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THE EFFECT
OF BANK RECAPITALIZATION ON THE ECONOMY OF NIGERIA
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND
OF THE STUDY
Over the
years, the Nigerian economy is faced with national and global economic
challenges and as such, the financial institutions, especially the banking
sector has an option of sanitizing and restructuring its operational processes
in order to survive the depressed economy, as well as embarking on a
consolidation exercise which would have some wider structural effects on the
industry and on the economy as a whole.
Basically,
banking is a service industry operated by human beings for the benefit of the
general public while making returns to the shareholders. As such, it is natural that the services
provided thereof by the industry cannot be 100% efficient; however, there is
always a room for improvement. It is on
this statement that the index of our further discussion on this study is based.
The banking
sector in the third world economies has been grossly under managed when
compared with their counterparts in the developed countries of the world. This has made it imperative for Nigerian
banks to sanitize and restructure their operational processes so as to be in
line with the global trends, and to survive the depressed economy.
Before the
introduction of Structural Adjustment Programme (SAP) in 1986, the banking
sector was characterized by few banks.
The operators of these banks had almost total control of the business of
banking as customers had to look for their services which most of the times
were of poor quality. The managers,
because of the pressure to provide banking services, had little time to market
their bank services or design new products to improve their customers’ service
and at the same time, they received changes based on the approved tariff. Competition was minimal and customers could
spend long hours trying to obtain service in the banking hall due to long
queues.
Prior to the
2004/2005 recapitalisation exercise, the Nigerian banking sector was highly
oligopolistic with remarkable features of market concentration and leadership.
Under the recapitalization and consolidation exercise in the industry, each
licensed bank was expected to meet up with the new minimum capitalization
requirement of =N=25 billion on a solo basis or achieve that either through
merger with others or acquisition of/by others. The banks were encouraged to
enter into merger/acquisition arrangements with other relatively smaller banks
thus taking the advantage of economies of scale to reduce cost of doing
business and enhance their competitiveness locally and internationally.
According to
the former governor of the Central Bank of Nigeria (CBN), Prof. Charles Soludo,
recapitalisation of the Nigerian Banking Sector was necessitated by the high
concentration of the sector by small banks with capitalization of less than $10
million, each with expensive headquarters, separate investment in software and
hardware, heavy fixed costs and operating expenses, and with bunching of
branches in few commercial centers - leading to very high average cost for the
industry (Soludo, 2004). The fragile state of the Nigerian Banking Sector in
the pre- recapitalization exercise is so bad that, only ten banks (10) out of
the eight-nine (89) in operation accounted for 51.9% of total assets, 55.4% of
total deposit liabilities, and 42.8% of total credit (CBN, 2004). The rating of
the licensed banks in operation, using the CAMEL parameters, revealed that ten
(10) banks were “sound”, fifty-one (51) were “satisfactory”, sixteen (16) were
rated “marginal” and ten (10) banks were rated “unsound” in 2004 (CBN, 2004).
However, the performance of banks since 2001 exhibited a deteriorating trend as
the number of “satisfactory” banks declined steadily from 63 in 2001 to 51 in
2004. In the same vein, the number of banks that were “marginal” increased from
8 in 2001 to 16 in 2004. “Unsound” banks also increased from 9 in 2001 to 10 in
2004. The marginal and/or unsound banks exhibited such weakness as
undercapitalization, illiquidity, weak/poor asset quality, poor earnings etc
(CBN, 2004; Soludo, 2004).
The CBN
reform to consolidate the banking sector through drastic increase of the
minimum capital base of commercial banks from =N=2 billion to =N=25 billion in
2005 led to a remarkable reduction in number of banks. Immediately after the
recapitalization deadline ended in December 31st, 2005, the number of operating
banks in the country reduced from 89 banks to 25 banks but later reduced
further to 23 banks with the merger of some banks like First Altantic Bank Plc
and Inland Bank to form Fin Bank Plc, Stanbic Bank Limited and IBTC Chartered
Bank Plc to form Stanbic-IBTC bank Plc. The number of operating bank later
increased to 24 banks with the entering of Citibank Nigeria Limited. With the
recent merger and acquisition of some of the nine rescued banks i.e the merger
of Access Bank Plc with Intercontinental Bank Plc; merger of Ecobank
Transnational Incorporated with Oceanic Bank Plc; merger of First City
Monumental Bank with Fin Bank Plc, the number of banks operating in Nigeria has
been reduced further.
