Sunday, 24 April 2016

Effect Of Recapitalization On The Nigerian Banking Sector

1.1   Background to the Study
The Nigerian banking sector has over the years faced and still facing various kinds of crisis ranging from inadequate capital base which has resulted in the collapse/liquidation of many banks, poor management quality, incurring losses in place of profit, liquidity challenges and other related problems. Soludo, (2004) stressed that the Nigerian banking system is fragile and marginal. The system faces economic challenges which if not addressed urgently could snowball into a crisis in the near future. This phenomenon, has necessitated  a continues financial sector reforms globally  in order to minimized the risk of bank failure, reduced if not totally eradicate bank losses, and ensure capital adequacy in the banking sector; hence the of bank recapitalization policy.

The history of recapitalization in the banking sector, date back to 1952 when the colonial government then raised the capital requirement for banks especially the foreign commercial banks to 12,500.00 pounds. Ever since then, the issue of banks recapitalization has been a continuous occurrence not only in Nigeria, but generally around the world. In 1969, the paid-up capital was increased from £12,500.00 - £300,000.00. In 1979 when Merchant bank came on board the Nigeria banking authority set the capital base for Merchant banks at N2 million and N600, 000.00 for commercial banks. 

As from 1988, there had been further increase in the capital base, particularly coupled with the liberalization of the financial system and introduction of structural adjustment programme in 1986. In February 1988, the capital base for commercial banks was increased to N5 million while that of Merchant banks was increased to N3 million. In 1989, there was a further increase to N20m for commercial banks and N12 m for Merchant banks.

In recognition of the fact that well-capitalized banks would strengthen the banking system for effective monetary management, the monetary authority increased the minimum paid-up capital of commercial and merchant banks in February 1991 to N50 and N40 million from N20 million, respectively. In 31st March 1997, twenty-six banks comprising 13 each of commercial and merchant banks were liquidated as a result of bank failures.

In January, 1998 the minimum paid-up capital of merchant and commercial banks was consequently raised to a uniform level of N500 million. Finally in year 2005, the Central Bank of Nigeria(CBN), brought into force the risk-weighted measure of capital adequacy recommended by the Basle Committee of the Bank for international settlement and raised the paid-up capital to N25 billion (Bakare, 2011).

However, this study provides evidence on the effect of bank recapitalization on the Nigerian banking sector.

1.2   Statement of the Problem
In the process of consolidation many bank CEOs and chairmen of boards lost their positions as a result of merger and acquisition. But more devastating has been the job losses across cadres in the industry. In many banks this has been done quietly, while in other banks, workers have been encouraged to resign with benefits.

The governor of CBN had, at the beginning of the process admitted that “there will be job losses but the question then is whether, on a net basis, there will be  more job losses after the consolidation than would have occurred” (Manuakas, 2006). Ebimobowei and Sophia (2011)  however stated that despite the merger and acquisition of  banks in the country, some of the merged banks are still facing those challenges that led to the 2005 consolidation.

These challenges according to them include; poor risk management, poor corporate governance practice, over reliance on public sector funds, weak infrastructure, insufficient regulation and reporting, weak credit assessment skills, lack of professionalism and skills gap. Therefore, this study focuses on a critical examination of the effect of recapitalization on the Nigerian banking sector.

1.3 Objective of the Study
  The main objective of this study was to evaluate the effect of recapitalization on the performance of  Nigerian bank. To achieve this aim, the following specific objectives were pursued:
         i. To evaluate the roles recapitalization will play on banks liquidity position.
      ii.  To determine the effect of recapitalization on the profitability of banks.
    iii.  To examine the role of recapitalization in terms of employment in the Nigerian banking sector.   

1.4 Research Questions
The following research questions were raised based on the objectives of this study:

  • 1.Does recapitalization in the Nigerian banking sector affect banks liquidity position?
  • 2.Does recapitalization in the Nigerian banking sector affect banks profitability?
  • 3.Does recapitalization in the Nigerian banking sector affect employment?

1.5 Hypotheses of the Study
Below are the hypotheses that were tested and analyzed in this study
Ho1:  Recapitalization has no significant effect on bank liquidity.
Ho 2: Recapitalization has no significant effect on banks profitability.
Ho3:  Recapitalization has no significant effect on employment in the bank.
Ho: Represent the null hypotheses of the study.

 1.6 Justification for the Study
          The roles of banks in any economy cannot be overemphasized. These roles cut across many areas of the economy such as savings and investment because banks collect deposit through savings and grant loans to investors. Hence they serve as intermediaries between savings and investments. This explains the reason why the federal government has over the years, come up with policies to keep the sector sound. 

In spite of the 1952 Banking Ordinance, the Nigerian banking sector has experienced a number of bank failures. The period of 1994-2003 also witnessed a wave of systemic distress culminating in another round of bank failures. Notwithstanding the heave impact this ugly and recurring development has inflicted on the sector, the 2004 Banking Sector Reform swept away 14 additional banks. 

The tenacity of bank failure in the country therefore became a matter of grave and utmost concern not only to the entire nation but to the practitioners and the academia (Babalola, 2011). Researchers like Adegbaju and Olokoyo (2008) have also established that the resultant effect of financial liberalization opened up the Nigerian economy to global financial market which has generated increasing apprehension in the economy and has exposed the fragility and vulnerability of her financial system. Despite the merger and consolidation put in place to strengthen the sector, researchers like Salleo in Somoye (2008) added that if a voluntary consolidation does not enhance the performance of the participating banks, any performance enhancing effect of the consolidated promoted by the government police is more questionable.

However,  this study give an in-depth knowledge on the effect of recapitalization on the Nigerian banking sector and proffer a better way on how to tackle the challenges in the banking sector for the benefit of the bankers, employees and bank customers.

1.7 Scope of the Study
This study is expected to cover the effect of the bank recapitalization policy on the Nigerian Banking sector. However, due to the inadequate resource to achieve this aim and the time frame. The study only covers the effect of recapitalization on three selected banks in Ilorin metropolis between years 2007 to 2012. And particular emphases were laid on bank managers, bank employees and shareholders of the banks.

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