ABSTRACT
This study investigated the effect of bank consolidation on the performance of SMEs in Nigeria. This study adopted the ex-post-facto research design and time series data from 2005 to 2015 were collected from Nigerian Corporate Affairs Commission database, Central Bank of Nigeria Statistical Bulletin and Small and Medium Scale Enterprises Development Agency of Nigeria database. The Ordinary Least Square (OLS) regression in a multiple regression framework was used to estimate the partial impact of the coefficient of the key variables. Te t-statistic was used to test the three hypotheses formulated for the study. The results emanating from this study indicated bank consolidation had positive and significant impact on the number of registered SMEs in post consolidation era in Nigeria; assets size of SMEs and bank consolidation has positive and non-significant effect on bank lending to SMEs in post consolidation banking era in Nigeria. The study, thus, concludes that the consolidation exercise in 2005 was a welcome development aimed at enhancing the growth of SMEs. We therefore, recommend, among others, that government should make policies that will strengthen and boost access to funds for small and medium scale enterprises. Again, banks should continually increase their capital base so as to boost their funds availability to SMEs. This will ensure continual survival and growth of SMEs which have been adjoined as the engine room for economic growth and development of nations.
TABLE OF CONTENTS
Title
Page i
Declaration ii
Approval iii
Dedication iv
Acknowledgements v
Abstract vi
List
of Tables ix
CHAPTER
1: INTRODUCTION
1.1 Background
of the Study 1
1.2 Statement
of Problem 8
1.3 Objectives of the Study 9
1.4 Research Questions 10
1.5 Research Hypotheses 10
1.6 Scope of the Study 11
1.7 Limitations of the Study 11
1.8 Significance of the Study- 11
1.9
Operational definition of terms 13
CHAPTER 2: LITERATURE REVIEW
2.1. Conceptual Framework 14
2.1.1 History of banking sector reforms in Nigeria
16
2.1.2 Overview of the role of the banking industry
24
2.1.3
Basis for banking industry
consolidation in Nigeria 32
2.1.4
Rationale for banking system
consolidation 33
2.1.5
Strategies for banking sector
consolidation 37
2.1.6 Issues and challenges associated with bank
consolidation 38
2.1.7 Post-consolidation challenges and issues 42
2.2 Theoretical
Review 45
2.3 Empirical
Review 49
2.4 Review Summary 71
CHAPTER 3:
METHODOLOGY
3.1.
Research Design 75
3.2 Nature and Sources of Data 75
3.3 Model Specification 76
3.4 Description of Model Variables 78
3.4.1 Dependent variable 78
3.4.2 Independent variables 79
3.4.3 Control variables 79
3.5 Techniques
of Analysis 80
CHAPTER 4:
PRESENTATION OF DATA AND ANALYSIS OF RESULT
4.1
Presentation and Analysis of Data 83
4.2 Test of Hypotheses 86
4.2.1 Test of hypothesis one 86
4.2.2 Test of hypothesis two 88
4.2.3 Test of hypothesis three 90
4.3 Implications of Results 92
CHAPTER 5: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1. Summary of Findings 97
5.2 Conclusion 97
5.3 Recommendations 98
5.4 Contribution to Knowledge 99
References 100
LIST OF TABLES
2.1 The Bridge banks 21
2.2 Changes in the minimal capital
requirement of Nigerian
Commercial banks (1952-2010 22
2.3 Summary of empirical review 71
4.1a Data presentation 83
4.1b Descriptive statistics 84
4.2 Result regression
of hypothesis one 87
4.3 Result regression
of hypothesis two 89
4.4 Result regression
of hypothesis three 91
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
In
recent times, Small and Medium Enterprises (SMEs) appears to be among the best
options for rapid economic growth and development. In this regard,
Fatai (2010), states that in
Nigeria where the private sector is developing, SMEs are assumed to play
prominent role in employment generation and facilitation of economic
development. The growing recognition of the role of SMEs may have influenced the decision of World
Bank Group to commit roughly $2.4 billion on SME, as core element in its
strategy to foster economic growth, employment generation and poverty
alleviation (Fatai 2010).
