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Importance of Bank capitalization in Nigeria ( Chapter 1 & 2)

1.1   Background to the Study
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.
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 N20 m 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
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
1.3 Objective of the Study
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
following research questions were raised based on the objectives of this study:
1.     Does
recapitalization in the Nigerian banking sector affect banks liquidity
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.
2: Recapitalization has no significant effect on banks profitability.
Ho3:  Recapitalization has no significant effect on
employment in the bank.
Represent the null hypotheses of the study.
 1.6 Justification
for the Study
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.
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.
1.8 Definition of Terms
to Omoruyi (1991), recapitalization is the main driving force of bank reforms.
It focuses mainly on restructuring, rebranding and refurbishing the banking
system to accommodate the challenges of bank liquidation
bank is a financial institution and an intermediary that accepts deposit and
channel those deposit into lending activities, either directly by loaning or
indirectly through the capital market. Abdullahi (2002), expressed that the
banking industry in particular play crucial role in the economy development by
mobilizing saving and channeling them for investment especially in the real
sector which increase the quantum of goods and services produced in the
economy, thus national output increases and employment improves.
Bank Recapitalization
occurs when the capital structure of a bank is reorganized or rearranged in
order to meet the financial goal or obligations of the bank. Usually, it has to
do with the restructuring of the debt and equity of the banks so as to avoid
bank failure and ensure the effectiveness of banks in a country.         
       Accoding to Oladejo (2011) The
Recapitalization policy Frameworks require a bank to have minimum capital base
of N25 Billions bellow which within the given deadline the bank should merge
with other banks, get acquired by bigger bank or face outright liquidation.
implies a change produced by an action or other cause; a result e.g. the effect
of recapitalization in Nigeria will be the result or changes that accompany the
recapitalization excises in Nigeria which could be either negative or positive
in nature. (Dictionary of Business)
2.1 Introduction
Over the years, researchers like
Adegbaju  and  Olokoyo 
 (2008), Gunu (2009), Ajede (2011),
Ebimobowei and  Sophia (2011) and many
others  have looked into the effect of
recapitalization of  banks as it affects
different variables such as manpower planning and control, performance of  banks, employment, merger and acquisition,
and have emphasized the need to straighten the capital base of the bank and
also suggest solutions to the negative effect of the recapitalization policy.
This chapter covers and review of various literatures and the approach of the
researchers on the issue of recapitalization in the banking sector
 2.2   Conceptual Framework
2.2.1 Recapitalization
 Recapitalization in the Nigerian banking as to
do with raising the capital base of the banks in other to ensure that the
bank’s capital base is in a position to effectively handle its liability and that
banks are also able to effectively carry out their obligations in the sector as
required. According to
Adegbaju (2008), recapitalization literarily means increasing the amount of
long term finance used in financing the organization. Recapitalization entails
increasing the debt stock of company or issuing additional shares through
existing shareholder or new shareholder or a combination of the two. 

It could
even take the form of merger and acquisition or foreign direct investment.
Whichever form it takes the end result is that the long term capital stock of the
organization is increased substantially to sustain the current economic trend
in the global world.  The study also
viewed banking sector reforms and recapitalization as a deliberate policy
response to correct perceive or impending banking sector crisis and subsequent
failures. However, the quality of banks
performance and its effectiveness in terms of its main objective of fund
mobilization from the surplus unit to the deficit unit and it contributions to
the economy growth and development in a country will depend largely on the  level of it capital.

2.2.2 An Overview of
the Central Bank of Nigeria (CBN)
the establishment of the        Central Bank
of Nigeria (CBN) date back to the period between 1892 -1952 when an inquiry was
passed by the then colonial administrator to investigate banking practice in
Nigeria. The G.D. Paton report which emanated from the inquiry was the basis
for the first banking ordinance of 1952. The ordinance was designed to ensure
orderly commercial banking and to prevent the establishment of unviable banks. 

A draft for the establishment of the Central Bank of Nigeria was presented to
the House of Representative in March, 1958. The Act was fully implemented on 1
July, 1959 when the Central Bank of Nigeria (CBN) came into full operations.  The Central Bank Act of 1958 (as amended) and
the banking decree 1969 (as amended) constitute the legal framework within
which the CBN operate and regulate bank. The wide range of economic
liberalization and deregulation measures following the adoption, in 1986, of a
Structural Adjustment Programme (SAP) resulted in the emergence of more banks
and other financial intermediaries.

