EFFECT OF RECAPITALIZATION ON BANKING INDUSTRY IN NIGERIA: A STUDY OF FIRST BANK OF NIGERIA PLC

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 CHAPTER ONE

INTRODUCTION

1.1       Background to the Study

Recapitalization of banks is not a new phenomenon. Right from 1958 after the first banking ordinance in 1952 the colonial government then raised the capital requirement for banks especially the foreign commercial bank from 200,000 pounds to 400,000 pounds. Ever since the issue of bank recapitalization have been a continuous occurrence not only in Nigeria but generally around the world especially as the world continues to witness increasing interdependence among national   economies (Adegbaju and Olokojo, 2008).

The relevance of banks in the economy of any nation cannot be overemphasized. They are the cornerstone the linchpin of the economy of any country. Economic activity as it is known could not be smooth sailing without the continuing flow of money and credit. Consequently, it is submitted that the economic well being of a nation is a function of the advancement and development of her banking industry (Ajayi, 2005). This led to Soludo’s decision of restructuring the banking industry in Nigeria with 25 billion naira recapitalization and consolidation exercise.

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).

According to Bello (2005), recapitalization is when a company changes its capital structure which often times is aimed at improving a company’s debt/equity ratio. It 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.

Capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities while consolidation is -when two companies combined together to form a new company altogether, that is to say, a bigger, more efficient, better-capitalized company and more skilled industry. Consolidation is a term used by the Central Bank of Nigeria (CBN) to describe the coming together of some banks within the country to become one bank and be able to meet CBN’s requirement for recapitalization (Dominic, 2012).

1.2       Statement of the Research Problem

There have been constant issues on the falling standard of banking industry in Nigeria and bank liquidating base on mismanagement of customer fund, living their customer with nothing to go home with from their savings and investment.

The banking recapitalization and consolidation in Nigeria of 2004/2005 to a minimum of N25 billion in asset base and the associated financial innovations generated an unprecedented degree of expansion and competition in the banking industry (Dominic, 2012).

The Central Bank of Nigerian’s resolve to carry out reforms in the banking sector which was borne out of the past of the nations banking industry. Between 1994 and 2003 a space of nine years, no fewer than 36 banks in the country closed shops due to insolvency (Imala, 2005).

In 1995 four banks were closed down. But 1998 may go down well in history as the year for the banking industry as 26 banks closed shops that year. Three terminally ill banks also closed shops in 2000. In 2002 and 2003 at least a bank collapsed. The failed banks which gave rise to recapitalization had two things in common; small size and unethical practices’. Of the 89 banks that were in existence as at July 2004, when the banking sector reforms were announced, no fewer than 11 banks were in distress. According to the CBN, between 69 and 79 of the banks were marginal or fringe players (Umar, 2008).

It is on this ground that the study seeks to assess the effect of recapitalization on banking industry in Nigeria.

 1.3       Aims and Objectives of the Study

The aim of the study is to assess the effect of recapitalization on the banking industry in Nigeria. The following are the objectives of the study:

1. To examine the effects of recapitalization on Nigerian economy.
2. To examine the outcome of recapitalization on customers loyalty.

3. To find out the effect of recapitalization on the expansion of Nigerian Banking sector.
4. To examine the challenges militating against effective recapitalization in Nigerian banking system.

 1.4       Research Questions

The following research question would be addressed in the course of the project.

1. What are the effects of recapitalization on Nigerian economy?
2. How effective is the outcome of recapitalization on customers’ loyalty?

3. Does recapitalization has any effect on the expansion of Nigerian Banking sector?
4. What are the challenges militating against effective recapitalization in Nigerian banking system?

1.5       Research Hypothesis

This research hypothesis will be treated

H_o: Bank recapitalization in Nigeria has no significant effect on the Nigerian economy.

H_i: Bank recapitalization in Nigeria has significant effect on the Nigeria economy.

 1.6       Significance of the study

This work would be of great importance to many investors, share holders, banking industry, stakeholders, government, researchers and students in the sense that investors would be able to rely on the industry that they are investing in with the mind that their money will be utilized.

The study will also serve as an eye-opener to the weaker banks with low capital base, owing to the fact that a bank with a strong capital base has the ability to absolve losses arising from non performing liabilities.

Furthermore, the study will be of great benefit to customers, helping them to realize that recapitalization of the banking sector will lead to improvement in customers’ service delivery.

1.7                Scope and limitation of Study

The study is carried out to examine the effect of recapitalization on banking industry in Nigeria with a view to explore First Bank of Nigeria Plc.    First Bank plc is chosen because it is one of the banks that the shareholders fund was in excess of N25 billion prior to the recent re-capitalization period. The issues covered that of identification of the effectiveness of Central Bank in administering recapitalization policy in Nigerian banking sector and also to assess the effectiveness of recapitalization on Nigerian economy,

1.8       Operational Definitions

• Recapitalization: This is when   a   company   changes   its   capital structure which often times is aimed at improving a company’s debt or equity ratio.

• Consolidation: This is when two companies combined together to form a new company altogether that is to say a bigger, more

• Merger: This happens when two firms agree to go forward as a single new company rather than remain separately owned and

 Economy: An economy consists of the economic system of a certain country or region, which comprises the production, distribution or trade, and consumption of goods andservices in that country or area. From an investment perspective, an economy depends on, and is limited by, available capital and resources, including land and labor.

Bank: A bank is a financial institution and a financial intermediary that acceptsdeposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets.

REFERENCES

Adegbaju, A. A. and Olokoyo, F. O. (2008), Recapitalization and Banks Performance: A Case Study of Nigerian Banks, African Economic and Business Review, Vol. 6, No, 1, 2008.

Dominic, E. (2012). Monitoring banking sector. European Journal of business administration of Nigeria, Volume 11, (3) 32

Ajayi, M. (2005). Banking Sector Reforms and Bank Consolidation: Conceptual framework,Bullion, Vol. 29, No. 2, 23-26

Bello, Y. A. (2005).  Banking System Consolidation in Nigeria and Some Regional Experiences: Challenges & Prospects. Bullion, 29 (2), 5-9

Imala, O. I. (2005). Challenges of Banking Sector Reforms & Bank Consolidation in Nigeria.Bullion, 29 (2), 16

 Soludo, C. C. (2004). Consolidating the Nigerian Banking Industry to Meet the Development Challenges of the 21st Century. Bankers’ Committee held on July 6, at the CBN Headquarter, Abuja.

 Umar, A. D., (2008). Banks consolidation in Nigeria: an assessment of its intended and unintended consequences. Conference on Evaluating the Restructuring and Developmental Process of the Nigerian Economy, Faculty of Social and Management Sciences, Kaduna State University, pp. 3-7

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