However, in
August 2011, the CBN revoked the licenses of three of the rescued banks for
failing to show ability to recapitalise ahead of the September 30, 2011
deadline, effectively nationalizing Bank PHB, Afribank and Spring Bank. The
assets of these banks were transferred to three newly created, nationalised
banks: Keystone Bank, Enterprise Bank and Mainstreet Bank. AMCON which took
over the banks also injected N680 billion to recapitalise the banks. Unity Bank
Plc, one of the bailed out banks has already recapitalised while Wema Bank Plc,
the last of the rescued banks, has since scaled down operations to become a
regional bank with emphasis in the south west region.
The
post-recapitalization performance of all Nigerian banks was overcast in 2008 by
the global financial and economic crisis, which was precipitated in August 2007
by the collapse of the sub-prime lending market in the United States (Bunescu,
2010). The crisis led to the crash of most other sectors and markets across
Europe with consequent effect on developing economies especially oil-export
dependent countries like Nigeria. The rush by stock investors to liquidate
their investment to repay their loans in order to avoid the excessive lending
rate caused the Nigerian stock market to crash. The crash of the stock market
did not only affect the financial performance of some of the banks, it also
increased their risk exposure. Sanusi (2010a) attributed the
post-recapitalization challenges of Nigerian banking industry to the inability
of the industry and the regulators to sustain and monitor the sector’s
explosive growth which as a result led to risk-build in the system.
According to
Sanusi (2010b) the reports of the special examination team carried out by
CBN/NDIC revealed that nine (9) out of the 24 (twenty) banks were in grave
situation, prompting immediate intervention by CBN. The reports further
revealed that non-performing loans in ten banks totaled =N=1,696 billion,
representing 44.38% of total loans while the Capital Adequacy Ratio in the ten
banks ranged between -1.01% and 7.41%, which were below the minimum ratio of
10%. This statistics portrays a fragile banking system. It is therefore
necessary to conduct a study of this nature to evaluate the =N=25 billion
recapitalization exercise in Nigerian banking sector in terms of the financial
performance of the commercial banks.
1.2
STATEMENT OF THE PROBLEM
Evidence has
shown that the Nigerian economy is undergoing several transformations. With the
2005 recapitalization policy mandated on banks in Nigeria, the various effects
from structural changes in these banks, mergers and acquisitions, and
liberalization of businesses can be noticed in the economy. The service of
banking is supposed to be hinged on the effective satisfaction of both the
surplus units and the deficit units of the economy. The quality of banking is
based on the manner and the environment in which such services are rendered
quality service in banking must meet three basic requirements namely;
competence reliability and credibility.
For banks to
be able to function effectively and maintain high efficiency level in the
economy and to contribute meaningfully to the economic growth and development
of a country, then the industrial sector must be safe, sound and stable, being
devoid of any economic problem that can tilt it off the rail of achieving its
primary duty of satisfaction, such as distress.
In all indication
what we are experiencing and witnessing in this country today is a far cry from
the ideal state of stability expected. Due to inflation and the general
socio-economic decline and political uncertainties around us which have taken a
large toil on the banking industry.
Most banks
have suffered from loss of business and this has resulted to loss of income.
The banks were unable to pay customers on demand due to non availability of
liquid cash. The public lost confidence in the banking industry.
1.3
OBJECTIVES OF THE STUDY
The main aim
of the study is to critically review the 2005 bank recapitalization policy, and
bring out the total effects the policy has had on the economy of Nigeria. The
specific objectives of the study are:
To examine
the circumstances that gave rise to the 2005 bank recapitalization.
To identify
the benefits of the recapitalization policy to the Nigerian banking sector and
the Nigerian economy as a whole.
To suggest
better economy friendly financing options for Nigerian banks.
RESEARCH
QUESTIONS
What
circumstances gave birth for the need for the 2005 recapitalization policy on
Nigerian banks?
2. What are
the benefits of the 2005 recapitalization policy to the economy of Nigeria?
What better
financing strategies could be used by Nigerian banks in such a way the Economy
of Nigeria would not be negatively affected?
1.5
SIGNIFICANCE OF THE STUDY
The
significance of the research is base on the fact that the role of financial
institutions in general and banks in particular on the economic stability, well
being and development of any society cannot be over looked and as such, these
institutions must be stable and operating well for economic development of any
society .It is in this effort that the federal government of Nigeria introduce
the 2005 recapitalisation policy in its annual budget in order to stabilise the
industry and eradicate the long existing distress problems in our banking
industry.
