THE CRITICAL ANALYSIS OF BANKS PERFORMANCE IN NIGERIA

ABSTRACT

The sound financial health of financial institutions especially banks is often seen as a guarantee not only to its depositors but also it enhances shareholders wealth, ensures employees’ commitment as well assist in growing the economy. As a sequel to  this  maxim, efforts have been made over  time  by  regulatory authorities at ensuring a stable financial position of bank. It was against this background that this study evaluates the performance of banks in Nigeria for the period of 2001 to 2010. The study adopted the ex-post research design and data were collated from annual statement and accounts of the banks under review. While, Return on Asset (ROA), Return on Equity (ROE) and Net Interest Margin (NIM) were used as the dependent variables Shareholders fund was used as the independent variable for the three hypotheses stated and the Ordinary Least Square (OLS) regression model was used to test the hypotheses stated. The result showed indicates that Shareholders’ Fund (SHF) have positive but insignificant impact on Return on Assets (ROA), Return On Equity (ROA) and Net Interest Margin (NIM) of these banks. It was therefore concluded from the results that financial structure of banks in Nigeria does not have significant impact on profitability of banks in Nigeria. We thus recommend that management of banks in Nigeria should ensure the utilization of optimal financial structure of their banks as regards the use of external financing that will enhance profitability of their banks thereby enhancing shareholders’ wealth maximization.

CHAPTER ONE INTRODUCTION

1.1BACKGROUND OF STUDY

Performance failure among Nigerian banks has resulted in loss of public confidence in the banking sector. Performance links an organization’s goal and objectives with organization decisions. Public confidence on the banking industry in Nigeria depends greatly on the profitability of the participating banks in Nigeria. This explains why the call for the critical assessment of the performance of the banking system in Nigeria.  The efficiency of the banking system has been one of the major issues, in the new monetary and financial environment of the world today. The efficiency and competitiveness of financial institutions cannot easily be measured, since their products and services are of an intangible nature. Many researchers  had  attempted  to  measure  the  productivity  and  efficiency  of  the banking industry using outputs, size, costs, efficiency and performance. This is because the scale and scope of economies of banking have been one of the issues relating to the competitiveness, efficiency and survival. The outcome of this issue of   performance   is   the   existence   of   many   reforms   aimed   at   reorienting, repositioning and revitalizing an existing status quo bedecked with bottlenecks that inhibits against institutional smooth running and growth. The dynamic nature and

uncertainties in human endeavors, also added to call for innovations and reforms aimed at addressing weak corporate governance, risk management, operational inefficiencies and undercapitalization and so on in order to meet the going-concern aims and objectives of profit maximization and the requirements of the economy and  the  globe  at  large.  Banks  promote  economic  growth  by  pooling savings together from the surplus units and supplying some to the deficit units requiring short and medium term funds for their investment. The proportion of deposits mobilized by banks constitutes the bulk of bank liabilities. The shareholders’ fund is relatively a small proportion of the financial resources available to banks. Also banks are medium through which the country’s monetary policy is discharged. The achievement of the nation’s macroeconomic objectives cannot be facilitated in the absence of the banking system acting as a semi-permeable membrane. This accounts for the government interest in banking.

Apart from rigid regulations guiding entry into the banking system, Government all over the world through the central bank influences monetary policy and the operations of the banking system which is known to impact remarkably on the economy.  Thus,  the  monetary  policy  transmission  mechanism  and  economic growth mechanism permeate through the banking sector. In the light of the role of banks  in  the  financial  landscape,  it  becomes  imperative  that  technical  and

technological innovations meant for positive adjustment be introduced at any little porous signal of anomaly.

