Banking is in
the midst of change that has arisen due to economic depression. As government
seek to improve economic efficiency and better allocation of resources to solve
the problem of economic depression, policy makers are shifting towards
openness, competitiveness and market discipline. In response to the
developments, Deposit Money Banks in Nigeria engaged in financial sanitizing,
management strengthening, corporate refocusing, Business Process Reengineering
(BPR), mergers and acquisitions in order to survive the depressed economy. This
whole process is called survival strategies through corporate restructurings. The
writer made efforts to discuss issues, facts and environmental factors
surrounding the wave of deposit money banks’ survival in a depressed economy
like Nigeria. The impact of this research in banks was gleaned from five
performance indicators namely total assets, total deposits, loans and advances,
profit before tax and shareholders’ funds, of First Bank of Nigeria Plc. The
research looked at the position of these indicators before and after the
sanitizing exercise undertaken by the banks for survival and also, its impact on
the entire banking system bearing in mind the effect of globalization on the
financial market in particular and the economy at large.
shows the presentation and analysis of First Bank’s financial statement with
the use of chart, tables, bar chart and graph. Chapter five summarizes all that
was discussed from chapter one to four and gave suggestions on how deposit
money banks can survive in a depressed economy. Finally, this researcher leaves
this work open to constructive criticisms and expects future scholars to delve
into further research and improve on this work.
TABLE OF CONTENTS
Title Page - - - - - - - i
Approval Page - - - - - - ii
Certification Page - - - - - - iii
Dedication - - - - - - - iv
Acknowledgement - - - - - v
Abstract - - - - - - - vii
Table of Contents - - - - - - viii
CHAPTER ONE: INTRODUCTION
of the Study - - - - 1
of the Problem - - - - 9
of the Study - - - -
Questions - - - - 12
of the Study - - - - - 12
of the Study - - - - 13
of the Study - - - - 14
of Terms - - - - 15
of Related Literature - - - 1
in Bank Survival - - - - 17
Overview of the Operating Environment for
Deposit Money Banks - - - 19
2.2.1 The Macro-Economic Environment - - 20
2.2.2 Industry Environment - - - - 29
2.2.3 The Regulatory Environment/Legal
Framework - 32
Business Process Re-Engineering (BPR) Option - - 35
2.3.1 Origin and Meaning of the BPR Concept
- - - 35
2.3.2 Fundamental Breakthrough Required for
Services in Banks - - - - - - -
2.3.3 Key and Methodology for Carrying Out
a BPR Project in Banks 42
2.3.4 The Role of BPR in the Survival and
Sanitizing of the Nigerian
Deposit Money Banks - - - - - -
2.3.5 Positive Effects of BPR To the
Banking Sector - - 50
Merger and Acquisition Option - - - - 52
2.4.1 Meaning of the Concept Merger and
Acquisition - - 52
2.4.2 Legal Issues in Merger and
Acquisition - - - 55
An Efficiency Indicator in Bank Sanitizing - - 56
of Deposit Money Bank in Nigeria
- - - 59
Historical Overview of First Bank of Nigeria Plc - - 60
Economy - - - - - - 62
2.8.1 Causes of Economic Depression - - - - - 63
Methodology - - - - - - - 65
Method - - - - - - - 65
of Population size of the Study - - 65
of Sample size - - - - - 67
of Data Collection - - - - - 68
of Data Analysis/Interpretations - - - 69
Presentation and Analysis- - -
- - 71
4.1 Financial Statement of First Bank
Plc for the Month ended
31st March - - - - 71
4.2 Analysis of Total Assets - - - - -
4.3 Analysis of Total Deposits- - - - - - 77
4.4 Analysis of Loans and Advances- - - -
4.5 Analysis of Profit Before Tax -
- - - -
4.6 Analysis of Shareholders’ Funds- - -
- - 89
Conclusion and Recommendation-
- - 93
- - - - - - - - - 93
Assets - - - - - - -
Deposits - - - - - - -
and Advances - - - - -
Before Tax (PBT) - - - - -
Funds - - - - -
- - - - - - - - 96
5.3 Recommendation - - - - - - - 96
Bibliography - - - - - - - - 99
1.1 BACKGROUND OF THE STUDY
Nigerian economy is faced
with national and global economic challenges and as such, the financial
institutions, especially the banking sector has an option of sanitizing and
restructuring its operational processes in order to survive the depressed
economy, as well as embarking on a consolidation exercise which would have some
wider structural effects on the industry and on the economy as a whole.
