RECAPITALIZATION AND BANK PERFORMANCES IN NIGERIA
BY
VICTOR
MAT N0:
THE DEPARTMENT OF BANKING AND FINANCE FACULTYOF MANAGEMENT SCIENCE UNIVERSITY OF BENIN, BENIN CITY FOR THE PARTIAL FULFILLMENT OF THE AWARD OF BACHELOR OF SCIENCE (BSc)
MAY, 2011
TABLE OF CONTENTS
Title Page Dedication Certification Acknowledgement Abstract Table of Contents List of Tables
CHAPTER ONE Introduction 1.0. 1. 0. Back Backgr groun ound d of of the the Stud Study y 1.1. 1. 1. Statem Statement ent of Proble Problem m 1.2. 1. 2. Rese Resear arch ch Quest Questio ions ns 1.3. 1. 3. Objec Objecti tives ves of the Study Study 1.4. 1. 4. Signif Signific icanc ance e of the Study Study 1.5. 1. 5. Scop Scope e of of the the Stud Study y 1.6 1. 6. Hypo Hypoth thes esiis 1.7. 1. 7. Defi Defini niti tion on of of Term Terms s 1.8. 1. 8. Organ Organiz izati ation on of of the the Study Study
CHAPTER TWO Literature Review 2.0 2. 0. Intr Introd oduc ucti tion on
TABLE OF CONTENTS
Title Page Dedication Certification Acknowledgement Abstract Table of Contents List of Tables
CHAPTER ONE Introduction 1.0. 1. 0. Back Backgr groun ound d of of the the Stud Study y 1.1. 1. 1. Statem Statement ent of Proble Problem m 1.2. 1. 2. Rese Resear arch ch Quest Questio ions ns 1.3. 1. 3. Objec Objecti tives ves of the Study Study 1.4. 1. 4. Signif Signific icanc ance e of the Study Study 1.5. 1. 5. Scop Scope e of of the the Stud Study y 1.6 1. 6. Hypo Hypoth thes esiis 1.7. 1. 7. Defi Defini niti tion on of of Term Terms s 1.8. 1. 8. Organ Organiz izati ation on of of the the Study Study
CHAPTER TWO Literature Review 2.0 2. 0. Intr Introd oduc ucti tion on
2.1.
What is Recapitalization?
2.2. 2.2. History History Of Recapit Recapitali alizat zation ion 2.3. The
position
of
the
banking
sector
before
recapitalization. .3.1.
The Agenda For Recapitalization 2.4. 2.4. The Reaso Reason n For Banks Banks Recapi Recapital taliza ization tion 2.5. 2.5. Factors Factors Affec Affecting ting Bank Bank Perfo Performan rmance ce In Nigeri Nigeria a 2.6. 2.6. Challeng Challenges es Of Of Bank Bank Reca Recapita pitaliz lizati ation on 2.7. 2. 7. The Impl Implic icati ation on Of Reca Recapi pital taliz izati ation on On The Banki Banking ng Industry
.7.1.
Brand Implication
.7.2.
Structure Implication 2.8. 2. 8. Impac Impactt Of Recapit Recapital aliz izati ation on 2.9. 2.9. Prospect Prospect Of Of Banks Banks After After Recapi Recapital taliza ization tion 2.10.Bank Recapitalization through Merger and Acquisition 2.11.
Pre of Bank Performance in Nigeria
2.12.
Post of Bank Performance in Nigeria
2.13.
Nigeria-Primary Capital Market
2.14.
Banking Sector And Capital Market
Chapter Three Research Methodology 3.0 3. 0. Intr Introd oduc ucti tion on 3.1. 3.1. Researc Research h Desi Design gn 3.2. 3. 2. Stud Study y Pop Popul ulat atio ion n
3.3. Sampling Techniques 3.4. Data Collection 3.5. Instrument for Data Collection 3.6. Validity and Reliability of Data 3.7. Administration Instrument 3.8. Plan for Analysis
CHAPTER ONE INTRODUCTION 1.0. BACKGROUND OF THE STUDY Banks are medium through which the country’s monetary policy is discharged. The achievement of the nation’s macroeconomic objectives cannot be facilitated in the absence of the banking system acting as a semi-permeable membrane. Government through the central bank, apart from rigid regulations guiding
entry into the banking
system through
monetary policy, influences the operations of the banking system which is known to impact remarkably on
the
economy.
transmission
Thus,
mechanism
the and
monetary economic
policy growth
mechanism permeate through the banking sector. In the light of the role of banks in the financial landscape, it becomes imperative that technical and technological
innovations
meant
for
positive
adjustment be introduced at any little porous signal of anomaly. Thus, the reforms in the banking sector are necessary to ensure the safety of depositors’ money, deepen the financial system for soundness and
efficiency of the system in order to engender growth of the economy. Kama (2006) observed that a feeble banking discounts
system is repressive, the
precipitating
intermediation
macroeconomic
discretionary
and
process
thereby
instability.
Reforms
therefore involve the articulation of robust policies that will deepen the financial system to enable banks play their roles most efficiently. This study therefore aims at investigating the effect of bank reforms on the performance of the banking system and the growth of the Nigerian economy. The recapitalization and exercise in the banking industry has necessitated the need for different organization to engage in corporate Recapitalization (mergers
and
recapitalization
acquisition). refers
to
the
The
concept
current
trend
of of
compelling all commercial banks to raise their capital base from 2billion to 25billion Naira by the Central Bank of Nigeria on or before 31st December 2005. This has sent some of these banks on the move to consider
Merger
and
Acquisition
as
a
survival
strategy. Banking reform have been an on going phenomenon around the world right from the 1980s, but it is more intensified in recent time because of the impact of
globalization which is precipitated by continuous integration of the world market and economics. Banking reforms involve several elements that are unique to each country based on historical, economic and institutional imperative. In Nigeria, the reforms in 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
tolerance
of
deficiencies
in
the
corporate
governance behaviour of banks (Uchendu, 2005). 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
recapitalization
(merger
and
acquisitions), recapitalization, use of bridge banks, establishment of assets management companies to assume control and recovery of bank assets, and outright liquidation of non redeemable banks. Irrespective
of
the
cause,
however,
bank
recapitalization is implemented to strengthen the
bank bankin ing g
syst sy stem em,,
embr embrac ace e
glob gl obal aliz izat atio ion, n,
impr improv ove e
heal health thy y comp compet etit itio ion, n, expl exploi oitt econ econom omic ics s of sc scal ale, e, adopt adopt advan advance ced d techno technolo logi gies es,, raise raise effic efficie iency ncy and impr improv ove e
prof profit itab abiility lity..
