly open economies like Nigeria, with weak financial<br>infrastructure, can be vulnerable to banking crises emanating from other<br>countries through infectivity.</p><p>Banking crisis usually starts with inability of the bank to<br>meet its financial obligations to its stakeholders. This, in most cases,<br>precipitates runs on banks, the banks and their customers engage in massive<br>credit recalls and withdrawals which sometimes necessitate Central Bank<br>liquidity support to the affected banks. Some terminal intervention mechanisms<br>may occur in the form of consolidation (mergers and acquisitions),<br>recapitalization, use of bridge banks, establishment of asset management companies<br>to assume control and recovery of bank<br>assets, and outright liquidation of non redeemable banks. Bank consolidation,<br>which is at the core of most banking system reform programmes, occurs, some of<br>the time, independent of any banking crisis.</p><p>Irrespective of the cause, however, bank consolidation is<br>implemented to strengthen the banking system, embrace globalization, improve<br>healthy competition, exploit economies of scale, adopt advanced technologies,<br>raise efficiency and improve profitability. Ultimately, the goal is to<br>strengthen the intermediation role of banks and to ensure that they are able to<br>perform their developmental role of enhancing economic growth, which<br>subsequently leads to improved overall economic performance and societal welfare.<br>The proponents of Bank consolidation believe that increased <br>size could potentially <br>increase bank returns, through<br>revenue and cost efficiency gains. It may also, reduce industry risks through<br>the elimination of weak banks and create better diversification opportunities<br>(Berger, 2000). On the other hand, the opponents argue that consolidation could<br>increase banks’ propensity toward risk taking through increases in leverage and<br>off balance sheet operations. In addition, scale economies are not unlimited as<br>larger entities are usually more complex and costly to manage (De Nicoló et<br>al., 2003).</p><p>Banking sector reforms in Nigeria are driven by the need to<br>deepen the financial sector and reposition the Nigeria economy for growth; to<br>become integrated into the global financial structural design and evolve a<br>banking sector that is consistent with regional integration requirements and<br>international best practices. It also aimed at addressing issues such as<br>governance, risk management and operational inefficiencies, the centre of the<br>reforms is around firming up capitalization. (Ajayi, 2005)</p><p>Capitalization is an important component of reforms in the<br>Nigeria banking industry, owing to the fact that a bank with a strong capital<br>base has the ability to absolve losses arising from non performing liabilities.<br>Attaining capitalization requirements may be achieved through consolidation of existing banks or<br>raising additional funds through the capital<br>market.</p><p>In his maiden address as he resumed office in 2004, the current<br>Governor of Central Bank of Nigeria, Soludo, announced a 13-point reform<br>program for the Nigerian Banks. The primary objective of the reforms is to<br>guarantee an efficient and sound financial system. The reforms are designed to<br>enable the banking system develop the required flexibility to support the<br>economic development of the nation by efficiently performing its functions as<br>the pivot of financial intermediation (Lemo, 2005). Thus, the reforms were to<br>ensure a diversified, strong and reliable banking industry where there is<br>safety of depositors’ money and position banks to play active developmental<br>roles in the Nigerian economy.</p><p>The key elements of the 13-point reform programme include:</p><p>Ø<br>Minimum capital<br>base of N25 billion with a deadline of 31st march, 2016;</p><p>Ø<br>Consolidation of<br>banking institutions through mergers and acquisitions;</p><p>Ø<br>Phased withdrawal<br>of public sector funds from banks, beginning from July, 2016;</p><p>Ø<br>.Adoption of a<br>risk-focused and rule-based<br>regulatory framework;</p><p>Ø<br>.Zero &nbsp;tolerance <br>&nbsp;for &nbsp;weak &nbsp;corporate &nbsp;governance, <br>&nbsp;misconduct &nbsp;and &nbsp;lack &nbsp;of</p><p>transparency;</p><p>Ø<br>Accelerated<br>completion of the Electronic Financial Analysis Surveillance System (e-FASS);</p><p>Ø<br>.The establishment of an<br>Asset Management Company;</p><p>Ø<br>.Promotion of the<br>enforcement of dormant laws;</p><p>Ø<br>.Revision<br>and updating of relevant laws;</p><p>Ø<br>.Closer &nbsp;collaboration<br>&nbsp;with &nbsp;the &nbsp;EFCC<br>&nbsp;and<br>&nbsp;the &nbsp;establishment &nbsp;of<br>&nbsp;the &nbsp;Financial Intelligence Unit.