THE IMPACT OF RECAPITALIZATION ON THE NIGERIAN BANKING INDUSTRY: A CASE STUDY OF ZENITH BANK, UNITED BANK FOR AFRICA (UBA), AND UNION BANK

ABSTRACT

In this study the researcher evaluated the impact of bank consolidation on the performance of the Nigerian banking industry. The study was saddled with three objectives: to evaluate the impact of recapitalisation on the profitability of Nigerian banks; to evaluate the impact of recapitalisation reform on the deposit mobilisation of banks; to evaluate the impact of recapitalisation reform on the shareholders' earnings of banks. Using different statistical ratios and regression model analysis supported by the f-test (ANOVA), it was found that banking sector re-capitalization legislation has always been a means of strengthening the capital base of banks in Nigeria. It has always been achieved through legislation. Since the 1952 banking ordinance witnessed about eight (8) minimum capital legislations, all with the intent of stabilizing the financial system. However, it was also found that with each minimum capital it appeared that the objectives of setting it were far from being achieved. This study also found that, though there is a significant relationship between bank capital and profitability, the impact of the recapitalisation exercise in Nigeria has not been felt in the areas of profitability, deposit mobilisation and shareholders earnings. The following recommendations were proffered for the study: that though having a strong capital base is important to any business, it should be borne in mind that the banking industry is a highly leveraged industry, hence legislating minimum capital should follow the business trends in the industry. As a follow up to this, regulatory environment should be such that will enable the banks invest profitably; since robust capital base does not translate to profits automatically, banks should be encourage to mop up the excess liquidity in the economy, thus helping them have robust deposit base for meaningful intermediation; banks should be encouraged to get involved in good banking habits, as this will translate to meaningful profit. This is when it is considered at the backdrop that there is a positive relationship between bank capital and profitability.

CHAPTER ONE
INTRODUCTION
1.1      BACKGROUND OF THE STUDY
The Nigeria banking 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 challenges posed by deregulation of the financial sector, globalization of operations, technological innovations and adoption of supervisory and prudential refinement based on international standards.

As at June 2004, there were 89 banks operating in the country, comprising institution of various sizes and degrees of soundness. Structurally, the sector was highly concentrated as ten largest bank accounts for about 50% of the industry’s total assets and liabilities. The small size of most of our banks each with expensive headquarters, separate investment in software and hardware, heavy fixed cost and operating expenses and with high branches, few commercial centers led to very high average cost for the industry. This in turn has implication of the cost of intermediation, the spread between deposits and lending rate which put pressure on banks to engage in sharp practice as a means of survival. It is obvious that some of our banks are not engaged in strict banking business in terms of savings, intermediation, but are traders in foreign exchange; government treasury bills and sometimes indirect importation of goods through phony companies. This is unhealthy for the economy sometimes ago before the reform for the banking sector; many Nigeria banks depend significantly on government deposits with the three tiers of government and parastatals accounting for 20% of the total deposits liabilities with banks.

The ultimate strength of a bank lies in its capital funds. Banks capital funds, therefore is to reassure the public and especially bank supervisors that the bank is in a position to withstand whatever strains may be


placed on it. Adequate capital serves to keep banks open so that they may be able to absorb losses out of future earnings rather than out of capital funds themselves (Nwankwo, 1991). However it should be borne in mind that capital is made up of paid-up capital, and retained earnings. This means that capital could be built up over the years, with good business practice.

This in essence is what has been influencing minimum capital legislation. But how has the various legislations impacted on the economy and the banking industry? Should legislation on minimum capital be pursued in isolation of other factors that influence the stability of the economy? This study in an attempt to study the impact of Bank recapitalization on the Nigerian banking industry, by appraising its impact on the operations of the Union Bank, the United Bank for Africa Plc, and the Zenith Bank Plc.

1.2      STATEMENT OF THE PROBLEM
Capital adequacy has remained an issue for the banking industry in Nigeria and elsewhere. Herein lays the reasons for the various minimum capital legislations for Nigerian banks. Ever since the 1952 Banking Ordinance, the Nigerian banking industry has witnessed more than eight minimum capital legislations, all with the intent to stabilise the financial system.

But how has this minimum capital legislation impacted on the banking industry? Is capital adequacy, the only factor that will stabilize the banking industry, or are there some other more important factors? According to IMF (2003), each banking crisis has its own dynamics of which most of the main ingredients are noticed before the crises. Based on their most common causes, banking crises can be classified into one of two categories: Microeconomic (or bad banking) and Macroeconomic (or bad operating environment). Which of these characterised the


Nigerian experience? Is the recent twenty five billion naira (N25bn) minimum capital legislation, what the banking industry in Nigeria need currently? Does growth come by legislating minimum capital or by sheer good business practices? Will the increased minimum capital actually impact positively on the banking industry in Nigeria? All these and many other issues, bog the mind of the researcher, which are intended to be unravelled in the course of this study.

However, just like any other business, banking requires capital to function effectively. Adequate capital is required to maintain public confidence by standing ready to absorb unexpectedly or unusual losses not absorbed by normal earnings. Banks require adequate capital to be able to attract additional funds in the market, and to assuage the confidence of the depositors, the regulators and the general public on their ability to continue in business to discharge their obligations (Nwankwo, 1991). Added to the above, regulators in the Nigerian environment are often pointing to bank distress and failures as reasons for adequate capital base

1.3 OBJECTIVES OF THE STUDY
The objectives of this research work are as follows:

i).        To evaluate the impact of recapitalisation on the profitability of Nigerian banks.

ii)                . To evaluate the impact of recapitalization reform on the deposit

mobilization of banks.

iii).      To evaluate the impact of recapitalization reform on the shareholders' earnings of banks.

1.4 RESEARCH QUESTIONS
i).        To what extent has bank recapitalization impacted on the profitability of Nigerian banks?


ii).       To what extent has bank recapitalization reform impacted on the deposit mobilization of banks?

iii).      To what extent has bank recapitalization reform impacted on the shareholders' earnings of banks?

1.5      RESEARCH HYPOTHESES
The following hypotheses will be tested for their validity, in line with the objectives of the study.
Ho1: Bank recapitalization exercise does not have a significant positive impact on the profitability of banks.

Ho2: Bank recapitalization exercise does not have a significant positive impact on the deposits of banks.

Ho3: Bank recapitalization exercise does not have a significant positive impact on the shareholders earnings of banks.

1.6 SCOPE OF THE STUDY

This study has for its scope, the determination of the impact of bank recapitalization on the Nigerian banking industry- using United Bank for Africa (UBA) Plc, Union Bank of Nigeria (UBN) Plc, and Zenith Bank Plc, as a case study; and for the period 2000 to 2009......

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Item Type: Postgraduate Material  |  Attribute: 66 pages  |  Chapters: 1-5
Format: MS Word  |  Price: N3,000  |  Delivery: Within 30Mins.
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