The
importance of small and medium enterprises has not been in doubt, because
classifying businesses and organizations into large and medium scale is
subjective and depends on different value parameters. These parameters follow
different criteria such as employment, total assets or total investment. Small and
medium enterprises are defined differently in various economies but the
underlying concept is the same. Ayyagari, Beck and Demirguc-kunt, (2003) opine
that the “definition of small and medium scale enterprises varies according to
context, author and country”.
In
the case of Nigeria, hardly do we have a clear-cut definition that
distinguishes small and medium scale enterprises. The Central Bank of Nigeria
in its monetary policies circular No. 22 of 1988, defines SMEs as those
enterprises with annual turnover not exceeding 500,000 naira. Similarly, in
1990, the Federal Government of Nigeria defined small scale enterprises for the
purpose of commercial bank loans as those enterprises whose annual turnover
does not exceed 500,000 (five hundred thousand naira) and for merchant bank
loan, those enterprises with capital investment not exceeding 2 million naira.
In
1993, the definition of SMEs was reviewed by the Federal Government. This
increased the total asset of SMEs to five million as a result of the
introduction of the Second Tier Foreign Exchange Market (SFEM), and the spiral
inflation fuelled by the Structural Adjustment Programme. Ogechukwu (2006)
opines that the changing dynamics in the economy has also prompted scholars and
practitioners to reclassify SMEs into micro and super-micro businesses, with the
aim of providing adequate incentives and protection for the former. In that regard,
any business or enterprise below the upper limit of N250, 000 and whose annual
turnover exceeds that of a cottage industry which is currently put at N50, 000 per annum is a small scale
industry. Furthermore, the National Directorate of Employment (NDE) puts the concept
of a small scale industry as those with fixed maximum of N35, 000.
The definition of small-scale enterprises (SSEs) in Nigeria
changed over the years not only in consonance with the changing fortune of the
country but in accordance with the diversity of the Small and Medium
Enterprises. Prior to 1992, different institutions in Nigeria adopted varying
definitions of the concept. The institutions include the Central Bank of
Nigeria (CBN), Nigerian Bank for Commerce and Industry (NBCI), Centre for
Industrial Research and Development (CIRD), Federal Ministry of Industry (FMI)
and the National Economic Reconstruction Fund (NERFUND). However, in 1992, the
issue of conflicting concept was rectified with the establishment of National
Council on Industry, which is now policy making organ for the sector in
Nigeria. Among the conceptual issue that was rectified was whether Small-Scale
Industry definition should include all economic activities such as trading,
buying and selling or whether it should be restricted to productive industrial
activities especially manufacturing. Accordingly, a clear distinction was made
between small-scale enterprises consisting of trading, buying and selling
activities and small-scale industries engaged in manufacturing industry. This
definition of SMEs may not be the same in other countries, but may be useful in
developing countries, because of the low capacity of these countries small
scale industry.
Among the factors militating against the development
of SMEs in Nigeria is lack of funding. This is because SMEs in Nigeria depends
on owners equity (personal savings), borrowings from friends and relations,
borrowing from government agencies (example; Small and Medium Scale Equity
Investment scheme), and borrowing from commercial banks. Extensive studies have
shown that the most reliable and effective source is the commercial bank loan
to SMEs. The studies further argue that those small banks are more effective in financing this sector
and attribute this to relationship bonding. The studies further states that the
size of a bank influences the volume of funding to SMEs. SMEs in Nigeria cannot
access the capital market because of the stringent listing requirement for the
first and second tier markets. However, it is speculated that the recent
banking reforms, through consolidation, might have affected the effectiveness
of banks in discharging this function.
There
are potential benefits derivable from the lifting of geographic barriers to
competition in banking and the associated wave of consolidation. These include
diversification, improved competition, and the elimination of entrenched
inefficient or self serving bank managers. What is less clear is the effect of
consolidation on the supply of credit to businesses, particularly small
businesses that depend on banks for external credit.