 Series of amendment were also recorded
to strengthen the power of the CBN in carrying out its obligations which
include, the Bank and Other Financial Institution (BOFID) Decrees 24 and 25 of
1991 which repealed the Banking Decree 1969, the CBN [Amendment Decree No.3 and
BOFI (Amended)] Decree No. 4 in 1997 to remove completely the limited autonomy
which the Bank enjoyed since 1991, the CBN (Amendment) Decree No. 37 of 1998
which repealed the CBN(Amended) Decree No. 3 of 1997 which provide a measure of
operational autonomy for  the CBN to
carry out its traditional functions and enhances its versatility. 

the legal framework within the CBN operates is the CBN Act of 2007 which
repealed the CBN Act of 1991 and all its amendments. The Act provides that the
CBN shall be a fully autonomous body in the discharge of its functions under
the Act and the Bank and Other Financial Institution Act with the objective of
promoting stability and continuity in economic management. In line with this,
the Act widened the objective of the CBN to include ensuring monetary and price
stability as well as rendering economic advice to the Federal Government.                                

CBN website)
2.2.3 The Role of CBN
 The Central Bank of Nigeria (hereinafter
referred to as CBN) was established by the CBN Act of 1958. According to the
Act, the CBN had the principal objects as follows:
    of legal tender
    :-The Central Bank of Nigeria
    (CBN), engage in currency issue and distribution within the economy. The bank
    assume this important function since 1959 when it replaced the West African
    Currency Board (WACB).Naira and kobo where introduced in 1973 and at present they
    are denominated in N5, N10, N20, N50,N100,N200, N500,N1000 respectively.

of Nigerian external reserves
:-In order to safeguard
the international value of the legal tender currency, the CBN is actively
involved in the management of the country’s debt and foreign exchange. This
they do through debt management and the foreign exchange management which
involved the acquisition and deployment of foreign exchange resources in other to
reduce the destabilizing effect of short-term capital flows in the economy (CBN

and maintenance of monetary stability and a sound financial system
– In Nigeria, the CBN also plays specific roles in consumer protection (in this
case, users of banking products and services) to ensure that “bank charges are
reasonable and consistent with both the profit motive of the individual banks
and the interest of the system” (Sanusi 2009). This has been reflected in such
areas as issuance and enforcement of bankers’ tariff, several circulars on
interest and exchange rates, and other charges.

and financial adviser to the federal government
– The CBN undertake most of federal government banking businesses within and
outside the country. The bank also provide 
banking services to the state and local government  and may act as banker to institutions, firms
or corporation set up by the federal, state and local government.

According to Alford (2011).The banking reform advocated by Governor
Sanusi Lamido Sanusi were anchored on four pillars which are; enhancing the
quality of banks, establishing financial stability, enabling healthy financial
sector evolution and ensuring that the financial section contributes to the
real economy.

 Banker and lender of last
resort to banks
: – The CBN maintain current account
for deposit money banks. It also provides clearing house facilities through
which instruments from the banks are processed and settled. As lender of last
resort, Central Banks sustain financial system stability by being ready to lend
to other banks and financial institutions in the event of a financial panic in
the system. This reduces the threat of bank runs and the mood swings of
depositors based on their perception of the solvency of the banks. However, the
central banks put in place prudential guidelines to guard against unwholesome
lending by banks. Emeka R.O (2009).
other banks in the system
: – The Central Bank of Nigeria (CBN) is the apex
regulatory body for banks and financial institutions operating in Nigeria by
virtue of the Banks and Other Financial Institutions Act (BOFIA) 1991 as
amended. Okeke (2008) reported that the Central Bank of Nigeria has introduced
the “Resident Examiners Programme” whereby the apex bank will send its staff to
banks to monitor and supervise their activities on a daily basis. This is an additional
measure to entrench a corporate governance culture in the banks.
2.2.4 An Overview of Commercial Banks in
The Nigerian banking industry is made up
of the Central Bank of Nigeria (CBN). Which serves as a regulatory body in the
system, the deposit money bank refers to as commercial banks, development
institutions and other financial institution which include; microfinance bank,
finance companies, bureau de change, discount houses and primary mortgage
The history of banking operation in
Nigeria is traceable to 1892 when the first Nigerian Bank, African Banking
Corporation, was established. In 1894, First Bank of Nigeria (which was known
as the Bank of British West Africa then) was incorporated at Liverpool and
acquired by African Banking Corporation (First Bank, 2010). Although, the
banking business was originally started by the British colonial to serve the
interest of the British shipping and the trade agencies in Nigeria, the sector
had since then thrived from government regulated agency to a deregulated sector
with the aim of  budding and directing
the local economy (Cowry, 2009). Banking legislation did not, however, exist in
Nigeria until 1952 when five banks began to operate legally in the country. The
banks were; the Bank of British West Africa, Barclay Bank and French Bank
(three foreign banks). 