</p><p>Of all the reform agenda the issue of increasing<br>shareholders’ fund to N25 billion generated so much controversy especially<br>among the stakeholders and the need to comply before 31st march, 2016.</p></b></b></div><b><b><div><p><b>1.2 STATEMENT OF<br>PROBLEM</b></p><p><b></b></p><b><p>This issue of the impact of recapitalization on the<br>performance of banks in Nigeria has really being the main topic in research.<br>The illiquidity, insolvency has really caused so many weakness in the banking<br>industry or sector. If the government can get direct and a proper solution to<br>these problems, then recapitalization will be very effective to ensure<br>diversified, strong and reliable banking where there is safety of depositor’s<br>money.</p><p><b>1.3 RESEARCH QUESTION</b></p><p><b></b></p><b><p>1. Does the recapitalization give room to improve in the<br>banking sector?</p><p>2. Is there any significant impact of the recapitalization on<br>the performance of banks in Nigeria?</p><p>3. &nbsp;Will the recapitalization help to reduce the<br>poverty index in Nigeria?</p><p>4. Does the<br>recapitalization exercise have any role to play on unemployment in Nigeria?</p><p><b>1.4 RESEARCH HYPOTHESIS</b></p><p><b></b></p><b><p>H0:<br>There is no significant impact of recapitalization on the performance of banks<br>in Nigeria.</p><p>H0:<br>There is significant impact of recapitalization on the performance of banks in<br>Nigeria.</p><p>H0:<br>There is no significant effect of ROE, ROA on YEA</p><p>H1:<br>There is significant effect of ROE, ROA on YEA</p><p><b>1.5 AIM AND OBJECTIVE OF STUDY</b></p><p><b></b></p><b><p>1. To<br>investigate the impact of recapitalization on the performance of banks in<br>Nigeria.</p><p>2. To<br>investigate the role of the recapitalization exercise on unemployment.</p><p>3. To find<br>out the poverty index of Nigeria since the recapitalization exercise.</p><p>4. To<br>investigate the improvement of improvement of the performance of banks since<br>recapitalization.</p><p>5. To assess<br>the relevancy of the recapitalization in the Nigerian Banking industry</p><p><b>1.6 SIGNIFICANCE OF STUDY</b></p><p><b></b></p><b><p>By the end<br>of this research, we will able to find out the impact of recapitalization on<br>the performance of banks in Nigeria. The research will also give room to<br>investigation the poverty index, the level of unemployment in Nigeria and also<br>suggest a proper means of rendering good and reliable services in the banking<br>sector.</p><p><b>1.7 SCOPE OF STUDY</b></p><p><b></b></p><b><p>This<br>research work covers most of the area of the level of unemployment, the poverty<br>index, the various reform of the central bank of Nigeria. It also covers the<br>area of the yield earning assets, return on equity (ROE) and return on assets(<br>ROA)</p><p><b>1.8 DEFINITION OF TERMS</b></p><p><b></b></p><b><p>Ø RECAPITALIZATION: is a type of corporate<br>reorganization involving substantial change in a company’s capital structure.<br>Recapitalization may be motivated by a number of reasons. Usually, the large<br>part of equity is replaced with debt or vice versa.</p><p>Ø YEA: Yield on earning assets is one measure of a<br>financial industry’s solvency used by banking regulators. It looks at total<br>interest, dividend and fee income earned on loans and investments as a<br>percentage of average earning assets.</p><p>Ø ROE: &nbsp;Return on equity (ROE) measures the rate of<br>return for ownership interest (shareholders’ equity) of common stock owners. It<br>measures the efficiency of a firm at generating profits from each unit of<br>shareholder equity, also known as net assets or assets minus liabilities.</p><p>Ø ROA: Return on assets (ROA) is a financial ratio that<br>shows the percentage of profit a company earns in relation to its overall<br>resources. It is commonly defined as net income divided by total assets. Net<br>income is derived from the income statement of the company and is the profit<br>after taxes.</p></b></b></b></b></b></b></b></div><b><b><b><p>Ajayi, M. (2005). Banking Sector Reforms and Bank Consolidation:<br>Conceptual framework,</p><p><i>Bullion, </i>Vol. 29, No. 2.</p><p>Asediolen (2004). For the Economic<br>and Financial Interest of Nigeria. <i>Nigerworld:<br></i>1 &amp; 2. Bello, Y. A. (2005). Banking System<br>Consolidation in Nigeria and Some Regional</p></b></b></b></b></b> <br><p></p>