Ulti Ultim matel ately y,
the the
goal goal is to
strengthen the intermediation role of banks and to ensure
that
t h ey
are
able
to
perform
their
develo developm pment ent role role of enhan enhanci cing ng econ econom omic ic growt growth, h, whi which
subs bse eque quentl ntly
leads ads
to
improv roved
overal eralll
econ econom omic ic perf perfor orma manc nce e and and soci societ etal al welf welfar are. e. The The prop propon onen ents ts of Bank Bank reca recapi pita tali liza zati tion on beli believ eve e that that incre ncrea ased
size
coul uld d
pote otentia tially
incr ncreas ease
bank ank
returns, through revenue and cost efficiency gains. Capitalization is an important component of reforms in the Nigeria banking 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. Atta ttaini nin ng
capi apital talizati ation
requi equire rem ments nts
may
be
achieved through recapitalization recapitalization of existing existing banks or raising additional funds through the capital market. 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 the req requi uire red d flex flexib ibil ilit ity y to su supp ppor ortt the the econ econom omic ic development of the nation by efficiently performing its functions as the pivot of financial intermediation (Lemo, 2005). Thus, the reforms were to ensure a
dive di vers rsif ifie ied, d, st stro rong ng and and
reli reliab able le bank bankin ing g
indu indust stry ry
whe where ther there e is safe safety ty of depo depos sito itors’ rs’ money oney and and position banks to play active development roles in the Nigerian economy. In an attempt for banks to meet up with the new requirement, some Banks are exploring the option of inviting foreign investor to buy into Banks. Other are looking at the possibility of getting investors to shore up their capital, and some are looking at the capital market option, while others are considering mergers and and acqu acquiisiti sition on.. The The effe effect ct of the the merge ergerr is that that merg mergin ing g bank banks s in the the coun countr try, y, unde underr the the curr curren entt dispensation may lose their licenses and be issued new ones to reflect the new consolidated outfit. As we go on in the subsequent chapters, critical look shall be taken on the effect that this development is likely to or will have on the Nigeria banking industry and the economy at large.
1.1
STATEMENT OF PROBLEM Business
organizations
are
recently
seeing
Reca Recapi pita tali liza zati tion on (Mer (Merge gers rs and and Ac Acqu quis isit itio ion) n) as an alternative alternative means of recapitalizing. recapitalizing. The current trend of comp compel elli ling ng all all comm commer erci cial al bank banks s to rais raise e thei theirr capital base from 2billion to 25 billion naira by CBN on or before 31st December 2005 has sent some of
these banks on their heels to consider Merger and Acquisition as a survival strategy. In Nigeria today, a numb number er of bank banks s want wantin ing g to merg merge e may may run run into into diff di ffic icul ulti ties es,, beca becaus use e most most Nige Nigeri ria a bank banks s are are not not quoted on the stock exchange and the assets of some are really bad. There exit a high degree of calculated risk taking to tap opportunities that come the way of business, but there is risk avoidance in Nigeria business and where risk risk is low, low, devel developm opment ent is also also low low and indus industri trial al advancement becomes near static. Recapitalizati Recapitalization on could be a very expensive venture in terms of funds required to prosecute it successfully. Corrupt practices at public and private sector levels are another impediment. This need to be discouraged and incidence of corrupt practices should be severely puni punish shed ed
beca becaus use e
reca recapi pita tali liza zati tion on
deal deals s
requ requir ire e
confidence and trust to promote consummation. Nigeria Nigeria suffers suffers anemica anemically lly from from lack lack of inform informati ation on which which may unfortun unfortunatel ately y hinder hinder sig signif nifica icant nt leaps leaps in business combinations.
1.2. RESEARCH QUESTION The question on this research work is
1. How
can
we
examine
the
impact
of
bank
performances on the Nigerian banks? 2. What are the challenges posed by the policy of bank
recapitalization? 3. Are there benefits of recapitalization in the Nigerian
banking performances? •
What
are
the
prospects
of
banking
after
recapitalization?
1.3. OBJECTIVE OF THE STUDY The fundamental objectives of this study are 1.
To examine the impact of bank performances on the Nigerian banks.
2.
To highlight possible challenges posed by the policy of bank recapitalization.
3.
Identify the benefits of the recapitalization in the Nigerian banking performances.
4.
Evaluate
the
prospect
of
banking
after
recapitalization.
1.4.
SIGNIFICANCE OF THE STUDY The significance of this study is to add to the general body of knowledge, enlighten the general public on the recapitalization and banking performance of banks in Nigeria. And also explain the challenges of
bank performances. This research work would also establish the fact that recapitalization (merger and acquisition) is a veritable means for fostering banking growth.
1.5
SCOPES OF STUDY The scope of this study is to know the challenges of banking performances in Nigeria which is being carry out in Benin City, Edo State. There are many factors that act as constraint to the effort of the researcher in the course of writing this project. Most prominent of the factors are: a)
TIME: The research work is a big task and as such requires time and energy, which was not on the researcher’s side.
b)
FINANCE: This is another limiting factor. Due to limited
financial
researcher
cannot
resources procure
available, all
the
the
needed
material is for this project. For instance, to get books from the library the researcher has to pay library, which the researcher does not have all the time. c)
COST: The cost of transportation to and from First Bank of Nigeria Plc, Ekenhuan Edo State is very high for the researcher.
d)
SECRECY: Nigerians dislike activities that tend to probe them. They tend to avoid researcher because they feel their activities that are not meant for public consumption would be exposed through research work.
1.6. RESEARCH HYPOTHESES The following hypotheses will be formulated from the objectives and will be verified in the course of this research work and noted as null from the guide us in finding the solution to the problem that is induced in this research work. a.
Null Hypotheses H0: The null hypothesis is accepted that if there is significant relationship between re-capitalization and liquidity ratio of banks in Nigeria
b. Alternative Hypotheses H1: the tested would be rejected if there is no significant relationship between re-capitalization and loan to deposit ratio?
1.7 •
DEFINITION OF TERMS Bank Re-capitalization: It is the act of supplying long-term funds of the owners of the bank to meet
the requirement of monetary authority. Osiegbu (2005). •
Recapitalization: It is the reduction in the number of banks and other deposit taking institution with a simultaneous increase in the size and concentration of the recapitalization entities in the sector (BIS, 2001:2)
•
Merger: It is the combination of two or more separate firms into a single firm
•
Acquisition: It is where a company takes over the controlling shareholding interest of another company
1.8
ORGANIZATION OF THE STUDY The research work will be made up of five chapters as follows:
CHAPTER ONE: This consists of the introduction, statement of the problem, purpose of the study, research questions, research hypothesis, significance of the study, limitations of the study, organization of the study and definition of terms.
CHAPTER TWO: This section consists of reviews of relevant literature of renowned authors in the field of this study.
CHAPTER
THREE:
This
section
entails
the
methodology selected by the researcher of the study. It entails research design, sample procedure, data collection, operational measure of the variables, and data analysis technique.
CHAPTER FOUR: This consists of a vivid presentation and analysis of data collected from relevant sources for the study.
CHAPTER FIVE: This is the last section of the work and
it
consists
of
discussion,
conclusion
recommendations made by the researcher.
REFERENCES
and
1.
Ajayi , M. (2005) Banking Sector Reforms and Bank Recapitalization: Conceptual framework, bullion, vol. 29, N0.2
2.
Adegbaju,
A.A
and
Olokoyo,
F.O.
2008.
Recapitalization and Banks’ performance: A Economic and Business Review of Case Study of Nigerian Banks. Africal., 6(1): 1-16 3.
Berger N. Allen. 1998. The Efficiency Effects of Bank Mergers and Acquisition: A Preliminary GL Mergers and Acquisitions Interactive seminar, held at Eko Hotels & Suits, V.I., on une 24.
4.
De Nicolo, Ginni, et al. (2003). Bank Recapitalization, Internationalization and Conglomeration: Trends and Implications for Financial Risk. IMF Working Paper, 3 (158).
5.
