The Impact Of Recapitalization On The Performance Of Banks In Nigeria

Project and Seminar Topics with material for Banking and Finance

The Impact Of Recapitalization On The Performance Of Banks In Nigeria


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 Study

Banking reforms have been an ongoing phenomenon around the world right from the 1980s till date, but it is more intensified in recent time because of the impact of globalisation which is precipitated by continuous integration of the world market and economies. Banking reforms involve several elements that are unique to each country based on historical, economic and institutional imperatives. In Nigeria, the reforms in the 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 the tolerance of deficiencies in the corporate governance behaviour of banks (Uchendu, 2005). Banking sector reforms and recapitalization have resulted from deliberate policy response to correct perceived or impending banking sector crises and subsequent failures. A banking crisis can be triggered by weakness in banking system characterized by persistent illiquidity, insolvency, undercapitalization, high level of non-performing loans and weak corporate governance, among others. Similarly, highly open economies like Nigeria, with weak financial infrastructure, can be vulnerable to banking crises emanating from other countries through infectivity.

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 consolidation (mergers and acquisitions), recapitalization, use of bridge banks, establishment of asset management companies to assume control and recovery of bank assets, and outright liquidation of non redeemable banks. Bank consolidation, which is at the core of most banking system reform programmes, occurs, some of the time, independent of any banking crisis.

Irrespective of the cause, however, bank consolidation is implemented to strengthen the banking system, embrace globalization, improve healthy competition, exploit economies of scale, adopt advanced technologies, raise efficiency and improve profitability. Ultimately, the goal is to strengthen the intermediation role of banks and to ensure that they are able to perform their developmental role of enhancing economic growth, which subsequently leads to improved overall economic performance and societal welfare. The proponents of Bank consolidation believe that increased size could potentially increase bank returns, through revenue and cost efficiency gains. It may also, reduce industry risks through the elimination of weak banks and create better diversification opportunities (Berger, 2000). On the other hand, the opponents argue that consolidation could increase banks’ propensity toward risk taking through increases in leverage and off balance sheet operations. In addition, scale economies are not unlimited as larger entities are usually more complex and costly to manage (De Nicoló et al., 2003).

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 design 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 and operational inefficiencies, the centre of the reforms is around firming up capitalization. (Ajayi, 2005)

Capitalization is an important component of reforms in the Nigeria 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. Attaining capitalization requirements may be achieved through consolidation of existing banks or raising additional funds through the capital market.

In his maiden address as he resumed office in 2004, the current Governor of Central Bank of Nigeria, Soludo, announced a 13-point reform program for the Nigerian Banks. 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 required flexibility to support the economic development of the nation by efficiently performing its functions as the pivot of financial intermediation (Lemo, 2005). Thus, the reforms were to ensure a diversified, strong and reliable banking industry where there is safety of depositors’ money and position banks to play active developmental roles in the Nigerian economy.

The key elements of the 13-point reform programme include:

  1. Minimum capital base of N25 billion with a deadline of 31st march, 2016;
  2. Consolidation of banking institutions through mergers and acquisitions;
  3. Phased withdrawal of public sector funds from banks, beginning from July, 2016;
  4. Adoption of a risk-focused and rule-based regulatory framework;
  5. Zero tolerance for weak corporate governance, misconduct and lack of transparency;
  6. Accelerated completion of the Electronic Financial Analysis Surveillance System (e-FASS);
  7. The establishment of an Asset Management Company;
  8. Promotion of the enforcement of dormant laws;
  9. Revision and updating of relevant laws;
  10. Closer collaboration with the EFCC and the establishment of the Financial Intelligence Unit.

Of all the reform agenda the issue of increasing shareholders’ fund to N25 billion generated so much controversy especially among the stakeholders and the need to comply before 31st march, 2016.


1.2 Statement of Problem

This issue of the impact of recapitalization on the performance of banks in Nigeria has really being the main topic in research. The illiquidity, insolvency has really caused so many weakness in the banking industry or sector. If the government can get direct and a proper solution to these problems, then recapitalization will be very effective to ensure diversified, strong and reliable banking where there is safety of depositor’s money.


1.3 Objectives of the Study

The objectives of this research work are as follows:

  1. To evaluate the impact of recapitalisation on the profitability of Nigerian banks.
  2. To evaluate the impact of recapitalization reform on the deposit mobilization of banks.
  3. To evaluate the impact of recapitalization reform on the shareholders’ earnings of banks.

1.4 Research Questions

  1. To what extent has bank recapitalization impacted on the profitability of Nigerian banks?
  2. To what extent has bank recapitalization reform impacted on the deposit mobilization of banks?
  3. 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 Significance of Study

By the end of this research, we will able to find out the impact of recapitalization on the performance of banks in Nigeria. The research will also give room to investigation the poverty index, the level of unemployment in Nigeria and also suggest a proper means of rendering good and reliable services in the banking sector.


