The Impact Of Bank Consolidation On The Manufacturing Sectors In Nigeria

The Impact Of Bank Consolidation On The Manufacturing Sectors In Nigeria (Daniel)

Abstract

This research work examines Bank Consolidation and the Growth of Nigerian manufacturing sector. The objective of the study is to ascertain the effect of bank consolidation on manufacturing sector. For this purpose, we made use of books from various authors and internet materials were consulted as well for the review of related literature. we gathered secondary data from the CBN Annual Reports for the period 2004 to 2013. We analyzed our data using regression analysis through the Statistical Package for Social Sciences (SPSS) statistical software. Having conducted the test, we discovered that bank consolidation does affect the growth of firms in Nigeria. Specifically, results show that there is no significant relationship between bank capitalization and manufacturing firms total assets, that the level of banks aggregate credit has significant impact on manufacturing firms growth in Nigeria, while the level of banks loans and advances has no significant impact on the growth of manufacturing sector in Nigeria. We recommend the need for a radical overhauling and reorganization of the existing conditions for loans and advances of Nigerian firms in order to make them more effective catalyst of growth and development. We also recommend the need for the monetary authority to introduce proactive and tight supervisory policy to ensure sound, strong and safe financial institutions needed to re-enforce confidence on all stakeholders and to boost profitability, banks should diversify their investment with more of it on long-term basis and as well integrate the informal financial services sector through effective intermediation process to increase the growth of Nigeria economy. Finally, Policy framework and initiatives should be strengthened in the areas of quality bank management, supervision and control by the Central Bank of Nigeria and the Federal Government to ensure consistency in policy objectives and instruments through good implementation strategy to boost growth in the manufacturing sector.

Table of Content

• Title Page
• Certification
• Dedication
• Acknowledgement
• Table of Content
• List of Tables
• Abstract

Chapter One:

Introduction

• 1.1 Background of the Study
• 1.2 Statement of the Problem
• 1.3 Objective of the Study
• 1.4 Research Questions
• 1.5 Research Hypothesis
• 1.6 Significance of the Study
• 1.7 Scope of the Study
• 1.8 Limitation of the Study
• 1.9 Definition of Terms
• 1.10 Organisations of the Study

Chapter Two:

Review of Literature

• 2.1 Conceptual Framework
• 2.2 Theoretical Framework
• 2.3 Empirical Review

Chapter Three:

Research Methodology

• 3.1 Introduction
• 3.2 Research Design
• 3.3 Population and Sample Size
• 3.4 Sample Techniques
• 3.5 Method of Data Collection
• 3.6 Methods of Data Analysis
• 3.7 Model Specification
• 3.8 Aprori Expectation

Chapter Four:

Data Presentation and Analysis

• 4.1 Data Presentation
• 4.2 Analysis of Data
• 4.3 Test of Hypotheses

Chapter Five:

Summary, Conclusion and Recommendation

• 5.1 Summary
• 5.2 Conclusion
• 5.3 Recommendation
• References
• APPENDIX
• QUESTIONNAIRE

Chapter One

Introduction

1.1 Background to the Study

Nigeria banking sector has experienced a boom-and-burst cycle in the past 20-25 years. After the implementation of the Structural Adjustment Programme (SAP) in 1986 and de-regulation of the financial sector, new banks sprang up driven mainly by attractive arbitrage opportunities in the foreign exchange market (Enyimba, 2007). Prior to the de- regulation period, financial intermediation was weak and even declined in the1980’s and 1990’s (Chigbo and Konye).
The consolidation process in Nigeria has basically been driven by government restructuring efforts rather than by the market forces (Asogwa, 2003). Consolidation has been used as an efficient way of resolving problems of distress among banks. According to Sinkey, (1992), banks can be viewed as regulated firms information processor, and portfolio of assets, liabilities and equity that is (balance sheet). But since the funds, which banks trade upon are owned by “third parties”, prudence demands that such funds be effectively and efficiently managed to sustain the confidence of the depositor in the banking industry.

