The Impact Of Re-Capitalization Of CBN On Deposit Money Bank Profitability
The main objective of the study is to examine the impact of CBN recapitalization on the profitability of Deposit Money Banks in Nigeria. The study employed secondary data which were gathered and analyzed, using Panel Regression Model. In order to ensure that essential assumptions for a valid regression model are considered and also avoid a spurious regression result, Unit Root Test using the Augmenred Dickey-Fuller (ADF) technique was employed. Serial correlation test and normality test were also conducted to estimate the reliability of the model used. Stationarity test (Unit Root Test) was also applied to determine how consistent and reliable the time series data in use are. The research findings revealed that there was no significant relationship between capital adequacy and profitability of Deposit Money Banks in Nigeria, implying that banks‟ capital base is. not necessarily a yardstick for enhanced profitability The study, therefore, recommended that for Deposit Money Banks to achieve the purpose of their recapitalization, they should make frantic efforts to improve on factors which can lead to improved performance, develop more aggressive approach in their profit drive for improved financial position, promote better managerial skills and adopt attractive deposit interest rates to enhance deposit mobilization. Also, regulatory authorities should develop an improved capital assessment mechanism for banks in the country. Finally, government should provide an enabling banking environment for the provision of effective infrastructural facilities in order to enhance the operational efficiency of banks in Nigeria.
1.1 Background of the Study
In developing countries like Nigeria, banks play important and sensitive roles; hence, their performance directly affects the growth, efficiency and stability of the economy. The banking sector has always received utmost attention on protection and regulation due to the vital role it plays in an economy (Oladejo & Oladipupo, 2011). Over the years, Central Bank of Nigeria (CBN) and other stakeholders in Nigeria have expressed concern on what could be done to address the problems associated with undercapitalization of banks in the country for effective performance and growth in the system. The last 2005 consolidation exercise attempted finding solutions to the problem of recapitalization by raising the capital base of all Nigerian Deposit Money Banks (DMBs) to a minimum ofN25 billion. This recapitalization has made the exercise a regular feature or phenomenon in Nigerian banking sector. however, though the financial system in Nigeria had gone through phases of reforms, surprisingly, more than fifty years afterthe country‟s political independence, the banking sector can be said to be performing far below expectations in terms of profitability due to the low capitalization capital formations of the banks in Nigeria. Consequently, banks were prone to overtrading, abandoning the true function of banking to focus on quick profit ventures such as trading in forex and tilting their funding support in favour of import- export trade instead of manufacturing, reliance on unstable sector funds for their deposit base (Soludo,2004).Similarly, barely four years into the consolidation of the industry some banks have seriously exhibited varying symptoms of distress which necessitated CBN to bail out nine out of the twenty-four banks with the sum of 620 billion in 2009 in order to prevent the occurrence of distress in the industry (Sanusi,201 0).Profit could be looked at as the ultimate, since it is the basic standard by which the performance of a business is measured with the resource in the form of financial capital. High profits provide a buffer against adverse shocks and thus increase the charter or franchise value of the bank (Soludo, 2004). In view of the above, this study seek to assess the impact of re-capitalization of CBN on deposit money bank profitability.
1.2 Statement of the Study
Despite the effort of the regulatory authorities to enshrine soundness, efficiency and profitability into the biking system, through its various capital reforms, these have always recorded failure and distress. Before the banks recapitalization exercise of 2005, 14 banks out of 89 were considered to be distressed due their inability to meet the capital base requirement at the period (Adegbaju and Olokoyo).Consequently, the continuous failure of banks in Nigeria stemming from decline in capital base has 4-su1ted to loss of public confidence which invariably leads to customer defection, thus, undermining their contribution as the nation‟s engine of growth. The spate of bank failure in Nigeria warranting intermittent recapitalization in financial sector since 2005 hinged on a number of factors, ranging from macroeconomic instability, deficient supervision, poor strategies, weak management, inadequate control systems and operational failures, fraud, etc.
Previous research studies adopted performance indicators like profitability, capital adequacy, liquidity d operating efficiency, loans and advances as well as deposits, in line with the work of Muhammad and (2014) and Adah (2012), using shareholders‟ funds as an independent variable and each of the indicators as dependent. Specifically, studies that adopted profitability as a performance indicator failed establish if capital adequacy, when used as an independent variable impacts significantly on banks‟ profitability. Capital adequacy is an integral factor in the prudential returns which external auditors must submit after audit exercise as provided in Section 38 of the NDIC Act. It is one of the major banking issues ii the Nigerian banking system which necessitated the recapitalization policy since 2005. This study therefore, evaluates whether the exercise is a sufficient approach to ensure sound banking system as the study intends to determine the impact of the post CBN recapitalization exercise of 2005 on the profitability of Deposit Money Banks in Nigeria.
1.3 Objective of the Study
The study generally focus on the examination of the impact of re-capitalization of CBN on deposit money bank profitability. The study will specifically assess the objectives below;
- Examine the circumstances that gave rise to the CBN 2005 bank recapitalization.
- Identify the benefits of the recapitalization policy to the Nigerian banking sector.
- Ascertain the impact of the CBN recapitalization on the profitability of Deposit Money Banks in Nigeria.
1.4 Research Question
The study will be guided by the following questions;
- What are the circumstances that gave rise to the CBN 2005 bank recapitalization?
- What are the benefits of the recapitalization policy to the Nigerian banking sector?
- What is the impact of the CBN recapitalization on the profitability of Deposit Money Banks in Nigeria?
