ABSTRACT
One of the major
macroeconomic variables that compliment bank performance is availability of
capital. Economic theories show that inadequate capital contributes to bank
failures and retards economic growth. This study however, examined the impact
of bank recapitalization of banking industry on economic growth of Nigeria. It
is the aim of this research work to examine the past bank failures as a result
of inadequate capital and how recapitalization exercise in the banking industry
in Nigeria has increased the minimum paid-up capital and increased the banks’
asset qualities. This research work is carried out to achieve some objectives
among which are: to examine the impact liquidity ratio on economic growth in
Nigeria pre and post capitalization 2005, to determine the impact of cash
reserve ratios on economic growth in Nigeria pre and post capitalization 2005,
to examine the impact of money supply on economic growth in Nigeria pre and
post capitalization 2005, to examine the impact of loan-to-deposit ratio on economic
growth in Nigeria pre and post capitalization in 2005. The methodology adopted
for this work was based on the use of tables and charts, which established
structured relationship between the variables studied. The data collected were
only from secondary data and variable specification used were dependent and
independent variable: while GDP was used as dependent variables, money supply,
loan-to- deposit ratio and cash reserve ratio are independent variable. The
findings indicate that liquidity ratio, cash reserve ratio have no positive and
significant impact on economic growth of Nigeria as opposed to money supply to
GDP and loan to deposit of commercial bank that have positive but
non-significant impact on economic growth in Nigeria. It is, however, recommended
that government should make policies that are less stringent and more
favourable for the operators to have room to operate more freely.
TABLE OF CONTENTS
CHAPTER
ONE
INTRODUCTION
1.1 Background
of the study
1.2 Statement
of the problem
1.3 Objectives
of the study
1.4 Research
questions
1.5 Research
hypotheses
1.6 Significance
of the study
1.7 Scope
of the study
1.8 Limitations
of the study
CHAPTER
TWO
REVIEW
OF RELATED LITERATURE
2.0 Introduction
2.2 Role
of banks in the Nigerian economy
2.3 The
concept of capital base
2.4 Trends
in bank consolidation
2.5 Reasons
for concern over capital adequacy in Nigerian banks
2.5.1 Regulatory
and legal framework of capital adequacy
2.6 The
position of the banking sector before consolidation in Nigeria
2.6.1 Consolidation
strategy of CBN and the emergence of mega banks
2.6.2 Bank
consolidation through mergers and acquisition
2.6.3 Approval
under merger and acquisition
2.6.4 The
role of Security and Exchange Commission, Central Bank of Nigeria, Nigerian
Stock
Exchange and Corporate Affairs Commission as regulatory authorities in mergers
and acquisitions
2.6.5 Impact
of consolidation exercise on the Nigerian economy
CHAPTER
THREE
RESEARCH
METHODOLOGY
3.0 Introduction
3.1 Research
design
3.2 Sources
of data
3.3 Research
model
3.4 Explanation
of model variables
3.5 Techniques
of analysis
CHAPTER
FOUR
PRESENTATION
AND ANALYSIS OF DATA
4.1 Presentation
of data
4.2 Test of
hypotheses
4.2.1 Test
of hypothesis one
4.2.2 Test
of Hypothesis Two
4.2.3 Test
of Hypothesis Three
4.2.4 Test
of hypothesis four
4.3 Implications
of results
CHAPTER
FIVE
SUMMARY
OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary
of findings
5.2 Conclusion
5.3 Recommendations
5.3.2 Recommendation
for further studies
REFERENCES
CHAPTER ONE
INTRODUCTION
1.1 Background of the study
Globally, the
activities of banks reflect their unique roles as the engine of growth in any
economy. The role which comes from both banks and non-banks financial
intermediaries and the regulatory framework in stimulating economic growth is
widely recognized especially in developmental economics. Uboh (2005) set the
pace for the landslide of other works on the interdependent and the
relationship between banks and economic growth.
Stressing further, the
pioneering work of Guiley and Shaw (1956) on the relationship between real and
financial developments shows that financial intermediaries, monetization and
capital formation determine the path and pace of economic growth and
development of any country. Nevertheless these pivotal roles have not been
highly noticeable in Nigeria. The scenario arises as a result of poor
performances of Nigeria commercial banks. According to Soludo (2004), “The
Nigeria banking system today is fragile and marginal. The system faces enormous
challenges which if not addressed urgently could snowball into a crisis in the
near future”. Soludo identified the problems of the banks, especially those
seen as feeble, as persistent liquidity, unprofitable operations and poor asset
base.
Imala (2005) posited
that the objectives of banking system are to ensure pure stability and
facilitate sustainable rapid economic development. Regrettably, these
objectives have remained largely unattained in Nigeria as a result of some
deficiencies in the banking system. This phenomenon has necessitated continuous
financial sector reforms globally. In 1988, an international agreement among
the banking authorities known as Basle agreement was reached. The main
objective of this was to apply a common set of rules for capital adequacy in
order to minimize the risk of bank failures. In compliance with the Basle
agreement, the governor of Central Bank of Nigeria Professor Charles Soludo
announced on July 6, 2004 that the banking sector should increase their capital
base with about 100% (from initial capital base of _2 million to a whopping _25
billion). The policy directives of this initiative according to the C.B.N
Governor are ita alia.
(i) To strengthen the
commercial banks thereby intensifying the growth of the economy.
(ii) To encourage
competition locally and internationally in conformity with the new trend of
globalization.