Basically, banking is a
service industry operated by human beings for the benefit of the general public
while making returns to the shareholders.
As such, it is natural that the services provided thereof by the industry
cannot be 100% efficient; however, there is always a room for improvement. It is on this statement that the index of our
further discussion on this study is based.
The banking sector in the
third world economies has been grossly under managed when compared with their
counterparts in the developed countries of the world. This has made it imperative for Nigerian
banks to sanitize and restructure their operational processes so as to be in
line with the global trends, and to survive the depressed economy.
Before the introduction
of Structural Adjustment Programme (SAP) in 1986, the banking sector was
characterized by few banks. The
operators of these banks had almost total control of the business of banking as
customers had to look for their services which most of the times were of poor
quality. The managers, because of the
pressure to provide banking services, had little time to market their bank
services or design new products to improve their customers’ service and at the
same time, they received changes based on the approved tariff. Competition was minimal and customers could
spend long hours trying to obtain service in the banking hall due to long
The quality of the bank
staff was poor. They were rude to their
customers and most of the time; they felt they were doing a favour to their customers. As at that time, no Nigerian bank had neither
a simple computer nor a network of computers for online banking. In the area of credit appraisal, Ezeikpe (1993) observed that they were two
conservative in extending credit facilities.
The system was highly under banked while the payment mechanism was
filled with imperfection such that locally drawn cheques took more than one
week to clear.
However, with the
introduction of Structural Adjustment Programme (SAP) and its policy of
deregulation and liberalization, some structural reforms were ushered into the
banking sector. By this policy, direct
management and rigid controls in banking and security business by the
government were de-emphasized for a broad based and private sector driven
process. Laws inhibiting competition
were removed to ensure that banks are reasonably sound, competitive and
The traditional reforms
were aimed towards achieving the following objectives:
1. A strategy for competition.
2. A sound organizational structure and effective
management to support the strategy.
3. To ensure management of critical
financial and operating risks in banking.
4. A system for planning, budgeting and
5. Entrenching a programme for human
6. Ensuring a strong and effective internal
7. Putting in place the most appropriate
Information Technology (IT) to automate the process. Without any doubt, this policy was geared
towards enabling banks to respond flexibly to monetary conditions and to
facilitate an effective mechanism for transmitting the effect of monetary
policy to the real sector.
The policy of
liberalization ushered in an era of bank proliferation and reduction in
professionalism. Investors rushed into banking business with about the same
zeal with which they embraced contracts during the oil boom era of the
1970s. In no distant time, signals of
distress started manifesting in the banking sector by way of liquidation. Some factors were identified as the causes of
the distress that besieged the banking system.
These factors included:
1. Under capitalization which made the
capital structure of some of the banks to be inconsistent with their risk asset
2. No clearly defined lending policies and
credit appraisal techniques.
3. Unprofessionalism in the conduct of bank
4. High incidence of bad debts and
5. Boardroom squabbles and undue
interference of the board in the day-to-day management of the bank.
6. Poor staff quality which arose due to the
absence of retraining, and giving lip service attention to human premium.
7. Incompetent management.
8. Conflict of interest and insider abuse.
9. Policy problem or delay and inadequate
institutional arrangement and structures on the part of the regulatory
authority before implementing policy changes thereby creating unhealthy and
avoidable suspense and uncertainties.
10. Inadequate prudential regulation and
framework for credit classification.
11. The sudden withdrawal of public sector
deposit from the banking system to Central Bank in June, 1989.
12. The epileptic stabilization securities and
their lack of clear guidelines or modalities with respect to timing, mode of
computation and amount
The list is almost unending but one
can observe from the above that apart from the last four (4) points which are
externally induced stock, the rest are problems that can be controlled with
appropriate in-built mechanism of internal control in the individual banks.
In the face of all these
problems and uncertainties, the option available for the system to have a
better control of these factors is to sanitize the bank internally and
externally for survival. Aderingbe
(1997) observed that “for Nigerian banks to remain relevant in the next century
with the current incursion of technology and globalization of the world market,
they have to learn how to sanitize their operations for survival.” Also Elumelu (1998: 26-27) observed that “the
N25 billion recapitalization of
Nigerian banks has made banks to go into several arrangements for its continued
relevance. This has resulted into
arrangements like mergers, acquisitions, take-overs, re-engineering etc.”
