Recapitalization And Bank Performance In Nigeria, -abstract
The Study Focuses On Recapitalization And Bank Performance In
Nigeria- It Revolves Round The Happenings In ...
The study focuses on recapitalization and bank performance in
Nigeria. It revolves round the happenings in the banking industry
pre-recapitalization, and how the recapitalization exercise has affected the
It also seeks to mirror into the future to know what challenges
and prospects lie ahead.
To achieve the objectives of this study, quantitative data was
gotten from secondary sources ,and random sampling technique was utilized in
selecting a sample size of sixteen Banks representing 67% of the total
The Ordinary Least Square technique of regression analysis was
used to estimate the parameters of the model.
In the course of this study, it was observed that a
significant relationship exists between profit of banks and recapitalization
which is in line with our theoretical expectation. It was also discovered that
there are other factors outside the locus of control of banks that affects
lending rate. Such factors as inflation, general micro economic factors,
monetary policy, amongst others.
The study also revealed that there is no significant relationship
between Recapitalization and shareholders funds, which also contradicts our
As a results of the findings, recommendations were made; and some
of them are;
Recapitalization should be sustained until Nigerian banks
are among the first 100 banks in the world.
Standard regulations should be enacted in order to control bank
services to prevent exploitation tendencies.
Various types of competitions should be stimulated thereby pushing
Nigerian banks towards global trends.
Apex banks should perform their duties effectively and
modern banking practice should be transmitted from advanced countries.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
1.0Background to the
1.1Statement of the Research Problem
1.2Objectives of the
1.3Significance of the
1.4Scope of the
1.5Limitations of the Study
1.7Definition of Terms
CHAPTER TWO: LITERATURE REVIEW
and Structure of the Nigerian Banking
2.3Rationale for the Increase in the Minimum
Paid-Up capital Requirement for
2.5The Benefits of Recapitalization
2.6Bank Consolidation through Merger and
2.8Recapitalization and Financial Sector Stability
2.9Recapitalization as it Affects Profits of
2.10Recapitalization as it Affects the Nature of
2.11Recapitalization as it Affects Banks Ability to
2.12The Job Effect of the Recapitalization Exercise
CHAPTER THREE: METHODOLOGY
3.1 Theoretical Framework
3.2 Research Design
3.3 Population and Sample Size of the Study
3.4 Model Specification
CHAPTER FOUR: PRESENTATION AND
ANALYSIS OF RESULTS
4.2 Presentation of Results
CHAPTER FIVE: FINDINGS,
CONCLUSION AND RECOMMENDATIONS
5.1 Summary of
1.0BACKGROUND TO THE STUDY
The process of recapitalization has been in existence right from
the 1980’s, 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.
Recapitalization is the substantial injection of capital into a
company. This implies making the company more solid or stronger by increasing
its capital base (Unugbro 2009).
It is predicated upon the need for re-orientation and
re-positioning of an existing status quo so as to attain and sustain an
efficient and effective state of affairs.
The Nigerian banking sector was recapitalized through the
regulatory powers of the Central Bank of Nigeria in line with its 13-points
reform agenda. This was the first of the 13-points reform agenda because the
banking sector plays an unparalleled role in the growth and development of any
economy irrespective of its level of development (i.e. underdeveloped,
developing or developed) by its intermediate function and visible multiplier effect
on the economy (Abosede 2004).
In Nigeria, the reforms in the banking sector preceded against the
backdrop of banking crisis due to highly undercapitalized deposit taking banks,
weakness in the regulatory and supervisory framework, weak management practices,
and the tolerance of deficiency in the corporate governance behavior of banks
Banking sector reforms and recapitalization have resulted from
deliberate policy response to correct the perceived or impending banking sector
crisis, and subsequent failures.
