IMPACT OF RECAPITALIZATION POLICY ON THE BANKING INDUSTRY IN NIGERIA

ABSTRACT

Prior 2005, the Nigeria banking sector was bedeviled with lack of adequate capital base over reliance on public sector funds. Inability to compete favourably with banks in other countries in African. As such, the study attempts to examine the impact of recapitalization. Introduced by the Central Bank of Nigeria Governor professor Charles Soludo. The study focuses on 24 currently listed banks on the Nigeria Stock Exchange (NSE), this number is divided into four (4) subgroups using the stratified random sampling techniques. A 18-item questionnaire constructed by the researcher validated by two experts in the Department of Statistics, Auchi Polytechnic, Auchi served as the instrument for data collection. A non-parametric statistical tool the chi-square (X2) was used to analyses the data collected. The result indicates that there is a significant effect of the recapitalization policy on the banking sector, the policy had contribute to the efficiency performance of banks in Nigeria. Based on the findings obtained the following were recommended among others; deregulation programmes should be properly sequenced; policies should be divince from the regulatory activities of the banking sector in Nigeria. The study concludes by expressing the fact that the ultimate responsibility for the healthy, reliable and effective banking sector layerly rests on the practice of good corporate governance adopted by banks in Nigeria.

TABLE OF CONTENTS

          Title Page                                                                                i

          Certification                                                                            ii

          Dedication                                                                              iii

          Acknowledgement                                                                  iv

          Abstract                                                                                  vi

          Table of Contents                                                                 viii

          Chapter One: Introduction                                                  1

1. Background to the Study                                                      1
2. Statement of the Research Problems                                    6
3. Objectives of the Study                                                          8
4. Research Hypothesis                                                             9
5. Significance of the Study                                                       10
6. Scope of the Study                                                                 13
7. Limitation of Study                                                                14
8. Operational Definition of Terms                                            15

Chapter Two: Review of Related Literature                        16

1. Introduction                                                                           16
2. An Overview of the Nigeria Banking System                        16
3. Meaning and Objectives of the Recapitalization Policy        35
4. Nigerian Banks and the Recapitalization Policy                  44
5. Nigerian Economy and the Recapitalization Policy              46
6. Recapitalization Policy Options                                             51
7. Highlights of facilitates granted to Owners and

Directors of some Selected Banks                                        56

          Chapter Three: Research Methodology                              58

1. Introduction                                                                           58
2. The Research Design                                                             59
3. The Population                                                                       59
4. The Sample Size                                                                     60
5. Sampling Technique                                                              60
6. Sources of Data Collection                                                    61
7. Method of Data Collection                                                     61
8. Method of Data Analysis                                                       63

Chapter Four: Data Presentation, Analysis and

Hypothesis Testing                                                                 65

1. Introduction                                                                           65
2. Presentation of Data                                                              65
3. Data Analysis                                                                         68
4. Hypothesis Testing                                                                 78

Chapter Five: Summary of Findings, Conclusion

and Recommendations                                                          85

1. Introduction                                                                           85
2. Summary of Findings                                                            85
3. Conclusion                                                                                       86
4. Recommendations                                                                 87

References                                                                              90

Appendix                                                                                93

Questionnaire                                                                        94

CHAPTER ONE

INTRODUCTION

1.1   Background to the Study

Before the recapitalization policy was implemented, the Nigerian banking industry could be likened to a financial landscape that was flooded with adverse, negative, unwanted implications and practices such as poor, declining capacity utilization, weak financial systems, bank failures, bank mismanagement and crisis etc.

Until Tuesday July 6, 2004 when the Central Bank of Nigeria CBN helmsman unleashed a swarm of locust on the Nigerian financial landscape, the reformative locusts carrying with them financial incentives, options, regulations and better developments on how forward the Nigerian banking industry is to move or directed.

Gyargy (2001) (as cited in Ajayi, 2005) in Hungary documented that the reforms in the banking sector proceeded against the backdrop of banking crisis due to highly under capitalization to state owned banks, weakness in the regulatory and supervisory framework; weak management practices; and the tolerance of deficiencies in the corporate governance behaviour of banks.

The existing financial landscape were run by a team of no-do-well, draw back based incentives or ideas, these same set of people reacted to the outbreak of the swarm of locust that was unleashed by the apex bank- CBN, various means were employed to check or put under control the unanticipated outbreak of reforms on the industry. Various regulatory bodies such as the CIBN and even the national assembly tried several attempts to boycott, the revolution that has being initiated by the Central Bank of Nigeria (CBN) Governor-Professor Charles Soludo. After several power tussles, the directive was still in full force, solidly supported by former President Olusegun Obasanjo. Ogwuma (1996) states that “the control of the monetary and banking system by the CBN is carried out in partnership with the federal government which has the overall authority over the system”.(P.3) Thus , the Central Bank of Nigeria initiates the guiding policy measures and implements them only as approved by the Government.