The
recapitalisation policy has a lot to offer as regards the promotion of the
banking industry and the economy, but most banks are frowning at the policy
because of the obstacles concerning banks implementation of the policy but if
proper measures are taken this could eliminate most of the problems which looks
seemingly difficult at the beginning because of the bleak out look of the
Nigeria economy at present. This project among other things, will educate the
readers on; what recapitalisation is all about, how best a bank can
successfully recapitalise, benefits of the 2005 policy to .both banks and the
general economy, laws regulating relating banking operations in Nigeria and
various happenings in the Nigeria banking industry since inception.
1.6 SCOPE OF
THE STUDY
Basically,
the study covers the early banking period in Nigeria so as to relate the
problem of recapitalisation to performance of banks in this period and the
period in which the first banking legislature was released, hence the
introduction of minimum capital requirements of banks until date.
The work
features structure and types of banks, business of banking, legal frame work
concerning operations of banks, the recapitalisation policy of the federal
government of Nigeria as announced in its annual budget for 2005 and why
government felt there is a need for this policy. Included in the work are the
various options on how best banks can raise the required capital base and the
benefit to be derived from having a large capital base by banks and the economy
in general. This work will also look at problems existing in the Nigeria
banking industry since its inception and problems faced by the banking industry
within the 2005 to date. Not left out is the period of banking boom in Nigeria,
reasons for this boom and what problems it left behind. Finally, how
recapitalisation will help to resolve the current problems in our banking
system. Since this policy concerns the whole banking system, it has been decided
that no particular case study will be used in this work, but that not
with-standing, some banks would be mentioned and used as example in certain
situations.
1.7
LIMITATION OF THE STUDY
The major
constraint to this study is the difficulty in getting the relevant data for the
study. The area of study (recapitalisation policy of 2005) is a recent
development in the banking sector, so that not much literature has been
published on it and most banks are not ready to release needed data as they see
it as an important business secret, this compounded the issue of scarcity of
data.
Therefore
the researcher has little option than to rely on textbooks (which were very
scanty on the issue), newspapers reports, Journals, conference papers from
N.O.I.C top management and C.B.N Governors. and the opinions of some staff and
managers of few banks. Sources of information are quoted in the report proper
where necessary and also in the reference section.
1.8
DEFINITION OF TERMS
ASSETS:
These are properties of a business and its stock in trade or its stock of goods
at any particular time.
ACCEPTANCE
HOUSE: These are financial institutions that specializes in the grants of
acceptance facilities.
BANK: Sec 2
and 61 of(BOFID) 1991 defines a bank as; "A duly incorporated company in
Nigeria holding a valid banking license to receive deposit on current account,
savings account or other similar accounts, paying or collecting cheques drawn
by or paid in by customers. provision of finance or such other business as the
government may order to publish in the gazette designated as banking business.
CAPITAL:
This refers to the sum invested in a business. It is also seen or used in
business by a person, corporation, government etc. Capital can also be referred
to as the net worth of a business; amount by which the assets exceed the
liabilities.
CAPITAL
BASE: The total sum value of amount invested in a business.
CAPITAL
MARKET: The market for sale of Securities. It is also refer to as a market
where investment instruments mostly in monetary forms are exchanged either
through long, short or medium term agreements.
CAPITALIZE:
Convert into capital.
DISTRESSED
BANKS: These are banks with problems relating to liquidity, poor marginal or
total earnings and non-performing assets. The climax of it is that it could be
a condition of insolvency, which implies inability to pay debtors or meet
maturity obligations as they fall due.
FIXED
INTEREST PAYMENT OR FIXED REDEMPTION: These are investments that already have a
fixed duration and interest rate.
HOLDING
ACTION: This refers to condition prescribed by Central Bank for the turn-around
of distressed banks.
INFLATION: A
rise in the average price level of goods and services.
LIABILITY:
This is what a business owe to outsiders.
LIQUIDATION:
To put a firm out of business or stop its operations due to insolvency.
LIQUIDITY:
Money or near money (e.g. Bank drafts).
MERGER: The
combination of two or more companies in which one firm survive as a legal
entity.
OPEN MARKET
OPERATION (OMO): This is the sales and buying of government bonds in the market. The market
consist of commercial banks and the public.
PAID UP
CAPITAL: The amount subscribed in a company share capital.
RECAPITALISATION:
Review of the require minimum capital and the process of adopting to the new
requirement. It is also defined as the enhancement and restructuring of the
financial resources of anorganization with a view to enlarging the long term
fund available to the organization.
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