1.5 Research Hypothesis
H0: CBN recapitalization exercise has no impact on the profitability of Deposit Money Banks in Nigeria.
Ha: CBN recapitalization exercise has a impact on the profitability of Deposit Money Banks in Nigeria.
1.6 Significance of the Study
The significance of the research is base on the fact that the role of financial institutions in general and banks in particular on the economic stability, well being and development of any society cannot be over looked and as such, these institutions must be stable and operating well for economic development of any society .It is in this effort that the federal government of Nigeria introduce the 2005 recapitalization policy in its annual budget in order to stabilize the industry and eradicate the long existing distress problems in our banking industry. The recapitalization policy has a lot to offer as regards the promotion of the banking industry and the economy, but most banks are frowning at the policy because of the obstacles concerning banks implementation of the policy but if proper measures are taken this could eliminate most of the problems which looks seemingly difficult at the beginning because of the bleak out look of the Nigeria economy at present. This project among other things, will educate the readers on; what recapitalization is all about, how best a bank can successfully recapitalize, benefits of the 2005 policy to .both banks and the general economy, laws regulating relating banking operations in Nigeria and various happenings in the Nigeria banking industry since inception.
1.7 Scope of the Study
This study covers on the impact of re-capitalization of CBN on deposit money bank profitability. The study made use of secondary data, and shall cover a period of 8years from 2005-2013. The study will be limit to ten (10) quoted deposit money banks in the Nigeria stock exchange.
1.8 Limitation of the Study
Like in every human endeavour, the researcher encountered slight constraints while carrying out the study. Insufficient funds tend to impede the efficiency of the researcher in sourcing for the relevant materials, literature, or information and in the process of data collection, which is why the researcher resorted to a limited choice of sample size. More so, the researcher simultaneously engaged in this study with other academic work. As a result, the amount of time spent on research will be reduced.
1.9 Definition of Terms
Review of the require minimum capital and the process of adopting to the new requirement. It is also defined as the enhancement and restructuring of the financial resources of an organization with a view to enlarging the long term fund available to the organization.
It is an excess of revenue over associated expenses for an activity over a period of time or for particular transaction.
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), statement of problem, objectives of the study, research question, significance or the study, definition of terms etc. Chapter two highlight 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.
Summary, Conclusions and Recommendations:
This chapter summarizes the findings on the impact of re-capitalization of CBN on deposit money bank profitability. The chapter consists of summary of the study, conclusions, and recommendations.
5.2 Summary of the Study
In this study, our focus was on the impact of re-capitalization of CBN on deposit money bank profitability. The study is was specifically set examine the circumstances that gave rise to the CBN 2005 bank recapitalization, identify the benefits of the recapitalization policy to the Nigerian banking sector, and ascertain the impact of the CBN recapitalization on the profitability of Deposit Money Banks in Nigeria.
The panel data used in this study were obtained from financial statements of banks understudied, Central Bank of Nigeria bulletin, Fact book of Nigerian Stock Exchange and Securities and Exchange Commission. The study made use of Ex-post facto or causal comparative research.
In the overall, the objectives of recapitalization are to enable the banks increase their performance financially, in terms of efficiency, induce restructuring and engender the alignment and realignment of banks to ensure a good, responsive, competitive, transparent and improved banking system which suits the demand of the Nigerian economy and the challenges of globalization. Experience from the developed economies has shown that the development of a sound financial system requires the collaborative efforts of the government, the monetary authorities, the operators in the industry and the general public. The study concludes that while recapitalization raised the capital base of the banks, it is not all the time that it transforms into better profitability. Moreover, it is not only capital that enhances profitability and good performance of banks. This is evident from the findings of this study and the 2009 regulatory authorities audit report which revealed that despite the 2005 recapitalization exercise, 13 banks were found to be sound, I bank was marginal while 10 banks were already pronounced unsound as at 2009 which led to the audit and restructuring exercise. It is instructive to note that size and huge capital do not necessarily make a good and sound bank. What makes a sound bank is really how effective and efficient the management of the bank is deploying the available resources.
Based on the findings of this study, the following recommendations were made:
- Banks should make frantic efforts to consider improving on other factors which can lead to improved performance such as improved corporate governance policies, adopt attractive deposit interest rates to enhance deposit mobilization, promote better managerial skills and intervention.
- There should be strict and closely monitored supervision by the apex regulatory authorities such as Central Bank of Nigeria (CBN), National Deposit Insurance Corporation (NDIC) and Economic and Financial Crime Commission (EFCC) through their various on-site and off-site examinations.
- In order to build and retain public confidence and avoid a run on Nigerian banks, greater transparency and accountability should be firmly embedded as the hallmark of the Nigerian banking system.
- Both government and regulatory authorities should be mindful of the fact that the environments in which they operate are important factors in the banks‟ performance and behaviour, therefore, government should provide a conducive and supportive banking environment through the provision of effective infrastructural facilities to support banking services for an improved performance.
- The regulatory authorities should put in place effective monitoring mechanisms to regularly investigate the authenticity of banks recapitalization exercise to avoid window dressing report as revealed by the 2009 audit exercise.
- Regulatory authorities should adopt problem based intervention strategies to address the challenges facing the banks at each point in time as recapitalization may not always profer the intended solution.
- Regulatory authorities should periodically carry out a comprehensive audit of banks to reveal their genuine financial position such as the 2004 and 2009 audit exercise in order to detect early warning signals and take corrective measures.
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