CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The resultant impact of financial liberalization opened up the Nigerian economy to global financial markets, which has generated increasing apprehension in the economy and has exposed the fragility and vulnerability of her financial system. It is therefore imperative for the Central Bank of Nigeria to introduce measures that will reduce the exposure and enhance the stability of small business operators in Lagos State and the nation’s financial system. A defensive measure that will strengthen the existing banks and still provide small businesses with financial facilities and services, is what is really needed. This study investigated the impact of previous recapitalization in the banking system on the performance of some selected small businesses in the country with the aim of finding out if the recapitalization is of any benefit. The study employed both primary and secondary data obtained from responses gotten from issued questionnaires and NDIC annual reports. The data were analyzed using both descriptive e.g. means and standard deviations and analytical techniques such as the t-test and the test of equality of means. It was found that the mean of key profitability ratio such as the Yield on earning asset (YEA), Return on Equity (ROE) and Return on Asset (ROA) were significant meaning that there is statistical difference between the mean of the bank before 2001 recapitalization and after 2001 recapitalization. The study recommends that the banks should improve on their total asset turnover and to diversify their funds in such a way that they can generate more income on their assets, so as to improve their return on equity Over the years, the Nigerian economy is faced with national and global economic challenges and as such, the financial institutions, especially the banking sector has an option of sanitizing and restructuring its operational processes in order to survive the depressed economy, as well as embarking on a consolidation exercise which would have some wider structural effects on the industry and on the economy as a whole. Basically, banking is a service industry operated by human beings for the benefit of the general public while making returns to the shareholders. As such, it is natural that the services provided thereof by the industry cannot be 100% efficient; however, there is always a room for improvement. It is on this statement that the index of our further discussion on this study is based. The banking sector in the third world economies has been grossly under managed when compared with their counterparts in the developed countries of the world. This has made it imperative for Nigerian banks to sanitize and restructure their operational processes so as to be in line with the global trends, and to survive the depressed economy.
Before the introduction of Structural Adjustment Programme (SAP) in 1986, the banking sector was characterized by few banks. The operators of these banks had almost total control of the business of banking as customers had to look for their services which most of the times were of poor quality. The managers, because of the pressure to provide banking services, had little time to market their bank services or design new products to improve their customers’ service and at the same time, they received changes based on the approved tariff. Competition was minimal and customers could spend long hours trying to obtain service in the banking hall due to long queues.
Prior to the 2004/2005 recapitalisation exercise, the Nigerian banking sector was highly oligopolistic with remarkable features of market concentration and leadership. Under the recapitalization and consolidation exercise in the industry, each licensed bank was expected to meet up with the new minimum capitalization requirement of =N=25 billion on a solo basis or achieve that either through merger with others or acquisition of/by others. The banks were encouraged to enter into merger/acquisition arrangements with other relatively smaller banks thus taking the advantage of economies of scale to reduce cost of doing business and enhance their competitiveness locally and internationally. According to the former governor of the Central Bank of Nigeria (CBN), Prof. Charles Soludo, recapitalisation of the Nigerian Banking Sector was necessitated by the high concentration of the sector by small banks with capitalization of less than $10 million, each with expensive headquarters, separate investment in software and hardware, heavy fixed costs and operating expenses, and with bunching of branches in few commercial centers – leading to very high average cost for the industry (Soludo, 2004). The fragile state of the Nigerian Banking Sector in the pre- recapitalization exercise is so bad that, only ten banks (10) out of the eight-nine (89) in operation accounted for 51.9% of total assets, 55.4% of total deposit liabilities, and 42.8% of total credit (CBN, 2004). The rating of the licensed banks in operation, using the CAMEL parameters, revealed that ten (10) banks were “sound”, fifty-one (51) were “satisfactory”, sixteen (16) were rated “marginal” and ten (10) banks were rated “unsound” in 2004 (CBN, 2004). However, the performance of banks since 2001 exhibited a deteriorating trend as the number of “satisfactory” banks declined steadily from 63 in 2001 to 51 in 2004. In the same vein, the number of banks that were “marginal” increased from 8 in 2001 to 16 in 2004. “Unsound” banks also increased from 9 in 2001 to 10 in 2004.