CHAPTER ONE
1.1 BACKGROUND
OF THE STUDY
Banking
institutions require adequate capital to function effectively. This can be explained from the
Fact that banking is a highly leveraged
industry with risky assets and
liabilities and thus can be described as a conditionally solvent institution.
In Nigeria, the need for adequate
capitalization of banking has being a
source of concern to regulatory bodies
especially the CBN. Over the years, the monetary authorities in the country have stipulated
minimum capital requirements for the
banking industry. For instance as a
result of incessant bank failures recorded during the Free Banking era, the 1952 Banking Ordinance
stipulated a minimum paid-up capital of
N25000 and N200,00 for indigenous and
expatriate banks respectively.
Ever since then, the minimum capital
requirements of banks has been
experiencing huge increment that in the
year 2003 with the subsequent introduction of universal banking into the country in 2001, the CBN
directed all banks operating in the
country to store-up their base to a
minimum paid-up capital of N2 billion.
Shortly
afterwards in July, 2004 with the assumption of office of the governor of CBN
Prof. Charles Soludo. He came up with his 13 point reform agenda of the
financial system. Under the reform, banks were directed to recapitalise to the whooping tune of N25
billion before the end of December 31st,
2005. The main aim of this recent order
by the CBN for banks to increase their capital base is to achieve the consolidation of Nigerian
banks through mergers and acquisition.
Although a lot of controversies has surrounded
this directive by the CBN, the point is
that with adequate capital, public
confidence on Nigeria banks will be
maintained. With adequate capital, banks will be able to absorb unexpected or unusual losses not
absorbed by normal earnings. Also,
adequate capital will enable bank to
attract additional funds in the market and to assuage the confidence of the depositors, the regulatory
authorities and the general public on
the banks ability to continue in
business to discharge their obligations effectively and (Nwankwo G.O.).
It therefore follows ensuring adequate capital
is of fundamental importance to bank
management. In this connection, a broad
consensus exists that high priority should be attached to restoring sound
capital ratios and to improve the profit performance of banks in the face of
increased vulnerability of banking that has resulted from greater economic and
financial instability and the growing
interdependence of financial institutions and markets all over the world.
1.2 STATEMENT
OF PROBLEM
The issue of capitalization and management of
capital funds of banks have drawn much
attention in this era of globalization
and Information Technology explosion. As a
result, failure to give it the attention it deserves can pronounce doom for a bank.
For instance, one of the antidotes prescribed
for the arrest of the distress syndrome
and instabilities being experienced in
our banks today has been the need for
our banks to be adequately
capitalized. Without adequate capital, a
bank will not be able to compete
favourably well in international financial market and also will not be
able to cope with the sharp increase in
the volume of business done by banks in
this period of economic deregulation.
Furthermore, capital inadequacy has been pointed
as the main impediment to quality
service delivery and inability of banks to extend credit to the preferred
sectors of the economy. And this has been the major reason for the
underdevelopment of the economy. The problem of the study is therefore to find
out if increased capital base for banks
will bring about the derived financial capital sector stability.
1.3 OBJECTIVE OF THE STUDY
This
research work is aimed at achieving the following objectives:-
1.
To investigate the need for adequate capitalization
of Nigerian banks.
2.
To analyse the various ways in which banks
attempt to achieve recapitalization.
3.
To highlight on the challenges posed by
consolidation to the management of
Nigerian banks.
4.
To examine the benefits of recapitalisation to Nigerian banks and the entire economy.
1.4 FORMULATION
OF HYPOTHESIS
Ho: The level of capital has no
significant effect on the profitability of a bank.
H1: The level of capital has a
significant effect on the profitability of a bank.
Ho: Capitalization of a bank has
no direct relationship with the volume
of credit extended to the real sectors of the
economy.
H1: Capitalization of a bank has
a direct relationship with the volume of
credit extended to the real sectors of the
economy.
