EFFECTS OF RECAPITALIZATION IN THE BANKING INDUSTRY IN NIGERIA
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CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Recapitalization of banks is not a new phenomenon. Right from 1958 after the first banking ordinance in 1952 the colonial government then raised the capital requirement for banks especially the foreign commercial bank from 200,000 pounds to 400,000 pounds. Ever since the issue of bank recapitalization have been a continuous occurrence not only in Nigeria but generally around the world especially as the world continues to witness increasing interdependence among national economies/Adegbaju and Olokojo 2008.
The relevance of banks in the economy of any nation cannot be overemphasized. They are the cornerstone the linchpin of the economy of any country. Economic activity as it is known could not be smooth sailing without the continuing flow of money and credit. Consequently, it is submitted that the economic well being of a nation is a function of the advancement and development of her banking industry. This gave raise for Soludo to look into the banking industry of Nigeria for restructuring which gave raise to the 25 billion naira recapitalization and consolidation exercise which took place.
Recapitalization is when a company changes its capital structure which often times is aimed at improving a company’s debt/equity ratio. Capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities while consolidation is -when two companies combined together to form a new company altogether, that is to say, a bigger, more efficient, better-capitalized company and more skilled industry. Consolidation is a term used by the Central Bank of Nigeria (CBN) to describe the coming together of some banks within the country to become one bank and be able to meet CBN’s requirement for capitalization (Recapitalization). Dominic (2012).
The Central Bank of Nigerian’s resolve to carry out reforms in the banking sector which was borne out of the past of the nations banking industry. Between 1994 and 2003 a space of nine years, no fewer than 36 banks in the country closed shops due to insolvency. In 1995 four banks were closed down. But 1998 may go down well in history as the year for the banking industry as 26 banks closed shops that year. Three terminally ill banks also closed shops in 2000. In 2002 and 2003 at least a bank collapsed. The failed banks which gave rise to recapitalization had two things in common; small size and unethical practices’. Of the 89 banks that were in existence as at July 2004, when the banking sector reforms were announced, no fewer than 11 banks were in distress. According to the CBN, between 69 and 79 of the banks were marginal or fringe players Umar (2009).
It is on this ground that the study seeks to assess the effect of recapitalization on banking industry in Nigeria.
1.2 Statement of the Research Problem
There have been constant issues on the falling standard of banking industry in Nigeria and bank liquidating base on mismanagement of customer fund, living there customer with nothing to go home with from their savings and investment.
The banking recapitalization and consolidation in Nigeria of 2004/2005 to a minimum of N25 billion in asset base and the associated financial innovations generated an unprecedented degree of expansion and competition in the banking industry. Dominic (2012).
Problems which the study will attempt to tackle and provide solution to are:
- Examine the effect of recapitalization on banking industry in Nigeria.
- The degree of compliance with recapitalization provision
- The challenges militating against effective recapitalization in Nigeria.
1.3 Aims and Objectives of the Study
The main aim of the study is to access effect of recapitalization on the banking industry in Nigeria
Research Questions
For the purpose of this study the following research question would be addressed in the course of the project.
- What are the effects of recapitalization on Nigerian banking industry?
- The increase from 2billion to 25billion asset base developed the Nigerian banking industry?
1.5 Research Hypothesis
This research hypothesis will be treated]
Ho: Bank recapitalization in Nigeria has no significant effect on the Nigerian economy.
Hi: Bank recapitalization in Nigeria has significant effect on the Nigeria economy.
1.6 Significance of the study
This work would be of great important to many investors, share holders, banking industry, stakeholders, government, researchers and student in the sense that investors would be able to relay on the industry that they are investing in with the mined that their money will be utilized and it will yield good interest as well as shareholders, banking industry, investors, government will be able to regulate their activities to put more effect were necessary.
1.7 Scope and limitation of Study
The study is carried out on First Bank of Nigeria Plc office. First Bank plc is chosen because it is one of the banks that the shareholders fund was in excess of N25 billion prior to the recent re-capitalization period. The issues covered that of identification of the effectiveness of Central Bank in administering recapitalization policy in Nigerian banking sector and also to asses the effectiveness of recapitalization on Nigerian economy,
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