Kama U. 2006. Recent Reforms in Nigerian banking Industry: Issues and Challenges. CBN ullion, 30 (3): 65-74.
6.
Lemo,
T.
(2005).
Regulatory
Oversight
and
Stakeholder Protection. A paper Presented at the BGL Mergers and Acquisitions Interactive Seminar, held at Eko Hotels &Suites. V.I., on June 24. 7.
Okpara G.C. 2009. A Synthesis of the Critical Factors Affecting
Performance
of
the
Nigerian
Banking
System. European Journal of Economics, Finance and Administrative Sciences, 17: 34-44.
8.
Okpara G.C. 2010b Relative Potency of Financial Repression
and
Liberalization
on
Financial
Development and Economic Growth: An Empirical Survey. American Journal of Industrial and Scientific Research, 1 (3) Forthcoming. 9.
Uchendu, O.A. (20050.Banking Sector Reforms & Bank Recapitalization: The Malaysian Experience. Bullion, 29 (2)
10.
Soludo C.C. 2004. Consolidating the Nigerian
Banking
Industry
to
Meet
the
Development
Challenges of the 21st Century being an address Delivered to the Special meeting of the Banking Committee. Held on July 6, 2004at CBN Headquarters. Abuja.
CHAPTER TWO LITERATURE REVIEW 2.0. INTRODUCTION This research problem seems to be a recurrent public issue
in
the
banking
sectors
in
Nigeria
and
researchers in public sectors and private sectors as well. In order to obtain knowledge of previous research works, substantial numbers of articles, textbooks, journals related to the research problem were reviewed and presented under this chapter. The recent call for recapitalization in the banking industry has raised much argument among the bank regulators, promoters and depositors as if shoring up of bank's capital base is a new phenomenon in Nigeria. Historically, the failure of pioneer 1930's and 1940's brought about the enactment of banking ordinance
of
1952.
Banking
ordinance
of 1952
prescribed an operating licence and emphasized on minimum equity capital for all banks (Onoh, 2002: 321). Since then, rising of bank capital has become the
hallmark
response
monetary authorities.
policy
of
the
Nigerian
Capitalization is an important component of reforms in the banking industry, owing to the fact that a bank with a strong capital base has the ability to absorb losses arising from non-performing liabilities (NPL). Attaining
capitalization
requirement
is
achieved
through recapitalization, convergence as well as the capital market. Thus, banking reforms are primarily driven by the need to achieve the objectives of recapitalization,
competition
and
convergence
(Deccan Herald, 2004). Capitalization is an important component of reforms in the 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 (NPL). Attaining c a p i t a l i z a t i o n requirements is achieved through recapitalization, convergence as well as the capital market. Thus, banking reforms are primarily driven by the need to achieve the objectives of
recapitalization, competition and convergence
(Deccan Herald, 2004) in the financial architecture. The concept of recapitalization refers to the current trend of compelling all commercial banks to raise their capital base from 2billion to 25billion Naira by the Central Bank of Nigeria on or before 31st December 2005. This has sent some of these banks
on the move to consider Merger and Acquisition as a survival strategy.
2.1. RECAPITALIZATION Recapitalization is a change in any company's capital structure, such as an exchange of bonds for stock. Recapitalization is often undertaken with the aim of making the company's capital structure more stable, and sometimes to boost the company's stock price (for example, by issuing bonds and buying stock). Companies that do not want to become hostile takeover targets might undergo a recapitalization by taking on a very large amount of debt, and issuing substantial
dividends
to
their
shareholders
(this
makes the stock riskier, but the high dividends may still make them attractive to shareholders). Also, bankrupt
companies
often
undertake
a
recapitalization as a part of their reorganization process.
2.2. HISTORY OF RECAPITALIZATION 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. Recapitalization
in
Nigeria
comes
with
every
amendment to the existing banking laws. In 1969, capitalization for banks was N1.5m for foreign banks and N600, 000 for indigenous commercial banks. In 1979, when Merchant banks came on board the Nigerian banking scene the capital base was N2m. as from 1988, there had been further increase in the capital
base,
liberalization
of
particularly the
coupled
financial
system
with and
the the
introduction of SAP in 1986. In February 1988, the capital base for commercial bank was increased to N5m while that of Merchant bank was pegged at N3m. In October the same year, it was jerked up to N10m for commercial bank and N6m for Merchant banks. In 1989, there was a further increase to N20m for commercial bank and N12m for Merchant bank. The Nigerian banking industry since its inception (in August 1891 which saw a branch of the African Banking Corporation open in Lagos) had evolved in 7 stages. The first stage (1891 – 1951) was a free era
banking, characterized by unregulated/unguided and Laisez faire banking practices and hence massive bank failures. The rest of the 6 stages fall under reform
stages
which
started
with
the
banking
ordinance of 1952 that dominantly prevailed till 1959. Thus, the first phase of bank reforms in Nigeria (1952 – 1959) bordered on definition of banking business, prescription of minimum capital requirements for the expatriate and indigenous banks, maintenance of reserved funds, adequate liquidity and inculcating of examination, supervision and control habit into the banking management in Nigeria. Following the Paton Report in 1948, the first banking ordinance was enacted in 1952. The ordinance defined a bank as any company carrying on banking business or using bank or banking as part of the title under which it carries on business. 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 1990 to N50 and N40 million from N20 and N12million, respectively, Distressed banks whose capital fell below existing requirement were expected to comply by 31st March, 1997 or face liquidation. Twenty-six of such banks
comprising 13 each of commercial and merchant banks were liquidation in January, 1998. Minimum paid up capital of merchant and commercial banks was raised to uniform levels of N500 million with effect from 1st January, 1997, and December 1998, all existing banks were to recapitalize. The CBN brought into force the risk weighted measure of capital adequacy recommended by the Basle Committee of the Bank for International Settlements in 1990. Before then, capital adequacy was measured by the ratio of adjusted
capital
to
total
loans
and
advances
outstanding. The CBN in 1990 introduced a set of prudential guidelines for licensed banks, which were complementary
to
both
the
capital
adequacy
requirement and Statement of Standard Accounting Practices. The prudential guidelines, among others, spelt out the critical to be employed by banks for classifying non-performing loans. In 2001, when the Universal banking was adopted in principle, the capital base was jerk up to N1billion for existing bank and N2billion for new banks. But in July 2004, the new governor of the CBN announced the need for banks to increase their capital base to N25billion all banks are expected to comply by December 2005. Many Developing Countries implemented financial reforms as part of broader market oriented economic
reforms since the late 1980’s (Uboh, 2005). Globally, activities of banks reflect their unique role as the engine of growth in any economy. The importance of the financial sector of an economy which comprise banks and non-banks financial intermediaries, the regulatory
framework
and
the
ever
increasing
financial products, in stimulating economic growth is widely
recognized
economics,
(Uboh,
especially 2005)
set
in the
developmental pace
for
the
landslide of other works on the interdependent relationship between banks and economic growth. Stressing further that the pioneering work of Gurley and Shaw (1956) on the relationship between real and financial developments shows that financial intermediaries, monetization and capital formation determine
the
path
and
pace
of
economic
development. The Nigerian system has undergone remarkable changes over the years, in terms of the number of institutions, ownership structure, as well as depth and breadth of operations. These changes have been influenced largely by changes posed by deregulation of the financial sector, globalization of operations, technological innovations and adoption of supervisory and
prudential
requirements
international standards.
that
conform
to
Prior to the recent reforms, the state of the Nigerian banking sector was very weak. According to Charles Soludo (2004), “The Nigerian banking system today is fragile and marginal. The system faces enormous challenges which, if not addressed urgently, could snowball into a crisis in the near future. He identified the problems of the banks, especially those seen as feeble,
as
persistent
illiquidity,
unprofitable
operations and having a poor assets base” Banks recapitalization, which is at the core of most banking system reform programmes, occurs most of the time, independent of any banking c 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 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 centre
of
and
the
operational
reforms
is
inefficiencies,
around
firming
the up
recapitalization. (Ajayi, 2005). The issue of recapitalization is a major reform objective; recapitalization literarily means increasing the amount of long term finances used in financing
the organization. Recapitalization entails increasing the debt stock of the company or issuing additional shares
through
existing
shareholders
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 economy trend in the global world.