Nigerian banking sector reforms have aimed at improving the stability of Nigerian economy. Bank consolidation started 11 years ago (2004) when Central Bank of Nigeria (CBN) announced that banks operating in Nigeria had to increase their capital base to N25billion. Before the reform, there were 89 commercial banks operating in Nigeria which have a good size and a very high degree of soundness. Structurally, Nigerian commercial banks were highly concentrated and accounted for about 50% of the industry’s total assets and liabilities (Johnson, 2007). Most banks in Nigeria operated with a capital base of less than $10million before 2004. The largest bank in Nigeria as at 2004, had a capital base of about US$240million compared to the US$526million for the smallest bank in develop countries like USA whose asset base is larger than all of the Nigerian commercial banks put together (Johnson, 2007 and Adekoya and Oyatoye, 2007).

Chukwuka (2004) opined that the problems facing most Nigerian banks include persistent illiquidity, poor asset quality and unprofitable operations. Nigerian banks seem wholly dependent on government and government-owned parastatals. The implication of Soludo (2004) view is that the resources of Nigerian banks cannot contribute to the growth of the economy. This makes their operations highly vulnerable to savings in government revenue which arises from the uncertainties of the international market.

Against this background, the Central Bank of Nigeria introduced a minimum capitalization base for banking institutions to meet up the demand of the customers. Full compliance was required before the end of year 2005, with a view to enhancing bank efficiency, size and developmental rates. The banking reform required banks in Nigeria to have a minimum capital based of N25billion. This means that a number of existing banks had to consolidate through merger and acquisition. Affected banks were therefore required to make strategic decisions on how to consolidate.

Consolidation can be defined as an act of merging many things into one. In finance, consolidation is similar to merger. In a merger, a firm A buys firm B and the surviving firm is the buyer, A. When A and B consolidates, a new firm C is created. (Amanchi and Olokoyo, 2008). As at 2012, banking consolidation exercise produced 21 commercial banks out of the 89 banks which hitherto have been in existence in Nigeria before 2004. In the same year 2004, other banking sector reforms like the take-over of banks (Spring bank, Bank PHB and Afribank now Enterprise Bank, Keystone Bank and Mainstreet Bank respectively) by government and recent development of mergers among few banks, one of which is Access Bank. , which Access bank is one of them.

With regards to banking sector reforms, the assumption is that banking sector liberalization accompanied by increased capital base requirements is a necessary condition for improved performance of the banking sector. The underlying argument is that increased capital base may imply increase liquidity and availability of loanable funds which should lead to fall in interest rate, thereby stimulating demand as envisaged by Say’s Law of market which states that supply creates its own demand in the market (Jhinghan, 2003). Unfortunately, the consolidation exercise in Nigeria which is believed to have drawn a significant proportion of currency outside banks and new monies from both the domestic and international money markets into Nigerian banks may not have had significant effect on the increased credit to the real sector of the economy. This is contrary to the opinion of the financial analyst that banking sector consolidation should enhance the ability of banks to create more credits to investors (Somdi, 2008).

The Central Bank of Nigeria uses rediscount rates as tool for controlling the commercial bank rates. Rediscount rate is the rate at which Central Bank of Nigeria discount first class bill held by the commercial bank. When customers go to commercial banks to borrow money, the interest charge by the commercial banks is based on the rediscount rate. If the rate increased general interest rate will increase.

The rediscount rate is thus used to regulate the liquidity position of the economy. The resultant of high inflation rate and high interest rate policy restrains investment and growth in output, through increase in production cost, contrary to the specified aim of monetary policy (CBN 2000, 2002).

1.2 Statement of the Problem

The competitive financial environment in the beginning of the decade of 2005 provided the platform for banking reform through the consolidation exercise of 2004. The Nigerian banking industry, prior to the year 2004 had 89 banks with branches across the country. None of these banks was rated very sound by the CBN.