The issue of bank
survival through restructuring and sanitizing does not exist only as a failure
resolution strategy. However, it can be
adopted in solving so many operational problems of corporate
organizations. The financial service
industry has applied it in many operational problems. In acknowledging the strategies and its
impacts in the banking sector, a world bank report in the United States of
America shows that for the year 1992-’96, the banking industry accounted for
13% of mergers, acquisitions and other survival activities by number of
institutions and 12% by dollar amount and ranked first among other industries’
survival through sanitizing activities.
However, certain global factors have been identified as haven
contributed to the result in an upward trend in survival and sanitizing
activities; these included:
1. The dismantling of regulatory barriers
and regional economic groupings which jerked up the pace of globalization.
2. The recent advancement Information
Technology (IT) and the new rate of interest in banking.
3. Continued institutionalization of the market
participants as opposed to individualization.
4. The need for an enhanced payment
5. The increase competition in the financial
services delivery. The survival strategies and the impact of sanitizing the
Nigerian banks have resulted in emergence of strong new local banks fully 100%
owned foreign banks or both local and foreign participation in owners such as
Citibank and NBM, Stanbic Merchant bank within the limited availability of
Mike Hunder (1997:12) in
his crusade for re-engineering, restructuring, sanitizing and survival, opined
that, “as competition among banks become keener in the face of declining market
margins, banks’ management have to manage the hard way of re-engineering.”
As the banks are devising
ways of improving efficiency and ensuring the optimization of the available
resources, policy makers and regulatory authorities are moving towards
openness, competiveness, and at the same time ensuring market discipline. This is in tandem with the trend in the
banking sector globally. Ahmed (2000:33)
described this development as a magic one which caused quite a substantial
number of Nigerian banks to be sick while some became healthier. In his view, he contended that growth in the
banking sector should be transmitted easily into growth of the real
sector. But as banks continued to record
impressive growth in all economics, indices show a declining margin of economic
growth. This makes one begin to wonder
where the impacts of the impressive performance of the banks as reported in the
financial reports are being felt. Even
the NDIC which is established to insure the deposit liabilities of licensed
banks has liquidated some distressed banks.
The action, Ezeikpe (1993: 36-38) commended while arguing that some
distressed banks should be liquidated as a way of survival for the banking
It is on this argument
that this work lies to assess the survival strategies of deposit money banks in
a critically depressed economy with special reference to the First Bank of
Nigeria Plc, paying attention to its performance, growth and stability.
OF THE PROBLEM
Evidence has shown that
the banking business is undergoing several transformations. With the increased
deregulation and liberalization of the business, their structural changes are unavoidable;
hence, the current wave of restructuring in the sector is to respond adequately
to the fast changing and increasingly competitive business in order to
survive. Banks that are unable to
restructure in line with the global revolution in the industry should be ready
to go down the drain in the process and be liquidated.
Between 1991 and 1997, a total of 31 Nigeria banks
have been liquidated by the NDIC due to their protracted problem of distress,
but some of the casualties would have been averted if appropriate restructuring
strategies were implemented.
In this era of customers’
sophistication and advancement in information technology, bank management
should learn to be proactive and more efficient in product/service
delivery. They should continually review
their operational strategy in readiness for the on-going global challenges, more
so, as customers are becoming aware of their environment and ready to move
their funds to where their demands would be adequately met while yearning for
more personalized services.
In consideration of the above
challenges, one may ask, how effective are the various survival/options and
sanitizing strategies adopted by banks in the face of economic depression? Has information technology been given
adequate attention? Do bank mergers
achieve the desired synergy? Has
survival strategy through restructuring led to an improved bank
performance? How far could the result of
the exercise be sustained without abandoning the strategy?
These stated problems together with
the research questions below are what the researcher tries to encapsulate in
the research topic with a view to providing their answers in the course of this
OF THE STUDY
In dealing with the above stated
problems, the study seeks to achieve the following objectives;
1. To find out if the volume of assets
of banks improved after survival strategies were employed through sanitizing
2. To find out how survival strategies
adopted by the banks have affected deposit mobilizations.
3. To ascertain the extent the
depositors’ confidences have been restored in the survival strategies employed
by banks in a depressed economy.