2.3.
THE
POSITION
OF
THE
BANKING
SECTOR
BEFORE RECAPITALIZATION. There was
existence
of
eighty-nine (89)
banks
predominantly in the urban centres as at June 2004, Characterized by structural and operational weakness of low capital base. Dominance of a few banks insolvency, and illiquidity over dependence on public sector deposits, and foreign exchange, trading. Poor asset quality, weak co-operate governance, a system with low depositor confidence. Banks that could not effectively support the real sector of the economy at 24 percent of GDP compared to African average of 87 and 272 percent for developed countries. Furthermore the vision of recapitalization amongst others includes becoming Africa's financial centre and CBN as one of the best in the world. Within ten years,
Nigerian bank(s) should be among the top 50 0f the 100 banks in the world. Facilitate evolution of a strong of a save and strong banking system. Improve transparency and accountability in the sector. Drive down the cost structure of banks and make them more competitive and development oriented. A new banking
system
that
depositors
can
trust
and
investors can rely upon to usher in a new economy. 2.3.1. THE AGENDA FOR RECAPITALIZATION •
Recapitalization of banks to 25 billion naira share holders fund by December 31 2005. o
Zero tolerance on misreporting and infarctions.
o
Stricter enforcement of corporate governance principles.
o
Policy framework on Risk Management systems.
o
Strengthening
risk
management
systems
in
banks. o
Risk based supervision.
o
Payment system Reforms.
o
Closer collaboration with the Economic and Financial Crimes Commission (EFCC) in the establishment of the Financial Intelligence Unit (FIU) and enforcement of anti money laundering measures.
o
Some element of reform, to a strengthened, Universal, bank.
2.4. THE REASON FOR BANKS RECAPITALIZATION The inability of the Nigeria banking system to voluntarily embark on recapitalization in line with global trend has necessitated the need to consider the adoption of appropriate legal and supervisory framework as well as a comprehensive incentive package to facilitate to recapitalization in the banking industry, both as a crisis resolution option and to promote soundness, stability and efficiency of the system by the apex regulatory body of the banks in Nigeria (Soludo, 2004:4). The major objective of the banking system is to ensure price stability and facilitate rapid economic development.
Regrettably, these objectives have
remained largely unattained in Nigeria as a result of some deficiencies. These include: •
Technological drive: A bank desirous of enhancing its operations but constrained by its inability to easily access the needed technology may be driven into merging with another which has the technological advantage over it
•
Desire for growth: A merger arrangement may be entered into by a bank with a view to harnessing the other bank to achieve the desire growth.
•
Poor rating of number of banks: though the banking system
in
Nigeria
is,
on
the
average,
rated
satisfactory, a detailed analysis of the condition of individual banks, as at December, 2004, showed that no bank was rated very sound only 10 were adjudged sound 51 satisfactory, 61 marginal and 10 unsound. (Imala; 2005 pp: 27). •
Low capital Base: The average capital base of Nigeria banks is US$10milion, which is very low compare to that of banks in other developing countries like Malaysia where the capital base of the smallest bank is
US$526million.
capitalization
if
the
Similarly Nigeria
the banking
aggregate system at
311million naira (US$2.4million) is grossly low in relation to the size of the Nigeria economy and in relation to the capital base of US$688billion for a single banking group in France US$541billion for a bank in Germany. (CBN 2005: 17) •
Stock Exchange Quotation: Business combination could be motivated by the desire for stock exchange listing. In this case, a bank unable to meet the requirement of the stock exchange, but desirous of
public quotation may integrate with another bank in order to realize its goal. •
Increased Market Share: Recapitalization (Mergers and Acquisition) may be compelled by the desire banks that have similar line of product to enlarge its market share after the merger.
In addition to the above inadequacies, the Nigeria banking system suffers the following operational problems: •
Weak corporate governance, evidence in inaccurate and non- compliance with regulatory requirement, declining ethics and gross insider abuse resulting in huge non-performing insider related credits.
•
Over-dependence on public sector deposits and foreign exchange trading and neglect of small and medium scale private savers. (Imala; 2005:27).
2.5. FACTORS AFFECTING BANK PERFORMANCE IN
NIGERIA A CBN/NDIC collaborative study of distress in Nigerian financial institution in 1995 revealed that factors such as bad loans and advances, fraudulent practices, under capitalization, rapid changes in government policies,
bad
management,
lack
of
adequate
supervision, undue reliance on foreign exchange, economic
depression,
political
crisis,
bad
credit
policy, and undue interference from board members are factors responsible for bank and other financial institutions distress. Ogunleye (2003) grouped these factors into institutional, economic; and political factors;
including
supervisory
measures.
The
institutional factors are endogenous factors which are largely
within
the
control
of
the
owners
and
management of the banks. The general institutional factors that led to the
identified factors on the banking system can be discussed
as
governance,
insiders’ weak
risk
abuse, asset
weak
corporate
management
and
inadequacy of capital. Economic and political factors as well as regulatory and supervisory measures will also be discussed in brief.
a.
Insiders Abuse The
government
owned
bank
suffered
from
incessant/frequent changes in board membership and many appointments were made based on political affiliation Consequent
rather upon
than this,
expertise board
consideration. members
saw
themselves as representative, of political parties in sharing the national cake emanating thereof and thus, ascribed their loyalty to the party members rather than the proper running of the bank itself. On
the side of the privately-owned banks, shareholders constituted a problem. According to Olufon (1992), the
owner-managers
regarded
banking
as
an
extension of their operations by appointing their relatives or friends to key positions instead of relying solely
on
professional
managers.
Thus,
their
appointees were mere loyalists who cared for the interest of their masters rather than the business itself.
Shareholders
quarrels
and
boardroom
squabbles were common among the banks that management
attention
unnecessary
squabbles.
deviated
in
In
banks
some
favor
of
where
harmony seemed to exist, another type of insider abuse took the form of the owners and directors misusing
their
privileged
positions
to
obtain
unsecured loans which in some cases were in excess of their banks statutory lending limits in violation of the provisions of the Banks and other Financial Institutions Act (BOFIA) of 1991 as amended. In addition, some of these owners and directors granted interest waivers on non performing insider-credits without obtaining the CBNs prior approval as required by BOFIA. Their conversion of bank resources to service
their
other
business
interest
such
as
allocation of foreign exchange without naira cover to insiders, later crystallized as hard core debts. They
also indulge in compelling their banks to directly finance trading activities either through the banks or other proxy companies, the benefits of which did not accrue to the banks (Ogunleye, 2003). b.