The last two banks which were indigenous are made up of:
National Bank of Nigeria and the African Continental Bank. Prior to 1952 when the
banking activities was regulated in Nigeria by enactment, many Commercial
banking were introduced and carried out. For example, a second foreign bank-the
Bank of Nigeria- was established in 1899 to compliment the establishment of
Bank of British West Africa (BBWA) in 1894. In 1916, the Colonial Bank
established its presence in Nigeria. Barclays bank entered the Nigerian banking
arena in 1925 through the merger between the Colonial Bank, the Anglo-Egyptian
Bank and the National Bank of South Africa to create Barclays Bank (Dominion, Colonial
and Overseas). In 1948, the British and French Bank for commerce and Industry
was established (later to become the United Bank for Africa). These banks
therefore did not aim at meeting the needs of the Africans. 

One prominent person
in Africa who founded a bank with an African root (the African Continental Bank
– ACB) was Dr. Nnamdi Azikiwe. According to him, he decided to establish the
bank because foreign banks discriminated against him and his group of
companies. The ACB was really not the first indigenous bank to be founded. In
1929, for instance, the Industrial and Commercial Bank became the first
indigenous bank to be established. The bank was short-lived and went into
liquidation in 1930. Its failure has been attributed to mismanagement, accounting
incompetence, embezzlement and the non-co-operative attitude and denigration of
colonial banks (ibid).

In 1947, according to Uche’s (2004)
account, the Nigerian Farmers and Commercial Bank also came into existence.
Worried by the spate of establishment of these indigenous banks, the federal
government, in 1948, appointed Mr. G.D. Paton, an official of  the bank of England to ‘enquire generally into
the business of banking in Nigeria and make recommendations to the Government
on the form and extent of control which should be introduced’. Mr. Paton
submitted the report in October 1948. This culminated in the 1952 Nigerian
Banking ordinance. Many people also took advantage of the long gap between the appointment
of the Paton commission and the enactment of the 1952 Banking Ordinance to establish
indigenous banks. The result was that by 1982, at least 24 indigenous banks had
been established between 1951 and 1952. With the introduction of regulation,
mass indigenous banks with banking failure followed. Sixteen of the indigenous
banks failed in 1954 alone.

Again, unethical practices were at least
in part, responsible for the failure of most of these indigenous banks. One of
such banks was the standard bank of Nigeria, which went into liquidation on
20th September, 1952. The directors and auditors of the banks were subsequently
charged with stealing and falsification of accounts. 

The case of the Industrial
Bank of West Africa Ltd was similar. Two of its directors were jailed for
falsifying its accounts. Allegations of fraud and embezzlement were also in the
forefront of the winding up of the provincial Bank, Afro Seas Credit Bank and
the United Commercial Credit Bank. Essentially the 1952 Ordinance was a
response to the indigenous banking experiences of the pre-banking regulation
era. There have been subsequent banking regulations in Nigeria. The 1958
banking ordinance repealed the 1952 Banking ordinance while the 1969 Banking ordinance
also replaced the 1958. Many banks have come, gone or stay (Uche,

2.2.5 The Roles of Commercial
Banks in an Economy:
 In Nigeria, the financial system is the hub of
productive activity, as it performs the vital roles of financial intermediation
and effecting good payments system as well as assisting in monetary policy implementation.
The process of financial intermediation involves the mobilization and allocation
of financial resources through the financial (money and capital) markets by financial
institutions (banks and non-banks) and by the use of financial instruments
(savings, securities and loans). 