1.7 Scope of Study

This research work covers most of the area of the level of unemployment, the poverty index, the various reform of the central bank of Nigeria. It also covers the area of the yield earning assets, return on equity (ROE) and return on assets( ROA)


1.8 Definition of Terms

Recapitalization:

Is a type of corporate reorganization involving substantial change in a company’s capital structure. Recapitalization may be motivated by a number of reasons. Usually, the large part of equity is replaced with debt or vice versa.

YEA:

Yield on earning assets is one measure of a financial industry’s solvency used by banking regulators. It looks at total interest, dividend and fee income earned on loans and investments as a percentage of average earning assets.

ROE:

Return on equity (ROE) measures the rate of return for ownership interest (shareholders’ equity) of common stock owners. It measures the efficiency of a firm at generating profits from each unit of shareholder equity, also known as net assets or assets minus liabilities.

ROA:

Return on assets (ROA) is a financial ratio that shows the percentage of profit a company earns in relation to its overall resources. It is commonly defined as net income divided by total assets. Net income is derived from the income statement of the company and is the profit after taxes.


Chapter Five


Summary of Findings, Conclusions and Recommendations

Introduction

In this study, the researcher appraised the Impact of Bank Recapitalization on the Nigerian Economy, using the Union Bank Plc, the United Bank for Africa Plc, and Zenith Bank Plc. Three objectives of study were analysed, while also Three hypotheses were tested for there validity.

This chapter is therefore set forth to interpret the research findings, which is a key component of a research process. Conclusions will also be drawn based on the findings of the study, while recommendations will be thereafter. Also for ease of understanding, the summary of findings is presented along the lines of the objectives of the study.


5.1 Summary of Findings

Objective One:

To Evaluate the Impact of Recapitalisation on the Profitability of Nigerian Banks.

It was found that there was no difference in the pattern of the movement of the profit after tax (PAT) of the banks, inspite of the recapitalisation exercise. This was further validated by the result of hypothesis one, where it was concluded that Bank Recapitalisation Exercise has not impacted positively on the Profitability of Banks. And this result is statistically significant, at .006 significance value.

Objective Two:

To Evaluate the Impact of Recapitalisation Reform on the Deposit Mobilisation of Banks.

Using data from the sampled banks, it was found that deposit mobilisation was not affected by recapitalisation; rather there was a widening gap noticed in UBA after the consolidation exercise. This was attributed to the inherited robust deposits from the defunct STB. As regards whether there was a significant impact on deposit mobilisation, hypothesis two result further shows that there was no significant impact. The result concludes that Bank Recapitalisation Exercise has not impacted positively on the Deposits of Banks. And this result isstatistically significant, at (.001) significance value.

Objective Three:

To Evaluate the Impact of Recapitalisation Reform on the Shareholders’ Earnings of Banks

It was also found that the recapitalisation exercise did not also have any special effects on the shareholders earnings, as measured by EPS. It was also validated in hypothesis three, with the result showing that Bank Recapitalisation Exercise has not impacted positively on the shareholders earnings of Banks. And this result is statistically significant, at (.105)significance value.


5.2 Conclusion

Bank re-capitalization, has always been a means of strengthening the capital base of banks in Nigeria. It has always been achieved through legislation, to wit that Nigeria has, since the 1952 banking ordinance witnessed about eight (8) minimum capital legislations, all with the intent of stabilizing the financial system. However, with each minimumcapital legislation, it was found that the objectives of setting it were far from being achieved. This study 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.


5.3 Recommendations

Following the findings of the study, the researcher makes the following recommendations:

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 the above, 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.


Get Complete Project Material

5,000 5000

The Complete Material Will Be Sent to You in Just 2 Steps

Quick & Simple…


Step One Purchase

Make Payment (Through Transfer) of ₦5,000 to the Account Below

Zenith BankAcc No: 1225513212
Samphina Academy
Current Account

Or CLICK HERE To Pay With Debit Card


FOR STUDENTS OUTSIDE NIGERIA
CLICK HERE To Purchase Material ($15)

Step Two Purchase

Send the Following Details on WhatsApp ( 08143831497) After Payment

  1. Payment Details

  2. TOPIC: The Impact Of Recapitalization On The Performance Of Banks In Nigeria

The Complete Material Will Be Sent To You On WhatsApp After Receiving Your Details
T & C Apply


  Contact Our Help Desk


Need a Different Topic? Perform a Quick Search



List of Related Works

Click on Any Topic to Preview the Content

samphina.academy

Samphina Academy

Samphina Academy is an Online Educational Resource Center that is aimed at providing students with quality information and materials to aid them in succeeding in their academic pursuit.