Weak Corporate Governance As a result of the insiders abuse of recruiting inexperienced and incompetent personnel to hold key positions in the bank, deterioration of management culture and weak internal control system instigated by the squabbles among the high rank management decision making team, and non compliance with laws and prudential standards, mismanagement seemed to play a major role in bank failure in Nigeria. Bank losses increased and management resorted to hiding the losses in order to buy time and remain in control. Many banks granted loans with no collateral or with little or no regard to the ability of the borrowers to repay the loans. In this regard, Ogunleye (2003) noted that the proportion of non performing loans in the distressed banks had during the period 19892000, been consistently high, reaching about 80 percent
of
their
loan
portfolio.
This
ratio
has
significantly exceeded the prudential maximum ratio of 20 percent.
c.
Weak Risk Asset Management and Inadequacy of Capital A number of banks had poor credit policies that loans are granted without securities and/or ability of the borrowers to pay back. Okpara (1997) noted that it is not uncommon to find securities being over valued and
sometimes
funds
are
disbursed
without
securities. Odejimi (1992) noted that the major factors
responsible
for
the
precarious
financial
condition of the banks were huge uncollectible loans and advances. In this observation, Ajani (1992) puts it that this maladministration of credit portfolio is one of the most lapses that can make a high-flyer manager lose ever thing overnight capital inadequacy has been reoccurent in the banking system that from time to time the CBN continues to articulate on the increase of the capital base of the banking system. For instance the recent N25 billion Naira recapitalization exercise was meant to beef up the ailing banks capital base.
c.
Economic Condition The banking industry being the nerve centre of the economy is invariably affected by economic and political environment/condition of the country. For instance the Structural Adjustment Programme (SAP)
introduced in 1986 led to a wide range of economic reforms that affected the banking system. Also political situation like the political crisis resulting from aborted attempt to return the country to democratic rule in 1993, led to massive withdrawal of funds that affected
banks
(especially)
those
around
Lagos
adversely.
d.
Regulatory and Supervisory Measures The regulatory and supervisory measures of the CBN/NDIC were unable to keep pace with the rapid changes in the banking industry. The CBN brief (1999) noted that the ability of the CBN to perform its regulatory role had in the past been affected by inadequate manpower both in terms of quality and quantity. NDIC (1995) in discussing the challenges of bank liquidation and deposit payoff, noted that closing a bank is a specialized job requiring services of technically skilled people in banking, accounting, legal,
quantity
surveying,
estate
management,
information management and technology as well as facility
support and also
noted
that
manpower
constituted a problem to its supervisory function.
2.6. CHALLENGES OF BANK RECAPITALIZATION
The challenges identified in this research work cut across the banks, their shareholders, bank employees and other stakeholders in the banking industry. It is an established fact that the route to improving efficiency in any industry is to foster competition among the operators. This is evident in two important growth sectors of the Nigeria economy- aviation and telecommunications
over
(Adedipe
A
2005:37).
the
major
last
one
decade
challenge of bank
recapitalization is how to foster competition with fewer mega banks. Certainly, fewer cannot be more competitive. There is however, the other side to the argument, which considers the number and spread of bank branches. The fewer banks are likely to be pressured to expand further,
seeking
aggressive
business
branding
to
opportunities hitherto
through
unexplored
territories. (Moon, 1998). There is ample evidence that this is the direction that the emerging banks in Nigeria are likely to follow, going by the indications in their capital raising information memorandum. International evidence in bank recapitalization also confirms this except that it is more in the context of cross boarder acquisitions (Hughes, Lang, Master and Moon, 1998).
One of the supposed benefits of recapitalization (Bigger Banks) is indeed and efficiency challenge. The argument has been that bigger banks might not necessarily be filter or more efficient, since they have no incentive to improve efficiency within the limited competitive field. Observers of Nigerian banking have noted that the big banks (perhaps because of the increase in the number of customers) have slipped back to their erstwhile habits before the advent of the new generation banks. Available, empirical evidences from Hughes et al (1998). Another
major
challenge
of
recapitalization
is
capacity building for risk management for both the regulators and operators. Both constituencies of the bank system need to enhance their risk management skills and indeed acquire new ones, covering the three
plant
of
risk
recognition,
evaluation
and
monitoring (Adepide, 2005:41).
2.7. THE IMPLICATION OF RECAPITALIZATION ON THE BANKING INDUSTRY The directive by the Central Bank that, banks should raise their capital base to the tune of N25 billion several implications for both the banking industry and the Nigerian economy at large. These implications are as follows: with respect to the banking industry, the
implications can be categorized
into
two parts
namely; brand and structural implications.
2.7.1 BRAND IMPLICATION: With regards to branch implications, the new entities that will come from the dust of recapitalization will need to deal with brand-related issued such as: •
There will be a change of name if two or more banks come together and decide not to adopt any of the participating bank name.
•
The logos which were formally used by each of these banks will be dropped and another one adopted.
•
There will also be the evolution of a new brand culture for the emerging banks after recapitalization.
•
The brand message of the consolidated banks will also be changed.
•
The place of information communication technology (ICT) in the bank will be changed, that is, banks software as the new banks will go for the best to meet up customers demand.
•
2.7.2. STRUCTURE IMPLICATION: The recapitalization of banks will leave in its wake, a number of structural issues which will have direct
impact on staff, customers and the entire banking sector. They include: •
The reduction in the number of banks in the country
•
The closure of many small banks, especially those in the rural areas with poor capital deposit.
•
Increased competition due to better incentives and rendering of banks services.
2.8. IMPACT OF RECAPITALIZATION According to the report, the more time and money caused to be diverted from productive business activities to regulatory activity, the harder it is for businesses to compete, grow and create jobs and the harder it is for government to achieve its growth and job creation targets. The study showed further that small firms are hurt the most by regulatory burdens because time and money spent on regulatory activity would have been better spent doing business. The report further revealed that the consequences of regulatory burden weigh most heavily on the poor and unemployed because firms shift the cost burden elsewhere - to the consumer and the workforce by adopting some or all of the following measures to cushion the effect of regulation; lower wage; down – staffing, lower quality; and higher prices. Others in
order to avoid detection go underground to operate in the informal sector. According to Soludo (2007), in terms of policy thrust therefore, the banking sector reform is expected “to build and foster a competitive and healthy financial system
to
support
development
and
to
avoid
systemic distress”. It is further argued that deepening the banking sector in terms of asset volume and instrument diversity could lead to drastic reduction of fiscal deficit financing and freeing resources for lending to the private sector. The reforms will bring about a structured financing for cheep credit to the real sector and financial accommodations for small and rural credit schemes (Balogun, 2007).
In his conclusion, Balogun (2007) pointed out that the major challenge to the Nigerian financial sector reforms is how to engender healthy competition in addition to enhancing investments. This demands the need to evolve an investment friendly interest rate regime that is supportive of the growth objective of the
government.
