Impact Of Bank Recapitalization On Stock Market Development

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Impact Of Bank Recapitalization On Stock Market Development


Abstract


This study examines the impact of bank recapitalization on sock market development. To meet the N25 billion recapitalization benchmark, the Nigerian capital market became an option as well as an avenue for consolidation of banks via mergers and acquisition. This study examined the impact of banks recapitalization on stock market development. Secondary data collected from the Nigeria Stock Exchange (NSE) and the Central Bank of Nigeria (CBN) was analyzed using regression analysis. It was found that Market Capitalization (MCAP), All-share Index (ASI) and Gross Fixed Capital Formation (GFCF) are significant determinants of shareholders funds (SHF) at 5% level while value of Trading VOT) is significant at 1% level. The overall performance of the result was good with of 84%. It was therefore concluded that bank recapitalization has impacted positively on the Nigerian Stock Exchange. The study recommends among others that economic and financial policies that would encourage investment in the Nigerian capital market should be implemented regularly.


Chapter One


Introduction

1.1 Background to the Study

The relevance of banks in the economy of any nation cannot be overemphasized. They are the cornerstones of the economy of a country. Banks play the important role of promoting economic growth and development through the process of financial intermediation; in this process, banks facilitate capital formation and lubricate the production process. This intermediation is important because in the absence of banks, the savings would have been fragmented and put in small packet here and there. By pooling together such savings, banks are able to achieve economic of scale with beneficial effects for their borrowing customers.

For banks to function effectively, it is imperative that they are visible and healthy and that the entire industry is stable and sound. It is in appreciation of this, that the industry worldwide is usually heavily regulated and supervised a major objective of regulation and supervision, therefore, is to ensure that the industry is sound and stable, thereby encouraging public confidence in the system. The need for banking sector regulation is further underscored by the fact that shareholders’ funds are usually only a small proportion of the financial resources available to a bank. The bulk of the funds available to a bank are depositors’ monies. These deposits usually constitute not less than 70% of a typical banks liability. Itis therefore crucial that the interest of these depositors is protected, especially those of them who are not well informed.

The Nigeria banking sector has undergone remarkable changes over the years, in terms of the number of institutions, ownership structure as well as the depth and breadth of operations. These changes have been influenced largely by the challenges posed by the deregulation of the sector, globalization of operation, technological innovations and the adoption of supervisory and prudential requirement that conform to international standards The deregulation of the sector which began during the period 1986-1990 was followed by a flood of new banks. The existence of so many banks, couple with the non-compliance with market regulation by majority of the players, inadequate capital, poor credit administration, etc led to high incidence of distress in the banking industry in the 1990s, bank sector in Nigeria are driven by the need to deepen the financial sector and reposition the Nigeria economy for growth; to be integrated into the global financial structural design and evolve a banking sector that is consistent with regona1 integration requirements and international best practices. It also aimed at addressing issues such as governance, risk management and operational inefficiencies, the center of the reform is around securing up capitalization. Against, this background, the Central Bank of Nigeria (CBN), on July 6, 2004, a day now referred to as “Back Tuesday” in the banking sector of the economy, announced a reform programme for the nation’s banking industry. The thrust of the reform required the 89 insured banks then in the system to raise their shareholders’ fund to a minimum of 25 billion each, with a deadline of 31st December, 2005 for full compliance. Bank were specifically required to achieved that through fresh capital injection where applicable, but were most importantly encouraged to consolidate through mergers and acquisitions arrangements with other banks.

Recapitalization is an important component of reforms in the banking industry owning to the fact that a bank with a strong capital base has the ability to absolve losses arising from non-performing liabilities. It is also intended among others to help mobilize domestic savings, deepen and broaden intermediation, improve allocation of resources and help to mobilize foreign savings.

To meet the N25 billion recapitalization benchmark many of the existing banks wont to the capital market to raise fresh funds in the bid to step up their capital in order to either stand in a good stead for a merger/acquisition or meet the minimum capitalization requirement on a solo basis. Thus, this study is specifically designed to evaluate the impact of bank recapitalization on stock market development.


1.2 Statement of Problem

Adequate capital is an essential element of any banking system which serves as a guard against unexpected losses, provided protection to depositors, creditors, deposit insurance funds and ultimately the economy. Due to all these protection it provides against loss, the maintenance of adequate capital is the principle source of public confidence in individual banks and the banking system.

Over the years the Central Bank of Nigeria (CBN) had been challenged by the relatively weak capital base of banks which had contributed to the failure of some banks. Section 9 of the Banks and Other Financial Institutions Act (BOFIA) 1991 as amended, require the CBN to determine from time to time the minimum-paid up share capital requirements of banks. However, the challenge of weak capital base of banks in line with that requirement, the CBN had periodically reviewed the minimum capital requirements of banks. However, the challenge of weak capital base of banks had remained until the recent introduction of the banking reform programme which also move the capital base of banks from N2 billion to N25 billion.

