RECAPITALIZATION AND BANK PERFORMANCE IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.0 BACKGROUND 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 (Uchendu 2005).

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, 2005).

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.

1.2 STATEMENT 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 research questions;

i.            Has recapitalization  affected the profit margin of Banks?

ii.           Does recapitalization have any effect on  shareholders funds?

iii.         Has it affected the lending rates of banks?

1.3 OBJECTIVES OF THE STUDY

1.          To determine the effect of recapitalization  on the profit margin of banks.

2.          To ascertain the effect of recapitalization on shareholders funds.

3.          To determine the effect of recapitalization on the  lending rate of banks.

1.4RESEARCH HYPOTHESES

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.

1.   Ho:  There is no significant relationship between recapitalization and Bank profit.

2.   Ho:  There is no significant relationship between recapitalization and shareholders funds.

3.   Ho:  There is no significant relationship between recapitalization and lending rates.

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 potential.

ii.           Bank 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.

iv.         Regulatory Bodies: Regulatory 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 areas.

v.          The government: This 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.

1.6 SCOPE 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

Recapitalization: Substantial injection of capital into a company (Unugbro, 2009).

CBN:                    Central Bank of Nigeria

Reform:               To become better by correcting or making improvement.

Accuracy:             State of being exact without error.

Effect:                 A result of an outcome

Merger:                Combination of two or more separate firms into a single firm.

Acquisition:         Where a company takes over the controlling shareholding interest of another company.

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 inter mediation, 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.