Adegbaju
and
Olokoye
(2008)
figured out that the return on Equity (ROE), which measures the rate of return to shareholders, was quite low falling sharply from 99.45 in 2000 to 41.63 in 2002 and further to 29.11 and 27.23 in 2003 and
2004 respectively. This shows that the shareholders receive very low returns in terms of dividend during this period. The return on assets (ROA) also fell from 3.96
in
2000
to
2.63
in
2002
showing
that
management of the banks has not been able to convert the banks assets into net earning in this period. The return on assets declined further in 2003 to 2.0 but then pick up again in 2004 to 2.58. Somoye (2008) noted that the asset size of an average bank within a year after recapitalization exercise had a growth
rate
of
534.27
percent,
the
level
of
capitalization of an average bank recorded a growth rate of 404 percent while the leverage ratio measured in terms equity to total asset also declined from 18.28 percent in 2004 to 14.52 percent in 2006 for an average bank coming closer to the CBN minimum level of 10 percent. He also noted that the post consolidated ratio is better in terms of its distribution among
the
banks
compared
with
the
pre
recapitalization ratio where more than 70 percent of the equity and assets were concentrated in the largest five banks that constitute less than 5 percent of the existing banks. Thus, the intermediation activities of an average bank improved significantly in 2006.
However, the banking system’s profit and asset utilization
efficiencies
have
declined
since
the
conclusion of the recapitalization. For instance, the industry return on equity declined from 35.28 per cent in 2004 to 11.12 per cent in 2006, while return on asset declined from 8.37 per cent to 2.09 per cent over the same period. The asset utilization ratio also declined; while an average bank was able to earn 34 kobo for every N1.0 asset in 2004, this declined to 11 kobo in 2006.
Thus, while the recapitalization has improved the structure of the Nigerian banking industry in terms if asset size, deposit base and capital adequacy, the profit efficiency has not been impressive. The banks will need to become more efficient in terms of their ability to generate enough return to justify the increase in the equity base as well as the resources put at their disposals by their stakeholders. (Somoye, 2008).
2.9.
PROSPECT
OF
BANKS
AFTER
RECAPITALIZATION •
The initial public offering by banks through the capital market when completed is likely to increase the level
of financial deepening as evidenced in the upsurge in the volume and value of trading in stock market. •
The reform in the banking industry has been able to attract more foreign investment inflow, especially in the area of portfolio investment; this development if sustained will boost the level of economic activity especially toward non oil sector.
•
The recapitalization of banks is likely to attract a significant level of foreign banks entrance into Nigeria which will become a feature in the industry over time. This
will
bring
international
about
more
community
of
confidence the
by
banking
the
sector
thereby attracting more foreign investment into the country. As the level of financial intermediation increase, interest rate is likely to fall and increase lending
to
the
real
sector
that
will
generate
employment and booster growth. 2.10. BANK RECAPITALIZATION AND ACQUISITION
THROUGH
MERGER
Recapitalization is achieved through merger and acquisition. A merger is the combination of two or more separate firms into a single firm. The firm that results from the process could take any of the following identities: •
Acquirer target or new identity.
Acquisition on the other hand, takes place where a company takes over the controlling shareholding interest of another company. Usually, at the end of the process, there exist two separate entities or companies. The target company becomes either a division or a subsidiary of the acquiring company (Pandey, 1997:885). Acquisition digestion issues which will include loss of jobs, recapitalization of branch locations and tackling of inefficiencies and bureaucracies. While recapitalization involves merger and acquisition of banks, convergence involves the recapitalization of banking and other types of financial services like securities and insurance (FRBSF Economic letter, 1998). Anecdotal evidence indicates that the commonest form of mergers and acquisitions found in the financial services industry involves domestic firms competing in the same segment (for instance, bank to bank). The second most common type of merger and acquisition transactions involves domestic firms in different segments (e.g. bank-insurance firms). Crossborder merger and acquisition are less frequents particularly those involving firms in different industry segments (Roger Ferguson Jr., 2002).
2.11. PRE OF BANK PERFORMANCE IN NIGERIA Pre 2001 Recapitalization Performance Evaluation Ratio for Nigerian Banks. Pre-recapitalization Net Interest Margin (NIM) % 1998 Yields on Earning Assets (YEA) 11.16 % Funding Cost (FC) % Return on Equity (ROE) % Return on Asset (ROA) %
17.55 86.08 4.52
1999 14.88
2000 9.12
2002 10.47
2003 7.71
2004 10.21
4.64 80.59 4.13
4.62 99.45 3.96
27.55 41.63 2.63
20.32 29.11 2.00
18.88 27.33 2.58
Source: NDIC annual report, various issues.
The funding cost (FC) rose from 9.47 in 2000 to 13.05 in 2002, and later fall to 9.63 in 2003 and 9.66 in 2004. This is quite expected as with every major recapitalization there is an expected cost as all the banks will be all out to meet the deadline. However, this was tapered off in 2003 and 2004 and was consistent with the industry average even before the recapitalization.
The Return on Equity (ROE), which measures the rate of return to shareholders, was quite low after the recapitalization falling sharply from 99.45 in 2000 to 41.63 in 2002 and further to 29.11 and 27.23 in 2003 and
2004
respectively.
This
shows
that
the
shareholders receive very low returns in terms of
dividend
after
the
recapitalization.
This
is
not
surprising as most banks raise their fund through equity share which now increase the equity capital and the profit after tax have not improve substantially to compensate the shareholder who add additional fund to finance the bank recapitalization. 2.12.
POST
CAPITALIZATION
OF
BANK
PERFORMANCES IN NIGERIA The table below shows that the total asset of all 89banks operating in Nigeria in 2004 prior to the recapitalization was N3, 753.28 (US$28.250billion) and
rose
to
N
6400.78billion
(US$49.88billion)
indicating a growth rate of 70.54.16 percent within one year after geometrically to N267.482 billion (US$2.0856billion) within a year after recapitalization exercise, a growth rate of 534.27 percent. This was an impressive performance.
The level of capitalization of an average bank prior to the exercise indicates an equity base (Net worth) of N 7.71 billion (US $0.0618 billion) rising to N 38.83 billion
(US$0.31064billion)
in
2006,
indicating
a
growth rate of 404 percent. The leverage ratio measured in terms of equity to total asset also declined from 18.28 percent 2004 to 14.52 percent in 2006 for an average bank. This ratio compares
favourably with the CBN minimum level of 10 percent. The post recapitalization ratio where more than 70 percent of the equity and assets were concentrated in (the largest five banks) less than 5 percent of the existing banks. However, the intermediation activities of an average bank improved significantly by about 1,690 percent from an average deposit base of N 10.48 billion (US$0.08384) in 2004 to N 188.48billion (US$1.50784) in 2006
Macroeconom ic Indicator Average Lending (N’m) Average Assets (N’m) Average Deposit (N’m) Average Net worth (N’m) Return on Equity (%) Return on Assets (%) Assets Utilization (%) Total Bank Loan & Advance (N’ m) GDP (Current Basic Prices) (N ‘m Real GDP (growth %) Inflation Rate
N’m
N’m
2005 N’m
2006 %Change
Increase(+)
2004(a) 14,371.238
(b) 42,380.180
(c) 80,788.854
Decrease(-)or Difference (D±) +462.15%
42,171.66
132,017.34
267,482.50
+534.27%
10,482.36
85,007.13
188,478.55
+1690.05%
7,708.73
19,708.88
38,831.31
+403.73%
35.28
12.72
11.12
-24.16 (D)
8.37
3.01
2.07
-6.30 (D)
33.62
11.52
11.04
-22.56(D)
1,294,449. 50
1,859,555.5 0
2,338,718.8 0
+80.67
11, 411, 14,572,240. 070.00 00
18,067,830. 00
+58.34%
6.5
7.06
7.17
+0.67(D)
10.00
11.6
10.6
+0.60 (D)
Exchange Rate 132.86
129.00
128.3
+8.28(D)
N/$ Min.