Prior to December 2005, banks in the Nigeria financial sector were
given eighteen (18) months (July 2004 to December 2005) to recapitalize from N2 billion, to a minimum of N25 billion naira or have their operating
licenses revoked (Thisday, 28 July, 2004). The need for a shake up in the
sector could not be overemphasized, because banks had not played its
expected role in the economy due to an accumulated systematic distress over the
years. They had little or no capacity to give loans because they had very low
capital base. The need for the repositioning of the banking sector arose
greatly as the distress worsened through the years.
If the federal government’s vision of making Nigeria a developed
nation by 2020 (vision 2020) had to be realized, the banking industry is to be
an instrument and a propeller of such an achievement. Strengthening the capital
base of banks would ensure a diversified, strong and reliable banking sector
that would be active in developmental issues.
Irrespective of the causes of bank distress, however, banks
recapitalization is implemented to strengthen the banking system, embrace
globalization, improve healthy competition, exploit economics of scale, adopt
advanced technologies, raise efficiency and improve profitability (Abosede,
Ultimately, the goal is to strengthen the intermediation role of
banks and to ensure that they are able to perform their developmental role of
enhancing economic growth which subsequently leads to improved overall economic
growth and societal welfare.
With the exercise completed, twenty-three (23) consolidated banks
emerged out of eighty-nine (89) existing banks. This was achieved through
mergers, acquisition of weaker banks and sales of shares to the public.
The reform has stimulated activities otherwise dampened by long
term distress. Major examples are activities on the stock exchange floor,
trading in long term bond and debentures. It is an economic landmark and a
giant strive towards global trends to reposition Nigerian banks from mere
rubber stamps to a proactive and strategically focused one, capable of facing
the challenges of an emerging world.
Soludo (2004), opined that big and strong banks would mean better
returns to shareholders, bigger contributions to national economic growth,
return to traditional banking, financial intermediation, greater reach to the
grass roots, good corporate governance and cheaper credit to borrowers.
1.2STATEMENT OF THE RESEARCH PROBLEM
In the fact of age long
systematic distress, the loose-grasp of authorized regulatory bodies i.e.
Central Bank of Nigeria (CBN), Nigeria Deposit Insurance Corporation (NDIC) etc
on the administration, control and development of banks, the unethical and poor
standards 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.
A critical examination of these problems after the
recapitalization policy has been effected, and gives rise to the following
i.Has recapitalization affected the profit
margin of Banks?
ii.Does recapitalization have any effect on
iii.Has it affected the lending rates of banks?
1.3OBJECTIVES OF THE STUDY
1.To determine the effect of
recapitalization on the profit margin of banks.
2.To ascertain the effect of recapitalization on
3.To determine the effect of recapitalization on
the lending rate of banks.
Firstly, hypothesis implies a scientific statement expressing the
relationship between two or more variables which is meant to be tested (Anyiwe,
et al 2006). It is a tentative answer to a problem (Baridam 2002). Hence, it is
a tool for correcting the defined problem of the study.
Therefore, in order to solve this research problem, the following
hypothesis shall be tested.
There is no significant relationship between recapitalization and Bank profit.
There is no significant relationship between recapitalization and shareholders
There is no significant relationship between recapitalization and lending
1.5SIGNIFICANCE OF THE STUDY
This research work would establish the fact that recapitalization
is a veritable means of fostering banking growth.
This study is of relevance to the following;
i.Banks: This study will give banks a basis to be
able to compare their past performances (before re-recapitalization) and their
present performances (after re-recapitalization). Such comparison will point
out how well they have done and what capacity they still have for expansion. It
will also highlight those areas that are still un-harnessed with very high
Customers: This study
will enlighten bank customers by knowing the competencies of their bankers
brought about by recapitalization. Though, this reform has received accolades
from local and international observers, many bank customers do not know the
implications it has directly as an individual, group or organizational
customers. Ignorance of such implications excludes customers from taking
advantage of such benefits. Thus, this study will enable bank customers
understand, recognize and utilize such benefits.