A
survey of small credit to small firms
(Cole, Wolken, and Woodburn 1996), has established a fairly strong link between
size of banks and the supply of small business credit, with bigger banks
devoting less proportions of their assets to small business lending than
smaller banks (Berger, Kashyap, and Scalise 1995, Keeton 1995, Levonian and
Soller 1995, Berger and Udell 1996, Peek and Rosengren 1996, Strahan and Weston
1996). Small banks are considered
primary sources of credit for small businesses. Unlike highly capitalized and
publicly traded firms, which have access to capital markets, small businesses
rely strongly on banks for small business credit, partly because of the
challenges of accessing fund from the capital market. These Small and Medium
Scale businesses often concentrate their borrowing at financial institutions,
mostly small banks with which they have long-term relationships, ie
relationships that prove mutually beneficial to both parties. This relationship
enables banks to collect information about the SME’s ability to repay such
facility, thereby reducing the cost of providing credit facilities. Small and
Medium Scale Enterprise in turn, enjoy
better access to credit facilities and lower cost of borrowing . Small banks
make more of these “mutual relationship
loans” than do large banks, which are more likely to make generic loans
based on calculated financial ratios from the operating result of the borrower
and credit indices.
The banking industry which is considered as a major
provider of fund to small and medium enterprises has passed through several
stages of regulatory frameworks to its present state and this development could
be categorized into five stages. Okafor (2011) presented five clusters of
reform as (i) First (Independence) reforms cluster 1960 to 1996. The objective
of this reform was to establish indigenous Banking institutions that will pilot
the economy of the newly independent Nigeria (ii) Second (indigenization)
reform cluster 1970 to 1976. (iii) Third (Okigbo Committee) reform cluster 1977
to 1985, (iv) Fourth (Structural Adjustment Programme) reform Cluster 1986 to
1990. (v) Fifth (Fourth Republic) reform cluster 2000-2010. Okafor (2011)
further states that each of the clusters represents some major and minor
reforms that are directed at improving banking service delivery in Nigeria.
Nnanna (2006) states that the
first stage from 1930 to 1959, was characterized by poorly capitalized and
unsupervised indigenous banks, leading to failure at their infancy. He states
that the second stage was from 1960 to
1985. In this period, the Central Bank of Nigeria regulatory policy framework
was designed to ensure that only persons with good character and financial strength
were granted Banking License subject to prescribed minimum paid up capital.
The development of this stage was based on the introduction of minimum
paid up capital and other requirements before the grant of banking licenses to
operators. He states also that the third
stage from 1986 to 2004 involved the post Structural Adjustment Programmes
(SAPs) or the De-control Regime during which the neo-liberal philosophy of free
entry was over stretched and Banking licenses were dispensed by the political
authority on the basis of patronage. A major reform in the banking sector
during the period was universal banking policy. This policy was responsible for
the consolidation of merchant banks, commercial banks and exchange house into a
universal bank. Therefore, one bank was required to perform all banking
functions. He states further that the fourth stage of banking sector reform
could be described as the era of consolidation that is from 2004 to 2008.
The major emphasis of that period was on recapitalization and proactive
regulation based on risk focused supervision framework. The fifth stage; he
describes as the post consolidation era, where the focus is to strengthen the
banking sector through efficiency-driven policies. The fourth stage, which was
the consolidation era elicited interest both from the academic circle as well
as from operators in the Nigerian Banking industry more than the other eras
(Nnanna, 2006).
This frequent policy changes which the CBN introduces as a regulatory
institution may have affected the banking landscape in Nigeria, as a result,
there have been several attempts both within and outside Nigeria to examine the
impact of these consolidation programmes on bank performance. In Nigeria and other economies, researchers have
viewed banking sector consolidation differently.
