The Implication of 25 Billion Recapitalization Policy of Central Bank of Nigeria (CBN) on Nigerian Economy
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 the 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 in 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 banks, investors, government public, and customers. The data were analyzed
using both descriptive e.g. means and standard deviations and analytical techniques. It was found that the mean of key profitability ratio such as the yield on
earning asset, Return on equity and Return on Asset 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 assets turnover and to diversify their funds in
such a way that the can generated more income on their assets, so as to improve their return on equity. As a result of the findings, recommendations were made and
some of them are:Recapitalization should be sustained until Nigerian banks are among the first 100 banks in the world. Standard regulations should be enacted in
order to control banks services to prevent exploitation tendencies various types of competitions should be stimulated thereby pushing Nigerian banks towards global trends.
TABLE OF CONTENTS
Title page i
Table of content vii
CHAPTER ONE INTRODUCTION
1.1 Background of the study 1
1.2 Statement of the problem 4
1.3 Objectives of the study 5
1.4 Research Question 6
1.5 Research Hypotheses 6
1.6 Significant of the study 7
1.7 Scope of the study/limitation 8
1.8 Limitation of the Study 8
1.9 Definition of terms 9
CHAPTER TWO LITERATURE REVIEW
2.1 Conceptual Framework 11
2.1.1 Recapitalization 11
2.1.2 History of Recapitalization 11
2.1.3 Effects of 25 billion Naira capital base on the Nigeria
2.1.4 Recapitalization & economic growth & development 16
2.2 Theoretical Framework 18
2.3 Bank concentration theory 18
2.3.1 The bank capital channel theory 19
2.3.2 Recapitalization & economic growth model 19
2.4 Empirical framework 20
CHAPTER THREE METHODOLOGY
3.1 Research Design 30
3.2 Nature and Source of Data 30
3.3 Population 30
3.4 Samples 30
3.5 Model specification 31
3.6 Techniques of Data Analysis 32
CHAPTER FOUR DATA PRESENTATION AND ANALYSIS
4.1 Introduction 35
4.1.1 Data Presentation 35
4.1.2 Restatement of Hypothesis in Null and Alternate forms 40
4.2 Data Analysis and Interpretation 40
CHAPTER FIVE SUMMARY OF FINDINGS, CONCLUSION AND
5.1 Summary of findings 54
5.2 Conclusion 54
5.3 Recommendation 55
1.1 Background of the study
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. Uboh (2005) set the pace for the landslide of other works on the interdependent and the
relationship between banks and economic growth. Also, Imala (2005) posited that the objectives of banking system are to ensure pure stability and facilitate sustained rapid
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. 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. Thus, this has led to the recapitalization of banks.
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 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. The marginal and/or
unsound banks exhibited such weakness as undercapitalization, illiquidity, weak/poor asset quality, poor earnings etc (CBN, 2004; Soludo, 2004).
The CBN reform to consolidate the banking sector through drastic increase of the minimum capital base of commercial banks from =N=2 billion to =N=25 billion in 2005
led to a remarkable reduction in number of banks. Immediately after the recapitalization deadline ended in December 31st, 2005, the number of operating banks in the country
reduced from 89 banks to 25 banks but later reduced further to 23 banks with the merger of some banks like First Altantic Bank Plc and Inland Bank to form Fin Bank Plc,
Stanbic Bank Limited and IBTC Chartered Bank Plc to form Stanbic-IBTC bank Plc. The number of operating bank later increased to 24 banks with the entering of Citibank
Nigeria Limited. With the recent merger and acquisition of some of the nine rescued banks i.e. the merger of Access Bank Plc with Intercontinental Bank Plc; merger of
Ecobank Transnational Incorporated with Oceanic Bank Plc; merger of First City Monumental Bank with Fin Bank Plc, the number of banks operating in Nigeria has been
reduced further. Sixteen banks (16) that were operating in the banking sector before recapitalization and also met the N25 billion minimum requirements shall be studied.
However , in August 2011, the CBN revoked the licenses of three of the rescued banks for failing to show ability to recapitalise ahead of the September 3 2011 deadline, effectively nationalizing Bank PHB, Afribank and spring Bank. The assets of these banks were transferred to three newly created, nationalised banks; keystone Bank, Enterprise
Bank and mainstreet bank. Assets management company of Nigeria(AMCON) which took over the banks also injected N680 billion to recapitalise the banks. Unity Bank plc,
one of the bailed out banks has already recapitalised while wema Bank plc, the last of the rescued banks, has since scaled down operations to become a regional bank with
emphasis in the south west region.