iii.Economists: This study will serve as a basis for
comparing, evaluating and analyzing the rate of growth and development in the
financial sector as well as its relationship to other major indicators in the
economy. Such comparisons may be used to project or predict future state of
affairs of the financial sector and the Nigerian economy.
bodies like the CBN, NDIC, CIBN etc will know how appropriate the rules and
regulation set for banks are through this study. Through the determination of
appropriateness, it will point out previous areas which regulatory frameworks
have been created and formulate further to cover up loop holes. As banks have
been upgraded through the recapitalization, existing regulations should also be
upgraded to bring about consistency and this study gives pointers to those
study will serve as a guide to the government in the area of policymaking. It
is a basis to assess the extent of improvement brought about by the
recapitalization policy and how policies in other areas of the economy will
lead to benefit derivation and relationship, from and between other areas of
the economy and implications of the re-recapitalization policy. The arms of
government and various level of government all fall within this category
because they are in charge of governing individuals and activities, the
promulgation of laws, regulations, and policies, i.e. the judiciary, executive,
legislature, federal, state and local governments.
1.6SCOPE OF THE STUDY
A sample of sixteen (16) banks that were operating in the banking
sector before recapitalization and also met the N25
billion minimum requirements shall be studied.
The period to be studied will be between 2002 to 2009, where need
be to state the degree of improvement in performance in preceding years,
performances shall be stated only as a point of reference.
Data will be gotten from CBN, NSE and other existing relevant
literatures including the internet.
1.8DEFINITION OF TERMS
injection of capital into a company (Unugbro, 2009).
Central Bank of Nigeria
To become better by correcting or making improvement.
State of being exact without error.
result of an outcome
of two or more separate firms into a single firm.
Where a company takes over the controlling shareholding interest of another
1.9 DATA ND RESEARCH METHODOLOGY
The nexus between recapitalization and financial sector
performance has long been established in extant literature (Business day, 2004;
Roger, 2002; Imala, 2005 and Decaan, 2004). It spans through conceptual models
as the Hubris theory and the agency theory to findings from empirical studies
as; Pandey (1997), Soludo (2005), Decean (2004), and Berger (2004). The
Nigerian banking sector prior to the recapitalization policy was referred to by
the International Monetary Fund (IMF) report (2001), as a collection of small
scale enterprises due to the abysmal credit and liquidity position of majority
of the banks in comparison with global standards. Consequently, the initiation,
planning and implementation of the recapitalization policy was necessitated by
the need to avoid systemic distress, address the operational and structural
problems of the sector and improve the capacity of the sector in providing the
necessary conditions needed for economic growth.
Precisely, the theoretical framework for the recapitalization
policy is quite unanimous as indicated by findings of several studies (1997),
the expectations according to Balogun (2007), was rooted deeply in both
Keynesian and classical economic doctrines. The idea basically, was that
recapitalizing the banks would result in economies of scale effects on the
economy. Specifically, the credit availability effects implies that due to the
improved liquidity position of the banks, the financial capacity to provide
short, medium and long term financing for the real sector would increase.
Furthermore, the interest rate effect was expected, since the rise in liquidity
is expected to reduce interest rate and other associated market rates which is
necessary in order to stimulate investments. More so, the expected increase in
aggregate income arising from the multiplier effects of improved liquidity and
reduction in interest rates amongst others was expected to result in an
increase in employment both in the formal and informal sectors of the economy.
Thus, according to Soludo (2004), the recapitalization policy is designed to play
a catalytic role in the economy by ensuring better returns to shareholders,
bigger contribution to national economic growth, effective financial
intermediation, greater reach to the grassroots, good corporate governance and
cheaper credit to borrowers.
However, four years down the line, it is implausible as to what
extent the apriori expectations that formed the underlying theoretical
framework for the recapitalization policy has been realized. Consequently, this
study attempts to provide an empirical premise for analyzing the effects of the
recapitalization policy on bank performance.
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