The kernel of this
argument is that with this new policy of recapitalization, banks that cannot
meet the required amount will have to merge with bigger or stronger ones.
Following the implementation of the policy, an unprecedented process of
recapitalization has taken place in Nigerian sector shrinking the number of
commercial banks from 89-25 banks. No other event is more challenging than this
recapitalization policy in the history of Nigeria banking. Prior to the
reformation, the state of Nigeria banking sector was very weak. It’s fragile
and marginal being plagued by persistent liquidity, unprofitable operations,
poor asset base and intermittent failures. It was expected that the reform should
promote efficiency, better banking performance, operational stability,
profitability and reduce bank failures.
According to Imala
(2005), the current structure of the banking system has promoted tendencies
towards banking effectiveness and efficiency particularly at the retail level.
1.2 Statement of the problem
The Nigerian 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 the challenges posed
by deregulation of the financial sector, globalization of operations,
technological innovations and adoption of supervisory and prudential
requirements that conform to international standards. As at the end of June
2004, there were 89 deposit banks operating in the country, comprising
institutions of various sizes and degrees of soundness. Structurally, the
sector is highly concentrated, as the ten largest banks account for about 50
percent of the industry’s total assets/liabilities. Most banks in Nigeria have
a capitalisation of less than $10 million. Even the largest bank in Nigeria has
a capital base of about US $240 million compared to US $526 million for the
smallest bank in Malaysia. The small size of most of our banks, each with
expensive headquarters, separate investment in software and hardware, heavy
fixed costs and operating expenses, and with several branches in few commercial
centres – lead to very high average cost for the industry. This in turn has
implications for the cost of intermediation, the spread between deposit and
lending rates, and puts undue pressures on banks to engage in sharp practices
as means of survival.
Inspite of the efforts
pulled together by the regulatory authorities to revitalize the institution,
Nigerian banking sector continued to witness pockets of distress that led to
the consolidation reform agenda. Moreover, while copious studies and reports
have provided results for pre and post consolidation exercise in Nigeria, comparatively,
little has been done to provide a comprehensive assessment on how the
consolidation, merger and acquisition would impact on bank services. It is
therefore, necessary to undertake a critical study of how the impact of
recapitalization exercise by the Central Bank of Nigeria towards enhancing the
performances of commercial banks in Nigeria can lift the economic standards of
this country.
1.3 Objectives of the study
The set objective of
this study is as follows:
(i) To examine the
impact of liquidity ratios on economic growth in Nigeria, pre and post
capitalization exercise in 2005
(ii) To determine the
impact of cash reserve ratios on economic growth in Nigeria, pre and post
capitalization exercise in 2005
(iii) To examine the
impact of money supply on economic growth in Nigeria pre and post consolidation
in 2005
(iv) To examine the
impact of loan-to-deposit ratio on economic growth in Nigeria pre and post
consolidation in 2005
1.4 Research questions
This following
research questions will emanate in this study. These are:
(i) To what extent do
liquidity ratios pre and post consolidation have positive and significant
impact on economic growth in Nigeria.
(ii) How far does cash
reserve ratios of commercial banks pre and post have positive and significant
impact on economic growth in Nigeria
(iii) To what extent
does money supply have positive and significant impact on economic growth pre
and post consolidation.
(iv) To what extent
does loan to deposit ratio have positive and significant impact on economic
growth in Nigeria pre and post consolidation.
1.5 Research hypotheses
The following research
hypotheses will arise for the research question raised above. These are;
(i) Liquidity Ratio of
commercial banks does not have positive and significant impact on economic
growth pre and post consolidation in Nigeria
(ii) Cash reserve
ratio of commercial banks does not have positive and significant impact on
economic growth in Nigeria pre and post consolidation in Nigeria.
(iii) Money supply of
commercial bank does not have positive and significant impact on economic
growth in Nigeria pre and post consolidation in Nigeria.
(iv) Loan to deposit
does not have positive and significant impact on economic growth in Nigeria pre
and post consolidation in Nigeria.
1.6 Significance of the study
In the wake of bank
failures, the economy suffered severe stress. Many depositors lost their
hard-earned money; many suffered starvation because their breadwinners lost
their jobs in the process. People from different sphere of life have commented
on this seemingly topical issue as it touches the very fabric of the national
economic life. The study is being embarked upon as a way of further
investigating the issue in a view to justifying the ongoing recapitalization
exercise as directed by the Central Bank of Nigeria and how it would affect the
Nigerian economy.
The research will be
of benefit to practicing bankers, students of Business Studies seeking to study
the Nigerian Banking Industry and the entire public who need to have knowledge
of the recapitalization and consolidation of the Nigerian Banking Industry.
1.7 Scope of the study
In carrying out this
research, attention would be focused on commercial banks’ consolidation (N25
billion capital base) and its effects on the Nigerian economy. The scope would
have included other consolidation exercises around the world’s commercial banks
but due to lack of finance and time, this could not be feasible.
1.8 Limitations of the study
This research work
would have been appreciated mostly if it had captured a deep study of
consolidation, merger and acquisition of commercial banks in Nigeria but
because of the following constraint, it was found difficult.
(i) Financial Constraint: Financial problem was
encountered by the researcher to carry out a detailed study of this research
work. Limited capital at the researcher’s disposal restricted is gathering of
enough materials for the purpose of undertaking this research work.
(ii) Time Constraint: Time was not of essence to
embark on a more detailed work because the curriculum the degree programme is
designed in such a way that courses are registered together with project
thereby creating difficulties in conducting intensive work.
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