THE IMPACT OF BANK CONSOLIDATION ON OPERATIONAL EFFICIENCY IN
FIRST BANK
CHAPTER ONE
INTRODUCTION
1.1
Background of the Study
The
consolidation of banks has been the major policy instrument being adopted in
correcting deficiencies in the financial sector. The economic rationale for
domestic consolidation is indisputable. An early view of consolidation in
banking was that it makes banking more cost efficient because larger banks can
eliminate excess capacity in areas like data processing, personnel, marketing,
or overlapping branch networks, cost efficiency also could increase if more
efficient banks acquired less efficient ones. Though studies on efficiency in
banking raised doubts about the extent of overcapacity, they did point to
considerable potential for improvement in cost efficiency through mergers.
Consolidation is viewed as the reduction in the number of banks and other
deposit taking institutions with a simultaneous increase in size and
concentration of the consolidation entries in the sector (Bis 2001).
The driving
forces in bank consolidation include better risk control through the creation
of critical mass and economics of scale advancement of marketing and product
initiatives, improvements in overall credit risk and technology exploitation.
These drivers have led to improved operational efficiencies and larger and
better capitalized institutions. The results of this policy are neither here
nor there contrary to the expectation. The most difficult aspect of consolidation
is the ones induced by government through mergers and acquisition. Farlong
(1994) claimed that consolidation in banking is distinct 1990’s market induced
consolidation normally holdout promises of scale economics, gains in
operational efficiency, profitability improvement and resources maximization,
the outcomes have however, not totally confirmed these supposed benefits and
they have varied across jurisdictions, especially when compared with the
particular pre-consolidation expectations.
Whatever the
potential, the research go far on the effects of bank mergers ahs not found
strong evidence, that on balance, mergers banks
improve cost efficiency relative to other banks. This does not mean that
many mergers, including those of some large banks, have failed to lead to
significant gains in cost efficiency. It just means that the outcomes for those
banks tend to be offset by problems encountered in other mergers, and that many
banks have improved cost efficiency without merging.
A new view is
that bank mergers are not just about adjusting inputs to affect costs; rather,
they also involve adjusting output (products) mixes to enhance revenues. Two
research efforts taking this approach are Akakhavein, et al. (1997), covering
mergers in the 1980’s, and Berger (1998), covering mergers in the 1990s. These studies
find that bank mergers do tend to be associated with improvements in overall
performance, in part, because banks achieve higher valued output mixes. While these
studies do not track all of the channels through which bank mergers affects the
value of output, they suggest that one channel has been banks’ shift towards
higher yielding loans and away from securities.
This channel
is particularly interesting given the other, results in these studies. They
find that merged banks also tend to experience a lowering of their cost of
borrowed funds without needing to capital ratios. The lower cost of funds is
consistent with a decline in the overall risk of the combined bank compared to
that of the merger partners taken separately. This apparently occurs even
though a shift to loans by itself might be expected to increase risk. One
interpretation of these results, then, is that a merger can result in a
reduction in some dimensions of risk, which then affords the post-merger bank
more latitude to shift to a higher return, though perhaps higher risk but
output mix. The sources of diversification could be differences in the range of
services, the portfolio mixes, or regions several by the merging banks.
It is against
this background that the subject matter of this research becomes worthy of
investigation.
1.2
Statement of the Problem
The current
credit crisis and the transatlantic mortgage financial have questioned the
effectiveness of bank consolidation programme as a remedy for financial
stability and monetary policy in correcting the defects in the financial sector
for sustainable development. Many banks consolidation had taken place in
several countries in the last two decades without any solution in sight to bank
failures and crisis, Olabisi (2006).
As such the
concerned of this research is; does bank consolidation ahs any impact on the
operational efficiency of first Plc Kaduna? It is against this that the subject
matter is considered a problem.
1.3
Objectives of the Study
i. To identify the impact of
bank consolidation on operational efficiency of first bank.
ii.
To asses the performance of first bank in post-consolidation
period.
iii.
To find out the problems militating against first bank in
post-consolidation period.
iv.
To recommend workable solution to the identified problem of
first bank in post-consolidation period.
1.4
Significance of the Study
The study will
be beneficial to commercial banks in Nigeria, especially as they utilize
the findings of this research to solve post-consolidation problems militating against
their banks.
The study will
enhance existing knowledge of bank consolidation problems militating against
their banks.
The study will
enhance existing knowledge of bank consolidation and will be a springboard to
undertake similar research.
1.5
Research Questions
i.
What is the impact of bank consolidation on operational
efficiency of first bank?
ii.
How is first bank performing in the post-consolidation
period.
iii.
What are the problems militating against first bank in post-consolidation
period.
iv.
What are the solutions to these problems?
1.6
Scope of the Study
The study will
cover an investigation into the impact of first as well as assessment of its
performance in the post-consolidation period.
The study will
equally cover problems militating against first bank in first-consolidation
period. The collection of primary data will be restricted to first bank Kaduna.
1.7
Definition of Terms
Bank:-Can be define as a place of business that receives,
lends, issues, exchanges and takes care of money: extent credit and provide
ways of sending money and credit quickly from place to place.
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).
Economy:-Can be
defined as the structure of economic life of a country, area or system. From
“Convergence”. He says that consolidation refers to merger and acquisitions of
banks by banks while convergence refers to the mixing of banking and other
types of financial services like securities and insurance, through acquisitions
or other means. He concluded that the impact of consolidation on bank structure
has seen obvious, while its impact on bank performance has been harder to
discern.
The government
policy – promoted bank consolidation rather than market mechanism has been the
process adopted by most developing or emerging economies and the time lag of
the bank consolidation varies from nation to nation. Banking sectors reforms
are part of monetary policy instruments for effective monetary systems and
major shifts in monetary policy transmission mechanisms economies in the last
decade in both developed and developing nations. The banking sector in emerging
economies has witnessed major changes to compete, attract international
investment and increase capital market growth.
There are as
many reasons and strategies for bank consolidation as there as banking
jurisdictions. When the opportunities in the operating environment for banks,
either within the boundaries of a country, an economic zone or geographical
sphere, become amenable only for market dated institutions. There is a tendency
for market induced consolidation. Many cases of bank consolidation that have
been recorded to date in the modern history of banking are of this kind, and
ready examples are the European and American bank mergers and acquisitions of
the 1980s and