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ABSTRACT
This project study examines the ‘impact of recapitalisation order on the performance of commercial banks in Nigeria. The financial sector is one of the dominant sectors in any economy because of its involvement in the promotion of economic growth and development. The study aims at; examining how recapitalization order affect the banks individual and companies and also to determine if recapitalization encourage lending and acquisition of shares. . In this study secondary materials were used and questionnaires were administered to four commercials banks (GT-Bank, Access Bank, First Bank and FCMB) to make detailed analysis. Hypothesis were formulated and the Pearson Product Moment Correlation Coefficient was the statistical tools used in test the hypothesis. Based on the tested hypothesis reading were found that recapitalization process caused a structurally change in only the capital adequacy and management quality of the commercial banks in Nigeria. Based on the findings the following recommendations were formulated; There should be a balance between strict compliance to corporate governance practices, zero tolerance on misreporting and fraudulent practices, enforcing laws like the liabilities of board members of failing banks and finally, every business needs an enabling environment to enhance profitability.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The recapitalization and consolidating exercise in the banking industry by the former central bank of Nigeria Governor Professor Charles Soludo has necessitated the need for different organization to engage in corporate consolidation (Mergers and Acquisition) The concept of recapitalization refer to the current trend of compelling all commercial banks to raise their capital base from 2 Billion to 25 Billion Naira by the central bank of Nigeria on or before 31st December, 2005. This has sent some of these banks on the move to consider merger and acquisition as a survival strategy.
Even before recapitalization commence aggressively, many bank were before consolidation, we got to discovered that about 89 banks with 3382 branches predominantly in the urban centres as at June, 2004 characterized by structural and operational weakness such as: Low capital base:
- Dominance of a few banks:
- Insolvency and illiquidity:
Over dependence on public sector deposits and foreign exchange trading.Weak corporate governance system with low depositor confidence.Bank that could not effectively support the real sector of the company at 24% of GDP. Compare to Africa average of 78%and 77%for developed countries.
As Africa’s financial centre and CBN as are the best in the world.
Facilitate evolution of a strong and safe banking system improve transparency and accountability in the sector drive down the cost structure of banks and make them a new banking system that depositors can trust and investors can rely upon user in a new economy disposed to consolidation (merger and acquisition) after considering various option available to them on account which will also send most of the banks managing Directors and there board to meetings and marshalling of some plans from the preliminary report from the negotiation table bank could trade several option exploit. In an attempt for banks to meet up with the new requirement, some Banks are exploring the option of inviting foreign investors to buy into banks, other are looking at the possibility of setting investors to share up their capital and some are looking at the capital market option.Others are considering mergers and acquisition.
This process of recapitalization and restructuring ofNigeria Commercial banks has been gathering pace sincethe decision was made by CBN on the recapitalization ofNigeria Banks from 2 billion to 25 billion naira by December31 2007.
The proposed recapitalization as confirmed by the former CBN Governor Sanusi L. Sanusi is a subtle way to, in his address on 6th July, 2004. The formal Central Bank Governor said “the Nigeria banking system today is fragile and marginal. Our vision is a Banking system that is part of the Global change, and which is strong competitive and reliable. It is banking system which depositor can trust, and investors can rely upon.
Evolving such a banking system is a collective responsibility of all agents in the Nigeria Economy which may point and reason were stated as earlier mentioned above “Persistent obliquity poor asset quality, insider abuses, weak capital base, unprofitable operation and over dependency on public sector funds among others that necessitated banking sector reform.
Although the distribution among Banks is not uniforms there are some banks whose dependency ratios are in excess of 50 Percent. The Implication is that the resource base of such banks is weak and volatile, rendering their operation highly vulnerable to swings in government revenues arising from the uncertainties of the international oil market.
Sanusiwent on to justify the banking reform by parting the uncomfortable picture of the banking industry stating that “In recent times, many banks appear to haveabandoned their essential Intermediate role of household and mirror enterprise levels”.
Also in a paper title “Post merger integration matters arising”. The deputy Governor, Dr ShamsuddeenOsman has to say; the need to address the distress syndrome effectively and holistically informed the recent banking sector reforms initiative which is anchored on 13point agenda that included, among others the injection of fresh capital into the industry to strengthen the banks recapitalization in order to banking institution through merger and acquisition creating better plat-form nor more effective banking regulation and policy.
1.2 STATEMENT OF THE PROBLEM
On a raced to rescue some of this bank many financial Institution and companies who is financial stable were undergoing this process. Stock — market and investment analysts the central Bank of Nigeria (CBN) rescued banks coupled with impressive second third quarter financials of quoted companies will drive the performance of the stock market.