The efficiency and effectiveness of financial
intermediation in any economy depend critically on the level of development of
the country’s financial system. In effect, the underdeveloped nature of the
financial system in most developing countries accounts largely for the relative
inefficiency of financial intermediation in those economies. E.J.Ofansen (2010).

 These roles include the following:
of Deposit:
Banks accept three types of
deposit from its customers. The first is savings deposit on which the bank pays
small interest to the depositors who are usually small servers and are allowed
to draw their money through cheque up to a limited amount during a specific
period of time. Others are current and fixed deposit account on which the bank
charges some amount for the services rendered. 
ii.      Agency
A bank act as an agent for its
customers in collecting and paying cheques, bills of exchange, drafts, dividend;
it also buys and sells shares, securities, and debentures for its customers,
pays subscriptions, insurance premium, rent, electricity and water bills and
other similar charges on behalf of its clients. 
Credit creation is one of the most
important functions of the commercial banks. Like other financial institutions,
they aim at earning profit. For this purpose, they accept deposit and advance
loans by keeping small cash reserve for day-to-day transactions.   
Foreign Trade:
Commercial bans finances trade of
its customers by accepting foreign bills of exchange and collecting them from
foreign banks; it also transacts other foreign exchange business and buys and
sells foreign currency.
v.    Advancing
One of the primary functions of
commercial bank is to advance loans to its customers. A bank lends a certain
percentage of the cash lying in deposits on a higher interest rate than it pays
on such deposit. This is how it earns profit and carries on its business. The
bank advance loans through cash credit, call loans, overdraft, discounting
bills of exchange and others.
Beside the above noted services, the
commercial bank performs a number of services. It acts as custodian of valuables
of its customer by providing them with lockers where they can keep their
jewelleries and valuably documents. It issues various forms of credit
instrument, such as cheques, drafts, and traveller’s cheques etc., which
facilitate transactions. The bank also issues letters of credit and act as
referee to its clients. It underwrites shares and debentures of companies and
helps in the collection of funds from the public. Some commercials banks also
publish journals, which provide statistical information about the money market
and business trends of the economy. Babarinde and Ajala(2005).
2.2.6 Causes and Impact
of Bank Distress/Failure on the Nigerian Economy
The terms bank failure and bank
distress have been closely interchanged in the literature. Bank failure or
distress could be loosely defined as the inability of a bank to meet up with
its financial obligation to its customers. In technical terms, banks are
defined as financially distressed when they are technically insolvent and/or
illiquid (Brownbridge, 1998). In financial terms to be insolvent means that a
business is both unable to meet its current obligations and settle its
outstanding debt. (Bibeault, 1982; Glaessner and Mas, 1995). The authors also
posit that insolvency (as described above) and financial distress/failure are
two different things. This is mainly because distress or failure occurs when
insolvency is officially recognized and the organization is closed or measures
are taken towards consolidation or merger.
 In Nigeria, the problem of bank distress has
been observed as far back as 1930s. According to Soyibo and Adekanye (1992)
between 1930 and 1958, over 21 bank failures were recorded in the Nigerian
banking sector. The banking failures during that era may have been caused by
the domination of foreign banks in terms of the exclusive patronage by British
firms (Soyibo and Adekanye, 1992). Banks distress was also recorded in the
1990s and in the early parts of the 2000s. 
The total number of banks in Nigeria was 115 in 1995. The number of
distressed banks grew from 15 in 1991 to about 55 in 1994; 60 banks were known
to be distressed in 1995 and by 1997, the number of problem banks had reduced
to 47. 

As at year end 2002 that number reduced significantly to 13, then 15 in
2001 before dropping again to 10 shortly before the 2004 banking consolidation.
(CBN and NDIC Annual Reports, 2002-2006). A number of reasons have been
attributed to financial distress of commercial banks. According to Sanusi
(2002) as cited in Musa (2010), one major cause of the distress in the sector
was that the increase in the number of banks overstretched the existing human
resources capacity of banks which resulted into many problems such as poor
credit appraisal system, financial crimes, accumulation of poor asset quality
among others. A result of the reason stated above is that most if not all of
the banks that failed in Nigeria failed due to non-performing loans. Arrears
affecting more than half  the loan
portfolio were typical of the failed banks. 