4. To examine how survival strategies adopted
by banks impacted on the shareholders’ funds of the affected banks.
5. To find out if the volume of loans
and advances improved after adopting the survival strategies through sanitizing
6. To know whether profitability of
banks improved as a result of survival strategies adopted by banks after
sanitization and restructuring.
1.4 RESEARCH QUESTIONS
In trying to make a
critical analysis of survival strategies for deposit money banks through
sanitization of the banking industry for growth and stability, the following
questions will be very important as the researcher tries to provide answers to
those mind bugging questions which are:
there been any improvement in the bank’s assets as a result of the
there been increase in deposit mobilization?
what extent has depositors’ confidence been restored?
there been increase in the size of loans and advances?
has the strategy impacted on the bank’s profitability?
impact has the strategy made on the shareholders’ funds?
SCOPE OF THE STUDY
This study attempts to
study survival strategies through corporate restructuring and sanitizing as
they are applied in enhancing the performance of deposit money banks in a
depressed economy. The study covers the activities and impacts of sanitizing in
Nigerian banks using First Bank of Nigeria Plc as a case study. Acquisitions
and business reengineering are discussed.
The period chosen is from
2003 – 2008 in First Bank Plc of the Nigerian Banking Sector. This is to enable
the researcher study the trends for about three years before sanitizing and
three years after sanitizing. This is with the understanding that the time
frame will only be fair and balance for comprising their performance. It is
also extended to 2008 to ensure that the information and data used are timely, up
to date and accurate enough to represent the current position of the bank under
SIGNIFICANCE OF THE STUDY
Although much have been
written about banks’ survival in a depressed economy and sanitizing of banks in
recent times, much of these literatures approached the issue only as a failure
resolution option. Though banks’ survival through sanitization can sometimes is
appropriate approach for failure resolution, it can also be embarked upon to
enhance performance in good performing banks.
In view of the above
reason, this study does not limit its scope to the distressed banks or
resolution of distress. A good performer may also be required to sanitize for
survival of its business process or reposition for further challenges in the
market or to respond to certain global developments. In this regard, bank
directors, corporate bodies and management that want to embark on banks’
survival strategies and corporate refocusing to achieve better results will find
this as an interesting piece. For academicians, it will serve the purpose of
arousing deep thoughts and genuine interest on the subject matter for further
completion, this work will:
1. Detail out the various forms of
survival and sanitizing strategies that are desirable for banks using the First
Bank as a case in point.
2. Recommend the approach or methodology
to be followed in sanitizing and reengineering the business process in banks
for survival in a depressed economy.
3. Determine if survival strategies and
sanitizing have restored confidence among Nigerian banking public.
LIMITATIONS OF THE STUDY
The major constraints
encountered in this research work are:
The obvious attempt by
banks to classify most of their information that is necessary for the
completion of this work due to certain management policies.
The escalating cost of
transport and financial impediments which made the cost of carrying out the
research to be expensive.
The inability to collect
the annual reports of many banks for various years was a slow down to this
research as the staff refused to disclose the figures for analysis which
necessitated the use of First Bank Plc as a case study.
On the whole, academic
stress and time factor also added to the problems but the researcher made the
best efforts in optimizing the available resources and information without
allowing the limitations to make the researcher lose sight of the quality of
the final output. In essence, these limitations do not impinge on the validity
of this work.
DEFINITION OF TERMS
SURVIVAL: The state of continuing to live or exist often in spite of difficulty or
STRATEGY: A plan designed for a particular purpose. The process of planning
something or carrying out a plan in a skillful way.
DEPOSIT MONEY BANKS: The resident depository corporations and quasi-corporations
which have many liabilities in the form of deposits payable on demand, transferable
by cheque or otherwise usable for making payments.
DEPRESSION: The state of being depressed. It is a period when there is
little economic activity, and many people are poor or without jobs.
ECONOMY: The relationship between production, trade and the supply of money in a
particular country or region. It is the system of trade and industry by which
the wealth of a country is made and used.
DEREGULATION: It is a way to free a trade, business activity etc from
certain rules and controls.
LIBERALIZATION: This is a way to free somebody or something from political,
religious, legal or moral restrictions.
LOAN AND ADVANCE: Loan is a sum of money which is borrowed, often from a
bank, and has to be paid back usually together with an additional amount of
money known as interest, while Advance is bank lending which may be via term
loan, overdraft, or bill discounting.