Abstract
This study examines the impact of bank
recapitalization on sock market development. To meet the N25 billion recapitalization benchmark, the Nigerian capital market
became an option as well as an avenue for consolidation of banks via mergers
and acquisition. This study examined the impact of banks recapitalization on
stock market development. Secondary data collected from the Nigeria Stock
Exchange (NSE) and the Central Bank of Nigeria (CBN) was analyzed using
regression analysis. It was found that Market Capitalization (MCAP), All-share
Index (ASI) and Gross Fixed Capital Formation (GFCF) are significant
determinants of shareholders funds (SHF) at 5% level while value of Trading
VOT) is significant at 1% level. The overall performance of the result was good
with of 84%. It was therefore concluded that bank recapitalization has impacted
positively on the Nigerian Stock Exchange. The study recommends among others
that economic and financial policies that would encourage investment in the
Nigerian capital market should be implemented regularly.
TABLE OF CONTENTS
Title
Page i
Certification
ii
Dedication
iii
Acknowledgements
iv
Abstract
v
Table
of Contents vi
Chapter One:
Introduction 1
1.1
Background to the Study 1
1.2
Statement of Problem 5
1.3
Research Questions 6
1.4
Objective of the Study 7
1.5
Statement of Hypothesis(es) 8
1.6
Significance of the Study 10
1.7
Scope of the Study 10
1.8
Limitations of the Study 11
1.9
Definition of Terms 12
Chapter
Two: Review of Related Literature 13
2.1 Introduction
13
2.2 The
Financial Market 13
2.3 The Capital Market 14
2.3 The
Evolution of the Nigerian Capital Market 17
2.4 The
Securities and Exchange Commission (SEC) 20
2.5 Brief History
of the Nigerian Stock Exchange (NSE) 22
2.6 Internationalization
of the Nigeria Stock Market 26
2.7 Recent Developments toward an Effective Stock Market
27
2.8 Listing
on a Stock Exchange 32
2.9 The
Evolution of the Nigerian Banking Sector 36
2.10 Rationale for Banking System Reform in Nigeria 39
2.11 What is
Recapitalization? 45
2.12 History of
Bank Recapitalization in Nigeria 46
2.13 Views on
Bank Recapitalization 50
2.14 Bank
Recapitalization Option: The Capital Market 57
2.15 Bank
Recapitalization Option: Consolidation 61
2.16 Mergers
and Acquisitions 67
2.17 Bank
Consolidation: Comparative Review 75
2.18 Implementation
of Recapitalization Option in Nigeria 80
2.19 Benefits
of Banks Recapitalization 88
2.20 Empirical
Evidence 89
Chapter
Three: Research Method and Design 94
3.1
Introduction 94
3.2
Research Design 94
3.3
Description of Population of the Study 95
3.4
Sample Size 95
3.5
Sampling Techniques 95
3.6
Sources of Data Collection 96
3.7
Method of Data Presentation 96
3.8
Method of Data Analysis 96
Chapter
Four: Data Presentation, Analysis and Interpretation 98
4.1 Introduction 98
4.2 Presentation of Data 98
4.3 Data Analysis 100
4.4 Hypothesis Testing 104
Chapter
Five: Summary of Findings, Conclusion and Recommendations 106
5.1
Introduction 106
5.2 Summary of Findings 106
5.3
Conclusion 108
5.4
Recommendations 109
References
111
CHAPTER ONE
INTRODUCTION
1.1
Background to the Study
The
relevance of banks in the economy of any nation cannot be overemphasized. They
are the cornerstones of the economy of a country. Banks play the important role
of promoting economic growth and development
through
the process of financial intermediation; in this process,
banks facilitate capital formation and lubricate the production process. This
intermediation is important because in the absence of banks, the savings would
have been fragmented and put in small packet here and there. By pooling
together such savings, banks are able to achieve economic of scale with
beneficial effects for their borrowing customers.
For
banks to function effectively, it is imperative that they are visible and
healthy and that the entire industry is stable and sound. It is in appreciation
of this, that the industry worldwide is usually heavily regulated and
supervised a major objective of regulation and supervision, therefore, is to
ensure that the industry is sound and stable, thereby encouraging public
confidence in the system. The need for banking sector regulation is further
underscored by the fact that shareholders’ funds are usually only a small
proportion of the financial resources available to a bank. The bulk of the
funds available to a bank are depositors’ monies. These deposits usually
constitute not less than 70% of a typical banks liability. It is therefore crucial that
the interest of these depositors is protected, especially those of them who are
not well informed.