One of the options open to Nigerian banks to meet the stipulated minimum capital base requirement was to approach the capital market for funds; hence, the focus of this research is on the “impact of BankRecapitalization on Stock Market Development”.


1.3 Research Questions

This study also seeks answers to the following questions:

  1. How will increase in shareholders fund of banks in impact on the market capitalization of the Nigerian Stock Exchange?
  2. To what extent will increase in shareholder funds of bank have impact on market capitalization of the Nigeria Stock Exchange?
  3. How will increase in shareholders of bank impact on all-share-index of the Nigeria Stock Exchange?
  4. What is the relationship between increase in shareholders funds of banks and the number of listed securities on the Nigeria Stock Exchange?
  5. What impact do increase in shareholders funds have on Gross Fixed Capital Formation (GFCF)?

1.4 Objective of the Study

The main objective of this study is to ascertain the impact of bank recapitalization on stock market development. The specific objectives include:

  1. To find out if increase in shareholders funds of bank have impact on market capitalization of the Nigeria stock exchange.
  2. To ascertain of increase in shareholders funds of bank have impact on value of transaction of the Nigeria stock exchange.
  3. To find out if increase in shareholders funds of bank have impact on all-share-index of the Nigeria Stock Exchange.
  4. To ascertain if Increase in shareholders funds of bank have impact on numbers of listed securities on the Nigeria stock exchange.
  5. To ascertain if increase in shareholders funds of banks have impact on Gross Fixed Capital Formation (GFCF).

1.5 Statement of Hypotheses

In the light of the statement of research problems and objectives, the hypotheses of this research are stated in both the Null (HO) and Alternative (HI) hypothesis, viz;

Hypothesis One
  • HO: Increase in shareholders funds of banks does not have impact on market capitalization of the Nigerian Stock Exchange,
  • HI: Increase in shareholders funds of banks have impact on market capitalization of the Nigeria Stock Exchange.
Hypothesis Two
  • HO: Increase in shareholders funds of banks does not have impact on value of transactions of the Nigerian Stock Exchange.
  • HI: Increase in shareholders funds of banks have impact on value of transactions of the Nigerian Stock Exchange.
Hypothesis Three
  • HO: Increase in shareholders funds of banks does not have impact on all-share index of the Nigerian Stock Exchange.
  • HI: Increase in shareholders funds of banks have impact on all- share index of the Nigerian Stock Exchange.
Hypothesis Four
  • HO: Increase in shareholders funds of banks does not have impact on listed securities on the Nigeria Stock Exchange.
  • HI: Increase in shareholders funds of banks have impact on listed securities on the Nigeria Stock Exchange.
Hypothesis Five
  • HO: Increase in shareholders funds of banks does not have impact on Gross Fixed Capital Formation on the Nigerian Stock Exchange.
  • HI: Increase in shareholders funds of banks have impact on Gross Fixed Capital Formation on the Nigerian Stock Exchange.

1.6 Significance of the Study

The Nigeria stock exchange is the hub of the Nigeria capital market. An understanding of this market would enhance its development and performance. This study will broaden our knowledge on the operations of the market. It is therefore hoped that this study would help build awareness among investors of the activities of the stock market which will translate into increased investment and hence economic grow and development.

This study will also provide an assessment of the bank recapitalization exercise and the extent of its success. This will assist the CBN to develop mechanism for more effect recapitalization in future.

Furthermore, this study will enlighten players in the Nigeria financial system, students, academicians and researchers and make them to be conscious of the activities in the banking sector as well as the Nigeria stock exchange.


1.7 Scope of the Study

This research work tends to cover mainly the recapitalization in the Nigeria banking industry via consolidation and its impact on the Nigeria Stock Exchange. We would consider nine banks (Access Bank, Afribank, Fidelity Bank, Guaranty Trust Bank, FinBank, Sterling Bank, United Bank for Africa, Union Bank and Wema Bank) from 1996 – 2008. The Nigeria capital market, historical development of the Nigeria stock exchange, its operations, listing requirements, etc will be looked into.

The research work will also consider the reasons for bank reforms, history of bank recapitalization, mergers and acquisitions (M & A), post- consolidation benefits, empirical evidence and other related area.


1.8 Limitations of the Study

This project work should not be seen as complete and accurate as some factors will limit the successful completion of this work. For example, because the project is on a new area, there was the problem of inadequate information from past studies in this area of research. Also, due to financial constraints and the limited time at the disposal of the researcher, data collected was not enough. A much more expensive job might have done to make a case for bank recapitalization and stock market development in Nigeria.