Many of the bad debts were
attributable to moral hazard: the adverse incentives on bank owners to adopt
imprudent lending strategies, in particular insider lending and lending at high
interest rates to borrowers in the most risky segments of the credit markets
contrary to the interests of the bank’s creditors (mainly depositors or the
government if it explicitly or implicitly insures deposits), which, if
unsuccessful, would jeopardize the solvency of the bank (Brownbridge, 1998). On
close scrutiny, it will also be observed that the single biggest contributor to
the bad loans of many of the failed banks in Nigeria was insider lending.
Insider loans accounted for 65 percent of the total loans of the four banks
liquidated in Nigeria in 1995, virtually all of which was unrecoverable (NDIC,

The threat posed by insider lending to the soundness of the banks was
exacerbated because many of the insider loans were invested in speculative
projects such as real estate development, breached large-loan exposure limits,
and were extended to projects which could not generate short-term returns (such
as hotels and shopping centers), with the result that the maturities of the
bank’s assets and liabilities were imprudently mismatched. The high incidence
of insider lending among failed banks suggests that problems of moral hazard
were especially acute in these banks. In our own speculations, several factors
contributed to this. 

First, politicians were involved as shareholders and
directors of some of the banks. Political connections were used to obtain
public-sector deposits: many of the failed banks obtained their deposits from
the public sector (Ministries and). And because of political pressure, the
parastatals which made these deposits are unlikely to have made a purely
commercial judgment as to the safety of their deposits. 

Moreover, the
availability of parastatal deposits reduced the need to mobilize funds from the
public. Hence, these banks faced little pressure from depositors to establish a
reputation for safety. Political connections also facilitated access to bank
licenses and were used in some cases to pressure bank regulators not to take
action against banks when violations of the banking laws were discovered. All
these factors reduced the constraints on imprudent bank management. In
addition, the banks’ reliance on political connections meant that they were
exposed to pressure to lend to the politicians themselves in return for the
assistance given in obtaining deposits, licenses. 

It was as a response to yet
another round of impending crisis on the banking sector that on July 6, 2004,
the Central Bank of Nigeria announced a major reform programme that would
transform the banking landscape of the country. The main thrust of the 13-point
reform agenda was the prescription of a minimum shareholders‟ funds of N25
billion for a Nigerian deposit money bank not later than December 31, 2005. The
banks were expected to shore up their capital through the injection of fresh
funds where applicable, but were most importantly encouraged to enter into
merger/acquisition arrangements with other relatively smaller banks thus taking
the advantage of economies of scale to reduce cost of doing business and
enhance their competitiveness locally and internationally (Bello, 2008).

2.2.7    Effect of Recapitalization
Merger and Acquisition: The term merger refers to the
combination of two or more organizations into one larger organization. Such
actions are commonly voluntary and often result in a new organizational name
(often combining the names of the original organizations). An acquisition, on
the other hand is the purchase of one organization by another. Such actions can
be hostile or friendly and the acquirer maintains control over the acquired
firm (Jimmy, 2008; Alao, 2010). Nzotta (2004) maintain that banks in Nigeria
explored the option of mergers and acquisitions in an attempt to meet the
capital base of N25 billion. Alao (2010) argue that Nigerian banks adopted
different strategies to achieve the stipulated minimum capital base of N25
billion during the consolidation of banks in 2004 and 2005 which include
mergers and acquisitions.
ii. Reduction in the Numbers of Banks: This process resulted in the
reduction of deposit money banks operating in Nigeria from 89 to 25 and created
several corporate governance challenges for the banks and even the CBN. For
instance 13 banks could not meet the December 31, 2005 deadline given by the
CBN to recapitalize. They were liquidated and their banking license revoked by
CBN (Okafor, 2009). The stakeholder issues arising from the liquidation of
those banks are still on-going. 