Adeyemi (2006) examines the issues and challenges
arising from the banking sector reform programme in Nigeria. He noted that
since the consolidation programme was policy induced, the 18 months given
for total compliance appeared
inadequate, following the number of activities required for consolidation to be
successfully consummated, he however acknowledged that the programme could lead
to the emergence of a sound and efficient financial system that would support
the growth and development needs and aspirations of the Nigerian economy, to
fully harness the synergies and potentials of the consolidation programme. He
therefore, advocated for proper handling of post consolidation challenges such
as continuous flow of fund to small and medium enterprises.
Oladepo (2010) posits
that the value gains that alleged to accrue to the large and growing wave of
consolidation activity have not been verified. Thus leading the research
community in quandary on whether the industry has followed a path of massive
restructuring or a misguided belief of value gains of consolidation. He stated
that it is not clear whether the financial regulators and operators are
insincere to the public and shareholders about the effects of their activity on
shareholders’ value and banking performance. It is important to address this issue
by reconciling data with empirical reality of continued consolidation activity.
Soludo (2004) states
that one of the focus of the banking
sector consolidation was to develop a diversified, strong and reliable banking
sector capable of playing active developmental roles in the local economy
including funding of SMEs and of being competent and competitive players in the
African regional and global financial system. It is argued that small banks are
primary source of credit for small and medium enterprises. This is because
these enterprises do not have access to capital market where large funds can be
sourced. Their inability to access fund from the capital market could make them
to concentrate their borrowing from institutions with which they have long term
relationship i.e. relationship that prove mutually beneficial. It is generally
argued that this relationship enables banks to collect information about the
borrower’s ability to repay, and this could reduce the cost of providing
credit.
The need to empirically
investigate the impact of bank consolidation on the performance of SMEs in
Nigeria motivates this study, since empirical studies on this issue, based on
the researcher’s knowledge are inadequate.
1.2 STATEMENT OF THE PROBLEM
Graig and Hardee (2006) posit that
small and medium enterprises are the major sources of job growth in any
country. It is generally argued that small and medium enterprises are
characterized by three principal features namely (i) relatively small principal
(ii) absence of asset-based collateral and (iii) simplicity of operations.
The bulk of small and medium enterprise
credit is said to come primarily from banks therefore institutional changes
through consolidation could have an adverse effect on small business credits
and the performance of SMEs (Gray and Hardee, 2006). This really has to be
ascertained in the Nigerian situation, hence the challenge or problem of this
study. For instance, government in past have tried through several intervention
schemes to promote funding to SMEs. The schemes which were designed to ensure
continuous flow of fund to SMEs include; the Nigerian Agricultural and
Co-operative Bank Ltd (NACB), the National Directorate of Employment (NDE), the
Nigerian Agricultural Insurance Corporation (NAIC), the Peoples Bank of Nigeria
(PBN), the Community Banks (CBs), the
Family Economic Advancement programme (FEAP).
Despite these schemes, SMEs largely rely
on commercial bank for fund. However, the 2004/2005 bank consolidation is
argued to have constrained the smooth flow of fund from commercial banks to
SMEs in Nigeria. Some studies have argued that consolidation of the banking
industry will have negative impact on the amount of credit available to small
businesses. Strahan and Weston (1996) state that small banks are said to be
major source of credits for small business outfit, unlike large firms which
have access to the capital market, small and medium enterprises rely heavily on
bank credit. If small banks are increasingly acquired by large banks in the form
of consolidation, it may be strongly contended that it will have a negative
effect on the availability of credit to small and medium enterprises.
Graig and Hardee (2004) examine the
implication of consolidation on the amount of credit available to small
business. They found that access to credit consolidation significantly reduced
banking credit to SMEs. They argue that this can reduce the productivity of
small businesses and their overall contribution to the economy in terms of
increasing employment creation and social welfare. The implication of lack of
credit to small business is that these small businesses may be increasingly
turning to non-bank sources of finance to access credit. However, this source
comes with a cost to this class of business hence increasing the cost of
production.
However, apart from the distinct modeling
technique and variable inclusion previous studies equally failed to investigate
the impact of bank consolidation on the performance of SMEs in Nigeria. This is
especially necessary, given that bank consolidation was aimed at ensuring bank
stability, promoting good corporate governance, establish mega banks and
promote bank lending to the private sector.