Therefore, there was need for regulations and reforms to ensure stability in banking system. Giddy (1984) and Sheng (1999) provide four major reasons why banks should be regulated. The first relates to monetary policy – the ability of banks to create money. Second, as channels of credit or investments, banks are involved in credit allocation. Third, banks are regulated to ensure healthy competition and innovation by preventing the formation of cartels. The fourth is  for prudential regulation reasons and to mitigate the problem of information. This view is supported by Howells and Bain (2004) who stated that the reason for bank regulation originates from the existence of asymmetric information – the fact that customers of the institutions (banks) are less informed and thus more at a disadvantage about the affairs of the banks and not the banks as perceived by opinions. This justified the fact that reforms in the banking sector are necessary to ensure the safety of depositors’ money, deepen the financial system for soundness and efficiency of the system in order to engender growth of the economy. Okpara (2011)  observed that a  feeble banking system is  repressive, discretionary and discounts the intermediation process thereby precipitating macroeconomic instability. Therefore to ensure normalcy in any financial economy, reforms are necessary.

Reforms therefore involve the articulation of robust policies that will deepen the financial system to enable banks play their roles most efficiently.

The Nigerian banking industry since its inception in August 1891 which saw a branch of the Africa Banking Corporation (ABC) opened in Lagos had evolved in

7 stages. The first stage (1891 – 1951) was a free era banking, characterized by unregulated/unguided and Laisez-faire banking practices and hence massive bank failures. The rest of the 6 stages fall under reform stages which started with the banking ordinance of 1952 that dominantly prevailed till 1959. Thus, the first phase of bank reforms in Nigeria (1952 – 1959) bordered on definition of banking business, prescription of  minimum capital requirements for the  expatriate and indigenous banks, maintenance of a reserved funds, adequate liquidity and inculcating of examination, supervision and control habit into the banking management in Nigeria. Following the Paton Report in 1948, the first banking ordinance was enacted in 1952. This was as results of the reason that indigenous banks  were  established  out  of  nationalistic  consciousness, rather  than  on  the existence of relevant resources and banking skills (CBN; 1979) and most of the banks failed in quick succession, mainly because of the absence of bank regulation, resulting in, inadequate capitalization, fraudulent practices and bad management (Okigbo; 1981).

The ordinance defined a bank as any company carrying on banking business or using bank or banking as part of the title under which it carries on business. Banking is also defined as the business of receiving from the public on current account money which is to be repayable on demand by cheque and of making capital requirements for expatriate and indigenous banks. Each banking candidate must obtain a license on paying a nominal capital of £25000 with at least a paid – up of capital of £12, 500 while expatriate banks must have a paid – up capital of

£100, 000. Banks were required to maintain a reserve fund into which 20 percent of the profit would be paid annually until the reserve fund equaled the paid-up capital and all capitalized expenditure must have been retired before any dividend pay-out. They were also expected to maintain adequate liquidity. No bank was allowed to make unsecured loans against its own shares for more than £300 to any of its directors or to a company associated with any of its directors. Thus, the ordinance made mandatory the supervision, examination and control of banks in the country by the government but failed to provide for the liquidation of banks or bank examiner (Okpara 1997:180). The second phase of the reform (1959-1986) came with the commencement of operations of the Central Bank of Nigeria in May

1959. The CBN actually took off on July 27, 1958 with Mr. R.P. Fenton of the bank  of  England  as  the  first  governor.  The  preceding  CBN  Act  of  1958 incorporated all the requirements in the 1952 ordinance and introduced mandatory

liquidity ratio in the banking business. The CBN Act of 1958 marked the turning point in government’s efforts and desire to harmonize the activities of the banks for national development and growth through the issue and regulation of currency, credit and foreign exchange control and the supervision of the financial system of the country.

In 1969, came yet another reform in banking which has remained the pillar and base of banking laws in Nigeria till date was an addition to the companies Act of

1968 which made it mandatory for all banks, like other business operating in Nigeria to  register as  Nigerian companies. The  1969  Act  increased minimum capital requirement for both indigenous and foreign banks; raised the maximum lending to any single borrower to 331/3 per cent of the sum of the paid-up capital and statutory reserves of bank from the former 20 per cent level in 1958; provided that no bank should own any subsidiary company and clients, and gave the apex bank extensive supervisory and regulatory power over all banks (Akinmoladun,

1992). The major amendments to the 1969, Banking Act were made in 1970, 1972 and 1979 to  fortify the CBN to cater for recent developments in the banking system (Okpara, 1997).

