ABSTRACT
The purpose of this research work was to examine the
challenges faced by recapitalisation of banks in Nigeria. Hypotheses were
formulated in view of the challenges identified and to meet the objective of
the study.
Questionnaires were designed and administered on sixty
randomly selecte4d executive of five banks (Union Bank, First Bank,
Intercontinental Bank, Guardian Express Bank and Standard Trust) all located in
Anambra State of Nigeria. Out of sixty questionnaires distributed, fifty–five
were found useful to study.
A thorough analysis using percentages and chi-square test
revealed that bank consolidation will help to broaden the ownership base of
Nigeria banks and as such tend to separate ownership from management as far as
possible. This in turn will enhance management effectiveness. In addition, it
was found that consolidation will enhance control and supervision of the
banking industry by the CBN because the number of banks operating within the
system will be reduced significantly. This will enhance the supervisory and
regulatory role of the CBN in the industry and this will improve the quality of
services offered to customers.
In particular, recapitalisation of banks will facilitate the
economic growth of the nation because more credit will be channeled to the real
sectors of the economy.
From the result of the study, we conclude that the newly
consolidated banks need to employ highly qualified and competent professional
in order to meet the expectation of shareholders in terms of returns on their
equity and in order to compete favourably in a globalised world economy.
CHAPTER ONE
1.1 BACKGROUND OF
THE STUDY
Banking institutions require adequate capital to function
effectively. This can be explained from the Fact that banking is a highly
leveraged industry with risky assets and liabilities and thus can be described
as a conditionally solvent institution.
In Nigeria, the need for adequate capitalization of banking
has being a source of concern to regulatory bodies especially the CBN. Over the
years, the monetary authorities in the country have stipulated minimum capital
requirements for the banking industry. For instance as a result of incessant
bank failures recorded during the Free Banking era, the 1952 Banking Ordinance
stipulated a minimum paid-up capital of N25000 and N200,00 for indigenous and
expatriate banks respectively.
Ever since then, the minimum capital requirements of banks
has been experiencing huge increment that in the year 2003 with the subsequent
introduction of universal banking into the country in 2001, the CBN directed
all banks operating in the country to store-up their base to a minimum paid-up
capital of N2 billion.
Shortly afterwards in July, 2004 with the assumption of
office of the governor of CBN Prof. Charles Soludo. He came up with his 13
point reform agenda of the financial system. Under the reform, banks were
directed to recapitalise to the whooping tune of N25 billion before the end of
December 31st, 2005. The main aim of this recent order by the CBN for banks to
increase their capital base is to achieve the consolidation of Nigerian banks
through mergers and acquisition.
Although a lot of controversies has surrounded this directive
by the CBN, the point is that with adequate capital, public confidence on
Nigeria banks will be maintained. With adequate capital, banks will be able to
absorb unexpected or unusual losses not absorbed by normal earnings. Also,
adequate capital will enable bank to attract additional funds in the market and
to assuage the confidence of the depositors, the regulatory authorities and the
general public on the banks ability to continue in business to discharge their
obligations effectively and (Nwankwo G.O.).
It therefore follows ensuring adequate capital is of
fundamental importance to bank management. In this connection, a broad
consensus exists that high priority should be attached to restoring sound capital ratios and to
improve the profit performance of banks in the face of increased vulnerability
of banking that has resulted from greater economic and financial instability
and the growing interdependence of financial institutions and markets all over
the world.
1.2 STATEMENT OF
PROBLEM
The issue of capitalization and management of capital funds
of banks have drawn much attention in this era of globalization and Information
Technology explosion. As a result, failure to give it the attention it deserves
can pronounce doom for a bank.
For instance, one of the antidotes prescribed for the arrest
of the distress syndrome and instabilities being experienced in our banks today
has been the need for our banks to be adequately capitalized. Without adequate
capital, a bank will not be able to compete favourably well in international
financial market and also will not be able to cope with the sharp increase in
the volume of business done by banks in this period of economic deregulation.
Furthermore, capital inadequacy has been pointed as the main
impediment to quality service delivery and inability of banks to extend credit to the preferred sectors of the
economy. And this has been the major reason for the underdevelopment of the
economy. The problem of the study is therefore to find out if increased capital
base for banks will bring about the derived financial capital sector stability.
1.3 OBJECTIVE OF
THE STUDY
This research work is aimed at achieving the following
objectives:-
To investigate the need for adequate capitalization of
Nigerian banks.
To analyse the various ways in which banks attempt to achieve
recapitalization.
