Bank-Recapitalization And The Growth Performance Of Nigerian Banks

Bank- Recapitalization And The Growth Performance Of Nigerian Banks (1986-2007)

Abstract

This paper reviews the perspective of banking recapitalization and growth performance in Nigeria, since 1986 to date. It notes four eras of banking sector reforms in Nigeria, viz: the post-SAP (1986-1993), the Reforms Lethargy (1993-1998), Pre-Soludo (1999-2004) and post Soludo (2005-2007). Using both descriptive statistics and econometric methods, three sets of hypothesis were tested: firstly that each phase of reforms  culminated in improved incentives; secondly that policy reforms which results in increased capitalization, exchange rate devaluation; interest rate restructuring and abolition of credit rationing may have had positive effects on real sector credit and thirdly that implicit incentives which accompany the reforms had salutary macroeconomic effects. The empirical results confirm that eras of pursuits of market reforms were characterized by improved incentives. However, these did not translate to increased credit purvey to the real sector. Also while growth was stifled in eras of control, the reforms era was associated with rise in inflationary pressures. Among the pitfalls of reforms indentified by the study are faulty premise and wrong sequencing reforms and a host of conflicts emanating from adopted theoretical models for reforms and above all, frequent reversals and/or non sustainability of reforms. In concluding, the study notes the need to bolster reforms through the deliberate adoption of policies that would ensure convergence of domestic and international rate of return on financial markets investments.  

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CHAPTER ONE

INTRODUCTION

1.1       Background Of The Study

The banking system in any economy plays the important role of promoting economic growth and development through the process of financial intermediation.  Plays the vital role of financial mobilization and intermediation in an economy. In the work of Schumpeter (1911) he argued that financial services are paramount in promoting economic growth. In this view production requires credit to materialze, and one “can only become an entrepreneur by previously becoming a debtor….what [the entrepreneur] first wants is credit. Before he requires any goods whatever, he requires purchasing power. He is the typical debtor in capitalist society”. In this process, the banker is the key banking sector agent. Keynes (1930), in his A treatise on Money, also argued for the importance of the banking sector in economic growth. He suggested that bank credit “is the pavement along which production travels, and the bankers if they knew their duty, would provide the transport facilities to just the extent that is required in order that the production powers of the community can be employed at their full capacity”

However, the Central Bank of Nigeria in pursuit of one of its core mandates of promoting the safety and soundness of the Nigeria financial system has continued to formulate and implement policy measures that are aimed at achieving that statutory objective. As part of its responsibility to promote a sound financial structure, efficient payments and settlement system, the Central Bank of Nigeria carries out supervisory duties in respect of deposit money banks and other financial institution.

The CBN commenced a far reaching and comprehensive reform of the Nigeria banking industry on July 6, 2004 with the announcement of a reform programme for the nation’s banking industry, the main thrust of which required the 89 deposit money banks then in the system to raise their capital base to a minimum of N25 billion each through injection of fresh capital and/or mergers and acquisitions.

Following the policy pronouncement and the subsequent release of the guidelines on bank’s consolidation, the financial system witnessed a frenzy of activities as bank rushed to meet the minimum capital requirement. Many banks went to the capital market to raise additional funds while other entered into merger arrangements.

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Notably, at the close of the first phase of the consolidation programme on 31st December, 2005, 25 banks have emerged which saw the beginning of the growth of intercontinental bank plc, having met the minimum capitalization requirement. It may interest us to note further that before the advent of the exercise in 2004, reputable international financial institutions and rating agencies would not bother to look the way of Nigeria banks for partnership, lending to rating not anymore. By June, 2007, Nigeria banks have become the toast of financial institutions and multilateral agencies across the globe. Even respected international rating agencies are adjusting their ranking in favour of Nigeria banks. (The news, 27 August, 2007. Vol. 29, No 07).

Twenty-five emerged from 75 banks, out of a total of 89 banks that existed as at June 2007. The successful banks account for about 93.5% of the deposit liabilities of the banking system. In the process of complying with the minimum capital requirement, N406.4 billion was raised by banks from the  capital market out which N360 billion was verified and accepted by the CBN; and also the process led to the inflow of FDI of US$652 million and 162,000 pounds sterling, (Central Bank of Nigeria, press conference, 16 January, 2006). Aside from the shrinkage of banks to 25 and the heavy capital mobilization, there are other benefits.

  • The liquidity engendered by the inflow of funds into the banks indeed interest rate to fall drastically while an unprecedented 40% increase has been recorded in lending to the real sector.
  • With higher single obligor limits, our, banks now have greater potential of finance big tick transactions.
  • Already, more bank now have access to credit line from foreign banks (one recently received $250 million from two foreign banks… this is unprecedented.
  • Ownership of the banks been diluted. This will in no small way tame the monster of insider and corporate governance abuse.
  • With virtually all the banks now publicly quoted, there is wider regulatory oversight; with SEC and NSE joining the team. Regulatory resources would now be focused on fewer and more stable banks.
  • Depositor confidence is bound to be greater and interest rates on deposit lower due to “safety in bigness” perception by depositors
  • The banks will of course enjoy economies of scale and consequently, pass on the benefit in the form of reduced bank charges to their customers.
  • The capital market deepened and consciousness about it increased significantly among the population. The market has become more liquid and the total markedly increased. (central Bank of Nigeria, Press Conference, 16 January, 2006)

However, the recapitalization reform measures highlighted above have change the Nigeria banking system fundamentally for the better. Foreign interest in banking system has increased confidence in the system has tremendously improve, banks stocks are one of the most actively traded on the Nigerian stock exchange; Nigerians at home and abroad are investing heavily in the sector. A new banking structure and system has emerged to the pride of all stakeholders.

