ABSTRACT
The study is based on the
capitalization m Nigeria banking industry.
The study critically looked into the
reasons for concern over capital adequacy, need for capital and the legal and
regulatory control of capital in the banking industry.
The research in the course of study
made use of questionnaires as a method 'of data gathering, and the data was
statistically analyzed, using simple percentage and chi-square method of
analysis.
Secondly, data were obtained through
the review of related literature including· textbook, banks manuals and
journals. The data obtained were analysed and on the basis of the findings,
made some recommendations.
The study recommendations. The study
recommends that government must always ensure that bank operative in the economy
shall not at any point in time operates contrary to the provision of the act as
regards to capitalization.
It suggested that bank should always
see capitalization strategy as a shield on them and confidence regained from
those ones lost in the past times before recapitalization.
Furthermore, bank should always see
merging as one of the best strategies rather than liquidation.
TABLE OF CONTENTS
DEDICATION
CERTIFICATION
ACKNOWLEDGMENTS
ABSTRACTS
TABEL OF CONTENT
1.0
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study
1.2 Purpose of the Study
1.3 Choice of study
1.4 Significant of study
1.5 Scope of study
1.6 Working of Hypotheses
1.7 Limitation of Study
1.8 Research Methodology
1.9 Historical background of the study area
CHAPTER TWO: LITERATURE REVIEW
2.0
Introduction
2.1 Research for concern over capital adequacy\
2.2 Legal and Regulatory Control of Capital
2.3 The Need for capital
2.4 Condition Influencing capital adequacy
2.5 Forms of Capitalization may take
2.6 Bank Capitalization and Leverage
2.7 Why should the Minimum Capital Base for Banks
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Research Design
3.2 Data Collection
3.3 Identification of Population
3.4 Determination of Sample size
3.5 Questionnaire Assumption
3.6 Questionnaire Assumption
3.7 Reliability Test
3.8 Validity
3.9 Questionnaire Administration
3.10 Validity
CHAPTER FOUR:
DATA ANALYSIS AND INTERPRETATION
4.1 Data Analysis and Interpretation
CHAPTER FIVE:
SUMMARY, CONCLUSION, RECOMMENDATION
5.1 Summary
5.2 Conclusion
5.3 Recommendation
Bibliography
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The engine for economic growth of any
society banking institution. No doubts, that in the past the banks have
experienced a lot of pitfalls even till this present day. Banks by its nature
mobilize funds from the surplus spending units into the economy and by on-
loading such funds to the deficit spending unit for investment, banks increase
in the process, the quantum of national savings and investment. Through an
appropriate investment multiples, the volume of goods and services produced in
an economy increases overtime as a result of the investment projects embarked
upon through banks direct and indirect contributions towards the growth of the
national economy is achieved contributions towards the growth of the national
economy is achieved. They [banks] succeed in promoting an efficiency payment
system, and creating banking habits needs a solid capital base and developing
the society at large. However, an efficient banking system needs a solid
capital base. The question now arises; what is capital? According to Oxford
mini dictionary, capital is accumulated wealth or money with which a business
is started”. In banking, capital has these two meaning. At the onset, capital
in the form of issued and paid up shares is money with which the business of
banking is started.
Overtime, the capital funds of the
bank reflect the accumulated [addition or depletion] of capital.
In good production business, the need
for capital is obvious, as this is required to provide for substantial fixed
capital resources in form of building, plant and machinery, and even working
capital resources in form of raw material. The need for capital resources is
not in the same form business organization in the financial services industry.
In the main, the intelligent of the operators are employed for financial
intermediation between the Savers and borrowers in the economy.
Thus, the banker, the goldsmith, did
not require addition capital beyond what he had a gold smith for his early banking business. However, today, the ingenuity of
banker has to be developed and employed so much that we can talk of banker been
engaged in financial engineering.
Consequently, the issue of cost of
capital has to be considered. Traditionally, the term cost of capital meant
some interest rate paid on borrowed funds. This definition implies that cost is
a cash cost or an out of pocket cost to be paid out in implicit opportunity
cost. Moving from the general case to branding, the concept of cost funds as it
relate to the banking industry was defined by David Durand in 1995 as: The rate
of return required to attract new equity into the business fast enough to keep
pace with the secular increase in bank deposit. Having seen what capital means
and cost associated to it, one may ask. Do banks have solid capital base? The
answer is No. This has been responsible for the distress in the banking sector.
And the government has overtime, regulate the required minimum paid up capital
for banks before starting operation. But the persistent inflationary trend experience
in our economy keeps eroding the capital base. Hence, a lot of people have lost
their jobs, the effect is biting hard on the citizen because the banking sector
employ at least (15 percent) of the Nigeria working population.
Apart from this, the multiplier effects it had on other sector of the economy
ranging from agriculture to manufacturing
have been devastating. This is so, due to role of banks in economic
development.
Be it as it may, the way out is to
find a lasting solution to the problem of the banking sector, through continual
capitalization not occasion by distress. Presently, because of the weak capital
base, they (banks) find it difficult to confidently transact business on behalf
of their customers across the border of his country. In fact only few banks can
boast of giving letter of credit.
Actually, the bank's capitalization
decision and practice influence bank asset structure. And it is in these are of
bank assets, or equivalently how large should be the composition of these are
the main problems bank management.
Conclusively, the biting effects of
economic recession with its attendant survival antidote make it different to
capitalization of banks started along, the establishment of banking industry
and presently the lies on capitalization. This research work will examine and
evaluate the capitalization in banking.