The post-recapitalization performance of all Nigerian banks was overcast in 2008 by the global financial and economic crisis, which was precipitated in August 2007 by the
collapse of the sub-prime lending market in the United States (Bunescu, 2010). The crisis led to the crash of most other sectors and markets across Europe with consequent effect on developing economies especially oil-export dependent countries like Nigeria. The rush by stock investors to liquidate their investment to repay their loans in order to avoid the excessive lending rate caused the Nigerian stock market to crash. The crash of the stock market did not only affect the financial performance of some of the banks, it also increased their risk exposure. Sanusi (2010) attributed the post-recapitalization challenges of Nigerian banking industry to the inability of the industry and the regulators to sustain and monitor the sector’s explosive growth which as a result led to risk-build in the
According to Sanusi (2010) the reports of the special examination team carried out by CBN/NDIC revealed that nine (9) out of the 24 (twenty four) banks were in grave
situation, prompting immediate intervention by CBN. The reports further revealed that non-performing loans in ten banks totaled =N=1,696 billion, representing 44.38% of total
loans while the Capital Adequacy Ratio in the ten banks ranged between -1.01% and 7.41%, which were below the minimum ratio of 10%. This statistics portrays a fragile
banking system. It is therefore necessary to conduct a study of this nature to evaluate the =N=25 billion recapitalization exercise in Nigerian banking sector in terms of the
financial performance of the commercial banks.
1.2 Statement of the Problem
The recapitalization of banking sectors is also an evidence of transformation as to achieve economic growth in Nigerian. Evidence has shown that the Nigerian economy is undergoing several transformations. With the 2005 recapitalization policy mandated on banks in Nigeria, the various effects from structural changes in unemployment,
interest rate and population can be noticed in the economy. The service of banking is supposed to be hinged on the effective satisfaction of both the surplus units and the
deficit units of the economy. The quality of banking is based on the manner and the environment in which such services are rendered. Quality service in banking must meet
three basic requirements namely; competence reliability and credibility.
For banks to be able to function effectively and maintain high efficiency level in the economy and to contribute meaningfully to the economic growth and development of a
country, then the industrial sector must be safe, sound and stable, being devoid of any economic problem that can tilt it off the rail of achieving its primary duty of satisfaction, such as distress. In all indication what we are experiencing and witnessing in this country today is a far cry from the ideal state of stability expected. Due to inflation and the general socio-economic decline and political uncertainties around us which have taken a large toil on the banking industry.
Many banks have suffered from loss of business and this has resulted to loss of income.
The banks were unable to pay customers on demand due to non-availability of liquid cash, thus, the loss of confidence in the banking industry by the public. The above
problems has necessitated the need to carry out this study.
1.3 Objectives of the Study
The main aim of the study is to critically review the 2005 bank recapitalization policy, and bring out the total effects the policy has had on the economy of Nigeria. The specific objectives of the study are:
1. To determine the effect of the bank recapitalization policy on unemployment before and after recapitalization.
2. To examine the circumstances that gave rise to the 2005 bank recapitalization.
3. To analyse the impact of the 2005 recapitalization policy on interest rate changes and loan to small business enterprise before and after the recapitalization exercise.
4. To examine how the recapitalization exercise brought changes to GDP economic growth in Nigeria before and after recapitalisation.
1.4 Research Questions
1. To what extent has the bank recapitalization policy affect unemployment in Nigeria before and after the recapitalization policy of 2005?
2. What circumstances gave birth to the need for the 2005 recapitalization policy on Nigerian banks?
3. Have the 2005 recapitalization policy has positively significantly influence changes in interest rate and loan to small business enterprise before and after
4. Recapitalization of bank has not positively significantly affected GDP?
1.5 Research Hypotheses
In order to arrive at a result the following hypotheses will be tested
1. H0: The bank recapitalization policy of 2005 has not significantly enhance unemployment rate in Nigeria.
2. H0: The bank recapitalization policy of 2005 have no significant impact on the interest rate changes in Nigeria.
3. H0: The bank recapitalization policy of 2005 have no significant impact on the increase in commercial banks’ loan to SMEs in Nigeria.
4. H0: The Bank recapitalization has not led to increase economic growth GDP
1.6 Significance of the Study
This study is very beneficial to the following:
– The federal government is making policies that will benefit the economy. It will help formulate similar policies in other sectors of the economy by emphasizing the
need for prudence in using loans.