It then dawn on the banks that if they do not start cultivating or sowing on this new fertile financial landscape, they will definitely die of starvation and eventually go extinct.

It was really amazing how the bottom have fallen off an industry that has over the past five years shown as annual growth rate of 24%, the fastest growing sector in the economy, if one should ignore the telecommunications sector which is yet reach maturity. How could an industry that has had the highest deployment and utilization of information technology, that has attracted MBA’S from many of the world’s top business schools, that pays the highest remunerations that employs over 50,000 people be a target for a revolutionary change?. The reason is not far-fetched; the industry has been eroded with malpractices, mismanagement, frauds of high levels, inadequate financing etc.

Ezegbu (2005) opines that “the Nigerian banking industry, has been like a cat sent by its master to hunt squirrels, killed a few and ate them up and
returned to the master empty-handed and then the master was angry and gave it a flogging”(P. 22).

The banking industry’s growth lacked staying power, the fundamentals supporting it were all wrong. It was like a balloon floating, hoping it did not accidentally have a puncture. The bubble had to burst; it was only just a matter of time. On the surface it was always business as usual. But deep down the operators lived in perpetual fear. Emotions were dashed when the CBN governor, at a special session of the bankers committee in Abuja, unveiled a 13- point reform agenda, of which included an upward review of banks capital based from 2 billion Naira to 25 billion naira.

Otu (2005) states that “capital provides a cushion to absorb abnormal losses not covered by current earnings thereby enabling banks to regain equilibrium and return to normal earning pattern” (P. 61).

Obitayo (1992) states that “the development process in the developing countries has been constrained by shortage of productive factors, a critical aspect being capital (P.23).

It was catastrophic, and a financial debacle for most of the banks. The industry’s profitability was questioned and it was found out that it was empty- the industry’s profitability; the time of judegment for the industry has finally come and stared it in the face. These banks never really understood the meaning of financial intermediation, not knowing that it is only through effective financial intermediation that banks can contribute to economic performance, the society’s main purpose for the banking business.

Mutallab (1986) opines that “the traditional macro-economic role of banks is financial intermediation.” A silent war had been on between the banking industry and the rest of the society, contentions raging from the lending rates on the high side, interest rate on retail deposits very low, millions of people losing core saving due to bank distress and failures. Making the society to go bank into time, patronizing local daily collectors-the “esusus” (P.23).

It cannot be ignored or neglected that the place of the banking industry on the economic life of any nation is to strategic, that every effort is made by the appropriate financial authorities-CBN, NDIC, and NSF etc, to regulate and effectively supervise the business of the industry. This objective could be achieved through the combination of Accounting, Code of Conducts, Financial Regulations, Financial Acts- Companies and Allied matters Act (CAMA 1990), Banks and Other Financial Institutions Acts (BOFIA 1991) etc, mechanisms designed to purge the banking industry of diverse frauds and malpractices.

The Nigerian banking industry today might have preserved a phase for itself in history, since the July 6, 2004 announcement. A reform most people in the financial circle tagged “The Soludo’s Solutions”.

1.2   Statement of the research problems

As a way of improving the Nigerian banking industry, there have been a series of reforms, all aimed at making the banking industry play it economic function, reforms such as the recapitalization policy and other development corrective measures, which includes; mergers and acquisitions, new capital rising programmes, through the stock market, private placement, foreign equity participation, group consolidation etc.

A policy that is aimed to transform the industry to having unique characteristics such as; investors confidence , branch expansion, increased asset base, creating banks of world-class status, attraction of foreign investors, stable interest and exchange rate regimes, and most especially availability of capital for some businesses etc. Cole and Wairaven (1998) (as cited in Adedipe, 2005) suggest that consolidation in the banking industry may have enhance rather than restricted the availability of credit to small businesses, although they did not rule out changes in the credit terms.

Jayaratne and Wolken (1998) (as cited in Adcdipe, 2005) suggest that bank consolidation will have little effect on credit availability to small firms.

In order to achieve the purpose of this study, the research will work towards answering the following questions:

1. Is the recapitalization policy having any sufficient positive impact on the banking industry and the Nigerian economy?
2. Is the policy increasing the financial trust that the government and other relevant stakeholders have on the banking industry or system?
3. Has the recapitalization policy improve the efficiency or performance of the financial sub-sector-banking industry?
4. Has the policy made corporate entities, individuals, and other stakeholders benefit from the operative efficiency of the recapitalized banking industry?

1.3   Research hypothesis

To achieve a meaningful objective of this work, the following hypothesis has been formulated to enhance the authentication of the subject matter. That is the hypothesis will be tested in a null form, denoted by 40 and the alternative form denoted by HI
Formulations:

HO:    There is no significant impact of the recapitalization policy on the banking industry and the Nigerian economy.

HI:     There is significant impacts of the recapitalization policy on the banking industry and the Nigeria economy.

