Full Project – REGULATION AND BANKING SUPERVISION: PRE AND POST MERGER REVIEW

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CHAPTER ONE 

INTRODUCTION
1.1 Background of the Study The banking industry of any nation is the key driver of its economy. It is the prime mover ofthe economy as no economic activity will sail smoothly without adequate funds, the bulk of whichis provided by the banking sector. Banks therefore occupy a significant place in the economy ofevery nation. It is therefore not surprising that their operations are perhaps the most heavilyregulated and supervised of all businesses (Soyibo and Adekanye, 1991). Banks play a crucial role in propelling the entire economy of a nation. It is thereforenecessary to reposition them for efficient financial performance through a reform process gearedtowards forestalling bank distress. The performance of banks in Nigeria prior to the 2004consolidation exercise could be described as being characterized by a high regime of insolvency,vulnerability to systemic financial crises and macro-economic instability (Obideyi, 2006). Therewas a serious incidence of distress and technical insolvency in the banking sector; the capital baseof the banks was so low that they could not absorb losses occasioned by non-performing riskassets, keen competition and poor management. Okpanachi (2011), observes that most Nigerianbanks could not perform well due to operational hardship and expansion bottlenecks as a result ofheavy fixed and operating costs. There were also serious cases of insider abuse, loss of confidenceby the customers and shareholders of the banks and long customer queues in the banking halls. Generally, the level of capitalization of the banks was quite low and they exhibited various formsof weaknesses and bankruptcy (SEC Quarterly, 2005). Earlier recapitalizations exercises,particularly those of 2000 and 2001 which raised the capital base of merchant and commercialbanks to a uniform level of N1 billion and N2 billion respectively, were discovered to beinadequate for the survival of the Nigerian economy (Bakari, 2011). This led the Central Bank ofNigeria (CBN) to direct all commercial banks to raise their paid-up capital to a minimum ofbillion or consolidate through mergers and acquisitions by December 31, 2005. According toSoludo (2004), the major goals of the CBN consolidation exercise were to: (i) create a sound andmore secure banking system that depositors could trust (ii) build domestic banks that investorscould rely upon to finance investments in the Nigerian economy and (iii) improve bank’sefficiency and encourage competition with the goal of lowering interest rates and providingaffordable credits to the economy, among others. The mergers and acquisition of the banking industry in Nigeria, just like other countries around the world, made the banks more capable, active, better funded and well advanced in this area. Mergers and acquisition are policies presented to inform or to take into account the financial institutional problems. The accomplishment of the banks is examined by looking at two performance measures called the efficiency and the profitability. The consolidation of the banks has been quickened in the last 10 years. More importantly, more figure of the consolidation in this area took place around the governmental surrounding. In a related study of the Chilean bankingindustry, Kwan (2002) suggested that the high rate of economic activities experienced in Chile was mainly from the productivity’s improvement from the large banks formed as a result of mergers and acquisitions. Central Bank of Nigerian Governor Charles ChukwumaSoludo started a fresh set of rules and regulation in the country’s banking system on July 6, 2004. The bank chief (Soludo) outlined his position at the gathering of senior ranked officers of the banking industry during a special general meeting. He spoke and told the country’s bankers group in charge on a long-term discussion regarding the financial impact of banking sectors field and the size of one by one bank. The bank chief Soludo interposed saying that Nigerian financial framework can fully benefit through several combinations or alliance amongst several banks. He clearly mentioned that only those financial institutions that have the least capital needed ($172,000,000 in 2005 roughly) 25 billion naira notes best before the December 31, 2005, which would be given the chance to have in hand the general public sector money and to publicly sell out their shares. The governor realized that his desire was in benefit of a sector where small number of banks could conquer the Nigerian financial sector; thereby opened a way for a new idea of banking industry in mergers and acquisition.

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Full Project – REGULATION AND BANKING SUPERVISION: PRE AND POST MERGER REVIEW