The
Nigeria banking sector has undergone remarkable changes over the years, in
terms of the number of institutions, ownership structure as well as the depth
and breadth of operations. These changes have been influenced largely by the
challenges posed by the deregulation of the sector, globalization of operation,
technological innovations and the adoption of supervisory and prudential requirement
that conform to international standards The deregulation of the sector which
began during the period 1986-1990 was followed by a flood of new banks. The
existence of so many banks, couple with the non-compliance with market
regulation by majority of the players, inadequate capital, poor credit
administration, etc led to high incidence of distress in the banking industry
in the 1990s, bank sector in Nigeria are driven by the need to deepen the
financial sector and reposition the Nigeria economy for growth; to be
integrated into the global financial structural design and evolve a banking
sector that is consistent with regona1 integration requirements and international
best practices. It also aimed at addressing issues such as governance, risk
management and operational inefficiencies, the center of the reform is around
securing up capitalization. Against, this background, the Central Bank of
Nigeria (CBN), on July 6, 2004, a day now referred to as “Back Tuesday” in the
banking sector of the economy, announced a reform programme for the nation’s banking
industry. The thrust of the reform required the 89 insured banks then in the
system to raise their shareholders’ fund to a minimum of 25 billion each, with
a deadline of 31st December, 2005 for full compliance. Bank were
specifically required to achieved that through fresh capital injection where
applicable, but were most importantly encouraged to consolidate through mergers
and acquisitions arrangements with other banks.
Recapitalization
is an important component of reforms in the banking industry owning to the fact
that a bank with a strong capital base has the ability to absolve losses
arising from non-performing liabilities. It is also intended among others to
help mobilize domestic savings, deepen and broaden intermediation, improve
allocation of resources and help to mobilize foreign savings.
To
meet the N25 billion recapitalization
benchmark many of the existing banks wont to the capital market to raise fresh
funds in the bid to step up their capital in order to either stand in a good
stead for a merger/acquisition or meet the minimum capitalization requirement
on a solo basis. Thus, this study is specifically designed to evaluate the
impact of bank recapitalization on stock market development.
1.2
Statement of Problem
Adequate
capital is an essential element of any banking system which serves as a guard
against unexpected losses, provided protection to depositors, creditors,
deposit insurance funds and ultimately the economy. Due to all these protection
it provides against loss, the maintenance of adequate capital is the principle
source of public confidence in individual banks and the banking system.
Over
the years the Central Bank of Nigeria (CBN) had been challenged by the
relatively weak capital base of banks which had contributed to the failure of
some banks. Section 9 of the Banks and Other Financial Institutions Act (BOFIA)
1991 as amended, require the CBN to determine from time to time the
minimum-paid up share capital requirements of banks. However, the challenge of
weak capital base of banks in line with that requirement, the CBN had
periodically reviewed the minimum capital requirements of banks. However, the
challenge of weak capital base of banks had remained until the recent
introduction of the banking reform programme which also move the capital base
of banks from N2 billion to N25 billion.
One
of the options open to Nigerian banks to meet the stipulated minimum capital
base requirement was to approach the capital market for funds; hence, the focus
of this research is on the “impact of Bank Recapitalization
on Stock Market Development”.
1.3 Research
Questions
This
study also seeks answers to the following questions:
1. How will increase in shareholders fund of
banks in impact on the market capitalization of the Nigerian Stock Exchange?
2. To what extent will increase in shareholder
funds of bank have impact on market capitalization of the Nigeria Stock
Exchange?
3. How will increase in shareholders of bank
impact on all-share-index of the Nigeria Stock Exchange?
4. What is the relationship between increase
in shareholders funds of banks and the number of listed securities on the
Nigeria Stock Exchange?
5. What impact do increase in shareholders
funds have on Gross Fixed Capital Formation (GFCF)?