The third financial system reforms (1987-1993) led to deregulation of the banking industry that hitherto was dominated by indigenized banks that had over 60 percent Federal and State governments’ stakes, in addition to credit, interest rate  and

foreign exchange policy reforms.  Though the  deregulation reforms  in  Nigeria started in the fourth quarter of 1986 with the setting up of a foreign exchange market in September 1986, the reforms pertaining to the banking industry proper did not commence until January 1987 (Ikhide &Alawode 2001, Asogwa 2005). The reform took the form of deregulation of the rate of interest both on loans and on deposits. Market mechanism was left to determine the rate of interest any bank would charge. Government also brought out new rules for setting up banks and issuing licenses that favoured new entrants most. This consequently led to a sudden upsurge in the number of banks which invariably increased from 56 in 1986 to 120 in 1993 (Okpara, 2010a). Banks were also accommodated in trading in the exchange rate sector as the exchange rate was partially freed from government administration and paved way for auctioning forex system. Initially, the forex was divided into official and unofficial windows. While government sourced forex in the official market at administratively controlled rates, the licensed foreign exchange dealers usually banks, bid foreign exchange at the instance of market mechanism on behalf of their clients in the unofficial window. This trading also appeal  to  the  interest of  the  banking system and  coupled  with  the  favorable licensing issues, led to increase in the number of banks. The phenomenal growth in the number of banking institutions overstretched the regulatory capacity of the CBN  while  the  growing  sophistication  in  the  design  and  use  of  financial

instruments heightened the  risks of malpractices and fraud in the  industry. In particular, mismanagement such as insiders’ abuse and poor credit appraisal systems, resulted in the accumulation of unpaid loans and advances, which eventually contributed to the distress situation experienced in the banking system in the early 1980’s and mid 1990’s and the revocation of the licenses of 26 banks in 1997 (Wilson, 2005). To ensure the healthy platform for the system, and build public confidence in the banking system, Nigerian Deposit Insurance Corporation was established in 1988 and commenced operation in January 1989. In 1991 two new  decrees  were  put  in  place  to  enhance  the  powers  of  the  regulatory and supervisory authorities of the financial system to enable them manage the reform – packages  well  towards  the  realization of  effectiveness  in  performance  among Nigerian banks. The first is, the Central Bank of Nigeria Decree 24 of 1991 and the, Banks and Other Financial Institution Decree (BOFID) 25 of 1991. The new banking sector regulatory reforms gave the CBN power to issue banking licenses and to revoke them. It gave the CBN power to apply any type of measures to handle ailing financial system. By 1991 some of the reform measure of 1987 were reversed, a cap was replaced on interest rates standing at 21% for lending rates and

13.5% for deposit rates. Also a maximum interest rate spread was specified at 4%. By 1992 government divested itself from the seven banks where it had 60% equity holding in line with the new private sector – driven development and privatization.

In 1993 the Open Market Operations as an indirect instrument of monetary control was introduced. The first discount house took off in 1993 known as Associated Discount House, subsequently others followed, and by 2003 there were 5 discount houses. The discount houses intermediate between the central bank and the other banks, offloading government treasury securities from the CBN and auctioning same to the banks. Where the banks cannot pick – up all of the treasury securities, the discount houses warehouse them (Adegbite, 2005).

The fourth phase began in the late 1993 (1994-1998), with the re-introduction of regulations. In 1994 another reform measure was introduced. Hitherto banks in Nigeria which had not been paying interest on demand deposits (current account) were then granted permission to do so. The cash reserve ratio which before the reforms had been virtually stagnant was revised, to now begin to work as an indirect instrument of credit control and granting of loans on the strength of foreign exchange held in foreign accounts was prohibited. All government deposits held by the commercial and merchant banks were withdrawn, so that the banks could function without undue government interference (Adegbite, 2005).

