AN APPRAISAL OF THE PERFORMANCE OF NIGERIA BANKING INDUSTRY IN POST CONSOLIDATION ERA

ABSTRACT

The current credit crisis and financial turmoil have questioned the effectiveness of bank consolidation programme as a remedy for financial stability and monetary policy in correcting the defects in the financial sector for sustainable development. The project attempts to examine the performances of banks induced bank consolidation and macroeconomic performance in Nigeria in a post consolidation period. The work further analysis published audited account of  twenty (20)  out of  twenty –  five (25) banks that  emerged from  the  consolidation exercise and data from Central Bank (CBN), that is, the researcher made use of secondary sources of data for the study. The research employed the use of ordinary least square distribution in the test of two hypotheses formulated. Hypothesis 1, 2, 3, ‘t’ test distribution were used by the researcher and all hypotheses were accepted, while only ordinary least square analysis was used in hypothesis two, which showed that non performing assets of Banks has negative effect on the performance of banks in the post consolidation exercise. More so the use of simple percentage conversion were used in measuring or determining  the  macroeconomic  variables  on  the  yearly basis which covers the pre/post consolidation era  2004- 2005 for the research analysis in chapter four; the following

result/conclusion emerged from research project work: That consolidation programme has not improve the overall performance of banks significantly, and also has contributed marginally to the growth of the real sector for sustainable development; The bank sector is becoming competitive and market  forces  are  creating  an  atmosphere  where  many banks simply cannot afford to have weak balance sheets and inadequate corporate governance; That consolidation of banks may not necessarily be sufficient tool for financial stability for  sustainable development and  we recommend that bank consolidation in the financial market must be market driven to allow for efficient process.

CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND OF STUDY

Banks serve vital intermediary role in a market- oriented economy and have been seen as the key to investment  and  growth.  Falegan  (1987)  and  Bashir  and Kadir (2007) observed that commercial banks play a crucial role  in  the  nation’s economy, by  using various financial instruments to obtain surplus funds from those that forgo current consumption for the future. They also make same funds available to the deficit spending unit (borrowers) for investment purposes. In this way, they make available the much need investible funds required for investment as well as for the development of the nation’s economy.

It is important to note that the business of banking is service-oriented, that is, banks render services to their customers. This is why Adekanye (1986) traced the origin of banking to the Italian merchants. The term “bank” is from an Italian language that simply means ‘Bench or Benco’, it is a process that developed out of the ingenuity of the then

Italian blacksmith who specialized in the act of building boxes  for  safe  keeping  of  jewelries and  ornaments. This process was further expanded to numbers of banks in the economy, especially the Bank Consolidation of 2005 which brought the number of banks to 24. This has completely reshaped the face of the financial services industry as we include  the  safe  keeping  of  other  valuables,  including money.

The fundamental changes in the industry in the last few years have brought a reduction in the industry now have more enlightened investors that are keen on a higher return on their investment (Pandy, 2004). With more people now becoming shareholders in the banking sector, it is apparent that more dividends will be paid out to these new shareholders.

As such dividend decision is one of the three main financial decisions of any firm and it involves the determination of the proportion of a company’s earnings to be paid-out or retained earnings (Olowe, 1998, ICAN, 2006). Consequently,   investors   are   keenly   interested   in   the

outcome  of  their  investment,  that  is,  the  value  of  their shares (capital appreciation) and the returns on their shares (dividend). These two values are affected by the quality of policy   put   in   place   by   management,   which   directly influenced the returns on such investment or the value of the stocks of the firm (ICAN, 2006).

A dividend policy therefore is the tradeoff between retained earnings, on one hand, and paying out cash as dividend, on the other  hand  (ICAN, 2006). Olowe (1998) opined that dividends are distributions, made out of a company’s earnings after the obligations of all fixed income holders have been met. The objective of this study therefore is to assess the factors that could be responsible for the performance of banks in the post consolidation era in Nigeria, where performance is determined through the level of profitability.

1.2  STATEMENT OF THE PROBLEM

The problem which this study seeks to solve is to ascertain the reasons for banks poor performance in the

post consolidation era in Nigeria. Improvement in individuals, groups or organizations cannot be guaranteed except or unless there is a process of evaluation. Evaluation as a concept is therefore a process by which an organization or firm obtains a feedback on the ways it has carried out its activities  over  time.  Performance  links  an  organization’s goals and objectives with organization’s decisions (Abdulkadir, 2007). It is important to note that before we can declare that an activity has improved, it must have been measured so that the extent of improvement can be determined and/or quantified. Measurement is therefore the first step in achieving improvement.

1.3  RESEARCH QUESTIONS

This study is being guided by the following research questions:

1.     To  what  extent  does  capital  base  influence  the savings mobilization performance of a bank in the post consolidation era?

2.     What   is   the   relationship  between   banks   poor performance and supervision in the post consolidation era?

3.     To  see  if   there  is  a   positive  impact  between shareholders funds and NIM (Net Interest Margin).

1.4  OBJECTIVES OF THE STUDY

The objectives of the study are highlighted below:

1.     To evaluate the influence of capital base on the savings mobilization performance of Nigeria banks in the post consolidation era.

2.     To  determine  the  relationship  between  banks  poor performance and supervision in the post consolidation era.

3.     To state that shareholders fund does not have positive significant impact on NIM.

1.5  HYPOTHESES OF THE STUDY HYPOTHESES I

Ho:   That there is no relationship between the capital base

and  savings  mobilization  performance  of  banks  in

Nigeria.

HYPOTHESES II

Ho:  That there is no relationship between banks poor performance and supervision in the post consolidation era.

HYPOTHESES III

Ho:   That there is no positive impact between shareholders funds and NIM.

1.6  SCOPE AND LIMITATION OF THE STUDY

The scope of this study should be limited to 25 (twenty- five)   commercial   banks   in   Nigeria   who   survived   the

2004/2005 bank consolidation exercise. The study covers a period of eight years, (1999-2006). This is in order to ascertain the performance of banks pre/post consolidation.

A major limitation was data lag and paucity of bank data with reference to the contribution of the various commercial banks who survived the consolidation. Another is  the  financial stress which the  researcher encountered during the course of the research work.

1.7  SIGNIFICANCE OF THE STUDY

Therefore, the significance of this study lies in the fact that it would provide an empirical evaluation of the success of  the  recent  recapitalization and  consolidation exercise. Besides, it will put to rest the argument stated above between the proponents and opponents of the relationship between banks performance and  supervision in  the  post consolidation era.

The findings of this study would be beneficial to the regulators of  the  Nigerian banking sector  as  they  would serve as a yardstick for appraising the banks post consolidation so far. It would also be beneficial to the management of Nigeria banks as it intends to reveal the extent  to  which  the  recapitalization  and  consolidation exercise have impacted on their performance thereby providing a basis on the need to re-strategies if the need be. Investors, Banking practitioners, analysts and students of banking and  finance  would  be  more  enlightened  on  the direct and indirect effects of bank recapitalization and consolidation on banks performance and the banking sector as a whole.

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