1.9 Definition of Terms

Bank:

A bank is any corporate entity licensed to carry out banking activities such as mobilization of savings, lending of money, keeping of valuables etc.

Central Bank:

Central bank is the highest financial institution in the country in which it operates and does not transact business with private individuals apart from the government and members of the money market. It is established Act of parliament and so, it has no shareholders.

Capitalization:

Making a company more solid or stronger by increasing its capital base.

Securities:

Securities are written or printed documents by which the claims of holders in specified property are secured. They could be stock, shares, bonds and debentures.

Stock Exchange:

A Stock exchange is an arrangement whereby large and small investors alike buy and sell securities through stockbrokers and government agencies. This arrangement could be through computer, Internet, telephone, fax, trading floor, etc.


Chapter Five


Summary, Conclusion and Recommendation

5.1 Introduction

It is important to reiterate that the objective of this study was to examine the impact of bank recapitalization on stock market development.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given.

In this chapter, certain recommendations are made which in the opinion of the researcher are drawn from the findings of the study.


5.2 Summary

This study was undertaken to examine the impact of bank recapitalization on stock market development. The study opened with chapter one where the statement of the problem was clearly defined. The study objectives and research hypotheses were defined and formulated respectively. The study reviewed related and relevant literatures. The chapter two gave the conceptual framework, empirical and theoretical studies. The third chapter described the methodology employed by the researcher in collecting both the primary and the secondary data. The research method employed here is the descriptive survey method. The study analyzed and presented the data collected in tables and tested the hypotheses using the chi-square statistical tool. While the fifth chapter gives the study summary and conclusion.


5.3 Conclusion

This research work noted some macroeconomic and institutional factors which could possibly determine stock market development in literature review. The study was narrowed in Nigerian context between the period 2001 and 2010. Emphases were laid on savings, investment, and stock market liquidity. Owing to the great importance attached to savings and investment as a stimulus to stock market development, the need to mobilize private, public and foreign savings becomes paramount. This will be achieved through positive application of policy instruments to improve the standard of living of the populace. It is a known fact that savings induces investment. It should be noted that investment in other investment outlets like real estate, banks and other non-bank financial institutions than stock market would decrease the rate of investment on financial assets. It is believed that reduction in high rate of illiterates and ignorance in Nigeria will enhance more investors’ influx in stock market. There is strong conviction that lacks of public awareness by most Nigerians limit the level of activities in stock market. Most Nigerians, including the educated few have not embraced stock market as an avenue to invest for high return. Some lack complete knowledge of the existence of stock market. As a result, stock market will continue to be shallow as long as it is characterized by few investors.


5.4 Recommendations

No doubt, stock market development is crucial in economic advancement of any country. Through its known function of savings mobilization and subsequent allocation to investment especially where other financial institutions are backward in mobilizing the amount of resources that would be adequate for meaningful economic development, it is hoped that the following recommendations will help the stock market to strengthen its weakness for better and effective operation in order to achieve its goals and socio- economic advancement in Nigeria.

  1. Economic under development has been seen as one of the reasons why the rate of savings in the country is low and statistically insignificant. Government should improve the standard of living of people. This is evidenced through low income, high inflation rate, high rate of unemployment and many others. Both monetary and fiscal measures should be employed to better standard of living.
  2. One of the functions of the stock exchange is mobilization of surplus funds and making them available to the deficit sector to hasten the rate of investment. In the Nigerian context, this basically needs public enlightenment. A persistent enlightenment should be created far and wide to arouse the interest of potential investing public who wish to avail themselves of the opportunities of investing in financial securities. Also, public awareness about the returns and benefits drivable from trading in stock and shares should be encouraged. Infrastructural deficiencies and malfunction are major impediment affecting the pace of investment growth in Nigeria. As a result, the overall result is drags and delays in handling of securities transactions and low dissemination of information as regards the operations of Nigerian stock exchange. Enabling infrastructural facilities, proper monitoring and dissemination of information should be adequately put into commensurate market expectations.
  3. For investors to easily buy and sell stocks, the market must be liquid. Liquid market facilitates the trading of varieties of financial securities. Though, third tier security market has been created to promote indigenous products, it is still recommended that the primary market on the stock exchange should find a means of relaxing some of the entry requirement to both the first tier and second tier securities market. By so doing, many companies will obtain entry into the market and have their securities traded. Government should also raise funds through capital market to boost market activity. Buy and keep attitude of investors restricts activities in the stock exchange. Shareholders do not relinquish their shareholdings for sale. This is because they either keep it as a property of inheritance for their children or they are reluctant to sell their declining stock for appreciating ones especially during the incident of global financial crunch of 2007 that affected stock markets world over. Stock holders should learn that stocks are not held to perpetuity but are disposed when the price appreciates. Investors should also keep track of companies stocks in their portfolio to enable them sell off their declining stocks.

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