 Specifically, as at the end – March, 2004, the
Central Bank of Nigeria’s (CBN) rating of all the banks, classified 62 as
sound/satisfactory, 14 as marginal and 11 as unsound. Two of the banks did not
render any returns during the period. The CBN said the weakness of some of the
ailing banks manifests in their overdrawn position with the CBN, high incidence
of non-performing loans, capital deficiencies, weak management and poor
corporate governance. A further analysis of the returns of the marginal and
unsound banks as at 2005 revealed that they accounted for 19.2 percent of total
assets of the banking system and 17.2 percent of total deposit liabilities. The
industry’s non-performing assets accounted for 19.5 percent. (Adeluyi 2004;
Olajide 2006a; Omoh 2006).

iii.    Reduced Number of Employees: As a result of merger and acquisition
and the liquidation of some of the banks that could not meet up with the
requirement, the numbers of the existence banks was reduced from 89 to 25 banks.
Many of the banks were not able to accommodated the employees thereby resulting
in loss of jobs as confirmed by (Manuakas, 2006), that 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.
2.2.8 Banking Reforms in Nigeria
Prior to 1952, banking in
Nigeria was largely rudimentary while legislative regulation was non-existent
(Onyeakagbu, 1997). The Nigerian government in a bid to regulate the Nigerian banks
promulgated the Banking Act of 1952 (Offor, 2009). The act has been repealed
and amended (replaced by Banks and other Financial Institutions Act of 1999 and
2004) several times in the wake of growth and economic developments which have
led to increased banking operations and activities nationwide. 

importantly, the establishment of the central bank of Nigeria in 1959 did
spiral in many of the banking reforms (Balogun, 2007). The banking reforms,
according to Balogun (2007) were classified as: the Pre-SAP (1970- 1985) reform,
the Post-SAP (1986-1993) reform, the reform lethargy (1993-1998), the Pre-
Soludo (1999-2004) Soludo and the Post Soludo (2004-2008) reforms. The latest
reform which was being  anchored by the
central bank of Nigeria governor, Lamido Sanusi Lamido, is termed generally by
the populace as “Tsunami reform”(2009 up till date).

2.3 Theoretical Framework
2.3.1  Buffer Theory of Capital Adequacy 
The buffer theory of Calem and Rob
(1996) predicts that a bank approaching the regulatory minimum capital ratio
may have an incentive to boost capital and reduce risk in order to avoid the
regulatory costs triggered by a breach of the capital requirements. However,
poorly capitalized banks may also be tempted to take more risk in the hope that
higher expected returns will help them to increase their capital. This is one
of the ways risks relating to lower capital adequacy affects banking

In the event of bankruptcy of a bank, the risks are absorbed by the
bank, customers and Nigeria Deposit Insurance Corporation (NDIC). At present
NDIC pays a maximum of N200, 000 to a customer in the event of bank failure.
Hence, customers are concerned about capital position of banks at all time.
Banks are expected to insure and pay 15/16 of customers deposit liabilities
multiplied by 1% to NDIC to enable their customers benefit from the scheme. 

above practice of NDIC in Nigeria is applicable to other countries but varies
in amount.  The higher the shareholders
fund the better is bank liquidity and capital adequacy. The Deposit insurance
scheme, which is compulsory in Nigeria, also exerts regulatory pressure on
banks. The Vojta (1980) study opined that adequate capital provision against
excess loss permits the bank to continue operations in periods of difficulty
until a normal level of earning is restored. The benchmark set by regulators of
bank capital sometimes differs from those of the bankers. 

These capital standards
have led to questions on whether or not regulators have been able to bring
about changes in bank capital when their standards of capital adequacy differed
from those of bankers. Aggressive banks may try to extend the frontiers of
“imprudent management policy” by operating with less capital base, often in
violation of the regulatory guidelines. But the supervisory agencies usually
stand their ground by resisting decline of capital to avoid bank failure with
the concomitant high cost to the society. 

 In addition to
the maintenance of cash reserve with the Central Bank, the commercial banks are
also required to maintain a minimum level of liquid assets. While the primary
reason behind the imposition of minimum liquidity ratio is to ensure that the
commercial banks have, at all times, a reservoir of liquidity which can be
tapped to meet unusual deposit withdrawals, the ratio can also be used as a
means of influencing the monetary situation in these countries. Furthermore, it
must be noted that liquidity is the quality of an asset that makes it easily
convertible into cash with little or no risk of loss. 

A bank is considered to
be liquid when it has sufficient cash and other liquid assets, together with
the ability to raise funds quickly from other sources, to enable it to meet its
payment obligation and financial commitments in a timely manner. When total
demand for liquidity exceeds its total supply, the commercial banks will be
faced with liquidity deficit. In such a situation these institutions will be forced
to raise additional liquid funds by borrowings or disposing some of their
liquid assets. 

