ABSTRACT
The global phenomenon in the financial service industry is the consolidation of the financial activities towards ensuring financial stability. It is occurring at a rapid pace due to changes in economic environment, which often alter the constraints faced by financial service firms.
The main objective of this study is to examine the effect of recapitalization of banks on Nigerian economy. Secondary data was gathered from CBN statistical bulletin on GDP, bank capitalization, number of distressed banks, number of banks, from the year 1990-2007. The gathered data was analyzed using the multiple regression models on statistical package for social sciences (SPSS). The research showed a strong correlation coefficient between the dependent and the independent variables. Hence, our finding revealed that there is a significant and thus positive relationship between bank recapitalization, number of banks, number of distressed banks and GDP.
Hence, this research work recommends that there should be effective training and manpower development, asset management company (AMC), cross border merger, and the use of modern information and communication technology. These are to ensure stability, effectiveness and efficiency in the system. Thus, from the analyzed data and other findings, this research work concludes by recapitalization of banks as improved the Nigerian economy.
CHAPTER ONE
INTRODUCTION
1.1BACKGROUND OF THE STUDY
It is widely recognized that the financial system plays crucial roles in economic development. In Boyd.et.al (1993), it was discovered that in an Merger and acquisition arrangement, a larger, more efficient institution tends to take over smaller, less efficient institution, presumably at least, in part to spread the expertise or operating policies and procedures of the more efficient institution over the one acquired.
It has also been found that acquiring banks are more profitable and have smaller non-performing loan ratios than target (Peristiani 1993) consolidation of the financial activities is the global phenomenon been faced in the financial stability. It is a way of resolving problems of financial distress and its occurrence is at a rapid pace in most countries of the world, particularly in emerging markets.
According to Lemo, T (2005), he argued that 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 resilience to support the economic development of the nation by efficiently performing its functions as to fulcrum of financial intermediation.
It was also discovered in the study that profitable banks are always willing to be acquires while small, unprofitable banks tend to be acquired (Forcarell, Panetta and Salleo 1998).
Soludo 2004, argues that the consolidation is one of the key components of financial reforms designed to ensure a diversified, strong and reliable banking sector, which will in turn guarantee the safety of depositors money, effective performance of developmental roles and competitive players in African regional and global financial system.
There are some analysts that are of the view that the main motivation behind consolidation is to maximize shareholders values which is best achieved through mergers and acquisition while others view that consolidation will not only bring about increase shareholders worth but also contribute to the expectation of economics of scale as well as altering the centers and peripheries of financial activity but in spite of its benefits, it is not without its consequences.
One possible impact of financial consolidation on bank customers could stem from the disruption of historical lending patterns. A lack of short-run substitutes for bank credit would imply that a disruption in the supply of bank credit would have negative consequences for the affected borrowers and possibly for the macro-economy, as argued in the literature reviewed by Bernanke (1993).
Strahan and Weston (1998) examined banks involved in mergers by comparing the small business lending of the bank pre-and post-merger to a sample of bank not involved in mergers. Their findings therefore, do not support the consolidation hypothesis.
1.2PROBLEM IDENTIFICATION
The central bank of Nigerian (CBN) Act 21, 1990 and Bank and other financial institution Act (BOFIA) 1991 represent significant watershed, in capital regulation for the Nigerian banking system. From a modest value of ten million Naira minimum paid up capital in 1988, Nigerian commercial banks were required to maintain capital not below N50million in 1991. Between 1991
and 2005 subsequent increase have also been made ranging from N500 million (1997); N2billion (2002), to N25 billion in 2005.
Today, a lot of people no longer have faith in these banks anymore because of the fact that a lot of problem exists in distress while some were liquidated. While, various regulator approaches starting from deregulation to consolidation have brought about growth in the size structure and function of the Nigerian banking system, capital regulation cannot be said to have been efficient in ensuring a stable banking system or a corresponding level of economic growth.
1.3 RESEARCH QUESTIONS
The research work is attempting to answer the following questions;
i. Has the introduction recapitalization of banks in Nigeria brought a positive reaction or not?
ii. Has it in any way affected the economy?
iii. Is it a venture that will boost the banking sector?
iv. Have the problem of weak capital base been solved?
v. Do small and medium savers now benefit from these banks?
vi. Does the society now have the confidence to request for help form the bank? i.e. financial supports.
1.4 PURPOSE OF THE STUDY
The main purpose of this study is to examine;
1. The effect of recapitalization of banks on the Nigerian economy.
2. To determine the relationship between bank recapitalization, Gross domestic product (GDP), distressed banks and the number of banks.
3. To also examine the various theories of bank recapitalization.
No nation can attain greater height in its economy without the banking sector because banks are the pivot of any economy. there is no sound, safe and viable banking sector in an economy, nothing can be moved, be it political or other spheres of life.
1.5 RESEARCH HYPOTHESIS
The conjectural statement for the research work in respect of the research question is as follows;
Ho – h=recapitalization of banks has not improved the Nigerian economy.
Hi – h ≠recapitalization of banks has improved the Nigerian economy.
1.4RESEARCH METHODOLOGY
This research is based on secondary data which was sourced from the use of bank journals, books on banking and CBN statistical bulletin etc. the span of the project takes place between 1990-2007 and the method of analysis goes this;
Y = F (bo + bI xI + eI)
Where;
Y = GDP
XI = Bank capitalization
bo = The constant (S)
bI = The co-efficient for the independence variable
e = Standard errors
1.5SIGNIFICANCE OF THE STUDY
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