The Impact Of Recapitalization On The Performance Of Banks In Nigeria (A Study Of Nigerian Banks)

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The Impact Of Recapitalization On The Performance Of Banks In Nigeria (A Study Of Nigerian Banks)

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PROJECT TOPIC AND MATERIAL ON THE IMPACT OF RECAPITALIZATION ON THE PERFORMANCE OF BANKS IN NIGERIA (A STUDY OF NIGERIAN BANKS)

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  • Name: The Impact Of Recapitalization On The Performance Of Banks In Nigeria (A Study Of Nigerian Banks)
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CHAPTER ONE

1.0     INTRODUCTION

Banking reforms have been an ongoing phenomenon around the world right from the 1980s, 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. Banking reforms involve several elements that are unique to each country based on historical, economic and institutional imperatives. In Nigeria, the reforms in the banking sector preceded against the backdrop of banking crisis due to highly undercapitalization of deposit taking banks; weakness in the regulatory and supervisory framework; weak management practices; and the tolerance of deficiencies in the corporate governance behavior of banks (Uchendu, 2005). Banking sector reforms and recapitalization have resulted from deliberate policy response to correct perceived or impending banking sector crises and subsequent failures. A banking crisis can be triggered by weakness in banking system characterized by persistent illiquidity, insolvency, undercapitalization, high level of non-performing loans and weak corporate governance, among others. Similarly, highly open economies like Nigeria, with weak financial infrastructure, can be vulnerable to banking crises emanating from other countries through infectivity.

Banking crisis usually starts with inability of the bank to meet its financial obligations to its stakeholders. This, in most cases, precipitates runs on banks, the banks and their customers engage in massive credit recalls and withdrawals which sometimes necessitate Central Bank liquidity support to the affected banks. Some terminal intervention mechanisms may occur in the form of consolidation (mergers and acquisitions), recapitalization, use of bridge banks, establishment of asset management companies to assume control and recovery of bank assets, and outright liquidation of non redeemable banks. Bank consolidation, which is at the core of most banking system reform programmes, occurs, some of the time, independent of any banking crisis.

Irrespective of the cause, however, bank consolidation is implemented to strengthen the banking system, embrace globalization, improve healthy competition, exploit economies of scale, adopt advanced technologies, raise efficiency and improve profitability. 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 performance and societal welfare. The proponents of Bank consolidation believe that increased size could potentially increase bank returns, through revenue and cost efficiency gains. It may also, reduce industry risks through the elimination of weak banks and create better diversification opportunities (Berger, 2000). On the other hand, the opponents argue that consolidation could increase banks’ propensity toward risk taking through increases in leverage and off balance sheet operations. In addition, scale economies are not unlimited as larger entities are usually more complex and costly to manage (De Nicoló et al., 2003).

Banking sector reforms in Nigeria are driven by the need to deepen the financial sector and reposition the Nigeria economy for growth; to become integrated into the global financial structural design and evolve a banking sector that is consistent with regional integration requirements and international best practices. It also aimed at addressing issues such as governance, risk management and operational inefficiencies, the centre of the reforms is around firming up capitalization. (Ajayi, 2005)

Capitalization is an important component of reforms in the Nigeria banking industry, owing to the fact that a bank with a strong capital base has the ability to absolve losses arising from non performing liabilities. Attaining capitalization requirements may be achieved through consolidation of existing banks or raising additional funds through the capital market. In his maiden address as he resumed office in 2004, Soludo announced a 13-point reform program for the Nigerian Banks. The primary objective of the reforms is to guarantee an efficient and sound financial system. The reforms are designed to enable the banking system develop the required flexibility to support the economic development of the nation by efficiently performing its functions as the pivot of financial intermediation (Lemo, 2005). Thus, the reforms were to ensure a diversified, strong and reliable banking industry where there is safety of depositors’ money and position banks to play active developmental roles in the Nigerian economy.

The key elements of the 13-point reform programme include:

• Minimum capital base of N25 billion with a deadline of 31st December, 2005;

• Consolidation of banking institutions through mergers and acquisitions;

• Phased withdrawal of public sector funds from banks, beginning from July, 2004;

• Adoption of a risk-focused and rule-based regulatory framework;

• Zero tolerance for weak corporate governance, misconduct and lack of transparency;

• Accelerated completion of the Electronic Financial Analysis Surveillance System (e-FASS);

• The establishment of an Asset Management Company;

• Promotion of the enforcement of dormant laws;

• Revision and updating of relevant laws;

• Closer collaboration with the EFCC and the establishment of the Financial

Intelligence Unit. Of all the reform agenda the issue of increasing shareholders’ fund to N25 billion generated so much controversy especially among the stakeholders and the need to comply before 31st December, 2005.

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