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CHAPTER ONE

1.0     BACKGROUND OF THE STUDY

The recapitalization and consolidation exercise in the banking industry by the former Central Bank of Nigeria Governor, Professor Charles Soludo has necessitated the need for different organization to engage in corporate Consolidation (mergers and acquisition). The concept of recapitalization refers to the current trend of compelling all commercial banks to raise their capital base from 2billion to 25billion Naira by the Central Bank of Nigeria on or before 31st December 2005. This has sent some of these banks on the move to consider Merger and Acquisition as a survival strategy.

WHERE WE WERE BEFORE CONSOLIDATION

89 banks with 3,382 branches predominantly in the urban centres as at June 2004   characterized by structural and operational weaknesses such as:

Low capital base ; Dominance of a few banks Insolvency and illiquidity. Over dependence on public sector deposits and foreign exchange trading. Poor asset quality. Weak corporate governance; A system with low depositor confidence. Banks that could not effectively support the real sector of the company at 24% of GDP, compared to Africa average of 78% and 272% for developed countries.

1.0.1 THE VISION OF CONSOLIDATION ARE AS FOLLOWS:

As Africa’s financial centre and CBN as one the best in the world Facilitate evolution of a strong and safe banking system Improve transparency and accountability in the sector Drive down the cost structure of banks and make them more competitive and development oriented A new Banking system that depositors can trust and investors can rely upon usher in a new economy

There are indications that banks are now favourably disposed to Consolidation (merger and acquisition) after considering various options available to them on account of the introduction of the 25billion Naira recapitalization, which will also send most of the banks Managing Directors and their boards to meetings and marshalling of game plans from the preliminary reports from the negotiation table, banks could have several options to explore. In an attempt for banks to meet up with the new requirement, some Banks are exploring the option of inviting foreign investor to buy into Banks. Other are looking at the possibility of getting investor to shore up their capital, and some are looking at the capital market option, while others are considering mergers and acquisition.

This process of recapitalization of recapitalization and restructuring of Nigeria (commercial) banks has been gathering pace since the decision was made by CBN on the recapitalization of Nigeria Banks from 2billion to 25billion naira by December 31st, 2005. The proposed recapitalization as confirmed by the CBN governor, Professor Charles Soludo, is a subtle way to compel Nigeria Banks to merger so as to strengthen in totality the Nigeria banking system through Consolidation (mergers and Acquisition). The process would further enable the banking sector to meet up with international standards.

Apart the pronunciation by Professor Charles Soludo, the recent change in banking has necessitated the need for different banks to engage in corporate Consolidation. The Oxford Advance learner English dictionary fourth edition (1999), defines consolidation as a positive of power or success stronger so that it is more likely to continue and Merger as the combination of commercial companies into one. Acquisition on the other hand was defined by another source as a company taking a controlling ownership interest in another firm, could be legal subsidiary of another firm or selected asset of another firm.

It may involve the purchases of another firm asset or stock with the acquired firm continued to exist as a legally owned subsidiary require. For the purpose of this study, mergers and acquisitions will be deemed to have occurred when two or more organisation join together all or part of their operations. Globally, such business combinations have involved various sizes of companies as well as assets and have cut across economic sectors. While many business combinations have been well received by parties involved, other have done so with stiff resistance often resulting in long battles to prevent the combinations.

With the latest CBN regulation and the systematic withdrawal of Federal funds from the banks, a lot of banks are on the brink of extinction. As a result of this a lot of banks are now either going public or trying to position themselves as banks of  choice for possible merger or acquisition by other banks. This new development would also impact on employment, as most top management would be affected and other young staff would be thrown into the labour market in the bid to have the required number of directors by the regulatory authorities and on the economy at large.

In Nigeria today, a number of banks wanting to merge may run into difficulties, because most Nigeria banks are not quoted on the stock exchange and the assets of some are really bad. The effect of the merger is that merging banks in the country, under the current dispensation may lose their licenses and be issued new ones to reflect the new consolidated outfit. As we go on in the subsequent chapters, further critical look shall be taken on the effect that this development is likely to or will have on the Nigeria banking industry and the economy at large.

1.1    STATEMENT OF PROBLEM

Business organisations are recently seeing Consolidation (Mergers and Acquisition) as an alternative means of recapitalizing. The current trend of compelling all commercial banks to raise their capital base from 2billion to 25 billion naira by CBN on or before 31st December 2005 has sent some of these banks on their heels to consider Merger and Acquisition as a survival strategy.

The expected problems regarding consolidation are

There exit a high degree of calculated risk taking to tap opportunities that come the way of business, but there is risk avoidance in Nigeria business and where risk is low, development is also low and industrial advancement becomes near static.

Consolidation could be a very expensive venture in terms of funds required to prosecute it successfully.

Corrupt practices at public and private sector levels are another impediment. This need to be discouraged and incidence of corrupt practices should be severely punished because consolidation deals require confidence and trust to promote consummation.