17.8
18.30
+3.43(D)
19.50
28.70
+8.28(D)
13.0 442,008.9
10.0 525,482.0
+2.80(D) +68.87%
Sector(N’ m) Bank Market 662,712.
1,212,
2,142,745.7
+233.82%
Capitalization
600
218.545
33
34.41
41.880
41.84
+7.43(D)
2,900,06.072
5,120,943.22
+165.89%
Lending 18.91
Rate Max.
Lending 20.42
Rate
MRR/MPR Credit to
12.80 the 311,646.8
Private
(N’ m) Bank Capitalization/NS E
Capitalization
(%)
Total
Market1,925,937.5
Cap.
NSE 30
market
Cap.
0
(total) Bank
Mkt 5.80
8.32
11.86
+6.06(D)
Cap./GDP NSE
mkt 5.7
11.8
28.34
+1.22(D)
30.8
27.82
+0.18(D)
3.03
2.91
+0.18(D)
76.7
96.8
+24(D)
23.77
22.47
+1.6(D)
cap./GDP Credit Private
to 26.6 Sector
growth rate (%) Credit to 2.73 Private sector/GDP Average
72.8
loan/Deposit Ratio (%) Credit
to 24.08
private Sector/Total loan (%) Loans Adv.
1,294, 449.5
Total Assets (N’ 3,753,277. m)
Total
8 Deposit 1,661,482.
Liabilities Capital
1 348,387.6
+Reserves m) Comm.
2,338,718.8
80.67%
0 4,515,116.6
6,400,783.9
+9.92%
7 2,036,089.9
1,826,275.6
+9.92%
591,738.7
0 953,001.20
+173.5%
30.98
35.43
+2.54(D)
3.03
2.91
+0.18(D)
(N’ Bank 32.89
Asset/GDP (%) Non-financial Private
1,859,555.5
2.73
Sector
Bank Credit/GDP (%)
Source: Various audited Account of Recapitalized banks as at 2006 financial Year; Central Bank of Nigeria Statistical Bulletin 2005 Central Bank of Nigeria Annual Reports and Account 2006 The
profit
efficiency/asset
utilization
has
not
been
impressive. Although the banks have been able to double their
gross
earnings
from
their
pre
recapitalization
performances level, their profit and asset utilization efficiencies have declined since the conclusion of the recapitalization. For instance, the industry return on equity from 35.38 percent in 2004 to 11.12 percent in 2006, while return on asset declined from 8.37 percent to 2.09 percent
over the same period. The asset utilization ratio also declined, while an average bank was able to earn 34 kobo for every N1.0 asset in 2004, this declined to 11 kobo in 2006.
Thus, while recapitalization has improved the
structure of the Nigerian banking industry in terms of asset size, deposit
base
and capital adequacy,
the profit
efficiency has not been impressive. The banks will need to become more efficient in terms of their ability to generate enough return to justify the increase in the equity base as well as the resources put at their disposals by their stakeholders. The lending capacity of the banks improved significantly as result of the recapitalization. As at 2004, an average bank could only lend about N14, 371 billion. Whereas, the capitalization strengthen the bank where a typical bank in Nigeria in 2006 could lend an average of N80.788 billion. This represents a growth rate of 462.13 percent growth from the table above showing the post-recapitalization.
2.13.
NIGERIA-PRIMARY CAPITAL MARKET
The Nigerian capital market consists of two broad categories. These are the primary capital market and the secondary capital market. The primary capital market category consists of securities which are most freshly created. That is to
say, that these are any securities that have not yet been traded, bought, or sold. Securities that have been traded, bought, or sold are categorized under the secondary market. Primary capital market securities may be issued in several ways. Some of these include issuance of rights, sales offers, subscription offerings and private placements. Several regulatory bodies which participate in the Nigerian capital market are The S.E.C. (Securities and Exchange
Commission),
the
Federal
Ministry
of
Finance, the Central Bank of Nigeria, and the Nigerian Stock Exchange. The Securities and Exchange Commission strives to protect investors in the market as well as well as to make
advancements
improvement.
In
toward
addition,
the
socio-economic Securities
and
Exchange Commission is involved in the primary market in that it can manage the amount and timing of issuances. The Central Bank of Nigeria has goals and objectives such as to issue currency (known as the Naira and Kobo), financially advise and act as a sort of banker for the government, as well as cheque clearing, and
lending of last resort for other banks and financial institutions, managing accounts and debts of the entire country. In addition to all of this, the Central Bank of Nigeria takes actions to keep the economy. In recent times it has been insinuated that the Nigerian capital market was unstable and might crash, however, recently market analysts have shown to believe otherwise. It was discussed that despite occasional acute dips in the market, it always manages to recover because these are not large depressions of the overall market, which would definitively imply a crash. The Nigerian capital market can be used to generate long-term funds by hiring a broker or issuance house. Professionals
such
as
these
are
dedicated
to
improving the performance of companies Each country has its own way of controlling its financial and capital markets. The more developed countries are more proficient in their techniques and therefore function at a higher, more advanced and complex level. The smaller, less-developed countries usually don’t quite have the tools and/or power needed to compete with the larger markets, resulting in a struggle to stay afloat.
The Nigerian capital market is comprised of two main sections, the primary market and the secondary market. New securities are issued in the primary market. In the secondary market, the exchange of existing securities takes place once they have initially been issued in the primary market, either privately or publicly. Since 1993’s government deregulation in Nigeria, In comparison
to
more
developed
countries,
the
Nigerian Stock Exchange is dragging along behind. It has a trivial 183 companies listed on it, where London Stock Exchange has over 5,000 companies, and Indian Stock Exchange has about 4,300. Although the Nigerian Stock Exchange is newer in existence than the others, it still has a lot of catching up to do. This simply clarifies the need for fast growth in the market. It
is
said
that
the
secondary
market
is
more
advantageous to enter into, though. This doesn’t say much as far as the primary market goes. But, it is a more ideal market for the public to invest, as opposed to the primary market. The secondary market is generally utilized more by investors and spectators. It is not necessarily Nigeria’s fault that it is so far behind, however. Companies are finding that there is
a lack of exposure in the market, where it is difficult to get their name out. This is just one problem this market needs to focus in on. This is partially the government’s doing. There are potential dangers in the market such as funds that are being raised for unnecessary needs, in the long run causing economic development to suffer, and mere unproductiveness and wasted resources and time in the short run. This market is lacking in depth and the government is at the root of the problem. It is not allowing freedom in the pricing of securities, and is maintaining strong control
over
productive
innovations
within
the
secondary market and the entire financial system. The country needs some help, such as a microfinance bank to come about in the capital market of Nigeria, which could be possible if small stock broking firms tended to the lower end of the market. Since 1993’s government deregulation in Nigeria where limited foreign
involvement in
the market
was
enforced, the country’s capital market has expanded, even though there are still many areas the need attention and expansion. The growth of the secondary market has unfortunately slowed down since then. The stock market in Nigeria has never had a problem with raising funds to support the government. The
secondary market has suffered the consequences of a government with too much power. 2.14. BANKNING SECTOR AND CAPITAL MARKET The market capitalization of quoted banks was 34.41 percent of total market capitalization of the Nigerian Stock Exchange (NSE) in 2004, but rose significantly to
41.80
percent
in
2005
and
renamed
at
41.84percent by 2006. The NSE market capitalization grew by 160.70 percent between 2004 and 2006, whereas, the banking sector market capitalization grew by 233.33 percent over the same period. In fact, about 46.32 percent of the total growth in market capitalization came from the growth in banking sector market capitalization. This, form the capital market perspective, indicates that the banking sector has made a significant combination, and it has further improved the value and liquidity of the Nigerian Capital market.
