The Impact of Recapitalization on the Performance of Banks in Nigeria

Chapter One Of The Impact of Recapitalization on the Performance of Banks in Nigeria

BACKGROUND OF STUDY

Banking reforms have been an ongoing phenomenon around the world right from  the 1980s till date, but it is more intensified in recent time because of the impact of globalisation 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 deposit taking banks; weakness in the regulatory and supervisory framework; weak management practices; and the tolerance of deficiencies in the corporate governance behaviour 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, the current Governor of Central Bank of Nigeria, 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:

Ø Minimum capital base of N25 billion with a deadline of 31st march, 2016;

Ø Consolidation of banking institutions through mergers and acquisitions;

Ø Phased withdrawal of public sector funds from banks, beginning from July, 2016;

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

Ø .Zero   tolerance   for   weak   corporate   governance,   misconduct   and   lack   of

transparency;

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

Ø .The establishment of an Asset Management Company;

Ø .Promotion of the enforcement of dormant laws;

Ø .Revision and updating of relevant laws;

Ø .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 march, 2016.

STATEMENT OF PROBLEM

This issue of the impact of recapitalization on the performance of banks in Nigeria has really being the main topic in research. The illiquidity, insolvency has really caused so many weakness in the banking industry or sector. If the government can get direct and a proper solution to these problems, then recapitalization will be very effective to ensure diversified, strong and reliable banking where there is safety of depositor’s money.

RESEARCH QUESTION

1. Does the recapitalization give room to improve in the banking sector?

2. Is there any significant impact of the recapitalization on the performance of banks in Nigeria?

3.  Will the recapitalization help to reduce the poverty index in Nigeria?

4. Does the recapitalization exercise have any role to play on unemployment in Nigeria?

RESEARCH HYPOTHESIS

H0: There is no significant impact of recapitalization on the performance of banks in Nigeria.

H0: There is significant impact of recapitalization on the performance of banks in Nigeria.

H0: There is no significant effect of ROE, ROA on YEA

H1: There is significant effect of ROE, ROA on YEA

AIM AND OBJECTIVE OF STUDY

1. To investigate the impact of recapitalization on the performance of banks in Nigeria.

2. To investigate the role of the recapitalization exercise on unemployment.

3. To find out the poverty index of Nigeria since the recapitalization exercise.

4. To investigate the improvement of improvement of the performance of banks since recapitalization.

5. To assess the relevancy of the recapitalization in the Nigerian Banking industry

 SIGNIFICANCE OF STUDY

By the end of this research, we will able to find out the impact of recapitalization on the performance of banks in Nigeria. The research will also give room to investigation the poverty index, the level of unemployment in Nigeria and also suggest a proper means of rendering good and reliable services in the banking sector.

SCOPE OF STUDY

This research work covers most of the area of the level of unemployment, the poverty index, the various reform of the central bank of Nigeria. It also covers the area of the yield earning assets, return on equity (ROE) and return on assets( ROA)

DEFINITION OF TERMS

Ø 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.

Ø YEA: Yield on earning assets is one measure of a financial industry’s solvency used by banking regulators. It looks at total interest, dividend and fee income earned on loans and investments as a percentage of average earning assets.

Ø ROE:   Return on equity (ROE) measures the rate of return for ownership interest (shareholders’ equity) of common stock owners. It measures the efficiency of a firm at generating profits from each unit of shareholder equity, also known as net assets or assets minus liabilities.

Ø ROA: Return on assets (ROA) is a financial ratio that shows the percentage of profit a company earns in relation to its overall resources. It is commonly defined as net income divided by total assets. Net income is derived from the income statement of the company and is the profit after taxes.

References

Ajayi, M. (2005). Banking Sector Reforms and Bank Consolidation: Conceptual framework,

Bullion, Vol. 29, No. 2.

Asediolen (2004). For the Economic and Financial Interest of Nigeria. Nigerworld: 1 & 2. Bello, Y. A. (2005). Banking System Consolidation in Nigeria and Some Regional