To the individual companies there must be flexibility in their investment but when bank fail or distress it affect all investor and even the activities of the bank. It was because of too much failure of bank and insolvency, inconvenience in banking creation account dominant, poor management regulation and high level of competition with neighbour bank that resolved this mandate of recapitalization with the expectation that it will help financial sectors.
In 2004 the government decided to raise the minimum capital requirement of both new and existing banks paid up capital to the minimum of twenty five million naira N25. And few banks that were unable to raise such capital were close down and as the result of the scarcity of jobs. Deflation in circulation and many of bank staff were reattached to the other and unemployment to our fresh graduate.
Perhaps, it was earlier stated base requirement of 25billion (25bn) naira will be liquidated; if such hence banks are given permission there will be fraudulent practice partiality in banking sector.
However, nobody is ready to be cheated on sun-day light and it will also lead to instability in financial sectors. This question still unanswered is how-recapitalization improve the performance of commercial banks in Nigeria since 2005. This research work therefore intend to examine the impact of recapitalization on the performance of commercial banks in Nigeria.
1.3 OBJECTIVES OF THE STUDY
The broad objective of this study is to examine the impact of recapitalization on the performance of commercial banks in Nigeria. The specific objectives include:
(i) To critically examine the effect of re-capitalization on the operation of commercial banks in Nigeria.
(ii) To distinguish between recapitalization, merger and acquisition of banks.
(iii) To examine how recapitalization order affect the banks individual and companies.
(iv) To determine if recapitalization encourage lending and acquisition of shares.
(v) To recommend the ways to better handle the recapitalization order, for upligtmentof economy
1.4 RESEARCH QUESTIONS
Some questions would be asked to guild this research work. The following research question are;
- Has the level of minimum paid up capital improved the capital adequacy ratio of commercial banks in Nigeria?
- Has the level of minimum paid up capital improved the asset quality ratio of commercial banks in Nigeria?
- Has the level of minimum paid up capital improved the profitability ratio of commercial banks in Nigeria?
- Has the level of minimum paid up capital improved the liquidity ratio of commercial banks in Nigeria?
1.5 RESEARCH HYPOTHESIS
Recapitalisation do not seems to have any significant impact on the performance of commercial banks in Nigeria.
1.6 SIGNIFICANT OF THE STUDY
The recapitalization policy which started 2004 and in December 2005, implemented bythe commercial banks in 2006 which was basically a review of their minimum paid up capitalwas able to achieve its stated objectives. The important of this study is aimed at giving answer to the above stated question. The study will also be of help to both students, researchers, lecturers of institutes and others.
1.7 SCOPE AND LIMITATION OF THE STUDY
The scope of the study is basically on commercials banks in Nigeria. The research work covers the period of 10 years (2005-2015).
The study is limited based on the following;
- Lack of time for an exhaustive and more elaborate study to be made.
- Shortage of finance which humped the size of the sample chosen.
- Inadequate materials on the research problem also constitute a big constraint.
- Furthermore, the attitude of some of the respondents who supplied primary data for the work proved uncooperative.
1.8 ORGANISATION OF THE STUDY
The study is divided into five chapters and organized as follows chapter one from, the introduction part, this is where the theme of the research work is given, including background of subject matter justifying the need for the study. This chapter comprises of the statement of the problem, Objectives of the study, statement of the hypothesis, scope and limitation of the organization of the study and definition of terms. Chapter two shall present related literature concerning the impact of recapitalization on the performance of commercial banks in Nigeria, the chapter shall also present the empirical and theoretical framework for the study. The research methodology which include ‘sources of data, method of data analysis and model of specification shall be outlined in chapter three while chapter four focuses on the presentation and analysis.
Concluding comments in chapter five shall reflect on the summary, conclusion and recommendations.
1.9 DEFINITION OF TERMS
RECAPITALIZATION is a type of corporate reorganization involving substantial change in a company’s capital structure. Recapitalization may be motivated by a number of reasons. Usually, the large part of equity is replaced with debt or vice versa.
BANK MERGER ACT: Among other things, the Bank Merger Act requires the responsible federal regulators to: Not approve a proposal that would result in a monopoly or would be in furtherance of any attempt to monopolize the business of banking in any relevant market.
MERGERS AND ACQUISITIONS (M&A) are transactions in which the ownership of companies, other business organizations or their operating units are transferred or combined.
INTEREST RATE: is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR).
EARNINGS: A bank functions to make profit through its operations and through their policies, some are paid out as dividend and others retained for investment and expansion purposes. Return on capital employed will be used as proxy for profitability.
LIQUIDITY: this is the measure of the ability and ease with which assets can be converted to cash. Liquidity ratio is a statutory required condition.
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