CHAPTER THREE RESEARCH METHODOLOGY 3.0. INTRODUCTION
The research procedure, instrument and methodology employed in this research are discussed in this chapter. The methodology of any research work is an essential instrument for ensuring that the finding, analysis and conclusion have a systematic correlation with other areas of the research. It is a discussion or outline of the specific procedures that are followed in the sample, data collection techniques and methods of data analysis. This study is a descriptive survey. The study was conducted
in
the
instrument
used
questionnaires. “Recapitalization
in for
The
Edo the
State study
instrument and
Bank
environs.
The
was
structured
was
captioned
Performance”
questionnaire designed by the researcher. 3.1.
RESEARCH DESIGN The basic research design employed are descriptive and statistical type, whereby using Chi-square. The main objectives of the research studies are to ascertain the current status of what is being studied.
It is the frame work for a study that is used as a guide in collecting and analyzing data. This research will make use of the descriptive research design while investigating the research topic ‘Recapitalization and Bank of Performance”. Also it is refer to a set of instruction for making something which leaves the details to be worked out. According to Okwandu (2004) design is a term used to describe a number of decision, which need to be taken regarding the collection of data before ever the data are collected. The choice of a research approach is informed by the objective of the research which is concerned with the study of the research population comprises all the data collected
from
respondent
in
banks,
non-
governmental offices for in formations but because of the huge cost and time involved, a sample of the population is used. 3.2. STUDY POPULATION The term population generally refers to a collection of people, objects or events with a common identity. Research
population is the
theoretical
specified
aggregation of survey elements. A population is the aggregation of all cases that conform to some
designated set of pacifications. One may similarly define population as consisting of all households in a given community, all the registered voters in a particular precinct, all the books in a library. A population may be a group of people, houses, records, and so on. The specific nature of the population depends on the research problem. If one is studying voting behavior in a presidential election, the population is all those registered to vote. On the other hand, if one is investigating the consumer behavior in a particular city, the population might be all the households in that city. Going by these definitions, a population does not refer to just a collection of people only, but a group of elements, events and issues that are of interest to a researcher. Therefore the population of this study consisted of the selected banks in Benin city comprises of 100 (one hundred) of the population which is use for the analysis.
3.3.
SAMPLING TECHNIQUES Judgments sampling techniques is used to draw the sample for this research. Judgment sampling is one in which the population members are drawn in the basis of the judgment as to which members will constitute a genuine representative sample. It is
obvious that if a sample is representative of a population,
important
conclusion
about
the
population can often be inferred from the analysis. The choice of the public services used for this research were based on the type of service which are primary important to the society. 3.4. DATA COLLECTION The data for the study will be collected through survey. Survey is the chosen method to collect data because its function is to generalize results from a sample to a larger population. The primary purpose and advantage of surveys is generalization of the results. Usually, surveys are interested in gathering data from many than in obtaining intensive, detailed information from a few individuals; therefore, it is seldom for
a survey to consist of one or very few
individuals. Consequently, in designing a survey research study, one has to take into consideration the sample and the sampling procedure: the sample size should be adequate to allow generalization of the results, and the sampling procedure should also be such that small sub-groups within the population (such as landless farmers) are properly represented in the sample. This is because errors in sampling procedures
may not justify generalization of the results, thus lowering the value of the survey. 3.5. INSTRUMENT FOR DATA COLLECTION There are three major instruments use for collecting data: questionnaires, telephone, and e-mails. The issue of telephone is ruled out due to poor network sometimes in the country. Mail techniques was used for this research because it was considered to be cheaper,
more
convenient
method
of
obtaining
information from a large number of subjects over a wide geography area and also the respondents can remain anonymous which encourage them to respond more freely and openly on sensitive matters. By this method the respondents were given enough time to formulate their answer.
The only serious disadvantage is the low responses rate associated with it. This advantage of mail questionnaire was somehow taken care of by the personal interview method. Out of the one hundred and twenty questionnaires sent
out
to
country/offices
different only
84
respondents were
around
the
administered
and
returned good enough for the analysis. In the design of the questionnaires format, the tight schedule of the officers was taken into considerations.
3.6. VALIDITY AND RELIABILITY OF DATA The
validity
of
the
research
instrument
was
established by content validity. This kind of test is on the basis that the items of the test are representative of the universe of items deemed by experts in subject matter. The first draft of the questionnaire used in this study was subjected to expert analysis. In this case, the input, criticisms and reconstruction of the questions by my supervisor and other senior academics during the presentation was taken seriously. Through this test, the content validity of the questionnaire was claimed.
On the other hand, the reliability test of the research instrument was established in a test pilot study. The statistical tool which was used to test the reliability of the questionnaire is the correlation coefficient which was adjusted by the Chi-square (X2) method. The method
adopted
was
by
giving
the
same
questionnaire twice to the respondents. Each of the two sets of items was separately treated after which it was correlated as measure of reliability of the questionnaire 70% was used as the correlation coefficient.
3.7. ADMINISTRATION INSTRUMENT The questionnaire and in-depth interview a schedule was the research instrument for this study. This questionnaire schedules were used in the study, namely form of questionnaire and the in-depth form of questionnaire. Both forms were designed to obtain information about the “Recapitalization and Bank Performance” of Edo State in Nigeria. The closed form of survey questionnaire was divided into two sections; section A and B section A contained information as regards
the
personal
status,
educational
qualifications, occupation, age and In the case of the in-depth interview the questionnaire was divided into sections, A and B section A contained the personal characteristics of the respondents exactly as they appeared on the survey questionnaire. The section B of in-depth interview contained set of items related to the activities of the community in the case study. The questions were structured in the open-ended form. The respondents were left to answer the questions freely and fully in their own words and frame of mind. Finally, the X-test statistics at five percent was used to determine the overall significance of the study.
3.8.
PLAN FOR ANALYSIS
The data generated for this study through the questionnaire statistical
was
techniques
statistically utilized
analyzed.
were
the
The simple
percentage and the chi-square (x2), The data generated through the questionnaire for this study were presented in tabular forms. The simple percentage was utilized in the description of the responses elicited while the chi-square was used in the study. The simple percentage was utilized to determine the distribution of respondents in terms of personal profile and responses to the research variables on the subject matter of the study. The formula for the computation of the simple percentage % = Pc x 100 N 1 Where% =
Arithmetic Sign of Simple percentage
PC =
Percentage Compliance
N
Total number of respondent (Cases)
=
100 =
Common based of simple percentage
The Chi-square formula is given thus; n 2 (O E) X =∑ E 1-! 2
Where, O
=
Observed frequencies
E
=
Expected frequencies
