THE IMPACT OF RECAPITALIZATION ON THE NIGERIAN BANKING INDUSTRY A CASE STUDY OF ZENITH BANK UNITED BANK FOR AFRICA (UBA) AND UNION BANK

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.

INTRODUCTION

CHAPTER ONE

1.1   BACKGROUND OF THE STUDY

The Nigeria banking system has undergone remarkable changes over the years in terms of the number of institutions, ownership structure, as well as depth and breadth of operations. These changes have been influenced largely by challenges posed by deregulation of the financial sector, globalization of operations, technological innovations and adoption of supervisory and prudential refinement based on international standards.

As at June 2004, there were 89 banks operating in the country, comprising institution of various sizes and degrees of soundness. Structurally, the sector was highly concentrated as ten largest bank accounts for about 50% of the industry’s total assets and liabilities. The small size of most of our banks each with expensive      headquarters, separate investment in software and hardware, heavy fixed cost and operating expenses and with high branches, few commercial centers led to very high average cost for the industry. This in turn has implication of the cost of intermediation, the spread between deposits and lending rate which put pressure on banks to engage in sharp practice as a means of survival. It is obvious that some of our banks are not engaged in strict banking business in terms of savings, intermediation, but are traders in foreign exchange; government treasury bills and sometimes indirect importation of goods through phony companies. This is unhealthy for the economy sometimes ago before the reform for the banking sector; many Nigeria banks depend significantly on government deposits with the three tiers of government and parastatals accounting for 20%  of the total deposits liabilities with banks.

The ultimate strength of a bank lies in its capital funds. Banks capital funds, therefore is to reassure the public and especially bank supervisors that the bank is in a position to withstand whatever strains may be

placed on it. Adequate capital serves to keep banks open so that they may be able to absorb losses out of future earnings rather than out of capital funds themselves (Nwankwo, 1991). However it should be borne in  mind  that  capital  is  made  up  of  paid-up  capital,  and  retained earnings. This means that capital could be built up over the years, with good business practice.

This  in  essence  is  what  has  been  influencing  minimum  capital legislation.  But  how  has  the  various  legislations  impacted  on  the economy and the banking industry? Should legislation on minimum capital be pursued in isolation of other factors that influence the stability of the economy? This study in an attempt to study the impact of Bank recapitalization on the Nigerian banking industry, by appraising its impact on the operations of the Union Bank, the United Bank for Africa Plc, and the Zenith Bank Plc.

1.2   STATEMENT OF THE PROBLEM

Capital adequacy has remained an issue for the banking industry in Nigeria and elsewhere. Herein lays the reasons for the various minimum capital legislations for Nigerian banks. Ever since the 1952

Banking Ordinance, the Nigerian banking industry has witnessed more than eight minimum capital legislations, all with the intent to stabilise the financial system.

But how has this minimum capital legislation impacted on the banking industry? Is capital adequacy, the only factor that will stabilize the banking industry, or are there some other more important factors? According to IMF (2003), each banking crisis has its own dynamics of which most of the main ingredients are noticed before the crises. Based on their most common causes, banking crises can be classified into one of two categories: Microeconomic (or bad banking) and Macroeconomic (or  bad  operating  environment).  Which  of  these  characterised  the

Nigerian experience? Is the recent twenty five billion naira (N25bn) minimum capital legislation, what the banking industry in Nigeria need currently? Does growth come by legislating minimum capital or by sheer good business practices? Will the increased minimum capital actually impact positively on the banking industry in Nigeria? All these and many other issues, bog the mind of the researcher, which are intended to be unravelled in the course of this study.

However, just like any other business, banking requires capital to function effectively. Adequate capital is required to maintain public confidence by standing ready to absorb unexpectedly or unusual losses not absorbed by normal earnings. Banks require adequate capital to be able to attract additional funds in the market, and to assuage the confidence of the depositors, the regulators and the general public on their ability to continue in business to discharge their obligations (Nwankwo, 1991). Added to the above, regulators in the Nigerian environment are often pointing to bank distress and failures as reasons for adequate capital base

1.3 OBJECTIVES OF THE STUDY

The objectives of this research work are as follows:

i).      To evaluate the impact of recapitalisation on the profitability of

Nigerian banks.

ii)       . To evaluate the impact of recapitalization reform on the deposit mobilization of banks.

iii).      To   evaluate   the   impact   of   recapitalization   reform   on   the shareholders’ earnings of banks.

1.4 RESEARCH QUESTIONS

i).       To  what  extent  has  bank  recapitalization  impacted  on  the profitability of Nigerian banks?

ii).      To what extent has bank recapitalization reform impacted on the deposit mobilization of banks?

iii).    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 SCOPE OF THE STUDY

This study has for its scope, the determination of the impact of bank recapitalization on the Nigerian banking industry- using United Bank for Africa (UBA) Plc, Union Bank of Nigeria (UBN) Plc, and Zenith Bank Plc, as a case study; and for the period 2000 to 2009.

1.7 SIGNIFICANCE OF THE STUDY

This study is significant for the following reasons:

             It  will  help  enlighten  the  readers  on  current  issues  in  bank minimum capital requirement;

             It will bring to light, the various capital legislations and its effect in the banking industry and the economy, in general;

             The work will also bring out the various views on the current twenty five billion naira (N25bn) capitalization debate;

        It will serve as a resource material for further works and studies.

The  study  of  “The  Impact  of  Bank  Recapitalization on  the  Nigerian Economy” is a current issue and in variably is needed by both the regulators and the operators. Hence, the significance of this study cannot be over emphasised.

It will help the central bank of Nigeria (CBN) and other authorities to further there examine the internal control and policy in the bank.

It will also serve as a foundation on which research can carry out further studies on the topic.

1.8 LIMITATION OF THE STUDY

The following limitations were encountered by the researcher, in the course of carrying out this study.

Time: This has always been a limiting factor for a research of this kind, because the student needs to complete his work within a specified time frame.

Data collection: The problem of data collection was a recurring decimal, since bank officials were not ready to release “classified data”, neither were  they  to  be  found  in  any  official  CBN  or  NDIC  publications. Therefore, the researcher had to limit himself to the available data for this study.

Finances: Research has always been cost intensive, as the researcher had to make various journeys, photocopy materials, and obtain official documents. Thus, whereas the need for finance abounded, its supply was limited.

1.9   OPERATIONAL DEFINITION OF TERMS

Acquisition: This may be defined as an act of acquiring effective control by one company over assets or management of another company without any combination of companies. Thus, in an acquisition two or more companies may reunion independent. Separate legal entity, but there maybe charge in control of companies (Pandey, 2002).

Bank Capital: Bank capital is the paid up capital and reserves, unimpaired by losses. In other words, it is the shareholders’ funds as published in the balance sheet.

Merger: A merger is said to occur when two or more companies combine into one company. One or more companies may merge with an existing company or they may merge to form a new company.

Consolidation: A consolidation is a combination of two or more companies into a new company. All the companies get legally dissolved and a new entity is created.

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