The study employed data collection methods and data analysis methods, were the data collection method involves the use of primary sources of data, with the aid of questionnaires, and the secondary sources of data with the aid of textbooks, financial journals, research projects, newspaper cuttings, conference and seminar papers presented by stakeholders in the industry professionals and regulatory publications etc.

The data analysis methods used or employed are tables, which will help ease the calculation of the percentages in relation to the responses from the respondents and finally the chi-square (X2) inferential statistical took will be used to test the research hypothesis formulated above.

1.4   Objectives of the Study

This research is wholly undertaken to examine the recapitalization policy both the banking industry and its impact on the Nigeria economy. After the research, one should be able to know what the recapitalization policy is all about, the impact it has made so far on the banking industry and on the wholesome existence of the Nigerian economy, and then contribute necessary recommendations.

These are to be done with the following objective in mind

a.       To critically evaluate the impacts of the policy on other economic industries in Nigeria.

b.      To examine the impacts on the various sectors in the Nigeria economy.

c.       To examine the impacts on the overall banking industry.

d.      To look into the impacts on the stakeholders of the industry

e.       To examine the impacts on international or global banking.

1.5   Significance of the study

This is carried out to add or increase the awareness of the Nigerian banking systems industry, impacts on the economy. Further research on banking, periods of bank distress and failures as well as relevant banking eras. Also to breakdown or reduce the hullabaloo about the recapitalization policy implemented as announced on Tuesday July 6, 2004 by the CBN Governor.

The study is aimed to assist the following:

1. The Nigerian Government: the government stands to benefit from the recapitalization policy implementation in the following ways

1. Adequate financing of the public sector banks worth partnering with.
2. Adequate trust in the system to be able to implement other goal oriented policies.
3. By ensuring macro-economic stability.

1. Policy formulators and analysts: the following will benefit in the below stated ways;

1. Availability of data to enable them give valid analytical judgments and formulations.
2. It will increase their persuasive powers, when advising the government on policies and other strategies issues

c.       The Academia; will benefit in the following ways;

i.        It will increase the bank of knowledge in the field or area of banking.

ii.       The academia might benefit if they further research, in the way that they may be appointed by the government to run or head an economic
committee.

d.      The Nigeria society: benefits in the following way:

i.        The Nigeria society will be rid of job losses, occasioned by banks going under, and benefit from job savings

ii.       Investments by members of the Nigeria society will be encouraged, that is the initial public offer by the banks to raise capital.

iii.      It increase confidence, in terms of having relaxed mind and not necessarily having tensed up behaviours, which can lead to medical implication.

e.       Foreign and Domestic investors; will benefit in the below stated ways;

i.        Increased returns on their investments without the fear of a shaky financial system.

ii.       Will also benefit from the diversification of the economy because of solid based of the financial system

f.        Management of companies benefits range from

i.        Corporate governance of corporate entities will be boasted, thereby giving such management added value and advantages.

ii.       Management will benefit by having good and lasting relationship with the government stakeholders and even itself

g.       Researchers; will benefit in the following ways

i.        Availability of data bank for further research and improve on other research.

ii.       Creation of a stable and enabling environment to conduct research.

(h)     Financial and regulating bodies; will benefit in the following ways;

i.        The essence why they were created or established will be achieved

ii.       Data provide will help them place or put checks and controls on organization, systems that are not contributory to the economy.

1. Scope of the Study

The study concentrates on the Nigeria banking industry, where an overview of the Nigeria banking system shall be discussed, development of banks in Nigeria, eras of banking with time frames ranging from, (1892-1952), (1953-1959), (1959-1969), (1970-1979), (1980-1985), (1985-1993), (bank failure years-1994), (1995-till date). Looking at the pre-recapitalization, recapitalization and post-recapitalization periods.

1. Limitation of the Study

It must be pointed out-that the process of this research work was lead with some limitation which include human and socio-economic impediments encountered in the courses of this work.

However, the main limiting factor was the reluctant of the brass of some banking and other sector management to disclose the relevant cost data economy financial information need for adequate review of research, due to fear of being exposed to competitors. And luckwarm attitude of some members of staff of course time constraint due to the fact that write ups had to be combined with other academic work. Above all they when financial constraint. Despite the above mentioned limitations encountered during the course of carrying out this research work, the purpose for which it was met and achieved.

1. Operational definition terms

Acquisition: This involves process of controlling shares in another company.

Merger: This is viewed as the situation where two or more companies combine together to form a large business organization.

Synergy: This is the generic term used in the field of business acquisitions and mergers to cover the economics which can result through integration, often expressed as 2+ 2 = 5

Re- organization: It means to re-arrange the business by adding orderliness of business into the existing one e.g. by diversification.

Re-structuring: Refers to change in the capital structure of a company, in some cases the ownership structure is also charged in order to make it operate more effectively.

Re-construction: This means to build or create again the business entity and the capital structure of the organization.