Furthermore, in a bid to ensuring stability and effectiveness in performance of the Nigerian banks, the fifth phase began with the advent of civilian democracy from (1999-2003) which saw the return to liberalization of the financial sector, accompanied with the adoption of distress resolution programs. This era also saw

the introduction of universal banking which empowered the banks to operate in all aspect of retail banking and non-bank financial markets (Balogun, 2007). The introduction of universal banking at this time was aimed at making the banks more viable through profit maximization probably by way of economies of scale. Therefore it is not unreasonable to expect the Nigerian bank to have cashed in to the juicy reforms by the apex banks and be very viable. Unfortunately the sixth phase of reforms in 2004 by the Nigerian monetary authorities asserted that the financial system was characterized by structural and operational weaknesses and that the only way of ensuring that their catalytic role in promoting private sector led-growth could  be  enhanced is  through a  more pragmatic reform (Balogun,

2007). According to Ebong (2006), the banking system was characterized by low capital base, high non-performing loans, insolvency and illiquidity, over dependence on public sector deposits and foreign exchange trading, poor asset quality, weak corporate governance, a banking sector that could not support the real sector of the economy at 25% of GDP compared to African average of 78% and 272% for developed countries and a system with low depositors’ confidence.

1.2    STATEMENT OF THE PROBLEM

Despite the regulation in place, more banks have continued to be in distress even with forceful merger and acquisition initiated over the years aimed at reducing the rate of bank distresses in Nigeria.

The pre-SAP era witnessed over five banks’ collapses which led to government acquisition  of  51%  stake  in  indigenous  banks  in  1970.  The  SAP  to  the consolidation period witnessed over five (5) adjustments in the banks’ share capital with rise in the number of commercial banks, yet the issue of bank consolidation, merger and acquisition persisted in the Nigerian banking sector thus raising issues and questions on the performances of banks in Nigeria. Shortly after the SAP period,  the  banking  sector  suffered  deep  financial  distress  and  it  was  only necessary to have another round of reforms to manage the distress. The period of

1993 recorded 33 distressed banks and in 1995, the number peaked to 60 all under the Paul Ogwuma leadership of the central bank (Okpara, 2010a). The Joseph Sanusi’s reign in CBN saw  more banks like Savannah, African Express bank (Afrex) Banks going into extinction

The Soludo administration in CBN started in 2004 with a new form of reform. Soludo (2004), the then governor of the CBN described the industry as being generally  characterized  by  small-sized  and  marginal  players  with  very  high

overhead cost. The primary objective of his reform was to guarantee an efficient and sound financial system. These reforms were designed to enable the banking system develop the required resilience to support the economic development of the nation by efficiently performing its functions as the fulcrum of financial intermediation (Lemo, 2005). According to Adeyemi (2007), the reforms were to ensure   the   safety   of   depositors’   money,   position   banks   to   play   active developmental roles in the Nigerian economy, and become major players in the sub-regional, regional and global financial markets.

The CBN gave 13-points reform agenda on July 6, 2004. These include; Minimum capital base from N2 billion to N25 billion with a deadline of 31st December.

2005;   Consolidation   of   banks   through   mergers   and   acquisitions;   Phased withdrawal  of  public  sector  funds  from  banks,  beginning  from  July,  2004; Adoption of a risk-focused and rule-based regulatory framework; Adoption of zero tolerance for weak corporate governance, misconduct and lack of transparency; The automation of the rendition process of returns by banks and other financial institutions through the electronic financial analysis and surveillance system (e- FASS) and others.

The CBN 2004/2005 raised the share capital to twenty-five billion Naira (N25Bn)

from the existing two billion (2Bn) and upheld the existing 2005 compliance

period  under.  This  raised  eye  brow  on  the  strength  and  performance  of  the

Nigerian commercial banks.

This research was further necessitated by the Mallam Sanusi Lamido Sanusi CBN led  bank  reforms  that  saw  more  mergers  and  acquisition of  even banks  that consolidated in  Soludo’s consolidation program.  These periods showcased the greatest mergers and acquisitions in the banking industry since Nigeria’s independence in 1960.

This research is committed to ascertaining if these banks performed well with increased capital or underperformed, using some profitability ratios, as most of the banks actually posted huge profit figures over the period of existence. This way, it will be ascertained if Central Bank’s consolidation and reform exercises of Professor C.C Soludo and Mallam Sanusi Lamido Sanusi respectively were as a result of the banks underperformance or an exercise of will and power.