Industry its economic consequences
and further discuss whether the government regulation on the N25 million paid
up capital for banks should be uniform for all banks.
1.2 STATEMENT OF PROBLEM
With the rising inflationary trend,
the government in 2004, saw the need to raise the minimum capital requirement
of bank from N l billion to N25 billion capital base. This is because poor
capitalization is identified as a major factor inhibiting against, bank's
survival. The government also moves into restructuring some of the ailing banks
and liquidate the terminally distressed ones.
In view of this, the research work IS
expected to find solutions to some likely problems, which the banking industry
or customers might face. These problems are outline as follow;
·
To what extent has capitalization affected the operation of banks?
·
What are the ways to be adopted to achieve capitalization before the dead
line of [31 FIRST OF DECEMBER, 2005]?
·
How has capitalization affected the cost of services rendered to customers?
·
How those inflation erode the capital base of the banking sector?
·
Have the capital base of the banks meet up to international standard?
·
Can capitalization standard secure depositor’s funds?
·
Has capitalization brought about operational efficiency?
·
How does capitalization affect the dividend policy of the banks?
1.3 OBJECTIVES OF STUDY
Financial distress syndrome is not an
issue that is peculiar to Nigeria but rather features of global finance
systems. The causes, effect and remedies
for problem failing banks are the same all over the world.
The regulators have been
"defeated" by the problem once it take root as it has always defied all
solution. No doctor regulator has ever been able to find any preventive
vaccine for it,
although they exist some reactive medicine. One of such reactive is
capitalization.
Once the capital of a bank is eroded,
it can easily be affected by other virus, so the purpose of this is to known
economic implication of bank capitalization. Can this capitalization put an end
to the distress now being experience in the banking sector?
1.4 RESEARCH
QUESTIONS.
The research questions that would
guide the Study are;
1. What
is capitalization?
2. What are the effects of
capitalization on performance of banking system in Nigeria?
3. Does capitalization has
positive effects on development and size of banks?
4. Has
capitalization leads to merger and acquisition of banks?
1.5 SIGNIFICANCE OF STUDY
The completion of this research
project would be of great importance to the society as a whole since it will lead them to know the effect of government policies on capitalization
of banks.
·
Capitalization will fill the gap created by inflationary trend, which have
eroded the capital base of banks.
·
With capitalization, customers' confidence will be restored in the banking
system.
·
Finally, the research work will serve as spring board to furthering this
study area.
1.6 RESEARCH HYPOTHESIS
The findings on this project will be
based on the following hypothesis:
·
That capitalization process will give banks good solid capital base for
operations.
·
That capitalization will increase confidence of customers
·
That capitalization will increase financial engineering.
·
That capitalization will increase time volume of transaction both locally
and abroad.
1.7 LIMITATION OF STUDY
The problems to be encountered in the
process of carrying to this Research will include the following:
·
The availability of people to be contracted and their willingness to
express their frank opinion in issues relating to the banks.
·
The collection of the questionnaire raised may not turn in the
questionnaire in time and some may not even give a feedback making it a more
different task.
·
The time to be spent on this research is short.
1.8 ORGANISATION OF STUDY
This study will be divided into five
chapter as follows:
Chapter one focused on the
introduction of study which include back ground of study, statement of problem,
objectives of study, research questions, significance of study, scope and
limitation of the study and organization of study.
Chapter two contain literature review
and theoretical frame fork of the study.
Chapter three contained the research
methodology and method of date analysis.
Chapter four focused on data analysis
and interpretation.
Chapter five contained the summary,
recommendation and conclusion of the study.
1.9 HISTORICAL BACKGROUND OF THE STUDY AREA
The CBN is empowered by the Central Bank
act (as amended) 1991, to “promote stability and sound financial system"
and the Governor of the Central Bank of Nigeria is empowered further by the
BOFIA to "make rules and regulations for the operation and control of all
institutions under the supervision of the bank". The CBN is also
exercising its power as the lender of the last resort.
Prior to 1991, the minimum paid up
capital requirement for banks in Nigeria was N12 million for merchant banks and
N20 million for commercial banks. A review that year moved the requirement to
N40 million and N50 million respectively. This level lasted till 1997 when a
uniform and N 50 million minimum capital was introduced. The reason for
discontinuing the dichotomy was to allow for a level playing field and the
realization that there was no real difference between the capital requirements
of the two categories. It was also to prepare the system for the introduction
of universal of banking. In 200, the minimum capital was moved to N1 billion for new banks while existing banks were expected
to meet this level by December 2002.
N2 million minimum paid up capital
was introduced for new banks in 2001 while existing banks were given until
December 2004 to comply. The reasons for these adjustment include:
(1) Increasing
cost of IT and other infrastructure.
(2) Comparison
with other jurisdictions.
(3) Inflation
and increase interest rate.
(4) Depreciation
of national currency, the Naira.
(5) Strengthening
the operational capacity of deposit money banks.
(6) Minimizing
the bank risk of distress.
There was also the need to curb the
spate of requests for license, which in many cases were not backed with any
serious intention.
The absorptive capacity to run the
banks, supervisory resources, the cut throat competition that was breeding
malpractices, etc.
Presently, the BOFIA has increased
the minimum capital base of commercial banks from NG billion to N25 billion in
2004 and are expected to meet this level by December 2005.
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