Nigeria suffers anaemically from lack of information which may unfortunately hinder significant leaps in business combinations

1.2     OBJECTIVE OF THE STUDY

The fundamental objectives of this study are

To assess the implication of consolidation on the banking industry To examine the impact of consolidation on the Nigeria banks. To highlight possible challenges posed by the policy of bank consolidation Assess Nigeria banks before consolidation Identify the benefits of bank consolidation Evaluate the prospect of banks after consolidation Assess the implication of consolidation on banks in Nigeria

1.3    SIGNIFICANCT OF THE STUDY

The significance of this study is to add to the general body of knowledge, enlighten the general public on the effect of bank consolidation on the performance of banks in Nigeria. And also explain the challenges of bank consolidation. This research work would also establish the fact that consolidation (merger and acquisition) is a veritable means for fostering banking growth.

1.4    SCOPES AND LIMITATION OF STUDY

The scope of this study is to know the challenges of bank consolidation.

Due to the financial constraint coupled with available, the research will make use of available materials in the Securities and Exchange Commission’s library. Central Bank of Nigeria(CBN) and Association of Issuing Houses of Nigeria’s library where books relevant to the research topic will be consulted and the internet.

1.5     RESEARCH QUESTION

The question on this research work is

Is there significant relationship between capitalisation and liquidity ratio of banks in Nigeria? Is there significant relationship between capitalisation and loan to deposit ratio?

1.6     RESEARCH HYPOTHESES

Baridam (2001) defined hypotheses as a tentative answer to the problem. The following hypotheses will be formulated from the objectives and will be verified in the course of this research work and noted as null from guide us in finding the solution to the problem that is induced in this research work.

HO:   There is no significant relationship between capitalisation and liquidity ratio of banks in Nigeria

HO:   There is no significant relationship between capitalisation and loan to deposit ratio?

1.7     DEFINATION OF TERMS

Bank Re-capitalization: It is the act of supplying long-term funds of the owners of the bank to meet the requirement of monetary authority. Osiegbu (2005). Consolidation: It is the reduction in the number of banks and other deposit taking institution with a simultaneous increase in the size and concentration of the consolidation entities in the sector (BIS, 2001:2) Merger: It is the combination of two or more separate firms into a single firm Acquisition: It is where a company takes over the controlling shareholding interest of another company

1.8     ORGANIZATION OF THE STUDY

The research work will be made up of five chapters as follows:

CHAPTER ONE: This consists of the introduction, statement of the problem, purpose of the study, research questions, research hypothesis, significance of the study, limitations of the study, organization of the study and definition of terms.

CHAPTER TWO: This section consists of reviews of relevant literature of renowned authors in the field of this study.

CHAPTER THREE: This section entails the methodology selected by the researcher of the study. It entails research design, sample procedure, data collection, operational measure of the variables, and data analysis technique.

CHAPTER FOUR: This consists of a vivid presentation and analysis of data collected from relevant sources for the study.

CHAPTER FIVE: This is the last section of the work and it consists of discussion, conclusion and recommendations made by the researcher.

CHAPTER TWO

2.0    THE CONCEPT OF CAPITAL BASE

The recent call for recapitalization in the banking industry has raised much argument among the bank regulators, promoters and depositors as if shoring up of bank’s capital base is a new phenomenon in Nigeria. Historically, the failure of pioneer z1930′s and 1940′s brought about the enactment of banking ordinance of 1952. Banking ordinance of 1952 prescribed an operating licence and emphasized on minimum equity capital for all banks (Onoh, 2002: 321). Since then, raising of bank capital has become the hallmark response policy of the Nigerian monetary authorities.

Capitalization is an important component of reforms in the banking industry, owing to the fact that a bank with a strong capital base has the ability to absorb losses arising from non-performing liabilities (NPL). Attaining capitalization requirement is achieved through consolidation, convergence as well as the capital market. Thus, banking reforms are primarily driven by the need to achieve the objectives of consolidation, competition and convergence. (Deccan Herald,2004), in the financial architecture.

2.1      THE POSITION OF THE BANKING SECTOR BEFORE

CONSOLIDATION

There was existence of eighty-nine (89) banks predominantly in the urban centres as at June 2004, Characterized by structural and operational weakness of low capital base. Dominance of a few banks insolvency, and illiquidity over dependence on public sector deposits, and foreign exchange, trading. Poor asset quality, weak co-operate governance, a system with low depositor confidence. Banks that could not effectively support the real sector of the economy at 24 percent of GDP compared to African average of 87 and 272 percent for developed countries.

Furthermore the vision of consolidation amongst others includes becoming Africa’s financial centre and CBN as one of the best in the world. Within ten years, Nigerian bank(s) should be among the top 50 0f the 100 banks in the world. Facilitate evolution of a strong of a save and strong banking system. Improve transparency and accountability in the sector. Drive down the cost structure of banks and make them more competitive and development oriented. A new banking system that depositors can trust and investors can rely upon to usher in a new economy.