– The CBN in better articulation of the policies that can improve the banking profession.
– The international community of investors in having faith in the Nigeria’s economy.
– The local economy in improving investment and eradication poverty at the long run.
The significance of the research is based on the fact that the role of financial institutions in general and banks in particular on the economic stability, wellbeing
and development of any society cannot be over looked and as such, Banks, investors, government public and customer these institutions must be stable and
operating well for economic development of any society. It is in this effort that the federal government of Nigeria introduce the 2005 recapitalisation policy in its
annual budget in order to stabilise the industry and eradicate the long existing distress problems in our banking industry.
The recapitalisation policy has a lot to offer as regards the promotion of the banking industry and the economy, but most banks are frowning at the policy because of the
obstacles concerning banks implementation of the policy but if proper measures are taken this could eliminate most of the problems which looks seemingly difficult at the
beginning because of the bleak outlook of the Nigeria economy at present. This study among other things, will educate the readers on; what recapitalisation is all about, how
best a bank can successfully recapitalise, benefits of the 2005 policy to both banks and the general economy, laws regulating relating banking operations in Nigeria and various
happenings in the Nigeria banking industry since inception.
1.7 Scope of the Study/ limitation
Basically, the study covers the early recapitalization period in Nigeria so as to relate the problem of recapitalisation to performance of banks in this period and the period in which the first banking legislature was released, hence the introduction of minimum capital requirements of banks until date. This study would examine the significance of several economic variables in relation to economic growth 5-year before and 5-year after bank
recapitalization in Nigeria.
Included in the work are the various options on how best banks can raise the required capital base. This work will also look at progress existing in the Nigeria economy since
its inception and problems faced by the economy within the 2005 to 2010. Finally, how recapitalisation will help to resolve the current problems in our economy system. Since
this policy concerns the whole economic system, it has been decided that this study will cover the recapitalization of banks and its effect on unemployment.
1.8 Limitation of the Study
The major constraint to this study is the difficulty in getting the relevant data for the study. The area of study (recapitalisation policy of 2005) is a recent development in the banking sector, so that not much literature has been published on it and most banks are not ready to release needed data as they see it as an important business secret, this compounded the issue of scarcity of data. Therefore the researcher has little option than to rely on textbooks (which were very scanty on the issue), newspapers reports, Journals, conference papers from N.O.I.C top management and C.B.N Governors. And the opinions of some staff and managers of few banks. Sources of information are quoted in
the report proper where necessary and also in the reference section.
1.9 Definition of Terms
Banks: this study will give banks a basis to be able to compare their past performances (before re- recapitalization) and their present performance (after re-recapitalization). Such comparison will point out how well they have done and what capacity they still have for expansion. It will also highlight those areas that are still un-harnessed with very high potential.
Sec 2 and 61 of(BOFID) 1991 defines a bank as; “A duly incorporated company in Nigeria holding a valid banking license to receive deposit on current account, savings
account or other similar accounts, paying or collecting cheques drawn by or paid in by customers. Provision of finance or such other business as the government may order to
publish in the gazette designated as banking business.
Capital: This refers to the sum invested in a business. It is also seen or used in business by a person, corporation, government etc. Capital can also be referred to as the net worth of a business; amount by which the assets exceed the liabilities.
Recapitalisation: Review of the require minimum capital and the process of adopting to the new requirement. It is also defined as the enhancement and restructuring of the
financial resources of an organization with a view to enlarging the long term fund available to the organization.
Bunescu , R.A( 2010). The Financial Sector in Africa: Overview and Reforms in Economic Adjustment Programmes. CBN Econ. Finance Rev., 29(4), pp. 110-
Imala ,O. I. (2005). Challenges of Banking Sector Reforms and Bank Consolidation in Nigeria. CBN Bullion, 4 (29), pp. 2-27
Onaolapo, A. A. (2008). Implication of Capitalization on Bank Financial Health. Journal of Economic Theory, 2(5), pp. 4-19
Soludo, C.C (2004). Consolidating the Nigerian Banking Industry to Meet the Development Challenges of the 21st Century”. Bankers’ Committee held on July 6,
at the CBN Headquarter, Abuja.
Sanusi, T. A. (2004). The Impact of Bank Reform on Commercial Bank Performance in Nigeria. Journal of Economic Thought, 1(6), pp. 31-
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