1.3 OBJECTIVES OF THE STUDY
The main objective of this study is to
assess the impact of the 2004/2005 bank
consolidation exercise
on the performance of SMEs in Nigeria. Specific objectives of the study are:
(i)
To determine the effect
of post bank consolidation
capital on the number of registered small and
medium enterprises in Nigeria.
(ii) To
examine the impact of post bank consolidation capital on the asset size
of small and medium enterprises.
(iii) To
assess the contribution of post bank consolidation capital on total bank credit to
small and medium enterprises in Nigeria.
1.4 RESEARCH
QUESTION
As a follow-up to the objective, this
research seeks to provide answers to the following questions.
(i)
To what extent does post bank consolidation capital affect the number
of registered small and medium enterprises in Nigeria?
(ii) In
which ways does post bank consolidation capital affect the asset size of
small and medium enterprises in Nigeria?
(iii) How does post bank
consolidation capital
enhance bank credit to small and medium enterprises?
1.5 RESEARCH HYPOTHESES
Based
on the foregoing research questions, the following hypotheses are formulated.
(i)
Post bank consolidation capital does not have significant and positive impact on the
number of registered small and medium enterprises
(ii) Post
bank consolidation capital does not have significant
effect on asset size of small and medium
enterprises in Nigeria.
(iii) Post
bank consolidations capital does not have significant
contribution regarding bank
credit to small and medium enterprises in Nigeria.
1.6 SCOPE OF THE STUDY
The
scope of this study covers the period 2005 to 2015. The choice of 2005 is
predicated on the consolidation exercise in Nigeria. The post consolidation
analysis is to aid the researcher understand the importance of consolidation on
the performance of small and medium enterprises in Nigeria.
1.7 LIMITATIONS OF THE STUDY
The
researcher did all he could to make this study very objective and concise but some
forms of limitation appeared inevitable in the course of the study. Amongst
these factors is data availability; which insufficiency made the scope of this
study to start from 2005 and end in 2015. Another factor that limited this
study is insufficient recent empirical works which made this study to
efficiently utilize the available ones and exploring various other sources of
literature.
1.8 SIGNIFICANCE OF THE STUDY
It is important to investigate this issue
by reconciling data with empirical reality of consolidation activity.
Therefore, this study will be significant to the following group of persons:
1
Management of banks
The decision making authority in banks lies in the hands of managers.
Therefore, this research will enable management to understand what must be done
in order to act in the best interest of shareholders in choosing expansion
measures which will help the bank achieve an optimal structure that will
maximize shareholders’ value.
2 Investors and potential investors
The major beneficiaries of an enhanced performance of banks are
shareholders otherwise called investors or potential investors. The choice of
consolidation between banks ultimately affects their role in lending to small
and medium enterprises. Therefore, this research will contribute along with
other similar literatures available in this area of finance in enhancing value
maximization on the effect of consolidation on the performance of small and
medium enterprises in Nigeria.
3 The academia
Essentially, this research intends to contribute significantly to the
volume of literature available in this area of finance. In academics, the unknown is never exhausted,
as the list of what we do not know could go on forever. Therefore, as a contribution in this area,
recommendations about consolidation and its effect on performances of SMEs in Nigeria
will be studied. Localizing the research to the Nigerian environment is
particularly important in this research.
4 The government
The outcome of this study shall be of immense benefit to the public
authorities in policy formulation.
1.9 OPERATIONAL DEFINITION OF TERMS
Consolidation: consolidation is the process by
which one banking company takes over, merges with or absorbs another. This
process makes such banks stronger than they have been in the past.
SMEs: This study
defines this as those enterprises with annual turnover not exceeding 500,000
naira. Similarly, in 1990, the Federal Government of Nigeria defined small
scale enterprises for the purpose of commercial bank loans as those enterprises
whose annual turnover does not exceed 500,000 thousand naira and for merchant
bank loan, those enterprises with capital investment not exceeding 2million
naira (excluding the cost of land).
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