To highlight on the challenges posed by consolidation to the
management of Nigerian banks.
To examine the benefits of recapitalisation to Nigerian banks
and the entire economy.
1.4 FORMULATION OF
HYPOTHESIS
Ho: The level of
capital has no significant effect on the profitability of a bank.
H1: The level of
capital has a significant effect on the profitability of a bank.
Ho: Capitalization
of a bank has no direct relationship with the volume of credit extended to the
real sectors of the economy.
H1: Capitalization
of a bank has a direct relationship with the volume of credit extended to the
real sectors of the economy.
Ho: There is no
significant relationship between level of capitalization and efficiently of the
banking system.
H1: There is a
significant relationship between the level of capitalization and efficiency of
the banking system.
1.5 METHOD OF
STUDY
This research work tends to study the challenges posed by
recapitalisation of Nigerian banks by sampling the opinions of bank executives
within Awka and Onitsha territory. The total number of the bank executive which
is estimated to be two hundred and forty (240) will form the population of the
study.
Simple random sampling will be used to select a sample of
sixty (60) executives of these banks that are going to be studied. The banks to
be studied include Union Bank Hallmark Bank. These banks are expected to
express the opinions of the banking industry because they represent both first generation and new generation banks opening in the
country.
Questionnaires will be used to collect data. While the
responses obtained from the questionnaire administered to respondents will be
analysed with the responses categorized into “Strongly Agreed” to “Strongly
Disagree” and presented in tales.
Finally, the hypothesis formulated will be tested using
chi-squate test (x2).
1.6 SCOPE OF THE
STUDY
This research work is prospective since the consolidation is
still in progress and therefore the study will be limited to the present impact
and problem posed by the consolidation on the banking industry and not on the
economy as a whole.
The study will focus more in the areas of management
efficiency, credit extension, quality service delivery and meeting with the
expectation of the shareholders etc.
1.7 LIMITATIONS OF
THE STUDY
The researcher encountered the following problems while
carrying out this research work;
Time constraint – The time set aside for this work is too
short.
Financial constraints – Lack of finance made it difficult for
the researcher to cover most of the banks operating in Nigeria, and to reach
out to a large area of the country.
The busy nature of banks executives made it difficult to
return all the questionnaires administered to them.
Difficulty in getting information needed due the level of
confidentiality of bank documents, and sometimes lack of confidence and/or adequate
knowledge on the part of the respondent.
1.8 DEFINITION OF
TERMS USED
Recapitalisation: This is defined as the enhancement and
restructuring of the financial resources of a bank with a view to enlarging the
size of the long term funds available to the bank.
Adequate capital: This is defined as that quantum of funds
which a bank should have or plan to maintain in order to conduct its business
in a prudent manner. Similarly, it can be viewed functionally, as the amount of
capital that can effectively discharge the primary capital function of
preventing bank failure by absorbing losses.
Mergers: This is a legal arrangement whereby assets of two or
more banks become vested in or under the control of, one company, which has as
its shareholders, all or substantially all, the shareholders of those banks in
the arrangement. It can in other words be seen as a commercial or economic
marriage among banks or roughly equal size that is evidenced by signing of memorandum
of understanding among the banks.
Acquisition: This is a situation where a bank acquires
control of another company, usually a smaller bank than the acquiring bank. It
involves take over of management of usually a smaller bank by a bigger bank.
Bank distress: This is defined as when a bank is unable to
meet its obligations as a result of weakness in their financial, operational
and managerial capabilities which render the bank illiquid or insolent.
Non-performing credit: These are loans and advances in which
repayment of principal and or interest are not up to date and as such have been
classified as either substandard, doubtful or lost.
Real sector of the economy: This is defined as the sector of
the economy that plays a crucial role to the economic growth and development of
the nation. This sector includes the agricultural sector, manufacturing sector
and the SMEs.
Capital of reserve: This implies depleting banks general
reserves so as to achieve recapitalisation. The extent to which this is done
depends on the other activities that may need to be financed through the
reserves such as pension and gratuity and reserve for SMIEIS.
Capital market: This is the market where long-term funds are
mobilized for investment purposes. The funds mobilized in these markets can be
inform of equity stock, debentures etc. The capital market enhances the
mobilization of financial resources form the general public and channeling them
to accumulation of capital.
Initial public offer (IPOs): It is an offer for subscription
by a company for its own shares made for the general public for the first time.
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Item Type: Project Material | Size: 109 pages | Chapters: 1-5
Format: MS Word | Delivery: Within 30Mins.
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