1.4
Objective of the Study
The
main objective of this study is to ascertain the impact of bank
recapitalization on stock market development. The specific objectives include:
i. To find out if increase in shareholders
funds of bank have impact on market capitalization of the Nigeria stock
exchange.
ii. To ascertain of increase in shareholders
funds of bank have impact on value of transaction of the Nigeria stock
exchange.
iii. To find out if increase in shareholders
funds of bank have impact on all-share-index of the Nigeria Stock Exchange.
iv. To ascertain if Increase in shareholders
funds of bank have impact on numbers of listed securities on the Nigeria stock
exchange.
v. To ascertain if increase in shareholders
funds of banks have impact on Gross Fixed Capital Formation (GFCF).
1.5 Statement
of Hypotheses
In
the light of the statement of research problems and objectives, the hypotheses
of this research are stated in both the Null (HO) and Alternative (HI)
hypothesis, viz;
Hypothesis
One
HO: Increase in shareholders funds of banks does
not have impact on market capitalization of the Nigerian Stock Exchange,
HI:
Increase in shareholders funds of banks
have impact on market capitalization of the Nigeria Stock Exchange.
Hypothesis Two
HO:
Increase in shareholders funds of banks
does not have impact on value of transactions of the Nigerian Stock Exchange.
HI:
Increase in shareholders funds of banks
have impact on value of transactions of the Nigerian Stock Exchange.
Hypothesis Three
HO:
Increase in shareholders funds of banks
does not have impact on all-share index of the Nigerian Stock Exchange.
HI:
Increase in shareholders funds of banks
have impact on all- share index of the Nigerian Stock Exchange.
Hypothesis
Four
HO:
Increase in shareholders funds of banks
does not have impact on listed securities on the Nigeria Stock Exchange.
HI:
Increase in shareholders funds of banks
have impact on listed securities on the Nigeria Stock Exchange.
Hypothesis
Five
HO:
Increase in shareholders funds of banks
does not have impact on Gross Fixed Capital Formation on the Nigerian Stock
Exchange.
HI:
Increase in shareholders funds of banks
have impact on Gross Fixed Capital Formation on the Nigerian Stock Exchange.
1.6
Significance of the Study
The
Nigeria stock exchange is the hub of the Nigeria capital market. An
understanding of this market would enhance its development and performance.
This study will broaden our knowledge on the operations of the market. It is
therefore hoped that this study would help build awareness among investors of
the activities of the stock market which will translate into increased
investment and hence economic grow and development.
This study will also provide an
assessment of the bank recapitalization exercise and the extent of its success.
This will assist the CBN to develop mechanism for more effect recapitalization
in future.
Furthermore, this study will enlighten
players in the Nigeria financial system, students, academicians and researchers
and make them to be conscious of the activities in the banking sector as well
as the Nigeria stock exchange.
1.7
Scope of the Study
This
research work tends to cover mainly the recapitalization in the Nigeria banking
industry via consolidation and its impact on the Nigeria Stock Exchange. We
would consider nine banks (Access Bank, Afribank, Fidelity Bank, Guaranty Trust
Bank, FinBank, Sterling Bank, United Bank for Africa, Union Bank and Wema Bank)
from 1996 – 2008. The Nigeria
capital market, historical development of the Nigeria stock exchange, its
operations, listing requirements, etc will be looked into.
The
research work will also consider the reasons for bank reforms, history of bank
recapitalization, mergers and acquisitions (M & A), post- consolidation
benefits, empirical evidence and other related area.
1.8
Limitations of the Study
This
project work should not be seen as complete and accurate as some factors will
limit the successful completion of this work. For example, because the project
is on a new area, there was the problem of inadequate information from past
studies in this area of research. Also, due to financial constraints and the
limited time at the disposal of the researcher, data collected was not enough.
A much more expensive job might have done to make a case for bank
recapitalization and stock market development in Nigeria.
1.9
Definition of Terms
Bank:
A bank is any corporate
entity licensed to carry out banking activities such as mobilization of
savings, lending of money, keeping of valuables etc.
Central
Bank: Central bank is the highest financial institution in
the country in which it operates and does not transact business with private
individuals apart from the government and members of the money market. It is
established Act of parliament and so, it has no shareholders.
Capitalization:
Making a company more solid or stronger by increasing its capital base.
Securities: Securities are written or printed documents by
which the claims of holders in specified property are secured. They could be
stock, shares, bonds and debentures.
Stock Exchange: A Stock exchange is an arrangement whereby large
and small investors alike buy and sell securities through stockbrokers and
government agencies. This arrangement could be through computer, Internet,
telephone, fax, trading floor, etc.
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