The consolidation of the Nigerian banking sector successfully produced 21 commercial banks out of 89 banks through merger and acquisition. The programme saw the consolidation of a large number of small banks into larger ones. To survive under the programme, banks had to attain a certain capital threshold. Many banks borrowed money to reach the required capital threshold of N25 billion. Thus the consolidation of banks aimed at sanitizing the banking industry through effective management of the sector. It was adjudged a proper policy required to nip the danger in the growth of Nigeria banking sector.

However, it has been arguably noted that the consolidation exercise has led most banks into huge debt and high exposure to risky ventures. Some banks invested their monies in stocks, while others granted out their monies as loans recklessly. Those banks that invested their borrowed monies in stocks were severely affected when the financial crisis occurred, hitting the Nigerian Stock Market hard. For those who loaned out funds, it was realized after an extensive forensic probe by committee set up by the then governor of CBN, Mr. Lamido Sanusi, that most had dealt irresponsibly with highly risky borrowers, which subsequently attracted $2.6bn bailout package by the CBN to remedy the situation in the banking sector.

Chukwuka (2004) opined that the problems facing most of the Nigerian banks include persistent illiquidity, poor asset quality and unprofitable operations. Nigerian banks seemed whole dependent on government and government owned parastatals. It is thus against the above backdrop of bank consolidation exercise, that this research intend to find out the probable effect of consolidation on the growth of the manufacturing sector.

1.3 Objectives of the Study

The main objective of this study is to ascertain the impact Of Bank Consolidation On The Manufacturing Sectors In Nigeria.

Specific objectives are to;

1. Ascertain whether consolidation of banks has affected the growth of industries in Nigeria;
2. Examine the effect of bank capitalization on the total asset of firms;
3. Find out whether the expansion in banks’ aggregate credit through consolidation has contributed to the growth of manufacturing sector in Nigeria; and
4. Investigate the extent to which increase in bank loans and advances through consolidation has impacted on the growth of the manufacturing sector.

1.4 Research Questions

The study would examine the following questions;

1. How has consolidation of banks affected the growth in manufacturing sector?
2. What is the effect of bank capitalization on firms’ total asset?
3. What effect does the expansion on aggregate credit through consolidation have on the growth of manufacturing sector?
4. What effect does the increase in bank loans and advance through consolidation have on the growth of manufacturing sector?

1.5 Statement of Research Hypotheses

The hypotheses that would be tested in this study are stated below as;

1. Ho: Bank consolidation does not affect the growth of firms in Nigeria.
   Hi: Bank consolidation affects the growth of firms in Nigeria.
2. Ho: There is no significant relationship between bank capitalization and firms’ total asset.
   Hi: There is significant relationship between bank capitalization and firms’ total asset.

1.6 Significance of the Study

The relevance of this study relates to the assessment of the consolidation procedure in the banking system. It will serve as helpful avenue of getting material for researchers and students.This study is relevant as follows;

1. It will help the investors in the financial industry to appropriate the chance given by the consolidation exercise in that particular system.
2. It will go on to help businessmen to comprehend the importance of consolidation of banks to capital provision.

1.7 Scope of the Study

The researcher based this work on the manufacturing firms in Nigeria. The analysis covers the period ranging from 2018-2020.

1.8 Limitations of the Study

Certain factors limited the project. Basically, these are human and material factors which cannot be undermined. These constraints are as explained below:

1. Harsh Economic condition: The harsh economic condition in Nigeria has its negative toll on the researcher’s financial potency. Increase in fuel price hindered the planned estimates of transportation needed for this research to scale through. For that simply reason, the scope (in terms of volume, data sourcing, sample size and literature materials) was limited to the level at which the available finance could cover the transportation.
2. Secrecy, some of the information required for this study were regarded as confidential which was difficult to obtain.
3. High Inflation: Due to high inflation in the country, which led to high price increment, the cost of carrying out this research work till the final stage of producing it was far more expensive than budgeted.