As at February29, 2008, the extract audited operating results published by Intercontinental Bank plc on vanguard Monday July 14, 2008, showed an unprecedented growth performance of N82.414 million gross earnings in 2007 with an increase at N154, 927 million in the first quarter 2008, an increase of 88% profit tax of N21, 450 million in 2007 and N42, 82 million in 2008, showing an increase of 60%. Tax estimate of 6,636 which rise to 9, 960 in 2008. (50% rises). Profit after tax of N14, 814  million in 2007 with arise of   N32,861 million in 2008, showing 122% of improvement. Other are N782, 050 million of total assts plus contingents in 2007 with a raise of 112% to close at N1,654 billion in 2008, while deposit liabilities is quoted at N457, 29 million with an increase of 132% to close at  N1, 058, 920 billion in 2008.

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However, with the above record one may be tempted to say that banks in Nigeria have recorded a landmark growth performance prior to the recapitalization reform, using intercontinental records as case study.

1.2       Statement Of The Problem

The Nigeria financial system is one of the largest and most diversified in Sub-Sharan African. In recent years, the system has undergone significant changes in terms of the policy environment, number of institutions, ownership structure, depth and breadth of markets as well in the regulatory framework.  However, in spite of the far reaching reform of the past ten years, the Nigerian financial system is not yet in a position to fulfill its potential as a propeller of economic growth and development. The financial system is relatively shallow and the apparent diversified nature of the financial system is deceptive. Although, a wide variety if financial institutions and markets exist, commercial banks overwhelming dominate the financial sector and traditional bank deposits represent the major forms of financial savings.

With over 70 million Nigerians now living in poverty, sustained and equitable economic growth is the key to alleviating chronic poverty. For such growth to take place, abundant capital has to be made available for actors in the real sector. There is abundant empirical evidence on the linkage between a strong, efficient and diversified financial system and economic growth. The decaled strategy of private sector is in a position to provide effective support for the real sector. Small and medium scale (SMEs), which have sustainable potential for employment generation, currently lack reliable access to long term/and often short term credit and other financial services due to the underdevelopment of learning.

In analyzing the Nigeria economy, in the light of growth performance of the banking sector, real sector nexus, there has not been considerable debate in the literature on the relative merits of bank dominated financial systems and capital market dominated financial system in promoting growth (Allen and Gale, 2000). Bank- based or market based financial system tend to promote long term economic growth as banks tend to offer longer loans to the entrepreneurs. In contrast, a market- based financial system is more likely to have short- term affects as firms are primarily concerned with their immediate performance. Given their diverse roles, it is possible for the financial intermediaries and financial markets to have a mutually reinforcing role in the overall development of the financial system.

Given the above analysis, this work tends to evaluate the impact of recapitalization on the growth performance of Nigeria banks, using Intercontinental Bank Plc as a case study. The role of the banking sector on bridging the gap between the financial deficit and the financial surplus has placed some question: how does the bank in Nigeria in response to the recapitalization reform, effectively accumulating savings or encouraging withdrawal in the economy? Does real sector investment response positively to accumulated savings? Is there causal effect on the growth performance of banking sector and the recapitalization reform in the economy  and finally, what is the relationship between accumulated savings, bank loan the gross domestic in Nigeria? To which extent does the banking recapitalization reform have translated to increase credit purvey to the real sector? And finally does this reform help in controlling the inflationary pressures in the economy?

1.3       Objectives Of The Study

This study intends to evaluate recapitalization reform and the growth performance of Nigeria banks. For this purpose, the following objectives are drawn.

  • To ascertain the response of banking sector to the reform as regards growth performance.
  • To find out the impact of banking sector reform on the performance of Nigeria commercial banks.
  • To examine the extent to which reform programms have translated to increase credit purvey to the real sector.
  • To find out how the reform era has manage the inflationary pressures.
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1.4       Statement Of The Hypothesis

Base on the study, the following hypotheses are suggested;

  1. The policy reform which results in increased capitalization has no positive effects on the growth performance of bank in Nigeria.
  2. The reform exercise has not shown any positive effects to the real sector of the economy.
  • The exercise did not help in controlling inflation pressure in Nigeria
    • Significance Of The Study

The most crucial challenge faced by Nigerian economy today has been the provision and supervision of capital for actors in the real sector so as to curb the growing number of unemployed youths and the ravaging effects of poverty. The head role the banking sector plays in this regard cannot be overemphasized. Thus, the apex banking body comes up with the necessary policies to focus the banking sector on this important role. This study will be of immense benefit to policy maker in appreciating the role of the financial sector on real sector performance, and the recent consolidation exercise of the banking sector by the Central Bank of Nigeria. It will assist students through the  provision of framework  upon which  further research in the financial discipline can be carried out. Actors in the real sector and operators in the financial system can be assisted through this research work in appreciating the role of the banking sector on capital accumulation, provision and supervision

  • Scope And Limitations Of The Study

This study on the recapitalization and the growth performance of Nigeria banks will be guided by the objectives as stated above. It has its primary and major focus on the Nigeria economy. It is projected to cover the period of thirty six years (36 years), from 1970 to 2006, which is subdivided into pre-SAP (1970-1985) and post SAP (1986-1993), Reforms Lethargy (1987-1998) and pre/post Soludo (1999-2006). This is mapped to help trace the growth performance, this trend throughout this period. This study is principally restricted to those banks under pre/post Soludo reform that survived the consolidation exercise.

According to the Central Bank of Nigeria  statistical bulletin 2005; xi, financial date are normally complied from documents, notably balance sheets and financial statements which are primarily designed to meet a variety of legal and administrative requirements rather than the specific needs of economic analysis. This can constitute a possible limitation to the quality and efficiency of the data used in this study

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