Ho: There
is no significant relationship between level of
capitalization and efficiently
of the banking system. H1: There is a significant relationship between the
level of capitalization and efficiency of the banking system.
1.5 METHOD
OF STUDY
This research work tends to study the
challenges posed by recapitalisation of
Nigerian banks by sampling the opinions
of bank executives within Awka and Onitsha territory. The total number of the bank executive which is
estimated to be two hundred and forty
(240) will form the population of the
study.
Simple random sampling will be used to select
a sample of sixty (60) executives of
these banks that are going to be
studied. The banks to be studied include Union Bank Hallmark Bank. These banks are expected to
express the opinions of the banking
industry because they represent both
first generation and new generation banks opening in the country.
Questionnaires will be used to collect data.
While the responses obtained from the
questionnaire administered to
respondents will be analysed with the responses categorized into “Strongly Agreed” to
“Strongly Disagree” and presented in
tales.
Finally, the hypothesis formulated will be
tested using chi squate test (x2).
1.6 SCOPE
OF THE STUDY
This research work is prospective since the
consolidation is still in progress and
therefore the study will be limited to
the present impact and problem posed by the consolidation on the banking industry and not
on the economy as a whole.
The study will focus more in the areas of
management efficiency, credit extension,
quality service delivery and meeting
with the expectation of the shareholders etc.
1.7 LIMITATIONS
OF THE STUDY
The researcher encountered
the following problems while carrying
out this research work;
a.
Time constraint – The time set aside for this
work is too short.
b.
Financial constraints – Lack of finance made it
difficult for the researcher to cover most of the banks operating in Nigeria,
and to reach out to a large area of the country.
c.
The busy nature of banks executives made it
difficult to return all the questionnaires administered to them.
d.
Difficulty in getting information needed due the
level of confidentiality of bank documents, and sometimes lack of confidence
and/or adequate knowledge on the part of the respondent.
1.8 DEFINITION
OF TERMS USED
1.
Recapitalisation: This is defined as the
enhancement and restructuring of the
financial resources of a bank with a
view to enlarging the size of the long term funds available to the bank.
2.
Adequate capital: This is defined as that
quantum of funds which a bank should
have or plan to maintain in order to
conduct its business in a prudent manner. Similarly, it can be viewed functionally, as the amount of
capital that can effectively discharge
the primary capital function of
preventing bank failure by absorbing losses.
3.
Mergers: This is a legal arrangement whereby
assets of two or more banks become
vested in or under the control of, one
company, which has as its shareholders, all or
substantially all, the shareholders of those banks in the arrangement. It can in other words be seen as
a commercial or economic marriage among
banks or roughly equal size that is
evidenced by signing of memorandum of
understanding among the banks.
4.
Acquisition: This is a situation where a bank
acquires control of another company,
usually a smaller bank than the
acquiring bank. It involves take over of management of usually a smaller bank by a bigger bank.
5.
Bank distress: This is defined as when a bank is
unable to meet its obligations as a
result of weakness in their financial,
operational and managerial capabilities which
render the bank illiquid or insolent.
6.
Non-performing credit: These are loans and
advances in which repayment of principal
and or interest are not up to date and
as such have been classified as either
substandard, doubtful or lost.
7.
Real sector of the economy: This is defined as
the sector of the economy that plays a
crucial role to the economic growth and
development of the nation. This sector includes
the agricultural sector, manufacturing sector and the
SMEs.
8.
Capital of reserve: This implies depleting banks
general reserves so as to achieve recapitalisation.
The extent to which this is done depends
on the other activities that may need to
be financed through the reserves such as pension and gratuity and reserve for SMIEIS.
9.
Capital market: This is the market where
long-term funds are mobilized for
investment purposes. The funds mobilized
in these markets can be inform of equity stock,
debentures etc. The capital market enhances the mobilization of financial resources form the
general public and channeling them to
accumulation of capital.
10. Initial
public offer (IPOs): It is an offer for subscription by a company for its own shares made for the
general public for the first time.