This is necessary to clear the air on public’s perception of the commercial banks performances as unreliable. Also it will throw more light on the issue concerning the strength of the commercial banks and their competences in managing effectively the  depositors’ funds  as  well as  shareholders’ fund toward  greater profitability. This research will restore eroded public confidence on the capabilities

of Nigerian commercial banks in the area of management of public deposits, their stability and continuity.

1.3    OBJECTIVE OF THE STUDY

In view of the subject under review, the major objective of this study is to examine the  financials of the selected banks with a view to  finding out  their level of performance in terms of how the assets are used to generate profit, the net income per naira of the shareholders’ equity contribution to the business and its liability management in terms of cost and benefit of such deposits.

1.4    RESEARCH QUESTIONS

Our research questions for this study are as follows:

i.      Does Shareholders fund have positive significant impact on ROA? ii.     Does Shareholders fund have positive significant impact on ROE? iii.     Does Shareholders fund have positive significant impact on NIM?

1.5     HYPOTHESES OF THE STUDY

Our hypotheses for the study are:

H1: Shareholders fund does not have positive significant impact on ROA. H2: Shareholders fund does not have positive significant impact on ROE. H3: Shareholders fund does not have positive significant impact on NIM.

1.6     SCOPE OF THE RESEARCH

The research covers six banks in the world of commercial banking in Nigeria. These are First Bank of Nigeria Plc., Union Bank of Nigeria Plc., United Bank for Africa Plc., Zenith Bank Plc, Access Bank Plc and Guaranty Trust Bank Plc. The period 2001-2010, covers the aspect dealing with our data for statistical analysis. The period of 2011 was not captured as some of the bank’s financial record is yet to be made public following their Annual General Meeting (AGM) in waiting. The banks were carefully selected with First Bank of Nigeria Plc., Union Bank of Nigeria Plc., and United Bank for Africa Plc. representing the old generation banks having existed even before the introduction of SAP. The last two banks; Zenith Bank Plc. and Guaranty Trust Bank Plc., were to represent the banks that existed only after SAP i.e. the new generation banks both in style and technology age. Also the period under review is the period when major banking reforms, mergers

and acquisitions in the banking industry took place. The research made use of the Group accounts of the banks as a result of universal banking where financial institutions were allowed to own and run non-financial institution.

1.7    SIGNIFICANCE OF THE RESEARCH

The significance of this study comes in practical and academic forms.

1.7.1 Practical significance of the study

This kind of study will assist in broadening understanding of the following or the scope of knowledge of the following:

 To policy makers and regulators in the industry, it will present a scheme, through its analysis that could assist them in enunciating policies that will not only positively impact on banks’ performances but also remain relevant in the economy of Nigeria.

 To bankers in general, it will expose the relationship existing between our relevant variables, which will be of great interest to them in their respective banks.

 Specifically, to bankers in the banks under study, it will expose to a large extent  the  goings-on in  their  organizations with respect  to  our  relevant

variables and a comparative analysis of their actions over some relevant years.

 To economic watchers, analysts and the interested public, it will provide some insight into the performance and strength of the banks under study.

1.7.2 Academic Significance

In the academic arena, this study will prove to be significant in the following ways:

 It will serve as a body of reserved work and knowledge to be referred to by researchers.

 It will add value and enrich other literatures on banks’ performances in

Nigeria and the world at large.

 It will suggest ways of enhancing the performance of the banking industry in Nigeria and the entire Nigerian economy. This will in turn, boost development positively which is usually affected by banks and their activities.

 It will throw more light on profitability, its relationship with shareholders fund using ratios of Net Interest Margin (NIM), Return on Assets (ROA) and Return on Equity (ROE).

1.8     PROBLLEMS AND LIMITATION(S) OF THE STUDY

The conduct of research in Nigeria and the entire world is affected by a number of factors particularly in collection of secondary data. In the course of this research, a number of factors were associated:

i)  Limited sample due to limited financial resources ii) Uneasy access to research materials

iii) Lack of cooperation among the custodians of the information i.e. bank(s)

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