Usually, short-term borrowings are costly and the loss of income
from the sale of liquid assets will tend to have an adverse effect on
profitability. On the other hand, idle funds and the lower returns on liquid
assets may also adversely affect the profitability of those institutions with
surplus liquidity. Thus, liquidity management represents yet another important
determinant of commercial bank profitability. Since data on loans to deposits
of commercial banks are disclosed in their annual reports, the loans to deposit
ratio can be easily calculated.  Resiah (2010).

2.3.3 Profitability
The role and importance of profit in any
business cannot be over emphasized. This serves as a determinant of success,
growth and survival of such business. According to the second proposition of
Modigliani and Miller (1958), investors’ required return on market equity is a
negative linear function of the ratio of equity to debt, since higher leverage
raises the return demanded by shareholders. Most academic studies have argued
that deviations from the M-M theorems are particularly relevant for banks, and
therefore banks have an optimal capital ratio which maximises their value
(Buser, Chen and Kane, 1981; Berger et al, 1995).
Quoting Alarape (2005) as cited in
Ologbondiya and Aminu  (2005), “we see a
very rosy future beyond the next two years or 2007 when profitability will grow
and all the adjustment that the industry need to go through in the
macro-economy including legislature that will be put in place to support the
new types of business especially retail banking would have been put in place”.
Banking sector reforms in Nigeria are driven by need to deepen the financial
sector and repositioning the economy for growth; to become integrated into the
global financial structural design and evolve a banking sector that is
consistent with regional integration requirement and international best
practices. It also aim at addressing issues such as governance, risk management
and operational inefficiency, the centre of the reform is around firming up capitalization
2.4 Empirical Framework
Bakare (2011) noted that the
implementation of the recapitalization policy as cause an unprecedented process
of  revival and resuscitation of the
Nigerian banking sector shrinking the number of 
commercial banks from 89-25 banks. The study also reveals that no other
event is more challenging as this recapitalization policy in the history of
Nigeria banking. The conclusion was that recapitalization is good for Nigerian
banking sector and that what remain however is how the country should sustain
the tempo of the revival and stability in the sector? In other word the banking
sector together with its complimentary institutions should be strengthened and
bank failure should be adequately tackled.
Gunu (2009) reveals that there was
reduction in employment in the banking industry between 1999 and 2001 and that
there was an appreciable increase in employment in the Nigerian banking
industry after the consolidation exercise from the year 2006 up to 2008. Uchendu (2005) also noted that banking
sector reforms and its subcomponent, recapitalization vis-à-vis consolidation,
convergence and capital market activities have emerged as a result of a
deliberate policy in response to correct the perceived or impending banking
sector crises and subsequent failures. A banking sector crisis can be triggered
by the preponderance of weak banks characterized by persistent  illiquidity, insolvency,
under-capitalization, high level of non- performing loans and weak  co- operate governance noting also that
Banking crises usually start with banks inability to meet their financial
obligation to their stakeholders.
Ajayi (2005) viewed recapitalization as
an important component of reforms in the banking industry, owing to the fact that
bank with strong capital base as the ability to absolve losses arising from
non-performing liability (NPL). Adegbaju (2008)
examined the effectiveness of recapitalization on the performance of twenty
Nigerian banks and discovered that while few banks recoded appreciable
improvement in their performance, majority of the banks remain the same or even
became worse.
The objective of banking system is to
ensure price stability and facilitate rapid economic development. Regrettably
these objectives have remain largely unattainably in Nigeria as a result of
some deficiency in our banking system these include; low capital base as
average capital base of Nigeria banks was $10 million which is very low, a
large number of  small banks with
relatively few branches, the dominance of 
few banks, poor rating of numbers of banks, weak corporate governance
evidence by inaccurate reporting and non compliance with regulatory
requirement, insolvency as evidence by negative capital adequacy ratio of some
banks, eroded shareholders fund caused by losses, over dependence on public
sector deposit and foreign exchange trading and the negligence of small and
medium scale private savers. The Nigerian banking sector play marginal role in
the development of the real sector (Imala, 2005)

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