1.9 Definition of Major Terms

Bank Consolidation:

Is cutting down the quantity of banks and other deposit taking organization with the same increase in the size and proportion of the consolidation entities in the sector.

Loans:

Refers to a debt provided by a financial institution at a particular time while
Advances are the funds given by the banks, which has to be paid within one year.

Capital Requirement:

Is the size of cash a bank or other financial institution has to own as needed by its financial regulator. This is often explained as a capital adequacy ratio of equity that must be in place as a percentage of risk-weighted assets.

Bank Credit:

Rely on either the borrower’s capacity to return or the overall size of credit available in the banking system.

1.10 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows.

• Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
• Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
• Chapter three deals on the research design and methodology adopted in the study.
• Chapter four concentrate on the data collection and analysis and presentation of finding.
• Chapter five gives summary, conclusion, and recommendations made of the study.

Chapter Five

Summary of Findings, Conclusion and Recommendations

5.1 Introduction

In this chapter, the researcher will summarize the findings from the result of the test, draw conclusion, give the necessary recommendations from the findings obtained and contribute to knowledge. This chapter include bibliography and appendix.

5.2 Summary of Findings

This study is titled “the effect of bank consolidation and the growth of Nigerian manufacturing sector” with the hope of ascertaining whether consolidation of banks has affected the growth of manufacturing firms in Nigeria. The results obtained using the regression analysis indicated that:

1. Bank consolidation does affect the growth of manufacturing firms in Nigeria.
2. It was discovered that there is no significant relationship between bank capitalization and manufacturing firm’s total assets.
3. That the level of banks aggregate credit has significant impact on manufacturing firm growth in Nigeria.
4. The study finally affirmed that the level of bank loans and advances has no significant impact on the growth of manufacturing firms in Nigeria.

This project summarized that the consolidation of the financial system has transformed Nigeria’s financial system and created opportunities for companies and market participants. Strong and large firms can increase competition. This development could facilitate the transmitting of financial principle and support private sector growth.

5.3 Conclusion

The purpose of this study was to examine the effect of bank consolidation on the growth of Nigerian manufacturing sector. Available evidence provided by the study depicts that both the theoretical analysis and the empirical evidences reasonably reveals that bank consolidation have made some impact in the manufacturing sector in particular and the economy of the nation as a whole. The study then concluded after testing of the two hypotheses that bank consolidation does affect the growth of manufacturing firm in Nigeria, that there is no significant relationship between bank capitalization and bank total assets and that the level of banks aggregate credit has significant impact on manufacturing firm growth in Nigeria. Finally, it was concluded that the level of bank loans and advances has no significant impact on the growth of manufacturing firm in Nigeria.

5.4 Recommendations

Having examined bank consolidation on the growth of Nigerian manufacturing firm, it is needful to give some useful suggestion on how to actualize the objective of bank consolidation.

Hence, it is necessary to make the following recommendations;

1. Based on the conclusion drawn from the findings of this study, it is pertinent to emphasis that bank consolidation is a concept that is very vital to the growth of Nigerian manufacturing sector. Therefore, banks should endeavour to place much importance on bank consolidation policy of government in order to position the banks for growth.
2. There should be a radical overhauling and reorganization of the existing conditions for loans and advances of Nigerian firms in order to make them more effective catalyst of growth and development.
3. There is need for the monetary authorities to introduce pro-active and tight supervisory policy to ensure sound, strong and safe financial institution needed to re-enforce confidence on all stakeholders in our banking system.
4. Policy framework and initiatives should be strengthened in the areas of quality bank management, supervision and control by the Central Bank of Nigeria and the Federal Government to ensure consistency in policy objectives and instruments through good implementation strategy to boost growth in the banking industry.
5. Bank consolidation should be reviewed upward from time to time to sustain the stability and performance of the banking industry and economy.
6. To boost profitability, banks should diversify their investment with more of it on long-term basis and as well integrate the informal financial services sector through effective intermediation process to increase the growth of banks in Nigeria economy.

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